Inuvo Inc (INUV) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Kowabunga! second-quarter 2008 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded today, Monday, August 11, 2008. I would now like to turn the conference over to Ms. Ina McGuinness. Please go ahead.

Thank you, operator. Earlier this afternoon Kowabunga! released its financial results for the second quarter and six months ended June 30, 2008. If you have not received the press release, it is available on the Investor Relations section of the Kowabunga! website at www.Kowabunga.com. This call is being webcast, and a replay will be available on the Company's website for 30 days.

Before we begin, we'd like to remind you that today's remarks contain forward-looking statements within the meaning of federal securities law. These statements do not guarantee future performance, and therefore undue reliance should not be placed on them. We refer all of you to the risk factors contained in the Think Partnership 10-K filed on March 31, 2008, and subsequent filings, for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements. Kowabunga! assumes no obligation to provide any forward-looking projections that may be made on today's release or call. This conference call contains time sensitive information that is accurate only as of the date of the live broadcast, Monday, August 11, 2008. Kowabunga! undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call.

Participating on today's call for the Company are Chief Executive Officer Stan Antonuk, Chief Financial Officer Jody Brown and Chief Revenue Officer Steve Lerch. With that, I'd like to turn the call over to Stan. Stan?

Good afternoon, everyone. I'd like to thank you for joining us today in reviewing our second-quarter 2008 earnings. After I conclude my opening remarks I will turn the call over to Jody Brown to review the financial results. Steve Lerch will then provide an update on the various business units and, in particular, our progress on our networks segment. Finally, I'll open the call to your questions. Jeremy Chrysler, our Vice President of Business Development for our pay-per-click business, will also be joining us for the Q&A session.

First, let me start by saying I'm particularly pleased with the continued growth in our network segment and the improvement in our operating margins and overall EBITDA this quarter. We had some very tough but necessary decisions to make in getting this Company back on a solid footing. We are executing on our plan of divesting non-core assets, streamlining our operations and focusing on our valuable core competencies in the interactive marketing and performance space. The second quarter marks the beginning of a lengthy turnaround process for Kowabunga!. I want to spend the majority of my time conveying my strategy and direction for our Company, but it's important to at least highlight some of the accomplishments in the second quarter because there were many.

As I stated during our last earnings call, we implemented many cost savings measures to strengthen the financial health of the Company. We commenced the process of rightsizing our organization, which resulted in more than $3 million in annualized payroll savings, and we closed our unprofitable UK-based Web Diversity business. The benefits from these improvements didn't begin to fully materialize until June and we expect to see the full benefit of improved operating margins in the third quarter. At the end of the second quarter we announced our plans to move forward with the divestment of certain non-core assets that secure the financial advisers, McFarlane, Dewey & Co., to assist us.

I am pleased with the progress we've made in preparing these assets for sale. We currently have interested parties under [NDA] looking at these assets. These divestiture efforts are an important element of our overall strategy.

We also recently added two experienced businessmen to our Kowabunga! board -- Jack Balousek and Charles Pope. Jack has more than 20 years experience in executive management, and Charlie brings more than 30 years experience in executive management, finance and accounting to their director positions. I am excited we have Jack and Charlie on our Board and assisting us with the transition of Kowabunga! I've directed CRO Steve Lerch to broaden and intensify our marketing efforts to assist in the growth of our continuing businesses. While you will hear more about this in his remarks, I will say that I'm encouraged by the recent progress including the hiring of a public relations firm with excellent credentials in the interactive marketing space.

As we announced in an 8-K two weeks ago, John Linden, formally our CTO, was terminated from the Company. We filed a lawsuit against him seeking recovery of certain Company assets and expect to litigate this and other claims regarding his termination. As has been our policy, I will not comment on pending litigation. I will note, however, that we have a very strong leadership team in place at Kowabunga!. These individuals are experts in the search and affiliate advertising industry. I am proud of this team and thankful for the commitment to the common goal of creating a leading Internet advertising company. We expect to successfully move forward with this team.

Now I would like to address the turnaround efforts for this Company that began in the second quarter. These efforts have three major components or phases. The first phase is to strengthen our financial position through significant improvements in operating efficiencies. As I mentioned, we have been very successful at implementing cost-cutting measures in the second quarter. We will continue to stay focused on driving efficiency improvements across our organization and are especially mindful of the importance of controlling corporate expenses in this period of transition.

The second component of our turnaround is to dispose of assets that are no longer considered core to our strategy going forward. This will allow us to strengthen our balance sheet and, more importantly, allow us to focus all of our attention on growing the network segment. As I said earlier, I am very pleased with our progress here.

The third component of the turnaround is to recast this Company as a pure Internet advertising company and focus on growing our search and affiliate marketing businesses. Kowabunga! is already a much different company than it was just only six months ago. Our network segment now makes up a majority of our revenue and continues to grow quarter over quarter. We are refining our strategy, reconfiguring our organization structure to match our priorities, especially with respect to our planned technology development needs.

We are also gearing up our communication efforts to address both internal and external channel requirements. Network segment revenue grew by 7% to $10.4 million in the second quarter over the first quarter. But it's important to highlight that, after a flat start to the quarter, we saw strong growth in our network segment toward the end of the quarter, especially with respect to our pay-per-click marketing business. Network revenue in June was $4 million, and the third-quarter run rates appear to be continuing this trend with July network revenue on par with June.

I highlight June and July revenue results to show that we have experienced more recent growth in our network segment, which makes us very excited about the results of our efforts in growing our search and affiliate networks. We are very much focused on increasing this segment, but it is important to understand that certain aspects of it are relatively young businesses, and we may have peaks and valleys over the near-term as we continue to get our arms around this opportunity.

Although we are on track to achieve our previously stated guidance of doubling network revenue in 2008 over 2007, because we are rebuilding and repositioning the Company coupled with the uncertainties that exist with a young and growing business, we will no longer issue guidance going forward. Steve will provide a more detailed update regarding the opportunities we have in our network segment, but I would like to take some time to convey our high-level plans for the network segment.

First, I am very pleased with the growth we have seen in our network pay-per-click business. We have two products sets for PPC advertisers -- our ValidClick Search Network and our ValidClick AdExchange. Our ValidClick Search Network continues to enjoy robust growth. We're fortunate to have a large tier one advertising feed in this network, and as we continue to add distribution, we're able to serve more ads and increase clicks. Our focus in the second quarter was to aggressively target new publishers for this network. We added 12 new publishers in the second quarter, and as a result paid clicks increased by 12% over prior quarter.

We will continue to focus our growing distribution in this network and have approximately 15 publishers already in the pipeline expected to be added to our Search Network this quarter.

Our ValidClick AdExchange, launched in November 2007, made very good progress in the second quarter and we continue to strongly believe that it presents a tremendous opportunity for us. The data center upgrade, completed in this quarter, gives us some of the additional capacity we expect we'll need to continue to grow this business. In the second quarter we focused on adding distribution to our AdExchange, which resulted in a 453% increase in paid clicks over the first quarter and resulted in a respectable increase in revenue to the Company from this exchange. We are now in a situation where we have more distribution than ad inventory within the exchange, and our focus in the third quarter will be to increase our advertiser base.

We will have a technology project completed this week that will allow us to easily integrate third-party advertising feed providers into the exchange and this will significantly increase our ad inventory. Currently, we have approximately 1000 advertisers in the exchange. With the launch of a new third-party feed capability, within a couple of weeks we expect to grow our advertiser base to 10,000 to 15,000 and at least 50,000 advertisers within four to six weeks. Our goal is to have 100,000 advertisers in the exchange by the end of the year.

Once we have this level of ad inventory, we believe we'll have access to a higher tier of publishers that will be interested in participating in the ValidClick AdExchange. At that point we would move closer to the critical mass we have referred to in the past and expect to start to see the real benefits of our scalable exchange.

With both (inaudible) products we are building a broad distribution network for PPC advertisers, both direct and from third parties to experience high converting Web traffic. And our alliance with Fair Isaac and the revolutionary technology that we delivered to the PPC marketplace provides the industry with a solution to close the value-price gap currently facing many advertisers in this space.

Our (inaudible) marketing products, MyAP and PrimaryAds, continue to generate solid results for us. We continue to have strong relationships with our large clients leveraging our clients leveraging our (inaudible) products and saw a significant increase in performance with many of our larger clients. Our significant upgrades to our MyAP merchant platform and new KB network affiliate platform are beginning to take shape, and we, as well as our clients, anxiously await their launch expected later this year.

As I stated earlier, Kowabunga! is a much different company than what it was just six months ago. Our strong and growing CPC and CPA-based businesses will allow us to transition into a pure Internet advertising company. Our older ValidClick Search Network and PrimaryAds and MyAP affiliate products are stable and continue to grow as we add distribution and new advertisers to those networks. I'm confident in the plan we have in place to build our ValidClick AdExchange and am very excited with our execution to date against this plan.

Now I would like to turn the call over to Jody Brown to review details about our first-quarter 2008 financial results. Jody?

Thank you, Stan, and good afternoon. Before I begin my financial commentary, let me preface my remarks by addressing the financial presentation for this quarter. Because the Board formally approved the divestment of certain entities during the quarter, this action established a measurement date for disposal that, among other things, requires us to segregate the operating results of the continuing operations from those expected to be divested. Additionally, we've added some degree of complexity to our periodic valuation of the goodwill and intangible assets because we could no longer avail ourselves of traditional means but were forced to view them on more of a liquidation value basis.

As you will see, this led to significant non-cash impairment write-downs that added to a loss from discontinued operations. There is a lot of detail provided in the footnotes to the 10-Q regarding these discontinued operations, and the bulk of my remarks today will focus on the continuing entities.

We are pleased with the overall revenue growth for the second quarter with revenue from continuing operations totaling $12.8 million, up from $12.1 million in the preceding quarter and $5.8 million a year ago. Revenue in our network segment was $10.4 million for the quarter, up from $9.7 million in the prior quarter.

Our Search Network and affiliate networks grew sequentially by $0.2 million and $0.5 million, respectively. Direct revenue was $2.7 million for the quarter. Our BabyToBee property contributing $2.4 million, the same as the previous quarter. Revenue associated with companies being held for divestiture amounted to $7.5 million compared to $8.9 million in the previous quarter.

Gross profit for the quarter was $5.1 million, 40% of revenue. Gross profit for the prior quarter was $4.8 million, also 40% of revenue. Gross profit for the second quarter of 2008 from our segments was as follows. Network segment overall was $3.6 million, 34% revenue, compared to the prior quarter of $3.2 million or 33% of revenue. Within our network segment search gross margin was $1.6 million, 28% of revenue. For the previous quarter it was also $1.6 million or 29% of revenue. Our affiliate networks contributed $1.8 million, 40% of revenue, as compared to $1.4 million, 35% revenue, for the prior quarter.

Our direct segment had gross margins of $1.7 million, 62% of revenue, as compared to $1.8 million or 64% of revenue, for the prior quarter. Our BabyToBee property contributed $1.5 million in both the quarters, 62% of revenue for both quarters as well.

As a result of our declining market cap over the last six months and the decision to divest certain assets in the second quarter, we had to perform a valuation of all reporting units as of June 30th. Due to these valuations, we incurred non-cash impairment charges of $11.5 million related to intangible assets held in our direct segment. $9.3 million of the write-down was associated with our BabyToBee property, with the remaining impairment associated with our online education intangible assets.

Our pre-tax loss from discontinued operations for the quarter was $27.4 million. As mentioned above, we performed valuations of all our assets held for sale as of June 30th. As a result of these valuations we incurred pre-tax impairment charges of $27.9 million. This compares to a loss in the prior quarter of $1.8 million, of which $1.2 million was related to impairment charges.

Discontinued operations includes the results of MarketSmart advertising, Web Diversity, our online dating properties and iLead Media.

Amortization of purchased intangibles was approximately $0.5 million for the second quarter versus $0.6 million for the prior quarter. Interest expense for the three months ended June 30th, 2008 was $0.2 million, as it was for the prior quarter.

The Company's net loss per share from continuing operations was $8.9 million or $0.13 per share during the second quarter compared with a loss of $1.1 million or $0.02 per share for the prior quarter.

Net loss per share from discontinued operations was $25.8 million, $0.38 per share, as compared to a loss of $1.2 million or $0.02 per share for the prior quarter. Overall company loss was $34.7 million, $0.51 per share, as compared to $2.3 million or $0.03 per share for the prior quarter. Our cash and cash equivalents at June 30th, 2008 were approximately $0.1 million.

Prior to turning the call over, I wanted to address the cash balance in our financial statements. In an effort to reduce our interest costs, we made the decision to consolidate our bank accounts and have them [sweeped] daily against our line of credit. Due to this fact, our bank accounts have nominal balances in them. As of June 30th, we had approximately $3.4 million available under our loan agreements with Wachovia. We currently have a great relationship with Wachovia and feel that our current facilities with them are sufficient to allow us to operate and grow our business. We feel that the divestitures that we're focused on completing will further help us strengthen our balance sheet and cash position.

Now let me turn things over to Steve to talk more about the Company's growth plans.

Thank you, Jody, and good afternoon, everyone. As you can tell from the financial statements and some of today's commentary, we are a company in change and transition. However, from a current operating perspective, we believe we have already moved well beyond much of the transitional issues and our currently a more streamlined and focused organization. Our employee team is focused on our desire to become the leading innovator and develop in the most efficient and value-driven means of buying and selling online advertising. We're already evolving our strategy to not just grow our existing PPC and CPA product sets, we will also successfully implement our go-to-market plans for the ValidClick AdExchange, but to also be thinking ahead to ensure our platforms' continued relevance in a rapidly changing marketplace.

We believe that our unique technology, our value to Fair Isaac partnership, our strong customer base on both the advertiser and publisher side, and frankly, the experienced industry-savvy search and affiliate marketing talent we're fortunate to have in our organization today all lend themselves to the development of a sustainable and profitable organization.

As Stan indicated earlier, our pay-per-click business, specifically the Search Network, has continued to perform very well, and in fact we exited the quarter at a higher than average monthly revenue run rate that has been sustained through the first month of Q3. This favorable trend was driven primarily through adding quality publishers in the latter half of the quarter and a corresponding increase in paid clicks as well as a slight increase in revenue per click. This Search Network consists of our feed patrol click fraud filtering technology, a variety of publishers that we have recruited to network and a Tier 1 feed of advertisers composed primarily of small and medium-size businesses.

We're also pleased with the positive progress of ValidClick AdExchange. Although our plan includes enlisting a large concentration of advertisers to provide sufficient inventory so that we may serve ad calls from a broad, diverse group of publisher networks, we have chosen to initially focus on the distribution side. Throughout the second quarter we continue to partner with publisher networks, have seen a dramatic rise in impressions since the first of the year and have enjoyed moderate success in monetizing these searches from our direct advertiser base.

With the plant enhancements to our system that are due for release later this week, we expect to significantly increase the amount of ad inventory, particularly through advertisers with a local focus, by the addition of third-party networks. We anticipate that this wholesale network capability will have an almost immediate impact on the amount of paid clicks. And, perhaps more importantly, it should provide some upward pressure on bid prices, thus increasing revenue per click and making our exchange that much more attractive to publishers.

We're planning a number of other enhancements to the ValidClick AdExchange platform over the next several months and are working closely with our partners at Fair Isaac to coordinate our efforts and refine our process. We have also begun to explore with the very talented team at Fair Isaac some other opportunities to further work together that would allow us to better utilize our world-class quantitative analytic capabilities in conjunction with our embedded merchant and affiliate base and the other related offerings.

Our [CPA] programs had modest growth for the quarter. Our PrimaryAds cost-per-lead business has a very strong affiliate base and we're evaluating various options to increase the amount of offers available as well as adding (inaudible) offers to their repertoire. The MyAP business saw an increase in revenue from some of the large managed accounts during the quarter but a slight decrease in revenue from the unmanaged merchant base.

We're in the midst of the design and development of a new MyAP version 10 platform, which, among other things, standardizes much of the features, functionality and administrative procedures that were customized in many of the earlier versions. Once we roll out the new version, scheduled later this year, we anticipate significant growth in merchants and distributions.

I'm pleased to tell you that we launched our own e-mail messaging services business in the second quarter, and we're trading under the name Active Impression. This initiative is intended to coordinate our e-mail strategy across the enterprise, assist in promotional marketing and transactional messages and drive revenue retention and customer acquisitions. We have brought on board an experienced senior manager and his team, and are first looking at our internal list and opportunities and will move to external list management opportunities later this year. We're very pleased with the progress to date and expect to begin to see some positive impact in our P&L from this group commencing this quarter.

Lastly, I am very excited to have [Craig Smith] and the PReturn team now onboard to assist us with our marketing and public relations. Craig has already been to our offices twice to meet with the team and has worked with us to develop a number of initiatives around thought leadership, corporate messaging and branding, trade magazine exposure, to name a few. We're looking forward to some very positive outcomes as we step up the marketing of our network company sees and assets.

At this point, operator, we'd like to open the call for questions.

(OPERATOR INSTRUCTIONS). Richard Ingrassia, Roth Capital Partners.

(inaudible) put some perspective on the number you just gave, number of advertisers in the Search Network, and I believe you said 100,000 by year end, from 1000 today. Tell us how exactly you get there and, in a general sense, how this translates into revenue growth and margin. Obviously, you are not looking at a 100-fold increase on the top line in that business.

As I mentioned, we've got about 1000 advertisers in our AdExchange now, and it's important to note that the numbers that I stated are around our AdExchange. We're building a technology which will be released this week which will allow us to integrate with third-party advertising feeds. So that integration effort will give us the capability to bring in -- advertisers with large access to inventory into our AdExchange. So, in very short order, we expect to significantly grow the number of advertisers and offers into that AdExchange. So we're very confident in being able to grow the advertising base to those numbers that I stated, the 50,000 this quarter and up to 100,000 by the end of the year.

Now, I would agree with you, expecting an increase in revenue by 100-X -- I wouldn't expect that. But I will say increasing the amount of advertising in this exchange is our number-one priority. As I said, we've significantly increased our distribution in the second quarter in the AdExchange, and now we've got what I'll call pent-up distribution sitting there. So we need to add that inventory -- advertising base [down to the] AdExchange so we get clicks to cross, and we expect that will go a long way for us to really see the benefits out of the AdExchange.

I guess what I'm looking for here is a little bit better picture on what it means to profitability. What kind of margin are you giving up by going to such a broad distribution and encompassing third parties?

I don't think we're giving up any margin. We're expecting the margins to hold to where they have been. Our focus is on scaling this AdExchange and we believe the success is around building a scalable solution which we're doing with AdExchange. And, I would expect margins to hold favorably to where they have been.

Can I take a minute to discuss the state of the industry overall as it relates to second tier and third tier ad network players, such as yourselves? We've detected I guess what you might call a flight to quality in the current economic environment. That is an even larger proportion of search budgets going up to Google, Yahoo, MSN , the big four. Are you witnessing that effect as well, or not?

I think you've got a really good point there. I do think that, as new methods of fraud and different things like that evolve, that the, quote-unquote, tier two and tier three networks are vulnerable to changes, especially as relate to value. I think that's one reason why, for the first six, seven months of the launch it has been our primary focus to make sure that we refine this machine that we've built to protect our own advertisers so that we can make sure that we can deliver good quality for advertisers even in tier two/tier three distribution. I feel very comfortable with the fact that our engine does that, first by the filtering of the fraudulent clicks and, second, by bringing those bid prices down.

So I think, while you do see that in the industry, I think that our technology gives us a big leg up in terms of avoiding implications.

Finally, if you are no longer providing guidance, can we assume that you now do not expect network revenues to double this year?

No. As I said, we're well on our way to hitting that previously stated guidance. What it really comes down to is a matter of corporate philosophy. We're just not going to be in the business anymore of providing guidance. This is a growing business for us and we're focused on growing and executing it. So we're just not going to focus on guidance going forward; instead, let the numbers speak for themselves.

John Gilliam, Point Clear Strategics.

I wondered if you could give us an update on the stock repurchase program. Where are we at year to date with that?

Jody, you and to address that?

Right now we are constantly, along with our Board, analyzing the best uses our capital. Currently, along with our Board, we've decided that the best use of our capital is to work on growing this Company into paying down our line of credit, which would free up free cash flow to help us grow. In the future, we'll be looking at our cash on a quarterly basis to make decisions on whether we will be in the market.

The only thing I'll add there is that everyone around this table here would love to be able to buy shares at this price, without a doubt. As Jody stated, we're in a situation where there's better uses for that capital.

(OPERATOR INSTRUCTIONS) [Chandler Jinwani].

Could you name some marquee clients that you already have or are in the pipelines?

Could you repeat that?

Do you have any big-name or marquee clients who are already in the pipeline working with you or coming on board shortly?

We have various and sundry players on both sets of the business -- Chandler, it's Steve. We have, on the CPA product standpoint, particularly in MyAP, I think you know we have some large managed accounts where we do manage the affiliate networks on behalf of some pretty good names that you've seen us speak of in the past. And on the AdExchange -- excuse me, on the PPC side, with our ValidClick Search Network which we talked about earlier, we have a very large tier one customer that we've been partners with for three to four years now. We're looking to expand those relationships as well as a whole host of others. As we talked about before, both on the publisher side of the slate as well as on the advertisers slate, we're talking to other tier one players, ad agencies and the most recent is the third-party networks that we made reference to that should contribute a large part of the advertiser growth that Stan was talking about.

But we don't have any big names that we can release?

Much of the agreements and contracts we do as a rule preclude that. If we could do it, trust me, we would do it. But we're very comfortable that the people we are doing with are the right players.

Gentlemen, I'm showing that we have no further questions at this time. Please continue with any closing remarks.

So, in summary, if there are a couple of things you should take away from this call, it is this. Kowabunga! has gone through a great deal of difficult but very positive change in the second quarter and these changes were essential to our future success. I believe a majority of the work regarding the cleanup is behind us. We're now primarily focused on continuing operations, which are predominantly network-driven. Our continuing operations have shown favorable increases in the second quarter in revenue, gross margin and EBITDA. In particular, our network segment has surpassed our expectations to date. I believe our strong product sets in the TPC and CPA space will enable us to achieve our goal to become a successful pure Internet advertising company, and I look forward to sharing our results with you on future calls. Thank you and have a good day.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.