Inuvo Inc (INUV) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for joining us today and welcome to the MIVA first quarter 2008 financial results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like turn the call over to Mr. Sloan Gaon. Please go ahead, sir.

Good afternoon. Welcome to MIVA's first quarter financial results conference call. Joining me on the call today are Chief Executive Officer, Peter Corrao, and Chief Financial Officer and Chief Operating Officer, Lowell Robinson.

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 and year-over-year performance. They are adjusted EBITDA, adjusted net income/loss and adjusted net income/loss per share. We believe that adjusted EBITDA, adjusted net income/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 non-cash 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 non-cash 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 an internal measure of its business, and believes that 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/loss as net income/loss plus amortization and non-cash 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.

MIVA to defines adjusted net income/loss per share as the adjusted net income/loss as previously described, divided by the average basic or fully diluted number of outstanding shares of MIVA common stock over the recorded period.

For a detailed review of our first a results, including the corresponding GAAP financial measures, and 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 Q1 2008 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 website. And a replay of the conference call will be available for 90 days after the call.

I would like to turn the call over to our CEO, Peter Corrao, and Lowell Robinson, our CFO and Chief Operating Officer, and Seb Bishop, our President.

Good afternoon everyone and welcome due to today's conference call. We appreciate having you on the call with us.

Q1 was an important period in our turnaround effort as we continue to focus on and build on our consumer-focused strategy. Over the past year we had taken considerable steps to reposition the Direct business, a business that has grown 36% year-over-year from '06 to '07.

At first we established ourselves as a leader in the downloadable applications space by applying for and achieving trustee certification. Second, we established a distribution relationship with Google, which provides our users with the best of breed search experience with the familiar Google brand prominently displayed. Third, we enhanced our product with value-added features, including a Web 2.0 personalization homepage and a specialized targeted content from the likes of eMusic and Spill.com. And fourth, we have expanded the content verticals and geographies of our toolbars.

More recently we transformed our Direct business by launching our new ALOT brand. The brand was launched in Beta at the end of Q3 '07. As a leading direct marketer on the Internet, MIVA Direct spends approximately $2.5 million a month in promoting our product. We felt with is marketing scale it was important to begin to develop a strong brand strategy which would enable us to create a better and more valuable bond with our users long term.

We're happy to report that we believe these brand building steps are working. From our beta launch at the end of Q3 '07 we have grown the ALOT user base to 2.1 million users as of March 31. This represents an increase of $1.1 million from December 31, 2007.

Encouragingly these ALOT toolbar users have proved to be more valuable than users of our legacy toolbar. The metric we use to measure the value of toolbar users is daily RPMLU, or revenue per thousand live users per day. Over Q1 2008 RPMLU for our ALOT toolbar was 54% higher than our legacy toolbar. Additionally, we have seen a 14% improvement in retention rates when comparing ALOT to our legacy brand. We believe this is due to the enhanced feature set that we're delivering through ALOT, coupled with our more targeted and branded acquisition strategy.

So today ALOT toolbar is delivering us substantially more valuable users and less attrition than our legacy toolbar brand. However, with the shift from our legacy toolbar to the ALOT brand, we have experienced a 4.7% decline in revenues in Q1 '08 compared to Q4 '07.

Let me put some context around the decline in MIVA's Direct revenue from Q4 to Q1. The decline can be attributed to three main factors. Firstly, we experienced problems with a toolbar advertising partner that negatively impacted our ability to distribute our product. Second, we had challenges in obtaining display advertising that met our conversion criteria. And third, our overall active toolbar users base decline from 7.1 million on December 31 to 6.5 million on March 31, '08.

This decline is a result of us seeking higher value users and focusing our media buying average towards the ALOT brand. In doing so, we took the decision to cut a number of our lower quality toolbar verticals and to eliminate a number of affiliate partnerships that traditionally formed part of our acquisition effort from our legacy toolbar brand. In short, our ALOT user base is not growing fast enough to balance out the attrition rate of our legacy toolbar base.

We anticipate reaching an inflection point in our business whereby the ALOT toolbar user base overtakes the legacy brand. With this we would anticipate having a user base which is more valuable through its higher retention rate and stronger revenue per user metric. In short, we believe the early results we have achieved validate our strategy.

Leveraging this success by scaling our acquisition strategy for ALOT is a primary objective over the coming quarter, and we had taken several steps to help expedite this process, including strengthening our internal and external media buying [prowess].

Another encouraging trend we are seeing with ALOT brand is in relation to the ALOT homepage product. In Q1 we introduced the first version of the new homepage product. This was designed to provide a faster, more streamlined user experience than the product we offered when we first launched the ALOT brand. Following this launch, we have seen impressions for ALOT increase by 15%. We're excited by the potential that this provides, particularly as we roll out more interactive and sticky features in future ALOT homepage releases.

In addition to our ALOT toolbar and homepage initiatives, we have continued to build momentum around our vision of owning and operating our own traffic. As an example, Our movie review and entertainment site, Spill.com, continues to increase audience over the first quarter. Page views increased 269% from 1.5 million in Q4 2007 to 5.6 million in Q1 2008. Views of our professionally produced movie, video review content increased from 1.3 million views in Q4 to 2.4 million views in Q1. This growing audience has enabled us to further increase our monetization efforts for the site.

In Q1 Spill.com joined joint Viacom's BET ad network, and we're continuing to aggressively pursue other ad partnerships that will help us unlock the value of the site's growing user base.

Overall MIVA is executing well on our strategy of owning and operating our own traffic. The metamorphosis of our business continues as we shift from our third-party ad network with low margins to a direct-to-consumer strategy with higher margins, differentiated products, and what we perceive as better long-term value for our shareholders.

Speaking of which, our U.S. and EU MIVA Media network business has generally performed to expectation over the first quarter, although both declined slightly from Q4 '07 to Q1 '08. Much of the decline can be attributed to a weakening ad environment, especially as it relates to the financial vertical. The UK, which has seen revenue decline for several quarters, however, achieved a 7% quarter over quarter increase in revenue. We do however, continue to face challenges in our other EU countries which we operate in.

Development on our new technology platform continues to progress according to plan. The new platform is expected to launch by the end of the year, and we believe this technology is critical to the Media business to increase our operating efficiency and to grow our business.

Now importantly, the management team and the Board continues to assess the strengths and weaknesses of the Media business globally, and we continue to explore mechanisms to improve financial performance and create greater value for the Company. Overall the new measures we have put in place to help expand ALOT's user base more quickly have shown some encouraging early results, and building on this strategy remain our key focus for us over the coming months. We expect to get back to revenue growth in our Direct business in Q3 '08, while also looking to stabilize and grow our media ad network business.

With that said, I will turn the call over to Lowell, who will cover the financial results and outlook for the full year.

Our consolidated Q1 2008 performance did not meet our expectations. Essentially our Media U.S. and EU businesses are performing consistent with our expectations, but the Direct business was below our initial expectations on the year, primarily due to increased attrition of our legacy toolbar brand, and the decline in the overall toolbar user base. As we highlighted in our fourth quarter earnings call, revenue and EBITDA for the first half of the year would be below the second half of the year.

MIVA's consolidated revenues were $33 million in Q1 2008 compared to $34.6 million in Q4 2007. EBITDA loss was $3.8 million in Q1 2008 compared to an EBITDA loss of $8.9 million in Q4 2007. Q4 2007 included the $4.7 million non-cash goodwill impairment charge related to our Media U.S. business and the $1.3 million related to a portion of the Lane's Gifts litigation settlement. Normalizing for these, our estimated Q1 2008 EBITDA loss was $3.8 million compared to the EBITDA loss of $2.9 million in Q4 2007.

Excluding Q1 2008 $700,000 in non-cash compensation charges, and $100,000 in restructuring charges, and the Q4 2007 $200,000 in net non-cash comp, and a positive adjustment of $200,000 related to 2007 restructuring charges, adjusted EBITDA loss was $2.9 million in Q4 2007 and Q1 2008.

Cash and cash equivalents decreased from $29.9 million at the end of Q4 2007 to $22.6 million at the end of Q1 2008. The decrease was due to the timing of several large payments which went out in early January. Normalizing for these, cash would have decreased from approximately $25 million to $22.6 million, consistent with our expectations. We also paid out 2007 bonuses in Q1 2008.

Consolidated gross margins were 51.9% in Q1 2008, below the 52.3% we reported in Q4 2007. Direct's gross margin before advertising spend were 94% in Q1 2008 comparable to Q4 2007. Media EU gross margins increased from 27 to 28% from Q4 2007 to Q1 2008, while Media U.S. gross margins decreased marginally from 29% to 28%. MIVA Direct contributed 36.6% of total revenue in Q1 2008, comparable to the 36.7% in Q4 2007. We continue to expect the MIVA Direct business to increase as a percentage of the total overall revenue for the full year 2008.

MIVA Direct generated $12.1 million in revenue in Q1 2008, $4.7 million below Q4 2007 revenue of $12.7 million. The total number of active toolbars decreased from 7.1 million to 6.5 million over the same period, however, our ALOT brand toolbars grew from 1 million to 2.1 million. The decreased revenue was the result of our legacy toolbar brand experiencing faster than anticipated attrition, as Peter highlighted. The better metrics from the ALOT toolbar should produce higher quality revenue in the future.

MIVA Direct's gross margin was approximately 94% in Q1 2008, which is comparable to the 95% in Q4 2007. MIVA Direct's gross margin excludes advertising spend of $7.6 million in Q1 2008 and $7.5 million in Q4 2007, which is included in consolidated operating expenses within the marketing sales and service line. Including the advertising spend, MIVA Direct's gross margin was 35.8% in Q4 2007 and 30.7% in Q1 2008.

In our total MIVA Media third-party ad network we recorded 462 million total paid clicks in Q1 2008, up from 413 million in Q4 2007, and up from 329 million in Q1 2007. Q1 2008 revenue for our total MIVA third-party ad network was $20.9 million compared to $21.9 million in the fourth quarter of 2007. The approximate $1 million decline in total media revenue was due primarily to MIVA Media EU which was anticipated.

In our Media U.S. business revenue was down approximately $300,000 sequentially from the fourth quarter 2007, a reduction from the $500,000 decline from Q4 to Q3 2007. The lower revenue was attributable to some softness in our network business in the first half of Q1 2008; however, revenues have ramped up significantly in the latter half of Q1 2008. MIVA Media U.S. gross margins were 21% in the first quarter 2008, below the 29% in the fourth quarter due to higher tax primarily in our reseller business.

In our Media EU business revenue of $8.8 million was down $700,000 sequentially from the fourth quarter 2007 of $9.5 million. Quarter-over-quarter revenue was up 7% in the UK, but was down significantly in France, Spain and Italy.

Media UE gross margins increased from 27% to 28% from the fourth quarter to the first quarter, which is a function of [weeding] unprofitable customers in prior quarters.

Q4 2007 to Q1 '08 traffic acquisition costs were lower as a percentage of revenue from 66% to 64%. Changes to our UE cost structure undertaken in the first quarter of 2008 should allow us to operate at breakeven on significantly lower revenue for 2008 versus 2007.

The bulk of the changes to the cost structure included restructuring certain lease obligations, consolidation of infrastructure assets, headcount reductions, and renegotiation and/or cancellation of unprofitable partnerships. Collectively this equates to approximately $6.5 million in anticipated annual expense reduction.

Total operating expenses were $22.3 million in Q1 2008 compared to $29.1 million in Q4 2007. Q4 2007 includes $4.7 million in non-cash tangible and intangible Media U.S. asset impairment charge, and the $1.3 million portion of the Lane's Gifts settlement. Adjusting for these, operating expenses were $22.3 million in the first quarter 2008 and $23.1 million in the fourth quarter of 2007. The $800,000 decrease is a function of lower employee costs, rent and [parole] charges, partially offset by higher legal and consulting expenses.

As mentioned previously, adjusted EBITDA was a $2.9 million loss in both Q1 2008 and Q4 2007. Adjusted EBITDA loss in Q1 2008 excludes $700,000 in non-cash compensation charges and $100,000 in restructuring charges. The fourth quarter 2007 adjusted EBITDA loss, [excluded] $4.7 million non-cash impairment charge, $1.3 million in settlement charges for a portion of Lane's Gifts settlement, $200,000 in non-cash compensation expense, and a positive adjustment of $200,000 related to the 2007 restructuring charges.

As of March 31, 2008 the Company had an active base of 213 full-time employees, below the 230 employees in December 31, 2007 and 401 at December 31, 2006.

As you'll recall, for 2008 we will provide annual guidance instead of quarterly guidance. We believe it is critical that we focus our attention on achieving our long-term objective for shifting into owned and operated traffic, rather than on short-term results. We plan to update the annual guidance on a quarterly basis.

The Company is currently forecasting 2008 revenue of $140 million to $150 million, and EBITDA at breakeven to a $3 million EBITDA loss ex restructuring charges. We expect revenues to be stronger in the second half of 2008 compared to the first half of 2008 due to the rollout of the new technology platform.

We expect EBITDA to be a loss in the first half of 2008 and EBITDA profitable in the second half. The revenue forecast anticipates growth in MIVA Direct, but not as robust as previously anticipated.

Media U.S. and EU continue to perform to expectations. Media EU revenue will be slightly down from 2007, and Media U.S. revenue and EBITDA will be essentially flat to last year. Included in our Media forecast is the incremental revenue from the new technology platform.

I will now turn the call back to Peter for some concluding remarks.

In conclusion we are encouraged by the higher user value and better retention rates being delivered through the ALOT brand. Leveraging that value through our enhanced acquisition strategy will be a key focus. And we look forward to updating you with our progress in the coming quarters.

Sloan, let's turn it over to you for a Q&A.

We would like to turn it over to the operator, who will be able to assist you in your questions.

(OPERATOR INSTRUCTIONS). Eric Martinuzzi, Craig-Hallum.

The change in the outlook for MIVA Direct, this is primarily, or not primarily -- is it totally about the Starware runoff, as opposed to any change in your outlook for the ALOT traction?

That is correct. This is Lowell. As both Peter and I have said, we had higher attrition than we anticipated on the legacy Starware product, but our ALOT product continues to perform to expectations, and is even doing better than we expected.

The other part of the guidance, I noticed Media U.S. is -- your old language was slightly below, i.e., 2008 Media U.S. would be slightly below 2007. And you have reworded that to be basically flat. What changed in Media U.S. that actually --?

It is actually performing better than we had anticipated initially. We have had some strong sales, both in the first quarter and the second quarter. We feel better about the prospects for Media U.S. and being flat to last year in revenue and EBITDA.

Is that a demand side issue or a supply-side issue? In other words, did you come across new distribution that you have been able to monetize in a better manner or is it greater --?

Actually, it is a combination of both. But we continue to work on segmenting that traffic and sending a higher quality traffic to higher quality buyers, and that is working out for us well in the States.

A little more to your questions about Direct, we are very bullish still about the ALOT brand and what it compares to. Let me give you an example. Today with 2.1 million toolbars, ALOT represents one-third of all of our toolbars that are out there; however, it represents 45% of our revenue.

So they are really out-monetizing the old legacy Starware brand, we are just -- we were -- I would say we're not now to Lowell said, we were struggling with getting them going quick enough to offset the decline in Starware.

Two things that happened, one, we kind of kept Starware alive while we figured that out. I think we figured it out now. And we're very much back on growth with ALOT. And we think that we will actually reach a point where we've got more ALOT than we do Starware here in just another quarter. So by Q3 we will have that settled.

Further, I think we will get back to what we have all expected for quarter-over-quarter and year-on-year revenue growth for the Direct Group beginning in Q3.

Colin Gillis, Canaccord Adams.

This is [Wayne Chang] calling on behalf of Colin. I had a quick question. Can you talk about a little bit about what toolbar verticals you're monetizing best? And also just give me an estimate of what your expected lifespans are each of those toolbars?

We don't talk about expected lifespan. And partly we don't talk about them in ALOT vertical, because we do have a lifetime lived yet in them. Most of verticals are just new. I can tell you though that we have expanded pretty dramatically today. And for the ALOT brand we've got 29 separate verticals out now. Those 29 verticals are available in all of our English-speaking countries and some of our non-English-speaking countries. And we continue to roll them out at a pace of three or four new verticals per month or so.

Great. Thanks.

More to your question. If I were to answer which verticals are performing best, let me answer that by telling you the verticals that perform best when you take into account a buy low, expected sell high with ALOT -- because remember, we don't know what the ultimate sell high will be on the ALOT brands until they have lived their life. But the two best performing right now would be weather and news. That is again mostly in English-speaking countries, U.S., UK and Australia.

(OPERATOR INSTRUCTIONS). Peter Scheidler, Peninsula Capital.

I'm wondering first in your press release, you talk about on business outlook, $140 million to $150 million in revenues, and EBITDA in the range of breakeven to a $3 million loss. What EBITDA is that?

That is basically the --.

Lowell, you have to come closer to the phone, I can't hear you.

That is basically the unadjusted EBITDA. So that includes non-cash comp, etc. In the last earnings release we had at the end of the fourth quarter, we guided to $145 million to $155 million and breakeven. Because of the shortfall in Direct this quarter, and the recovery in the latter half of the year, we felt it prudent to adjust guidance down to $140 million, $150 million, and breakeven to a $3 million loss.

I'm also -- if you look back over the Media -- the Direct business, excuse me, ever since Google has been turned on, that business has gone flat to down. I'm just wondering how we can really look at Google as being good monetization engine when our revenues are going nowhere in four quarters?

Actually, our revenue on the first quarter we picked up Google, which would have been for Q1 '07, I want to think (multiple speakers) -- but I want to think we were up 35%, Pete, on revenue from that date.

Yes, the revenue, Pete, was $13.5 million versus $10.0 million in the fourth quarter of '06.

Now we are $12.1 million, so you are evening proving my point more. We're going down -- we're not going down -- we're not going up at all, we're going down.

But the volume of toolbars, which was all Starware at that time -- I wish I had these numbers in front of me. I think we're at an all-time high -- give me just a second. It is a good question and I want to answer it.

Our all-time high on toolbars was -- somebody find it here for me real quick. It was 8.4 million. And that would have been the end of Q4. That 8.4 million delivered us revenue then of -- about what? Let's find it.

The 8.4 million was Q1 '07.

Of $13.5 million. Right? Now we've got -- (multiple speakers). Let me find it for a second. Now we've got 6.5 million toolbars, but growing now. We think we've got that figured out. And $12.1 million in revenue. That make sense?

Yes, just it is not -- we're not getting anywhere. The second -- the third question I've got is on G&A. That number just isn't going down at all hardly. It was $9.4 million. It is $8.7 million or $8.8 million, and it was $7.9 million a year ago. I'm trying to figure out how you are going to get down to -- first of all, what are the major component of that G&A that are costing us so much money on a quarterly basis?

Basically we took out a lot of cost in G&A last year. The headcount, as we said, on December 31 was 401. We are now at 213. Actually when Peter took over we were at 483, Peter? So we took out $26 million in costs in aggregate over the past two years since Peter took over.

The major component to the G&A are twofold. One is public company expense and the other corporate expense associated with headcount, etc. So that is pretty much it. We did have an uptick this quarter in terms of legal expenses associated with some litigation stuff, which was about $0.5 million higher than we expected. But in aggregate the expenses are tracking to what our expectations are.

Let me ask you this. Just from a concept standpoint, why would there be any management bonuses when we are losing money every quarter? Why would management get any bonus at all?

This is Peter. Management did not get any bonuses. The only bonuses that were paid in Q1 were one guaranteed bonus in the entire management team from a new hire, no bonuses for the rest of management. The only bonuses that were paid were that of the rank-and-file employee. None were paid on their corporate or division level. The only thing they would have gotten any bonus level on would have been their personal attainment of goals. So no management was receiving any bonuses for '07.

How much did you lose in the European business in the quarter?

We haven't disclosed that.

Is that going to be in the Q?

No.

How much did you lose last year?

We didn't disclose that either.

All right.

As Peter and I said, the cost take out that we've done down will get it to breakeven this year. And we have taken out $6.5 million on an annualized basis in the EU. And frankly, the revenues that we are seeing there now are somewhat higher than we saw earlier in the year. So we're more optimistic based upon the increased focus in the business, and the new managing director in the EU has really done a stellar job in terms of turning the UK around.

My last two questions. Your guidance is really implying that revenue goes down again in Q2. And then you're hoping and praying that we can make up and get back to some kind of big revenue line in Q3 and Q4. First, does that sound right? And then secondly, how do you possibly expect to get, with two-thirds of your business flat -- get to see an amazing growth in Direct business in the third and fourth quarters to get to those revenue lines?

Frankly, what we said in the last conference call with the fourth quarter and in this conference call was that the forecast revenue and EBITDA would be below the second half of the year. We did say that the fourth quarter and part of the third quarter includes the benefits of the new platform coming on board, which is a significant number. And then we do expect a significant growth, as Peter said, that the Direct business will start to turnaround big-time in the third quarter and grow in the fourth quarter.

I want to add to that more specifically too for you. Back to this issue of all-time high of 8.4 million and our current low of 6.5 in toolbars, the 8.4 million you would have revenue per toolbar then of $1.61. Our current revenue against which only one-third of the toolbars being ALOT, is $1.86. That whole revenue spread is made up in only 2.1 million of 6.5 million toolbars. So they are really out monetizing Starware. And we haven't released inside of the quarter numbers, but I can tell you that right now Starware is growing net, meaning after all is said and done, we're growing the ALOT brand net 100,000 per week. Which is pretty dramatic and why we're so confident that we're going to achieve these numbers once we get it behind us in Q3 and Q4. So that is a net number, 100,000 per week growth.

As a shareholder I sure hate to see us burning so much cash. I would like to see more cuts in expenses or salaries or something, because we're just not getting to where we need to get. It is frustrating to see the Company going down consistently in revenue, and continuing to have large losses, and continuing to spend a lot of money in the operating line. I'm done.

(OPERATOR INSTRUCTIONS). That does conclude our question-and-answer session. I would like to turn the call back over to you, Mr. Gaon, for any additional or closing remarks.

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, intends, 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. These risks are described in MIVA's reports filed with the U.S. Securities and Exchange Commission, including the Form 10-Q for the first quarter 2008.

In addition, past performance cannot be relied on 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. One, the risk that one advertisement fee provider account for a significant portion of our consolidated revenue. Two, the risks that the success of MIVA Direct is dependent upon our ability to maintain and grow our active toolbar base. And three and finally, the risks that our MIVA Media business is dependent upon our relationships with, and the success of, our distribution partners. The risks that we have made significant investments in new initiatives that may not meet our expectations in terms of the viability, success, or profitability of such initiatives.

That concludes are call today. And we thank you for listening.

(technical difficulty) today's conference. Thank you for your participation. You may disconnect at this time.