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INUV: Q3 Focuses on Margins Not Revenues

By Lisa Thompson


Inuvo (INUV) reported revenues of $20.3 million as its had preannounced, up 16% from last year. The key improvement however was in margin. The company is now focused on profit after marketing expense as it deemphasizes its owned and operated websites. This quarter the margin was 17.2%, flat sequentially but up significantly from last year’s 13.9%. So on a 16% increase in revenues, the company made 154% more in profit dollars. Marketing spending was reduced to $7.2 million versus $9.9 million last year as the company deemphasized low margin digital publishing. The company expects margins to be sequentially flat for the rest of the year, but to eventually tick up as NetSeer’s higher margin contribution to total revenues increases. This was the second full quarter the company has reported with NetSeer revenues. To date, the NetSeer acquisition has been dilutive, but the company expects it to begin to be accretive in Q4 2017. Mobile was 66% of sales in the quarter, higher than the 2016 average of 52%.

Compensation expense increased to $2.4 million versus $1.7 million a year ago as the number of employees grew to 90 from 70 a year ago due to the purchase of NetSeer. The company had 90 employees as of the end of September versus 70 a year ago.  

SG&A was versus $2.0 million versus $1.2 million a year ago. This level was flat sequentially if you remove $441,000 in one-time expenses in Q2 2017. The reduction of locations and data center consolidation is still not finished, and its full effect will not be in force until December. This will reduce expenses even further, improving operating margins. 

Operating income was a loss $889,000 versus a loss of $452,000 in 2016. 

Loss for the quarter was $986,000 versus a loss of $435,000. Taking out stock-based compensation, adjusted EBITDA was $253,000 versus $167,000 in Q2 2017 and $420,000 last year. 

The company reported a loss of $0.03 versus a loss of $0.02 last year, but on an adjusted non-GAAP basis, taking out stock-based compensation, the EPS loss was $0.02 versus breakeven.

The company continues to be optimistic especially for 2018 as it now has capabilities beyond much of its competition. It has an engine, IntentKey, which is automated and can discern the intent of the end user by looking at what is read. It can better match ads with content and can further filter that with knowledge about the demographics of the reader. This allows Inuvo to finely target ads at the most desirable viewers. So knowing what you are reading or searching for, combined with who in the house is using the device allows the optimal ad to be served. This capability combined with additional information across users’ devices provided by Acxiom’s LiveRamp, should further increase sales next year. The company is now adding more salespeople and customer service employees to position it for 2018. 

The strategy for Inuvo investors and management has always been to grow the business large enough to be attractive as an acquisition. Once the company reaches over $100 million in sales, which we expect it to reach in 2018, we believe it could be large enough to be an attractive acquisition to a larger company.

We believe the company is valued way below its peers. If we use enterprise value to sales (since many competitors operate at a loss), the stock is still priced well below its peers who trade at an average of 1.6 times enterprise value to sales. At a multiple of 1.6xs estimated $79 million in 2017 revenue, the stock should be worth $4.40. 


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