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| EX-99.1 - EARNINGS RELEASE FOR Q4 AND FULL YEAR 2016 - Inuvo, Inc. | inuv_ex991.htm |
| 8-K - CURRENT REPORT - Inuvo, Inc. | inuv_8k.htm |
Exhibit 99.2
Inuvo, Inc.
Fourth Quarter and Full Year 2016 Conference Call
February 13, 2016
Operator Comments:
Good
day and welcome to the Inuvo, Inc. 2016 Fourth Quarter and Full
Year Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mr. Alan
Sheinwald of KCSA Strategic Communications. Please go ahead,
sir.
Alan Sheinwald (Investor Relations) Comments:
Thank
you, Operator and good afternoon. I’d like to thank everyone
for joining us today for the Inuvo fourth quarter and full year
2016 shareholder’s update conference call. Today, Mr. Richard
Howe, Chief Executive Officer, and Mr. Wally Ruiz, Chief Financial
Officer, of Inuvo will be your presenters on the call.
Before
we begin, I’m going to review the Company’s Safe Harbor
statement. The 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, Inc., 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 US Securities and Exchange Commission, which can
be reviewed at www.sec.gov.
With
that out of the way, now I’d like to congratulate Management
on an outstanding year which culminated recently with the
acquisition of NetSeer. With that, I’d like to now turn the
call over to Mr. Richard Howe, CEO of Inuvo. Rich, the floor is
yours.
1
Richard Howe (CEO) Comments:
Thank
you Alan, and thanks everyone for joining us today. 2016 was a very
busy year, marked by many successes and a few
obstacles.
We
entered 2016 coming off a significant growth rate of 42% in 2015.
Such rapid growth required that we hire additional resources
quickly to fulfill obligations that came with that growth. This
hiring continued into the early part of 2016.
Operationally,
we have generally tried to run the business at an efficiency ratio
of greater than $1M dollars in revenue per employee. As of the end
of January 2017 we had roughly 71 full and part time employees, not
counting the recent acquisition.
Managing
to this growth along with some temporary advertiser issues in Q2
did curtail business in the early part of 2016, however, we
recovered well in the second half of the year growing 12%
sequentially in each of the 3rd and 4th quarters to end the
year at roughly $71.5 million dollars in revenue. Our CAGR over the
last 2-years has been a little over 20%, which is in line with our
organic growth goals.
We also
had yet another year of positive EBITDA, adjusted for non-cash
expenses. We delivered $2.6 million dollars, well above the goal we
had set for the business given the growth investments we had been
making. As a Company, INUVO has been delivering positive Adjusted
EBITDA for over 5 years.
I would
like to take a minute now to talk about our two reporting segments,
which we have historically referred to as the Owned and Operated
Network Segment and the Partner Network Segment.
Within
the Owned and Operated segment, we build and market consumer
websites and applications. This segment consists of our main online
property marketed under the ALOT brand and several other websites
targeted at specific demographics.
In the
Partner segment, we provide a technology service to online
publishers the primary brands for which are ValidClick and
SearchLinks©.
2
As our
business has evolved, we have started referring to our Owned and
Operated Segment as Digital Publishing and the Partner Segment as
Ad-Tech. These segment titles are more descriptive and
understandable and thus we will be using them going forward when we
report financial performance.
We
started the 2016 year off with a short-term revenue over weighting
in the Digital Publishing Segment. The Q1 2016 Revenue in this
segment was 72% of total revenue while the Ad-Tech Segment was
about 28% of total revenue.
You
will recall that this unevenness was in part the result of revenue
transfer between segments that began in 2015. As we had expected
and had been messaging and been managing towards, the Ad-Tech
Segment grew quite rapidly throughout the year, up over 86% between
Q1 and Q4 2016 mostly because of various product introductions like
SearchLinks; The addition of publisher support personnel in account
management; and other revenue generating business development
projects.
In the
fourth quarter of 2016, the distribution of revenue between the
segments was roughly 50% each with about 60% from mobile and 40%
from non-mobile.
Operating
expenses were up year-over-year much of which was attributable to
supporting the growth we discussed earlier. On an adjusted EBITDA
basis, we delivered a very healthy 11 cents per share in
2016.
Let me briefly highlight a few important details about the Digital
Publishing and Ad-Tech Segments starting first with
Ad-Tech.
SearchLinks
was developed with the objective to become the platform from which
INUVO serves advertising of all shapes, sizes and types.
Additionally, we wanted a modern infrastructure for this
platform.
We
wanted a platform that would allow sophisticated analytics and
decision technologies to be easily integrated. Technologies that
would, for example, allow for contextual or behavioral targeting of
consumers across device types.
3
All of
these technologies were designed to support a business strategy for
the Ad-Tech segment. We wanted to put ourselves in the best
position to compete for publisher advertising
real-estate.
We feel
good about the way we have executed against this goal as is
evidenced by the growth of the Ad-Tech segment throughout the 2016
fiscal year. The acquisition of NetSeer, which I will talk about
shortly compliments this strategy beautifully.
Because
SearchLinks is more a technology platform than product and because
our goal is to have a suite of Ad-Units that leverage this
proprietary platform, going forward all the Ad-Units we
commercialize, including those from the recent NetSeer acquisition
will collectively comprise the Ad-Tech segment of the
business.
When
the Ad-Tech segment grows overall, it will be because we have
successfully penetrated more publishers with more of our Ad-Tech
and this goal will have been achieved because we have a suite of
Ad-Technology that fulfills the numerous needs of those
Publishers.
In this
extremely competitive Ad-Tech world, it is this strategy that will
distinguish INUVO from the other players on the field and increase
our probability of selling new publishers and upselling existing
publishers.
Some of
the more important tactical priorities for 2017 within this segment
will be;
The
expansion of our behavioral targeting technologies for improved
Ad-Unit performance;
The
inclusion of our Digital Publishing content as a demand option
within Ad-Targeting to create a source of traffic to our own
sites;
and,
the integration of the SearchLinks platform into the header bidding
environments, which should lead to more publisher relationships for
INUVO.
4
We are
bullish on the prospects for this segment in 2017, particularly
considering the breadth of product we now own after completing the
acquisition of NetSeer.
For Digital Publishing, which grew 13.5% from $40.1 million to
$45.5 million year over year, the objective remains the same in
2017 as it was in 2016.
First – We plan to continue to develop content of
various types that target consumer groups advertisers are most
interested in. We expect to continue to develop different content
types, including written, video and slideshows. We produced 120
videos in-house mostly in the 2nd half of 2016 and
feel like we have the knowledge and means to scale that capability
as warranted. We’ve written 10’s of thousands of
articles and built our own in-house studio for photography and
video. With the NetSeer acquisition, we now have the means to
monetize those videos and images.
Second – We expect to continue to develop new
advertiser relationships that maximize revenue for INUVO within our
various sites. We saw some very nice improvements here in 2016,
with the amount of money we collect from display Ad’s alone
up 15% because of these new sources of advertisers.
Third – We plan to continue to build automated
marketing technologies that allow us to economically acquire
consumer traffic to our sites. Nearly ¼ of all the marketing
campaigns we run are now being operated with artificial
intelligence technologies developed in-house. The closer we get to
100%, the more time our team can spend building new Campaigns as
opposed to monitoring existing ones.
And lastly – We will continue to use our Digital
Publishing assets as a laboratory for the suite of Ad-Technology we
bring to publishers. We are already integrating the NetSeer
ad-technology into the ALOT sites, starting first with the numerous
slide show galleries across all the content verticals.
We have
made significant progress across all these objectives in 2016 and
will continue to do so in 2017. Because we have an audience, we
continue to find new ways to make money from that audience beyond
simply the content experience they receive from our
sites.
5
Let me now turn our attention to the acquisition of
NetSeer.
This
company, its people, its owners and its customers are all an
exceptional fit for INUVO. We purchased the operating assets and
assumed certain liabilities of NetSeer in exchange for 3.5 million
shares of common stock valued at $1.6 a share.
In
addition to these shares, we have also issued, under the terms of
our long-term incentive program, about 200,000 Restricted Stock
Units which will vest over the next three years.
These
shares will be going to the roughly 20 new INUVO employees we now
have in our Sunnyvale, California office. Several NetSeer senior
managers will be helping us with the transition of this business
into INUVO and then moving on to their next
opportunities.
This
acquisition significantly accelerates our strategic objectives in
the following manner:
First – We immediately get diversity in sources of
advertisers and the technology to manage those varying sources. We
have long been suggesting that we want to develop these new
advertiser relationships. NetSeer provides this access and going
forward we expect about 20% of overall INUVO revenue to come from
these new sources. The long-term result here should be a higher
price paid for every ad we show. The synergy is in our ability to
incorporate these new advertiser sources into our existing
business.
Second – We immediately get access to over 200 new
publisher relationships. Publishers who we can now entertain with a
stronger and more complete upsell value proposition. I referred to
this in my remarks earlier about competitive differentiation in our
market. The synergy here is the ability to upsell existing INUVO
publishers the NetSeer products and vice versa.
Third – We get an exciting new set of Ad-Technologies
focused exclusively on monetizing images and videos, a product area
with no overlap to INUVO’s current ad-tech products.
Additionally, the current reach of these new products also gets us
data which can improve ad-targeting. The synergy here is the
ability to win business we might normally have lost because of a
limited suite of ad-technology products in the
portfolio.
6
In
addition to these synergies, we also acquire an exceptionally
talented group of professionals, at least 7 of which have either
Masters or PHD’s. This team has already commercialized and
patented many analytic technologies that will be scalable across
INUVO.
I’d now like to turn the call over to Wally for a more
detailed commentary on our financial performance.
Wally Ruiz (CFO) Comments:
Thank
you Rich; good afternoon everyone. We reported today the
results of our fourth quarter.
Inuvo
reported revenue of $19.7 million for the quarter that ended
December 31, 2016; a 12% increase from the immediate prior quarter
and a 7% decrease from the $21.0 million reported in the same
quarter last year. For the full year ended December 31, 2016, Inuvo
reported revenue of $71.5 million, a 2% increase over
2015.
EBITDA,
adjusted for stock based compensation expense, a non-GAAP financial
measure was $612 thousand in the quarter that ended December 31,
2016 or 2-cent per share; compared to $419 thousand or 2-cent per
diluted share in the immediate prior quarter and compared to $1.6
million or 11-cents per diluted share in the same quarter of the
prior year.
For the
full year of 2016, adjusted EBITDA delivered $2.6 million dollars
or 11-cents per Share compared to $4.7 million or 13-cents per
share for 2015.
On a
GAAP basis, Inuvo reported a net loss of $309 thousand or 1-cent
net loss per share in the quarter ended December 31, 2016. In the
same quarter last year, we reported a net income of $617 thousand
or 3-cents per diluted share.
For the
full year of 2016, the GAAP net loss was $723 thousand or 3-cents
per Share compared to $2.3 million net income or 19-cents per share
for 2015.
7
As Rich
mentioned, beginning this year we will refer to the Partner Network
as the “Ad Tech” segment and the Owned & Operated
Network will be referred to as the “Digital Publishing”
segment. This renaming better aligns with how we describe the
businesses internally.
The Ad
Tech segment reported $9.8 million in the fourth quarter of 2016,
50% of the total revenue of the quarter. The Ad Tech segment grew
more than 58% over the $6.2 million reported by both the immediate
prior quarter and the fourth quarter of 2015. Greater acceptance of
SearchLinks and a good holiday retail environment are the primary
reasons for the better results.
The
Digital Publishing segment reported $9.8 million of revenue in the
fourth quarter of 2016 compared to $11.3 million in the immediate
prior quarter and $14.8 million in the same quarter last year. The
decline was in part due to lower marketing spend in the
quarter.
Inuvo
gross profit in the fourth quarter of 2016 was $11.7 million
compared to $12.3 million in the immediate prior quarter and a
$16.4 million in the same quarter last year.
Gross
profit as a percent of revenue or gross margin was 60% in the
fourth quarter of 2016 compared to 78% in the same quarter last
year. The decrease in the percentage is largely due to the mix
between Ad Tech and Digital Publishing segment revenue, where the
lower gross margin Ad Tech revenue increased from 29% of the total
revenue to 50% of the total revenue.
Ad Tech
gross profit in the fourth quarter of 2016 was approximately $1.9
million compared to $1.1 million in the immediate prior quarter and
a $1.5 million in the same quarter last year. The higher gross
profit in this year’s quarter compared to the same period
last year is due to higher revenue this year compared to the same
period last year.
Gross
Profit in the Digital Publishing segment in the fourth quarter of
2016 was $9.8 million compared to $14.8 million last year. The
lower gross profit in this year’s quarter compared to last
year is due entirely to the lower revenue reported this
year.
8
Operating
expense, which is comprised of Marketing costs, Compensation and
Selling, general & administration expense was
$11.9 million in the fourth quarter of 2016 compared to $15.6
million in the same quarter last year.
Marketing
costs are the primary costs associated with the Digital Publishing
segment where dollars are spent to build an audience for the
various sites and apps we own. Marketing costs were $8.8 million in
the fourth quarter of 2016, a $3.9 million decrease from the same
quarter in 2015.
Compensation
expense increased by $332 thousand to $1.9 million in the fourth
quarter of 2016 compared to the same quarter in the prior year. The
higher expense in the current quarter is primarily due to higher
payroll cost associated with additional hiring. At December 31,
2016, we had 72 full- and part-time employees; a year earlier we
had 63 full- and part-time employees.
S,G&A
or Selling, general & administration expense was $1.2 million
in the fourth quarter of 2016 compared to $1.4 million in the same
quarter in the prior year. The lower expense this year is due to
$119 thousand lower consulting fee expense and $59 thousand lower
facilities expense than last year.
In
coming quarters, we expect marketing costs to be in-line as a
percent with the growth in the Digital Publishing segment. We
expect compensation expense to increase modestly in the core Inuvo
business to support technology development and our sales
initiatives. We expect S, G & A expense to increase due to the
cost of integrating the NetSeer operations.
Net
interest expense was $28 thousand in the fourth quarter of 2016,
compared to $30 thousand in the fourth quarter of last year the
same as last year.
The
current year quarter included a charge of $17 thousand to close out
the European subsidiaries and their accounts. These charges are
classified as part of discontinued operations.
At
December 31, 2016, we had cash and cash equivalents of $3.9 million
and no bank debt.
9
As Rich
mentioned, NetSeer was acquired in exchange for 3.5 million shares
of Inuvo common stock. The issuance of stock caused approximately
12% dilution. The consideration also included the assumption of
approximately $4.2 million of liabilities. The assumed liabilities,
mostly trade payables, are due over a course of up to 6 months.
This working capital deficit we assumed will be funded from
Inuvo’s bank revolving credit line. We expect approximately
$15 million in revenue from the NetSeer business this year. We
believe it will take the next 2 quarters to fully take advantage of
the synergies, as well as the cross selling and market expansion
opportunities. We believe we can accomplish this and have an
integrated business that is accretive by year end.
Now,
I’d like to turn the call back to Rich for closing
remarks.
Richard Howe Comments:
Thanks
Wally.
2016 is
behind us, we are now fully focused on having our best year ever in
2017. Operationally, we continue to manage for growth while
maintaining a positive adjusted EBITDA.
The
goal at this point is to make the moves necessary with hiring and
investments to continue fueling growth while maintaining fiscally
responsible practices, something we have proven we can and have
done successfully for many years.
We
expect the core INUVO business to deliver double digit
year-over-year growth and the newly acquired business to contribute
at least $15 million of Revenue in 2017.
The
operating plan for the new business, which will be reported under
the Ad-Tech segment, is to have it be accretive by year end and be
a significant contributor in 2018.
The
acquisition of NetSeer should demonstrate to stockholders that
INUVO is in a good position to be the Company that can roll up
assets within Ad-Tech. Many of these smaller Companies are now
becoming attractive as their valuations have dropped. We expect to
continue looking for such assets.
With
that, I’d like to turn the call over to the operator for
questions.
Richard Howe (CEO) Closing Comments:
I would
like to thank everyone who joined us on today’s call. We
appreciate your continued interest in Inuvo and look forward to
reporting progress over the coming quarters.
10