IZEA Worldwide Inc (IZEA) 2017 Q4 法說會逐字稿

Greetings, and welcome to the IZEA Inc. Q4 and Annual 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ryan Schram, Chief Operating Officer.

Hello, and welcome to IZEA's Q4 2017 Earnings Call and Fiscal Year Recap. I'm Ryan Schram, Chief Operating Officer at IZEA. And joining me on today's call is our Chief Financial Officer, LeAnn Hitchcock; and IZEA's Founder, Chairman and Chief Executive Officer, Ted Murphy.

On behalf of our entire team, we appreciate your time and are pleased to have you with us today.

On Wednesday, April 18, the company issued a press release with highlights from our fourth quarter and 2017 fiscal year performance. If you'd like to review those details, all of IZEA's investor information can be found online at izea.com/investors.

Before we begin, please be advised that during the course of today's earnings call, our management teams will discuss IZEA's business outlook and make forward-looking statements regarding the company that are pursuant to the safe harbor provided by federal securities laws. These statements are predictions based on our team's expectations as of today. Actual events, results or trends could differ materially from our forecasts due to a number of risks and uncertainties, including those mentioned in our most recently filed periodic reports with the SEC. The company and our management team assume no obligations to update any forward-looking statements made in today's call.

In addition, our update today will refer to certain non-GAAP financial measures, specifically gross billings and adjusted EBITDA. A discussion and reconciliation of these measures to the most directly comparable GAAP measure is presented in our most recent Form 10-K available under SEC Filings in the Investors section of izea.com.

Now with the appropriate disclosures out of the way, I would like to turn the call over to IZEA's Founder, Chairman and CEO, Ted Murphy. Ted?

Thank you, Ryan.

I would like to start today's call by addressing the restatement of our financials. The restatement of our financials is the result of an unfortunate but good faith error discovered during our review of our 2017 financials and in preparation for our adoption of ASC 606, a new accounting standard for revenue reporting in 2018. Accounting standards are nuanced and complex. We carefully prepared our historical financial statements and believed our previous practices to be in line with GAAP standards.

Nonetheless, upon further review, we determined that there were errors in our previously issued financial statements. These issues were related to our presentation of revenue associated with the self-service Content Workflow portion of our revenue and our classification of cost of revenue related to our Managed Services. Upon discovery of the errors, the audit committee took swift and diligent action to analyze and address the situation, including by engaging an additional independent third party to further assist in the verification and correction of the errors. We have now taken steps to correct those errors and have restated our financials accordingly in our most recent 10-K.

The restatement had no impact on our previously reported loss from operations, net loss, loss per share or on any of the consolidated balance sheets, statements of cash flows and statements of stockholders' equity.

The board and I take these matters very seriously, and team IZEA, along with our independent auditors at BDO USA, LLP have worked diligently to address these matters as quickly as possible. We are working with our audit committee and partners to further strengthen our accounting procedures moving forward.

I would now like to turn it over to our Chief Financial Officer, LeAnn Hitchcock, to provide a summary of the company's performance from the fourth quarter of 2017.

Thank you, Ted, and good afternoon, everyone.

The financial information presented on today's call and in our annual report on Form 10-K for our fiscal year ended December 31, 2017, reflects restated financial information related to our prior period information. All comparisons are on an as-adjusted basis. For further details regarding the restatement adjustments, see Notes 2 and 14 in the notes to our consolidated financial statements under Item 8 in our Form 10-K.

We will begin with an overview of our annual results for our fiscal year ended December 31, 2017.

Revenue for fiscal '17 was up 15% to $24.4 million compared to $21.2 million in fiscal 2016. This was an all-time annual revenue record for the company. This increase is primarily due to organic growth in our Managed Services revenue, which is comprised of Sponsored Social and Custom Content services.

Our Managed Services revenue increased 17% to $23.8 million compared to $20.4 million in 2016, accounting for 98% of our total revenue in the year. Content Workflow, our self-service revenue from the use of our platforms by marketers to handle their content workflow, decreased 25% to $351,000 in 2017 compared to $465,000 in 2016, accounting for 1% of total revenues in 2017.

With the change in the presentation of reported revenue in our financial information, we believe that it is important to report gross billings to provide continued visibility to the gross amounts earned from our customers for the services we performed and total transactions billed through our platforms. This is an important indicator of the value of our services and platforms provide to marketers and it also is a critical measure to our cash flow.

Gross billings for 2017 was $29.2 million compared to $27.3 million in 2016. Cost of revenue as a percentage of revenue decreased from 49% in 2016 to 47% in 2017, an improvement of 2%. Cost of revenue includes both the amount we paid to creators for content or sponsorship services they provide as well as any associated personnel costs associated with the fulfillment of a campaign or project.

Total cost and expenses were $29.9 million in 2017 compared to $28.7 million in 2016, an increase of $1.2 million, which is primarily the result of our increase in revenue. Total cost and expenses as a percentage of revenue decreased from 135% in 2016 to 122% in 2017 as we improved the margins on our services, reduced personnel costs by working more efficiently with 11% less staff, and decreased our marketing costs on trade show and promotional spending. These were targeted reductions as part of our efforts to speed up our path to near-term profitability that began in early 2017.

Net loss for 2017 was $5.5 million compared to a net loss of approximately $7.6 million in 2016, an improvement of $2.1 million or 28%.

Loss per common share in 2017 was $0.96 compared to a loss per common share of $1.41 in the prior year, an improvement of 32%.

Adjusted EBITDA for the year was approximately negative $2.5 million compared to negative $5.5 million during the same period last year. This is an improvement of $2.6 million year-over-year.

Now turning our attention to the quarterly results for Q4. IZEA recorded fourth quarter 2017 revenue up 16% to $6.8 million compared to $5.9 million in the fourth quarter of 2016. This increase is primarily due to organic growth in our Managed Service revenue, which is comprised of Sponsored Social and Custom Content services.

Our Managed Services increased 16% to $6.6 million in Q4 2017 compared to $5.7 million in Q4 2016, accounting for 97% of total revenues in the quarter.

Content Workflow decreased 33% to $77,000 in Q4 2017 compared to $116,000 in Q4 2016, accounting for 1% of total revenues in the quarter.

Revenue backlog at the end of the quarter was $8.2 million. Revenue backlog consists of $5.3 million in unbilled bookings for campaigns which have not yet started as well as unearned revenue of $2.9 million for campaigns that have been billed but not yet complete.

Cost of revenue as a percentage of revenue decreased from 49% in Q4 2016 to 48% in Q4 2017. This is primarily due to lower costs related to our fulfillment of campaigns. We believe that with advancements in technology, we are able to manage more client spend with fewer personnel.

Total cost and expenses were $7.5 million in Q4 2017 compared to $7.7 million in Q4 2016. We experienced lower cost on increased revenue. As a result, our total cost and expenses as a percentage of revenue decreased from 130% in Q4 2016 to 111% in Q4 2017 as we improved the margins on our services, reduced personnel costs and reduced marketing costs on trade show and promotional spending.

Net loss for the fourth quarter of 2017 was $743,000 compared to a net loss of approximately $1.8 million in the fourth quarter of 2016, an improvement of 59%.

Loss per common share for the fourth quarter of 2017 was $0.13 compared to a loss per common share of $0.34 in the prior year quarter, an improvement of 62%.

Adjusted EBITDA for the fourth quarter was a positive $103,000 compared to a negative $1.1 million during the same period last year. This is an improvement of $1.2 million year-over-year and our second consecutive quarter of positive EBITDA results.

As of December 31, 2017, we had $3.9 million in cash on hand and stockholders' equity of $5.3 million. Receivables at the end of the quarter were $3.6 million, and we have accessed approximately $500,000 of our $5 million credit facility with Bridge Bank to maintain the strong cash balance.

I will now pass it over to Ted to provide some additional commentary.

Thank you, LeAnn.

First, I would like to provide some updates on previously announced initiatives. We start with the strategic review process announced last year.

In 2017, we announced that the company had received an unsolicited acquisition offer. That offer led the board to engage Waller Capital Partners in July 2017 to run a strategic review process. The board reviewed a number of strategic alternatives over the course of 2017 and into 2018. While we will continue to have strategic discussions with various parties from time to time, that formal review process has now concluded and we ended our relationship with Waller Capital in January of 2018.

As a result of the review process, we have made the decision to focus our primary efforts on the growth of our business and strengthening operations. Earlier this year, we announced that we were commencing limited cryptocurrency mining operations in connection with the our development of software that could pool our network's computing resources to mine cryptocurrency. Our engineering team made quick work against that goal and was able to create a functional CPU software miner and supporting infrastructure. However, despite how fast we were able to move, the crypto environment changed even faster over the past 3 months.

Since we made our crypto announcement, Facebook, Twitter and Google have banned cryptocurrency-related ads. Our e-mail provider MailChimp has taken similar steps regarding e-mail send. These steps, combined with the global increase in regulatory scrutiny and subsequent impact on the crypto market, have fundamentally altered the challenges, opportunities and risks associated with our original crypto strategy.

While the mining software we developed works, the landscape has become too muddied for us to have a clear path forward with our original plan. As such, we have decided not to release our mining software to the public at this time. We may revisit the initiative in the future pending financial, legal and regulatory clarity.

While we will not release our software, we will continue to operate our small internal GPU mining cluster for the foreseeable future. We have long-term interest and potential uses of blockchain and cryptocurrencies as they relate to IZEAx. We see applications for these technologies as a company that operates in online marketplace and deals with contracting, governance and payments between buyers and sellers. It is our belief that these technologies will at some point play a role in our future.

In my June 2017 shareholder letter, I made a commitment to our investors to achieve our first EBITDA positive quarter in the second half of 2018. We got there a full year early.

Q3 2017 was adjusted EBITDA positive. We followed that by an adjusted EBITDA positive Q4. We were able to demonstrate that IZEA can be adjusted EBITDA positive at an annualized revenue run rate of approximately $27 million to $28 million per year. We were able to get to positive adjusted EBITDA while delivering a 15% annual revenue growth.

I want to commend the IZEA team on making this a reality. Every team member across the company contributed to helping us achieve this goal. The past 18 months at IZEA were all about streamlining and optimization. Our team wanted to get to positive adjusted EBITDA as soon as we responsibly could. We have significantly increased output efficiency across the board. 2017 provides us with record revenue per sales team member, per campaign fulfillment team member and per employee.

Our investment in technology was a driving factor in our ability to gain efficiency. From the artificial intelligence in CurationEngine to ContentMine, our tech has allowed us to do more with less and that evolution is ongoing.

Since 2014, we have more than doubled the average revenue per campaign fulfillment team member. Our engineering team continues to focus on automating internal processes, replacing repetitive human tasks with robots and using other tools to perform those tasks to make the team faster and more responsive wherever possible.

From 2014 through mid-2016, top line growth was our primary objective. We grew fast and we spent aggressively on acquisitions, our personnel and marketing to fuel that growth. In late 2016, through the end of 2017, when the primary goal became near-term profitability, we reduced spending significantly in marketing and personnel. That reduction in spend clearly came at the expense of slower growth as we knew it would.

As we look to 2018 and beyond, our team does so with renewed vigor and affirmation in our business model. The influencer and content marketing industries continue to grow, and we believe we have a duty to our shareholders to capture as much of those markets as possible.

As such, we expect that 2018 will be a year of some incremental investment for IZEA. Not nearly as heavily as in past years, but also not as conservatively as the past 18 months.

We ended 2017 with 117 team members, down from a peak of 153 team members in August 2016, a headcount reduction of 23% over 5 quarters. Those were difficult but necessary decisions needed to rebalance the organization.

In 2018, we have started to reverse this trend, reinvesting in the growth of our team with a concentration on our sales operations in particular.

IZEA averaged 40 sales team members in 2017. That is only 8% more sales team members than 2 years ago in 2015. However, in 2017, we delivered 78% more revenue in Managed Services compared to 2015.

We know that investment in our sales team drives results. More importantly, we know that we need the proper incremental infrastructure to recruit, train and maximize their time each day. That approach, married with IZEA's existing operational culture, is what we believe will take this business to new heights.

On the recruiting front, we have broadened the team to include specialty outbound recruiters. This team will now have the resources to more aggressively engage in outbound recruiting as well as foster IZEA's partnerships with universities where we source the majority of our up-and-coming talent.

But it's not just about getting salespeople on board, it's about making them as effective as possible, as quickly as possible. To that end, we have created a new business operations unit that is responsible for not only training new sales team members but serving as the central service for proposal generation and contracting, 2 areas that had historically consumed an outsized portion of our sales team member time. Our biz ops team was installed at the beginning of this year and is enjoying early success along with the appreciation of our sales team.

I would like Ryan to speak briefly about some of the improvements we have made in sales for 2018.

Thanks, Ted.

Over the past several years, our leadership team has placed emphasis on increasing our average deal size as a GPI. And while that average deal size in 2017 was a record high for IZEA and a 22% increase over 2016, we've also become increasingly mindful that, that focus on larger deals can inadvertently manifest into an unhealthy deal mix, causing salespeople to sometimes miss out on smaller transactional opportunities with clients that can then expand into larger engagements over time.

Now to be clear, we are thrilled to have earned the opportunity to receive 6- and 7-digit investments from agencies and brands alike. These "whale-sized deals" are a very positive indicator about IZEA's place in the broader marketing ecosystem. However, what we've learned is that if one happens to slip from one quarter to the next or a budget is unexpectedly cut, it becomes very difficult for us to manage. And while we didn't have one client representing over 10% of our revenue in 2017, when a few deals shift or reduce scope unexpectedly, it can have a real impact on our quarter. To that end, the team and I believe that we were impacted by whale hunting in Q4 of 2017 and again, in Q1 of this year.

While the majority of the deals that we expected to see from Q4 have indeed come in, some commitments were smaller than we had hoped. Others have been floated in chunks over multiple quarters rather than one large annual booking as we saw in years past. This is due in part to the clients managing their own budgets against a larger spend with us overall.

We're currently on pace to have our first client spend in excess of $3 million in Managed Services with us this year. That's a meaningful spend and a testament to the value and the quality service that IZEA is providing. We covet that type of customer but we also realize that those types of relationships take time to develop and can be complex in nature.

To aid in both evening out our risk profile and broadening our revenue base, we have created 2 new sales groups to flank our existing Managed Service team. These are our small and medium business, or SMB team, and our partnerships team. We began planning and investing in ramping these teams at the end of 2017 and will be continuing to invest in them throughout 2018. By the end of this year, it's our goal to have close to a dozen sellers working in these new groups.

Like any new initiative, it will take some time for the investment in these units to yield meaningful revenue as both groups are focused on selling monthly subscription-based services. We expect the real impact from these groups will benefit IZEA later this year and into 2019 as the content and software subscriptions begin to stack. However, we're encouraged that in their early innings, we're seeing signs of success in both the SMB and SaaS partnerships in the early part of this year.

In addition to the creation of these 2 new groups, we have also adjusted deal size expectations for our existing Managed Service sales team. We're simply putting greater emphasis on a balanced mix between that whale hunting and what we call fishing for tuna. This adjustment in strategy was put into effect at the end of last year and has helped our team frame the opportunity in front of them to be both the transactional as well as the transformational. The early results of this balanced approach to sales look positive.

In Q1 of 2018, our new opportunity pipeline, or the total dollar value of new proposals created within the quarter, was up 26% year-over-year, the largest quarter of activity in the history of the company.

Thank you, Ryan.

Of course, our sales team is nothing without the technology that makes what they sell possible. IZEAx, in particular, will make a large leap forward with the introduction of IZEAx 3.0, which is expected to launch later this year. We've reimagined creator search, doubled down on data, further integrated AI and are rebuilding a completely new workflow from the ground up. We deem to take the best concepts from Ebyline, ZenContent and the current IZEAx platform to produce something radically new and extensible, including a dynamic workflow where humans and automated bots can work together in concert with each other. We expect IZEAx 3.0 to make its official debut in Q4 of this year.

We have grown revenue by double digits every year since inception with the exception of 2009 as we battled our way through the Great Recession. In 2017, we grew our revenue by 15%. That was slower than our growth in 2016 due to the cost reductions necessary to rebalance operations. Our #1 goal in 2018 is to put the right pieces in place to reaccelerate growth in 2019 and beyond.

First, we are going to need to absorb the low-end bookings in Q4 and Q1 from an overdependence on whale hunting last year. That will impact the revenue in the front half of this year. As a result, we are currently estimating 8% to 10% revenue growth for 2018, or $26 million to $27 million. We believe our revenue growth will be back half heavy in 2018 while the beginning of the year may be down compared to prior years. The back half should benefit from the strong and diverse new opportunity pipeline we had in Q4 of 2017 and Q1 of this year. More importantly, we believe we are setting ourselves up for more aggressive growth in 2019 as the investments and adjustments and focus we are making today will take some time to fully mature.

Our heaviest investment will be in salespeople, and it's important that we're upfront and transparent with our shareholders that we expect those investments to affect near-term adjusted EBITDA as a result. We expect negative adjusted EBITDA for 2018 between $2.25 million and $2.5 million, and we believe it will follow a similar pattern as it did in prior years. This will be heavily weighted to the first 2 quarters, in particular, as we absorb the dip in bookings from Q4 along with larger legal and accounting fees. We will also be funding the increase in personnel costs prior to their production of revenue.

It is our intention to be at or very near to positive adjusted EBITDA in Q4 of 2018. Some of that depends on the timing of contracts and revenue, along with the expenses of professional fees, but it remains very important to our executive team to manage to the goal of profitable growth.

We emerge from our streamlining as a better organization with stronger operations. We have great technology. We are in a growing industry with plenty of opportunity. We continue to win direct relationships with some of the world's biggest brands, and we have an incredible group of loyal team members committed to our long-term success.

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

(Operator Instructions) Our first question is from Mike Malouf, Craig-Hallum Capital Group.

This is Eric on for Mike. Could you guys talk a little bit more about Custom Content and just help us understand what features that -- have you implemented that were really behind driving that 47% growth?

Yes, I think that, that's actually more a function of sales in 2017. We have really put an emphasis on Custom Content in terms of all of the packages that we're presenting to our customers, and I think that it integrates nicely with what we're doing on the Sponsored Social side. So as our team ramps up and as they become more and more comfortable with selling Custom Content, we're seeing more success there. And that's going to be a continued emphasis for us in the future. That's something that is really important to us and something that we believe has a lot of potential upside.

Okay, that's great. And then I was wondering if you could also talk a little bit about the financial impact of your AI initiatives that you announced last year, what those have had to date, and if you expect any material financial impact in Q -- or in 2018. Or is that something that we should expect after IZEAx 3.0 has been implemented?

Yes, I would say that the biggest impacts last year were from CurationEngine in particular. We used to have a small team of people that were going through and manually doing that curation, and now that's a part-time task because CurationEngine handles a lot of that for us. But it's also increased the efficiency of our campaign management team because it organizes a lot of the content, it programmatically -- I'm sorry, the AI organizes a lot of that content, programmatically tags it inside of ContentMine. And that is becoming a very important tool both for our campaign managers and then actually for our salespeople. We see it being used a lot in the presale process as a way for the advertisers to really understand how Influencer Marketing and Custom Content come together.

Okay, great. That's helpful. And then last question for me. Given the accounting changes that you guys have had, I'm wondering what you expect the impact on gross margins to be, especially given the fact that first half looks to be a little bit softer than second half. Should it be pretty flat as we go through or is the lower revenue volume going to have an impact on gross margins?

Well, the margins really now are representative of the cost of revenues, and it's really a blend of everything now that we're changing between the net and the gross on part of our business. So really, we're just looking at those cost of revenues as a percentage of the total revenues and we believe that they should follow kind of the same pattern that we're seeing from last year.

Our next question comes from [Mike Jeffrey,] private investor.

Yes, sir. I just wanted to know that now that the strategic review process is closed, I wanted to see what kind of offer you got and what was the reason that you turned it down because your intention was to maximize shareholder value, and since 6 months ago, the price of your stock has dropped from $7 to about $2.75 today. And do you have any kind of plan to maximize shareholder value such as having some kind of -- getting upgrade from this brokerage firm or buyback of your shares or anything, something like that?

Yes, I would -- thank you for your question. Building shareholder value is always our primary objective. We can't really comment on any previous strategic discussions or what the structures were of those. Obviously, those are always very nuanced. But our focus as a board and as a management team is to build that value, and that is why we're focused on operations and execution, and that's why we believe -- that's what we believe ultimately builds that long-term shareholder value.

Okay. And then, do you have any plan to maximize shareholder value such as getting hold of a brokerage firm to recommend your stock because you are doing very well; you're one of the fastest-growing companies in Florida. And then also do you have any plan to buyback? And my last question is that when do you think that you would be announcing the first quarter results because last year you did it, I think, around May 7?

Yes, so I'll comment on the first 2 parts, and then I'll have LeAnn talk about Q1. We do have some broker coverage, and some of that has been ongoing for several years and we continue to hope to have those great relationships there. There is no planned shareholder (sic) [share] buyback at this time, and that is not something that I would expect in the near term.

Yes. And as far as the plan for our reporting, we have until May 15, 45 days after our March 31 quarter end, to file the Form 10-Q. We are working diligently to close out the quarter and report as soon as possible. But given additional disclosure changes required by several new accounting standards this quarter, we do not believe it will be much before that time.

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

LeAnn, I'm traveling, and I don't know if I was able to access all of the information that was released this morning, but -- or after the close. Did you publish the bookings for Q4 and Q1?

No. This is Ted. We did not publish the bookings for Q4 or for Q1. Actually, we did publish the bookings for Q4 last year -- I'm sorry, no. No, we didn't. That was Q3, sorry. For Q4, that would be part of this new year. And what we're looking at is our bookings moving forward, we think that they could be introducing some confusion. So our bookings were based on the gross amounts of the sales orders and our platform transactions. And because those were on a gross basis, they would no longer be comparable to our reported GAAP revenue. So to avoid any confusion going forward, we're going to be basing our guidance on estimated revenue moving forward.

Not booking?

Not booking.

Okay. So then, LeAnn, maybe we should take this off-line, but I am going over the restated financial information. I understood the revenue change and the margin change. I didn't understand the change to your sales and marketing line, why that went down. Can you -- is that easy to explain or do you want to tell me that off-line?

Sure. No, I'm happy to report that online, and as stated in our 10-K as well. We historically considered and reported the cost of our campaign fulfillment personnel as part of our sales and marketing expenses. Through part of our restatement analysis we determined that these costs should be included as a cost of revenue related to Managed Services rather than in our sales and marketing expenses line. So as a result, our sales and marketing expense line has decreased, and it's moved to cost of revenue.

Okay, and then -- good, okay. So again, that's all above the operating line? Okay.

You can see further detail of that in Note 14 in our financial statements.

Yes, okay. And then I guess this is for Ryan. So you said that you had a best year-over-year gain in opportunity, but yet you guys are kind of telling us that the first half of the year is going to be weak. Does that mean those opportunities aren't going to materialize until 6 months from now?

Well -- right. Across 3 different units, Managed Services, which we had before, and then the 2 new units, SMB and Partnerships, our general sales cycle suggests 90 to 120 days on average between when a proposal is created and when it ultimately closes. And then we'd recognize that as a gross billing. So on the average, it's very possible that something that was created in our pipeline here in the first quarter, which was a phenomenal quarter of activity for us, may not be actually seen to the public as a billing until the second half of this year.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Ryan Schram for closing remarks.

We would like to thank everyone for joining us today. And as always, we supply information available online on our investor website. That's izea.com/investors.

Thanks, and have a great rest of your Thursday.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.