Inuvo Inc (INUV) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for joining us today. This call is being recorded. I would now like to turn the call over to Mr. Weinberg, Vice President of Investor Relations. Mr. Weinberg, you may begin.

Thanks, Kimberly. Thank you, and good afternoon. Welcome to MIVA's second quarter 2007 financial results conference call. Joining me on the call today are Chief Executive Officer Peter Corrao, Chief Financial and Administrative Officer Lowell Robinson, and President and CMO Seb Bishop. I would 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 from those expressed in the forward-looking statements. 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 begin, 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 performance and year over year performance. They are adjusted EBITDA, adjusted net income or loss and adjusted net income or loss per share. Notably in Q4 '06 and Q1 '07, MIVA calculated adjusted EBITDA and adjusted net income or loss without adding noncash compensation expense to the calculation. Beginning in Q2 '07, MIVA calculates adjusted EBITDA and adjusted net income or loss by adding noncash compensation to the calculation. We believe that adjusted EBITDA, adjusted net income or loss and adjusted net income loss per share provide meaningful measures for comparison of the company's current and projected operating performance with its historical results due to the significant increase in noncash amortization that began in 2004 primarily due to certain intangible assets resulting from mergers and acquisitions. MIVA defines adjusted EBITDA as EBITDA earnings before interest, income tax, depreciation and amortization plus noncash compensation expense, and plus or minus certain identified revenues or expenses that are not expected to recur or be representative of future ongoing operation of the business. MIVA uses adjusted EBITDA as an internal measure of its business, and believes it is utilized as an important measure of performance by the investment community. MIVA sets goals and awards bonuses in part based on performance relative to adjusted EBITDA. MIVA defines adjusted net income or loss as net income or loss plus amortization and noncash compensation expense, plus or minus certain identified revenues or expenses that are not expected to recur or be representative of future ongoing operation of the business. In each case including the tax effects, if any, of the adjustment. Adjusted EBITDA and adjusted net income or loss amounts for Q1 '07 referred to on this conference call are calculated by adding noncash compensation expense.

For a detailed review of our second quarter 2007 results, including a reconciliation of our non-GAAP financial measures to GAAP financial measures, please refer to the press release we issued today and to our Form 10-Q for the second quarter 2007 to be filed 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 web site 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?

Thank you, Peter. Good afternoon, everyone, and welcome to MIVA's second quarter 2007 conference call. We appreciate having you on the call today. We're encouraged with the second quarter, which by in large was in line with our expectations. We achieved revenue of $39.6 million and EBITDA loss of $200,000, excluding the estimated $14 million noncash impairment charge. We maintained effectively flat gross margins and increased cash sequentially. On a cash operating basis, our fundamentals have continued to improve, due primarily to $16 million in annualized cost reduction which are now behind us and our ongoing revenue mix shift into higher margin MIVA-owned primary traffic. Looking at our cost structure, our adjusted cash operating expenses were $21.9 million in Q2 '07, below Q1 '07 adjusted operating expenses of $25.1 million. Q2 '07 adjusted operating expenses exclude the estimated $14 million noncash impairment, the net $22,000 restructuring charge and $1.6 million in incremental ad spending. Q1 '07 adjusted operating expenses, excluding the $3.1 million restructuring charge.

We have done a lot of work over the prior quarter to get to a more efficient cost base. Through our outsourcing plan with Perot initiated in the second quarter, we expect an additional savings of more than $20 million over the initial seven year term of our contract. We're pleased to see cash grow in Q2 '07 and we believe this represents a reasonable proxy for progress off the anticipated lower Q2 '07 revenue of $39.6 million. With the more efficient operating base in place, we expect to bottom out revenue in Q3 '07 and then grow more profitable revenue in Q4 '07 and into next year. We're pleased to see the value being created in the current internet advertising environment. The market's rewarding the fact consumers continue to spend more of their available media time online and advertisers continue to spend more money to reach a growing online consumer audience. We believe we are positioned to leverage this positive trend and the continued strength demonstrated by our online advertising market. Our goal is to deliver valuable digital audiences to our advertisers. On the MIVA Direct primary traffic side, we develop direct marketing relationship with our audience and seek to create value for them and our advertisers seeking to reach them both through our 8.3 million active toolbars and through our growing portfolio of MIVA owned and operated websites such as spill.com. On the MIVA Media third party side, our contextual ad networks enabled advertisers to reach targeted consumers through our vertically oriented Precision Network and reach an increasingly fragmented consumer audience through our broader B&B and core media ad networks.

Now let's review the second quarter performance of our complementary businesses MIVA Direct and MIVA Media. I'll also cover the strategic initiatives that are either underway or planning as they relate to our business. MIVA Direct recorded revenue of $13.5 million in the second quarter, flat compared to Q1 '07. We ended Q2 '07 with 8.3 million active toolbar consumers, down marginally from Q1 at 8.4 million. The decrease of approximately 100,000 active users resulted in a marginal increase in revenue per active user. In the first quarter, our advertising spend totaled $7.5 million. We increased our second quarter ad spend by an incremental $1.6 million. While we're disappointed that the increase in ad spend didn't yield an immediate increase in toolbar users, we believe we improved on our distribution late in the quarter by concentrating our ad spend on more profitable toolbar channels and categories. We will continue to pursue more profitable toolbar growth rather than focus on simply increasing the number of active users. We expect active users and ad spend to decrease in quarter 3. Anticipated decline is related to spend shift into prospective higher margin, lower volume channels. We expect Q4 2007 revenue will increase above Q2 '07 as a result of our various initiatives and seasonality.

On the monetization side, we're still learning about our new toolbar partner since switching from Yahoo at the end of January '07. Over time, we believe we will have a better feel for their seasonal patterns and other prospective variances such as refinements to their algorithms which have had an impact on our toolbar search revenue. Overall, however we're very satisfied with the partnership. We believe we have grown -- we believe we have growth potential in our MIVA Direct business and will expect to leverage our toolbar footprint -- 8.3 million active users -- and the scale of our media buying to extend this opportunity.

We're actively working on the following initiatives. First, continuing horizontal expansion in the new global market with an initial focus on western Europe. We spent approximately $1.2 million on European ad spend in Q2 and we expect to increase that spend in Q3. Although early, we continue to see an encouraging spread on the media buy versus the monetization potential in Europe. We're also studying new geographies where our monetization partner has a strong presence. This includes markets such as Australia and Latin America.

Second, expanding vertically into new toolbar categories. While we currently offer toolbars for many categories including recipes, weather and horoscopes, we have identified additional categories where we're working to launch these new categories in the coming months.

Third, solidifying new distribution partnerships. A portion of our current ad spend is done on a CPA basis. Aside from CPA affiliate networks, where the value proposition tends to be less attractive than search, we are speaking with prospective distribution partners that have an existing audience base which attributes that are aligned with our toolbar categories. An example would be an auto site where we would offer an auto specific toolbar. We believe more targeted distribution where the consumer has greater affinity for for the toolbar will potentially have a positive impact on our lifetime value.

Fourth, focusing on other methods of reducing attrition and increasing lifetime example. For example, we currently offer a very basic start page. Start page becomes the default page when the consumer launches their browser. The page offers content, some customization and search functionality. We believe we can improve on our current start page offering to provide a richer experience for the consumer. We believe a more comprehensive start page bundling program and a compelling start page would have significant impact on revenue per active user without increasing our cost to acquire the user.

Fifth and lastly, leveraging our complementary ad network. Our ad network in MIVA Media enables us to buy media at a low cost and direct traffic to our owned and operated sites and toolbar landing pages. Analyzing incoming search queries from our network helps us identify highly searched terms to develop audiences around for our owned and operated sites. We're also positioned to use the toolbar button and send consumers back to MIVA owned websites.

Turning to MIVA Media, we were pleased to see revenue for [FLICK], or RPC, up marginally for the second second quarter in Media U.S. We believe our Vertical Precision network program in the U.S. continued to have a positive impact on RPC. In Q1 '07, Precision accounted for 30% of total Media U.S. revenue, and that has increased to approximately 40% in Q2, and we expect to continue migrating targeted vertical traffic into the Precision Network and broader contextual traffic into B&B where revenue shares are generally lower and our cost of service to clicks are lower as well.

In contrast, Media EU did not perform well in the second quarter, and we're in the process of taking steps to stabilize that business. Given the early success of the Precision Network in the U.S., we will be relaunching verticals in the EU using U.S. style analytic models to replicate that program there. Initially over the second quarter, we identified certain unprofitable deals that had an adverse impact on gross margins in the EU. We are actively managing unprofitable partners to reverse margin losses through a variety of means including contract terminations, renegotiations, and conversions to the renewed Precision Network. We're currently in the process of scaling out of these unprofitable deals, and while this will reduce revenue and subsequent quarters, it is expected to improve margins. The process is expected to continue through Q3 2007. Given all these initiatives, our more efficient cost base, and our ongoing mix shift, we expect to bottom out revenue in Q3 and then grow more profitable revenues in Q4 and into next year.

With that said, I'll turn the call over to Lowell, who will cover our financial results and our outlook for Q3 and Q4. So Lowell, let me turn it over to you.

Thank you, Peter. Our overall progress during Q2 '07 was consistent with our expectation. As we have mentioned, 2007 is a transitional year to a solid profitable base from which to grow revenue. We achieved consolidated revenues of $39.6 million in Q2 '07 compared to $43.2 million in Q1 2007. This was consistent with our expectations of approximately $40 million of revenue. The revenue decrease was primarily due to the planned expiration of our private label offering, typical seasonality and a decrease in revenue per click in our Media EU ad network business. EBITDA was $14.2 million loss in Q2 '07. Excluding the estimated $14 million noncash impairment charge related to our Media EU business, EBITDA was a loss of $200,000, essentially consistent with our forecast for break even. After excluding noncash compensation expense of $1.2 million, we would have had positive EBITDA of $1 million. Notably cash, cash equivalents, increased by $2.5 million sequentially from Q1 to Q2, from $21.4 million to $23.9 million. The increase was due to several large remittances received after Q1 2007 in addition to positive cash from operations.

Consolidated gross margins were 52.5% in Q207, essentially flat with a 52.9% reported in Q1 2007. Gross margins before advertising spend were 94% for direct and flat compared to Q1 2007, but gross margins declined for the Media EU and Media U.S. businesses. The Media EU decline was primarily due to the impact of unprofitable revenue share deals which Peter covered previously. The Media U.S. decline was primarily due to the planned expiration of our private label offering which contributed high gross margin revenue in prior quarters. MIVA Direct, our primary traffic business, contributed 34% of total revenue in Q1 2007 compared to 31% in Q1 2007. As an anticipated, our ongoing revenue mix shift continued over Q2 2007. MIVA Direct generated $13.5 million in revenue in Q2 '07, flat compared to the first quarter. MIVA Direct had $8.3 million active toolbars as of June 30, 2007, essentially flat to the $8.4 million as of March 31, 2007 and above the $6.5 million in the comparable prior year period. Late in the quarter, we began to concentrate our advertising spend on more profitable toolbar channels. We anticipate total active users to decrease over Q3 2007 and then increase again during Q4 2007.

MIVA Direct gross margin was approximately 94% in Q2 '07 which is flat to Q1 '07 and is above the 91% in the comparable prior year period. MIVA Direct gross margin excludes advertising spend of $9.1 million in Q2 2007 and $7.5 million in Q1 2007, which is in consolidated operating expenses within the marketing sales and service line. The increased spending did not yield the immediate anticipated results in revenue and toolbar growth. We expect to reduce ad spend in Q3 2007 as we focus on more profitable high margin toolbar growth. We anticipate gross margins to return to Q1 2007 levels after adjusting for the ad spend.

In our total Media third party ad network, we recorded 299 million total paid clicks in Q2 2007, down from 329 million in Q1 2007, but up from the 256 million in Q2 2006. Q2 2007 revenue for a total Media third party ad network was $25.7 million compared to $29.2 million in Q1 2007. The $3.5 million decline in total Media revenue was primarily due to a decline in Media EU revenue per click and fewer total paid clicks. Due to its planned expiration, our private label offering did not generate any clicks in the second quarter compared to approximately 10 million clicks in the first quarter. Notably, revenue per click was up sequentially for Media U.S. excluding B&B. We believe the increase in rate per click was primarily due to continued traction from our vertically oriented Precision Network program.

MIVA U.S. gross margin decreased from 34% in the first quarter to 31% in Q2 2007, once again primarily due to the planned expiration of our private label offering. In our Media EU business, revenue was down $2.5 million sequentially from Q1 2007. MIVA EU revenue per click was down 11% over the same period. We are continuing to focus on stabilizing our Media EU business in two ways. We have an initiative in place to scale out of unprofitable ad network deals or renegotiate certain deals and we have begun to replicate the model for our U.S. vertical Precision Network program in the EU. Media EU gross margins decreased from 33% in the first quarter to 30% in the second quarter. Traffic acquisition costs were up as a percentage of revenue in Q1 2007 to Q2 2007, due primarily to unprofitable revenue share deals, which as I said earlier we are in the process of reducing. We also recorded estimated noncash impairment charge related to goodwill for MIVA Media Europe in the amount of $14 million. MIVA Media Europe's goodwill was eliminated as a result of the charge. Small business recorded revenue of $400,000 in the second quarter. This compares to $500,000 in the first quarter. On August 1, 2007, we completed the asset sale of MIVA Small Business for $200,000 in cash net of liability assumed. The sale was structured to preserve certain net operating loss carry forward. The sale reflects our strategy to focus on building consumer media, and to transition away from noncore business operation.

Operating expenses were $37.5 million in the second quarter compared to $28.2 million in the first quarter. The $9.3 million increase in operating expenses included the $14 million noncash impairment for the EU businesses, the net zero or roughly $22,000 restructuring charge and approximately $1.6 million in incremental advertising spend for MIVA Direct. Adjusting for the impairment restructuring charge and incremental ad spend, our operating expenses were $21.9 million in the second quarter -- below the adjusted first quarter operating expenses of $25.1 million, which excluded the $3.1 million restructuring charges. The net $22,000 restructuring charge in the second quarter is a function of the $0.5 million in charges from the Perot outsourcing, due to one time employee severance and released cost, offset by $0.5 million in favorability due to lower settlement costs from the first quarter restructuring. Q2 2007 operating expenses included $1.2 million in noncash compensation expense. Q1 2007 operating expenses included a total of $2.1 million in noncash compensation expense, of which $700,000 was related to termination of employees and was included in the $3.1 million restructuring charge. Accordingly, the portion of the noncash compensation expense for the first quarter that was not accounted for in the restructuring charge was $1.4 million. Adjusted EBITDA was $1 million in the second quarter, which excluded the estimated $14 million noncash impairment charge, noncash compensation expense of $1.2 million and the net restructuring charge of $22,000. This compared to adjusted EBITDA of $1.6 million in Q1 2007, which excluded $3.1 million in restructuring charges and $1.4 million in noncash compensation expenses. GAAP net loss was $16.4 million or $0.52 loss per basic share in second quarter 2007. This compares to a GAAP net loss of $5.3 million or 17% loss per basic share in Q1 2007.

Now turning to our balance sheet, cash and cash equivalents were $23.9 million at June 30th, 2007, an increase of $2.5 million from March 31, 2007 cash of $21.4 million. Day sales outstanding or DSO and accounts receivable at June 30th were approximately 40, down from approximately 60 days outstanding at March 31, 2007. As of June 30th, 2007, the company had an active base of 265 full-time employees, down from 346 at March 31, 2007, and 401 at December 31, 2006. The decrease from Q1 is due primarily to the company's Q1 2007 restructuring plan and the Q2 outsourcing of technology to the Perot system. The company is forecasting Q3 2007 revenue of approximately $38 million to $39 million and Q4 revenue of approximately $40 million to $41 million. The company expects to achieve positive EBITDA in the third quarter of approximately $1 million to $1.5 million and approximately $2.5 million to $3 million in the fourth quarter of this year. This EBITDA guidance includes expense related noncash compensation. The increase in EBITDA is expected to be a function of removing certain profitable Media EU deals and increased focus on more profitable toolbar growth. The company expects cash and cash equivalents to be approximately $24 million as of September 30. 2007.

As we have said, this is a year of significant transition to what we expect to be a more profitable and vibrant business due to our initiatives in MIVA Media in Europe and lower MIVA direct ad spend. We look forward to sharing MIVA's continued efforts along this path throughout the second half of the year. I will now turn the call back to Peter for some concluding remarks.

Thanks Lowell, that was a good update. In conclusion, we're encouraged by the many improvements we have made. We've outlined many of the strategic initiatives currently underway, and we're very mindful that there's more work ahead of us. We believe we have made progress toward returning the business to profitable growth and we expect more profitable growth beginning in the fourth quarter.

Thanks, Peter. Kimberly, we can turn it over to Q&A.

Thank you sir. Ladies and gentlemen, the question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We will pause for just a moment. We will take our first question from Christa Quarles with Thomas Weisel Partners.

Yes, I guess I was wondering if you could just get into further explanation of, I guess felt there was two different stories with regard to the increase in ad spend relative to the toolbar performance. It sounded like it may have been kicking in toward the end, but you're going to still pull back in Q3, you expect lower toolbars in Q3 relative to Q2 -- I was just wondering if you could kind of reconcile that again for us. And then I guess the second quick question -- on the small business revenues I assume go away entirely in -- Q, after I guess the August stub period. And then a third question would be just U.S. [take] clicks versus international, I was wondering if you could give us those.

Okay. This is Lowell. Basically on MIVA Small Business, there will probably just be just revenue in the month of July, which will probably approximate about $100,000. And then with the deal, it essentially goes away. With respect to toolbars, we expanded significantly in Europe and over the quarter took a hard look at which areas of the toolbars we were making money in and set certain standards -- and decided over time to set certain margin requirements on the overall toolbar growth to get us even more profitability than we have had in the past. Consequently we're not going to be investing as much in terms of advertising spend to support the toolbar growth and the toolbars will decline somewhat in the third quarter, but will increase significantly and be more profitable in the fourth quarter.

This is Peter. You also had a question regarding RPC, but we lost it when we were [writing].

The paid clicks in the U.S. in the second quarter were 230 million and the EU they were 69 million.

Thank you. Our next question will come from Matt Hewitt with Craig-Hallum.

Good afternoon, gentlemen. Just a couple housecleaning. Cash flow from Ops and CapEx for the quarter?

We haven't released that. CapEx was minimal. Frankly, Perot Systems picks up the CapEx, so it's all included in the cost from Perot.

Secondly, how much of your guidance for Q3 is based upon seasonality in Europe? Do you expect somewhat of a decline versus how much would you say is operational, some of the changes you talked about implementing in Q3?

Well, of course, Matt -- $400,000 or $500,000 is MIVA Small Business being gone, so that's one piece of it. We're pretty sure that we know what we know about MIVA Media U.S. We continue to be bolstered by RPC, by the Precision Network, pretty much everything we're putting into place there as you know is either flattened or gone up. We're two quarters into RPC being up. We have stabilized revenue and are actually growing it. Precision Network and B&B is actually working. So that parts work. MIVA Direct -- that component of the business -- I guess the surprise we had was that there's some seasonality that we got from Google that surprised us in Q2. We have gotten guidance from our partner to anticipate sort of more of the same in Q3 and then anticipate being up in Q4. So that's just us not knowing what we don't know about our new partner versus our old partner and the numbers just happen to come in different from them.

Then, if there is a wild card at all in our guidance, especially as it relates to 3 and 4 it's -- can we get a bottom put into MIVA Media Europe? So it hasn't been great news there. Some of the things we're doing in terms of trying to get Precision Network in place is working. Turns out we need a technology fix we have implemented components of, what, along the last two weeks, where we have gotten some components put in -- we have seen early signs of success there. And we're hopeful against our strategy that we can put a bottom into Europe too. If we have that going for us, we will have a different story in Q4 and Q1 as we're able to try to regrow the company. We're seeing sort of what we expected, and certainly Europe is, what, two quarters behind where we are in the U.S. and where we are in MIVA Direct. But we're certain we're going to be able to get it fixed, but it will be a Q1 and Q4 fix.

Now specifically, the biggest component of our European fix was one of margin. And you'll recall that to take that margin up we actually have to stop revenue growth, because our plan was and still is to get out of these underwater partnerships that we have got. We have been promising you guys that we will largely be through all of that by the end of Q3. We still hold by that. Many are out now and more are coming out all the time. We hope to have that completely turned right side up by the end of Q3. The result of that is some component of our $38 million to $39 million guidance and then the lift into Q4 seeing stabilization into that, seasonality into that, then our operating things fixing in Q4 and beyond.

Thank you. (OPERATOR INSTRUCTIONS) Moving on we will take our next question from James [Kosh] with (inaudible) Capital.

Hi James.

Hi guys. I apologize, I was just getting off another line. So I apologize if you addressed this earlier, but MIVA Direct -- do you expect sequential growth in your MIVA Direct business in the September quarter?

No, we basically said that we're going to reduce advertising spending in MIVA Direct and our toolbars of [8.3] million will go down somewhat in the third quarter, and then increase again in the fourth quarter. The fourth quarter will revert back to historical gross margins net of advertising spend. So we're basically doing to MIVA Direct a little bit of what we have done with MIVA EU, and that is focusing on profitable toolbar growth -- have set hurdles in terms of the net margin and contribution margin you want to see out of the business. We will readjust in the third quarter and then grow from there.

Got you. And correct me if this is wrong, but looking at Q3 and Q4 EBITDA guidance, kind of in line with what previous expectations were.

Yes, on a previous call people asked about what we expect in Q4 to exit at, and we said about $3 million. So we're still at $2.5 million, $3 million. Q3, I think some of the analysts had -- some of the research reports said $1 million to $1.5 million, so the guidance is consistent with what research analysts had us at.

Okay, great. Well, continued success.

Thank you.

Thank you. It does appear we have no further questions in our queue at this time. Mr. Weinberg, I would like to turn the call back over to you for any further comments or closing remarks.

Thanks, Kimberly. 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, will, intend, anticipate, 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 report filed with the U.S. Securities and Exchange Commission including the Form 10-K for fiscal 2006 and its most recently filed quarterly report on Form 10-Q.

In addition, past performance cannot 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. The risks associated with the fact that we have materially in our internal control of financial reporting that may prevent us from being able to accurately report our financial results or prevent [fraud] risk that we are dependent on our ability to establish and maintain relationships with advertisers and advertising agencies. The risk that we have made significant investments in new initiatives that may not meet our expectations in terms of the liability, success or profitability of such initiatives. 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 in early 2007 we replaced an advertising fee providers that accounted for a significant portion of our revenue into '06, which could result in reduced revenue. The risk that our average revenue per click has been decreasing over the past few years, which could materially adversely affect our revenues and results of operations. The risk that we rely on a patent license from Yahoo! for certain portions of our pay per click business. That concludes our call today. Thank you for listening.

Thank you. Ladies and gentlemen, this does conclude today's MIVA conference call. We would like to thank everyone for their participation in today's call. Have a great rest of your day.