By Beth Senko, CFA
READ THE FULL INNV RESEARCH REPORT
There was a lot of good news in Innovus’ (INNV) third quarter report – higher subscription sales, strong growth in Canada and a slight decrease in absolute marketing spend. But the best news was a reduction in operating and investing cash spend from $2.8 million in 2Q18 to $2.1 million in 3Q18.
• Management’s comments were more focused than on the previous call and emphasized steps the INNV is taking to move to positive operating cash flow and, ultimately GAAP profitability.
• Much of INNV’s path to profitability relies on increasing its subscription persistency. Subscriptions create recurring revenue allowing the Company to focus its marketing dollars on new customer acquisition. In 3Q18, subscription revenues rose 31% on a sequential basis to $0.9 million, or c. $287K per month on average, up from c. $218K per month in 2Q18. Subscriptions now make up 11.6% of product revenues, compared with 8.7% in 2Q18.
• Another step is a more informed marketing program. We believe management took action based on its marketing data by reducing the number of products promoted in the quarter to 7 from 10 in 2Q18. In this way, the Company appears to be focusing on how to best deploy its marketing dollars.
• Third, the Company reduced inventory on hand by $20k (c.1%). We see this as a step towards improved cash flow management; however, it is unclear if inventories will climb in Q418 to support several product launches. In our initiation note we commented that INNV has typically carried six months of inventory on hand; however, we believe a three-month supply is a more normalized level. INNV used approximately $2.1 million in operating cash in the third quarter, flat with 2Q18 operating cash spend.
INNV notes that it is aiming for profitability in 4Q18. It may be possible for the Company to post positive operating income, however, we would rather see consistent improvement in operating metrics (sales, marketing expense, operating cash flow) than a quarter that “manages” to positive operating income in order to create a positive headline.
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By Beth Senko, CFA