Inuvo Inc (INUV) 2020 Q2 法說會逐字稿

Good day, and welcome to the Inuvo, Inc. 2020 Second Quarter Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Valter Pinto, Managing Director of 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 Second Quarter 2020 Shareholder Update Conference Call. Today, Inuvo's Chief Executive Officer, Richard Howe; and Chief Financial Officer, Wally Ruiz, will be your presenters on the call.

I'd like to start by letting listeners know that as a consequence of the COVID-19 pandemic, both our offices in San Jose, California and Little Rock, Arkansas remain closed. In our Little Rock facility, we have started to have twice-weekly leadership meetings. We are monitoring pandemic on a day-to-day basis, and we'll recommend a return to work for our employees if and only when we feel we can adequately safeguard our colleagues from co-infection. I'd also like to remind our shareholders that we anticipate filing our 10-Q with the Securities and Exchange Commission tomorrow, Friday, August 14, 2020.

Before we begin, I'm 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 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 received -- can be reviewed at sec.gov.

With that, now let's turn the call over to CEO, Richard Howe.

Thank you, Valter, and thanks, everyone, for joining us today. For the 3 months ended June 30, 2020, we delivered roughly $7.6 million in revenue, with approximately $5.7 million of it coming from the ValidClick platform and $1.9 million from the IntentKey platform. For the 6-month period, revenue was $22.5 million, with $18.7 million from ValidClick and $3.8 million from the IntentKey.

Revenue in the prior 3- and 6-month periods was roughly $14 million and $29.5 million, respectively. Lower revenue through the first 6 months of the year was predominantly caused by decreasing advertising budgets associated with COVID-19 and isolated within the ValidClick platform. While revenue was down sharply year-over-year, we countered the income implications of lower revenue by implementing a number of short-term expense and contract modifications within the quarter.

Net loss year-over-year within the quarter improved 30% from roughly $2 million in 2019 to $1.4 million in 2020. Sequentially, net loss improved by over 50% or approximately $1.5 million. On an adjusted EBITDA basis, there was also an improvement year-over-year within the quarter of roughly 84%, going from a loss of $854,000 in the second quarter of 2019 to a loss of $140,000 in the second quarter of 2020. Sequentially, adjusted EBITDA improved by roughly 90% or approximately $1.2 million. A reconciliation of adjusted EBITDA to net loss is contained in our earnings release.

As we had messaged on our Q1 conference call, we had expected the ValidClick business to be impacted materially by the pandemic, and it was down roughly 29% for the first half of the year and 53% within the quarter on a year-over-year basis. This impact on ValidClick was partially influenced by the markets that business serves. As a marketing tool for advertisers, the ValidClick platform is typically used by brands to extend their audience reach. As such, when budgets contract quickly as they have during COVID, these services tend to be among the first budget adjustments.

The Interactive Advertising Bureau recently surveyed advertisers to better understand how they were thinking about their marketing budgets generally during COVID for the period between March and June. 46% of the responders noted that their ad spend was likely to be down with 24% noting that they had paused all their advertising spend, 14% reported they had no plans to modify budgets and 16% were undetermined.

The ValidClick business had its lowest month of the year in May. Since then, we have started to see a modest but steady sequential monthly improvement through July, with August currently continuing that upwards trend. Within ValidClick, the team has been using this time to build new products, bring more services in-house and negotiate better deals with traffic acquisition partners for us to be in a position as the market turns to capitalize not only on growth but also on margin. One of those new products is currently scaling in collaboration with Yahoo! and Verizon.

The IntentKey business has held up very well in spite of dramatic reductions in marketing budgets across the industry. For the 6-month period, the business is up 17% year-over-year. For the 3 months ended June 30, 2020, the business was roughly flat year-over-year.

The impact COVID has had on the IntentKey business is perhaps best categorized as a pause in the growth rate, which we would expect to return as the economy begins to improve post-COVID. The lowest IntentKey revenue month in the year-to-date was April. The May through July months all grew sequentially, and August is currently forecast to continue that trend.

We have frozen company hiring in March as a result of COVID but have recently restarted recruiting activity within the IntentKey, having added an additional salesperson in July. We currently have 10 people in sales, sales support and account management positions within the group.

Gross margins within the IntentKey have continued to exceed expectations, now averaging over 50% through the first 6 months of 2020, which is approximately 100% improved from the prior year period. We've had roughly a 60% increase in the number of RFPs we responded to within the quarter as compared to the prior year. A majority of these RFPs are for budgets expected to be allocated in Q3 and Q4.

From a performance perspective, we exceeded client KPIs across the more than 50 campaigns that were operational within the quarter by approximately 65%. Roughly 1/4 of these campaigns were new, and 3/4 were renewals.

For our largest client, the IntentKey continues to perform very well. Our campaigns for that client currently include mobile video and display advertising. We had a successful test campaign in the quarter for desktop video, and we are currently in the process of testing Connected TV campaigns. When successful, test campaigns have historically turned into recurring budget allocation.

As a company, our capital position has never been stronger. At the end of July, we had roughly $12 million of cash on our balance sheet, which we try to put to work towards growth initiatives.

I would like to turn the call over to Wally for a more detailed assessment of our financial performance within the quarter.

Thank you, Rich. Good afternoon, everyone. I'll recap the financial results for our second quarter.

As Rich mentioned, Inuvo reported revenue of $7.6 million for the quarter ended June 30, 2020. This compares to $14 million reported in the second quarter of last year. The decrease in this year's revenue is primarily due to reduced advertising budgets, particularly in the ValidClick operations.

ValidClick revenue in the current quarter was $5.7 million compared to $12.1 million in the second quarter of last year. The lower ValidClick revenue was partially offset by higher revenue from our owned and operated sites.

IntentKey revenue was virtually flat in the second quarter this year compared with last year. Though for the first 6 months, it was up 17% from the prior year.

Gross margins increased in the second quarter to 86% compared to 60% in the same quarter last year due primarily to a renegotiation of payment terms and conditions with a ValidClick marketing partner. IntentKey gross margins continue to increase within the second quarter of 2020, increasing to 55% compared to 24% in the same quarter last year.

Operating expenses were $2.7 million lower in the second quarter of this year compared to the prior year. Marketing costs are primarily made up of the expense required to attract consumers to websites and apps. These are the ValidClick traffic acquisition costs, also known as TAC. ValidClick revenue is generated predominantly from ads served to these websites and, therefore, ValidClick has a lower cost of revenue but a higher marketing expense as a result of TAC.

Marketing costs were $3.9 million in the second quarter of this year compared to $6.5 million in the same quarter last year. The lower expense this year compared to last year is primarily due to lower ValidClick revenue compared to last year and to the renegotiation of payment terms and conditions with a ValidClick TAC provider.

Compensation expense was $2.1 million in the second quarter this year compared to $1.7 million in the prior year primarily due to higher employee benefits expense, accrued commissions, stock-based compensation and accrued incentive pay. Our head count at June 30 was -- June 30 of this year was 70 full and part-time employees compared to 62 at June 30 last year. In spite of a higher head count in this year's quarter, the payroll for the quarter ended June 30, 2020, was lower than the same quarter last year due to temporarily lowering the compensation for senior officers and employees with salaries in excess of $100,000 per year.

Selling, general and administrative expense decreased $432,000 in the second quarter this year compared to the prior year due primarily to higher legal and professional fees incurred last year from the merger agreement, which we terminated in June 2019. Interest expense was $73,000 in the second quarter of this year. That is compared to a interest income of $149,000 in the second quarter of last year. Last year's interest income or net interest expense, which was an income item, included an adjustment to the derivative liability expense associated with the convertible promissory notes that we issued in March 2019.

We had other expense of $50,000 in the second quarter of this year due to the loss associated with the mark-to-market of a derivative liability associated with the convertible notes that I just mentioned and due to a buyout of a lease of computer equipment.

We reported a net loss of $1.4 million or $0.02 per basic share compared to a $2 million net loss or $0.06 per basic share last year for the second quarter of last year. The adjusted EBITDA for the quarter ended June 30 was a loss of $140,000 compared to a loss of $854,000 in the second quarter of last year.

Our balance sheet at June 30, 2020, had cash and cash equivalents of $4.2 million and outstanding financing debts of $3.4 million. In the quarter -- in the second quarter, we engaged in a number of capital-raising activities. In April, we closed the second tranche of a registered direct offering, in which we sold our common stock for gross proceeds of $245,000. Also in April, we obtained an unsecured $1.1 million loan under the Paycheck Protection Program or a PPP loan. We used the proceeds entirely for payroll costs.

And in July, we applied for debt forgiveness as is provided by the program. In May, the remaining promissory noteholders that I had previously mentioned converted all of their notes. And as of today or as of the end of June, no notes were outstanding.

In June, we closed an additional registered direct offering of our common stock for gross proceeds of $5.5 million. Subsequent to June, in July, we closed a firm commitment underwritten follow-on public offering of our common stock for gross proceeds of $10.75 million.

Now just a word about COVID-19 and Inuvo. Beginning in late April 2020, we started to see a reduction in the number of advertisers available to ValidClick, and as a result, a decline in the monetization of traffic to those various websites and applications that ValidClick serves. This resulted in the reduction in revenue that we're now reporting in the second quarter.

Additionally, while at 17% growth, the IntentKey fared well through the first 6 months of 2020, the number of clients paused -- a number of clients had paused marketing spend in the second quarter, resulting in a slowing down of the growth rate and reporting -- and us reporting a flat second quarter year-over-year.

Generally, we have curtailed expenses, including compensation and travel. We have issued a work-from-home policy to protect our employees and their families. As mentioned earlier, we also implemented a temporary compensation change to senior officers and employees in May and June.

As Rich mentioned, beginning in mid-June 2020, we experienced an improvement in daily revenue, which appears to be continuing into the third quarter. We do not yet feel comfortable enough with the trend to predict with any certainty how the second half of the year will materialize nor whether our revenue run rate will continue to improve.

We are focusing on resources -- we are focusing all of our resources on areas we believe have immediate revenue potential and continuing to find expense reductions as necessary with as little disruption to our daily operations as possible.

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

Thanks, Wally. We continue to navigate our way through the economic changes associated with COVID, and the early trends heading into the strongest part of our year suggests the recovery has started. The IntentKey has continued to grow throughout the first half of the year in spite of significant and industry-wide marketing budget declines resulting from COVID.

And while ValidClick was impacted more severely than the IntentKey, we have seen encouraging monthly sequential growth within ValidClick following its low point in May. With now the strongest balance sheet in the history of our company, we feel confident in our ability to not only manage through COVID, but to thrive on the other side.

I'd like to turn it over to the operator.

(Operator Instructions) And we'll take our first question from Brian Kinstlinger of Alliance Global Partners.

And you had pretty impressive, pretty much breakeven on much lower revenue. In terms of IntentKey, can you talk about your ability to win new logos in this environment? Or when you look at the leasing ramp, I guess, month-by-month that you talked about, is that revenue growth coming from existing customers? Or is it also coming from new customers?

It's coming from both and leading into the second quarter, Brian. I believe our first quarter year-over-year growth rate alone for the IntentKey was north of 40% if memory serves, which is why with a flat second quarter, we have 17% growth in that business for the half of the year. But clearly, to achieve the kind of growth that we were seeing in the first quarter and the quarters before that, we need to be signing up new logos. And we have been, and we did sign the new logos in the quarter.

It's really just that those marketing budgets got pause for a lot of companies. But what we're seeing now is they're starting to be released again. And so IntentKey is picking back up. It's hard for us to gauge since there's never been a COVID before. There's no example for us to point you to say, how do the budgets come back? Do they come back full form, full strength, full capacity in Q3 or Q4? Or is it half capacity? I don't know. But right now, things are moving in the right direction, for sure.

So when you look at your -- can you provide or maybe quantify a customer account for IntentKey at the end of June versus the end of March or maybe today?

Yes. I don't have it handy, and I don't think we give out the customer accounts, but there are lots of customers with IntentKey. I think in my script, I mentioned that we are running -- in the second quarter, I think we had 50 campaigns. Now there are sometimes multiple campaigns for customers, but there were 50 campaigns running for the IntentKey in the second quarter.

And maybe to your question about demand, I think the other thing I mentioned in my script that people should pick up on is I believe we had like 60 RFPs, I think, in the second quarter we're in. And the budgetary season for marketing tends to pick up in a big way. And I think towards the end of the second quarter, of course, people are trying to fill their budgets for the Q3, Q4 season. So that many RFPs for us actually is we are feeling like it's a good sign that demand is going to be coming back in this back half of the year. Otherwise, why would companies be wasting the time asking for an RFP for money they're not planning to spend.

Great. And then can you talk about the sales cycle for new logos? How quickly after you meet them may something transpire? Does it start with a test campaign, and how quickly can that ramp?

So the answer to that question is not simple as you think because the results that we've seen can vary quite dramatically. We have closed business in 22 days, and it's taken us 9 months to close business. So you're looking at a pretty substantial range there.

I would say that like all things fails, the quality and determination of the salespeople is proving to be a big factor in terms of making the number closer to 22 days versus the 9-month period. But the reality is closing a material logo with a material budget is likely to be somewhere in between and maybe even on the higher end of the middle of that range.

Yes. Almost invariably, a new client is -- always starts as a test. I mentioned in my script even our largest customer, when they add new capabilities that they want to test with us, they use a test, which is exactly what happened. I said we're doing a connected TV test for our largest client right now actually. It started in August. And what happens is if the performance results for those tests look good, invariably, what happens is the client basically signs up and starts a more regular budget allocation towards whatever it is that we were testing for them.

Great. Now I think you clearly laid out the strength in demand for IntentKey month by month, and maybe I missed it, but can you kind of lay out how you're seeing ValidClick and that business recovering, albeit at a much slower clip over the last 2 months?

So ValidClick was expected to have some -- to have a greater, let's say, impact as a result of COVID than IntentKey was. And the reason for that is because it's not a primary budget source for marketers. Unlike the IntentKey, it's like a major channel, a major spend category. It tends to be an add-on budgetary expense.

Now the good news about ValidClick is it's an add-on budgetary expense for hundreds of thousands of advertisers, which is the advantage of that business for us is because of the way our integrations work with our demand-side partners. We have access to many, many, many advertisers. So you kind of get a little bit of budget from a lot of brands.

The challenge is when budgets pull back, when a marketer tends to pull back, it's those kinds of budgets that fall back first. And so that's why we saw a disproportionate reduction in the ValidClick business.

Now with that being said, the business did bottom out in May, and we saw sequential growth in June over May. And we saw a sequential growth in July over June, and we are seeing, at least through yesterday, growth trends in August that are above July. So we feel like the ValidClick business is coming back up, and it will come back up. It won't come back up as fast as it goes down, but it will come back.

Great. Last question I had and I skipped it, by the way, on the IntentKey. As you build scale in that business, you've already had your margins dramatically expand there. What is a material gross margin for the IntentKey business?

I've said a few times when I've been asked this question that I think that the sustainable margins for the IntentKey are probably in the 50% to 60% margin range. Now however, with that being said, I also mentioned, and perhaps it was not picked up enough, that we are actually in the process of building a SaaS version of the IntentKey on our clients to run their own campaigns. And we expect that product to be launched in 2021. And when we launch that product, there will be margins north of 90% for that business model.

And this has always been a part of the design for the IntentKey business model, but we wanted to offer it as a service before we offered it as a SaaS product so that we could generate excitement, improve the results and get a significant revenue base running on the program to have proof points, success proof points to point to for the SaaS version.

Going forward, when we think past 2021 and 2022, we'll always have a services business, but we'll have a complementary SaaS business. So the result of that is we should see increasing margins, but they won't start until we launch the SaaS version.

(Operator Instructions) And we'll go next to Ryan Meyers of Lake Street Capital Market.

First one for me. What was the cash at the end of July given the equity raise?

It was approximately $12 million.

Okay, $12 million. And then just one more sort of housekeeping item. What should we be looking for the share count to account for the recent equity raise?

Should be approximately 97.5 million.

All right. That's helpful. So then do you expect the IntentKey revenue to be up sequentially? Or how should we think about the seasonality for the rest of the year?

Well, we're certainly hopeful and not planning for it not to be, Ryan. But as I said in my preamble, COVID is just -- listen, I've never had to deal with a COVID nor has anyone else. So it's hard for me to take a trend that we're seeing right now, which for the IntentKey, by the way, is growth May over April. April was the lowest month for IntentKey, and it was May growth over April, June over May. July has grown over June, and August is forecast to be higher than July.

So there is a trend that's headed in the right direction as it relates to the IntentKey. But I don't know if that trend is going to continue. I suspect it will. It looks like it will. And if it does, then we should have a -- we should be back to year-over-year quarterly growth in Q3.

Okay. And then last one for me. You mentioned that you guys added one salesperson in July. How are you guys thinking about that for the rest of the year as far as adding more sales reps?

I'm looking right now to hire at least 2 more in preparation for the budgetary season coming up and for next year. So we're identifying candidates, and we're actively pursuing candidates for sales right now.

And with that last question, this will conclude today's call. We appreciate everyone's participation today, and you may now disconnect.