Inuvo Inc (INUV) 2015 Q2 法說會逐字稿

Good day and welcome to the Inuvo 2015 second-quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alan Sheinwald of Capital Markets Group, LLC. Please go ahead.

Thank you, operator, and good afternoon. I would like to thank everyone for joining us today for the Inuvo second quarter earnings conference call and shareholder update. Today, Mr. Richard Howe, Chief Executive Officer, and Mr. Wally Ruiz, Chief Financial Officer of Inuvo, will be your presenters on the call.

Before we begin I am going to review the Company's Safe Harbor statement. The statement 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, as 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 at this time.

In addition, other risks are more fully described in Inuvo's public filings with the US Securities and Exchange Commission, which can be reviewed at www.SEC.gov. With that out of the way now, I would like to congratulate management on their outstanding performance in the second quarter, and turn the call over to Mr. Richard Howe, CEO of Inuvo. Rich, the floor is yours.

Thank you, Alan, and thanks, everyone, for joining us today. We are pleased to be announcing our third consecutive quarter of strong growth year-over-year. Revenue in the second quarter was $16.7 million, up 53% from $10.9 million in Q2 last year, and up 25% sequentially. Net income was also strong at $445,000 or $0.02 per diluted share, up 16% over last year. This marks the sixth straight quarter of positive net income on a GAAP basis, and the 14th straight quarter of positive net income when we adjust for non-cash items.

Gross margin in the second quarter was a solid 58% and gross profit was up 54% year-over-year. Both segments of the business were up in Q2, with the partner segment revenue up 67% and the owned and operated up 39% year over year. Wally Ruiz, our CFO, will be sharing additional details about our financials shortly, but the bottom line is we have had a great first half of 2015.

Let me share with you what we have been up to within each segment of the business, starting first with the owned and operated segment. We experienced improvement within the O&O segment throughout the quarter, the result of a continued focus on additional site features designed to improve engagement with our audience. These feature enhancements began in the early part of the year and have started to translate into an increase in the number of pages the average user engage with on the ALOT branded publications, along with an increase in the total time spent on ALOT. Collectively, these two measures are what we mean when we refer to engagement.

In this regard, in the quarter, the average page views per user on the health site was up 50%, the living site was up 100%, and the travel site had an outstanding improvement of 200% sequentially. Increasing the engagement with our sites will be an ongoing focus for us this year, as it provides additional opportunities to put our advertisers' messages in front of involved, in market, information-seeking group of consumers. In turn, this improves user engagement, allows us to command a premium from advertisers for ad placements on our sites.

During Q2, we also completed the final transition of legacy ALOT properties, moving them to the new ALOT page template. The highest level domain, ALOT.com, has now joined the family and completes this brand overhaul. You can now go to ALOT.com as a launching point for all of the websites, and you will note that we now provide a consistent user experience for all visitors, including the legacy consumers who still use the ALOT toolbar.

Now, our work with the career site over the last year led to the development and launch of an education site, which we announced in the quarter. This vertical has a highly engaged audience searching for information that can help them further their own or, as it turns out, their children's, educational aspirations. While the site has only been live a relatively short time, we are seeing promising results for page views and visits.

Additionally, we have also been actively expanding the technology that supports our marketing initiatives, which we do in an effort to attract an audience to our sites. As a result, we have been able to broaden the number of channels we use to market through, and have seen some encouraging results from that effort. Pinterest, Facebook, Instagram, and a number of the content recommendation technology providers are among the marketing channels we expect to grow throughout the second half of the year.

In addition to building more engagement features and increasing our social presence, we are also excited about expanding the use of our in-house photographic and video production capabilities. During Q2, we began creating our first in-house and proprietary photo shoots, which we deployed in test to measure whether these more highly targeted photos would in fact translate into engagement with consumers through image galleries deployed on the sites. Early results suggest that they did, and because of that we have plans to scale this effort throughout Q3 and Q4 using, both in-house staff and freelance photographers who will work side-by-side with our design, editorial, and advertising teams. In addition, we will also be deploying our first in-house produced videos in Q3.

Our partner segment had a very successful second quarter. With that said, we can on occasion, within this segment, experience an acceleration of growth when partners benefit from a demand from advertisers that exceeds the supply of leads in that market. A number of our partners had this occur in Q2, and as a result we expect them to normalize within the second half of the year. Internally, and as a result of the SearchLinks launch, we have also organized within the partner segment around two product offerings, which we will refer to going forward as partner ads and SearchLinks.

The partner ads businesses has performed well for us over the last two years. Within partner ads, our focus will be to continue to sign up new customers while directing some resources towards selling, delivering, and supporting SearchLinks. Our partner ads business has, and continues, to successfully serve ads into thousands of websites daily. In the last few quarters, we have been messaging the upcoming launch of SearchLinks, reinforcing the strategic advantage of our digital publishing business as a catalyst for the design and optimization of that product line. The opportunity size, the quality of publishing partners, and the more comprehensive nature of the SearchLinks solution points to an opportunity to capitalize on the growing market for native advertising.

The partner ads business has also been an asset in this launch, having supplied the beta clients for the first quarter's in markets tests. The SearchLinks launch, which we announced officially on Tuesday, has actually been ongoing for about a month. The early feedback, the quality of publishing partners, the sign ups, and the pipeline are all progressing nicely. In this short time we have signed up about 40 new publishing partners for SearchLinks, and about half of them are now going live.

We designed SearchLinks to address some very real issues facing publishers who are currently using competing products. Among those issues were poor ad targeting, poor ad content, poor ad quality, and insufficient ad coverage per page topic. We wanted to design a product that didn't bait consumers into a click. Rather, we have designed and ad product that is so aligned with the content that it also aligns with the interests of the consumer.

Q2 was a very busy quarter for SearchLinks. Scaling a solution like this requires a coordination among development, delivery, account management, and sales teams. And in many of those functions, it has also meant hiring and training new people. We expect to continue to hire in support of this product for the foreseeable future. And as we onboard more publishers, we will continue to optimize, through technology enhancements, the delivery and support of those clients in an effort to become more efficient.

An example of this is self-service. For now, we have chosen to work closely with publishers to ensure, as much as possible, that these new clients experience early success with our product. Soon, however, we expect to be in a position where we feel comfortable allowing clients to go through the qualification, sign up, implementation, and payment processes in an automated fashion.

SearchLinks is by far the most technically sophisticated product line we have ever built, and we would not have directed our resources towards this solution if we didn't believe the opportunity warranted it. SearchLinks is currently delivering about $10,000 per day in revenue. The product line is currently comprised of three different ad unit types. We expect this suite of ad units to expand over time. We are excited about the launch and we plan to push hard through the second half to sign up and successfully implement as many new clients as practical.

Like any new product launch, we expect as we scale that we will encounter various challenges. But with that said, we feel good about our ability to deliver on the promise of the solution, both for ourselves and our partners.

I would now like to turn the call over to Wally.

Thank you, Rich. Good afternoon, everyone. Today we reported another consecutive quarter of strong revenue growth and profitability. Inuvo recorded revenue of $16.7 million in the second quarter of 2015 compared to $10.9 million in the same quarter of last year, a 53% increase. $9.3 million came from the partner network and $7.4 million from the owned and operated network. The partner network, which delivers advertisements to our partners' websites and applications, reported $9.3 million in the second quarter of this year compared to $5.6 million in the same quarter of last year, a 67% increase.

Higher revenue in the partner network this year compared to the same quarter last year is due largely to the expansion of market share within the existing publisher base and a focus on marketing campaigns and verticals that return better-than-average ROIs in the quarter. Though we are pleased with the high growth in the partner segment, we believe that these verticals will settle back to a normal growth level as competitors begin to exploit them.

The owned and operated network, which is made up of a collection of websites and apps we own and where income is derived from advertisements, represented 45% of the Company's total revenue in the current year quarter. The owned and operated network reported $7.4 million of revenue in the second quarter of 2015, a 39% increase over the same quarter last year. The growth in this business segment is largely due to the investment made in proprietary content and effective marketing campaigns resulting in more revenue.

In the second quarter of this year we announced the launch of a new website, education.ALOT.com, which contributed to the revenue growth in the quarter. Further, we acquired two websites that in their first full quarter were also important contributors to the quarter's revenue. During the second quarter, we increased our sales allowance by approximately $326,000 to a balance at June 30 of $866,000. The allowance is used to address advertiser adjustments that occur from time to time. Adjustments the Company has incurred in 2015 have not been material.

Gross profit in the second quarter of 2015 was $9.6 million compared to $6.3 million last year, a 54% improvement. Gross profit as a percent of revenue, or gross margin, was 58% in the second quarter of 2015 compared to 57% in the same quarter last year. Partner network gross profit in the second quarter of 2015 was approximately $2.2 million compared to $1 million last year. The improved gross profit in this year's quarter was primarily due to higher revenue associated with 45% more clicks on ads than during the same quarter last year, and due to higher RPCs, or revenue per click, this year compared to the same period last year. Gross profit in the owned and operated segment in the second quarter of 2015 was $7.4 million compared to $5.3 million last year. The higher gross profit in this year's quarter compared to last year is primarily due to higher revenue.

Operating expense -- which is comprised of marketing costs; compensation expense; and selling, general, and administrative expense -- was $9.1 million in the second quarter of 2013 compared to $5.8 million in the same quarter of last year. Marketing costs are the primary costs associated with the owned and operated network, where dollars are spent to build an audience for the various sites and apps that we own. Marketing costs were $6.6 million in the second quarter of 2015, a $3 million increase from the same quarter in the prior year.

Compensation expense increase by $200,000 to $1.3 million in the second quarter of 2015 compared to the same quarter in the prior year. The higher expense in the current year quarter is primarily due to higher payroll associated with hiring additional personnel and to higher Company incentive plan expense. At June 30, 2015, we had 56 full- and part-time employees. A year earlier, we had 40 full- and part-time employees.

SG&A -- or selling, general, and administration expense -- was $1.2 million in the second quarter of 2015 compared to $1.1 million in the same quarter last year. The increase in the current year SG&A expense is due primarily to higher professional fees and facility costs. For the remainder of the year, we intend to maintain our focus on accelerating growth with investments designed to continue the expansion of our properties and support costs associated with the expansion of our native advertising product, SearchLinks.

We therefore expect marketing costs to increase in coming quarters, commensurate with the growing revenue in the owned and operating network. We expect compensation to expense to increase as we step up hiring, particularly to support the rollout of SearchLinks. And we expect SG&A expense to remain relatively flat for the remainder of the year.

Net interest expense was $37,000 in the second quarter of 2015, $66,000 less than last year. This year's lower expense is due to lower loan balances and the renegotiation of our line of credit and term debt last year. We accrued a tax expense of $36,000 in the second quarter of this year for state income tax that we believe will be due. The net loss from discontinued operations was $15,000 in the second quarter of this year compared to $18,000 net income in the same quarter last year. The loss this year was due to foreign-exchange translation adjustment and an audit fee expense.

The Company reported net income in the second quarter of 2015 of $445,000, or $0.02 per diluted share. That compares to $382,000 or $0.02 per diluted share in the prior year quarter. EBITDA, adjusted for stock-based compensation expense, was approximately $1.1 million in the quarter that ended June 30 of this year compared to an adjusted EBITDA of $1.2 million in the same quarter in the prior year.

Turning to the balance sheet, as of June 30 of this year, cash and cash equivalents was $3.8 million at the end of June, about $64,000 higher than the cash balance at December 31 of last year. And bank debt was $1.5 million in June of this year compared to $3.6 million at December of last year.

With that, I would like to turn the call back to Rich for closing remarks.

Thanks, Wally. In summary, we have had an exceptional first half of 2015 and we have exciting plans in place for both segments of the business in the second half. Producing our own video and image libraries is an exciting next step in the evolution as a digital publisher. And SearchLinks opens Inuvo up to a market for advertising technology that we have never before had the opportunity to fulfill.

While we haven't provided guidance, we have suggested in the past that we felt, based on the performance of the business over these last 18 months, that Inuvo could be a $100 million annual revenue run rate company organically by the end of 2017. While aggressive, we still think this is an achievable longer-term goal for our Company, even though our quarterly performance may continue to fluctuate as we execute on our growth programs.

With that, I would like to turn the call over to the operator for questions.

(Operator Instructions). Eric Martinuzzi, Lake Street Capital Markets.

Congratulations on the real strong Q2; it's good to see both sides of the business performing so well. Partner network, $9.3 million, and I think I was modeling well below that. It was a pretty substantial beat versus what I was expecting, which is good to see, but 20% more than what I was looking for. What is driving that? Obviously you've got the two different parts of the SearchLinks or the partner ads relationship, new customers, and then SearchLinks, the new product. But is it fresh customers? Is it older customers being more productive with the products that you have for them? What's really driving that?

Yes, so a couple of things come to mind. One is yes, we do have revenue from SearchLinks, which is a product we never had before, so we are seeing the benefit of that. But we messaged just a few minutes ago in the script that it does happen sometimes in our industry, Eric, that a vertical -- or more than one vertical, as the case may be, in some instances -- has really good advertiser demand. And, as a result, the price that you get paid for those advertisings goes up. So we did have such a situation in the second quarter that allowed the -- in part, the revenue to be higher than we thought it would be.

Okay. And then as far as the -- well, I was going to go into O&O, but let me back up first to your monetization partners. Certainly Google had a real strong quarter. I think the Yahoo side of the relationship, your two big revenue concentrations there. I was looking out to I think it's the September-October time frame, but it looks like Yahoo has the option to switch between search monetization search engines. In other words, they can go from Bing to Google. Is there any potential ripple across to your business if Yahoo were to switch monetization partners on the search side?

First of all, I can't really speak to what Yahoo is going to do in terms of their business. They have had the relationship that has been ongoing now for, I don't know, at least four years I guess, with Microsoft. So I'm not aware of any changes that are imminent there. I think the answer is I don't think so, but I don't know. We would expect Yahoo to continue to be a provider of search services into the future.

Okay. And then shifting over to the O&O side, another strong quarter there. The one thing that caught my eye, though, was the marketing costs. Obviously you are rolling out new verticals. You want to make sure those verticals get traction. You spend to drive traffic to the -- for both the applications as well as the websites. It's been rising over time. If I look back over the last four quarters, that marketing cost as a percent of O&O network; it has been margin higher. Do you see that leveling out or maybe trending back down at some point?

It was a little bit higher in the second quarter than in the first quarter. And you are right; it was trending up a little bit since -- compared to last year, too. But from what we are seeing, it looks like it should level off at close to these current levels that we are at now.

Okay. And that would mean that maybe the new verticals are getting a little bit more organic traffic, or built up an audience, perhaps?

Yes. I think the marketing is paying off and we're seeing some more uniques and some better organic traffic coming to our site. So yes.

Okay. And then, now that SearchLinks has -- you talked about a self-service capability. You guys have always been very hawkish on inappropriate clicks; in some cases, fraud; quick to turn off traffic. If you are allowing a self-service capability, do you run a risk of higher exposure to inappropriate traffic to your monetization partners?

I think the answer is clearly yes to that. So, what you have to do is put in message to filter out those bad individuals, as it turns out, and/or companies at various stages in the process from the qualification side of it. We do go through a qualification process; the sign-up, the payment side. Sometimes you catch them in the payment side because their banking stuff is messed up. And then if you miss them through all of that, Eric, we do have technology also that sits in the back that is paying attention and trying to figure out if it's a real click or not. So all I can say is, we are as good as doing this as anybody in our market because it has been germane to the way we run our business. And so, we will continue to make sure that we don't let that happen.

Okay. And then lastly for me, the profitability here. It was good revenue outperformance. You guys have been pretty upfront that revenue outperformance is going to be rolled back into the business. Is that still the case here? We are targeting roughly $1 million a quarter, give or take, on the adjusted EBITDA, with everything else plowing back into really grabbing share.

Yes. So, you are right; we have been messaging this for -- well, I'll say two quarters at least, that we will be investing in faster growth and larger market share. So the focus has been more on the top line than the bottom line. And one of the things we have said is that we will remain profitable. And profitability and cash flow is important to us, so every dollar of cash flow that we generate first goes to our number one priority, and that is growth. And then, secondarily, to bringing down our debt obligations.

Yes. I did notice that the debt -- a nice swing there. You guys have a positive net cash balance here for the first time in a while, so kudos there.

(Operator Instructions). Lisa Thompson, Zacks Investment Research.

Can we go back a little bit to the partner network revenue? You said it was kind of something extraordinary happening with demand for some vertical markets. And your margins were pretty good, too. Does that then drop off in September to something more normal? Or do you expect to have sequential growth without that?

Yes, it can vary. I don't think we know. So what we are saying is we are forecasting that it will drop off simply because our experience suggests that sometimes when these opportunities arise, they are -- sometimes they are long lived, and sometimes they are short-lived. And we would rather plan on it being short-lived than longer life. But even with that, we continue to believe that the growth of the Company is on a path, probably evidenced more by the fourth quarter of 2014 and the first quarter of 2015 than it is, let's say, the second quarter of 2015.

Okay. And then --.

(multiple speakers) I'd give maybe another way of characterizing that is that the growth rate has been strong in the fourth quarter and the first quarter. We see nothing to the contrary as we look forward, but we shouldn't probably expect extraordinary growth.

Okay. Also, does that reflect in the gross margin for the partner network? Will that go back down where it was?

Yes. I think that we have been saying that should be in the low 20s percentage. And it will fluctuate in the low 20s. But when you take into -- yes, when you take everything into account. So there will be some fluctuation in the percentage, either higher or lower.

Okay. And am I looking at my models, that you had about $0.5 million in Appbar last year in this quarter? Is that now zero?

It's not zero, Lisa, but it is pretty darn close. I think it is under $1,000 a day right now. Isn't it, Wally?

Yes, it is.

So it is effectively nothing.

Okay. So then that actually shows that you grew even little faster, because you threw that into owned and operated?

Yes, I suppose that's true.

Yes. Okay. The other interesting question I'm interested about is, you said you were going to be hiring people and freelancers to do images and video. What does that do to your cost structure? Why would you do that?

Well, the why we would do is because we are trying -- continuing; we are not trying, because we are actually succeeding at this -- but we continue to work on techniques that will engage our visitors to the site. So, if there is some -- for example, the photo part of what we discussed on the call -- you can see when you go to one of our sites that has an image gallery in it, where someone can pan through a number of pictures that are representative of what the topic is that they were interested in in the first place.

So if it's a -- at the education site, it might be of the top 10 schools in the southern United States and there's a picture of each, with some captions underneath it. Those kinds of improvements to the website engage consumers for longer periods of time, and that's a good thing. Video is the next evolution of that for us. Video is one of the best engagement conduits for consumers. We all watch TV, so when we watch TV we are engaged with the program the whole time. Video is very effective.

So because we want to keep people on our site, because we want to keep people engaged in our content across the verticals, we are slowly introducing new things like this to the website to do that.

So that would be a video that's relevant to some content that you are writing?

That's correct.

To keep people -- okay. So we're not talking video ads, right?

No, no, no. Well, there would be ads on them because we make our money from ads, but it will be like -- we call them pre-roll, Lisa. So you would put an ad on the front, just like someone would see at YouTube, for example. But you've got the nature of what the video will be about. It will be related to content. And I don't want to mislead people. We are not going to hire 20 people to do this work. We tend to do things at a little bit smaller scale than that and move up as it starts to work. So I wouldn't expect us to start adding lots and lots of people here for this.

Okay. So it is just really to just to engage more, and keep people there.

Absolutely.

All right. Let's think. I think everything else was pretty straightforward. I just to see how sections would -- it also sounded like you got a lot of revenue from current customers. When do think that that is going to start moving to getting new customers?

Are you talking specifically about SearchLinks, Lisa?

Well, I think you said the partner network, right? You had some extraordinary things, where you had more market share with your current customers.

Yes. Yes.

So you displaced somebody, somehow. (multiple speakers)

When I was referring to that in the call, that's really -- yes. That's just existing partners that we have who are in certain verticals where, like I said, there was just a lot of demand. So we continue to add new partners on both business units within the partner segment. The partner segment now has two business units in it. One is what we call partner ads, which is the core business; and the second one is the new product line, SearchLinks.

So we are adding new publishing partners in both of those segments. We just have, let's just say, a greater focus right now on the SearchLinks side because it is the launch of a new product and we see a lot of opportunity for it.

So is that -- now that it is launched, it is going to be rolling out I assume with the current customers mainly? And then you will start adding the new people, or no?

We will. In fact, when we beta tested it, we actually signed up some existing partners to be part of that beta test. So yes, we will continue to market that new product to our existing client base. But I will say, on the call today, I mentioned that we had already signed up about 40 publishers, roughly half of which, I think, are either live or going live here any day. Those are all new. Every single one of those 40 is not an existing client. So we are actually seeing a lot of new opportunities with publishers that we have never had an opportunity to sell before.

And how do they end up coming to you? Because the product is so unique, or they are just going to try it versus whatever they have been doing?

If only I could hope that someone would come to me to want to buy something, Lisa. No, no. We are building a small team. We have a team of four right now. And we have technology that basically goes out and scans the Internet and finds suitable sites; and then we have this sort of automated email system that sends out an email with a nice-looking creative in it to say, hey, are you interested in SearchLinks? And then we get some inbound yeses.

So first, that is our process, our initial sales process. Our sales team then follows up with the ones that said they were interested. Now, aside from that, we also have a whole target list of suitable publishers, and our sales team are smiling and dialing and telling everyone the story of SearchLinks. And we are seeing really great results so far.

Well, that sounds great. As far as content, is there any other verticals you are looking at? Or are you going to be working on education for a while?

I don't think we should be expected to launch any new verticals. We have only scratched the surface in terms of the sheer quantity of content that we could write across all of the verticals that we are in. And in fact, really the only reason we launched the education vertical was because it was so closely complemented with the career vertical that we have. And we were seeing users really come into careers but be more interested in education content. And that's why we complemented that site with education. But I would not expect us to launch any more verticals here for a little while.

Great. Okay. Well, sounds like everything is working well, and looking forward to seeing what happens. Thank you.

Yes, we are pleased. Thank you for that.

And there are no other questions at this time. I would like to turn the conference back to our speakers for any additional or closing remarks.

Thank you. I would like to thank everyone who joined us on today's call. We appreciate your continued interest in Inuvo and we look forward to reporting progress over the coming quarters.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.