Inuvo Inc (INUV) 2009 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Kowabunga! first quarter 2009 earnings conference call. (Operator Instructions) At this time it is now pleasure to turn the floor over to your host, Melissa Witt. Ma'am, the floor is yours.

Thank you, Operator. Earlier, Kowabunga! released its financial results for the three months ended March 31, 2009. 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 45 days.

Before we begin, we would 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 Kowabunga! Form 10-K filed in March 2009 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.

This conference call contains time sensitive information that is accurate only as of the date of the live broadcast, Thursday, May 14, 2009. Kowabunga! undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. Participating in today's call from the Company are Chief Executive Officer, Richard Howe, and Chief Financial Officer, Gail Babitt. With that, I'd like to turn the call over to our CEO, Rich.

Thank you, Melissa, and welcome, everyone, to Kowabunga! 's fiscal year 2009 first quarter conference call. On the call today I will be providing a high level summary of operating performance for the quarter, identifying where appropriate additional areas where we could see operating benefit, and I will also highlight a number of important initiatives within the exchange and direct segments of our business. Gail will follow me today, providing a more detailed assessment of financial results for the first quarter. Let me begin with performance.

Q1 is the first full quarter under the new management's direction. Our primary operating focus over these last three months has been to continue to manage expenses aggressively in an effort to stay ahead of revenue declines resulting from a weak economy and as a means to improve the Company's cash flow position which is a condition of our working capital loans with the bank. To this end, beginning in Q1 and for the remainder of fiscal year 2009, I have aligned management incentives for the fiscal year principally with year over year EBITDA improvement.

For the first quarter, I am comfortable with our advancements reporting an EBITDA of $1 million in Q1. That is up $1 million from Q4 of 2008 and up $600,000 over the comparable period in Q1 of 2008. The biggest contributor to this improvement has been a reduction in SG&A expenses which were $1.8 million less this quarter than they were in the comparable period. On an annualized basis we now expect SG&A expenses to be down approximately $3.5 million overall in fiscal year 2009. In Q4, I commented that this number would be $2 million.

Both the net income and the net cash flow from operations lines have improved in Q1 over the comparable periods. Net losses for the quarter were $800,000 compared to a $2.3 million loss in Q1 of 2008. Net cash from operations was a positive $2.8 million this quarter compared to a negative $1.5 million in Q1 of 2008.

Revenue in the quarter from continuing operations was $13.9 million, down 14% when compared to $16.2 million in the comparable period of 2008. Revenue from discontinued operations for the quarter was $3 million. The decline in gross revenue from continuing operations was attributed to the Direct Segment and was the result of three factors when compared to the prior year. The former iLead business was, for the majority of 2008, a discontinued operation. A reduced focus and investment within this business over the period while within discontinued operations resulted in revenue declines. Recall that this business was only brought back into continuing operations in Q1.

We also experienced weakness within our lead generation business, PrimaryAds. That was the result of poor quality traffic caused by inadequate risk management processes when affiliates were signed up and the limited application of fraud technologies for monitoring while in production. Both problems have had an effect on advertiser customer satisfaction, the source of revenue within this business. Both issues are legacy, operating and technology issues that have their origins well before Q1 of 2009. These issues have now been addressed going forward.

And, lastly, the economy has had an impact on the number of programs advertisers are actually running with Kowabunga! in addition to having an impact on the sign up rates for our own product placement online. In the latter case, the reduction experience can be correlated to the absence of discretionary income within the consumer markets. Revenue within the exchange segment was up 34% over the comparable period in 2008. Growth within the exchange segment had been driven by the search side of the business, an area of the overall marketing budget that continues to attract dollars despite a challenging economy.

Looking forward for the exchange business, however, we do see some pressure on the revenue per click we receive. While overall search traffic is actually up across the industry, the average revenue received per search has dropped off dramatically, in some key word categories by as much as 70%. Advertisers are pulling back on spending and bid prices for key words have been dropping. For Kowabunga!, these market forces appear to be lagging effects of the economic downturn. Other than seasonal variability in revenue within the exchange, March of Q1 was the first month over the last two years where we experienced a significant month over month decline in search revenue. Since our traffic volume within search has not dropped materially, we attribute this decline directly to this overall market pricing issue.

A number of reputable research organizations have been forecasting weakness in the revenue achieved per click cross our industry. On a consolidated basis there appears to be some consensus that the trend will continue with improvements only beginning towards the end of the year. This trend, should it continue longer than expected, could have a potential impact on both our revenue and margins within our exchange segment for the year. Overall, while we have a business that remains well targeted to segments of the marketing budget that continue to attract spending, the unpredictability of the current economy and the uncertainty of its impact on our business will continue to drive an expense control focus at Kowabunga! for the foreseeable future.

I would like to now highlight some notable items within the direct marketing segment. I am encouraged overall by the progress we are making within this business unit. Recall that in Q1 we made a decision to combine the direct marketing technology, personnel and remaining products within the former iLead operation with direct marketing programs and the affiliate network of the former primary add operations. Both businesses generate leads through primarily online based programs and, as a result, we believe there were operational benefits to be had by combining these operations.

Some of the highlights from this business this quarter include the following. While I earlier commented that we have had challenges within our lead generation programs, the challenges -- the changes we made at the end of Q4 are now beginning to positively impact our billing rates to advertisers, in some cases, by as much as 25% over the comparable period in 2008. We entered the nutritional supplements market in Q1 with the promotion of two dietary products within our network. We plan to launch an additional two products before the end of the quarter to round out this product line. We now have preliminary information from the first product launch and we are already experiencing sign ups at an average rate of approximately 75 per day. The revenue recognized per sign up for Kowabunga! is approximately $50.

We are also now in market with our food and alcohol safety recertification website. While it is still too early to the report progress on this initiative, we do believe that online continuing education courses, like the ones we offer, will continue to attract increase single larger numbers of professionals. We also expect to go live with an accounting, finance and insurance recertification website later this month. Both these new offerings leverage our experience in this market and complement our existing real estate school online and the OSHA recertification website already in operation.

We are targeting industries with a labor force demands are expected to show sustainable growth. For example, the Bureau of Labor Statistics forecasts the need for accountants will increase by 18% between 2006 and 2016. Statistics like this one and the growing predisposition on the part of professionals to complete education and recertification obligations online position us well with these new online offerings. Within our BabyToBee website property we recently implemented a significant technology enhancement to our proprietary teleservices platform that allows for lead transfer. This capability will allow our agents to transfer leads to product partners in real time and, as a result, reduce the breakage that occurs between these steps. Let me now turn our attention to the exchange segment.

As described on the fourth quarter conference call, this segment is now exclusively focused on the platform technologies that serve both advertisers and publishers or affiliates. I would like to begin by updating you on an initiative I first highlighted for you in Q4. On that call I explained how Kowabunga! maintains relationships with a number of advertising feed providers. One of these relationships is with a tier one search portal. I commented in Q4 that I was renegotiating this contract as part of my overall risk management strategy for Kowabunga! . I am pleased to report that we have now concluded those negotiations and the resulting contract, which now extends out three full years, should over time provided we deliver on our collective growth expectations meet an improvement in margin for this segment of our business. Additionally, we will now also have access to advertising inventory for a few foreign markets, notably Brazil and Mexico.

In the past when we recognize a search from these countries we would not have anything to show. Now we will have country specific advertisements. We have also added a number of large publishers to the exchange this quarter. We do not release the name of these partners for competitive reasons. We expect to see some ramping up of revenue from these partners towards the second half of the year. These new publisher relationships increase our distribution and, as a result, are our current and best tactic for offsetting revenue per click declines occurring across the industry. Further, as mentioned on the Q4 call and in my letter to shareholders this year, we have been working diligently to improve the quality of the leads being generated within our exchange. In this regard we have always operated an exchange that exceeds industry bench marks. We believe this quality metric, which we track very carefully and as a function of numerous variables, will be a defining characteristic trait of the winners in this marketplace. In Q1, our traffic quality improved a full 20%. Traffic quality is in part a measure of actual convergence for advertisers.

Finally, we have been hinting that a major product announcements was forthcoming within the exchange segment. In what can best be described as the Company's most significant platform redesign initiative we will, towards the ends of June, begin sending out invitations to select advertisers and publishers to invite them to a private beta for this new offering. One of the most important aspects of this new platform for Kowabunga! is the incorporation of all of our various technology components and business processes within the single environment. Going forward, this will allow to us bring innovation more quick to the market. We expect a full public Beta market launch of the new platform in August. I would like to now turn the call over to Gail Babitt, Kowabunga! 's CFO, for a more comprehensive discussion of our financial results in the quarter. Gail.

Thank you, Rich. Good afternoon, everyone, and thank you for joining us today to discuss the Company's fiscal first quarter 2009 financial results and go-forward plans. Our revenue from continuing operations declined by 14% to $13.9 million for the three months ended March 31, 2009, compared to $16.2 million for the comparable period in 2008. The reduction in revenue from continuing operations was driven by our Direct Segment which experienced a decrease of 46% going from $10.2 million in 2008 to $5.5 million in 2009. This decline was partially offset by the increase in revenue of $2.2 million or 34% in the exchange segment from $6.4 million in 2008 to $8.6 million in 2009.

The decrease in revenue in the Direct Segment was the result of a decline in the lead generation business from some of the popular advertiser offers who have struggled during these difficult economic times and a reduction in the consumer marketing business due to lack of focus in investment by the Company as a result of the decision in the second quarter of 2008 to move this business to discontinued operations. The product line within our exchange segment that stimulated this growth was our search business which grew from $5.5 million in 2008 to $8.1 million in 2009. However, this revenue growth continues to come at a cost as we have been unable to sustain the margin rates we have experienced in the past due to competitive pressure in the overall publisher market.

Total gross profit from continuing operations declined by $1.7 million or 25% to $5.1 million for the three months ended March 31, 2009, compared to $6.8 million for the comparable period in 2008 reflecting a reduction in gross margin rate from 42% to 37%. The impact on gross profit was primarily the result of the decline of revenue in the Direct Segment where the gross profit decreased by $1.5 million from $4.7 million in 2008 to $3.2 million in 2009. That being said, a big reduction in the lead generation revenue was from lower margin advertisers resulting in an overall higher margin rate in the Direct Segment from 46% in 2008 to 59% in 2009.

Within our exchange segment we experienced margin deterioration with margin rates declining from 36% in 2008 to 22% in 2009. As previously stated, this margin rate decline is the result of competitive pressure in the publisher market. Our Company-wide SG&A costs from continuing operations decreased by 24% to $5.6 million for the three months ended March 31, 2009, compared to $7.4 million for the comparable period in 2008. In absolute dollars, our Direct Segment experienced a decrease of $1.2 million in 2009 compared to 2008. Our exchange segment and corporate SG&A each decreased by $0.3 million in 2009 compared to 2008. Approximately $1 million of SG&A reductions relate to compensation across the Company reflecting the head count reductions and the consolidation of responsibilities to a smaller group of executives.

As mentioned during our year end call, we will continue to evaluate the business to try to drive efficiencies and eliminate unnecessary cost. The net loss for the Company was $0.8 million or $0.01 per share for the three months ended March 31, 2009, compared to $2.3 million, or $0.03 per share for the comparable period in 2008. The EBITDA for the Company was $1 million for the three months ended March 31, 2009, compared to $0.4 million for the comparable period in 2008. The improvement in EBITDA reflects the positive impact of the cost containment measures in both continuing and discontinued operations and the one-time gain on the sale of the dating business, but is partially offset by the impact of the current market conditions.

We have experienced challenges so far for fiscal 2009 as a result of the downturn in the economy. This has been apparent in what consumers spend to buy products, what companies spend on advertising and as a result of the squeeze from both advertisers and publishers to try to keep a bigger portion of the dollars that are flowing through the market. This can be seen in the reduction in revenue in our Direct Segment and the negative impact on our margin rate in our exchange segment.

We are trying to offset these factors by taking the following three steps. First, expanding the product offering in the Direct Segment to expand the revenue base. Second, creating a new exchange platform that will provide value-added services for the advertisers and publishers to support a larger revenue share and/or a larger share of the market, and, third, managing cost to be as lien as possible. I would now like to turn the call back over to Rich.

Thank you, Gail. In the first quarter we made progress towards our goal to improve Kowabunga! 's operations. For the remainder of the year, we will be continuing the transformation that began in Q4. Over the remaining three quarters, we will balance our desire to improve short-term profitability with our desire to make investments that will allow to us capture greater market share. I would like to now turn the call back over to the operator for questions and answers.

Thank you. (Operator Instructions) Our first question comes from Colin Gillis of (inaudible) Advisors. Please go ahead.

Thanks for taking my question. Can you give us some color about the magnitude of the drop in revenue for (inaudible) that happened in March and also any color you can give us about revenue per click in April, macro commentary please?

We don't provide the actual percentage of drop that we are seeing but I think if you look at the industry overall there has been some declines. It really does vary depending upon the types of key words and the segments of key words that are being chosen. There is a general drop overall in the revenue per click for everybody in the industry. At this point we are not providing any information other than to say that we see it and we have the situation under control. We believe the expense programs -- reduction programs that we've been working on in the Company should offset revenue declines as a result are the of the revenue per click.

Of course it's being offset by (inaudible), but is there any color you can give us about revenue per click trends in the month of April?

Other than to say that they are down just like they were in March.

Okay. Thank you.

Our next question comes from [David Rabiner] who is a private investor. Please go ahead.

Hi, wanted to do get your perspective on something that's been confusing for me. I know when the, say a year or so ago there was a tremendous amount of fanfare made by the management about this wedding of the fraud -- click fraud prevention technology of Kowabunga! with the -- this sort of high powered way of pricing clicks that was based on Fair Isaac technology and that was really portrayed at the time as what was going to be the significant driver of growth for the Company and it just doesn't seem like that has happened to any appreciable degree, and it sounds now as though the Company is moving more in the direction or at least significantly relative to what it was in the direction of trying to generate new revenues with these sort of direct sales programs. I'm wondering if you can sort of comment on whether this technology that was so highly touted is just no longer seen as being really a significant advantage for the Company and is no longer really seen as hopefully a big driver of growth down the road.

David, one of the things I think to keep in mind is these technology components in and of themselves are really not as valuable as the combination of all the technologies together. The challenge that I have seen as I've come into begin managing Kowabunga! is there's a lot of great technology components and, yes, I can go back and see the conference call notes and what has been presented in the past, and there were certain elements of it that were highlighted and touted. The reality of the situation is from a platform perspective there was really no plans anywhere to be found to execute on a vision to bring those components of technology all together and that's where the real value is. It's not an individual component of technology, call it our fraud technology or the technology that we are developing with Fair Isaac to do click conversion scoring or the underpinning for the platform we have for affiliates. In and of themselves all of those are interesting but not necessarily unique.

It's the combination of them that is differentiated and that's the platform initiative that I'm referring to that we now, as a result of specific plans, have dates and deliverables and incentives in place to bring to market and that really is going to be the benefit for the Company. And primarily because we will be able to leverage that platform into the future as we add on new offerings. And, by the way, they may be more analytics cull offerings like what we have been doing with Fair Isaac or some offset of that and or data offerings.

As I mentioned on the Q4 call, there is a lot of information assets that this company collects as a result of their various platforms we have but there's really never been a consolidated effort to capture information, store it, synthesize it, do analytics on it and treat that information as an asset that can he resold and monetized. All of these things are by-products now of the new platform initiative that we have underway that began in Q4 shortly after I joined from a planning perspective and, as you now heard, is due to be delivered in private beta at the end of June and in public beta in August.

If I could ask just one follow up, I may have had a misunderstanding of this but what was my understanding is that this combination of click fraud technology and pricing conversion technology from Fair Isaac within (inaudible) network was going to make this -- would make an incredibly attractive platform for advertisers. Is that materializing? Is that no longer a direction that the Company is focusing on or -- ?

So the answer is we absolutely believe that the combination of our fraud analytic technology and the click conversion technology for pricing are key elements of our future. And we believe that in large part because we believe that as the market is maturing, the advertisers who are spending the money are assimilating a knowledge about what the return really looks like for this kind of marketing activity and, as a result, will be demanding from their suppliers the kind of return on investment that it can only be achieved with the use of analytic technologies like these. So it is a very big part of the important brain behind our platform, but it's not the only part. If you know my background you'll know I have a very long background on the analytics product front with companies like Fair Isaac and [H&C] and so that is being brought to our initiatives.

Okay. Thank you very much.

(Operator Instructions) Our next question comes from [Patrick Turow] of [Turow] Management. Please go ahead.

Hi, good morning, Rich. Hey, I guess one of the questions really maybe that the last caller was driving at, we've sort of had promises of deliverables in the past and I think in this whole platform thing it's been a discussion for probably the better part of a year or more. So it sounds like, the question is really can you deliver on the time that you just put out? If you can, that sounds reasonably exciting to me, and how confident are you on that time frame?

Pat, this thing is, I'm glad you asked that question because we do get asked that question a lot. There's a few things probably to put in perspective. One is from the best of what I can tell, in the past when we talked about the new platform there was a lot of talk but it does not look to me in my last five months here that there was any ever any execution associated with that nor any planning. So that was a big problem. Two, it's important to note that we have a new team here now that is actually driving the platform redesign initiative and they have been specifically tasked by me, they were tasked to do so back in December to build a project plan with delivery dates and incentives tied to those delivery dates and that is in place and quite candidly is one of the reasons why we are actually going to be able to deliver in June and August. Those plans, of course, never existed in the past. The other thing to keep in mine this platform design initiative that we have underway is not a point in time event. It should be looked at as more of a journey. It's a technology vision for this company upon which I expect us to be developing a multitude of ancillary products that could drive ancillary revenue. So think of the platform not as, it's done in June or August, but as this is the first wave of advancements on a platform that should be occurring for many, many years to come.

Well, I think the exciting thing from our standpoint is you are putting a target date that is not a quarter out or two quarters out but literally a month to two months or three months out. And so we will be able to track that progress at your next call which will be refreshing if you actually hit those dates. I have another question, Rich. I didn't hear you mention anything about the advertising asset that had been out there for probably the last, gosh, I guess it's greater than a year, probably almost two years, supposedly for sale. And can you give us any kind of incite on any progress or what the status is on that?

Yes, I can. So I think I mentioned on the Q4 conference call that it's no surprise that this is not exactly the best time to be selling any business. We, of course, did divest of the Cherish asset. As relates to the agency business that we have, one of the things that is probably important for everybody to understand is we have, just like the other parts of Kowabunga! been working on the operating performance of that business. And I'm pleased to say that in the first quarter that business actually helped us from an EBITDA perspective. That had not always been the case in the past.

So from my perspective, as I look at that business, at this point given some of the changes we made it's not hurting us going forward. So that's good news. We still do want to divest of that business because we believe it's not entirely synergistic with what we do. There are a few components of it that could be argued to be synergistic but generally it is not. So, concurrently, we do have a number of ongoing discussions with perspective buyers who have expressed an interest in the business. And the best I can say right now is I will continue to provide information as those discussions progress.

Great. I have a couple of questions for Gail. Gail, on the cash being up, I believe you say $2.8 million for the quarter?

Yes, the cash flow from operations were $2.8 million.

Okay. And is that primarily due to doing a better job on collecting receivables or what sort of made up the components there? I'm just trying to get a sense.

There are two things driving it. One is kind of a function of cash flow from operations. I'll view it as EBITDA. And the other is the collection efforts. We had a pretty large receivable from one of our customers that came in in the first quarter that got tailed out from the end of the year which a lot of companies do so, it was the combination of those two items.

Okay. And did that lead you in a prolific situation with your bank currently, I mean as far as availability and your cash needs?

Ask that question again, I missed the first part.

I'm trying to understand, are you up against your line of credit or are you in pretty good shape from a cash availability point of view?

We are not up against our line. We have a pretty good availability since during the quarter we paid down I think it's about $2.8 million of our debt to Wachovia.

Okay. I would like to make one comment to both you and Rich, that I want to commend you on what I see as a fairly major turnaround in managing this business in a very tough economic time. You have been very responsible with stockholder equity and you've done a great job of really overcoming some pretty significant hurdles and I have every reason to believe that you guys are going to give us positive results in the future. I want to thank both of you for your hard efforts to really what I consider create quite a turnaround at Kowabunga! and I realize we are not out of the woods and we have a tough economy, but you are showing me that you have the management skill and the tenacity to do what's important which is to protect our assets, protect our cash and grow asset combination of bringing some of our assets together to create products. So I want to commends both of you on an excellent job.

Thank you, Pat.

Thank you.

(Operator Instructions) Our next question comes from [Norman Seigel] who is a private investor. Please go ahead.

Good afternoon. My question is to either one of us is when you get the new products online in August or what have you, what do you expect the roll-out to be or how do you expect it to help the development and growth of the Company and what can we start looking for in the subsequent quarters?

So we actually in our plan for this year, for the Company, did not model much revenue increase from the platform itself. We are trying to be cautious about our expectations for the roll-out, meaning the growth that we will see as a result of the new platform but internally we have some pretty good expectations about it, particularly on the CPA side of our business that has been probably for the better part of a year and a half or more been constrained as a result of a technology platform that is not very adaptive. It will have a positive impact on us next year. It won't have much of a positive impact on us this year.

Will the impact be significant in the upcoming years?

I don't know if I can quantify what significant is for you since we are not providing guidance. What I can say is we are certainly banking on a growth pattern for this business that is in large part a function of the success of that platform.

Okay. That's a fair answer. That's what I was looking for.

There appears to be no further questions. I would like to turn the floor back to Rich for any closing comments.

Thank you, Operator. I would like to thank everyone who joined us on today's call. We appreciate your continued interest in Kowabunga! and look forward to reporting progress over the coming quarters.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.