Inuvo Inc (INUV) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vertro Second Quarter 2010 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Alex Vlastro, Vice President of Marketing and Communications. Sir, you may begin.

Thank you, Mary, and good afternoon everyone. Welcome to Vertro's second quarter 2010 financial results conference call. With me on the call today are President and CEO, Peter Corrao; CFO, Jim Gallagher; and General Manager, Rob Roe.

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

Before handing over to Peter, let me take a moment to 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 EBITDA, earnings before interest, income tax, depreciation and amortization; adjusted EBITDA; adjusted net income or loss; and adjusted net income or loss per share. We believe that EBITDA, adjusted EBITDA, adjusted net income or loss, and adjusted net income or 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 changes in non-cash amortization that began in 2004, primarily due to certain intangible assets resulting from mergers and acquisitions that have since been written off.

Vertro defines adjusted EBITDA as EBITDA 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 in the business. Vertro uses EBITDA and adjusted EBITDA as internal measures of its business and believes that utilizes an important measure of performance by the investment community.

Vertro defines adjusted net income straight loss as net income straight 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. Vertro defines adjusted net income straight loss per share as the adjusted net income straight loss as previously described divided by the average basic or fully diluted number of outstanding shares of Vertro's common stock over the reported period.

For a detailed review of our second quarter 2010 results, including a 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, the accompanying key metric slides to our Form-- and our Form 10-Q for Q2 filed with the SEC. You can find those metric slides on our website, www.vertro.com.

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

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

Thanks, Alex. Good afternoon, everybody, and welcome to today's call. We appreciate you having you with us.

I want to start this afternoon by introducing our new CFO, Jim Gallagher, to those of you who haven't already met him or had the opportunity to talk with him. Jim has a wealth of highly-relevant expertise for Vertro. He joined us in June from Gallagher Enterprises, a firm he founded in '01, to provide consultancy on financial, operational, and funding issues to start-ups and high-growth companies in the range of $150 million. He previously held senior level financial positions in software media industries and also worked for ten years as a senior auditor at Arthur Andersen here in New York City. Jim's already made a significant contribution to the business and we're delighted to have him on board.

So with that said, let me move on to our results for the second quarter. Q2 was a solid quarter for us in which we achieved both annual and sequential quarterly revenue growth, delivered our third consecutive quarter of profitability, increased sequential quarterly adjusted EBITDA, continued to expand our portfolio of apps we offer our toolbar and homepage user, and achieved continued growth in our user base and search volumes both nationally and internationally. While we're pleased to have continued our recent trend of sequential quarterly revenue growth, we do believe that our growth in the second quarter was tempered by our focus on regaining compliance with NASDAQ shareholder equity requirements. Let me tell you a little about that.

As a reminder, on February 16th, 2010, NASDAQ granted our request for a continued listing on the capital market, subject to the condition that on or before June 14th of 2010, we achieved a minimum of $2.5 million in shareholder equity. So we cautiously managed our customer acquisition program during the quarter to try and insure that we could regain compliance with NASDAQ's requirement with only a minimum capital raise. One of the issues that we faced during the quarter related to the considerable fluctuations in exchange rates between the US and European currencies. With all these Foreign Ex swings, affected balances related to our discontinued operations in Europe, they did directly impact our net income and shareholder equity. This added an additional layer of complexity to the execution of our customer acquisition strategy during the quarter in order to regain compliance with NASDAQ. We believe that without these constraints placed on us by NASDAQ shareholder equity requirements, we would have been able to spend more aggressively during the quarter, and in turn, drive more top line growth. Overall, we finished second quarter with $2.8 million in shareholder equity, which included approximately $250,000 raised through a stock purchase agreement executed between the Company and Red Oak Fund LLP and Pinnacle Fund LLP.

I'll let Jim run through the specifics of our current NASDAQ position, but suffice it to say, we're pleased to have regained compliance with the shareholder equity requirement and we believe we have a firm strategy in place to regaining clients with the remaining minimum bid requirement as well .

With the shareholder equity issue now resolved, we expect to get back to more robust growth in the third quarter. We're enjoying a strong start to the quarter, which we attribute largely to increased volume and continued efficiency in our customer acquisition program. Our ongoing focus on vertical and international expansion means that we continue to find new sources of users for our toolbar and homepage product. As we stated on previous calls, we believe we are the global leaders in acquiring micro-segmented consumer audiences online. We believe that are many new verticals we can target and we have additional opportunities for continued international and horizontal expansion.

In addition to the obvious benefits of increasing the potential audience for our products, one of the other advantages of international diversification is that it helps us insulate us, to a certain extent anyways, from the effects of seasonality. The efficiencies that we're currently enjoying in our customer acquisition program makes us excited about the growth prospects for third quarter and beyond. It's our intention to capitalize on these buying efficiencies throughout Q3, so we can drive accelerated top line growth. We currently expect to deliver double-digit, sequential quarterly revenue growth in the third quarter. And we believe that even with our planned exaggerated growth, we'll be able to achieve EBITDA breakeven or better for the quarter.

This is an important point and one which I'd like to elaborate on a little further for you. A key nuance to our business and one that I've addressed publicly a number of times in the past is our trailing revenue stream received from our current base, which we refer to as our long tail revenue. So, if we spend $2 million to acquire new customers in a month, we expect it will take us between 3 and 5 months to recoup that expense and we will then enjoy a long tail of revenue from those users over a period of a year and more. Conversely, if we limit our customer acquisition budget to drive short-term profitability, then we will restrict our mid and long-term growth by failing to acquire a portion of those users who would have contributed revenue for a year or more in the future. While the length of time it takes us to recoup our customer acquisition expense is better now than it's ever been in our past, thanks to our buying efficiencies, a sophisticated lifetime value model, and a better product, it does still impact the way in which we plan to execute our customer acquisition program.

We believe that leveraging these buying efficiencies that we're currently enjoying to drive more significant revenue and user growth in the third quarter may limit our ability to deliver EBITDA increase. However, because we believe that we can increase our customer acquisition spend while meeting or exceeding our target margins, we believe this growth strategy is in the best interest of the business and for our shareholders. We believe to capitalize in on these buying efficiencies will enable us to maximize on the opportunities presented by the Q4 holiday season and beyond into 2011.

Customer acquisition is part art and part science. And for the moment, we appear to have the ability to significantly increase our user base and have decided to aggressively pursue this strategy. Let me be clear, we do not expect to report negative EBITDA or negative adjusted EBITDA in Q3. We simply don't expect to report sequential quarterly adjusted EBITDA increases because we intend to heavily invest that money into our customer acquisition that's going favorably for us right now. Additionally, we believe that our customer acquisition strategy for Q3 can be funded completely organically with existing cash and that we will not need to draw in our line of credit with Bridge Bank or any other sources.

Now, to help put our expected growth in Q3 into context, let me share some non-financial metrics from July for the month that just passed that's already in Q3. On July 31st, we have 7.9 million live toolbar users or an increase of 12% over the 7 million live toolbar users we reported on June 30th, 2010. Also in July, we had 6.2 million absolute monthly unique visitors to ALOT home, a 9% increase over June of 2010. And in July our toolbar and homepage users conducted 97.5 million searches fully a 17% increase over the monthly average number of searches conducted by our users during Q2 2010.

I want to move on now to share details of some product enhancements that we're also working on. We've recently begun testing an exciting new and updated version of our toolbar product. From the visual perspective, the new product is considerably more impactful than our current crop of toolbars. It's larger in size. The background color can be customized by the users. And it includes a more prominent search box. From a functional perspective, a new scrolling feature enables users to easily display multiple apps without being constrained by the width of their browser. We're calling our new product the ALOT App bar. Test results from the new product have signaled improved value across a number of key metrics. Over the course of Q3, we'll be rolling the ALOT App bar out across further verticals before we undertake a full rollout, which is scheduled for Q4.

On our last call, I mentioned some of the great progress that we had made in improving the quality and quantity of apps that we offer users through our toolbar and homepage products. Over the course of Q2, we have proven the impact of these-- impact that certain of these new apps have made on our business metrics. We believe that these positive results validate our strategy towards content creation and optimization and we see the development and direct marketing of these high-quality apps to becoming increasingly central to our business over the coming quarters and into next year.

Now before handing over to Jim, I want to conclude by highlighting again some of the significant milestones that we achieved in Q2. First, we delivered approximately 42% year-over-year revenue growth and our third consecutive profitable quarter. Also, we regained compliance with NASDAQ shareholder equity requirement with less than 2% dilution to our shareholders. We appointed a talented new CFO to take the range of our financial operations. We secured shareholder approval for a reverse stock split, which when implemented, will assure our compliance with NASDAQ minimum bid requirement. And we successfully tested our new ALOT App bar, which we believe will be a valuable successor to our existing toolbar product. Finally and importantly, I believe that our strategy of driving user and revenue growth in the third quarter will enable us to capitalize on the forthcoming holiday season and maximize the long-term growth potential of our business.

We firmly believe that we have the resources available and the team on board to increase our business size and in doing so, increase our ability to deliver meaningful EBITDA and cash flow increases in the future.

So with all that said, I'll turn the call over to Jim to discuss our financial results. So, Jim, over to you and welcome

Thank you, Peter, and good afternoon, everyone. Before presenting a financial overview for the quarter, I want to start to say how excited I am as far as taking over the role, the CFO role at Vertro and having the opportunity to work with such a strong management team as well as a Company that I believe is poised for future growth and overall opportunities. When I met with Peter and the board as well as management to discuss the CFO opportunity at Vertro, I was impressed with the depth of the skills that the Company had in its management, product development, direct marketing, and content aggregation. I believe the Company has an industry-leading portfolio of products, a solid long-term growth strategy and the right management team in place to execute against the strategy. I've had the pleasure of speaking and meeting with many of you since joining Vertro in June and I look forward to working closely with you in the upcoming months and quarter.

Now moving on to the second quarter financial results. Please note that all the numbers that I will present today relate to continuing operations only. Q2 revenue of $8.5 million represented an increase of approximately 42% year over year and a 5% sequential quarterly increase. As Peter previously mentioned, we believe our revenue growth in the second quarter was tampered by constraints on our customer acquisition program resulting from the NASDAQ shareholder equity requirement. I'll come back to discuss the NASDAQ issue in more detail later in my remarks.

GAAP income for Q2 was $200,000 or $0.01 per basic share. This compares to GAAP income of $500,000 or $0.02 per basic share in Q1 of 2010. It's worth noting that our first quarter of 2010 GAAP income included non-recurring $300,000 gain from the sale of an internet domain name.

Adjusted net income was $500,000 or $0.02 per diluted share in Q2, up from adjusted net income of $400,000 or $0.01 per diluted share in Q1 of 2010. Q2 adjusted net income excluded $200,000 of non-cash compensation expense while Q1 2010 adjusted net income excluded $200,000 of non-cash compensation expense and the recurring $300,000 gained from the sale of the internet domain name.

EBITDA for the second quarter was $300,000, down from $500,000 in Q1 2010. Again, it's worth noting that the Q1 numbers for 2010 EBITDA included the non-recurring $300,000 gain from the sale of the internet domain.

Adjusted EBITDA was $500,000 in Q2, up from $400,000 in Q1 2010. Both Q1 and Q2 adjusted EBITDA excluded $200,000 of non-cash compensation while the Q1 2010 adjusted EBITDA numbers excluded the non-recurring $300,000 gain from the internet domain name.

Operating expenses were $7.9 million in Q2 compared to $7.4 million in Q1 2010. Operating expenses in both Q1 and Q 2010 included $200,000 of the non-cash compensation as well as customer acquisition costs of $5.2 million in Q2 2010 and $4.9 million in Q1 2010. We continue to maintain operating expenses, excluding customer acquisition costs, below our previously-stated forecast of about $3 million per quarter.

In terms of liquidity, we ended 2Q with cash and cash equivalents of $5.9 million or an increase of approximately $700,000 from the March 31st, 2010, cash of $5.2 million. The increase was primarily a result of gains from operations and the execution of the $250,000 stock purchase agreement with Red Oak Fund LP and Pinnacle Fund LLP that was executed in connection with the NASDAQ shareholder equity requirement. You will remember that on May 10th, 2010, we entered into a reserve equity financing agreement, which we refer to as the REF agreement with AGS Capital Group LLC pursuant to which AGS committed to purchase from time to time over a period of up to 2 years, shares of our common stock for cash consideration of up to $2 million, subject to certain conditions and limitations.

In connection with the REF agreement, we also entered into a registration rights agreement with AGS dated May 10th, 2010. We have filed an S3 registration statement in connection with this registration rights agreement. And it has not been declared effective by the SEC to date. As such, we are not able to draw on the REF agreement at this time.

Overall, we believe that we have sufficient cash currently for the next 12 months to execute our long-term growth strategy, even taking into consideration our more-aggressive customer acquisition strategy that Peter previously detailed. We continue to maintain our credit line of up to $5 million with Bridge Bank, although we have no immediate plans to draw upon it.

Next, I would like to move onto to discuss the current NASDAQ position. As a reminder, we were deficient in two separate requirements for continued listing on the NASDAQ capital market. First, we had to achieve shareholder equity of at least $2.5 million on or before June 14th, 2010. And secondly, we have to evidence a closing bid price of $1.00 or more on shares of common stock for a minimum of 10 consecutive days on or before September 13th, 2010. On June 14th, we announced that we believe we had regained compliance with the minimum shareholder equity requirement through a combination of income from operations and the execution of the $250,000 stock purchase agreement with Red Oak as well as Pinnacle Fund. On June 16th, we received written confirmation from the NASDAQ office of General Counsel that we had met the $2.5 million shareholder equity requirement. Pursuant to us starting on the NASDAQ listing rules, NASDAQ will continue to monitor our shareholder equity and has imposed a hearing panel monitor for that purpose, which will extend for one year until June 14th, 2011.

We continue to have until September 13th, 2010, to regain compliance with the $1.00 per share minimum bid price. At our 2010 annual meeting of shareholders held on June 10th, our shareholders approved a reverse split for our common stock at a range of ratios between 1 for 2 and 1 for 5 at any time prior to December 31st, 2010. We believe that this reverse split will enable us to regain compliance with NASDAQ's minimum bid price requirement. We will update shareholders and other stakeholders with our strategy and overall timing is as it relates to implementing this reverse split.

Before opening up the call to questions, I want to conclude by reinforcing Peter's comments regarding our plan and strategy for Q3. We believe strongly that focusing on top line growth in the third quarter is the best long-term strategy for our business in creating overall long-term shareholder value. By maintaining consistent customer acquisition strategy through Q3 and beyond, we expect to increase our user base, which we believe will better position us to capitalize in the fourth quarter holiday season and well into the future.

With that, let me turn the call back over to the operator to start the Q&A session. Mary, would you like to take it from here?

Certainly. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Ryan [Burgeon] from Craig-Hallum.

Thanks. I just want to start off by reviewing your sequential revenue growth commentary. Last quarter you had kind of talked about how through the back half of the year you were to see high single to low double-digit sequential growth. Now you're characterizing it more as kind of dropping that low or that high single digit commentary. I just want to reiterate or confirm that it is in fact, you're kind of focusing on double-digit sequential growth for Q3.

Yes, that's accurate, Ryan, and that's why I specifically called out our progress through July, right so. If you take a look at all the slides that we've got out and available and then you add to that the July start, we're still living numbers like that here in August. So, if customer acquisition cost had been running what they were earlier in the year, I'd say we would have stuck on the existing plan of slightly lower revenue growth and a slightly higher EBITDA growth. But as I said, it's part art and part science. And right now, we've got art and science both working in our favor. We're having fabulous results on customer acquisition. We're having to establish results volumetrically on lower prices than we've ever paid with higher margins than we've ever gotten. And so, we've made the decision that we're going to go for the goal line here and try to get that revenue up as high as possible. And separately, different from where we were earlier in the year, Ryan, is we were losing money, right. So the Company-- it was only a year ago that the question mark was on us whether we had a business that could stay in business after the sale of MIVA. Since then, we've grown at 42% year over year. We've done that while sort of jiggering our way through it with NASDAQ compliance, low cash reserves. We don't have that anymore. We've got a big line available to use if we need it. We don't think we will. We've got more-- we've been growing cash steadily now for three quarters. And we want to spend all we can at these high margins to get ourselves to bigger scale than we frankly thought was possible in the past.

Now, that slightly-- it's easy for me to tell that story when you're coming on the back of coming in on the 5% or 6% growth this quarter, instead of what we had hoped to, which was more like 10% or 11%. I can tell you though that if we didn't have to manage ourselves through that NASDAQ $2.5 million issue, we felt really comfortable throughout the quarter that we'd be able to blow that number out. And because we were trying to manage it so closely, it's only $2.5 million that we had to, we didn't want to cause dilution for our existing shareholders by doing a big raise. We made the decision to try to cut it as close as possible, raise as little as possible, and that caused us some fits and starts in our consistency in our ad spend throughout the quarter. And it hurt us a little bit on the top line for this quarter. And I certainly don't want anybody to think that's going to slow us down for the future. We're on to double digit and no single digit for the next few quarters, certainly as long as we can keep this value and ad spending up.

Okay. And then I may have missed this as I was scribbling my notes, but you talked about leveraging the buying ad efficiencies you were seeing here in the third quarter. Can you review what those inefficiencies are that you're leveraging?

Yes, so it's-- there's multiple things that are coming in here. So as we've talked in the past, we can either expand our market by going outside of what we call our tier one markets, which are the seven large English-speaking countries in the world, which was the Company's base. So, one method of expansion is to go to other countries. As I stated in the past, we're having great success with that and we're only expanding into those countries that after testing, proved to have equal to or greater margins than our base countries. So another way of saying it is every place we're going, we've got better margins equal to or better margins or we wouldn't be going there after very inexpensive and quick testing.

A second way is to expand the verticals that we've got for homepages and toolbars inside the base markets. And we've expanded them dramatically throughout last quarter and continued to do that this quarter. An example, just in our tier one markets, both in the last 2 or 3 weeks and for the next month, we've got 60 verticals up and running now that we're testing. And our typical run rate is something a little greater than half of those, usually our expanded markets. That would take our verticals just in tier one to something like 350 by the time we got to the next quarter plus all of our international expansion. So that's another way that we get efficiencies.

And then probably the biggest way we get it is to just-- is we've developed now we're a quarter and a half I guess Rob, into our new expected value model. So we're way better now at predicting what revenue we'll get. So our cost is always certain. We know the day that we buy it, what it costs us to get a consumer. Our lifetime value model though is a little less certain how much revenue you'll really attain from those consumers. And now that we're five or six months into running that lifetime value model and perfecting it, we're more certain than ever that we've got it right. So it makes us bolder about the investment we make when we do it up front.

So expansion, better lifetime value model and everything externally is working well for us. By externally, I mean our partnership on the sale side with Google and Yahoo is running to a fairly well. We're getting fill rates as high as we've ever had them. We're getting click rates as high as we've ever had them. And pretty much everything's running well for us.

And then shifting to the operating expense line, G&A that jumped up a bit in the quarter from Q1. Is this a new run rate? Was there some seasonality in that line?

Yes, there was one piece of seasonality in it which was-- rounds off either to 100,000 or 200,000. And that was a severance that we had-- that we took and fully accounted for in the period. And I think without that, if I'm right Jim, we would have been flat, right?

That is correct.

Flat at what, 2.5?

Right. When we compare it to the prior quarter, we were about 2.5. We're about 2.7 this quarter.

Okay. So we're still holding to this story that we've got-- we think we've got growth and wiggle room with the existing cost base to drive incremental revenues and scale in the business.

Okay, and then finally, can you just refresh me on the 10 consecutive days of stock price over a $1.00 or more for compliance I think is-- you have a date of mid-September?

It's September the 13th.

Yes, September the 13th is our date.

Okay, and can you just update us on kind of the situation?

Yes, so we're trading at-- I don't know what we closed at today, $0.52 or something. We were hopeful when we first got into this and the reason that we got NASDAQ to extend it to its full extent, which they did, September 14th I think is the date in full. We had hoped to be able to get their organically and on our own without having to do any sort of a reverse. A little more in the refreshment is you remember we got shareholders to approve for 2009 a 1 for 10 reverse. We didn't think we needed to do that so we let that lapse on October 31st-- I'm sorry, December 31st of 2009. Shareholders certainly didn't want the 1 for 10 if they didn't need it, so we went back-- frankly a lot of this we got shareholder input. In fact from all of our shareholders we got input. So why don't we go back for another vote, which we did in April. And in that vote instead of a fixed price, we went back with a variable price where the shareholders approved the split, but they allowed the board to make the decision on the day we had to what the split would be. And that we got approved was a range of 2 through 5 to 1 on a split. And the only thing I don't have for your answer, Ryan, but we can get it for you if it matters, is the only thing I can't answer, cause I don't have it in front of me unless somebody else does, is if you work your magic back from September 15th, what date we have to execute it to get the 10 days. And I just don't have it in front of me but it's got to be something like the end of August or the third week of August I would guess.

That's correct.

Thank you.

Okay.

Thank you. (OPERATOR INSTRUCTIONS) I show no further questions in the queue. I would like to turn the conference back to Alex Vlastro for closing remarks.

Thanks, Mary. 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 and Exchange Act of 1934. Words or expressions such as plan, will, intend, anticipate, believe or expect or variations of such words or similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. Key risks are described in Vertro's reports filed with the SEC, including its annual report on Form 10-K for 2009 and Form 10-Q's for Q1 and Q2 2010. In addition, past performance cannot be relied upon as a guide for future performance.

That concludes our call today. Thank you for listening.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.