Inuvo Inc (INUV) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the Inuvo, Inc. first-quarter 2012 conference call. During today's presentation all participants will be in a listen only mode. Following the presentation the conference will be open for your questions. (Operator Instructions). Today's conference is being recorded, May 14, 2012.

I would now like to turn the conference over to Alan Sheinwald of Alliance Advisor.

Thank you, Operator, and good afternoon everyone and all our shareholders. Welcome to Inuvo's first-quarter 2012 financial results conference call. Joining on the call today our President and CEO Peter Corrao; our CFO Wally Ruiz; and Rob Roe, our Senior Vice President and General Manager.

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 the call 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, EBITDA as adjusted for non-cash compensation expenses and nonrecurring items; adjusted income loss; and adjusted income 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.

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.Inuvo.com. And a replay of this conference call will be available for 90 days.

I would now like to turn the call over to our President and CEO Mr. Peter Corrao. Peter, the floor is yours.

Thanks, and good afternoon everyone. Thanks for joining us on the call today. The past few months have been a busy time at Inuvo. We have achieved much in the first quarter, including our first month of combined operations, and have seen improvements in most of our business segments.

Much of our focus at Inuvo has been on integrating the operations of the two companies. Now that the integration is fully underway our next bullet is to assimilate our products and set the stage for growth in the future.

We have expanded our product portfolio and can now access a more diverse set of strategic partnerships. We plan to further develop these relationships in order to realize the greatest return on a product specific basis. By integrating and modifying our existing portfolio, we plan to deliver the most viable products into the rapidly growing mobile and tablet market space, as well as enhance our current delivery into the traditional platform.

We also plan to expand geographically into countries not currently served. We have already begun our geographic expansion, and currently serve 24 countries and offer our product in seven different languages. Recent additions over the past quarter are Italy, Turkey and Russia.

At this point I would like to remind everyone that the Company's consolidated financial statements as of March 31, 2012 include only one month of operations and financial results of our Vertro subsidiary, as well as closing costs of the merger between Inuvo and Vertro.

Revenue for the quarter was $8.8 million, with $4.4 million of that amount from our first month of combined operations. I am also pleased to announce a positive adjusted EBITDA of $212,000 for the first quarter. Now since only one of the three months in the first quarter included results from combined operations, and as the Company incurred costs related to the closing of the merger, we do not believe that these results will be indicative of the Company's operations going forward.

With that said, let me walk you through Inuvo's current operational structure and where and how we plan to grow the Company in the future.

As I have been saying, we currently operate along three distinct business lines -- Software Search, our Publisher Network, and our Partner Programs. Our first and strongest business segment is Software Search, which includes our ALOT homepage and our Appbar products.

These are a specialized direct marketing program. We strive to continuously increase our user base and increase our monetization per user. The Appbar homepage and free apps developed by Inuvo are designed to increase the usability of the Internet while allowing us to attract new users to our products and increase our user retention.

Growth in the Software Search segment remains strong, and we anticipate increasing to approximately 10 million live users by the end of the year from our current 7.4 million live users as we expand internationally and continue to improve upon our direct marketing campaigns both domestically and abroad.

Our second business segment, the Publisher Network, we facilitate performance-based advertising between third-party publishers and advertisers through our partnership with Yahoo!. Additionally, our Publisher Network includes our owned and operated websites that we monetize with that same partner.

Our Publisher Network results are down on a year-over-year and a quarter-over-quarter basis due to an increase in the number of -- I'm sorry, decrease in the number of transactions driven through our network, both from third-party publishers and our own owned and operated websites.

The decrease in transactions running through our network is due primarily to traffic irregularities identified by Yahoo! that cause Yahoo! to make advertiser refunds that in turn resulted in a chargeback to Inuvo of approximately $238,000 in Q1 of 2012. This amount was a reduction of our revenue, and most of it has been chargebacked to our vendors.

Further, we have seen less traffic coming through specific partners. The revenue in this segment has been volatile, and we expect the negative volatility could continue into the near future.

We are currently targeting new publishers for our Publisher Network to add additional high-quality traffic to this network. Our new target publishers are smaller publishers than the Company has targeted in the past, and believe the Company has a unique selling proposition to help those small publishers increase their monetization opportunities.

For our own and operated business we are slowly testing and relaunching campaigns that we use to drive traffic to our websites that receive chargebacks. Importantly, we have switched management of these campaigns primarily from third-party and external vendors to our in-house media buying team here in New York.

Partner Programs, our third business segment, includes display, retail affiliate programs, BargainMatch and our Kowabunga properties. We anticipate these properties will experience rapid growth going forward as we introduce them to a broader user base.

As an example, BargainMatch, our customer loyalty comparison-shopping and cash back program has seen dramatic positive results and financial growth since the merger. This product is part of the ALOT Appbar and as well as a standalone website.

Knowabunga, our locally focused deal of the day marketing initiative is scheduled to launch May 21 in 10 small markets in North and South Carolina. We have high hopes for growth in this initiative, and we look forward to reporting our progress in the very near future.

Display revenues continues its march to higher highs each and every month. And the keys to our success in what will be our model going forward with these initiatives is our strong and growing ALOT user base, our ability to acquire customers to all of our properties through our internal resources, and our significant knowledge of consumer tendencies that enables us to leverage this data for improved monetization across our business lines.

The Company has rapidly and successfully adapted in this period of transition. We are dedicated to continuing our cost-savings and product synergy initiatives, and plan to introduce a number of new products and services to our users in the very near future.

Our combined development teams are working closely together to offer the most attractive products to consumers, whether it is an individual publisher or an advertiser. We are confident we can offer solutions that are both user-friendly and simple to use without heavy investment on our end. And we expect our new products and our enhanced existing products to retain and attract users and other constituents.

As we shift into Q2, our first full quarter as a newly merged Inuvo, we anticipate growth in our Software Search and our Partner Programs segment, but expect continued volatility in our Publisher Network. We anticipate that any further volatility in the Publisher Network will come from decreased transactions in the network from our lower-margin third-party network partners.

This is important. Consequently, while we believe there is a revenue risk in the Publisher Network, we believe the margin risk is lower and minimal.

With these new initiatives we expect to be cash flow positive by the end of the 2012, excluding the one-time cost from doing the deal. And we expect these initiatives can be funded internally and through our recently secured credit facility with Bridge Bank for up to $15 million.

With that said, let me hand the call over to Wally to discuss our financial results. Wally.

Thank you, Peter. Good afternoon everyone. Thank you for joining us today. My comments will be in regard to the financial results for the first quarter of 2012.

As mentioned, the first quarter was unusual as it had a number of one-time financial entries associated with our merger with Vertro on March 1. For example, only one of the three months of the quarter, March, had the combined operations of both companies. Also, the quarter saw charges to operations for the cost of closing the merger. And the ending balance sheet included the purchase accounting entries to record the assets and liabilities acquired in the merger.

Also, of note is the fact the new combined company called for a new organizational structure, more streamlined than the former organizations of either company prior to the merger. As described by Peter, we organize around three business segments -- Software Search, Publisher Network and Partner Programs.

Inuvo today reported net revenue of $8.8 million in the first quarter of 2012, $2.2 million higher than the immediate preceding quarter, and $3 million lower than the same quarter last year. In the current quarter the Publisher Network segment contributed $5.6 million or 64% of the total revenue. Software Search contributed $1.8 million or 20% of the total revenue, and Partner Programs contributed $1.4 million or 16% of the current quarter's total revenue.

On a go forward basis we expect the revenue to be allocated approximately as 50% being Software Search and 25% each for the Publisher Network and the Partner Programs segment.

The Publisher Network segment reported $4.2 million lower revenue compared to the first quarter of last year. This segment is comprised of the Inuvo platform, which allows Web publishers to operate search-related sites to have pay-per-click sponsored ads on those sites. This segment also includes our owned and operated search-related sites that monetize on a pay-per-click sponsor -- that monetize on pay-per-click sponsored ads.

This segment has experienced a decline in revenues since Yahoo! gave us notice in December that it had detected traffic irregularities across its published network. Though the irregular traffic did not originate with Inuvo, we are a partner to the Yahoo! published network. As a result of this traffic, Yahoo! made refunds to its advertisers, which were partially charged back to us.

In the first quarter of 2012 those chargebacks amounted to $238,000, which was a reduction to our revenue in the first quarter. And it was partially a reduction of the cost of revenue as we in turn charged it back to our publishers.

The Software Search segment reported revenue of $1.8 million in the first quarter of this year. This revenue stream is entirely the March search revenue from the ALOT Appbar and homepage businesses which we acquired from Vertro.

The Partner Programs segment contributed $1.4 million, $600,000 lower than the same quarter last year, mainly as a result of terminating the telemarketing operations last June, as partially offset by the revenue generated from display advertising and BargainMatch.

For the three months ended March 31, 2012, the Company's gross profit was $3.4 million, and its gross margin was 39%. That compares to $5.4 million or 46% for the same period last year. The lower gross profit is due primarily to the Publisher Network segment where revenue declined 43% and cost of revenue declined only 24%. The gross margin of the Software Search segment was 82% and the Partner Programs was 53%.

Our Companywide operating expenses decreased by $1.5 million or 22% to $5.1 million for the quarter ending March 31, 2012. Search costs were lower by $650,000 due to the lower volume in the Publisher Network segment, though partially offset by the search costs required to operate the Software Search segment for one month, the month of March.

Compensation and telemarketing expense were lower by $1.4 million due to the termination of the outsourced telemarketing agreement in June 2011, and somewhat lower compensation expense.

SG&A expense is $550,000 higher in the current quarter compared to the same quarter last year, primarily due to $436,000 of closing costs for the merger.

The net loss reported of $1.9 million was $481,000 greater than the same quarter last year. The last-year quarter included a $118,000 one-time net charge to settle legal disputes, and this year's quarter contained $436,000 of closing costs associated with the March merger.

The adjusted EBITDA for the three months ended March 31, 2012, was $212,000. This compares to an adjusted EBITDA for the first quarter last year of $201,000.

Turning to the balance sheet. The cash balance at the end of March was $3.5 million. The restricted cash balance was $475,000 at the end of the quarter, and it is composed of a deposit held by our bank to secure a Letter of Credit that is required by a lease.

Effective with the merger March 1, we commenced a new financing agreement with our bank, which includes up to a $10 million revolving line of credit and a $5 million term loan. The agreement has a term of two years for the revolving credit line and four years for the term loan.

In March we drew down the $5 million term note to pay the closing cost of the merger and outstanding vendor payables. The larger changes in the balance sheet since December are a result of the merger in March. The consideration given for all the outstanding shares of Vertro was $11.4 million of Inuvo stock.

Inuvo purchased or absorbed $3.1 million of cash, $2.6 million in current assets, mostly receivables; $2.3 million in noncurrent assets, mostly furniture and fixtures and equipment; $11.8 million in intangible assets, mostly customer lists and trade names; and we absorbed $8.2 million in liabilities. The resultant transaction left $4.3 million of additional goodwill on the balance sheet.

With that I am going to hand the call back over to the operator for questions. Operator.

(Operator Instructions). Ryan Bergan, Craig-Hallum Capital Group.

Hey guys and congratulations on your first quarter of combined operations. I want to start with your -- in your -- the Publisher Network segment continues to see some residual impacts from the traffic situation with Yahoo!-Bing. You said that could be some volatility going forward. I wonder if you can dig a little deeper on that and address it further?

Sure, this is Peter. How are you? So what has happened is beginning last year Yahoo! and Bing began to question some of the traffic quality that was coming both through the third-party network at Inuvo and the owned and operated sites at Inuvo.

As you know, that resulted in some pretty big chargebacks for last year, over $1 million, and then surprisingly actually resulted in another $200,000 and whatever it was -- $38,000 here in Q1, which of course reduced revenue pretty dramatically, but also caused us to take a good look at what we were doing in terms of Publisher Network and the traffic that we were sending through to them.

So I think we've got internally a really good team, especially now that we have combined the two teams, that knows how to source good traffic. And knows how to source traffic that comes only from the best possible sources, which we want to then put through back at our friends at Yahoo!. To do that though we have to sort through what we have got in the thousands of publishers on the network side and what kind of traffic we were putting into our own site, mostly through the Yellowise site.

We have done that now. We think we have got that revenue down to where it is going to be on a continuing basis, which is quite a ways off from where it was at the end of last year and the beginning of this year. But I think we hit bottom there. And even if we were to lose somewhere revenue, like I pointed out in my script, right, I don't think there is much more margin to lose as that our next largest publisher that I am frankly concerned about their traffic quality, and if we want to continue to send it through to Yahoo!, has really virtually no margin with it. So if we were to lose them it would come off the revenue line, but not off the margin line.

The long and short story is we are going to rebuild that business. I think most of the rebuild will come exactly what I said in my script -- on the back of smaller publishers where we know exactly where their traffic is coming from, one.

And, two, we know how to help these guys monetize and think we can make them more money by being our partner instead of going direct to the search firms to monetize. That is the first method.

And then the second method is we're taking over all of the buying -- no more third-party buying. We are taking over all of the buying that Inuvo used to do through third-parties which resulted in those chargebacks. We are going to do the buying internally. And in doing so we will know exactly where our traffic comes from and how to monetize that traffic, what the expectations would be from it from both our partners at Yahoo! and Google. And I anticipate in the future we will have no problems with our Yahoo! partners as it relates to traffic quality in the future.

Having said that, though, right, we have gone through sort of a bloodletting in terms of the revenue on this thing. Have been able to absorb the margin inside of the EBITDA, because luckily our other two businesses are on fire. And we are going to rebuild it into a real business that has got good margins with it going forward.

Okay, that's helpful. Now is there going to be any additional costs that go with buying the traffic internally as opposed to the prior method that you would incur?

No, the prior method was Inuvo, I think exclusively. I don't think they did any of their own buying when they were standalone -- did it all through third-party buyers and agents and paid hefty fees to do that.

Rob, I don't know, are we going to do any additions to costs? We might add a person or two internally.

Not (multiple speakers).

But the plan right now is to go with the team that we have got and handle all the buying internally. So we think we can do a better job of buying by deploying our skills set, build Vertro's skill set against the buying. And secondly we would have better margin because there is not a middleman to pay; we would do it ourselves. And for now it looks like we will use our existing team, led by Rob, to do all of that buying and not add any additional people to it.

Got you. I follow you. Okay, I want to talk on the Partner Programs. Versus my model the revenue there was down about $850,000 compared to what we were modeling. That could be an aggressive forecasting on our part for the quarter, or was there something else that maybe you didn't quite see the revenue impact that you were hoping for? I am wondering if you can just dig in a bit little further on your -- on the -- how that segment rolled out in the first quarter?

I think that wasn't so aggressive as much as it was that a lot of the Partner Program revenue was coming out of the old Vertro, not out of the old Inuvo. So you ended up not being able to count the revenue because of the three and one period -- you know, three months of Inuvo and one month of Vertro.

So let me just tell you on its big piece parts how that business is going. So retail affiliate programs are as strong as they have ever been as a standalone inside of there, and growing.

Our display network this month will do over $400,000 in display, so you're talking a run rate of $1.2 million plus in display alone, which has fabulous margins for us. Most of that display is on the homepage. And you will recall that only several months ago we had almost -- we didn't have a homepage. When did we actually introduce that, January, Rob?

The display --.

January or February, something like that?

It was end of Q4, I believe.

Right, so December and January is when we introduced it, so that is all net new revenue. We just didn't get to report it because two of the months of Vertro wasn't in it.

The Kowabunga program, no revenue to be had yet. It only launches May 21. But I am frankly pretty excited about our test in North and South Carolina and think that we really could be the number one consumer alternative or only alternative, frankly, to deal of the day -- an e-mail delivered sort of deal of the day programs in rural America, which round figures makes up 20% of all the households in America.

And then our BargainMatch product really was doing no revenue before we merged the two companies, and we are on track to do more than $150,000 in BargainMatch this month alone.

So I am, frankly, pretty darn pride of what we are doing with the Partner revenues. I think it is nowhere but up. And even though we have had fall-off to think that we are 50% search and 25% Partner revenue today, and 25% inside the Publisher Network, and are still with that much fall-off in the Publisher Network -- still able to deliver EBITDA positive and still be able to talk about growth quarter-on-quarter, I couldn't feel better about it.

Great. How about headcount, how has that changed since you gave your merger update about a month ago?

Our headcount is down actually a little. I think we've got --

45.

45 people as of today. And we don't anticipate any -- really any increases or decreases going into the next quarter. Rob is looking at bringing on one developer, I think -- hopefully keep our fingers crossed here in the next couple of weeks. So loosely we are going to stick at this 45 number.

And then as that ties to a big piece of the $2.2 million in cost synergies that we anticipated for this year and $2.9 million on an annualized basis, we are at or ahead of that pace on both this year's cost-saving synergies and the annualized cost-saving synergies.

Now we have only had $2.2 million and $2.9 million to pull out of it, so when I say ahead, we were talking $100,000 or $150,000 on an annualized basis, but still we are tracking better than we thought we would be on that front.

(Operator Instructions). Eric Martinuzzi, EM Research.

I'm just curious to know on the balance sheet, so I want to start there. Given we have now got the two companies combined, we are expecting stairstep throughout the year on the top line, does that also imply that we have based on the balance sheet as far as where the cash is right now?

The cash will be in the neighborhood, but it will fluctuate depending upon our operational needs. So, for example, the Accounts Payable at the end of March was $10 million, and we will use some of that to bring down those payables. But it will fluctuate based upon the operational needs. But, yes, we expect it to certainly be in the seven digits.

And the other reason that he is hedging a little bit here, Eric, is we have had some recent really good luck on the buying side for bringing more distribution in through the ALOT network. And we haven't gone crazy with it. We are still paying for all of that from cash from operations at our existing balance sheet, but of course if we lucked into dramatically more distribution per day we would want to take the opportunity to go get that, and that would of course change the balance sheet too as we bought more of that distribution.

You are (multiple speakers) talking about there?

I think Wally said it right. We anticipate being about where we are for the rest of the year and actually increasing cash on the balance sheet as we get to late in the year. And for sure, other than that one piece, which is if we luck into being able to buy some really big distribution on a daily basis, we don't anticipate any needs on the balance sheet beyond what we've got.

Okay. And that is where I was headed next, actually. Because the 7 million growing to 10 million, that is pretty exciting, and obviously implies about 1 million a quarter. What is the -- you talk about these new potential distribution partnerships. Would these be coming on in that sort of -- linear like that, or would be lumpy and take them where you can get them with 10 million as the goal?

Well, I will answer the -- I will let Rob answer the lumpy part. He will get the tough one, and I will answer the more linear one. So we are increasing, and been successfully increasing sort of slow as you go our distribution on a daily basis.

Right now we are distributing on any given day just under 100,000 and spend it in the -- about 65 to 70 range, I guess, on a daily basis -- today maybe a little more than that, a little less.

I will let Rob talk about some of the opportunities with bundles, but when we get them they would be lumpier, if you will. So, Rob, you want to talk about where we have been and maybe walk through the testing of bundles and why -- and then when we get them how we would charge (multiple speakers)?

Things have been -- actually, we have had fairly smooth and steady increases both in our advertising-driven distribution and in our bundled distribution. That is because we have been taking small bites on the bundle side. But occasionally we will get a big opportunity and we will see a stairstep increase in distribution. But generally we are pushing on both fronts.

So hard to predict that we might -- may get a big opportunity on bundles that might push things up dramatically. Certainly over time as we grow our population too we also have a need to grow the daily distribution rate. So it is not really -- it will be going up as well to keep pushing that number higher. But generally it has been smooth -- fairly smooth with occasional small increases in bundle size.

So just from your own -- from management's point of view would you be disappointed if you're below 8 million as we have this earnings call 90 days from now on Q2?

That is the trajectory we are headed for, so certainly we would anticipate that, and we would hope for that.

Our recent growth has been like this 400 to 500 per month. Rob said as the base gets bigger, it becomes a little bit more difficult to get it, but certainly we are feeling good about 10 million by the end of the year. And for now we are still growing at that clip.

Now when you get to 8.5 million last time we ran through this, if you recall, it gets more difficult as you get there. But we were just talking in the cab on the way down to the Alliance offices. It looks like the path to 10 -- 10 million, 10.5 million live users is a pretty clear one for us. And we would be disappointed on the 8 million, and disappointed if we didn't get to this 10 million number by the end of the year for sure.

And, remember, we are speaking in aggregate terms here, global distribution. So we have been pushing into new markets. We added three new markets this last quarter. Some markets produce greater increases in the user number, but of course that doesn't always -- the revenue doesn't always scale on the same level. So we would certainly trade, for instance, a lower growth in population number if that came with greater value. (multiple speakers). So mix is also important.

The other thing I would say about that is if we were going to change our mix dramatically, we would signal that in advance. So you don't need to worry that we'd say, oh, we got to 10 million, but it was all Indian consumers that are worth one-eighth of what a domestic consumer is. Our plan is to continue to grow at the same trajectory by market that we are doing it. Other than that, we are announcing new markets as we enter them, like we just talked about Turkey, Russia and Italy.

Okay, thanks for taking my questions.

Thank you. I am selling no further questions in the queue at this time. I would like to turn the conference back to management.

Okay, well thanks everybody for joining us on the call today. We think we had a pretty good quarter. We think we did a good job of explaining to you where we are strong and where we've got our weakness. Even in our weak areas we think we have got a good plan behind us where we can go bolster that and bring that -- bring those revenues and margins back better than they ever were inside of our Publisher Network. We are excited about the work we are going to do with that.

We have got one of our managers, Loren himself is exclusively focused on fixing this with us. And we think we are off to the races and can't wait to talk to you throughout the quarter, and again at our next quarter call when we will have full Company to report on both quarters.

So thanks for joining us on the call today, and we look forward to talking to all of you soon.

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