Inuvo Inc (INUV) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Vertro second quarter 2011 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will follow at that time. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to introduce your host for today, Mr. Mike Buchanan, Director of Investor Relations. Sir, please go ahead.

Thank you and good afternoon everyone. Welcome to Vertro's second quarter 2011 financial results conference call. Joining me on the call today are President and CEO, Peter Corrao, CFO, Jim Gallagher, and General Manager, Rob Roe.

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

Before handing over to Peter, let me 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 from continuing operations before interest, income taxes, depreciation and amortization, adjusted EBITDA, adjusted income or loss and adjusted income or loss per share. A description of our reasons for utilizing these measures, as well as our definition of them and their reconciliations to the corresponding GAAP measurements can be found in the earnings release we issued today. Certain of the ALOT user metrics we will be discussing this afternoon are broken out by Region One and Rest of World.

As a reminder, Region One comprises English speaking users in the US, Canada, United Kingdom, Ireland, Australia, and New Zealand. And to comply with the FCC's guidance on Fair and Open Disclosure, it made this conference call publicly available via audio webcast through the Investor Relations section of our website at www.vertro.com, and a replay of this conference call will be available for 90 days.

I would now like to turn the call over to President and CEO, Peter Corrao.

Thanks Mike. Good afternoon everyone. Thank you for joining us. Q2 was a challenging quarter for the Company. We experienced difficulties in achieving cost effective distribution for our ALOT products, because we were unable to acquire our targeted number of users at our desired prices.

As many of you are aware after reading our second quarter 2011 earnings release the impact of the change to our Search Engine Results Page, or SERP, mandated by our monetization partner, combined with our conservative approach to managing customer acquisition costs during the quarter, negatively impacted revenues as we had expected. The overriding factor in the revenue decline was the reduction in our ad spending or customer acquisition costs, which as we said in the past directly correlates to fewer new users and lower revenues. We took a prudent approach to spending in order to give ourselves time to adjust to the new SERP changes, and begin to optimize our new customer acquisition cost model, based on new adjusted LTV expectations.

To get into the specifics on the SERP change, before our last earnings call our monetization partner issued a mandate for displaying ads on the Search Result Page of its downloadable application affiliates, reducing the total number of ads in our case the SERP went from 18 ads, configured seven on the top, eight on the right and three beneath the fold, to 11 ads which is now three on the top, eight on the right, and none beneath the fold. While the timing of the announcement was unexpected as was the new configuration, we had previously done some testing on certain configurations, and were ready to confront the issue once the monetization partner decided to move forward with the newly proposed SERP changes. We anticipate and signaled that the proposed change to the SERP would affect our revenues, and we now see that there are approximately 7% to 10% below revenues that we expected for users before the SERP change.

To make up for our decline and return to growth in revenue and users, we have instituted a number of changes, some of which have already been executed. First, we have refocused our direct marketing team to more effectively manage our customer acquisition costs. Second, we are also continuing to focus on achieving greater distributions of our Appbars and apps in all of our supported markets. Third, we are further maximizing ROI by introducing new features and functionality that help improve retention, most notably with the new home page configuration that has shown encouraging initial results, and, fourth, we have proactive changes we have made to our search site to include the addition of seller ratings, daughter windows, and site links, enhancements are designed to make the search experience more positive, and create more user activity.

Overall Vertro's international users has increased as a percentage of total revenue due to the decline in the number of Region One users. As of the end of Q2 we had 4.1 million Region One users, and 4.2 million rest of world users. This compares to 4.4 million Region One users and 4.2 million rest of world users we had at the end of Q1. This mix of users while potentially favorable in the future due to faster growing user base in international regions other than Region One was also a contributing factor in the quarter's lower revenue. This is because countries outside of those included in Region One are currently providing less total revenue per user.

On the plus side some international markets were little affected by the SERP changes because ad fill rates are lower than Region One's ad fill rates. We plan to launch localized versions of the Appbar in Brazil, United Kingdom, France, Spain, Mexico, and other key markets within the next few months. Roll out in the United States as part of Region One and in Brazil will actually begin in the next few days. In addition, our new home page configuration is also available to the users in all of these markets.

I would like to now talk about our commitment to achieving our long-term goals primarily through the further execution and expansion of our Appbar strategy. We are very excited about the progress we have made in the last quarter and that we are currently making. The new apps released are already showing signs of success with a continuing pipeline of releases planned to keep user attraction high and lower our attrition. This is in part of our overall strategy to make high quality products available that cater to niche consumers. Our Appbar includes an expanding number of categories of end user interest from music and games, social networks, shopping and others geared to attract new high quality niche users to the targeted app offering.

All of the apps are designed to advance Vertro's strategic goal of either increasing distribution, enhancing user retention or lifetime value, and diversification of our revenue stream beyond search alone by increasing non-search revenue. Current search revenues comprised approximately 85% of Q2's amount while non-search made up approximately 15% of revenue totals. During the quarter we launched the Daily Music download app offered by eMusic. We also released apps developed through other third-party relationships such as Free Credit Score, built by Experian and our PeopleDeals apps built by PeopleString to increase non-search revenues.

Other apps introduced during the quarter built by the ALOT team included Package Tracker app, which allows users to follow their online purchases delivered via FedEx, UPS, or the USPS, and has initially produced strong retention rates. Craigslist.org, which provides easy access to the services and/or Groupon app, which notifies users when there are new deals in their area, and also alerts the user to Groupon's daily deals.

I want to take a moment to mention our most recent app releases. In the current quarter the Company introduced its ALOT app rewards, an app that offers users immediate value as they receive cash back into an individual account as they make their purchases online. We expect this app to drive revenue on a number of levels, mainly by improving user retention as customers continue to find new bargain deals, and build their cash back savings account. The app should also increase our non-search revenue as Vertro receives a percentage of every purchase made by the consumer.

During Q3 the Company will have released other apps such as SmileyTown, which allows users to post emoticons on Facebook. A Facebook share app, and an Expedia Travel app. Social media apps like SmileyTown and Facebook share offer a greater opportunity for viral distribution of our product, while apps like Expedia Travel offer more ways to increase non-search revenue.

I would also like to point out while we remain adjusted EBITDA positive despite our revenue shift making this our seventh consecutive quarter of adjusted EBITDA profitability. Other achievements during the quarter included one, the successful renegotiation of our credit facility with our strategic partner Bridge Bank, two, we were also notified by NASDAQ that we were no longer under NASDAQ monitoring review, as we have been, and continue to be in full compliance with NASDAQ's listing policies for some time now, and third, during Q3 we entered into a settlement agreement with regards to our litigation with Microsoft.

In closing I would like to reiterate we have integrated the SERP change, and believe it is manageable currently and in the future. The efforts of our direct marketing team to more effectively manage customer acquisition costs should enable us to acquire our targeted number of users at our desired prices. We have done some early testing with our home page configuration and the results are encouraging, increasing retention search activity and revenue per user. Lastly we remain excited about our Appbar and app strategy, and our ability to potentially increase retention and monetization.

We believe these activities and the related benefits will outweigh the anticipated negative effects attributed to the SERP change, and we should be back on the road to user and revenue growth. Our entire team is excited about the momentum and attraction that our Appbar strategy, our new home page configuration, and our direct marketing efforts are showing.

So with that said, let me hand the call back to Jim, and he can discuss our financial results. Jim.

Thanks, Peter. Good afternoon to everybody. As Peter explained, Q2 was a challenging quarter due to both internal and external changes that impacted our revenue model. We believe we have addressed these challenges that were accounted during the quarter, and executed solutions that minimized the effects on revenues. For the quarter overall revenue was $7.5 million, a decline of $0.9 million since last quarter, or approximately $1 million difference year-over-year.

As Peter discussed, our Q2 revenues were negatively impacted by our reduction in spending in order to afford us time to evaluate the SERP changes and their effect on our customer acquisition model, as well as the anticipated reduction in search revenue attributed to the mandated SERP change. In addition, the macroeconomic environment has resulted in a reduction in overall consumer spending. The reduction in revenue resulted in a loss from continuing operations of $0.3 million, or $0.05 per diluted share and adjusted net income of $0.01 million, and breakeven on a per diluted share basis for the quarter. Additionally, we experienced an EBITDA loss of $0.2 million in Q2. However, we still maintained adjusted EBITDA profitability of $0.1 million, and our results were in line with analyst estimates of breakeven adjusted EPS and adjusted EBITDA of $0.1 million.

While our financial results reflect the decline compared to the previous quarter, we did lessen the decrease by utilizing tighter overall cost controls on operating expenses. Our operating expenses were less than what we had projected in our last earnings call, due to savings from employee related costs and consulting service costs. Total OpEx excluding customer acquisition costs of $2.2 million for the quarter was approximately $0.73 million per month, which is below our previously projected estimate of $0.78 million per month.

Cash and cash equivalents decreased by $0.3 million during the quarter from $5.2 million in Q1 2011 to $4.9 million in Q1 2011. The decrease was primarily due to reduced cash flow from operations and capitalized software development costs, offset by the release of restricted cash under the new credit facility. As Peter previously stated, we announced in June that we successfully renegotiated our credit facility with our strategic partner Bridge Bank NA. The deal increased Vertro's total borrowing potential to $8 million from $5 million. The new credit facility is a combination of a receivable financing facility of up to $6.5 million, along with a capital growth facility of up to $1.5 million.

While we have not drawn on the financing facility to date, the new credit facility agreement will give us the ability to execute on appropriate and timely growth opportunities as they present themselves. Our balance sheet, cash position, and net working capital remain strong, as a direct result of the progress that we have achieved in executing our strategic initiatives, and closely managing our operating costs.

With that I am going to hand the call back to the operator for questions. Operator, Karen?

Thank you, sir. (Operator Instructions). Our first question comes from the line of Ryan Bergan from Craig-Hallum Capital.

Thank you. Do you feel like you have had enough time since I think it was June 11th when the SERP changes were going to take effect? Do you feel like you have had enough time to fully evaluate what those changes are going to be, and what are your expectations for the changes to be for the remainder of the year?

Yes, well, Ryan, enough time in the lifetime value model, our lifetime value model is scheduled around one year, so perfect for us would to be able to look at the changes for a year, but we have known about the changes since our partner notified us about mid-May, so we began testing mid-May, completely executed early to mid-June, and I think we do have a pretty good feel for it, and there are all sorts of numbers bantered around on the last call of how much the reduction could be.

Of course, we were scared to death not knowing what that reduction might be, because we never tested against the specific search implementation that we did. We have tested it though, and it looks like it ranges depending on the cohort and the country between 7% and 10%, and I would be surprised if that changed much.

I believe you had planned to offset some of the challenges there by sending some traffic to the Yahoo! Bing. Did you see the offset you were expecting from doing that and do you expect to continue to send traffic to Yahoo! Bing?

We have got a non exclusive with Yahoo Bing and Google. The way the program works is that we send a call out to ads for all of them. Our partners at Google get primary placement on those ads, that is required by our contract with them, and we fill the rest of the space with Yahoo! and Bing traffic, and so we will continue to do it just like that, and I don't see any changes coming on that front at all, Ryan.

Are you able to share what percent of revenue you got from Google in the second quarter?

I don't have that number in front of me, but 85% of our revenue, actually I think it was 84% of our revenue was search, 16% was non-search, and loosely, I don't have the number, but call it maybe 85/15 of the search would have been Google, 15 would have been non-Google search partners. That is not dissimilar, Ryan, to what it would have been in previous quarters before the SERP changes.

That is helpful. What was the non-search revenue percent in first quarter?

We have been, last quarter I think it was 84/16.

And it was 85/15 this time?

I am sorry, it was 86/14. I am sorry.

So the non-search revenue ticked up by 1 percentage point sequentially?

That is accurate.

Okay. And looks like the revenue per click had an uptick in Q2. Do you feel like that in Q1 you had a trough there, and can you talk to the trends you are seeing?

We don't generally publish the RPC results. Generally speaking, performance has been the most significant, this is Rob, by the way. The most significant performance effect recently was the change in the layout and the presentation. I wouldn't point towards other factors as being significant.

I think what Ryan may be doing is taking our total queries, I am guessing, because we don't publish anything different, and dividing them by revenue. Is that what you are doing, Ryan?

Correct.

An average revenue search continues to perform mostly steady, but the change in the mix of users from one tier to another definitely has an effect, so our Tier 1 or Region One users have a generally higher relative RPM or revenue per search, but that is really reflective of the value of those economies, and the search economies and then our other rest of world are generally lower, so we have seen a change in the mix more biased towards rest of world over the last quarter, and that does change the average RPU.

I think, Ryan, taking the total queries which aren't clicks on paid listings, dividing that into the revenue with the mix change, I wouldn't read too much into that between last quarter and this quarter. Generally speaking, I think it is accurate, Rob, we are not seeing any trend difference between last quarter and this quarter as a result of the SERP change. I think any changes that you would be seeing would simply be mix differences.

Got you. Thank you for that. Can you talk about revenue seasonality for the remainder of the year? I know you have got some changes going on, so to look back at your prior couple of fiscal years, I don't know how helpful that can be for me, but when I look at the model, I am just trying to help me understand where you think you can be Q3, Q4 versus Q2?

As you know, Ryan, and Eric as well, we are not forecasting revenues and EBITDAs, but I will zero in a little bit on what we are thinking. So we pulled in our horns as we discussed on advertising in Q2 because of the SERP changes, so when we knew it was coming, call it mid-May, we had over half of the quarter where we were very careful, and frankly under spending, but compared to what we would have done in the past and what our plan would have been, because we didn't know what the new LTV would be after we applied the SERP change, the result of that is we ended up with live users during the quarter that was down.

What I have tried to signalin the prepared statements and exactly where we want you guys to be thinking is we think we found our way to sort of steady state as a result of the SERP. That is the 7% to 10%. We used the time from May until literally today to figure out then how to readjust our CPAs, or our acquisition costs to attract new consumers in that have appropriate LTVs to meet the new lower LTVs that we are getting from our monetization partner.

We think we can get back to growth beginning now really or have been probably the last ten or twelve days, and continue that growth including growth in our acquisition spending in the 1% to 2% per month range beginning now and going forward, so we plan to do that. We think we can do it like that. Revenues would ensue.

That would lead you to believe, though that revenues would likely dip in Q3 slightly below the Q2 levels, and then we believe as of now we are kind of back to late 2009 and early 2010 growth levels, where once we get through that dip we should be back to where we are getting high single-digit. low double-digit growth on a quarter-by-quarter basis, and that growth like it did in late 2009 and early 2010, the way the majority of that growth should flow through to the bottom line because our operating expenses as you can see are well under control, and even dropping, and we think we have got our costs back in line from an acquisition costs from consumer standpoint, so look, the thing has been tough, just couldn't have been any tougher for us getting to where we are, but we are really satisfied with where we are right now in terms of being able to get back to growth.

We think that growth will come in terms of users now. We are growing now and have been the last ten days or so, and we are growing at levels that we need to on a cost basis, and that means revenues start to increase late next quarter, and really start to take off into Q4/Q1 of next year. I guess the best thing I would do is refer you back to late 2009 and early 2010, and we think we are on that pace again for user growth beginning about ten days ago.

What was the cash from ops in the quarter?

Total cash was approximately $4.9 million.

What was cash from operations?

That compared to $5.2 millionthe quarter before. Cash from operations we had cash and cash equivalents, net cash used provided by financing, let me just get the number for you, Ryan. We had some of what a drop in the operating activities of about $400,000, okay, and then the total decrease or adjustment in cash and cash equivalents for the quarter was about $1.5 million to 1.6 million.

CapEx?

CapEx we had in the area of about I think like $300,000 in terms of capitalized software development costs, which again is part of the overall app strategy roll out that we are looking at.

What are your expectations for your cash balance in Q3?

Again, we still feel that our cash position is strong. We are still looking to maintain the levels of cash that we currently have. The main focus that we do have is really focused on our networking capital number, and we have been able to really be able to maintain and strengthen that over the quarters. The main impact there we are looking at now is bringing down whatever liabilities that we do have to a more reasonable level.

The other thing to keep in mind, Ryan, is obviously with the new credit facility with Bridge Bank, we do have the ability to tap into that. We have chosen not to do that at this time. If something did come up in terms of a strategic opportunity, that would allow us to grow faster, we certainly would look into tapping into that. At the current time we can probably draw down up to about probably $4 million that would effectively allow us to do that if we so desired.

I don't want to get you turned off by that to think that we are planning on borrowing money to operate in Q3. We clearly are not. Cash in Q3 close should be approximately where we are and slightly behind that. It is not going to dip dramatically. We do not plan on drawing down on our credit facility for cash needs for operations. Another story, if we come up with a great deal for acquisitions of consumers, and we had to do an up-front payment, that is a different story. If we had one of those deals we would be crowing about it right now, and spending money as quick as we could. We just don't have one right now.

Alright, guys. I appreciate the color and good luck.

Great. Thank you.

(Operator Instructions). Our next question comes from the line of John Gilliam from Point Clear.

Good afternoon, gentlemen. On the previous caller asked a question about the revenue impact from the SERP changes. I think you said somewhere in the 7% to 10% range for the limited period that you have been able to judge thus far. Is that 7% to 10% below what you did in the same time period last year?

That is a good question, John. Great question actually. So when our partner gave us the change, part of the deal wasn't that we could run a cohort as an ongoing standard to compare it to, so we are not. We just made the change. The 7% to 10%, let me explain it this way, is for distribution that we are getting today and our existing customers today, what is the revenue per customer and/or revenue per thousand customers that we anticipate getting over the next year, compared to what we anticipate getting from that same customer and new customers over a year with the old SERP. So said another way, with the old SERP, old customer, new customer, if we expected one unit of revenue in a year, we are now it looks like we are getting 0.90 to 0.93 of that revenue instead of the 1.

I got you. Okay.

The reason we are even using the 7% to 10% is we don't have a standard that we are measuring against. We switched it all, right?

Okay.

Again, it is always back to this LTV. We are anticipating what we are going to get for the year. You never really know until you get there. We have got a good model for it, and I think if we did have, if our partner would have allowed us to run one cohort as a standard, and keep it open for the year and measure against it, I don't think we would see much difference, do you, Rob?

No.

We are pretty good at our measurements.

Okay.

And again, while that is not great, John, you are on the last call. There were numbers thrown around on the last call of what that SERP change might cost. I know it was way higher than 7% to 10%. I can hardly repeat the numbers, because it makes me want to throw up, right.

Sure. That was a scary thing. You just didn't really know.

Right. We feel pretty good about this. It seems like a manageable number, and one that we can get through and the things that we talked about adding to it, the new home page that we begin to introduce has really promising results for us, so we think incremental revenue, the app strategy seems to be working, non-search revenue is up, and I think we are going to get through this, and I am happy to signal as I did now two years ago, once we get through this dip because of lead lag on revenues, that you well know with our business, which I think we will get out of that mid-to-late Q3, but certainly in Q4, I think my whole team believes that we will be back to growth rates like we achieved back then on even lesser costs today, so we couldn't be happier about our business' future right now from where we sit.

And on that point, I think I got this, when you asked this, did you say we are looking at possibly a slight dip in Q3 from Q2 from a revenue standpoint, but you thought that you could get back to that possibly high single-digit quarterly growth in Q4?

That is right.

Okay.

And beyond that, and continue beyond that, so you remember that sort of the same drum that we were beating when we were back in Q3 or Q4 of 2009.

Okay.

We think that we can get back to growth rates like that.

Fair enough. The majority of the apps you guys introduced the last few months have potential for increasing that non-search revenue percentage. Do you feel like we will see a substantial change by Q4 in that mix, which has been pretty consistent the last few quarters in that 85/15 range?

Our apps that are revenue producing apps, John, are some of them are almost too good to be true story, like our cash back app.

Right.

We don't have enough experience now we can start forecasting that on its own. I would love to be able to say we have experience each cash back app user is going to give us and pick a big number and then we can start to multiply that out times the US and extensions into other English speaking countries and beyond. We are not there yet but for sure, our intention is to bring in more apps like our eBay app and our Groupon app and our cash back app that delivers substantial revenue along with satisfy our consumer, and I talked about it last time.

I would like to be in a position where looking out into future years, 50% of our revenue is coming from non-search and 50% was coming from search, and non-search was a big deal to us, and we are certainly trying to build and partner with companies whose apps can do that sort of revenue, and all of us feel like we can get those apps to do that.

And the Groupon app that you mentioned, did I understand you correctly, that is a potential for revenue generation?

Actually, we have got two similar apps, a Groupon app and a Living Social app, and we are not getting into specifics on the deal which wouldn't be good for us. Both are meant to get us new distribution. Both are meant to get us longer and lower attrition consumers. One of them is a high paying app, and the other one is a not high-paying app, so we like them both for consumer purposes. We promote against both of them. One of them pays us a substantial rev share, and one does not.

Rev share on the deals that the user participates in?

I guess I should say a CPA type relationship, John.

Okay.

The consumer buys a unit worth of a deal, and we get a percentage of that unit's worth of revenue back.

Okay. That could be a big deal. That is what I was getting at. I did not realize that.

Very similar to our eBay deal that we talked about.

Right, which has been significant in terms of at least a percentage of that non-search revenue.

That is exactly right.

Okay. Good deal. Thank you very much, gentlemen.

Thank you.

Thank you, sir. (Operator Instructions). I see no further questions in the queue at this time. I would like to turn the conference back over to Vertro for any final remarks.

This conference call contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Words or expressions such as plan, will, intend, anticipate, believe, or expect, or variations of such words and similar expressions are intended to identify such forward-looking statements including, one, our ability to successfully execute upon our corporate strategies, two, our ability to distribute and monetize our international products at rates sufficient to meet our expectations, three, our ability to develop and successfully market new products and services, four, the potential acceptance of new products in the market, and five, the impact of changes to our monetization partners implementation guidelines.

These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from these expectations contained in the forward-looking statements. Key risks are described in Vertro's reports filed with the US Securities & Exchange Commission, including Form 10-Q for Q2 2011, in addition past performance cannot be relied upon as a guide to 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. You may now disconnect. Everyone have a great day.