IZEA Worldwide Inc (IZEA) 2017 Q2 法說會逐字稿

Greetings, and welcome to the IZEA, Inc. Second Quarter 2017 Earnings Call. (Operator Instructions) A reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Ryan Schram. Please proceed, sir.

Good afternoon, everyone, and welcome to IZEA's Q2 2017 Earnings Call. I'm Ryan Schram, Chief Operating Officer at IZEA. And joining me today is IZEA's CFO, LeAnn Hitchcock; and IZEA's Founder, Chairman and CEO, Ted Murphy.

On behalf of all of us here at team IZEA, we're pleased to have you with us today.

Earlier this afternoon, we issued a press release with additional information regarding IZEA's second quarter performance. As a reminder, all of our Investor Relations information can be found on our corporate section of our website, izea.com. I-Z-E-A-dot-com.

Please note that during the course of today's call, our management team will discuss IZEA's business outlook and may make forward-looking statements regarding the company that are pursuant to the safe harbor provision of the federal securities laws. These statements are predictions based on our team's expectations as of today. Actual events or results could differ due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. The company and its management assume no obligations to update any forward-looking statements made during this call.

Our discussion today will also include certain non-GAAP financial measures, such as EBITDA and adjusted EBITDA. A discussion and reconciliation of these measures to the most directly comparable GAAP measure is available in the press release issued today and available on our corporate website, izea.com.

With the appropriate disclosures out of the way, I will turn the call over to IZEA's Chief Financial Officer, LeAnn Hitchcock, to walk us through a summary of the company's performance in the second quarter of 2017. LeAnn?

Thank you, Ryan, and good afternoon, everyone.

I am pleased to share that IZEA continues to improve its operations and set higher targets each period. IZEA reported second quarter 2017 revenue up 1% to $7 million compared to $6.9 million in the second quarter of 2016. This increase is primarily due to organic growth in our Managed Services revenue, which is comprised of Sponsored Social and Content revenue. Our Managed Services increased 7% to $5.6 million in Q2 2017 compared to $5.2 million in Q2 2016, accounting for 80% of total revenues in the quarter.

Content Workflow, our self-service revenue from traditional news agencies and publishers, decreased 15% to $1.4 million in Q2 2017 compared to $1.6 million in Q2 2016, accounting for 20% of total revenues in the quarter.

Net bookings decreased 3% to $6.6 million in the second quarter of 2017 compared to $6.8 million in 2016. The decrease is due to a $1 million cancellation by a customer in the second quarter of 2017 related to a 2016 booking.

Revenue backlog at the end of the quarter was $11.4 million compared to $8.9 million in the same quarter last year, an increase of 28%. This includes unbilled bookings of $7.5 million and unearned revenue of $3.9 million. Revenue backlog is increasing as a result of a large amount of bookings for longer-term contracts that are up to a year in length. Revenue backlog consists of unbilled bookings for campaigns which have not yet started as well as unearned revenue for campaigns that have been billed but are not yet complete.

Gross profit for the quarter increased 1% by $43,000 as compared to Q2 of 2016. The increase in gross profit is attributable to the increase in revenue during the quarter. Gross margin for the quarter was consistent with the prior year quarter at 51%. Our higher-margin Managed Service business averaged 61% margins versus our lower-margin Content Workflow business, which is only a 7% margin.

Due to the higher margins, our Managed Services contributed 97% of our gross profit in Q2 2017. We estimate that our annual gross margins for the year ending December 31, 2017, will average approximately 48% to 49%, but this is largely dependent on the sales mix between our Managed Services and Content Workflow.

Operating expenses in the second quarter of 2017 were $5 million compared to $5.1 million in the same period last year. Cash-based OpEx in the second quarter of 2017 was approximately $4.4 million compared to $4.6 million in Q2 2016, a decrease of 5% year-over-year.

Net loss for the second quarter of 2017 was $1.4 million compared to a net loss of approximately $1.6 million in the second quarter of 2016. Loss per common share for the second quarter of 2017 was $0.25 compared to the same loss per common share of $0.30 in the prior year quarter.

Adjusted EBITDA for the second quarter was negative $840,000 compared to a negative $1.1 million during the same period last year.

As of June 30, 2017, we have $3.6 million in cash on hand, a positive working capital balance and stockholder's equity of $6.2 million. In addition to our cash on hand at the end of the period, we still have an untapped $5 million credit facility With Bridge Bank and an open shelf registration.

I will now pass it over to Ryan to provide a recap of the company's operations during the second quarter of 2017.

Thanks, LeAnn.

As part of our Managed Services offering, Custom Content has become a key catalyst for IZEA's growth in 2017. Dating back to the January 2015 acquisition of Ebyline, the business hypothesis was never about the growth of Content Workflow or the legacy newspaper side of that business, but the ability to produce high-quality content at scale for brand marketers. Our purchase of ZenContent last July further extended our Custom Content capabilities, unlocking the e-commerce category for the company, while also increasing our margins.

Throughout 2016, our leadership team focused on efforts that were all about comprehensive cross-training for our sales staff, and we also completely revamped our marketing vehicles to underscore the advantages of these Custom Content offerings. The team's focus on execution is apparent when looking at the growth in the managed Custom Content segment of our business, in particular.

The first half of 2017 produced our largest Custom Content net bookings ever, $2.78 million, up from $1.29 million during the same period in 2016. That's 115% growth year-over-year.

And when you look at where that growth is coming from in Custom Content, it's a healthy mix of both new and return business for IZEA. It's also a diverse pool categorically, drawing from a wide range of sectors, running the gamut from travel and tourism, to insurance and financial services, to retail and e-commerce. This validates an overarching marketing trend that for today's consumer, brands will need to behave more like publishers in order to drive engagement in both the pre- and post-purchase decision-making process.

Developing content asset scale and distributing them effectively remains a top priority and a challenge for marketers. Thanks to the efficiencies gained by IZEA's platform technologies and proprietary processes, we're able to solve a meaningful need in today's marketplace.

Any customer or competitor attempting to scale content either manually or in the traditional billable hours methodology is at a substantial disadvantage. We have observed meaningful benefit from engagements that include Custom Content, namely that they tend to be larger, 6- and 7-digit-investment levels, where we work directly with the brands, as opposed to going through their agencies or other intermediaries. These engagements also tend to span a larger executional timeframe of multiple quarters up to a year as the needs for content are largely evergreen for these clients, particularly those who are focused on organic SEO efforts to boost their competitive stance. We welcome these factors with open arms as IZEA unlocks higher-profit margins on larger client commitments.

Our Custom Content gross margin has grown to over 60% in our past 3 quarters. That's impressive considering that when we started offering Custom Content in early 2015, our margins were only 33%. In other words, we've nearly doubled the margin in just over 2 years.

As you can tell, our team is very bullish on all aspects of Custom Content as a means of disrupting the broader marketing services ecosystem. However, e-commerce-related Custom Content needs, you know, the assets that are behind the scenes of your favorite online shopping destinations, such as metadata, product descriptions and other search engine optimization-centric, high-volume assets, present a rare opportunity for IZEA to dominate on a global basis.

To bolster our efforts, we recruited and appointed Eric Abrams, a 15-year industry digital marketing veteran, as Managing Director of our e-commerce sales group in June. Eric will lead a growing team of sales professionals who have worked directly with the online merchant side of large retail organizations. This highly specialized area of expertise is an investment we believe will provide a tremendous opportunity not only for IZEA but for our clients. It goes without saying that we couldn't deliver this type of growth and margin gain without our proprietary technology, IZEAx, furthered by a commitment from our team members to continuous improvement. We are constantly optimizing our business processes and gaining leverage on areas big and small every week.

In Q2 of 2017, we delivered the highest revenue per full-time employee since becoming a public company. $216,000 per employee, up from $197,000 per employee in quarter 2 of last year. IZEA is becoming more and more efficient as an organization while continuing to deliver growth and investing in the future.

For some additional commentary on IZEA's second quarter and prospective on our path to profitability, I'll now turn the call over to my colleague and IZEA's Chief Executive, Ted Murphy. Ted?

Thank you, Ryan.

Over the past few quarters, our leadership team has realigned our focus to emphasize profitability as our #1 objective. It is never easy to shift operating plans, but I am proud of our team's ability to adjust, adapt and deliver results. It is a testament to the flexibility and strength of our organization.

While many operational changes were made quarters ago, the results are just now becoming outwardly apparent. In Q1, large professional and marketing fees from IZEAFest clouded the overall financial picture, making it difficult to see the gains we had made in efficiency beginning in Q4 last year. In Q2, those gains are now much more apparent.

Cash-based OpEx in Q2 was at its lowest point since 2015, and Q2 EBITDA loss was the lowest it has been since Q1 of 2014. At the same time, our team has continued to grow bookings and revenue, and Managed Services growth is strong. This is important because the path to profitability requires a combination of top line growth and strong expense management.

In this quarter, we were encumbered by a $1 million bookings cancellation from a 2016 booking. IZEA reports bookings as a net number, meaning we reduce our bookings number each quarter to reflect any cancellations or refunds issued in that quarter. Inclusive of that meaningful reduction, the team still delivered 7% bookings growth in our Managed Services, the core of our business, representing 97% of contribution margin. Exclusive of that reduction, gross bookings for Managed Services increased 24% year-over-year, and our average deal size was a record for Q2.

In the trailing 12 months, our Managed Services revenue is up 30% to $21.8 million versus $16.7 million in the same period a year ago. This drove a large increase in gross profit, up 29% in the trailing 12 months to $13.8 million versus $10.7 million. Total revenue is up 17% to $28.1 million on a trailing 12-month basis, and we reiterate our guidance to end the year at $29 million to $30 million in revenue.

On our last call, I mentioned that the IZEA's Board of Directors was in the process of identifying and engaging a banking partner to provide guidance and further explore our options. In July, IZEA entered into an agreement with Waller Capital Partners, LLC as financial advisers to initiate a process to explore and evaluate strategic alternatives to further enhance shareholder value. There can be no assurance that this review process will result in a transaction or other strategic alternatives of any kind. The company does not intend to disclose developments or provide updates on the progress or status of this process until it deems further disclosure is appropriate or required.

I remain very bullish on our outlook. In my June shareholder letter, I made a commitment to profitability. We are making progress against that commitment, and I believe we will get to profitability without having to access the capital markets.

As we look to the second half of the year, we are excited by the road ahead. We are able to move past some of the challenges we have had to overcome in the first half of this year and focus our efforts on serving our clients. We have significant new features that will be coming to IZEAx and meaningful opportunities with both existing and new clients.

Thank you for spending your time with us this afternoon. I would like to open the call for Q&A.

(Operator Instructions) Our first question comes from Mike Malouf with Craig-Hallum.

This is Eric on for Mike. Just had a couple questions regarding your gross margin guide. I was wondering if you are seeing any margin pressure in the future with Managed Services. With it becoming a larger mix of revenues and, even more so, a larger mix of gross profit, I was just wondering how that fits into your guide of 48% to 49%. Just -- it's been running up at 61%, so I'm just wondering if you guys are seeing any expected margin pressure as we get to the second half.

At this point, we're expecting everything to remain consistent. A lot of that consolidated gross margin is going to be dependent on the mix of our workflow business compared to the Managed Services where the Managed Services are running at that higher 61% margin. To the extent that Content Workflow revenues are higher, that 7% margin will pull our average mix down. So if it doesn't decrease as much as we're predicting or it increases over that, that could change the overall mix. So that's why we're sticking with our guidance of the 48% to 49%.

Okay, that makes sense. And then you guys said that you expected Content Workflow to continue to decrease, obviously. I was wondering if you guys -- just sort of how drastically you expect that to happen. Last year, it looks like Content Workflow was flattish from the second half to the first half. Are you guys expecting that sort of same trajectory as we get to the second half of '17? Or are you expecting a more sudden sequential decrease in Content Workflow revenues?

Yes. We believe that, that is going to continue to decline over the course of the rest of the year. And it's a little bit unpredictable for us. We don't know exactly at what rate, but if you look at the past 2 quarters, you will see that there's been a pretty big decline year-over-year.

Our next question comes from Alex Silverman with Special Situations Fund.

Nice job on controlling expenses. That's a really pleasant surprise. Wondering if you could give us some sense of what the environment is like for your customers, and what sort of feedback you are getting from your sales force.

Sure. Hey, Alex, so the idea here is that we're seeing a few things, particularly in quarter 2, that were interesting to us. As it relates to new content customers, I made a reference that we're seeing a wide range of client categories. And not only that, but some new names who have been buying from us for the very first time. Interestingly enough, in some cases, these were people who are clients that we targeted when we only had Influencer Marketing to offer, and it may have not been the right fit for them at that time and content became the door opener. So that's been an interesting trend. What we also are seeing is that by using Influencer Marketing as a distribution mechanism, once that content is rooted and that relationship is built, it actually extends the conversation and, therefore, the budget opportunity in a much more handsome way.

(Operator Instructions) Our next question comes from Jon Hickman with Ladenburg Thalmann.

Ted, I just want to make sure I have this straight. The -- now that we're in the third quarter and when you announced your third quarter bookings, the $1 million loss -- or cancellation, that's gone, that's in the past, that won't affect Q3's booking results?

Correct. We...

Do I have that right?

Yes. That is the bookings cancellation that we originally announced on the last call. Between that last call and this call, we received the formalized paperwork on that and the entire $1 million bookings cancellation was taken in Q2. So we are happy to have that behind us and being able to focus on the future.

And that's -- you're not seeing -- like that's not a trend, right? I mean, that's kind of a one-off event?

Yes. I mean, that -- you can never control when customers have budget cuts, and that unfortunately was the result of a budget cut. So I don't believe it's at all indicative of our other clients or what else is happening on the sales front.

And then what about competition? Are you seeing any new like -- I mean, you're obviously having success, so is that inviting copycats at all? Anything different there?

Yes. I mean, there are absolutely a lot of copycats out there. There's a tremendous amount of fragmentation in the space. I mean, I think that what we are seeing is that there are many, many players, but a few players with any real scale or the caliber of clients that we have. And I think that we're in a very unique spot and that we have a Managed Services business, a SaaS business, a Custom Content business and an influencer business, and that allows us to open up doors that I think that the smaller players that are in any one of those given niches, they're not able to open those doors in the same way and unlock the same type of commitments from clients that we're seeing. One of the things that we're most excited about is, as these deal sizes have gotten larger, we've noticed that our margins have actually gone up with those larger commitments because we're able to get more scale and efficiency out of the tech platform. So that's one of the things that we're very much so focused on as an organization and having that combination of Influencer Marketing and Custom Content has allowed us to unlock those bigger deals.

Okay. I have another one for you. So you did away with search SocialLinks, right?

Correct, correct.

Yes. But what -- coming out of IZEAFest in February, the -- you introduced several new products. What can you tell us about the uptake of those?

I would say that our promoted post product is by far growing the fastest out of all of those. There's a lot of interest in that from clients. It dovetails really nicely into what we're doing on the Sponsored Social side. And then behind that would be our ContentAmp platform. More and more what we're seeing that our clients are spending across all these different offerings that we have. And so they may dial it up in one area and dial it back in another area, but it gives us a pretty unique offering overall.

And maybe this is a question for Ryan, but everything I'm reading says that video is like the new way to communicate with the consumer. So are you seeing big demand for video at the expense of maybe the written word?

I would certainly say it's growing, I don't know if it's necessarily at the expense of something like a long-form blog post quite yet, because when you stop and think about what makes a great blog post great is that it tends to have video that accompanies it, right? In the Sponsored Social category, what I will say is that we are seeing an uptick in all visual mediums. So Instagram, for example, being able to handle photo and video. And the fact that it's snackable and very mobile-centric, it hits a sweet spot. YouTube certainly continues to be on a tear, but frankly, that's consumed in a slightly different fashion.

At this time, I would like to turn the call back over to management for closing comments.

We'd like to thank everybody for joining us today. And as a friendly reminder, you're welcome to join us online anytime at IZEA.com/investors for a detailed summary of our second quarter results.

Thanks, and we'll see you again next quarter.

This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.