Q2 2020 Inuvo Inc Earnings Call

Good day and welcome to the Inuvo Inc. 2022nd quarter Financial results Conference call. Today's conference is being recorded at this time I would like to turn the call convertible for Pinto managing director of Tcs a strategic communications. Please go ahead Sir.

Thank you operator and good afternoon.

I'd like to thank everyone for joining us today pretty neutral second quarter 2020 shareholder update conference call.

I never Chief Executive Officer, Richard Howe, and Chief Financial Officer, what would release will be a presenters on coal.

It's still for lighting listeners know that as a consequence, you could be Nike pandemic hotel offices in San Jose, California in Little Rock, Arkansas remain closed.

In our little rock facility. We have started to have twice weekly leadership years, you're monitoring endemic, albeit a bit basis will recommend to return to work for our employees, if and only one they feel we can adequately safeguard our colleagues from construction.

That's what's reminder, shareholders that we anticipate follow your 10-Q Securities and Exchange Commission Tomorrow Friday August 14 2020.

Before we get I'm going to review the company Safe Harbor statement statements. In this conference call that are not descriptions of historical facts or forward looking statements related to future events and that's such all forward looking statements are made pursuant to Securities Litigation Reform Act of 1995.

These forward looking statements are subject to risks and uncertainties actual results may differ materially. When you think it's called the wouldn't anticipate could enable estimated said expects believes potential wells should for Jack and similar expressions as they relate to new boat or assets. You are forward looking statement. That's those are cautioned that all forward looking statements involve risks and uncertainties, which may cause actual results.

That's a different from business, it's a pretty valuable at this time.

Fishing servicer muscle described to me that's public filings with the its troops Exchange Commission.

Which can be received couldn't be reviewed I don't see back up with that now lets turn call over to see that you have.

Thank you balter and thanks, everyone for joining me today.

Three months ended June Thirtyth 2020, we delivered a roughly 7.6 million in revenue.

With approximately 5.7 million of it coming from the valley click platform and 1.9 million from the intent keep platform.

For the six month period revenue was 22, and a half million dollars with 18.7 million from Dallas, click and 3.8 million from the intent.

Revenue in the prior three and six month period, with roughly 14 million and 29 into half million respectively.

Lower revenue through the first six months of the year was predominantly caused by decreasing advertising budgets associated with cobot 19 and <unk>.

Isolated within the valid click platform.

While revenue was down sharply year over year, we countered the income implications of lower revenue by implementing a number of short term expense and contract modifications within the quarter.

Net loss year over year within the quarter improved 30% from roughly 2 million in 2019 to 1.4 million in 2020.

Sequentially net loss improved by over 50% worth approximately $1.5 million.

On our adjusted EBITDA basis that there was also an improvement a year over year within the quarter of roughly 84% going from a loss of $854000 in the second quarter of 2019 to a loss.

As a $140000.

The second quarter of 2020.

Sequentially, adjusted EBITDA improved by roughly 90% or more approximately $1.2 million.

A reconciliation of adjusted EBITDA to net loss is contained in our earnings release.

As we had message on our Q1 conference call. We had expected the valid could business to be impacted materially by the pandemic and it was down roughly 29% for the first half of the year and 53% within the quarter on a year over year basis.

This impact on valid click was partially influenced by the markets that business or I.

I think marketing tool for advertisers. The Balakot platform is typically use by brand to extend their audience reach.

That's such when budgets contract quickly as they have during cold bid.

These services tend to be among the first budget adjustments.

Interactive advertising girl recently surveyed advertisers to better understand how they were thinking about their marketing budgets generally during cold bid for the period between March and June.

46% of the responder noted that their AD spend was likely to be down.

24%, noting that they had paused all their advertising spend 14% reported they had no plans to modify budgets and 16% were.

<unk>.

The balance of business had its lowest month of the year in made since then we have started to see a modest but steady sequential monthly improvement.

In July.

With August currently continuing that upwards trend.

Within valid click the team has been using this time to build new products.

Bring more services in house and negotiate better deals with traffic acquisition partners.

So as to be in a position that the market turns to capitalize not only on growth, but also on margin.

One of US new products is currently scaling in collaboration with Yahoo and horizon.

[noise] picky businesses held up very.

Very well in spite of dramatic reductions in marketing budgets across the industry.

The six month period, the business is up 17% year over year.

The three months ended June Thirtyth 2020, the business was roughly flat year over year.

The impact Cobot has had on the intent keep businesses, perhaps best categorized as a pause in the growth rate, which we would expect to return as the economy begins to improve post coated.

The lowest in 10 key revenue month in the year to date was April.

The may through July month, all grew six sequentially.

In August is currently forecast to continue that trend.

We had frozen company hiring in March as a result of co bid, but have we restarted recruiting activity within the 10 key.

Having added an additional sales person in July.

Currently have 10 people in sales sales support and account management positions within the group.

Gross margins within the intent you have continued to exceed expectations now averaging over 50% to the first six months at 2020.

Which is approximately 100% improved from the prior year period.

We've had roughly 60% increase in the number of RFP use we responded to within the quarter as compared to the prior year.

The majority of these RFP is our budgets expected to be allocated in Q3 and Q4.

Well, how performance perspective, we exceeded client can't be eyes across the more than 50 campaigns that were operational within the quarter by approximately 65%.

Roughly a quarter of these campaigns, where new and three quarters were renewals.

For our largest client the intent keep continues to perform very well.

Campaigns for that client currently include mobile video and display advertising.

We had a successful test.

Campaign in the quarter for desktop video and we are currently in the process of testing connected TV campaigns.

When successful test campaigns have historically turned into recurring budget allocation.

As a company.

Our capital position has never been stronger.

At the end of July we had roughly 12 million of cash on our balance sheet, which we timed to put to work towards growth initiatives.

I would like to turn the call over to Wally for a more detailed assessment of our financial performance within the quarter.

Thank you rich good afternoon, everyone.

I'll recap the financial results for our second quarter.

As rich mentioned Inuvo reported revenue of $7.6 million for the quarter ended June Thirtyth 2020.

This compares to $14 billion reported in the second quarter of last year.

The decrease in this years revenue is primarily due to reduced advertising budgets, particularly in the valley click operations.

The only click revenue in the current quarter was $5.7 billion compared to $12.1 million into second quarter last year.

The lower valley click revenue was partially offset by higher revenue from our owned and operated flights.

In Kentucky revenue was virtually flat in the second quarter this year compared with last year, though for the first six months. It's it was up 17% from the prior year.

Gross margins increased in the second quarter to 86% compared to 60% in the same quarter last year due primarily to a renegotiation of payment terms and conditions with a valid click marketing partner.

The 10 key gross margins continue to increase within the second quarter of 2020, increasing to 55% compared to 24% in the same quarter last year.

Operating expenses were $2.7 million lower in the second quarter this year compared to the prior year.

Marketing costs are primarily made up of the expense required to attract consumers to websites and apps.

These are the valley click traffic acquisition costs also known as Tac.

Valley Click revenue, which suggests a generated predominately from AD served to these websites and therefore valid click has a lower cost of revenue, but a higher marketing expense as a result of of Tac.

Marketing costs were $3.9 billion into second quarter of this year compared to $6.5 million and the same quarter last year.

The lower expense this year compared to last year is primarily due to lower valid click revenue compared to last year and to the renegotiation of payment terms and conditions with a valid click pack provider.

[noise] compensation expense was $2.1 billion into second quarter, this year compared to $1.7 billion in the prior year, primarily due to higher employee benefit expense.

Crude commissions.

Stock based compensation.

And accrued incentive pay.

Our headcount at June Thirtyth was for June Thirtyth. This year was 70 full and part time employees.

Compared to 62 at June Thirtyth of last year.

I might have a higher headcount in this years quarter. The payroll for the quarter ended June Thirtyth 2020 was lower than the same quarter last year due to temporarily lowering the compensation for senior officers and employees with salaries in excess of $100000 per year.

Selling general and administrative expense decreased $432000 into second quarter. This year compared to the prior year due primarily to higher legal and professional fees incurred last year from the merger agreement, which we terminated in June 2019.

Interest expense was $73000 from the second quarter of this year.

It is compare to a interest income of $149000 and the second quarter of last year.

Last year is interested in.

Income.

Or net interest expense.

Which was an income item included an adjustment to the derivative liability expense associated with the convertible promissory notes that we issued in March 2019.

We had other expense or $50000.

In the second quarter of this year due to the loss associated with the mark to market of a derivative liability associated with the convertible notes that I just mentioned.

And due to a buyout of a lease of computer equipment.

We reported a net loss of $1.4 million or two cents per basic share compared to a 2 million dollar net loss or six cents per site per basic share last year for the second quarter of last year.

The adjusted EBITDA for the quarter ended June Thirtyth was a loss of $140000 compared to a loss of $854000 into second quarter last year.

Our balance sheet at June Thirtyth 2020.

Had cash and cash equivalents, a $4.2 million and outstanding financing debts of $3.4 million.

In the quarter.

In the second quarter, we engaged in a number of capital raising activities.

In April we close the second tranche of a registered direct offering in which we sold our common stock for gross proceeds of $245000.

Also in April we obtained an unsecured 1.1 billion dollar loan under the pay cheque protection program or who are a P.P.P. loan.

We use the proceeds entirely for payroll cost and in July we apply for debt forgiveness adds. It has is provided by the program.

In may the remaining promissory note holders that I previously mentioned converted all of their notes and and as of today or as of the end of June No notes were outstanding.

In June we closed an additional registered direct offering of our common stock for gross proceeds of $5.5 million.

Subsequent to June and July we closed a firm commitment underwritten follow on public offering of our common stock for gross proceeds of 10 and three quarter million dollars.

Just a word about covert 19, and a new though.

Beginning in late April 2020, we started to see a reduction in a number of advertisers available to valid click and as a result, a decline in the monetization of traffic to those various websites and applications that valid click serves.

This resulted in the reduction in revenue that we're now reporting in the second quarter.

Additionally.

Well at 17% growth do you 10 key fared well through the first six months of 2020, the number of clients pause a number of clients had pause marketing spend in the second quarter, resulting in a slowing down of the growth rate and reporting and us reporting a flat second quarter year over year.

Generally we have curtailed a expenses, including compensation and travel we have issued a work from home policy to protect our employees and their families.

As mentioned earlier, we also implemented a temporary compensation change to senior officers and employees in May and June.

[laughter] as rich mentioned beginning in mid June 2020, we experienced an improvement in daily revenue, which appears to be continuing into the third quarter.

We do not yet feel comfortable enough with the trend to predict with any certainty how the second half of the year will materialize or whether our revenue run rate will continue to improve.

Focusing on resources, we're focusing all of our resources on areas, we believe habit immediate revenue potential and continuing to find expense reductions as necessary with as little disruption to our daily operations as possible.

Now with other like to turn call back over the rich for closing remarks.

Thanks, Wally we continue to navigate our way through the economic changes associated with coded and the early trends.

Any heading into the strong as part of our year suggests a recovery it started.

The intent he has continued to grow throughout the first half of the year in spite of significant and industry wide marketing budget declines, resulting from cold and while valid click was impacted more severely than the intent key we have seen encouraging monthly sequential growth within valleys like.

Following its low points in may.

Now the strongest balance sheet in the history of our company, we feel confident in our ability to not only managed to public but to thrive on the other side.

I'd like to turn it over to the operator.

Thank you if you like the signal for question at this time. Please do so by pressing star one on or telephone keypad and as a reminder, if he argues in a speakerphone. Please make sure that your mute function is turned off to larger signals to retire equipment again that star one and we'll take our first question from Brian Kinstlinger I've Alliance global partner.

Hi, Good evening, guys things are getting a call seemed.

In that that they really impacts a wrong Phoenix breakeven on much lower revenue.

And Tony.

Thank you can you talk about your ability to win new logos in this environment or when you look at the leasing man I guess month to month on month that you talked about that revenue growth coming from existing customers or is it also coming from new customers.

[noise], it's coming from both you know in leading into the second quarter.

Brian I believe our first quarter.

For your growth rate alone for the intent key was north of 40% if memory serves.

Which is why with a flat second quarter, we at 17% growth in that business you know for the for the half the year, but but clearly do achieved the kind of growth. It worsening in the first quarter and the quarters before that you know eating signing up new logos I mean, the habit and we did sign new logos you know in the quarter.

It's really just that you know marketing budget, Scott you know pause for a lot of companies, but what we're seeing now is another starting to be released again.

So in 10 kids picking back up you know, it's hard for us to gauge since no. There's never been a co bid before you know there's no example for up to point to say, how good budgets come back do they come back you know for full form for full strength full well for capacity in Q3, a Q4 or or is it have capacity.

I don't know, but right now things are moving in that direction for sure.

So when you look at your.

Can you provide maybe quantify a customer account for in 10 P. at the end of June versus the end of March maybe today.

Yeah, I don't habit handy I don't think we give out the customer counts, but there are lots of customers pretty 10 key I think in my script.

Mentioned that we are running <unk> second quarter I think we had 50 50 campaigns that are sometimes multiple campaigns for customers, but what 50 campaigns running for the intensity in the second quarter.

And maybe to your question about demand Yeah, I think the other thing I mentioned in my script that people should pick up on its I believe.

We had we make 60 RFP that thinking the second quarter oriented.

And you know the budgetary season.

For marketing you know tends to pick up you know you know big way and unit towards the end of the second quarter of course people trying to kill them you know their budgets for the Q3 Q4 season. So.

That many arc piece for us actually as you know we are feeling like it's a good sign that demand you know is gonna be coming back in the back half of the or otherwise why would companies be.

Wasting the time asking for an RFP for money they don't planning to spend.

Right.

Can you talk about the sales cycle poor or new logos. How quickly you know when after unique and you know may something transpire, let's start with a test campaign and how quickly can that ramp.

So the answer that question is it's not simple get think because the the results that we've seen can vary quite dramatically. You know we have calls business in 22 days and it's taken US you know nine months to close business. So you know you're looking at a pretty substantial range there I wouldn't.

Say that you know like all things fails.

You know the quality and determination of the salespeople you know is proving to be a big factor in terms of you know, making the number closer to 22 days versus the nine month period, but the reality is no closing a material logo.

You know where the material budget is likely to be somewhere in between and maybe even no on the higher end of the middle of that range.

Yes, it almost invariably a new client is always starts as a test I mentioned.

In my script, even even our largest customer you know when they add.

A new capabilities that they want to test with us they use the test which is exactly what happened I said it you know they're doing a connected TV test for our largest client right now actually started in August and what happens if you know if the performance results for those tests look good invariably what.

Happens is the client you know basically finds up and start say more regular budget allocation towards whatever it is that we're testing for them.

Right.

Now I think you clearly laid out just thinking demand change can can see month by month, maybe I missed it but can you kind of lay out how you're seeing wallaby correct.

You know and that business, we're covering albeit at a much slower clip over the last few months.

So valid quick was.

Expected to have some.

To have a greater let's say impact as it was all the colder than than 10 key was.

You know and.

The reason for that is because it's not a primary budgets are worse for for marketers. Unlike the intent. He is like a major channel on major spend category tends to be.

An add on budgetary expense now the good news about Valueclick is it's an add on budgetary expense for hundreds of thousands of advertisers, which is the advantage of that business for us is because the way there integrations with good.

The Mantech partners, we have access to know many many many advertisers can you kind of get a little bit a budget from a lot of a lot of brand.

The challenge is you know when budgets are pulled back whenever that when a market or tends to pull back. It's those kinds of budget. They pull back first and so that's why we saw a disproportionate reduction in the valley could business now with that being said you know the business did.

Bottom out in May and you know we saw sequential growth in June over main saw sequential growth in July over June and we're seeing at least through yesterday, you know growth trends in August at or above July. So we feel like you know that altaic business.

As a is coming you know no backup and it will come back up it you won't come back up.

As fast as it goes down yeah, well, but it will will come back.

Great last question here accepted by the way and I mean can keep you build scale in that business.

We've already had your margins and dramatically expand there what is in mature gross margin can be in 10 key business.

I've said, a few times when I've I've been asked this question that I think the the sustainable margins from the intent key are probably in the 50% to 60% margin range.

Now however, with that being said you know I also mentioned and and perhaps with not picked up enough.

That we are actually in the process of building Psas were in the intent to a one where clients them on their own campaigns.

And we expect that product to be a launched and 2021.

And one wants that product.

There will be margins, you know north of 9% for that business small and this has always been a part of the design for the intent key business model, but we want to two offered as a sort of this before we offer digital fast product. So that we could generate excitement a pretty good results get all you know.

Significant them you know revenue base running you know on the program to have proof points success proof points to 2.2 for for the fast version.

Going forward you know, we think path 2021, 20 going to will always have a services business, but we'll have a complementary baskets and so the result of that as we should see increasing margin, but they won't start until we launch the msas where.

Great. Thanks for taking my questions.

Thank you.

And again that someone to signal for question well go next to run Meyers of Lake Street capital market.

Hey, guys. Thanks for taking my question. There's some for me what was a catch up into July give an equity raise.

[laughter] it was approximately.

$12 million.

Okay.

And then just one more sort of housekeeping item, what should we be isn't for share cone to account for that reason equity raise.

Should be approximately 97 and a half a million.

All right that's helpful. Thank you.

So then you expect to revenue to be up sequentially or how should we think about the seasonality for the rest of the year.

Well, we're certainly hopeful and not planning it for me not to be line, but as I said in my my preamble.

That's it covered it just listen you don't look I've never had to deal with a coated nor as anyone else. So it's hard for me to.

To take a trend that we're seeing right now which for the intent key by the way is you know growth may over April April was the lowest month for being 10 key and it may growth over April June over May July grown over June and August is forecast to be higher than July but there is a trend you know that's headed in the right.

Direction as it relates to the intent key but I I don't know that trends going to continue.

And I suspect it will it looks like it will and if it does then you know we should have a.

We should be back kids.

Year over year.

Quarterly growth you know in Q3.

Okay, and then last one for me you mentioned that you guys added one sales person in July how are you guys thinking about that for the rest of the here as far as adding more sales reps.

I'm looking right now to hire at least two more.

You know in preparation for you know the budgetary season coming up and and for next year. So we bought we're identifying candidates and we're actively pursuing candidates for sales right now.

Great. Thanks, guys.

You bet that's right.

And with that last question. This will conclude today's call me appreciate everyone's participation today and you may now disconnect.

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