Inuvo Inc (INUV) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Vertro, Inc. third-quarter 2011 financial results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and 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's conference, Mike Buchanan, Director of Investor Relations. You may begin.

Thank you, and good afternoon, everyone. Welcome to Vertro's third-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'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 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 continued operations before interest, income taxes, depreciation, and amortization, adjusted EBITDA, EBITDA as adjusted for noncash compensation expense and nonrecurring items, adjusted income, 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 the reconciliation to the corresponding GAAP measurements can be found in the earnings release we issued today.

Certain of the ALOT user metrics we'll be discussing this afternoon are broken out by Region One and the Rest of the World, ROW. As a reminder, Region One comprises English-speaking users in the US, Canada, United Kingdom, Ireland, Australia, and New Zealand. To comply with the SEC's guidance on fair and open disclosure, we have made this conference call publicly available via audio webcast through the investor relations section of our website at www.vertro.com, and a replay of this conference call will be available for 90 days.

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

Thanks, Mike, and good afternoon, everyone. Thank you for joining us.

During the third quarter of 2011 Vertro was presented with a combination of challenges that affected our revenues and overall results, some of which originated in the second quarter and were largely brought under control in the third quarter and early in our current quarter. While I'm disappointed with the results for the quarter, I'm pleased with the response from our team. We moved quickly and put in initiatives in place to address the changes in our business, and as a result, we exited the quarter on a more sound footing, and the stage has been set for improvements in our financial results.

We had anticipated a down quarter due to the effects of the change in our Search Engine Results Page, or SERP, which was implemented in June of 2011. Initially, we were uncertain as to how the changes in the SERP configuration would affect our buying model and how it would affect our ability to acquire users. Therefore, we decided to reduce our daily customer-acquisition costs or ad spending in June and July, the residual effect from the reduction in ad spending resulted in fewer total users and subsequently decreased user revenues early in the quarter. Customer-acquisition costs are recognized in the period which they are spent, but the user monetizes over a long -- a longer lifetime than the current period.

However, in the middle of the third quarter, the rollout of the new homepage product began to show significant increases in the expected lifetime value, or LTVs, per user compared to our recent trends. Based on these expected LTVs, we increased our spending at this point and continued to spend throughout the remainder of the quarter under the assumption that most of the benefit of this spending would be received over the lifetime value of the users in subsequent future quarters. So, our strong spending late in the quarter was immediately expensed, which added to our losses in Q3, while the majority of our revenue should be realized in Q4 and throughout the remainder of 2012.

In order to properly assimilate the SERP changes and its effect on our user base, we adjusted our buying model, basically rebuilt it, and we gradually accumulated new reliable pricing data. Indirectly, this caused some buying inefficiencies, making us unable to acquire our desired number of users at appropriate prices. These inefficiencies arose from our lack of pricing history, which I just mentioned, and caused the average cost to acquire a user to increase.

We also experienced buying inefficiencies due to the changes to our drug-marketing advertisements that were required to be made at the request of a third-party advertising network. This issue was addressed successfully at that time, and we continue to develop new advertising methods as third-party requirements evolved. We continue to work through the advertising policy issues, and we believe that the application of our new methods will enable us to achieve the needed margin levels and volumes required for growth.

Additionally, the mandated change to our SERP that was implemented in June caused a reduction in the number of overall advertising impressions, driving down click-through rates on advertising. Total search queries fell by 7% to 250 million queries. Queries made by users in English-speaking countries fell by 10 million, or 9%, while queries made in the Rest of the World fell by 7.4 million, or 4.9%. Total users fell by 100,000, or 1%, from 8.3 million to 8.2 million users. The impact on revenues, however, was more significant, since there was shift in the consumer mix during that quarter.

While there was a reduction in users in Region One, there was a corresponding increase in users in our non-English speaking markets, or what we call the Rest of the World, where the growth is high. However, total revenue per user is lower in the Rest of World due to lower advertising rates in these markets. Overall, Vertro's international users have increased as a percentage of total users to 58%, whereas Region One users represent 42% of total quarter-end figures. As of the end of Q3, we had 3.9 million Region One users, a decline of 200,000 users, or approximately 4.9%, compared to Q2 and 4.3 million Rest of World users, an increase of 100,000 users, or approximately 2.4% from the prior quarter.

Lastly, gross revenues achieved during the quarter did not meet our target set with key monetization partners in a tiered-rate structure. This resulted in a reduction of our revenue-sharing rates from June through September, driving down net revenues per click and per search. So, as you see, we faced a number of challenges to our revenue model during the third quarter, most of which arose from the mandated change to our SERP. We believe we've addressed the challenges the changes to our SERP presented and have made appropriate changes to our buying model.

During the later half of the quarter, when we were confident as to the consistency of our results, we increased our ad spending to prior levels, and we anticipate that this should result in a rebound in the fourth quarter, and we're poised to capitalize on the upcoming holiday buying season, as we will be operating at those improved levels.

I'd like to now touch on a positive trend in the expected drivers of our future growth. We believe our average daily revenue reached its bottom in Q3, and current rates are 20% above that low point. This should enable us to achieve gross revenue targets at a higher tiered-revenue sharing rate at some point during the fourth quarter. Attrition rates improved across key worldwide markets due to better targeting, as well as product enhancements and the introduction of our new, more simple homepage. The introduction of the new homepage has resulted in significant improvements in revenue per install, which increased the revenue achieved, average rates above 30% compared to recent trends. We believe the new version of our homepage product, strong increase in revenue rates, are due to a combination of better performance, increased usage, as well as lower attrition rates, which I just mentioned.

The Company continues to build on its already strong base of app offerings, adding apps designed to appeal to the user in established areas of interest, such as general user-friendly utility apps and those focused on entertainment and music and online shopping, food, games, social media, social networks. We expect the new apps to further increase distribution, and we have a continuing pipeline of releases planned. Some of the new apps are also designed to increase the lifetime value of our users by lowering attrition, while others are designed to enable us to diversify our revenue stream by increasing non-search revenue.

Optimally, our new products will include a component of all three of these goals in varying degrees. We expect to return to growth in Q4, realizing gradual improving returns, and we look forward to achieving our revenue goals based on the organic growth that we expect to generate from the continued successful execution of our app [bar] strategy.

Now, before turning the call over to Jim, I want to take a moment to talk specifically about our planned merger with the Inuvo, Inc., as it's an important component to our long-term strategic plans. Let me start off by saying that with the guidance of our investment bankers, the merger was decided after both Companies conducted mark - market testing, extensive due diligence, and a fairness analysis. Vertro's Board determined that recommending this particular transaction would be in the best interest of our stockholders. The combination of the two companies has a great potential and should allow us to monetize an enormous amount of traffic over diverse revenue streams, such as search, e-commerce, display, and affiliate programs. In addition, the synergies we expect to realize will affect both earnings and revenues.

The anticipated cost saving should have an immediate effect on our earnings, while the combination of the various products will enable us to offer increasingly rewarding benefits that will attract and retain consumers and result in increasing revenues. In regards to product potential, we believe the combination of ALOT direct to the consumer marketing experience and existing user base, provides an excellent platform for the distribution of consumer applications, will enable us to more aggressively compete in the multi-platform distribution of Internet publishing sector.

We expect to build apps similar in concept to Vertro's ALOT Rewards app, which was a collaborative product that we released during the third quarter using Inuvo's BargainMatch platform. These apps should help us increase retention or lifetime value of the user and greatly increase search revenues per user. Additionally, we believe we will be able to attract users who will give us a significantly higher value through revenues-generating capabilities that the Inuvo product, such as BargainMatch, or their Kowabunga product, for example, bring to the table.

Aside from the synergies in the two Companies' products and the potential they have, the combination should immediately impact our bottom line. Our operational costs savings should be approximately $2.4 million annually attained through the elimination of redundant public-company costs and other operating efficiencies.

So, in summary, the merger capitalizes on increasing growth in the Internet user experience and our combined strength in attracting and keeping high-quality users. The expected synergies and cost savings as a combined Company should achieve the goal of increasing shareholder value immediately and over the longer term. And I'm extremely excited at our Company's potential to attract and attain consumers in order to provide them with multiple options to engage in the Internet.

We believe that further opportunities in global markets will be significant going forward. Our plan is to assimilate the Company's operations and their products as quickly as possible after the expected closing. Most importantly, we expect to produce adjusted EBITDA profit, excluding deal costs in the first quarter of operations as a combined Company. We expect the registration statement on Form S-4 for the transaction, be filed early next week.

As we continue to move forward through the remainder of the fourth quarter and into 2012, we continue focus on the attract - on attracting new, high-quality, longer-term users, that will further increase distribution and lifetime value through greater user retention, as well as diversify revenue streams through multiple product offerings. Overall, we believe that we've met the challenges presented during Q2 and again in Q3 regarding the SERP changes. While it was a temporary setback, we believe that the issues were dealt with effectively within that quarter.

We're also looking forward to return of growth in Q4 and beyond. And we look forward to the coming quarters and the prospects of both strong organic growth and synergistic growth that we expect will arise from our planned merger with Inuvo, Inc. So, with all that said, let me hand the call over to Jim Gallagher, our CFO, to discuss our financial results. Jim?

Thanks, Peter, and good afternoon, everyone. As Peter explained, Q3 presented Vertro with a number of challenging issues, primarily concerning the changes we were required to make to our SERP that impacted revenues and overall results. For the quarter, total revenues were $6.3 million, compared to $7.5 million in Q2 2011. This represented a decline of approximately $1.2 million.

As Peter outlined, the revenue decline was a result of a number external factors arising from the mandated change in our SERP, as well as an internal decision to reduce customer-acquisition costs during June and July. As previously noted the reduction in our customer-acquisition costs directly causes a decline in users, which results in fewer searches and consequently reduces revenue.

While the factors were all interrelated, I'll put it simply that we were unable to acquire our desired number of users at the appropriate prices. With that said, we are in the process of returning to growth during the fourth quarter as our direct marketing efforts are back on track, we are broadening our scope and scale of product offerings, and our operating expense, or OpEx, remain steady. As to OpEx, we were able to maintain tight controls of our expenses, with total operating costs of approximately $2.2 million, which is the same as the prior quarter, after making substantial cuts to our costs in the first quarter of 2011.

We experienced a loss from continuing operations in the third quarter of 2011 of approximately $1.6 million, or $0.22 per diluted share, as compared to a loss of continuing operations of $300,000 or $0.05 per diluted share in the previous quarter. EBITDA and adjusted EBITDA for the quarter of 2011 -- third quarter 2011 -- reflected a loss of $1.3 million and $0.9 million, respectively, as compared to an EBITDA loss of $0.2 million and an adjusted EBITDA income of $100,000 in the prior quarter. Adjusted net income was $12 million, or $1.60 per diluted share, in the third quarter of 2011. This figure is the direct result of income from discontinued operations of approximately $13 million during the quarter.

As some of you may recall, in March of 2009, we sold the assets of our former MIVA Media division, and transactions and adjustments related to the MIVA Media division were thereafter classified as discontinued operations. This quarter's net income from discontinued operations represents the reversal of the accumulation of prior net foreign-currency translation adjustments of approximately $12.9 million that arose as part of the former MIVA Media EU operations. During the quarter, the accumulated balance was released to income, as the related foreign entity's net assets have been substantially liquidated.

As cash and cash equivalents decreased to $4 million as of September 30, 2011, a decrease of approximately $0.9 million from June of 2011 cash, which was $4.9 million. The decrease was primarily due to reduced cash flow from operations as we tackled the issues Peter previously outlined. We believe that we currently have sufficient cash from continuing operations, and I want to point out that we're continuing to maintain our untapped financing facility with Bridge Bank of approximately $8 million, which was renegotiated back in June of 2011.

With that, I'm going to turn the call back to the operator for any questions. Jen?

(Operator Instructions)

Eric Martinuzzi, Craig-Hallum.

I appreciate the commentary on the Inuvo transaction. Just curious to know with the filing of the S-4 if that gives you any better sense of timing for the potential closing of the acquisition?

We're really looking towards probably the (technical difficulties) quarter 2012 to get things wrapped up and to move it forward from there.

I'm sorry. You cut out there. Could you repeat what you just said?

What I said was if we file it next week, we'll go through and SEC process and then we'll probably be in a position to get this fairly well wrapped up by the early part of 2012, that is the first quarter of 2012.

All right, and then the -- your language -- it's obviously -- you're a little bit more encouraged. You see some positive trends. You're using words like prepared for a rebound and there's a return to growth in Q4. Is that to say sequential growth in Q4 versus Q3?

Yes. We're falling short of making a big proclamation because we've had such a tough time of it in Q3. We think that we'll grow revenues. We think that we'll have EBITDAs in Q4. We think we'll get all of our metrics going again, including we've got to get our users going again, and we've got to get our ratio back to 50-50 of Region One, or closer to 50-50 on Region One and Rest of the World.

We had a tough go of it. The SERP change knocked us on our butt pretty well, but we think we've got that behind us. It almost was offset by the changes that we made to the product. We've got some ongoing issues with our ability to attract new users. But we think we've got it fixed in place for all of that, and we can get back to growth again.

As you know, we dropped, or as you don't know, maybe, in Q3, we again dropped our OpEx down. We anticipate, besides ad spending, we anticipate bringing OpEx down again in Q4, I guess. Right, Jim? Another $30,000, $40,000, $50,000, possibly. We think we're in good shape on all fronts if we can get buying going again, which we're feeling pretty good about, get our growth going again. We think that our lifetime value expectations for consumers are as good as they've ever been right now in recent histories.

When I say recent histories, Rob, I guess I'd say back into the 2009 and 2010 range, when we were on a bit of a roll there. We've got LTVs now back to those ranges, so if that falls through on enough volume of users, we project that we could have a pretty good quarter coming up in Q4.

And the assumption then, you talked about obviously you're working towards having a positive EBITDA in Q4. Is the implication there then that the cash on the balance sheet would rise on the December 31 snapshot?

I think we're really looking at something as maintaining a comparable balance to where we are right now.

We'll probably spend it on advertising --

Just to give some color to what Peter had mentioned before, our average OpEx for the third quarter 2011 was down to about $733 per month. We're anticipating to be lower than that in the fourth quarter. By comparable amounts, if you looked at the first quarter, were at about $933. There's a significant reduction of almost $200 per month that's been factored in from the first quarter to the third quarter. We've gone through some cost reductions and things like that, but we continue to watch the operating expenses as much as we possibly can and obviously conserve cash where we possibly can as well.

Well, but the cash issue -- Eric's point was if we're expecting to make money in EBITDA, then would that translate to cash. My point, Jim, and for Eric's and the rest of them is because we're trying to still grow our base, our cash may then drop a little bit, but not below the numbers you're talking about, simply because we would continue to spend if we could through the holiday period.

That's true.

The customer acquisition cost was $5.2 million in Q3 and was $5.2 million in Q2. You're saying you would be greater than that is the expectation in Q4?

I think so. Of course, it all depends on how it goes towards the holiday period. There's still always a lull towards the end of the year, and it'll depend on how our performance on projected LTVs from that period, how that looks. Definitely, we're going to be adjusting throughout the period, but our anticipation is that it would be higher.

As I looked at the non-financial metrics, you seem to -- you had the same issues across the board as you were overhauling the SERP, the Search Engine Results Page, in accordance with your partner's desires here. But it looks like the Region One versus Rest of World, it seems like the Region One fell off more if I look at the search queries. I see Region One down 9% sequentially, but Rest of World only down roughly 5% sequentially. What's the explanation there?

It's all driven by customer acquisition. We've had more success in non-Region One acquisitions in terms of meeting these desired margin targets. We've had particular success in a couple of markets; one in Latin America, one in Europe. So that has definitely driven some of the disproportionate growth in non-Region One. We'd like to grow Region One, too. We'd like to grow the whole thing in proportion, and that's going to be our goal for Q4. But it's driven mostly by acquisition.

So one of the things, just to build on what Rob was saying, because I think he's right on the nose with that, but hen the SERP change hit us, as you know, Eric, we monitor our [CV, or our] cost for getting in, and our LTV on a product-by-product basis, much less on a country basis. Some of the international markets actually have higher margins for us than English-speaking markets.

When we decided to cut back on our spending in Q2 and Q3 because we didn't know what the new LTVs would be, because our greater margins were in the non-English speaking countries, we were able to continue spend in some of those, because we were pretty certain that we would be okay. We weren't able to spend in to some of the tier 1 targets where we weren't certain we would be okay. So I think we're still certainly living the residuals of that.

John Gilliam, Point Clear Strategies.

You mentioned some changes to your advertising that was required by a third party. Could you provide a little more color on that?

Not too much, please.

John, We've always had to deal with third-party requirements for advertising. All of the advertising networks that we work with have policies, and policies generally -- they're generally apply to all advertisers. There's also policies that apply specifically to advertisers who distribute software. We had an incident in June which affected us going into Q3, because that was the tail end of Q2. So most of our investment in advertising or customer acquisition would toward the end of the quarter had most of its impact in the following quarter. We believe we successfully addressed those issues.

There were specific changes that we made, which I won't go into detail on, that we felt were effective. We did more recently face additional challenges with advertising policy changes, and we've made changes that address those. And some of the things we learned early in Q3 and at the end of Q2 directly apply to the more recent issues, and we believe they're -- we're having some success there.

But it takes time to apply these changes. It takes time for us to adjust our buying model, because the model is based on analyzing the history of a campaign. If we are required to make a significant change to our methods that's disruptive for that campaign, we end up having to basically build a new historical model to optimize the costs or the pricing of the advertising that we're buying. So, it definitely is disruptive, and it definitely takes days and weeks to resolve, but not months.

Is it related to the consumers opting in or opting out the various products that we offer with each campaign?

No. We hadn't made any changes to our products or the disclosures of other things about -- that are delivered as part of the product installation. But there are changes that needed to be made to advertising creative or advertising copy.

Peter, I believe you said that you expect to hit the higher-risk share at some point in Q4 with your major partners. Did we hit that level in October?

We don't know, or I would've claimed it, John. What happens is we get a -- from our biggest partner, we get kind of a true-up on an escrow account, and we won't know what that true-up is until around the twenty-eight or twenty-ninth of this month, meaning the month of November. So that'll give you a sense of how close it is, right? We're right on the cusp of it, and if I was guaranteed over, we would claim it, but we're right there. It all has to do with the estimate on the payment at the end of the quarter. I'm sorry. At the end of this month, which is truing up October.

Thank you.

(Operator Instructions)

And I'm showing no further questions.

To close, 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, including our proposed merger with Inuvo, Inc.

Two, our ability to distribute and monetize 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 those expectations contained in the forward-looking statements. Key risks are described in Vertro's reports filed with the US Securities and Exchange Commission, including Form 10-Q for Q2 2011 and our 10-Q for the third quarter 2011, which we will file. 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, this does conclude your conference. You may all disconnect, and have a wonderful day.