Inuvo Inc (INUV) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the Inuvo 2018 First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Valter Pinto, Managing Director at KCSA Strategic Communications. Please go ahead, sir.

Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today for the Inuvo First Quarter 2018 Shareholders Update Conference Call. 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'm going to review the company 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 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 U.S. Securities and Exchange Commission, which can be viewed at sec.gov.

Before I turn the call over to management, I'd like to mention that Rich and Wally will be attending several upcoming investor conferences: B. Riley Conference May 23 and May 24 in Santa Monica, California, Ladenburg Technology EXPO May 31 in New York City and LD Micro June 4 through the 6 in Los Angeles California. More details regarding our presentations will be available via a news release forthcoming. We hope to see many of you in person.

With that, I'd like to congratulate management on an outstanding quarter, now with consecutive growth rates in Q4 of 2017 and Q1 of 2018 of 21% and 19% respectively.

I'd like to now turn the call over to Mr. Richard Howe, CEO of Inuvo.

Thank you, Valter, and thanks everyone for joining us today. We had another strong showing in the first quarter of 2018 with revenue up 19% year-over-year to $20.5 million. And as we had also expected, adjusted EBITDA for the quarter was also improved year-over-year $500,000. Adjusted EBITDA tends to be negative in the early part of our year followed by strong positive adjusted EBITDA in the back end of the year due in large part to demand, fluctuations and seasonality. We do expect strong improvement in adjusted EBITDA on an annualized basis in 2018. After adjusting for traffic acquisition cost, gross profits in the first quarter were only slightly higher year-over-year. On a cash basis, we had positive free cash flow in the quarter. And so far as the business is concerned, we have continued to experience strong interest in the IntentKey media solution as an audience building and digital advertising tool for merchants. The more we engage with our advertiser clients, the more we grow confident that our IntentKey solution is both unique and aligned with where the market is headed from both an artificial intelligence and privacy standpoint. More on that in a few minutes.

Through April of this year, we have already signed up 5 new advertisers and our pipeline is 3x as large as it was this time last year. New and prospective clients canvas multiple industries including insurance, online retail, pharma, automotive, consumer packaged goods and technology. This is a strong indication of our ability to diversify our revenue stream as a result of progress on the demand side of our business. Concentration at the largest demand partner dropped 5 percentage points year-over-year and as at the end of Q1 2018, 30% of our overall revenue came from sources other than this single partner. Both agencies and brands are beginning to experience the IntentKey's ability to find suitable customers beyond that of their existing digital acquisition activities and budgets. This should lead to an increasing share of ad spend for Inuvo as the IntentKey continues to perform for them.

The advancements we are making with our AI are particularly well suited to this new world where consumer privacy is front and center. The recent issues at Facebook and the implementation of new consumer privacy standards across Europe are changing the landscape and as a result, companies are rethinking the manner in which they target consumers online. As a general statement, Inuvo has not been materially impacted by these issues to date. As it relates to information sharing, Inuvo does not share consumer information with third parties. Our technologies and the data we possess are used exclusively to provide the clients we serve the means to better target their media budgets against those most responsive, contextually-relevant audiences, while also ensuring that their brand is safely associated with content that is aligned with those brand objectives. This brand safety capability continues to become an important feature that few companies can deliver on as effectively as Inuvo, and as evidenced recently by the acquisition of Grapeshot by Oracle. In fact, we are well positioned to take advantage of a more restrictive privacy environment in the future, because the AI we've developed is at its core a contextually-based machine learning technology. It actually gets smarter with every new website it reads. The brain behind this AI was built by processing in excess of 4 billion pages and evaluating over a trillion concept relationships within the content of those ingested pages. We process about 20 million new pages every day. Few companies have the technical know-how or the existing infrastructure to accommodate this kind of machine learning at this scale. The core of our technology is firmly rooted in its ability to contextually understand the content on webpages. We believe our process is one of the best, if not the best, at matching advertisers with publisher pages, as is evidenced by recent successes with our advertising clients. Conversely, many Inuvo competitors rely heavily on the retargeting of users and the utilization of third-party information, which may limit their abilities in the future as our industry shifts to a more consumer privacy-centric environment. In light of these advancements, we continue to align the company's strategy and resources around our artificial intelligence, with the goal to continue expanding the demand or advertiser's side of the business where we feel we have a very strong competitive advantage and the opportunity to build even stronger relationships with the organizations who pay us. The publisher or supply side of our industry continues to transition towards header bidding or publisher-based auctioning technologies. We will continue to develop solutions for the supply side where we expect to leverage our unique demand within those publisher header-bidding environments. However, we continue to align our resources towards the higher value demand side AI products that we offer. We believe this continuing focus towards the demand side of our business, which began in 2017, will reduce expenses and as a result have a positive impact on year-over-year adjusted EBITDA in 2018 with modest impact to revenue.

The China initiative we began in 2017 opened the door for collaboration with and possible investment from Chinese technology companies and investors. The Chinese have shown interest in our AI technology as a way to reach U.S. audiences and eventually, audiences within China. During the first quarter, we hosted a Chinese investor in both our facilities in Little Rock and San Jose where we demonstrated the reach and applicability of our technology. We are hopeful that the current trade and commercial controversy between the United States and China won't interfere with our continuing dialogue and the shareholder opportunities that might come from these engagements.

Moving back now to the business of Q1. We had the opportunity to make money on about 3.6 billion pages in the first quarter, up from 3 billion pages the prior year. Revenue for 1,000 pages was roughly flat year-over-year at about $5.70. In closing, we continue to become more and more a mobile company. Revenue from mobile sources was 70% of overall revenue in the first quarter, and for the first time at Inuvo, we started working directly with a software company to help them increase the number of installs of their mobile software products. We think this could lead to a whole new vertical for us.

And with that, I will now turn the call over to Wally for a more detailed reporting of financial performance for the quarter.

Thank you, Rich. Good afternoon, everyone. I will now recap the financial results of our first quarter. Inuvo reported revenue of $20.5 million for the quarter ended March 31, 2018, a 19.1% increase from the $17.2 million reported in the same quarter last year. EBITDA, adjusted for stock-based compensation expense, and non-GAAP financial measure, improved $518,000 year-over-year going from a negative $663,000 in the first quarter last year to a negative $145,000 in the first quarter of this year. For the year, we expect adjusted EBITDA to increase by at least double over 2017. On a GAAP basis, Inuvo reported a net loss from continuing operations of $1.4 million or $0.05 net loss per share in the quarter ended March 31, 2018, compared to $1.7 million net loss or $0.06 net loss per share in the prior year. Noncash expenses totaled $1.2 million or $0.04 per share in the current year quarter. We had a -- as Rich mentioned, we had a positive free cash flow in the current quarter. Revenue increased $3.3 million to $20.5 million in the first quarter of 2018 over the same quarter last year, both the advertising technology and the publishing sides of the business experienced growth year-over-year. As Rich mentioned, the publishing business will remain an important component of Inuvo providing focused supply to advertisers and a laboratory to test and optimize Ad-Tech innovation. However, with the planned emphasis on the demand side of the business, we expect publishing revenue in the future to represent a lower percentage of the overall revenue and correspondingly we expect reductions in operating expense, the implication being improved operating margin.

The ongoing rebalancing of revenue has reduced the company's concentration. Last year, we reported that 88% of our revenue was sourced from the 2 largest media partners. In the first quarter of this year, those same 2 partners represented 80% of the overall revenue, and their concentration continues to decline as new and additional direct and indirect relationships make up the difference.

Gross margins improved to 57.2% in the first quarter of 2018 over the 54.2% gross margin in the same quarter last year, and that is due to the mix of revenue. Publishing revenue has virtually no cost of revenue associated with it as its expense is predominantly in marketing cost. Website costs are reported in operating expense as marketing or TAC expense -- that's traffic acquisition cost expense. If you include the marketing or the TAC expense in gross profit, then the gross margins are virtually unchanged from this year versus last year at 16.7% during the first quarter of this year. Operating expense is composed of marketing costs, also known as TAC or traffic acquisition costs. It's also -- operating expense is also composed of compensation expense and finally the third category selling, general and administrative expense. Operating expense was $13 million in the first quarter of 2018, compared to $11 million in the same quarter last year. All components of operating expenses were higher this year over the prior year. Marketing costs or TAC were higher due to driving more traffic to websites. We do not expect marketing costs to increase in the next 2 quarters.

Compensation expenses increased by $232,000 to $2.6 million in the first quarter of 2018 compared to the same quarter in the prior year. The higher expense in the current quarter is primarily due to higher payroll cost. The average headcount both full-time and part-time was 92 for the first quarter of 2018 compared to an average headcount of 87 for the same quarter last year. We do not expect compensation expense to increase in coming quarters. SG&A or selling, general and administrative expense was $2.1 million in the first quarter of 2018, virtually unchanged from the same quarter of the prior year. We do not expect SG&A expense to increase in coming quarters. Net interest expense was $101,000 in the first quarter of 2018, compared to $43,000 in the first quarter of last year due to the higher outstanding balance on our revolver this year, and to a 25 basis point higher rate. We expect higher interest expense for the remainder of the year. The interest rate averaged 5.5% during the first quarter of this year.

Our balance sheet on March 31, 2018, had a cash and cash equivalent of $4.1 million and a $4.9 million outstanding balance on our bank revolving credit line. The revolver has a total commitment of $10 million with availability dependent upon accounts receivable. At March 31, 2018, we had an additional credit availability under our line of $1.2 million.

Now, I'd like to turn the call back over to Rich for closing remarks.

Thanks, Wally. We've had a strong start to the year and have had consecutive quarters 19% or better growth year-over-year. Q2 is shaping up along historical trendline. As mentioned in my script, we do expect some modest revenue decline on the publisher side of the business. We expect profitability to be positively impacted as a result. As Wally pointed out in his script, we expect solid year-over-year improvements in adjusted EBITDA. We remain exceptionally excited about the AI we exclusively own and the value of that technology to both our clients and our shareholders. We have many other applications for this technology on our roadmap.

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

(Operator Instructions) We'll take our first question from Eric Martinuzzi with Lake Street.

I wanted to dive into the outlook for Q2 here to make sure I understand it. When you say you're kind of throttling back on the publisher that will help the profitability, I'm trying to get to an absolute number here. I understand it's wrong to just kind of take 19% and multiply it x the revenue number from 2017, but just to get it down to brass tacks here, we just finished a quarter where we did $20.5 million. Is that just suggesting that Q2 will probably be roughly similar here, that we could see a flat revenue, but improved profitability sequentially?

Yes, I think that make sense, Eric. As you know, the first half of the year is our lower half, and Q1 and Q2 are fairly similar. Although, when you look at it by month, they're very dissimilar, right? One starts strong and ends weaker. One ends weaker and starts stronger, but in the end, they are similar. So Q2, we expect to be better than last year and so your thesis is correct. We expect better profitability in Q2 than Q1 from some of the things that Rich talked about, the shift in the demand side and having better margins there and lower cost overall.

Yes. And I do appreciate the fact that this -- we get an organic comp for the first time here in Q2 given that NetSeer acquisition closed in February of 2017, so am mindful of that. Shifting over to one of the other major issues that you guys need to get hammered out. I -- if you commented on it, I missed it, but I know last quarter you talked about a renewal with your largest partner in May of 2018. Any update there?

Yes, so we -- I think, if you look at our public filings, you'll see that we -- I guess we amended it to extend the date at which we'll renew the contract. And we've done that in the past when we need more time to sit with our partner and talk about all the things that we're working on together and to ensure that both sides get out of the agreement what they want. No one should read anything out of that amendment other than a good indication that the agreement is going to get completed just like it always has over the last 7 years. So I see no issues arising out of that process at this point.

Okay. And then lastly for me, the EBITDA guidance, very encouraging for 2018. You talked about doubling the $1.1 million that you did in 2017. How does that translate into kind of a free cash flow number? In other words, by the end of the year if we're starting from $4 million cash balance exiting -- I know we had a small amount of debt exiting the year and entering the first of the year here -- but does $2.2 million of adjusted EBITDA translate into $1 million or $1.5 million of free cash flow?

Yes, yes, in that ballpark. I would expect -- because we're going to be growing and we have greater needs for working capital in the last half of the year, I wouldn't expect much repayment of our debt at this point. We are at $4.9 million, it'll probably be similar towards the end of the year and the same thing with the cash, but we'll be generating cash as we did in the first quarter, which is one of our lowest quarters. We will continue to generate cash in the next 3 quarters and then have positive cash flow. So yes, more or less in the ballpark that you just cited, Eric.

Moving on, we'll go to Lisa Thompson with Zacks Investment Research.

So let's go back to the EBITDA conversation, because back in the past, your whole objective was really to grow the company and then plow back any excess cash into growing the company. Have you changed that at all, or [instead of] trying to be profitable?

No, that's still our objective as a business. As we have stated, our market's large and our company is -- you're sitting here at $80 million, but we have a dream to be considerably bigger. It's just that some of the changes that we're making are going to result in more cash free generated in the business, and we're sensitive to the bottom line as much as we are the top line.

Okay. That's kind of exciting to see some more profits come again. Could you go back and talk a little bit about your comments about how your AI and your methodology of finding the right customers for your advertisers will benefit you in this change in privacy? Can you contrast that with maybe how other people might be doing it and how it might benefit you?

Yes, it's a complicated thing that's probably beyond the scope of an answer on this call, Lisa. But fundamentally, the thing to realize with regard to our form of artificial intelligence is it's contextual-based technology, i.e., it's really the content on a page that is the basis for how we do the things we do. And I don't think that's ever going to change, even in the most privacy-sensitive environment that could exist, where everything is done away with: cookies, behavioral targeting, any other methodology gets used. They're never going to do away with a technology that says "Hey, I think I know what this page is about and as a result, I think I know, which brands are probably the best ones to be aligned with this particular page of content." Not that we do exactly that today, but our technology is based on that approach and as a result, we can move in that direction immediately if the environment moves that way.

So it sounds to me that means that you're focused on what the page says and you don't really care to identify who the reader is? You're just finding someone that's interested in that topic and not tracking who that person is?

Yes, that's not exactly the case, but that could be the case in the environment, if it moves towards that in the United States. I mean, the real issue here is, there's been a lot of changes that have been talked about in our industry as a result of the policy changes in Europe. And you're already seeing some implications to that in the United States with companies like Google, who are adapting even in the U.S. to some of the standards that are occurring in Europe -- not exactly, but -- and all I can say is, we are not impacted by those. We are not seeing impacts from it, and we are, as you know, in partnership with these large companies, and so we talk to them, we know what they're doing. And we're not expecting a problem with regard to the way that we do this. We do think other people will, but we're not going to experience it.

(Operator Instructions) And with no more questions in the queue, I'll turn it back to our presenters for any additional or closing comments.

Thank you very much, operator, and of course, 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 our progress in the coming quarters.

Thank you. And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.