Q2 2021 Inuvo Inc Earnings Call
Good day and welcome to the new home second quarter 'twenty 'twenty, One financial results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Valter Pinto managing director of KC USA Strategic Communications. Please go ahead Sir.
Thank you operator and good morning.
I'd like to thank everyone for joining us today for the new gold second quarter 2021 shareholder update conference call.
It's called the Nouveau Chief Executive Officer, Richard Howe, and Chief Financial Officer, Robert Rosewood Reis will be your presenters.
We'd also like to remind our shareholders that we anticipate filing our 10-Q with the Securities and Exchange Commission.
Before we begin I'm going to review the Companys Safe Harbor statement.
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.
Forward looking statements are subject to risks and uncertainties 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.
Miller expressions as they relate to a new vote or as such a forward looking statements investors are cautioned that all forward looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by a new go out at this time.
In addition, other risks are more fully described in any of those public filings with the US Securities and Exchange Commission, which can be reviewed at www SEC Gov.
With that I'd now like to turn the call over to CEO Richard Howe.
Thank you Walter and thanks, everyone for joining US today, we had a strong second quarter for the three months ended June 30th 2021, we delivered $12.6 million in revenue, which was up 66% year over year and up 19% sequentially.
At our current gross margins, we expect to breakeven on an adjusted EBITDA basis, when monthly revenue run rates exceed $5.5 million, which we expect to be able to deliver before the yearend.
Adjusted EBITDA in the second quarter was a loss of 965000, which was roughly flat sequentially.
Our balance sheet remains strong with no debt over $18 million in cash and marketable securities and an unused $5 million financing facility. The company is not currently in need of additional operating capital.
Of the $12.6 million delivered development platform contributed $9.7 million, which was up.
Year over year by 72%.
That platform's growth rate has been roughly 8% compounded monthly through June 2021 off the covid related low in may of 2020.
As we have previously mentioned valid clicks services had been materially revised post pandemic.
And this is most evident in the mix of revenue where of the three main clients are valid click.
The largest is now Google.
As the most dominant advertising marketplace in the world, We decided in 2020 to refocus our effort towards serving the objectives of this client strategy. We believe offers the most attractive growth prospects.
I will remind our shareholders that this client relationship or a new low goes back more than a decade.
More on balance like later in the conference.
In turnkey platform contributed roughly $2.9 million of revenue in the quarter growing 50% year over year and 37% sequentially.
Client performance results associated with this product are nothing short of astounding.
In the second quarter, we exceeded our client goals on average by 74%.
We would expect this product line to continue its double digit growth rates year over year for the foreseeable future.
For the third quarter of 2021, we expect strong continuing year over year and sequential revenue growth within both product lines.
I'll now provide some additional insights for both the intent and valid click.
As a result of the continuing performance results associated with the intent key platform.
Through the first half of 'twenty 'twenty, one we have seen a 56% increase in the number of prospective client presentations given at a 70% increase in the number of deals one as compared to the same period in 2020.
Market momentum appears to be building.
We had 18, new campaigns launched within the quarter, including our first deal sold by our sales Rep in Canada as part of our announced expansion into that market.
Had 84 total campaigns running in the second quarter.
In April we put out a release about a retail client where the intent key had delivered a staggering 88 to one return on ad spend.
The results for that client have only improved since then and as a result, they are now allocating more budget towards our service.
We also announced recently that we had closed our first casino client and I am pleased to report that the client continues to spend media dollars with us as their growth accelerates, having recently surpassed their largest competitor in the state and monthly gaming revenues.
We're currently working on an additional proposal for this client and casino International a leading publication within the gaming World, we'll be highlighting our technology in a September article.
Within the quarter, we added state agencies looking to promote covid and vaccination awareness.
<unk> services company, and a healthcare company, a recreational vehicle company, a large retailer and some tourism clients.
We are in active implementations associated with a SaaS version of the intent and we are in discussions with numerous prospects for the same.
Because our solution uses artificial intelligence and is therefore, not reliant on third party data cookies or IP addresses to make his advertising decisions. We have been experiencing increased interest from prospects, resulting from this competitive differentiation as though.
As companies look to select technology providers, who can future proof their ad spend.
We would expect continuing interest over the next few years related to this differentiation as brands begin to appreciate the scale of the performance challenges associated with what is fundamentally a change in the very way online advertising is delivered.
Google recently extended their timeline for the deprecation of third party cookies to allow the market additional time to prepare.
Since we are already prepared this added time gives us the opportunity to be working on the next advancement of our platform, while our competitors worry about reengineering their current platform.
With a growing list of clients and prospects hiring within the intent key to support clients in sales has continued throughout Q2.
We now have 20 people in sales account management and sales support roles are.
<unk> currently has 78 full and part time employees.
On the development front, we made several scalability improvements designed to accommodate our growing client base and our expansion into Canada.
We are also rebuilding and streamlining our internal dashboards as an efficiency improvement for client facing personnel.
And as a way to reduce the ramp up time associated with new hires as our growth continues.
We also recently started to enhance our web crawler.
Within our system. This crawler is akin to a librarian.
It continuously poles content from the Internet, which it then sends to our artificial intelligence for interpretation.
In this regard our AI already has learned from over 6 billion web pages covering most of humanities knowledge.
It also interprets millions of new web pages every single day.
We are working towards enhancing this call or in a manner that would allow our AI to understand what the sentiment is related to any individual concept within the English language.
For example is the sentiment towards a given brand or a place or a product or a person or a thing.
Concurrently and given the predominance of things like Emojis and hashtags, we are updating the crawler. So we can understand these new language construct.
Turning now to valid thick, whereas I mentioned earlier, we had a strong 8% compounded monthly growth since the covid low in may of 2020.
Increase in scale with invalid clicks competitive market is often about making small enhancements that can improve yield.
This was our main development and operational focus within the quarter.
There were two such enhancements that are worth noting.
First we continued to enhance the a b testing infrastructure, we put in place and launched last year.
We haven't talked about this before but it is a good example of the power of that incremental improvements can have on revenues.
In concert with the needs of our largest client.
We ran 17 different individual experiments within the quarter, where we made small adjustments on landing pages to things like color and font size and content spacing.
Of these 17 experiments 11 resulted in positive increases in revenue.
Each improvement typically represents around 1% to 3% this ability to quickly test in this manner at scale can add up over time.
In 2021, so far we estimate that we've increased the elegant revenues by about 8% to 10% using this continuous experimentation capability.
This increase enables us to better promote websites to be more competitive in the marketplace and ultimately serve the needs of our clients, while scaling our services to those clients.
Our second focus I'd like to highlight this quarter was a set of enhancements to our proprietary media buying tools. The technology update that makes managing advertising campaigns more efficient.
Using these internally developed tools, we were able to double the number of campaigns each of our campaign managers can build everyday.
This is critical because being effective in online advertising at scale requires optimization, which is achieved by developing campaigns across a wide variety of topics a process without technology that is manually prohibitive.
One of the valid took measures we track that might be interesting to our shareholders is the number of web pages into which we serve ads viewed by consumers in any given month.
In this regard valid claim hit an all time monthly high within the first half of the year by serving ads into roughly 100 million page views.
I would now like to turn the call over to Wally for a more detailed assessment of our financial performance within the quarter.
Thank you rich.
Everyone.
I'll recap the financial results of the second quarter of 2021, as Rich mentioned <unk> reported revenue of $12.
$6 million for the quarter that ended June 30 of this year. This.
This compares to $7.6 million reported in the second quarter of last year, both platforms that looks like and then turnkey exceeded the prior year.
Valley click revenue exceeded the revenue of the second quarter of last year by 72% and the <unk> revenue for the quarter ended June 30 of this year exceeded the prior year quarter by approximately 50%.
And that was primarily due to the acquisition of new customers.
Revenue in 2020 was affected by the Covid 19, pandemic, which had a material impact on advertising budgets beginning in April of last year.
As the intent key platform.
Revenue has become a greater percentage of the overall revenue the components of our overall cost of revenue has shifted.
Cost of revenue in 2021 was primarily generated by payments to AD exchanges that provide access to the supply of media inventory, where we serve advertisements using information.
<unk> by the turnkey and to a lesser extent by payments to website publishers and App developers that host advertisements that we serve through valid claim.
The majority of valid clicks cost our traffic acquisition related and therefore are reported as a marketing expense within the operating expense category.
Last year cost of revenue was primarily generated by payments to website publishers and App developers that hosted advertisements that we serve through valid claim.
<unk> gross margins decreased in the second quarter to 82% compared to 86% in the same quarter last year due primarily to the shift in the cost of revenue that I just mentioned.
The intent key gross margins were 42% in the second quarter going forward, we expect in turnkey gross margins to increase as the SaaS version, where as the SaaS version, where margins are expected to be significantly higher as a result of mostly fixed costs associated with operating.
Just the AI the modeling ended decision components of the platform.
Operating expenses were $12.8 million in the second quarter of this year compared to $7.8 million last year, an increase of $5 million.
The largest component of operating expense is as previously mentioned marketing costs.
Marketing costs are predominantly traffic acquisition costs associated with valid claim.
It's the largest expense associated with the valid quick platform.
Marketing costs were $8.2 million in the second quarter of this year compared to $3.9 million in the same quarter last year.
The $4.3 million higher expense this year compared to last year is primarily due to our reduction of traffic acquisition activities last year in response to the unusually lower valid click revenue associated with the Covid 19 pandemic.
Compensation expense was $2.9 million in the second quarter, this year compared to $2.1 million last year and Thats due to <unk>.
Higher stock based compensation expense this year and to higher employee salary costs are full time employment at June 30 of this year was <unk> 73, compared to <unk> 66 at June 30 last year.
The majority of the increase in this head count occurred within sales sales support and account management for the 10-K.
We also have higher active.
Acquisition professionals within valid collect to support our strategy to bring that function in house.
Selling general and administrative expense decreased $104000 in there.
The second quarter of this year compared to the prior year due to lower it costs, where we consolidated our computing facilities to two data centers.
Also due to lower facilities expense, lower corporate expenses, and lower depreciation and amortization expense.
These expenses were partially offset by higher professional and public company expenses.
Yesterday August 11th we held our annual shareholder meeting.
All four proposals submitted to the shareholders were approved the cost of holding the meeting was approximately $200000. The highest meeting costs in recent memory part of which was caught caused an offsetting higher expense to an otherwise lower SG&A.
We believe the higher cost of holding the shareholder meeting is primarily due to brokers surrendering their right to vote Uninstructed shares using the discretionary voting authority granted by the New York Stock Exchange.
Of the 119 million shares outstanding approximately a third of our shares are held by insiders institutions and large shareholders.
Leaving two thirds of our shares being held by retail shareholders.
Retail shareholders frequently keep their shares in brokerage accounts and often are not aware that that a boat is pending.
Proxy has not returned to the broker may be voted by the broker.
Since the returns from retail holders is often under 25% the brokers discretionary vote becomes very significant particularly small cap company.
The decline in discretionary voting by brokers is a real concern for many issuers as its becoming increasingly difficult and expensive to obtain enough votes to reach a quorum in past.
Specific proposals.
<unk> incurred the higher expense attempting to reach retail shareholders by contracting an independent third party, who attempts to identify and phone shareholders to remind them to vote.
Net interest expense was $8000 in the second quarter of this year compared to $73000 in the same quarter last year.
We had other income of $25000 in the second quarter of this year due to unrealized gains from marketable securities.
The other net expense from the second quarter of last year was due to the conversion of convertible debt securities.
We reported a net loss of $2.4 million or <unk> <unk> per basic share compared to $1.4 million net loss or <unk> <unk> per base. This year in the same quarter last year.
The adjusted EBITDA for the quarter ending in June was $965000 loss compared to a loss of $140000 last year.
At June 30 of this year, we had cash and cash equivalents of $17.3 million marketable securities of $889000 and a networking capital of $15.4 million. In addition, we have a $5 million working capital line.
Which currently has no outstanding balance and we maintain a simple cap structure with only common stock and employee restricted stock units through an it through an equity incentive plan with that I'd like to turn the call back to rich for closing remarks, yes. Thank you Wally we had a strong second quarter with 66% year over year growth.
A 19% sequential growth.
We would expect the third quarter to be up between 45, and 55% on a year over year basis.
We expect both product lines to show sequential growth in the third quarter, we expect our adjusted EBITDA will improve within the third quarter. We expect the <unk> remarkable client performance to continue alongside a growing pipeline with improving win rates.
At over $18 million in cash and marketable securities no debt our balance sheet is strong and consequently, we see no immediate need for additional capital with that I would like to turn the call back over to the operator for questions operator.
Thank you if you would like to ask a question. Please signal by pressing star followed by the one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again that is star one to ask a question.
And we will go first to Brian <unk> with Alliance Global partners.
Hi, Good morning, guys. Thanks for taking my questions. It sounds like you're having a lot of success with new logos from turnkey can you quantify how many customer you ran campaigns for in the second half.
Sorry in the second quarter of 'twenty, one what was that number for 2020, and then based on the trends of it sounds like you're you have more rfps with new logos than ever and Youre, winning more where.
Possible range of outcomes B at the end of the year, our customer count or campaigns from turnkey.
Wow that was a lot of questions.
Some of them I can't answer I can tell you what I said in the script, which is I know, we ran 84 campaigns in the second quarter end.
And the <unk> was.
A 50% year over year or so.
The number of campaigns run a year earlier is at least half if not more than half.
But what it was in this quarter Brian.
Because we do see growth from existing clients as well, but we are adding new clients.
Like I said in my script, we do.
Building a product in a market, which is kind of what we're doing is not easy and then theres sort of momentum point that tipping point at which point the market starts to assimilate your technology and how youre doing it and why it's different and I think we're starting to see that.
The good news.
And I think thats evident in the win rates that I talked about.
The number of deals we're actually winning versus the number of deals. We won last year, which I said was 70% for big deal. If it means we're winning 70% more of the deal counts. We have this year than we did last year.
Yeah.
What was the other question Brian.
I guess I'm. Just curious are you do you have 25% more clients in Europe, I always get more like 50% more clients I know there was a time that customers weren't looking for new AD Tac revenue. So I'm just kind of curious with some of those metrics.
Not exactly it's about two and provided above.
Two is about <unk> <unk> and then great and then describe the evolution of the new question will do most start with a small campaign and then the second is a little bit bigger before they start to give you more of that budget pie or just maybe take us through what the typical evolution I'm sure. It ranges.
It's pretty much the same every time.
Call it anywhere from <unk>.
Three months to nine months sales cycle, we do close deals within three months, but typically three months sales cycle.
$3 to $3 nine.
And it always starts the same way someone wants to test.
Our technology and they want to test us.
Against whatever else. It is they are using and that's that's our competition.
And then when the test is implemented and we go head to head against whoever the incumbent is.
When we win those tests and I will tell you I'm not aware of us ever losing one.
They start spending money with us on a more regular basis and it's incremental.
And I think when you look at the number I gave in my script, which I said.
We beat our clients performance goals in the second quarter by 74% and throughout the first.
Two quarters of 2021, we've beaten our client calls by 60% look at that and think that's how much we're beating our competitors because thats what that is the goal as we get our competitors' performance.
And that's also being competitors, that's click throughs and getting customers to their sites or that.
Those loop purchases.
Every customer has got different goals.
Retail customer selling our retail product is more likely to care only about how many of the product. They sold all return on their AD spend like.
Like the retailer we talked about.
In our and.
In our script, which happens to be a furniture retailers at a retailer a well known one.
Where we delivered 88 to one return on AD spend right and you know just think about that number writes a staggering number.
We basically for that customer and by the way that was the test we did with them. So the initial test with that customer is where that 88 to one return came in but they gave US 50 grand to basically spend and we delivered $4.5 million worth of sales of furniture.
It's staggering.
But.
And then for other customers maybe to your point it might be a click through rate, maybe that's what they're trying to optimize toward they care about how many people are actually clicking through to whatever it is that they are promoting they could they could definitely use that as a goal our AI doesn't frankly care what the target goal is it will optimize automat.
Likely and learn to that goal.
And they do vary.
Okay, and then how should we think about the introduction of this SaaS model from a P&L perspective, when will this lead to slower revenue growth given SaaS is generally recognized over time or as campaigns.
Are all at once but it is just maybe at a higher gross margin. So and then the second part of that is that each client going forward and have the option for SaaS or paper paper campaign.
There's two flavors of the product one is fully managed service and the other one SaaS, we will continue to sell both.
As do most companies who claim they have SaaS products. It's just a natural evolution I mean, nobody knows how to use our products for than we do and so I.
I would say sophisticated clients the most sophisticated clients they recognize that and they're willing to sort of acquiesced their responsibilities for managing the campaigns to us recognizing that we're probably going to be doing a better job of it.
So we see that continuing.
The services piece of our business and it's still the biggest one and the majority of deals. We are closing right now are the service with a fully managed service components.
So I don't see it's not like an and not an or it's an and.
I think the SaaS version of the product is very applicable to certain parts of the market.
Agencies, who are in the business of managing client relationships and want to run campaigns and really all they want to do is plug into the AI that we have and allow themselves to be client facing.
We'll probably see more sales too to these sort of agencies, who want to use the technology that way and of course, what that ends up being as a driver of the bottom line.
More of that we can do.
The more we throw down to the bottom because the margins on the SaaS version are north of 90.
With that said the managed service components of the business for the in turnkey run anywhere between 40, and 60% probably average around 50 so.
Yeah, Yeah, and then on and search.
<unk> revenue, we still about 25% below 2019, the market is still in recovery. What do you think the market has shrunk and budgetary shifted away from search and into other mediums.
No. It's not it's not that the market has shrunk or the opportunity size for valid click has shrunk it it's more about.
You can't scale back up as fast as you scaled down.
Doesn't work that way and so what youre seeing with the growth trajectory of valid claims as they return and then and then if our projections are correct and exceeding of where it was prior to the pandemic so that what the market should or our shareholders should look at when they're looking at our balance against that that businesses.
Bounced back and is recovering very very strongly.
And it's as I said in my script, it's recovering with a different mix that we believe will allow us to actually scale that business beyond where we were scaling it before.
Great. Thank you guys.
Thank you Brian.
And once again, if you'd like to ask a question that is star one at this time.
And we'll go back to Brian can slinger.
Oh look I wanted to make sure no one else I didn't take the whole time, if somebody else wanted to ask but I have one more question.
You highlighted your strong balance sheet talk about the M&A landscape and kind of your high level strategy on M&A.
Yeah, that's a good question Brian.
And we.
I guess opined on this on prior calls and I think our shareholders are well aware, we're sitting on $18 million and it is not our objective to sit on that cash I think our shareholders gave us that money and put it to use.
And we are operationally because we're still burning cash on an adjusted EBITDA basis, but thats going to.
And as I said towards the end of the year. So you know as a result, yes, we are actively.
In market looking.
For our assets.
That could help with our growth objectives, but I will say this.
We are not in need of technology.
The the turnkey is already the most sophisticated.
Advertising technology in the country.
And we know that so we don't need to buy technology. So our focus is.
He is more around looking for comp.
Companies.
Of varying sizes.
When we looked at some that are as small as $2 million a year revenue. We've let some that are as much as $50 million in revenue.
Were focused when we look at those companies that who are their clients we care more about the client portfolio associated with the company. We're evaluating them. We do the other things they may or may not do.
For obvious reasons, because we know the performance of the <unk> is so strong we really believe that we can if we can.
By a company that's got a great client list, we will be able to to.
To grow that client list and do a better job of performance for <unk> for each of those clients. So that's the focus.
Great. That's all my questions. Thanks.
Thank you Brian.
Yeah.
And there are no further questions in the queue at this time.
Thank you operator, and thanks, everyone, who joined US today. We appreciate your continued interest in our new boat.
And that concludes today's conference. Thank you for your participation you may now disconnect.
Yeah.
[music].