U.S. Markets closed

Edited Transcript of INUV earnings conference call or presentation 14-Aug-19 8:30pm GMT

Q2 2019 Inuvo Inc Earnings Call

CLEARWATER Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Inuvo Inc earnings conference call or presentation Wednesday, August 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Richard K. Howe

Inuvo, Inc. - Executive Chairman & CEO

* Wallace D. Ruiz

Inuvo, Inc. - CFO & Secretary

================================================================================

Conference Call Participants

================================================================================

* Eric Martinuzzi

Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst

* William Tennent Gibson

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Valter Pinto;KCSA Strategic Communications;Managing Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Inuvo 2019 Second Quarter Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Valter Pinto, Managing Director of KCSA Strategic Communications. Please go ahead, sir.

--------------------------------------------------------------------------------

Valter Pinto;KCSA Strategic Communications;Managing Director, [2]

--------------------------------------------------------------------------------

Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today for the Inuvo second quarter 2019 shareholder update conference call. Today, Inuvo's Chief Executive Officer, Richard Howe; and Chief Financial Officer, Wally Ruiz, will be our presenters.

Before we begin, I'm going to review the company's safe harbor statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events, and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Inuvo are as such a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by Inuvo at this time. In addition, other risks are more fully described in Inuvo's public filings with the U.S. Securities and Exchange Commission which can be reviewed at sec.gov.

With that, I'd now like to turn the call over to CEO, Richard Howe.

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [3]

--------------------------------------------------------------------------------

Thank you, Valter, and thanks, everyone for joining us today. For the 3 months ended June 30, 2019, we delivered $14 million in revenue compared to $15.5 million and $19 million for the 3 months ended March 31, 2019 and June 30, 2018, respectively. For the 6 months ended June 30, 2019, we reported revenue of $29.5 million compared to $39.5 million for the 6 months ended June 30, 2018. Overall, gross margins were 59.6% for the second quarter.

Lower year-over-year revenues have been, in part, the result of the disruption associated with the merger which was terminated in June 2019, a planned reduction in support for certain products, and as it relates to the first and second quarters of 2019, seasonality; wherein the Q2 sequential decline has averaged about 6% over the prior 3 fiscal years. Given these issues, we realized that this quarter is not indicative of the larger opportunity we have in front of us, which I'll explain later in my comments.

Let me now touch briefly on the impacts associated with the terminated merger and the defocusing of certain products.

In total, between the time we first started merger talks and the termination of the agreement, we had incurred roughly $1.3 million in expenses and close to a year of time and energy. The majority of the revenue impact associated with the merger can be attributed to the ValidClick business. While we cannot quantify this impact, the core value proposition of the combined companies involved the integration of the IntentKey with certain e-commerce technology. And this focused shift, along with merger planning, had an impact on our core business. While the parties involved in the transaction were all disappointed, one thing did become clear as we conducted the roadshows for the deal. The IntentKey, which was the foundation of the combined companies' offering, resonated well with investors and analysts, but we recognized its disruptive and transformational merits. We have made tremendous progress in this area of the business, and I will share more about that shortly.

As part of the termination, we negotiated a settlement that included the forgiveness of about $1.1 million in existing loans, approximately $125,000 in cash to cover certain legal obligations, and the acquisition of a business that has now been integrated into the IntentKey, where it has a current revenue run rate of roughly $50,000 per month. I would direct you to the website retargeter.com for additional information about the acquired business.

Now that this acquired business can benefit from the audience-building capabilities of the IntentKey platform, we expect the client that came with that acquisition to grow, while also delivering strong gross margins. Our shareholders will recall that we had discussed in early 2018 a reduced support for a product that has generated $11.3 million in revenue in fiscal year 2017. At that time, we explained the market-based rationale for this reduced support, and I would defer you to our Q1 2018 call transcript for additional detail. That product generated $3.7 million of revenue in the first half of 2018. It delivered $1.2 million in the same period of 2019. And thus, contributed nearly $2.5 million of the year-over-year revenue decline in the first half and $963,000 in the second quarter, specifically.

We had an adjusted EBITDA loss of roughly $850,000 in the second quarter of 2019, in part, the result of investments we have been making within the IntentKey data platform, and partly the result of the merger and product-related changes we just covered.

While we do not segment our revenue, for the purpose of our discussion today, I will disclose that overall Q2 2019 IntentKey revenue was $2 million. However, the media component of that business where our IntentKey data platform is integrated with AppNexus, delivered over $900,000 of that revenue in June alone, having risen from roughly $95,000 in January. Overall, the IntentKey platform was 24% of the June 2019 revenue. This media component of the business is the culmination of almost 2 years' worth of hard work and investments that began in Q2 2017, shortly after we acquired the core artificial intelligence technology that underpins the platform, right up through Q1 2019 when we announced the integration of the IntentKey into AppNexus, the largest open marketplace for dealer advertising.

Since that time, we have proved quantifiably through over 26 published case studies covering multiple engagements across numerous verticals, the differentiating power of the IntentKey's anonymous online audience-building capability. These studies are available at our website. Every marketer on the planet needs to identify and target their audiences online. A cornerstone of their ability to do so resides in the data that gets used to isolate those audiences. Modern data sources and technologies available to help marketers achieve this core objective they have, has been among the slowest evolving components of the digital ecosystem. The information typically being used to build audiences online today has limitations that result from the manner in which that data is both compiled and delivered online. For marketers, this often means their data is potentially outdated, limited to broad categories, subject to privacy concerns, and generally overused. The result, stagnant conversion rates across the board. These were the problem the IntentKey was designed to remedy, and the current growth rate, client base and performance statistics suggest strongly that our vision to create a differentiated, transformational and privacy-compliant media product for the 21st century is being achieved by delivering converting audiences for notable clients.

Year-over-year through July 2019, we have seen a greater than 200% increase in the number of RFPs the IntentKey is competing for, and a win rate on those RFPs that has gone from 38% in 2018 to over 55% in 2019 through July. Our largest current client, a major insurance provider, is spending on average about $150,000 per month with the IntentKey. They spent $400,000 in June. As we discussed in the past, this business model tends to scale within accounts. We typically get a small starting test budget, then as we perform for the client, that budget gets revised upwards. It is a land and expand strategy within a market where the expansion can be significant due to the size of the industry. The advertising budget of the client just mentioned is many hundreds of millions of dollars annually.

What is critical to appreciate is that we are the only company that has the anonymous information we use to build these targetable audiences for our clients. This gives us a tremendous competitive advantage and speaks to why our deal win rates continue to rise as we market our IntentKey solution more broadly through direct sales.

It's also important to mention that we do not sell our information to third parties. Our solution is a service powered by the IntentKey proprietary information. And because of the way our technology rationalizes intent, unlike most other marketing information suppliers, we do not ingest any third party consumer information when we build these audiences. This is the power of our artificial intelligence.

We believe the IntentKey is literally a paradigm shift in conventional data platform technologies that provides the means for marketers to build audiences at a granularity that is just simply unavailable within conventional data sources. In this regard, it removes the data handcuffs that have constrained marketers for decades. This is technology on par with products like Siri or Alexa, only applied to content, not speech.

Not only was June the largest revenue month ever for the IntentKey, it also delivered its highest gross margin, which was approximately 40%. This is now a business that can be scaled. Strategically, we have been aligning resources and capital expenditures towards the IntentKey. At its current size, the business continues to burn cash monthly, with its 2 largest expenses being the resources to support the business and the information technology infrastructure required to update information. As current growth pace, the business is expected to contribute to cash flow in 2020 and be the major contributor to cash flow thereafter.

The core ValidClick Platform will remain an important part of our company with the main objective to be a stable cash flow generator for the enterprise serving 3 major clients in what remains the largest single Ad Spend category, search. Given this industry's disproportionate size within media, we continue to see opportunities here that we will pursue on a case-by-case basis.

In July, we've successfully raised $4.4 million after underwriting fees and expenses to fund working capital, including the funding of the IntentKey's growth, principally through the hiring of additional sales professionals. The funding came from the sale of common stock with participation from insiders, existing shareholders and new notable technology investors.

With that, I will now turn the call to Wally for a more detailed reporting of financial performance in the quarter.

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [4]

--------------------------------------------------------------------------------

Thank you, Rich. Good afternoon, everyone. I will recap the financial results of our second quarter.

As mentioned, Inuvo reported revenue of $14 million for the quarter ended June 30, 2019, and $29.5 million for the first half ended June 30. This compares to $19 million reported in the second quarter of last year and $39.5 million reported in the first half of the previous year.

The revenue decrease of approximately $5 million in the second quarter and $10 million in the first half is primarily due to the ValidClick business, where the company was slow to adapt to fluctuations in pricing because of the disruption associated with the merger transaction that was pending during the quarter. Additionally, as mentioned, we made a decision last year for market reasons to reduce emphasis on the supply side of the business so we could focus IntentKey resources on the demand or advertiser side, where the IntentKey data platform solution has a considerable market advantage. This resulted in a reduction of revenue in the current year compared to last year of $963,000 in the second quarter compared to the same quarter last year, and $2.5 million in the first half of the current year compared to last year.

Gross margins decreased in the second quarter to 59.6% compared to 63.2% in the same quarter last year, due primarily to the lower revenue just described, yet not realizing an equivalent lower cost.

Overall, operating expenses are comprised of marketing costs, compensation expense and selling, general and administrative expense. Operating expenses were $2.3 million lower in the second quarter of 2019 compared to the prior year, that is $10.5 million in the second quarter of this year versus $12.8 million in the same quarter last year.

ValidClick revenue is generated predominantly from ads served to websites, and as such, has a small cost of revenue associated with it as the expense is mostly marketing or traffic acquisition costs. The marketing costs were 22.7% lower in the second quarter of this year compared to the prior year due to lower revenue. Compensation expense was 25.3% lower in the second quarter this year compared to the prior year due to lower payroll, stock-based compensation and incentive pay. The head count at the end of June was 62 compared to 65 at June of last year.

Selling, general and administrative expense increased 11.6% in the second quarter this year compared to the prior year due to $386,000 of merger-related costs that were partially offset by lower IT costs and lower travel and entertainment expense this year.

Interest income was $149,000 in the second quarter of 2019 compared to an expense of $95,000 in the same quarter last year. The reason for having interest income this year was the reversal of the derivative liability of $333,000 recognized in the first quarter of this year. The derivative liability arose from the convertible feature of notes we issued in March of this year. The liability became 0 in the second quarter as our stock price fell below the conversion price.

Our balance sheet at June 30, 2019 had cash and cash equivalents of $995,000, an outstanding bank debt of $2.9 million and notes of $2.5 million. As a result of the termination of the merger agreement, the acquirer was obligated to pay Inuvo a termination fee of $2.8 million. The acquirer and Inuvo agreed to settle the fee by: First, extinguishing the $1 million convertible note due to the acquirer in November 2021. Two, by transferring the assets and customers of their customer retargeting business to Inuvo. And three, by paying $125,000 to settle shareholder class action suits that arose from the merger agreement.

At June 30, we recorded a receivable of $2.8 million and fully reserved it pending full receipt of the above settled items -- settlement items. Subsequent to June 30, we obtained the extinguishment of the $1 million note and most of the assets of the retargeting business. We expect to receive the entire agreed settlement amount and items before the end of the third quarter, at which time, the receivable will be satisfied and the reserve will be reversed.

In addition, to address our capital needs, we sold $15.8 million of our common stock in mid-July, raising $4.7 million. As mentioned, these funds will be principally focused on the IntentKey business, where we have an investment plan designed to accelerate growth. As Rich pointed out in his comments, since the completion of the AppNexus integration, revenue in this part of the business has accelerated.

As we begin hiring additional sales personnel and they proceed through their ramp-up period, we expect to burn an average of $100,000 per month through the third quarter of 2020 when the gross margins on the new IntentKey revenue begin to outpace the lag between the sales costs and productivity. We expect ValidClick revenue to be stable at current levels. We believe the capital raised, along with the current bank credit, will provide us with adequate resources to execute these plans.

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

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [5]

--------------------------------------------------------------------------------

Thanks, Wally. With the merger now behind us, we have returned to our primary focus, which is to build a world-class client base around the disruptive and transformational artificial intelligence data platform that is the IntentKey. Within this product line, revenue has never been stronger, margins have never been better, RFP win rates continue to climb, and performance for clients continues to exceed benchmarks.

We believe the IntentKey Platform to be a unique and powerful data product built for the 21st century, and anticipate it will give Inuvo the ability to challenge existing marketing information and service providers. Our strategic plan will focus resources and investments towards scaling the IntentKey while ensuring a stable ValidClick business where opportunities are evaluated on a case-by-case basis.

With that, I'd like to now turn the call over to the operator for questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question today comes from William Gibson with Roth Capital Partners.

--------------------------------------------------------------------------------

William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

--------------------------------------------------------------------------------

Wanted to delve a little bit more into the hiring process on new salespeople. Has anyone new been hired yet? And what do you think the time line of getting each person is?

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [3]

--------------------------------------------------------------------------------

Yes, thanks, Bill. No. The answer is no new hires in our sales force have occurred. Of course, we only just closed the capital raise here over the last few weeks, and the plan was to hire 1 in August, and then there's a series of hires between August of this year and mid-2020 to the tune of roughly 14 salespeople. That is the plan.

--------------------------------------------------------------------------------

William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

--------------------------------------------------------------------------------

And is there any way to take the progress on IntentKey to leverage ValidClick at all?

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [5]

--------------------------------------------------------------------------------

Yes. But we would rather focus resources towards the IntentKey and the market that it's in, i.e., its better use of resources with a higher growth potential and higher margin potential. So we can't do everything, so we're focused there.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And our next question comes from Eric Martinuzzi with Lake Street Capital.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [7]

--------------------------------------------------------------------------------

I know it was disappointing for all parties to not be able to get the ConversionPoint transaction finished. But at least we've got clarity, so let's look forward from here. I wanted to specifically dwell on IntentKey for a moment. Certainly, given the strength that you saw in June, it's safe to say that IntentKey was up second quarter versus first quarter. Did you -- I know you're not commenting forward-looking, but did you disclose the IntentKey contribution in the first quarter or in the first 6 months?

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [8]

--------------------------------------------------------------------------------

I think I said it did $2 million of the $14 million that we did in the second quarter. We didn't disclose what that number was in Q1, but it was materially lower. I also said that the January number for the media piece was $95,000 and the June media piece was $900,000. So you can see the kind of massive growth rate that occurs there. With that said, July and August tend to be weaker months, and we are seeing that. So I don't see a $900,000 July, but it's not far off, and so we kind of expect July and August to be a little bit lower on that business simply because of the seasonality because it was summer, and then it should bump back up and it's going to rise from there again hopefully on the kind of growth rate we're expecting.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [9]

--------------------------------------------------------------------------------

Yes. Well, you kind of answered my next question which was you do, in fact, expect that part of the business to be up in Q3 versus Q2, is that correct?

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [10]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [11]

--------------------------------------------------------------------------------

Okay. The head count, you mentioned the head count in your press release that included both full and part-time employees. Just wondering what the comparable number was at December 31? I think your 10-K says 60, but that was just the full-time. How many full and part-time was it at the end of December?

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [12]

--------------------------------------------------------------------------------

Wally, do you know those numbers? I don't know those numbers off the top of my head.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [13]

--------------------------------------------------------------------------------

Well, maybe if you could just give me the full-time for June, strip out the part-time.

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [14]

--------------------------------------------------------------------------------

Wally?

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [15]

--------------------------------------------------------------------------------

I'm sorry. I had it on mute. June. You're talking about June of last year?

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [16]

--------------------------------------------------------------------------------

No, I was -- what I was trying to get was the comparable full-time employees December of '18 versus June of 2019.

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [17]

--------------------------------------------------------------------------------

Oh, okay. So at June of this year, we had a total of 62 employees, of which 58 were full-time. And do you have the December number, or do you need that?

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [18]

--------------------------------------------------------------------------------

Yes. I got the December number from the K. It says [60] full-time in the K. Okay. And then I wanted to shift over. My next question has to do with the -- your commentary about breakeven. We talked about getting to breakeven. I wanted to make sure I understood it. Your commentary about Q3 of 2020, was that -- you expect the business in its entirety to be -- to break through to cash flow-positive by Q3 of '20? Or is that a comment specific to inter click -- sorry, IntentKey?

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [19]

--------------------------------------------------------------------------------

No -- overall.

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [20]

--------------------------------------------------------------------------------

We were talking about -- yes.

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [21]

--------------------------------------------------------------------------------

Sorry, Wally.

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [22]

--------------------------------------------------------------------------------

Yes. Company overall.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [23]

--------------------------------------------------------------------------------

Overall business by Q3 of 2020. And next question would be, you did the raise in July, so can you give me a pro forma cash number and a pro forma debt number for July 31, Wally?

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [24]

--------------------------------------------------------------------------------

Sure. So yes, where we were is -- 1 second -- so the debt -- the notes were -- at July, were $1.5 million. And the bank debt was approximately $3.5 million. And what was the other question? I'm sorry.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [25]

--------------------------------------------------------------------------------

I was looking for the pro forma cash kind of post the raise, and net cash plus the cash you had before. But if you have the cash number for July 31.

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [26]

--------------------------------------------------------------------------------

Yes. I don't have the exact number here, but it was about $2.5 million.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [27]

--------------------------------------------------------------------------------

Okay. So pro forma, we got $2.5 million cash and roughly $5 million of debt, and the assumption here is that $2.5 million takes you through Q3 of 2020, is that correct?

--------------------------------------------------------------------------------

Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [28]

--------------------------------------------------------------------------------

That cash with the operating -- with what we were able to do through operations, yes. And our credit line, yes.

--------------------------------------------------------------------------------

Eric Martinuzzi, Lake Street Capital Markets, LLC, Research Division - Head of Research & Senior Research Analyst [29]

--------------------------------------------------------------------------------

Okay. And then lastly, this really -- that is exciting, the momentum that you're seeing in IntentKey. I know one of the appealing parts of the merger -- the acquisition that didn't go through was the ability to get the word out quicker. Are there other things you can do besides hiring of direct sales reps, Rich, to get the word out on IntentKey and what it can do for brands and agencies?

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [30]

--------------------------------------------------------------------------------

The answer to that is yes. We have -- as a result of our capital constraints, Eric, really not done any significant marketing of the IntentKey itself. And the weird thing about that is we believe we're one of the best audience-building companies in the planet, but we haven't spent any money ourselves simply because we didn't have it. So we do need to get ourselves out there, spend more time at events where people who could use our technology get exposure to it. Because obviously, what we're seeing in the field through our salespeople is we're winning business at a pretty nice rate when we get in the room and we show people what it is that we have. So we've got to do more of that, not just through direct sales, but through our own marketing publication, et cetera. Get the word out. We're not known.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And it appears there are no further questions in the queue at this time. Mr. Howe, I'd like to turn things back to you for any closing or additional remarks.

--------------------------------------------------------------------------------

Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [32]

--------------------------------------------------------------------------------

All right. Thank you, operator. And I'd like to thank everybody who joined us on today's call, and we appreciate your continued interest, and look forward to reporting our Q3 results some time in November.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

And this does conclude today's call. Thank you so much for your participation. You may now disconnect.