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Edited Transcript of INUV.A earnings conference call or presentation 11-Feb-21 9:30pm GMT

·35 min read

Q4 2020 Inuvo Inc Earnings Call CLEARWATER Feb 11, 2021 (Thomson StreetEvents) -- Edited Transcript of Inuvo Inc earnings conference call or presentation Thursday, February 11, 2021 at 9:30:00pm 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 ================================================================================ * Brian David Kinstlinger Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst * Dillon Griffin Heslin ROTH Capital Partners, LLC, Research Division - Research Associate * Valter Pinto ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Inuvo, Inc. 2020 Year-end and Fourth Quarter Financial 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. -------------------------------------------------------------------------------- Valter Pinto, [2] -------------------------------------------------------------------------------- Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today for the Inuvo Fourth Quarter and Full Year 2020 Shareholder Update Call. Today, Inuvo's Chief Executive Officer, Richard Howe; and Chief Financial Officer, Wally Ruiz, will be your presenters on the call. I'd like to start by letting listeners know that as of today, another consequence of the COVID-19 pandemic, our office in San Jose, California remains closed. In our Little Rock facility, we continue to rotate small groups in and out of the office on a voluntary basis, in a manner that permits the potential risk of infection through interaction with colleagues. I'd also like to remind our shareholders that we anticipate filing the 10-K with the Securities and Exchange Commission this evening. 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 would now like to turn the call over to CEO, Richard Howe. -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Valter, and thanks, everyone, for joining us this afternoon. For the 3 months ended December 31, 2020, we delivered roughly $12.9 million of revenue, which was up 40% sequentially, and yet another strong quarterly indicator following Q3's 21% sequential growth that the business must continue to recover following the impacts of COVID-19, which for Inuvo, hit us at a low point in May of the year. Of that $12.9 million, ValidClick delivered $9.3 million, which was an increase of 48.5% sequentially, and the IntentKey delivered $3.6 million, which was an increase of 22% sequentially. ValidClick was still down 40% year-over-year in the quarter. However, the IntentKey was up significantly at 34% year-over-year in the fourth quarter. For the full year, the company delivered $44.6 million, which is down roughly 27% year-over-year. But as we've mentioned in the past, the ValidClick business, which contributed roughly $34.2 million of the annual revenue in 2020 was hardest hit by COVID-19. But as can be seen from the third quarter and fourth quarter trajectories in 2020, has been recovering strongly. And barring any unforeseen additional COVID issues in 2021, we would expect to be roughly back in that business to its pre-COVID 2019 revenue run rate sometime in 2021. IntentKey delivered $10.4 million of revenue in the year, growing 22% year-over-year despite COVID. And we would expect this product line to continue its double-digit growth rates overall into 2021. So the IntentKey in 2020, we believe COVID effectively constrained the growth rate of the product. Both of our product lines serve the marketing and advertising industry. These are pockets -- excuse me, there are pockets within this industry, notably like insurance or home refinancing, that have continued to do well in spite of COVID, and then there's others like travel and entertainment that have lagged. We expect to return to a more predictable market sometime in the second half of 2021 after the vaccines find their way into the population. ValidClick gross profit after traffic acquisition costs was down roughly 35% in 2020. And this is a consequence of the COVID impact on the revenue from that product line. However, the IntentKey gross profit was up almost 90% in 2020. And this is a reflection of the steady increase in gross margins that have occurred throughout the year in this product line. Adjusted EBITDA in the fourth quarter of 2020 was approximately $340,000 and for the full year was a loss of roughly $2.4 million. Now the ValidClick business has historically been a strong contributor to cash flow. And it is in a rare category of marketing and advertising business models where the risk of collections is relatively low and the majority of the payables in the business go out after receivables are collected. The business is actually up over 100% in December when compared to its low point of May in the 2020 year. Most importantly, the primary relationships within the business, which are with Google and Yahoo are secure, with one of them having been renewed in 2020. And the other is in the final signatures of renewal process as we speak. For ValidClick, COVID really has offered the company opportunity to rethink both the go-to-market and the revenue concentration for the business while going through COVID in 2020. And so that we could design a better business to come into 2021 with a business better focused maybe on the future as opposed to the past. Consequently, we have increased our direct marketing capability within the business, which in turn has provided greater control over our traffic acquisition, has allowed us to have a tighter integration with our publishing platform and we believe positions the business well as it continues to recover to do so at higher margins. Revenue mix within the business has, by design, changed dramatically in 2020 and will continue to change into 2021. As of December 2020, revenue generated within ValidClick was roughly 1/3 from each of Google, Yahoo and then 1/3 from a collection of other demand sources. Now this compares to December 2019, where Yahoo was 70% of the revenue of the product line. So this represents quite a significant and we believe a positive diversification change in this business, again, designed to put the business in a position where it can scale and scale at higher margins. In 2021 and to ensure that these strategies are executed on, we have assigned our Chief Operating Officer a more direct day-to-day role in the activities of the business and its important partnerships. And so that will be one of his primary responsibilities in this year. The market for the services of this business measures in the tens of billions of dollars annually. And as a result, we've never not believed that there was plenty of market share here or no issues with respect to the business's ability to actually scale and ultimately return and to pass its pre-COVID cash contributions to the enterprise. IntentKey has continued to deliver outstanding results for clients throughout 2020. We now know in head-to-head tests against the competition, we are likely to win. Our job really now is to continue building out a world-class sales and account management team around what is truly a unique and proprietary product. The reason we win is because our AI creates audiences in near real time that only we know exist, and therefore, we have an ability to message those audiences on behalf of our clients before our competitors can. And this results in better performance for our clients. We ran 251 campaigns for clients in 2020, with approximately 40% of those campaigns coming from new business within the year. In the fourth quarter, we exceeded our clients' goals on campaigns by roughly 36%. Now for the year, we exceeded client goals by 46% on average. Now since these goals our clients give us are likely based on the performance of our competitors, these accomplishments are really a proxy for how much better the IntentKey is versus that competition. Throughout the 2020 year, the sales team closed many new brands across a variety of industry verticals, which itself is a testament to the technology's ability to identify and reach audiences, regardless of the product or service being offered by that client. With the launch of our software-as-a-service version of the platform in 2021, we significantly expanded the market size for the IntentKey by allowing clients who do not require a fully managed service to adopt the core differentiating components of this platform, which are really the AI modeling and data components. Coming out of 2020, we now have new clients in retail, nonprofit, automotive, casinos, pharmaceuticals and tourism. We did source a record number of RFPs in the third and fourth quarters of 2020. And the pipeline, thus far in 2021, looks healthy. Now COVID impact remains unknown to us. But typically, the first quarter of a new year is our slowest quarter as marketers tend to reassess their budgets for the year in that quarter. Now since we've not gone through a quarter where we have a business cycle combined with lagging the impacts of a pandemic, we don't really know how this will impact the distribution of client media spend throughout the year. You will recall that COVID's impact last year for Inuvo really began in April and May of the second quarter. And as a result, we really have no past experience beyond that to guide us here. Technically, we made a number of major advancements in 2020, and we believe that this positions us well and was designed to position us well for 2021 and then beyond. The first of these advancements was the launch of our real-time solution. Now while our AI was always able to identify audiences quickly, the infrastructure that supports that AI and the delivery of our clients' ads was not. So what we had to do was we had to significantly improve this connection between the hardware technology and the software technology. And I'm pleased to report that we can now process up to a staggering 100 billion transactions per day and have the capability to actually act on in-market audiences within 5 minutes of the AI identifying them, which we believe is well ahead of any of our competitors. Our technology was designed from the get-go to be anonymous and not dependent necessarily on third-party cookies for its targeting, albeit while they remain, we will use them and do use them. In 2020, we successfully tested, and have now deployed, a version of the core artificial intelligence engine that does not use those cookies. And we did not see a material change in the overall performance of the platform, which is good news. It signals that we are well positioned for any coming changes in privacy as that situation evolves. We expect that those changes do not come into play in 2021, but moreover, probably in 2022. But either way, we have our technology in a position where it can work regardless of what occurs there. And finally, in terms of technological advances within the year that were significant, we were well ahead of our projections when we launched the SaaS version of platform in January of this year. Up through the end, of 2020, we really had been selling the IntentKey as a managed service. And while this had the benefits of giving us greater control over the campaign since we were running them, it did limit the market for the sale of the product, essentially by excluding sale to prospects who perhaps wanted to run those campaigns themselves. This is now no longer the case. The SaaS version is expected to expand our market potential. And while doing that, it will do it at higher gross margins. The product was successfully client-tested at scale in the fourth quarter of 2020. And this is the principal reason why we decided to accelerate the launch of the product in 2021. And effectively, put it in the bag of our salespeople, so they could get out there and start promoting this version of the product alongside the managed service product. Now before I turn the call over to Wally, I also want to address strategy -- company strategy. As you all know, we now have roughly $18 million of cash, we have no debt and we have an unused credit facility we could draw at any time up to $5 million. And our market capitalization has been hovering somewhere around $200 million. Strategically, our focus is to consider using our strong financial position to accelerate the growth of the IntentKey. As such, we have retained an investment banking firm to help us identify, qualify and hopefully purchase acquisition candidates, including possibly digital advertising agencies and consulting firms, which have clients that could benefit from the insights and performance gains that existing IntentKey clients have experienced. I should note that many of our IntentKey clients today are, in fact, themselves, digital marketing agencies, and so we've learned a lot about what they do and how they do, and they see this as a strong fit where we're acquiring, first and foremost, clients and don't have a lot of technology to have a deal within those acquisitions, it's really more of a client-based acquisition strategy. Now not only would these potential acquisitions get us client relationships that we would be expected to grow because of improved performance, but we believe it would also allow us to eliminate the costs within the acquired business that are related to technology, technology the IntentKey would replace and as result would likely lead in an acquisition to increase margins within that acquired business. Now interestingly, at a small scale, we've already proven this model out with a business that we acquired in 2019, albeit it was a small business, where we saw in this particular small acquisition, both an improvement in client retention and in margins. Now with that, I'd like to turn the call over to Wally for a more detailed assessment of our financial performance within the quarter. Wally? -------------------------------------------------------------------------------- Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [4] -------------------------------------------------------------------------------- Thank you, Rich. Good afternoon, everyone. I will recap the financial results of our fourth quarter of 2020. As Rich mentioned, Inuvo reported revenue of $12.9 million for the quarter ended December 31, 2020. And this compares to $18.2 million reported in the fourth quarter of last year or the prior year. The decrease in this year's revenue is due to lower ValidClick revenue, which, in the fourth quarter of this year, was $9.3 million compared to $15.5 million in the same quarter of 2019. The lower ValidClick revenue was due to reduced advertising budgets associated with the COVID pandemic. In spite of reporting lower year-over-year revenue, ValidClick's recovery began in June following May's low. And by December of 2020, it was up 116% off that low. IntentKey revenue was 34% higher in the fourth quarter this year compared to same quarter last year. The IntentKey represents 28% of the overall fourth quarter revenue compared to only 17% of the overall revenue in the fourth quarter of 2019. Inuvo gross margins increased in the fourth quarter to 83% compared to 70% in the same quarter last year, due primarily to a decision to bring in-house historically outsourced campaign delivery services for ValidClick, thus improving cost effectiveness and control. In addition, IntentKey gross margins increased to 45% in the fourth quarter compared to 41% in the prior year, contributing to the higher overall gross margin improvement. Going forward, we expect IntentKey gross margins to continue to improve as we have launched the SaaS version of the IntentKey, where margins are expected to be in the neighborhood of 90%. Operating expenses were $12.6 million in the fourth quarter of 2020 compared to $14.1 million in the prior year quarter. That's a decrease of $1.5 million. The largest component of operating expense is marketing costs. Marketing costs are predominantly traffic acquisition costs associated with ValidClick, is the largest expense associated with the ValidClick platform. Marketing costs were $8.3 million in the fourth quarter this year compared to $10.1 million in the fourth quarter of last year. The $1.8 million lower expense this year compared to last year is primarily due to lower ValidClick revenue as well as to a decision to bring in-house traffic acquisition services, to bring those services in-house. Compensation expense was $2.4 million in the fourth quarter this year compared to $2 million in the prior year quarter due to higher employee salary costs. Our full-time employment was 71 employees at December 31, 2020, compared to 61 employees at December 31, 2019. The increase in the year-over-year headcount is due primarily to hiring traffic acquisition professionals as a result of bringing that function in-house, as I just mentioned. This added cost is expected to be made up in the ValidClick net margin, in the improved ValidClick net margin. We are actively recruiting for various positions with a focus on sales and account management professionals for the IntentKey. And we expect compensation expense to increase in 2021 as a result of that. Selling, general and administrative expense decreased $80,000 in the fourth quarter compared to the prior year, due primarily to $259,000 lower IT costs, where we completed the first phase of our computing facilities consolidation program. The IT savings for the entire year was over $600,000. We now have 3 data centers and are in the process of further consolidation with another data for closing very soon. These savings are related to the real-time project that Rich was referencing in his remarks. This saving was partially offset by higher public company and legal expense due to holding 2 shareholder meetings, a special shareholder meeting in October and a regular meeting in December. For our facilities, pandemic has allowed us to reconsider our work policies. And since our Little Rock facility was expiring, we recently decided to reduce the square footage by half. So as to structure a go-forward model for employees that has an in-home and at-work component, we believe this is going to be the future for us. Net interest was $2,000 income in the fourth quarter of 2020. And that's compared to $29,000 expense in the same quarter in 2019. We had other income of $1.1 million in the fourth quarter of this year, primarily due to the Small Business Administration forgiving our PPP loan or the Payroll Protection Program loan that we had acquired in April. Other income in the fourth quarter of 2019 was $92,000, and that was associated with the change in the fair market value of the derivative liability associated with convertible promissory notes that we had at that time. We reported a net loss of $715,000 or $0.01 per basic share, and that's compared to $859,000 net loss or $0.02 per basic share in the fourth quarter of 2019. For the year, we had a net loss of $7.3 million, which includes $4.5 million of noncash items like depreciation, amortization and stock-based compensation. The adjusted EBITDA for the quarter ended December 31, 2020, was $347,000 and that compares to a loss of $574,000 in 2019. For the full year, we had an adjusted EBITDA loss of $2.4 million. At December 31, 2020, we had cash and cash equivalents of $7.9 million and a net working capital of $5.8 million. The only debt at December 31 was a $150,000 SBA loan, which we have since paid off. In addition, we have a $5 million working capital line of credit, which currently has no outstanding balance. We maintain a very simple cap structure with only common stock and employee restricted stock units that are granted through an equity incentive plan. In January, we completed 2 underwritten public offerings for 19 million shares of common stock raising gross proceeds of $14.25 million. The additional funds will be used for working capital, building the IntentKey sales force and facilitating the acquisition strategy that Rich has just described. Our recent capital raise activity has brought new institutional shareholders to the company. It's replaced all of our debt, and at the same time, our shareholders have enjoyed a rising stock price. With that, I'd like to turn the call back over to Rich. -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [5] -------------------------------------------------------------------------------- Thanks, Wally. We've seen a steady upward trend in our business since its COVID-impacted low point in May of this year, which gives us confidence that 2021 could be a good year for Inuvo. We've seen the ValidClick business recover quite strongly in Q3 and Q4 of 2020. It's not where we want it to be yet, but we would expect that business to be back to its 2019 financial performance in 2021, barring any remaining unforeseen COVID issues. And the IntentKey business continued to grow in 2020 despite COVID, and we would expect that business to continue growing into the future. We couldn't be more excited about the collection of technologies results, clients, that we have amassed associated with that business. And finally, we do see opportunity to accelerate the growth within the IntentKey, while also taking advantage of our strong financial position by exploring acquisitions that might bring with them clients to meet the IntentKey client profile. And we've retained an investment bank to help us execute on this strategy. With that, I would now like to turn the call over to the operator for any questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we will take our first question from Brian Kinstlinger with Alliance Global Partners. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [2] -------------------------------------------------------------------------------- I've got a whole bunch. I'm going to ask you and then I'll let someone else ask before I get back in, please. The first question I have, you mentioned getting back to pre-COVID levels in ValidClick at some point this year. Comparisons in ValidClick, I haven't looked at that much, you're still down 40% year-over-year in the seasonally -- it's a seasonal business in December, which is similar to September. So has that changed during the current quarter, those year-over-year trends? And what gives you the confidence that the market is going to return to pre-COVID levels so quickly instead of gradually? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [3] -------------------------------------------------------------------------------- The trajectory of the business that gives us the confidence is going to get back to where it was. The interesting thing about the COVID situation is it dropped quickly but doesn't recover as fast as it drops. But with that being said, as I said in my prepared remarks. I mean, the December revenue for that business is up 100% over the May low period. So that's a pretty steep trajectory on the business, and it's that, that's giving us the confidence for that business to be back to 2019 numbers, which I think 2019 was somewhere around $50-plus million for that business, again, with strong cash. That business has always been a very strong contributor to cash. So we feel pretty good about it. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [4] -------------------------------------------------------------------------------- But the current quarter should be weaker than the December quarter, given the seasonality, right? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [5] -------------------------------------------------------------------------------- Well, the seasonality in that business has tended to be first half lower than the second half. That's a marketing-oriented phenomenon more than it is that business, it's the industry that it's in, it's true of the IntentKey as well. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [6] -------------------------------------------------------------------------------- And then in past discussions, we've talked about your growth in IntentKey is mostly coming from existing customers' increased usage or increased campaigns. With ad budgets beginning to improve, are you finding new customers beginning to evaluate new ads? I know you mentioned you're starting some new logos. And I guess, when do you see that new customer acquisition beginning to improve? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [7] -------------------------------------------------------------------------------- It's starting to already, that's why I referenced the increase in the RFP productivity that we saw in the Q3 and Q4. And we're seeing that again here in Q1. So I think it makes sense if you think in 2020 with COVID that a client, for a new client for us who already has a provider that they've been using might want to, in a COVID world, stay with what they have to mitigate risk and not take a look at something new, in spite of the fact that, that may be some much better. So there was sort of 2 phenomenon going on: one, they're reducing the budget; two, they're trying to mitigate risk as a result of actually reducing the budget. So that was kind of -- that caused us to, I would say, have less new sales in 2020 than we had expected when we were projecting 2020 and 2019 before we knew about COVID. But despite that, we did sign a whole bunch of new clients. So there was a bunch of them that wanted to take -- to go ahead and go ahead and get the best performance they could get. And the 2020 seems to be abating, it's not over. I'll say that, it's not like the budgets that the brands are working with are back to 100% of what they used to be. It's just coming back is probably the answer. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [8] -------------------------------------------------------------------------------- I guess the second part to that question is, are some of those new logos, they have delayed using some new technology, are you starting to see more campaigns from those new customers? And what's -- do you have a range of a reasonable growth rate in IntentKey, given you've got the existing customers, more campaigns and you have campaigns now from new customers as well, should accelerate? Should -- just trying to get a sense of the growth. -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [9] -------------------------------------------------------------------------------- Yes. So I think, as you know, Brian, COVID, and we're not trying to avoid this question, but it's really difficult. Nobody has ever been through a scenario like this with the pandemic. And I still -- we still don't know. We're still in it to some degree. So it's hard for me to project the business. But I do know this. And I said it in my remarks, I mean, there's no reason why that business isn't going to continue a double-digit growth rate. And things are abating. So it should grow technically faster than it did in 2020, right, in 2021. And to answer your question specifically, I mean, I said it in my notes, but look, we ran 250-something campaigns in 2020 and 40% of them were new campaigns, right? So those new campaigns are a function of new clients and existing clients who gave us new things to do, right? But that's a pretty healthy number, right, on the top of the population. Look, I don't -- I said it, and I'll say it again, but we could not be more bullish about this platform. Now that we see enough clients and case studies and results and performance. Like I said in my prepared notes, we go head-to-head and where the head-to-head is fair, I mean everybody's got the same metrics, we'll win every time, right? -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [10] -------------------------------------------------------------------------------- One more question, and then I'll get back in the queue with my others. Of course, we've talked obviously the ad market is seasonal. As you're ramping off smaller numbers on IntentKey, notwithstanding COVID, do you think we'll see the seasonality in this business as well in the first quarter? Or because you're increasing the number of campaigns or increasing usage, you're getting new customers? Is this business small enough right now to grow through seasonality as we head into 2021? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [11] -------------------------------------------------------------------------------- Hard to tell. The high-level question, forget about the size of the business, is this business, like every other marketing or advertising-oriented business, has uncertainty in the first quarter. We don't know whether the brand internally has finished their own marketing budget allocations, have gotten approvals for them. And with -- again, with the pandemic still on, does that mean that where they would normally get through that process and not have to worry with the pandemic in the first couple of weeks, so the first month of 2021, now it's maybe in March or February, I don't know. I mean, I just don't know. We've never been through it, right? So we'll see, right? We do know this, though, I mean, overall, regardless of whether or not there's a weaker quarter or somewhere in the year, we will end up better than we did last year with this product. And certainly, probably, the good news is the pandemic is likely to have abated provided maybe vaccines distributed in the U.S. by the summer. And that means we come into the highest quarters of our year, Q3 and Q4, with a bunch of, hopefully, pent-up demand for spend from RFPs that we're actually responding to now. And we do that. Now the bulk of our RFPs interestingly for the second half of the year with the IntentKey are occurring right now. We're negotiating and involved in prospecting for RFPs that have budgets for them in Q3 and Q4. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- We'll take our next question from Darren Aftahi with Roth Capital. -------------------------------------------------------------------------------- Dillon Griffin Heslin, ROTH Capital Partners, LLC, Research Division - Research Associate [13] -------------------------------------------------------------------------------- This is Dillon on for Darren. I wanted to ask you about -- I wanted to ask a little bit about the SaaS component of IntentKey. I mean you talked about your standing market reach. I mean is there any way to sort of quantify that? And then, I guess, where do you see the balance of SaaS versus your managed clients, I guess, in 2021, as a percentage of revenue? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [14] -------------------------------------------------------------------------------- Yes. So the first question is the quantification of the marketplace that we can play in and you combine both the SaaS and the managed service pieces, somewhere near $100 billion market. So that's one of these gigantic numbers. So there's plenty of market. Clearly, having a SaaS version and a managed service business version opens us up to people who would not have bought it because they wanted control over the clients, they were making money for running the services, so they wanted to do that themselves. And that's why we're excited about that. At the size that we're at, it's hard for me to quantify what's the split going to be. It's probably easier to conceive having done this before that -- that we could be running a business here at some point in the future where half the revenue is services, managed services and half is SaaS. And just as a side note, this is typically what happens when you do have a SaaS version of the platform, there's always clients who don't want to do it themselves. They want you to do it. I mean you're not going to turn them away, you want those clients. Sometimes, by the way, they end up being the biggest of the clients. So it's 50-50, like that, which is probably where it sort of ends up, that would probably be about, right, which we would expect if you can do the math, the managed service piece of the business runs about 50% margin and the SaaS version will probably run about 90%. So it's almost half and half, we'd end up with a business here that's, I don't know, if I use my head, 70% maybe gross margins, which is healthy, on the combination. -------------------------------------------------------------------------------- Dillon Griffin Heslin, ROTH Capital Partners, LLC, Research Division - Research Associate [15] -------------------------------------------------------------------------------- Got it. And then sort of a follow-up to that. I mean, what does the time frame look like for monetizing some of those clients that you talked about being in beta? Is it a few months? Is it -- is that ramp -- a second half in nature of '21? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [16] -------------------------------------------------------------------------------- Yes. Yes. So we're done with the beta program. The beta program ended in Q4. And that's why we're excited because we got through the beta program way faster than we had expected. If our shareholders will remember, I believe I had messaged that we wouldn't actually get to market with our SaaS product until the second half of 2021. And we just had an opportunity in the fourth quarter with clients to basically put the SaaS version to its numbers, if you will, to run it at scale and work out all the remaining issues. So there's no more beta. We're in go-to-market with this product. We know it works, we've proved it works, it scales. Now there's some things we have to do internally to support a SaaS product. There's some training and whatnot, and we've got to gear up for that, but we're doing that now. -------------------------------------------------------------------------------- Dillon Griffin Heslin, ROTH Capital Partners, LLC, Research Division - Research Associate [17] -------------------------------------------------------------------------------- Got it. Last one from me. Are you seeing any specific strength in certain clientele, like something like Connected TV, given just where that market has been going over the past, I guess, basically, 2020 and then sort of in the future? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [18] -------------------------------------------------------------------------------- Yes. We have seen it. And we've got -- we've had an increased number of Connected TV RFPs and have delivered on quite a number of connected TV campaigns. So we do see that as a growing channel for us and really great news about the IntentKey, as it relates to Connected TV, is it's one of few products that we are aware of where you can actually have this audience-building capability. There's some technical challenges associated with Connected TV because of the way the devices are technically designed and the apps on those devices. But we've worked around that solution, and so the AI, the modeling and the data that we've proven is so powerful in video and display, showing itself to be just as good at the Connected TV side, which we believe will give us an advantage, and we've seen great performance on those campaigns. So yes, Connected TV is a good channel. We've run -- just to add, it's not just Connected TV, but we've run a couple of our first times ever connected equivalent connected radio. In fact, one of our casino customers with a connected audio. And we knew we had it all the plumbing in place to make that work and we knew it would work. But it was only in the fourth quarter where we started running some campaigns for various clients. And once again, we're seeing really strong results there just as a complement to the Connected TV question. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- We'll take some follow-ups from Brian Kinstlinger with Alliance Global Partners. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [20] -------------------------------------------------------------------------------- Two follow-ups. The first on the SaaS offering. As it relates to go-to-market strategy, if you're targeting existing customers, will that cannibalize your existing revenue? And how should we think about the larger upfront campaigns versus -- and the revenue impact on maybe doing a monthly service? Does that mean lower revenue but much higher margins? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [21] -------------------------------------------------------------------------------- Yes. So Brian, we're not targeting existing clients. And maybe you can get your head around it this way is, like I said from the get-go, selling a managed service and selling a SaaS version, there really are kind of 2 audiences for that. Some people just don't want a managed service. So maybe you could take it this way. The ones that we've already sold, who we are running services for, wanted a managed service. And that's why we were able to close them. So I don't see us cannibalizing those. It will be a net new. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [22] -------------------------------------------------------------------------------- Perfect. Yes, that's good. And then lastly, on one hand, you mentioned less space working from home. It sounded like a budget cuts to operating expenses. On the other hand, you've got a slug at increased capital and you talked about increasing the sales force for IntentKey. So maybe how do we think about -- weigh both of those? Should we see OpEx growing from the fourth quarter? Should we see it shrinking? Is it kind of flat now as I think about those 2 things? -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [23] -------------------------------------------------------------------------------- I think that's Wally. -------------------------------------------------------------------------------- Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [24] -------------------------------------------------------------------------------- Yes. I think that there's a lot of the new employees that we're bringing on can work from home, particularly the salespeople. So we've factored that into our consideration for reducing the space in Little Rock. I would -- there's 3 major -- as you know, 3 major components to operating expenses: Marketing, compensation and SG&A. So like we said, we expect compensation to increase next year in 2021 because of the investment we'll make in the sales force. But the SG&A, it should stay relatively flat throughout the year, which includes facilities. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [25] -------------------------------------------------------------------------------- Great. And I mean the marketing cost moves with -- and then I think the marketing costs will move up and down with IntentKey? I mean not IntentKey, with ValidClick? -------------------------------------------------------------------------------- Wallace D. Ruiz, Inuvo, Inc. - CFO & Secretary [26] -------------------------------------------------------------------------------- Yes, with ValidClick. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [27] -------------------------------------------------------------------------------- Yes. That's right. -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [28] -------------------------------------------------------------------------------- One other thing, Brian, maybe I'll just note because it's related. And it's important for our shareholders to understand the advantage we have here, particularly with the SaaS version of the platform compared to the competitive marketplace for that product. But we noted in our call, and Wally noted it in the financials, but we did make some significant decreases in our overall information technology expenses in the year, I don't know, some $600,000. But what's important here is to recognize that the costs that we have related to how the IntentKey does what it does is, for the most part now, other than resources fixed -- and this is not typical, our competitors who use third-party data, which they bring together to offer people the ability to find audiences, have going uptick costs associated with the purchase of that data. We have no such cost. Every additional dollar now that we bring in, we have no more costs associated with the productivity, if you will, of the machine. It's, for us, we have an ability to not only go-to-market with our SaaS product, with a product that works better because of the artificial intelligence and because of the way that we manufacture information, but we can do it at a lower cost if we choose to because we can undercut the marketplace because we just don't have that cost burden. It's one of the advantages we have in our go-to market. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- This concludes today's question-and-answer session. I would now like to turn the conference back to your hosts for any additional or closing remarks. -------------------------------------------------------------------------------- Richard K. Howe, Inuvo, Inc. - Executive Chairman & CEO [30] -------------------------------------------------------------------------------- That's great. So thank you very much, operator, and thanks, everyone, for joining us on the call today, and we appreciate your continued interest in the company and look forward to catching up in the future. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- That concludes today's presentation. Thank you for your participation. You may now disconnect.