Inuvo Inc (INUV) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Inuvo, Inc. second 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 August 9, 2012. I would now like to turn the conference over to Alan Sheinwald of Alliance Advisors. Please go ahead.

Thank you, operator, and good afternoon. I would like to thank everyone for joining us today for Inuvo, Inc.'s 2012 results conference call. Mr. Peter Corrao, Chief Executive Officer, and Mr. Wally Ruiz, Chief Financial Officer of Inuvo, will be your presenters on the call today.

Before we begin I am going to review the Company's Safe Harbor statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events and as such all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially.

When used in this call the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Inuvo, Inc. are such a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by Inuvo, Inc. at this time.

In addition, other risks are more fully described in Inuvo, Inc.'s public filings with the US Securities and Exchange Commission which can be reviewed at www.SEC.gov. With that I would now like to congratulate management on a strong quarter and introduce Mr. Peter Corrao, CEO of Inuvo. Peter, please go ahead.

Thanks, Alan. Thanks, everyone, for joining us this afternoon for the second-quarter 2012 Inuvo conference call. Management is pleased with the financial results and strategic initiatives that the Company has achieved during the quarter. We increased overall revenue to $12.9 million and gross profit to $6.8 million and we anticipate continued quarter over quarter top line growth going forward.

The Company has already announced $4.6 million in revenue for the month of July and expects the third-quarter total revenue to show significant growth compared to our Q2 numbers. We believe that all the one-time expenses related to the merger have been put behind us and our operations are now fully integrated.

We fully expect to really hit our stride in terms of quarter over quarter revenue growth in Q3. We further anticipate cost savings and revenue increases will bring about increased adjusted EBITDA, an already positive number for us as we trend towards profitability.

I will now give you a quick overview of the recent past and the near-term future for our three revenue segments. Our Software Search segment revenue was $5.5 million for Q2 compared to $1.8 million for Q1 2012. As a reminder, the Vertro merger closed mid-quarter on March 1, 2012 and Q1 2012 results are only one month Vertro operations.

During Q2 2012 the Company was able to increase the number of Tier 1 search queries and user base of our ALOT app bar. The total search queries for the ALOT app bar and ALOT home page product in Tier 1 markets increased 15% in the second quarter of 2012 compared to the first quarter of 2012.

This news comes on the heels of the recent announcement that ALOT has alone achieved 18% live user growth in the United States, our most significant revenue generating country in the Company's Tier 1 market designation. The Tier 1 market at Inuvo encompasses the United States, the UK, Canada, Ireland, Australia and New Zealand.

During the first half of our year we also expanded our global marketing efforts for the ALOT app bar. We expanded into seven countries across Europe and South America, specifically Italy, Turkey, Russia, Argentina, Venezuela, Colombia and Chile. Our ability to successfully localize and grow our user base in multiple economies provided us with adversity of traffic and protection from regional market shifts.

We believe the expanding global footprint of the ALOT suite of products, which is ahead of the other Software Search companies that are focused primarily on domestic consumers. At the same time we have been expanding our global reach and we focused a significant portion of our consumer acquisition efforts to more expensive markets like the United States which has the side effect of lowering our total number of live users.

However since the new users are from higher monetizing markets this is positively affecting the amount of revenue that we generate and part of our recent revenue gains are directly attributed to this revenue from this group of new higher monitor end users. Despite the mix shirt in users we are still currently at 7.6 million total live users.

Another key achievement can be seen in the growth of our partner program segment, which remains our fastest growing business segment. This business is diversified across our BargainMatch, data sales, affiliate programs and display advertising. The segment has grown 131% during the second quarter of 2012 when compared to the same period in 2011. We continue to see outstanding margins for this business with an approximate average of 65%.

Additionally, the recent introduction of our two display advertisements on our ALOT homepage last month has already positively impacted our display advertising revenue, extremely good news because display ad serve one of the main drivers of the strong partner program margin. We believe this new dual display ad versus single ad produces accretive revenues with no incremental cost [incurred]. This should allow us to expand our margins going forward as we look to increase our adjusted EBITDA quarter on quarter.

During the second quarter of 2012 we launched our Kowabunga initiative, a deal of the day and group discount website and iPhone app for rural and suburban areas which we believe are underserved by the well-known players in the space including Groupon and LivingSocial. In conjunction with our partners we are continuing to explore how to further monetize this initiative.

To sum up our partner program per segment, display advertising continues its strong performance and we are thrilled with the results from its two ad testing and the recent rollout of those two ads. BargainMatch is being perfected as a product and we are optimistic for the very near and intermediate term and we are making progress on our Kowabunga initiative.

Now importantly our Publisher Network segment seems to have stabilized in the range of $1.8 million to $1.9 million in monthly revenue and we have high hopes for our recently released and internally owned and operated local dot.ALOT site. Our Publisher Network, which is underperformed to last year, is now showing signs of renewed growth as older, lower quality publishers are shifted out and new publisher businesses development with stronger traffic and better returns on investment.

On top of the revenue growth that we have already experienced we are expecting to grow even more throughout 2012 and we are continuing to control our operating thoughts. When we first merged we had promised the savings from synergies of $2.2 million for fiscal 2012. Additional savings year to date already are $900,000 greater than this target. So revenue is up and should continue growing while operating costs are down beyond our prior target.

In addition to this I've got some fabulous late-breaking news; just hours ago we received confirmation of an amendment to our Clearwater, Florida lease which reduces our financial obligation there by approximately $30,000 per month beginning September 1 of this year. As part of that amendment we are able to continue occupying a small portion of the space for our employees in Clearwater, thereby not disturbing their working routine.

Now let me turn the call over to Wally, our Chief Financial Officer, who will provide you with greater detail on our financial results and I will come back to close afterwards. 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 second quarter of 2012. This is the first full quarter of combined operations and financial results since the closing of our merger with Vertro.

Inuvo today reported net revenue of $12.9 million in the second quarter of 2012, an increase of 39.7% compared to the three months ended June 30 of last year and an increase of 46% compared to the immediate preceding quarter. In the current quarter Software Search contributed, as Peter had mentioned, $5.5 million or 43% of the total revenue. Partner Programs contributed $2.5 million or 20% of the current quarter's total revenue and the Publisher Network segment contributed $4.8 million or 37% of the total revenue.

The revenue stream from the Software Search segment is entirely search revenue from the ALOT app bar and home page business. We began recognizing this revenue as of the merger date, March 1 of this year.

Net revenue for the partner program segment increased 131% for the three months ended June 30, 2012. That compares to the same period of 2011 primarily due to revenue derived from partner programs associated with the ALOT operations acquired in the merger with Vertro on March 1 of this year. This segment also includes revenue from BargainMatch, Kowabunga and the Inuvo affiliate [path] platform.

Revenue from the Publisher Network segment decreased to $4.8 million for the three months ended June 30, 2012 compared to $10.5 million in the same quarter last year. The decrease is primarily due to fewer numbers of transactions driven through our owned and operated website using the valid click platform. Much of this contraction was due to suspect traffic acquired through third parties.

We have taken extensive measures to rid ourselves of this traffic and now focus on recruiting smaller high quality publishers for our ValidClick platform. We believe our efforts have cleared traffic that may cause an issue. In the third quarter we expect Publisher Network growth to stabilize as our traffic quality improvements have already been implemented.

Gross profit for the second quarter of 2012 increased to 64.7% to $6.8 million in the three months ended June 30, 2012 compared to the same period of last year. Our increase in overall gross profit, much like our increase in overall revenue, is due primarily to our Software Search segment acquired with the merger with Vertro.

For the three months ended June 30, 2012 the Company's gross margin was 52.6% compared to 44.7% for the same period last year. During the second quarter of this year operating expenses were $9.4 million, an increase of 64.6% over the same period of last year. The increase was due primarily to the $3.1 million increase in customer acquisition costs associated with the Software Search segment acquired with the merger with Vertro.

Selling, general and administrative cost was $1.3 million higher than the second quarter of last year due primarily to $530,000 higher depreciation and amortization expense, $175,000 higher IT operations expense and $132,000 higher rent expense. Partially offsetting the higher search and SG&A expense is a $711,000 lower compensation and telemarketing expense which is due primarily to shutting down the outsourced telemarketing call center last year.

The Company reported a net loss of $3 million or $0.13 per share for the three months ended June 30 of this year compared to a net loss of $1.9 million or a $0.21 loss per share last year. The net loss includes a $155,000 charge in discontinued operations for a tax refund that will not be realized.

The adjusted EBITDA, a non-GAAP measure, for the three months ended June 30 of this year was $204,000. This compares to the adjusted EBITDA for the second-quarter of last year of $108,000.

Turning to the balance sheet, the cash balance at the end of March was $3.3 million, the restricted cash balance was $475,000 at the end of the quarter and that is composed of a deposit that is held by our bank to secure a letter of credit for the Clearwater lease.

Bank debt was $7.9 million at the end of June of this year and that compares to $2.9 million at the end of 2011 -- December 2011. The increase in debt is primarily associated with the merger with Vertro in March. With that I would like to turn it back to Peter for closing remarks.

Thanks, Wally. In addition to all the achievements that we have experienced at the first of 2012, we expect to have additional success in our third quarter and throughout the calendar year. Our Software Search business is growing.

Additionally, we have made numerous improvements to our BargainMatch platform. In addition to that, a redesigned website that is more user friendly, we are incorporating a real time comparison engine to BargainMatch. This will allow shoppers to instantaneously compare prices on their purchases to ensure that they are getting the best deals possible.

We are also working on improved social networking integration and engagements that will allow users to shop and share their experiences with friends. Going forward Inuvo is perfecting BargainMatch app for use on mobile environment and this should increase our -- even more increase our user retention with BargainMatch.

The benefits of cash back programs are immediately evident, even to the first-time user, due to the high rates of savings that they occur. Our intent is to use our unique and proprietary direct marketing efforts and expertise to attract consumers and to leverage BargainMatch to incentivize them to become repeat buyers on our affiliate network of well-known consumer outlet. These improvements should enhance our Partner Programs' revenues even further.

We are also really excited about our recently launched local dot.ALOT initiative and we are pleased with the early results in this initiative and look forward to growing that business throughout Q3 and beyond. We are really excited with the prospects that lay ahead in 2012 and look forward to providing additional information on our operational and financial achievements.

Now that the Company is reporting full quarters of integrated financials, we believe that Inuvo can be more accurately modeled and more properly valued by the investment community.

With all the opportunities that surround the Company and the strong growth we are experiencing in our high-margin Partner Program segment we believe we are currently undervalued. We believe the Company is now on path to have double-digit quarter on quarter topline revenue growth throughout the rest of the year and we are very excited about the Company's prospects.

So on behalf of our team here at Inuvo, I want to thank you all for joining us today. We look forward towards increasing shareholder value with you. So with that, let me turn the call back over to the operator and we would be glad to entertain questions.

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

Thanks. First, Peter, do you feel like you're still on track to reach 10 million live users by year end? And then have you started thinking about goals for live users for 2013 yet?

That is a great question, Ryan. I do think we will probably hit the 10 million by year end, so I tried doing a little extra explanation in the script here. So we had an opportunity during Q2, and we are still living it now, to get incremental really high quality users, and of course they come at a higher price, in the US and other parts of Tier 1.

So I actually thought we might go down in live users and we didn't. We stayed stable at 7.6 million, but of course revenue is up because we get so much more revenue out of the Tier 1 live users.

My anticipation is that we will continue to be able to get those live users out of Tier 1 and, with the extra money that will be flowing through then because of the lead lag on cash, we will be able to get going again towards middle -- or now middle of the year, towards the end of the year on our other tiers as well.

So I definitely think we will be able to still hit numbers at or above 10 million by year end. If we don't we will be very close, but way ahead on revenue because the increments will be coming from these predominantly Tier 1 users instead of rest of the world. So that is for sure.

Now in terms of 2013, we haven't gone forward with that. But I can tell you nothing happens at the end of the year besides continued growth. Our best monetizing segment is everything regarding and around our ALOT live user base. So everything that spins off of that from our various Partner Programs requires that base to be stable and growing.

So our intention would be to march right on through into Q1 and beyond and have a similar growth rate to what we have enjoyed this year. So I can apply numbers to it next quarter, Ryan, but I can assure you now it will be a continuation of the growth that we have got into Q1 and beyond for 2013.

Okay. Now you were aggressive in acquiring Tier 1 users during the quarter. Did that contribute to the cash balance being down sequentially?

Yes, actually we have been aggressively monetizing the Tier 1 particularly. And so we have been focusing cash in that area and spending in that area. That is right, Ryan.

Is there anything more to the cash balance being down sequentially than just an aggressive spend to acquire higher monetizing users or --?

That is primarily it.

No, in fact, you remember, Ryan, I kind of boasted early on that we've actually -- on fixed operating expenses we are way the heck ahead of what we predicted. You know only in March when we first put the companies together we were predicting $2.2 million in calendar year savings on the fixed and we are actually at $900,000 greater than that already so we are pretty bullish on what we are doing with the fixed.

Look, we have got -- for our little Company that was really only in March, we have kind of got the tiger by the tail right now. We have got revenue growing, we are on a run rate way the hell beyond what we thought it would be going back only to March when we struggled so much with our third-party Publisher Networks.

So we believe we have the cash that it takes with our bank facility to go and grow with the Company and we are going to put every dime we can back into continuing to grow this thing which is why I sort of let the cat out of the bag on our expectations for Q3 and Q4. We are not giving clear guidance, but we are saying, look, we are going to grow this thing double-digit on a quarter on quarter basis and feel good about it.

Okay. Want to move on to that additional (inaudible) you are showing on the ALOT homepage. You gave some metrics intra-quarter on how that was impacting the financials. Any additional metrics at this point since that point when you issued the press release on the success or the ramp up in revenue you are seeing from that second ad display (multiple speakers)?

Yes, I can tell you just generally it is about the same. We have seen no depreciation at all in click ensuing from the homepage on search, that is good news. We've seen no change at all in rate from clicks ensuing from the homepage. That is good. And honestly all we haven't seen is an increase from the two ads.

Now remember, you don't get double the revenue. In fact, our increase has been running like 15%. So if you are running X units with one ad you are now getting X plus about 15% with two ads with no deterioration anyplace else. Moreover, there is no incremental cost for us other than a minor internal cost for our sales guy's commission that operates it or something. So it is all incremental money and it looks good all the way around.

And frankly we are not doing any testing anymore. We have completely rolled I believe every lick of all of our homepages that rolled down onto two ads. Now one of the reasons that we think we have kind of stabilized on this and are comfortable in that number continuing is when we first rolled it out in some cases we were getting repeat ads. Not our fault so much as some of the networks that were coming into us.

So instead of having an airline ad and next to it perhaps a hotel ad, we had two of the very same airline ads. Of course that doesn't do anybody any good, right? So we fixed that. That seems to be behind us now. We have always got varying ads on the page and we seem to be holding at this 15% to 20% more output from the two ads.

If we test anything it will be pushing our guidance to test three ads which it won't do. But that will be next before we go back one. So all is good on the two ad front.

Okay, great. Want to shift over to the Publisher Network segment. You seemed to -- in your prepared remarks you spoke much more positively this time around than you have in the last few quarters. Were there actually any chargebacks in the June quarter?

No. No chargebacks in the June quarter. So look, we had -- just focusing on the past, which, thank God, seems to be behind us. That business was in real trouble. Wally talked about versus last year being off -- I don't remember the percentage now Wally -- 40-some-percent versus prior year -- some big number.

We stabilized it, it being in the third-party portion of the Publisher Network seems to have stabilized now in the $1.8 million to $1.9 million range and we are not forecasting growth there but I wouldn't be surprised if we get some growth. It doesn't look like it is falling apart.

Our traffic that we are bringing in is coming from new smaller publishers that have really good quality of traffic so we are not getting any pushback on that. And in fact our margins from the business that has kind of stabilized while at a lower level because the business (inaudible) are actually better than they were pre it sort of falling apart late last year and then into merger time. So that part of the business is great.

Second part of our business was -- remember we completely took all of the traffic out of our Yellowise business because of suspicions about the quality of the traffic in the Yellowise business. That business went from something substantial in the oldco to really nothing in the newco.

But now we are rebuilding with our own traffic and our own efforts towards getting consumers inside of our local dot.ALOT initiative and I am certain we are getting only high quality traffic into that because we control it completely ourselves. There is no third parties being put into it. That business is growing substantially; I couldn't be happier with anything in the Company beyond our local dot.ALOT initiative and we think we will see growth there.

So look, we hit bottom. We built up from the bottom. We increased the margins in the business that was left and we have got a business that I believe we can grow from here and be proud of it and the traffic quality that is inside of it, not have to look back anymore.

And then can you provide me with a headcount number perhaps as of today if possible and then end of Q2 (multiple speakers)?

I think 42.

No, 43.

43 people, I was thinking 42. 43 people.

43 today, is that what it was at the end of June?

Yes. At the end of June it was 44.

I think we are 1 down.

Yes, we are 1 down.

All right, well thanks.

No big redirection there. So look, in terms of direction besides generally, everything more positive, that is why we are talking about it. The only directional difference that I want to make sure I said is that we are doing really well with our highest-quality Tier. It is more expensive on a per unit to get there but we get more output on a per unit basis too.

If that has anything to do with slowing down our live user base then so be it, but I still think we can get a live user base to this 10 million number and at the same time have redirected towards more high quality users. Not at all trying to minimize our new country entrees. We want to keep doing that.

But boy, if we can get these Tier 1 users at the right rate, still get our target margin, we are going to do so and I believe that we won't do it at the expense ultimately of still getting to our goal of 10 million and certainly our change in our direction in terms of growth in our live user base beyond that.

Got it. All right, guys, well, congratulations and keep up the great work.

Thanks, Ryan.

[Eric Martinuzzi], Lake Street.

Thanks for taking my question. Wanted to revisit the balance sheet, specifically the debt part of it, because it looks like the cash was relatively unchanged, down about $200,000. But on the balance sheet, I was just wondering the term and credit notes payable, is the bulk of that shift, which I've calculated rising from about $5 million at the end of March to about $7.9 million at the end of June. Is that roughly $3 million rise -- was that all dedicated spending on the search cost side or is there other things in there?

So if you look, we are at $7.9 million in debt at the end of June, and if you look at it at the end of December it was approximately $2.9 million, right -- $2.9 million. So a lot of that had to do with the merger and the costs associated with the merger and the fees that were payable associated with that. And then the rest of it had to do with reporting the search expense and the customer acquisition expense associated with the ALOT app bar.

Okay. And then just -- you talked about the sequential growth, but if I do the blunt instrument math with a double digit being a 10% minimum growth sequentially, does that say that we were talking about at least a minimum of $14.2 million of revenue for Q3.

Well, I only said double-digit and 10 is the lowest double-digit, so if that is what it works out to I would be happy with that for sure, Eric.

Like I said, I'm just -- I didn't really sharpen the pencil much, but (multiple speakers).

That is right. We think -- I don't know if you have been following it, Eric, since the move, but we already released July's number and we are comfortable growing into August after that. So we do think that for the quarter this 10% is kind of the minimum level of double-digit growth. I just don't want to get too exuberant because if I come and promise something greater and we miss it by 1% it looks like a miss. Right now we are on a roll and we want to keep going that way.

I appreciate that and I took the one month and [quarterized] it and came up with $13.8 million, so $14.2 million isn't too far from that. I follow you there. The growth sustainability in the Tier 1, which to me was the most impressive part here, this Tier 1 growth. You're growing across all the business, but characterize where is the focus here. Is it still to pull both levers at the same time or is it to press harder on one than the other?

We are still pulling all levers across the 22 countries at the same time. Our effort is still against our target margin. As you know well, we target way more than countries, we target 1,500, 1,600, 1,700 verticals at any one time; each one of them has a target margin of approximately 35% is what we are trying to hit. And if we can hit those margins -- and of course that's money out now on an expectation of 35% later so of course that they are modeling -- if we can hit those margins we keep spending like crazy.

Now it just happened that we had some opportunities that were unusual in Tier 1, even more unusual in the US in Tier 1. So we put -- while we kept both feet on the gas for all 22 countries, we put a little extra lead in the US portion of the gas and overspent there, but all for good -- great margins coming out of it and we were able to get it so we did.

All right, that covers it for me. Thanks.

Good to talk to you, Eric. Nice to hear from you.

(Operator Instructions). I'm showing no further questions in the queue at this time. I would like to turn the conference back to management for final remarks.

Thank you, Operator. That is it for us.

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