IZEA Worldwide Inc (IZEA) 2018 Q2 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to IZEA, Inc. Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ryan Schram. Thank you, you may begin.

Good afternoon, and welcome to IZEA's Q2 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 Chief Executive Officer, Ted Murphy. Thanks for being with us this afternoon. Earlier today, the company issued a press release with details pertaining to our second quarter 2018 performance. If you'd like to review those details, all of IZEA's investor information can be found on our Investor Relations website, izea.com/investors.

Before we begin, please take note of the safe harbor paragraph that appears at the end of the press release, covering the company's financial results. And 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. These statements are predictions based on our team's expectations as of today that are subject to inherent risks and uncertainties, and should not be unduly relied upon. Actual events, results or trends could differ materially from our forecast due to a number of factors, 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 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-Q available under SEC filings in the investor section of izea.com.

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

Thank you, Ryan, and good afternoon, everyone. IZEA reported second quarter 2018 revenue of $4.1 million compared to $5.7 million in the second quarter of 2017. Revenue from Managed Services, accounting for 97% of total revenue in the quarter, decreased 28% to $4 million in Q2 2018 compared to $5.6 million in Q2 2017. Lower revenue was the result of lower annual commitments from our larger annual customers, along with less sales and a decrease in smaller customers running short-term campaigns. Content Workflow, accounting for 2% of total revenue in the quarter, decreased 33% to $63,000 in Q2 2018 compared to $94,000 in Q2 2017. Bookings for Managed Services in Q2 2018 were $2.7 million compared to $5.4 million in Q2 2017. Revenue backlog at the end of the quarter was $9 million. Revenue backlog consists of $4.6 million in unbilled bookings for campaigns which have not yet started as well as unearned revenue of $4.4 million for campaigns that have been billed but are not yet complete.

Cost of revenue decreased $784,000 between the periods, primarily due to lower revenues in Q2 2018. Cost of revenue as a percentage of revenue improved to 47% in Q2 2018 compared to 48% in Q2 2017.

Our cost of revenue consists primarily of direct cost paid to our third-party creators, who provide the content and sponsorship services, and our internal personnel cost for those who are primarily responsible for the fulfillment of our obligations under our Managed Service contracts.

Although, our internal fulfillment costs have decreased 15% from approximately $540,000 in 2017 to $460,000 in 2018 due to a 17% reduction in departmental personnel year-over-year. Our internal fulfillment cost as a percentage of revenue increased to 11% in Q2 2018 compared to 9% in Q2 2017. This is primarily due to our fixed internal costs that do not fluctuate with revenue becoming a larger percentage of revenue when revenue decreases. Total cost and expenses were $5.8 million in Q2 2018 compared to $7.1 million in Q2 2017. Total cost and expenses largely decreased due to the lower cost of revenue, but also due to reductions in personnel costs and $231,000 reduction in our estimates for the future-contingent performance portion due on our acquisition liability related to ZenContent. Although, the total amount of cost and expenses are declining, as a percentage of revenue, they have increased from 125% in Q2 2017 to 142% in Q2 2018.

Net loss in the second quarter of 2018 was $1.6 million or negative $0.28 per share as compared to a net loss of $1.4 million or negative $0.25 per share in the prior year quarter. Adjusted EBITDA for the second quarter was a negative $1.5 million compared to a negative $840,000 during the prior year quarter.

As of June 30, 2018, we had $1.9 million in cash on hand and stockholder's equity of $2.3 million. Receivables at the end of the quarter were $2.8 million, and we had accessed approximately $845,000 on our $5 million credit facility With Bridge Bank.

We have been very busy following the end of our second quarter. On July 2, we completed a public offering, providing us with additional cash of approximately $3.1 million after financing commission and expenses. On July 26, we closed on acquisition of TapInfluence, with an initial payment of approximately $1.3 million in net cash and 1,150,000 shares of our common stock. We also paid $111,000 in cash and issued 98,765 shares of our common stock on July 30 as payment for the second annual installment payment due on our acquisition liability related to the purchase of ZenContent.

I would like to thank the entire IZEA team for their support, hard work and amazing accomplishments during my time as CFO of IZEA. I'm proud of what we've built here and know that the company will be in great hands with Michael Heald, as he steps into the role on August 15 as IZEA's new CFO, bringing fresh perspective and in-depth expertise from years of auditing and working with a variety of public and private companies.

I will now pass the discussion back over to Ryan to provide some additional commentary.

Thanks, LeAnn. And on behalf of all of team IZEA, we wish you nothing but the best. As we advised during our first quarter earnings call, Q2 results were expected to be lower than in prior years. However, our team has not stood still or become paralyzed by these challenges. Instead, they have dug deep, we have evaluated every facet of our historical efforts and looked inward on the things that they could've done better. And while the positive impact of those efforts have not been fully translated to bookings or revenue, we have evidence to believe that we are rebounding from the slump in top line performance. Let me explain why. If you're familiar with the broader category, you already know the influencer and content marketing space remains white-hot. Today, there are literally hundreds of companies in North America alone vying for market share. Whereas a few years ago, that number was less than 50. As a result, IZEA's go-to-market sales strategy and our resulting opportunity life cycle dynamics have evolved to reflect the fluid landscape.

On our last call, Ted mentioned in his remarks that we saw new opportunity pipeline grow year-over-year in Q1 2018. But at the same time, we saw bookings down year-over-year due to a decrease in close rates. Amongst our sales team, the consensus was that there was a disconnect between the positive momentum it felt like we had built in sales versus the results we were seeing. By developing a different look at our internal tracking data, we believe we now understand that correlation and the trailing effects of efforts in better detail.

For example, during the first 3 quarters of 2017, IZEA's new opportunity pipeline generated by our sales team was down year-over-year. But at the very same time, we saw opportunity close rates increase for those very same quarters, while also delivering bookings growth. If you look at those same quarters in isolation, it would appear that we were just getting significantly better at closing deals and growing the business. However, in retrospect, we now see that the total pipeline denominator was simply getting smaller during that same period of time. Not only was it getting smaller, it was becoming more concentrated, with fewer larger clients comprising the pipeline, which increased ultimately our risk. The deals that were being won were actually because of the sales effort put forward many months prior.

We also recognize that some of this could have stemmed from the team being distracted by our own strategic review process as well as the fundamental changes we made to the organization, as we restructured our operations on IZEA's path to profitability throughout the course of 2017.

But regardless of the reasons, every shareholder wants to know what did we learn from this period in the company's history and how can we avoid a similar scenario in the future. First, our sales management team now has a multiyear data model that strongly suggests that there is an 8- to 10-month trailing correlation between overall new opportunity pipeline trends and bookings.

This differs from our historical view of the correlation between pipeline and bookings, where we were primarily focused on pipeline and bookings within a singular quarter. Put simply, the sales pipeline effort put forth in a given quarter will be reflected over the next 3 quarters in the form of bookings, which ultimately convert to revenue. Case in point, in 2017, IZEA had 3 quarters of year-over-year declines in new opportunity pipeline. As a result, we had 3 quarters of year-over-year bookings decline beginning in the Q4 2017.

Second, it's important to acknowledge that access to larger brand-direct budgets can deliver a meaningful impact to IZEA's bottom line. But those impacts and investments can also have a prolonged consideration period or can entice a sales team to focus too much effort toward the largest opportunities instead of a broader spectrum of potential budget.

As a result, we have placed renewed emphasis on diverse client activities to build the top of our sales funnel, and it is working.

For investors who might be new to our story, IZEA defines new opportunity pipeline as the total dollar value of proposals presented to clients during a specific period.

Year-over-year, new opportunity pipeline growth began to return at the end of last year, and the positive momentum has continued in the first half of 2018. Simultaneously, we made staffing adjustments over the past 2 quarters to reduce overhead expenditure or rebalancing our go-to-market strategy to focus on diversifying our pipeline deal size. All told, it is our team's belief that IZEA will begin to see a positive effect and increasing quarter-over-quarter bookings beginning in Q3 of this year, with revenue recognition trailing those bookings.

Thank you, Ryan. We are indeed beginning to see a rebound. We have been aggressively filling the top of the funnel for 3 quarters now, and we are starting to see it flow through to purchase. From a sales perspective, July 2018 was the best July in the history of the company, with Managed Services bookings up 153% year-over-year.

New opportunity pipeline was up year-over-year, continuing the trend we have seen of positive year-over-year pipeline growth every month this year.

We believe the acquisition of TapInfluence will add meaningful gross billings and revenue to IZEA in the future. We expect that quarterly gross billings will grow sequentially in Q3 and Q4. Revenues are expected to trail this growth, and we will see the effect of low bookings from over Managed Services in Q4 of 2017 through Q2 of 2018, dragging down revenues in Q3 of 2018 and to a lesser extent, in Q4 of 2018.

While we believe gross billings will be up for this year, we now expect that revenues will be down for the year because of this trailing effect. We will have increased expenses from the TapInfluence acquisition in Q3, but expect our losses to taper dramatically in Q4. We are expecting to be EBITDA positive beginning in the first half of 2019, as we fully experience the operational efficiencies of removing duplicative resources in both organizations. As we look beyond this year, we envision both a recovery in Managed Services sales, combined with growth in SaaS and marketplace spend, as we continue to innovate on the product front. We have a number of major product improvements that we expect to release in the back half of 2018, some of which have been in development since early 2017. Many of these are firsts for our industry, and we believe they will have a positive impact on increasing SaaS sales and marketplace spend. SaaS is going to play an ever-increasing role in the future of our company. We see a large opportunity in this space and believe that both brands and agencies have a need for our software solution.

The technology, experience and people we acquired from TapInfluence will serve to accelerate development and enhance the end customer experience. On the technology integration side, we plan to migrate TapInfluence customers to the IZEAx platform over the coming 12 to 18 months. The migration of initial customers is scheduled to begin in about 6 months. As IZEAx 3.0 is [complete] released and the feature set in IZEAx eclipses all capabilities in the existing TapInfluence platform, TapInfluence customers will gain access to a variety of new features that have been on their wish list for quite some time. The amount of wasted effort and money between the players in our space is significant. There is duplicative spending among competitors, and those resources can be better applied and focused on a single entity. We can devote a higher percentage of overall spend towards servicing the end customer and growing the revenue base. Companies are spending sales and marketing dollars to compete aggressively with each other. They 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.

That doesn't make much sense, and we believe there is significant room to both grow top line and generate a profit at the same time. With our TapInfluence acquisition, we expect to significantly increase our revenue per employee, gross billings per employee and ultimately, EBITDA per employee, with many additional benefits to our organization and our customers.

We continue to have discussions with others in our space who see the opportunity in combining our efforts. This acquisition has also opened up new discussions with the platform players and large agencies in our space who are interested in partnering with companies who represent a more meaningful scale and strategic opportunities. We believe that scale matters, and we'll continue to explore new ways to gain more operational leverage and diversify our revenue streams.

As we look to the remainder of 2018, we have 4 goals: Close on the pipeline we have already established, continue pipeline development momentum and aggressively pursue new opportunities, deploy our new technologies and ensure a smooth acquisition transition.

Before we get to questions, I would like to give a special thanks to our outgoing CFO, LeAnn Hitchcock. LeAnn, you have been a tremendous IZEA team member, and you will be dearly missed. We appreciate all the long hours and hard work and thank you for your service and your friendship. Thank you for spending your time with us this afternoon.

I would now like to open the call for Q&A.

(Operator Instructions) Our first question comes from the line of Eric Des Lauriers from Craig-Hallum.

Congrats on closing the TapInfluence acquisition. I'm wondering if I could touch on something that Ryan spoke of. So in light of the increasing number of influencer marketing companies, I think Ryan said it's in the hundreds now. I'm wondering how you guys differentiate yourself when you're pitching to potential clients, both large and small.

Yes. The number that I said, it was actually for influencer and content marketing organizations that we're monitoring throughout North America. Really, what we find at a very high level, the key differentiators for IZEA being our, one, the scale that Ted mentioned. Really, no one has a marketplace with the depth and breadth that we have, and that's increasingly important especially when quantifiable quality is so foremost in the minds of our brand-marketing clients. Secondarily, the duality of our offering being both managed service and SaaS is very unique in the market. While many, many people claim to have some kind of technology, ultimately, we find in most of our competitive due diligence that those offerings are very limited or have very specific drawbacks that differentiate IZEA as the premier offering. Third, and I think equally as important, the huge rush towards the space happened perhaps as it became buzzy, and there was a lot of early-stage interest. But what ultimately happens in early-stage investments, as most people know, is that those get sorted out largely by reality and demand. So while they may have a flash bang effect on temporarily disrupting the market, we believe our position, having a fairly large sales staff, a very solid decade-plus reputation and a competitive offering I mentioned before, stands apart.

Okay, it's good to hear. I was wondering if I could dig in on that second point you made about duality. It seems, in the broader ad tech space, we're seeing more agencies and brands go away from managed services and self-service platforms or otherwise bringing their advertising in-house. To what degree are you guys seeing this trend in the influencer marketing space? And then as a follow-on, how might the acquisition of TapInfluence affect your business in light of this trend?

Great question. For us, you're absolutely right. We're seeing in the broader Fortune 1000 brand portfolio the move away from traditional agencies. And I think it's important to differentiate that from a managed service offering like IZEA has. What we've seen is that up to 1/3 of leading brands are trying to in-house some aspect of either their creation of content, creation of creative or management of media. And as a result, the traditional holding company approach for agencies has been disrupted as a result. You have those multiyear retainers, billing hourly has definitely decayed and those businesses are struggling as a result. What we've heard from our customers is that they're actually looking for a hybrid. They're looking for a technology-backed provider that can license software to them so that they can do certain executions of influencer and content marketing on their own. But then if resources are limited or templating is just simply too complex and they don't have that resource in place, they want to be able to have reasonable project management and strategy resources available to them vis-à-vis a managed service offering, and that's where our teams come in. So to answer the second part of your question regarding TapInfluence, this really, in our opinion, is triple accretive. There's the revenue aspect of it, the technology aspect and a talent aspect. We think that there is just a lot of complementary things that both companies were doing, frankly, that was a waste of duplicative effort, as Ted mentioned in his remarks. But at the same time, the ability to cross-sell and upsell different brand customers on those different services, being able to offer someone perhaps who was a TapInfluence licensee, the opportunity to bolt-on ad hoc managed services or Promoted Post offering is an immediate opportunity that we're very excited about. And then long term, being able to take the engineering resources and the intellectual property that IZEA required via the acquisition and really transforming the landscape for the future of what will be IZEAx in the combined entity is something that you'll hear more about from us in coming quarters.

Okay, that's great to hear. I was wondering if you could dig in just a little bit more on that, as it relates to TapInfluence and SaaS offering. Can you just give us sort of an overview of how that's different from managed services? Is it really just they have access to the TapInfluence platform and they can go on and sort of do their own self-service platform? Or just -- if you could help us understand how that sort of fits into the managed services versus in-house versus agency sort of dynamic, that'll be helpful.

Yes, this is Ted. The way that Tap operated was pretty different from the way that IZEA operates. So IZEA had IZEAx as kind of our backbone technology, and we've had a small group of customers who have been licensing that technology in a SaaS capacity and also, spending some money through the marketplace. But the majority of our revenue has historically come from Managed Services. Tap is the exact inverse of that. All their customers are paying a monthly SaaS fee to them, and then they also are getting a marketplace fee as well. So the brands are actually coming in, they're using the platform themselves, they're managing the campaigns themselves, and Tap is really the mechanism to allow those transactions to happen.

Okay, that makes sense. Appreciate the clarity there. Final question for me. With TapInfluence being a SaaS company and basically, license revenues and the little bit of managed services that they do, do seem to be recognized on a net basis. Is it reasonable to expect that Tap's gross margins will be north of 90%?

We are still in the process of going through and auditing everything, and we'll be putting out the financial information for Tap in the coming months. But when you look at the revenue, you have really 2 buckets. One, you have SaaS revenue, which is a license fee, and there are no cost of goods against that outside of developing the platform and maintaining the technology. And then you have the marketplace fee, and that percentage is anywhere between 15% and 20%. And the way that we account for that or will account for that is on a net basis. So the marketplace spend will show up in our gross billings, and then the net revenue from that will show up on the revenue line.

Okay. And the number that was decided for TapInfluence's trailing revenue, did that have marketplace fees on a net basis? Or was that gross?

That was a net basis. So you saw 2 numbers there. You saw the number that was the total billings in 2017, and then you saw a revenue number which was the net.

Our next question comes from the line of Jon Hickman from Ladenburg Thalmann.

Just one question on the number you quoted for the best July ever. You said bookings were up year-over-year 153%? Was that...

I believe that's the number, yes.

Okay, my question is, does that include anything from Tap?

No, that is strictly Managed Services. That does not include anything from the Tap acquisition.

Okay. And then in the past, you've given us some indication of bookings. You said that you expect year-over-year revenues to be down this year. Any clarity on bookings for the year?

We stopped reporting overall bookings in Q1. We are going to still continue to share managed service bookings through the end of this year, and we shared them for this quarter. We will continue to share those, but we're not giving any sort of guidance on bookings right now. And part of that too is just making sure that -- we want to make sure that everything is accounted properly for -- on the Tap side.

(Operator Instructions) Our next question comes from the line of [Mike Jeffrey], private investor.

My question is for Mr. Murphy. Mr. Murphy, first of all, I would like to thank you for the acquisition of TapInfluence back in July. And in addition to that, I noticed that you have purchased 100,000 shares of your stock as well as the other insider bought over 500,000, which I think you have done a good job by doing that, because that would give the investors’ confidence that insiders are buying. Do you have any plan for you or the insiders to purchase more of your shares in the near future?

I can't speak for all of our insiders. I will say that, for me personally, I've purchased stock every year and haven't sold any stock since inception. So I believe that there will likely be purchases in the future, but I can't say as to when or how much.

Okay. And is it possible that you could encourage your employee to purchase...

Are you there? I'm sorry, did we drop the line?

Gentlemen, the caller is no longer in queue. Our next question comes from the line of George Kafkarkou, a private investor.

Forgive me if I missed it. Did you guys give guidance for overall revenue including TapInfluence? If so, what is that, please?

No, we haven't given any sort of guidance for revenue or overall revenue. We need to get on the other side of the analysis of TapInfluence and also get, I think, a little bit more comfortable on this rebound before we're going to give additional updates on revenue moving forward.

Well, okay. If I understood the call properly, if I heard properly, it seems like things are being turned around. July was the biggest July ever. So how do you guys think about forward trajectories? I mean, yes, help me with that, please?

Yes, I think that we're starting to see some momentum. It feels like that we have reversed the trajectory in that bookings are heading in the right direction. We've had a number of notable wins here in the first 6 weeks of this quarter, and some of those are meaningful in size and also the type of customer, large organizations that are new to the company, and we're pretty excited about that. So we feel like the momentum is building on the Managed Services side, the core business pre-Tap. But we are also very, very excited about the synergies that have come because of Tap and specifically, the opportunities on the SaaS side of the business. Moving forward, you're going to hear us talking a lot more about SaaS, you're going to hear us talking a lot more about marketplace, because those are the things that we believe give us operational leverage, that helps to diversify our revenue, gives us more of a recurring revenue stream. And so we're investing a lot of time and resources in building that part of the business. To the question that we got earlier about what's happening with brands and agencies, we are seeing that more and more brands are taking these things in-house, that they've developed their own influencer marketing team. We've also seen that the agencies, frankly, are getting much more sophisticated and understand that they need software in order to run these things at scale. So we think that this space is kind of coming into the age of automation. It's coming into an age of bigger spends and the need for more sophisticated software. And what we believe we've built is an enterprise-class system to serve those customers. And we believe that through software, we're going to be able to get much, much stronger relationships with our clients and much more predictability in our own revenue and bookings.

Okay. And if I look at how the market values IZEA today, the valuation is about $12 million. I'm thinking that's 50% or less of what I would expect the forward revenues to be for the year. I'll be -- I mean, just as a -- is that a crazy thought?

Again, I can't give any sort of guidance on revenue, but I do agree with you that there seems to be a pretty steep discount to the revenue, especially as we look at SaaS and marketplace revenue moving forward and the types of multiples that are afforded other public companies in this space. Even on -- even for an agency model, when you look at the agency holding companies, you're typically talking about 1 to 2x revenue multiples on those types of organizations, and we're trading at a fraction of that right now.

One last question. It wasn't that long ago when I think the company mentioned that they were approached with an offer to be acquired. Is that offer still on the table?

We spoke about that earlier in the year, I think, in January, and that was in Q1 of 2017 that I think we talked about that. So that has not been the focus. We have more been focusing on growing the business and looking at opportunities to consolidate the other types of companies in this space.

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

I'd like to thank everybody for joining us, and as always, we invite you to review all of our investor relations information on our website, that's izea.com/investors. Thanks, and have a great rest of your evening.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for participation, and have a wonderful day.