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INUV: Q1 Earnings Show Revenue Miss but EPS Beat as NetSeer Becomes Integrated

By Lisa Thompson


Inuvo (INUV), a digital publishing and advertising technology company, purchased NetSeer on Feb 8th, adding an expected $14m to 2017 revenues. It is in the process of integrating the acquisition and its products into its offering. Management’s goal is to reach a revenue run rate of $100 million by the end of 2017 and with this acquisition it is more likely to achieve that. Having just reported four quarters of declining revenues, this should allow the company to return to growth this year and profitability next.

Inuvo reported revenues $1.5 million less than we expected but still beat on earnings. The company is trying to maximizes profits on its cash usage and has cut back on its owned and operated marketing spend as new opportunities created by the acquisition of NetSeer has shifted invested cash to higher ROI choices. With only two months of NetSeer integration in Q1, we expect Q2 should be more representative of ongoing revenues. However the reduction of locations and data center consolidation is expected to be started in June, and its full effect will not be in force until December. The company had 21 of the 93 employees (as of the end of March) in Sunnyvale who will be relocated to new, less expensive facilities in San Jose once its lease runs out in July.

Revenues totaled $17.2 million for Q1 2017 down 8% from an exceptionally strong Q1 2016. $1.9 million in revenues came from two months of NetSeer revenues. The company points out that the $17.2 million exactly half of the 2016 revenues for the company, meaning it is on track to beat H1 2016 as Q1 is typically seasonally lower than Q2.

Ad-tech grew 88% to $10 million while Digital Publishing fell 46% to $7.2 million. Going forward the company will not be segmenting revenues as it finds it harder and harder to determine where revenues are coming from especially with the combination with NetSeer into a unified product. Mobile was 57% of sales in the quarter, higher than the 2016 average of 52%.

Gross margin decline to 54% compared with 59% in Q4 2016 as Digital Publishing declined to 42% of total revenues. The company books revenues from that business gross at 100% before marketing expense. Overall margins for the company should decline as the ad-tech business grows as a percent of sales. Digital Publishing margins after marketing costs was 12%, up from Q4’s 11% but down year over year from 21%. 

Compensation and SG&A was $1.6 million higher than last year as NetSeer got integrated into the company and more added people and overhead.
Operating income was a loss $1.6 million versus a loss of $0.6 million in 2016. Of the $1.6 million loss, $350,000 was one-time expense.

The company had $43,000 in interest expense for the quarter and we expect that to rise because of the NetSeer acquisition and negative cash flow.  

Loss for the quarter was $1.7 million versus a loss of $600,000. Taking out one-time expenses for the acquisition and stock-based compensation, adjusted EBITDA was a negative $313,000 versus $1.3 million last year. We are expecting another EBITDA loss next quarter but smaller and a return to positive EBITDA as the acquisition expenses normalize.

The company reported a loss of $0.06 versus a loss of $0.02 last year, but on a non-GAAP basis, taking out one-time expense and stock-based compensation, the EPS loss was $0.04 versus a loss of $0.01 and beat our estimate by a penny.

2017 Estimates

Based on lower digital publishing revenues and company guidance of annual revenues of $88 million to $93 million we are lowering our estimate to $89 million. Due to the earnings beat in Q1 we are reducing our non-GAAP EPS estimate by one cent to a loss of $0.09 per share versus a positive $0.01 in 2016. Once the company reaches over $100 million in sales, which we expect it to reach in 2018, we believe it will be an attractive acquisition to a larger company and the management would be willing to entertain discussions. At an enterprise value of $30.2 million the company is valued well below the industry average of 1.1 times enterprise value to sales. 2017 est. revenue of $89 million yields a $3.05 target stock price. 


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