Inuvo Inc (INUV) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for joining us today.

[OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Weinberg, Vice-President of Investor Relations. Mr. Weinberg, you may begin.

Thank you and good afternoon.

Welcome to MIVA's second quarter 2006 financial results conference call. Joining me on the call today are Chief Executive Officer, Peter Corrao, our President, Seb Bishop is joining us from the UK and Chief Financial Officer, William Seippel.

I'd like to remind everyone that today's comments include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties will be outlined at the end of this conference call and are also detailed in MIVA's filings with the Securities and Exchange Commission.

To comply with the SEC's guidance on fair and open disclosure, we have made this conference call publicly available via audio webcast through the Investor Relations section of our website and a replay of the conference call will be available for 90 days after the call.

I'd now like to turn the call over to our CEO, Peter Corrao. Peter?

Thanks, Peter.

Good afternoon, everyone and welcome to MIVA's second quarter 2006 conference call. We appreciate having you on our call today.

As previously reported on July 7th, our financial results in the second quarter were below our expectations, and represented a disappointing revenue quarter for us. Unfortunately turnarounds are often not as timely as we would like, and ours is certainly given us some unanticipated challenges on the revenue front, but importantly these are challenges we believe we can solve over time.

On our Q1 earnings call, we shared a 12 to 18-month timeline for completing the turnaround. At that time we indicated we thought we were approximately six months into the process. Given our second quarter revenue results it is likely we have moved closer to the longer end of that timeline.

Although we did not deliver on the level of consistency we aspired to on our revenue front, we believe our second quarter demonstrates we are making progress towards managing our expense structure and this is a major objective for us during the quarter. Due in part to expense reductions, we believe we'll be better positioned to drive margin expansion in the longer term.

While we believe we have leverage remaining on the expense side, should we need it, we are currently focused on improving our revenue picture, and in a few minutes I'll share with you a little more detail on this point.

Overall our second quarter revenue shortfall was primarily the result of lower than anticipated click-through revenue from our European media business, while in the U.S. our combined businesses performed mostly to plan on revenue.

In addition the unusually warm weather and World Cup enthusiasm across Europe, we believe both had an overall negative impact on our partners internet traffic. We also experienced several specific factors that contributed to lower clicks and marginally lower RPC in Europe.

To begin we lost a valued partner operating in one of our European territories, after the partner experienced several network outages. We believe we have since resolved these network issues through our optimization initiative, but it's always regrettable to lose a partner especially due to non-competitive reasons.

We also discovered a larger pan-European distribution partner implemented a mechanism for generating traffic that was inconsistent with our guidelines. We immediately removed the partner from our network and only brought them back after validating remediation.

Finally, we experienced relative RPC weakness in a meaningful vertical that typically performed well for us in Europe and this has had some effect on our overall European RPC. In contrast, to the European revenue story, we delivered on our second quarter expense reduction initiatives through a global restructuring and integration plan which is expected to reduce annualized cash expenses by $6 million.

We also delivered on our goal for optimizing the network. We went live with an additional data center in the U.S. to facilitate load balancing, and we added additional servers in the U.S. and in Europe. Today we are operating our network's under capacity, and it's significantly reduced latency times. As a result, we believe we're now capturing clicks and instances where we previously may have lost on the revenue--out on that revenue opportunity.

With the initial expense reductions behind us and the optimized network underpinned our platform--weak platform, we believe we're in a better position to move forward on the revenue front. To that end we're beginning to focus our efforts on aligning distribution and advertiser characteristics.

In essence we are adding incremental value by helping our advertisers to achieve a higher ROI through improved targeting of their paid click ad buys. We are introducing a new layer of relevancy in addition to our keyword matching algorithms, of course what I just described is only tactical in nature, we believe.

We must first finish our corporate coarse correction steps before we set out on our new direction, however, I can assure you we're working to finalize our longer-term strategy and we look forward to sharing that strategy over the second half of '06.

So at this point let me turn the call back over to Will, and I'll talk to you again in a while. .

Thank you, Peter.

Before we get to our results, I would like to acknowledge we are dissatisfied with having to reschedule our earnings date and I can tell you we will continue to undertake all measures to ensure we meet our commitment. Unfortunately, we experienced complexities that delayed completion of the impairment process and our ability to calculate the subsequent tax effect.

However, today we are comfortable the estimated impairment represents management's current best estimates as to the actual charge. Regarding the estimated non-cash impairment charge during the second quarter events occurred as Peter described earlier, that caused us to reconsider and lower our operating projections for MIVA Media Europe, consequently we performed an impairment test to determine if the value of goodwill and other indefinite lived intangibles were recoverable under the provisions of FASB statement number 142, and it was determined that an impairment existed.

As a result we have recorded an estimated non-cash impairment charge related to goodwill and other intangible assets for MIVA Media Europe, in the amount of $63.7 million or $2.00 per diluted share. The final measurement of the impairment is yet to be completed, therefore as permitted by SFAS 142 the estimated impairment charge, is management's current best estimate as to the actual impairment which may be higher or lower than the estimated charge.

Upon finalization of the actual impairment charge in the third quarter of 2006, the Company will record any resulting increase or decrease to the estimated charge. After recording the estimated impairment charge MIVA Media Europe's other intangible assets were eliminated with a balance of goodwill being approximately $13.6 million.

With that said, let's review how we measure our financial performance. In addition to the standard GAAP measurements, we utilize certain profitability based metrics to evaluate our period to period and year-over-year performance. They are adjusted EBITDA and adjusted net income.

Due to the adoption of statements of financial accounting standards number 123R, effective January 1, 2006 we have modified our definition of adjusted EBITDA and adjusted net income to exclude non-cash stock compensation expenses incurred as a result of our adoption of this standard.

We define adjusted EBITDA as EBITDA earnings before interest income tax depreciation and amortization plus non-cash stock compensation expense and plus or minus certain identified revenues or expenses that are not expected to record or be representative of future ongoing operation of the business.

We define adjusted net income loss as net income loss plus amortization plus non-cash stock compensation expense and plus or minus certain identified revenues or expenses that are not expected to recur or be representative of future ongoing operations of the business. In each case including the tax effects if any of the adjustment. We believe the use of these measures does not lessen the importance of GAAP measures.

Now turning to our results, in Q2, 2006, MIVA achieved revenues of $41.4 million, compared to $44.4 million in Q1 2006 representing a 7% sequential decline. We recorded 256 million paid clicks in Q2 2006, compared to 248 million in Q1 2006 an increase of 3% sequentially. In the U.S. media network, excluding private label and B&B paid click throughs were flat sequentially.

Overall U.S. media click revenue was down approximately $1 million sequentially, the result of a decrease in average revenue per click or RPC. In the EU media network, paid click throughs were down 12% sequentially from Q1 2006, while RPC was down 3% over the same time period. EU media click revenue was down 2.7 million sequentially.

Overall the U.S. which includes the media network, private label, B&B, MIVA small business, and MIVA direct recorded 23.7 million in Q2 2006 or 57% of total revenue while the EU recorded 17.7 million or 43% of total revenue.

In the aggregate, B&B, MIVA small business and MIVA direct recorded revenue of approximately 12.7 million in Q2 2006, up approximately 5% over the 12.1 million recorded in Q1 2006. This compares to approximately 7.2 million recorded in Q2, 2005.

Operating expenses reflect the impact of non-cash stock compensation expense of 3.3 million in Q2 2006 which includes 2.1 million from accelerated vesting and restricted stockiness in connection with the severance for certain former executives. Additionally Q2 2006 operating expenses reflect 2.5 million in cash severance charges including 1.9 million related to executive severance and 600,000 relating to the Company's global restructuring and integration plan.

Operating expenses excluding the non-cash stock compensation charge and the estimated non-cash impairment charge were 27.3 million in Q2 2006, compared to 25.1 million excluding the non-cash stock compensation charge for Q1 2006. Again, cash severance charges totaled 2.5 million are included in Q2 2006 operating expenses. Amortization expense in Q2 2006 was 2.3 million, compared to 2.2 million in Q1 2006. Amortization expense included 1.5 million for acquired intangible assets and $800,000 for capitalized and purchased software.

We recorded a GAAP net loss of $73 million or $2.29 per diluted share in Q2 2006, this compares to a GAAP net loss of 3.8 million or $0.12 per diluted share Q1 2006. Adjusted EBITDA excluding the estimated non-cash impairment charge was a loss of 3.6 million in Q2 2006, compared to adjusted EBITDA $500,000 in Q1 of 2006. We recorded an adjusted net loss excluding the estimated non-cash impairment charge of $0.27 per diluted share in Q2 2006, compared with an adjusted net loss of $0.03 per diluted share in Q1 2006.

Now turning to our balance sheet review, our cash, cash equivalents and short-term investments at June 30, 2006, totalled 36.9 million a decrease of 2.8 million for March 31, 2006. The significant transactions effecting cash during the were a 5.3 million U.S. income tax refund resulting from our ability to carry losses back to prior years and a 1.7 million earn-out related to a company we acquired during 2004.

In addition, we invested approximately 2.5 million into capital expenditures and repurchased approximately $300,000 in MIVA stock. You may recall in the prior earnings call we announced a $10 million stock repurchase program, although we have thus far been limited in our ability to repurchase stock because of trading restrictions, we continue to believe repurchasing stock at these valuation levels is a prudent use of cash.

The Company's employee count decreased throughout the second half of 2005 and continued through Q2 2006. As of June 30, 2006, we had an active base of 436 full-time employees down from 483 at December 31, 2005.

Regarding our outlook for the Company, we are expecting seasonality in Europe to have impact and we are estimating Q3 2006 revenue in the range of $38 to $40 million.

Thank you. This concludes my review of our Q2 2006 financial results I will now turn the call back over to Peter.

Thanks, Will.

Although disappointed on the revenue front, Q2 was a productive quarter for the Company and the accomplishments we have outlined today will help put us in a position to drive margin expansion and growth over the longer term.

You'll recall in mid-May I purchased our shares in the open market underscoring my personal belief in the turnaround steps we have already taken and the steps we intend to take going forward. We believe we made progress in Q2 on multiple fronts to set a strong foundation for the future.

So thanks for spending time with us today. We look forward to updating you on our progress throughout the second half of the year. I'll now turn the call over to the operator.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll take our first question from Youssef Squali with Jefferies & Co.

Thanks this is Hagit Reindel from Jefferies for Youssef Squali.

First on the restructuring could you help me understand exactly, the annualized operating expenses that you are talking about is that the 27.3 million this quarter that you are annualizing and you expect 6 million less in '07?

And also where exactly most of the leverage is coming from? Is it mainly in G&A, sales and marketing or are you expecting to invest less in product development?

And just to follow up on Europe, you mentioned one distribution partner that was not consistent with your practices. Are you behind the U.S. in terms of the traffic clean-up efforts that you are doing in Europe? Just an update on the status there, thanks.

Yes. So this is Peter, I'll answer the last part of the question which is regarding are we behind in our efforts to clean-up traffic in Europe the answer there is clearly not. We found this anomaly immediately when it was started by our partner and caused us to shut them off immediately.

The efforts that we make for controlling traffic in Europe are similar to what we do in the U.S., and as I stated before we continue to stay on top of traffic and our traffic partners, and we don't anticipate any monumental changes in traffic and traffic partners like we had in Q1 and 2 of '05 again in the future, so that hopefully answers your question regarding the European partner.

Again, highlight was we caught them quickly, if not immediately, turned off their traffic immediately, unplugged them from our network immediately and until they remediated we didn't turn them back on. Generally speaking as it relates to the cost control part, we took $6 million of annualized cost out of the business, we did most of that right after my last conference call soon after I took over as CEO. Almost all was people related and I'll let Will be more specific on about the cost that we took out and what we expect from it.

The 27.6 has to be normalized there was 2.5 million related to severance that you need to take out from there, and the $6 million is from that, of course you have to multiply the quarterly number times four.

[OPERATOR INSTRUCTIONS]

We'll take a question from Matthew Hewitt with Craig-Hallum.

Two quick questions, first of all what was tax for Q2?

Matt this is Peter, hang on, we're looking it up right now.

Okay.

Yeah I'll give you a blended number.

Okay.

Between EU and U.S. And tax was 52%.

52%. Okay.

Blended.

Second question, given the weakness that there was during Q2 World Cup was mentioned and you have also mentioned that there's some seasonality that's going to effect Q3, we are six weeks into the quarter, have you seen any pick up despite that seasonality that you had mentioned?

We've seen--again, we just gave guidance on revenue, which you saw. We have seen a pick up from where we were, and interestingly enough we have seen the pick up with--August is a tough month in Europe, so here we're staring at it right now after nine days.

While it's a tough month we have seen a little bit of pick up but not enough to make us feel overall like we should take guidance above where we shared it with everybody, right? So we want to be careful, we know what we're doing in Europe.

Interestingly, enough, the big piece that we talked about that was that one partner that we had to turn off. We do have them back on now and we are nominalizing against them there too, but we are being very careful about Europe until we think that we've got it sort of in line the way we feel like we've got the U.S.in as you guys heard from the numbers, right?

And at this point there are no questions left in the queue. Mr. Weinberg, I'll turn the call back over to you for any closer remarks.

Thanks.

This conference call contains certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. Words or expressions such as plan, intend, believe, or expect or variations of such words and similar expressions are intended to identify such forward-looking statements.

These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. Key risks are described in MIVA's reports filed with the U.S. Securities and Exchange Commission, including the Form 10K for fiscal 2005 and the most recently filed quarterly report on Form 10Q.

In addition past performance can not be relied upon as a guide to future performance. The following factors, among others could cause actual results to differ materially from those described in the forward-looking statements. Potential of the information and estimates used to predict anticipated revenues and expenses were not accurate, the risks associated with the fact that we have material weaknesses in our internal control over financial reporting and may prevent us from being able to accurately report our financial results or prevent fraud.

The risks that we have in the past and may in the future incur goodwill impairment charges that materially adversely affect our earnings and our operating results. Potential that demand for our services will decrease. The risk that we will not be able to continue to enter into new online marketing relationships to drive qualified traffic to our advertisers.

The risk that our distribution partners will not--will use unacceptable means to obtain users, risks associated with our ability to compete with competitors, and increased competition for distribution partners, political and global economic risks attendant to our business, risks associated with legal and cultural pressures on certain of our advertiser's service and/or product offerings, other economic business and competitive factors generally affecting our business. The risk that operation of certain of our technology infringes upon intellectual property rights held by others, our reliance on distribution partners for revenue generating traffic, risks associated with our expanding international presence.

Difficulties executing integration strategies or achieving planned synergies with acquired businesses and private label initiatives, the risk that we will not be able to effectively manage our growth, the risk that new technologies could emerge which could limit the effectiveness of our products and services, risks associated with the operation of our technical systems including system interruptions, security breaches and damage. Risks associated with internet security including security breaches, which, if they were to occur could damage our reputation and expose us to loss or litigation, risks relating to regulatory and legal uncertainties both domestically and internationally.

That concludes our call today. Thank you for listening.

That does conclude today's conference call. We appreciate your participation. You may disconnect at this time.