IZEA Worldwide Inc (IZEA) 2018 Q1 法說會逐字稿

Greetings, and welcome to IZEA's First Quarter 2018 Earnings 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.

Good afternoon, and welcome to IZEA's Q1 2018 Earnings Call. I'm Ryan Schram, Chief Operating Officer at IZEA, and joining me today is IZEA's Chief Financial Officer, LeAnn Hitchcock; and IZEA's Founder, Chairman and CEO, Ted Murphy. Thanks for being with us this afternoon.

Yesterday, the company issued a press release with details pertaining to our first quarter 2018 performance. It and all of IZEA's investor information can be found on our Investor Relations website, izea.com/investors.

Before we begin, please be advised that during the course of today's earnings call, our management team 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 forecast 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 obligation to update any forward-looking statements made in today's call.

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

With the appropriate disclosures out of the way, I'm pleased to introduce my IZEA's Chief Financial Officer, LeAnn Hitchcock, to provide a summary of the company's performance in the first quarter of 2018. LeAnn?

Thank you, Ryan, and good afternoon, everyone. IZEA reported first quarter 2018 revenue of $3.9 million compared to $4.8 million in the first quarter of 2017. Revenue from Managed Services, accounting for 97% of total revenue in the quarter, decreased 19% to $3.8 million in 2018, compared to $4.7 million in 2017. Lower revenue is the result of lower initial annual commitments from larger customers, along with less sales and a fewer number of smaller customers running short-term campaigns. Managed Services revenue also decreased by approximately $200,000 due to the change in the timing of revenue under the new accounting standard, ASC 606, which we adopted in January 2018. This revenue should be recognized later in 2018 as the marketing campaigns are completed. Under the old accounting standards, revenue is recognized at a point in time as services were delivered. Under ASC 606, revenue is recognized over time based on a cost-to-cost methodology to determine percentage of completion for the services. This change creates a timing difference in when our revenue is recognized. Content Workflow, accounting for 2% of total revenues in the quarter, decreased 38% to $63,000 in Q1 2018, compared to $102,000 in Q1 2017.

Bookings from Managed Services in Q1 2018 were $5.7 million compared to $6.4 million in Q1 2017. Revenue backlog at the end of the quarter was $10.3 million. Revenue backlog consists of $6.3 million in unbilled bookings for campaigns which have not yet started as well as unearned of $4 million for campaigns that have been billed but are not yet complete.

Cost of revenue as a percentage of revenue increased from 48% in Q1 2017, to 56% in Q1 2018. Our cost of revenue consists primarily of direct cost paid to our third-party creators who provide services and our fixed internal personnel costs for those primarily responsible for fulfillment of our obligations under our Managed Services. As Managed Services revenue fell, our fixed internal fulfillment costs increased to 16% of revenue.

Total costs and expenses were $5.8 million in Q1 2018, compared to $7.5 million in Q1 2017. Our total costs and expenses as a percentage of revenue improved from 156% in Q1 2017 to 149% in Q1 2018, as we reduced marketing cost and public relations spending and incurred lower personnel costs and noncash general and administrative expenses.

Net loss in the first quarter of 2018 was $2 million or $0.35 per share, as compared to a net loss of $2.7 million or $0.49 per share in the prior year quarter, an improvement of 25%.

Adjusted EBITDA for the first quarter was a negative $1.8 million compared to a negative $2 million in the same period last year.

As of March 31, we had $2.8 million in cash on hand and stockholders' equity of $3.7 million. Receivables at the end of the quarter were $3.3 million, and we had accessed approximately $731,000 of our $5 million credit facility with Bridge Bank.

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

Thanks, LeAnn. The start of 2018 certainly hasn't been without its challenges, some of it being frustratingly unexpected or out of our team's control. This includes the rational recent budget reductions from existing commitments, driving refunds or cancellations, as well as a noticeable shift in investment strategy from our clients from annual to quarterly investment thresholds. In some cases, it led to larger annual spend that's spread across the year on a projected basis.

Because of those factors as well as the fluctuating (inaudible) and pipeline conversion inconsistency, our client development team leaders are continually down the path of diligently rebalancing our sales efforts to benefit from the widest spectrum of deal flow possible. Those efforts should be felt over the course of multiple quarters, not months, given the time required to properly prospect, vet and close different types of customers. However, Q1 presented evidence that our approach is beginning to positively impact our business in a number of ways. To that end, I'm pleased to report that Q1 provided several new milestones for IZEA and our client development organization, most notably our new opportunity pipeline creation and average deal size. The business' new opportunity pipeline or the total value of proposals placed in for the clients was $36 million in Q1. That's a company record. That was also a 26% increase in activity from the same period in 2017.

As we reported on previous earnings calls, IZEA continues to see impressive growth of average deal size from contracts closed within a particular quarter. This effect was particularly notable during the first quarter as our average deal size climbed 50% to $57,000 over the first quarter of 2017. To be fair, this increase can be viewed in 2 ways: First, the terrific job by our sales team demonstrated value to existing and prospective customers to [award] access to larger budgets or a potential risk by increasing the company's dependence on larger deals, as we mentioned during the Q4 earnings call last month, which can create lumpiness and performance month to month. During the quarter, we closed just over 100 new opportunities from brand agency clients, including a 7-digit commitment from a travel and tourism company who represented 29% year-over-year budgetary increase from the same period in 2017; excellent progress.

We also welcomed new business from a leading packaged food manufacturer as well as support the onset execution at the 2018 Consumer Electronics Show for a global leader in e-commerce, both of which were 6-digit investment. Moreover, the team continues to drive new and existing business [ratios], working hard to win new clients but, just as importantly, retain them by locking down return commitment.

On the extension front, our small to medium business, or SMB, (inaudible) subscription sales team and our Software as a Service partnership sales team that we announced during the Q4 earnings call are right on plan from an initial performance perspective. The SaaS team, based largely out of our Chicago regional office, commemorated a quarter of a handful of new partner clients using our IZEAx platform, including a top 10 public relations agency coming aboard and utilize IZEAx for all of their influencer marketing executions. We're excited about the potential for these groups as 2018 progresses on. That said, the competitive environment around IZEA has never been more intense from our own competitive research and there are close to 200 companies of varying size, from bootstrapped to venture-backed, in the influencer and content marketing space, whether in the form of managed services offering or a SaaS licensing model.

As we look at Q2 and beyond for this year, the [creed] for our team remains simple amongst the complex and increasingly fragmented industry: first, to continue to realize and benefit from the entirety of the investment we made in human capital across all 3 of our sales teams, Managed Services, SaaS partnerships and SMB; second, for our Managed Services team members to be able to upsell and cross-sell both influencer and content marketing to our clients as well as amplification to our Promoted Posts offering; and third, to recognize and leverage what makes IZEA both unique and powerful, being a technology-first organization with world-class engineering talent, driving innovation and providing efficiency for both our team members when executing campaigns as well as the clients that use that same platform.

Now for some additional insight on IZEA and for a perspective on the road ahead for the company, I'll turn the call over to my colleague and IZEA's Chairman and Chief Executive, Ted Murphy. Ted?

Thank you, Ryan. We have had to make a number of adjustments to our operations over the past few quarters. Q1 was rough as expected and Q2 will be a bit rough as well, but we believe there are positive indicators that point to a light at the end of the tunnel. From new clients and strategic initiatives to enhance software capabilities, there are a number of very exciting things happening at IZEA right now.

I want to take a moment to speak about the broader picture for IZEA in our industry. 12 years ago, I launched PayPerPost.com, the first marketplace that paid bloggers to create content for brands. That company later became IZEA, and we pioneered the development of the modern influencer marketing industry. That industry has thrived, but in doing so, it has become incredibly fragmented. There are hundreds of companies in the influencer marketing space alone and perhaps even more in the custom content space. The vast majority of companies in the influencer marketing space are executing programs with little or no technology in a traditional agency model. This traditional agency model still with waste, often lacks editorial control and governmental compliance and in void of the integrated measurements and optimization tools required to maximize return on client investment.

On the other hand, there are companies that build software platforms to help automate aspects of influencer marketing and content creation. These companies believe that technology is a long-term key to scalable programs and efficient marketing spend. The investment in technology is made with a conviction that both agencies and brands will eventually manage all their programs through an integrated technology platform rather than e-mails and spreadsheets, a phenomenon that has already taken place in online media buying. Technology companies are bearing the cost of building software and marketing and software solution in an industry that is still relatively young. Online display has more than a decade of industry development over Sponsored Social content. While more and more buyers are in the market for a technology solution every day, we have a long way to go as an industry.

I believe that our industry must be consolidated. Most of the companies investing in platform development aren't profitable and have been challenged to generate enough revenue to offset the cost of building a complete software set, or they have been forced to build a niche solution that doesn't address the full market need. Based on our knowledge, we believe the overwhelming majority of influencer marketing platforms generate very little annual revenue but they are marketed as the biggest and the best. The amount of noise in our channel is deafening as both marketers and creators have a difficult time separating the wheat from the chaff. I see this as both a tremendous challenge and an opportunity. We are all fighting for the same customers. We are all spending sales and marketing dollars to compete aggressively with each other. We are carrying the same overhead and administrative costs and, most importantly, investing significant engineering resources to build platforms that are trying to solve the exact, same customer problems.

We are very aware of the software landscape and have had the opportunity to review the software offered by many of our competitors. While every platform has strengths and weaknesses, it is very clear that teams are trying to build the same types of things in different ways. The utility of the end tool set will ultimately be similar in capabilities as will the challenges and costs associated with developing those capabilities. Building, maintaining and improving the software platform is expensive in general, but it gets more expensive when your platform is connected to other platforms that are constantly evolving. In the world of influencer and content marketing, the environment is relentless with ever-changing APIs, data sets and formats that require a refactoring of tools. On top of that, you are maintaining a dynamic marketplace where the inventory refreshment is daily due to requirements of the buyers.

The amount of wasted effort and money between the players in our space is significant. There is duplicative spending among competitors on things that don't deliver end customer value, and I believe it's the primary thing holding back the widespread adoption of platforms by marketers at agencies and brands alike. It is my belief that you will see meaningful shifts in our industry over the next 24 months. And as the only public company in our space, we have a unique platform to build upon. Our management team is excited by where our industry is going and our place in it. We believe that a company with a more robust software platform and expansive network of creators, superior customer service and efficient operations has an opportunity to capture a meaningful portion of spend in both influencer and content marketing.

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

(Operator Instructions) Our first question comes from the line of Jon Hickman from Ladenburg Thalmann.

Ted and Ryan, I don't know who wants to answer this, but could you elaborate a little bit on what's different in the demand side of your, like, industry from, say, 2 to 3 quarters ago? It just seems like -- I mean, you said something about competition. You said something about companies doing quarterly investments instead of annual. But is there a drop-off in demand for these -- for content marketing or influencer marketing? Or have people tried it and putting their dollars on the other places? Could you answer that question?

Yes, I mean, we are certainly seeing that our past models, which should have been consistent for years around conversion rates and timings of bookings and revenue, they're not holding true to what they were in the past. And there are certainly some contradicting indicators that we have out there right now. So things have definitely changed. At the same time, we had record pipeline in Q1 of 2018. We're up 46% year-to-date -- or I'm sorry, quarter-to-date in our opportunity pipeline here in Q2. But we are -- we also believe that we're suffering a little bit from slowdowns last year. So we did see a dip in new opportunity pipeline last year. It's kind of hard to say how much of that is rippling through this year versus how much of that is a change in our demand side and their purchasing patterns. But I think that the thing that we are excited about and bullish on is that we are getting more and more at-bats, and those customers that are closing are -- those deals are at all-time record, too. So the deal size continues to get larger, but it's definitely different composition right now. And that's something that we are working through and trying to address with our team because we think that the environment is changing, and we've got to react to that a bit.

Okay. So one other question. I don't know who wants to take this one. But as you project out the rest of this year, you, like last quarter, talked about $26 million to $28 million in revenues. Is that still -- or are you backing away from that? Are you reiterating that? Or neither of those.

Yes, I would say that right now, it's neither of those. We -- I think that we need a little bit more time here in Q2 to understand how this quarter is going to shake out for us and if those increases in -- that we saw in our pipeline in Q1 and actually in Q4 as well are going to flow through or if the conversion rates or time conversion is going to push out. But certainly here in Q1, we were off-paced from what we had hoped. Q2 is slower than expected as of right now, but there is a lot of opportunity out there at the same time.

Okay. And then could you talk about cash needs?

Yes, we can talk a little bit about cash needs. What are your specific questions there?

Well, I mean, you've got a couple of million in the bank and a $5 million line. Are you comfortable that, that will take you to cash flow breakeven sometime down the road?

I think that that's, again, a little bit difficult to say because we've got some parameters that are not in line with our previous models. We've got to kind of keep all options open to make sure that we remain in a good cash position. So that's something that we're continuing to monitor, and we've got to kind of adjust to how sales are falling.

Okay. Well, just so I understand, you said quarter-to-date, the pipeline is up 47%. But it's...

Up -- quarter-to-date, up 46%.

46%. But that's still slower than you had anticipated like a month ago when you did your Q4 call.

That is pipeline. That is new opportunity pipeline.

So the pipeline is good but...

The pipeline is growing. It's -- and it was up in Q4. It was up here in Q1. It's up in Q2, but we're not seeing that things are converting at the same speed and rate that they were historically.

Our next question comes from the line of [Mike Jeffrey].

My questions -- I have 3 questions and 1 suggestion if you would like to take my suggestion at the end. My first question is that when do you think that your company would be profitable?

I think that -- dovetailing off that last question from John, we're seeing a bunch of things that are not in line with our historical models. We are certainly still pushing towards that, but we also want to be -- we also want to make sure that we are investing in the right way and diversifying our revenue in the right way. So that profitability is sustainable.

But do you think it could be sometime this year or in 2019?

I really can't say it at this moment. I think that we've got to see how these models normalize and be able to get to a place where things are a little bit more predictable for us.

Okay. My second question is that last July, you had a plan to maximize shareholder value and it seems that you did not go through. Now what kind of plans do you have to maximize the shareholder value? Because the price of the stock has come down a lot from $7.85 last September to about $1.72 to today. And if you want to go further back, from over $100 6 years ago to $1.72 today. That shows that really, the management is not doing the right things. Otherwise, the price of the stock would be much higher. I would say management would be doing the right things if they -- if I see the price of IZEA stock is over $10. What do you say about that?

We can't control the stock price. The stock has had a lot of fluctuations over the years, both up and down. In terms of maximizing shareholder value, we're focused on building the best business that we possibly can. And we recognize that we are in a very fast-moving, highly dynamic industry that is constantly changing around us. So we have to adjust to those changes as a business, and it's frankly a very tough business. The team here, I think, is doing the best job to both operate the company in a way that is responsible and also try to build long-term shareholder value.

Because last month, you said that you are focused to build shareholder value. And it seems last month, the price of the stock has gone down. I'm not saying that you control the price of the stock, but if your company comes with a strong revenue and income profitability and so on, believe me, you don't have to control the price of the stock. The stock would grow much, much higher. Look at the other companies. When they come up with good quarterly report, a strong report, the price of the stock would go higher. And in your case, for the last 2 quarters, I feel -- as well as the other investors, they feel that it has been a disaster.

Yes. I will certainly say that it has been challenging, but I'll also note that last year was a record year for us. We had record revenue. We had our best EPS. We were able to deliver 2 quarters of EBITDA positive -- of being EBITDA positive, which was a year ahead of schedule. But again, the dynamics have changed around us, and we are doing our best to adjust to those things. But some of those changes are unavoidable, frankly, from our perspective. We are dealing with customers that had changes and challenges in their own business. And as those customers have become a more meaningful part of our business, when things happen to them, they directly affect us. So I'm proud of what we have -- what we had built. I'm proud of the consistent growth that we've been able to deliver. We have been focused on creating a profitable, sustainable company, but we also have to deal with the dynamics of the market and our customers and make adjustments based on that.

My other question is about the lawsuits that your company is having since last month. When I go to Yahoo and I look at -- I see a lot of law firms are suing your company since last month. What do you think about that? Do you think the lawsuits are useless, meaningless? Or do you think that you have to spend some money to defend yourself?

Yes, I mean, there will definitely be money that we'll have to allocate to defend ourselves. We're aware of only one lawsuit at this time even though you will see multiple announcements by multiple firms. It is one lawsuit, and we really can't comment any further on that.

Okay. And my last question is that how do you see IZEA, your company that you found, let's say, 5 years from now as far as the revenue and, let's say, profitability?

Yes. Again, we're looking at a very different model today than we've seen historically, and I think first things first for us is we've got to get back to a place where we are seeing the type of revenue growth that we expect and get to a place of profitable revenue growth. I can't give you a 5-year prediction right now. What I can say is that I adamantly believe that the influencer marketing space is robust. I believe that it is going to continue to grow. I believe that the content marketing space is going to continue to grow. I believe that we are uniquely positioned with our -- both our technology and our services to provide value to customers. I believe that we have the best-in-class technology solution. And I believe that ultimately, the concept of utilizing creators in a crowd-sourced fashion for content creation, for ideation, for sponsorship opportunities is going to be a big part of the future of marketing. And so the opportunity is vast, and we intend to continue to charge on strongly and be a dominant player in that space.

Okay. And the last thing that I'd like to discuss is that I just wanted to see that if you take good suggestions.

Yes, sure. We'll take suggestions.

Okay. Mr. Murphy, I really have lots of respect for you. And I feel that sometimes, the investors, they do have good suggestions. If you go to Yahoo website for IZEA under IZEA conversations, bulletin board, you see that some investors, they have made very good ideas, very good suggestions that, I think, it would enhance the price of IZEA stock and it would maximize shareholder value. If you get the time, I really appreciate because I read those -- and I feel -- I agree with them 100%, and I feel that you might like those suggestions. So if you go to Yahoo website under finance and then IZEA -- type IZEA and then go to conversations, you see the last 2, 3 weeks, let's say, that they have very different kind of very good suggestions that, I think, it could be very helpful to your company. If you get the chance, I think you should really read those. And once in a while, it's nice that since the investors, they want the best for their -- for your company. I think it would be a good idea if you feel that some of them are good. You just listen to them.

Thank you. I appreciate that, and we'll check that out.

(Operator Instructions) Our next question comes from the line of [Nick Sprenker] from [Rose Group].

So when I read the press release regarding the Unity Search tool, I found that extremely useful for your customers. And I'm just curious what kind of future enhancements you guys have in store for the software especially and related to optimized search, searching functionality because I think that will benefit your customers quite a bit.

Yes. We are very excited about Unity Search and the concept of discovery in general. That's something that we continue to put resources behind. We believe that being able to connect the right creator with the right marketer is incredibly important. And as our network has continued to grow, finding the right person by being able to utilize all the data that we're collecting on them is getting better and better. I still think that there is a tremendous amount of room for improvement in our platform and different ways to utilize the data that we're sitting on, and so we're going to continue to invest there. Another big part of the platform that we're focused on is workflow and splitting apart our workflow process to be able to allow for more dynamic types of content creation and collaboration between the marketers, the creators and, ultimately, AI and robots. We believe that AI is going to put -- play a big role in future content creation and editing and the general workflow. And so we're investing a lot in creating the infrastructure for that, that can be extensible to allow multiple types of creators and marketers to participate in a single piece of content and then distribute that content out.

Okay. Yes, I definitely think AI and machine learning are valuable especially when you're targeting certain markets so you can enhance who they're advertising to instead of just a specific advertisement to a group of people but maybe customizing the actual advertisements for each group.

Correct, yes.

Our next question comes from the line of [Nahul Sharma] from [CBI].

This is [Nahul], a retail investor. I had a question with respect to making this wonderful software available globally. So are there any plans to market it in different countries, not just being in North America?

So right now, we are -- IZEA operates in the U.S. and we also have IZEA Canada. We have done some experiments in the past with making the platform available to marketers in different countries but frankly just haven't had the resources to go after those markets the way that we would like to. And rather than diverting a small amount of resources and doing something that isn't maximized, we decided that the market here in the U.S., at least near term, is more than big enough for us. We had built the platforms so that it can be multilingual and one of the interests that we had around different types of cryptocurrencies, the ability to adopt those types of things and create a unified payment system. So we think that all those are opportunities in the future, but right now, with the resources that we have, we're focused on the U.S. and Canadian market. And I think there's a lot of opportunity in North America.

Cool. Just one more question. I mean, as you -- I saw one of your tweets. It posted that the use of machine -- so how you are planning to use the blockchain and cryptocurrency to your advantage. Just if you can provide a brief on that.

Yes, I mean, we -- I don't know if you joined our last call or heard our last call, but since that initial announcement around cryptocurrency mining earlier this year that, I mean, almost immediately after that, the legal and regulatory environment really got aggressive and it's changed pretty rapidly. So right now, we're not -- we put the mining software that we were developing on ice, and we really want to see kind of how the crypto markets evolve and how the regulatory environment evolves and get some clarity there before we would consider introducing crypto into IZEAx or any of our other platforms. There's just -- right now, there's just too much risk, and we need a little bit more clarity in order to be able to do that.

One last question. Are there any plans to partner with some other, like, vendors or providers? Like, as you said, you have (inaudible) the U.S. market. And are there any plans to partner with the software firms which (inaudible) you do to some other clients, something like Managed Services that you are already doing? Is there another way to partner and have other companies do the same thing for you?

It's -- for us, it's not as much about software companies as it is about ad agencies, PR agencies who essentially act as resellers of our software. So they license the platform from us, and then they run their influencer programs through our platform. And then they're charging their customers on the other side. So they're essentially acting as our network of resellers.

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.

Listen, thank you everybody for joining us this afternoon and for all the great questions during the Q&A. And as a further reminder, all of our Investor Relations information is available online on our website. That's www.izea.com/investors. Have a great rest of your Wednesday.

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