Q3 2022 Inuvo Inc Earnings Call

Good day, ladies and gentlemen, and welcome to <unk> incorporated third quarter 2022 financial results Conference call. Today's conference is being recorded at this time I'd like turn the conference over to an Italia Rudman. Please go ahead.

Thank you Keith and good morning, I'd like to thank everyone for joining us today for <unk> third quarter 2022 shareholder update call, but any new role as Chief Executive Officer, Richard Howe, and Chief Financial Officer, Wally Ruiz will be your presenters on the call wed also like to remind our shareholders that we filed our 10-Q with the securities and exchange commit.

Yesterday before we begin I'm going to review the company's Safe Harbor statements. The statements in this conference call that are not descriptions of historical facts are forward looking statements relating to future events.

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 a new low.

And are such a forward looking statement.

We are cautioned that all forward looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by a new fine. In addition, other risks are more fully described in our new world public filings with the U S Securities and Exchange Commission, which can be reviewed at www SEC Gov. The company makes no commitment.

To disclose any revisions to forward looking statements or any facts events or circumstances. After the date hereof that bear upon forward looking statements. In addition, today's discussion will include references to non-GAAP measures. The company believes that such information provides an industrial measurement and consistent historical comparison of its performance.

And of the non-GAAP measures to the most directly comparable GAAP measure is available in todays.

News release on our website with that honor the way I'll now turn the call over to CEO Richard Howe. Please go ahead rich.

Yes.

Thank you and Italia and thanks, everyone for joining us today.

We are pleased to report our sixth consecutive quarter of year over year revenue growth for the third quarter of 2022.

Year to date revenues have increased 45% to $58 3 million for the nine months ended September 32022.

As compared to the same period last year.

On a trailing 12 month basis revenues have increased 47% to 78 $1 million.

For Q3, 2022, we delivered $17 1 million in revenue.

We experienced modest revenue growth for the third quarter year over year, which we believe was due in part to a deceleration in consumer spending.

Carryover effects unknowingly purchased invalid advertising from a well known platform that we disclosed in the second quarter and from whom we are now seeking full reimbursement.

And the loss of an agency client, which I will discuss in more detail in a few minutes.

As it relates to the invalid traffic a new boat has reimbursed effected clients.

And we are withholding payment due the platform until such time as the issue is resolved and.

In the interim.

That form is shut down our accounts and we estimate that this contributed roughly a million and loss revenue in Q3.

We are currently in an arbitration proceeding with the platform regarding the dispute.

As you know a newbuild provides digital advertising technology and services across channels are valid click platform principally serves advertising within the search and social channels. While the intent key principally serves the connected TV online video display cable TV a native channels.

Through the first nine months of 2022, both platforms experienced strong growth with the intensity and valid click up roughly 121% and 20% respectively year over year.

The social and search related revenues from Valueclick represent roughly 67% of revenues, while the programmatic revenues associated with the intent key represents 33%.

For the third quarter of 2022, turnkey revenue increased 12% and valid click decreased 3% year over year.

As was mentioned in the second quarter transcript.

Revenues in that quarter were seasonally higher than expected and as such we message that Q3 could be impacted by a seasonal trend change in 2022.

And the potential economic conditions that were looming, which turned out to partially be the case.

Gross margins remained healthy in the third quarter at roughly 60% and 58% for the three and nine month periods.

Adjusted EBITDA was a loss of roughly $2 6 million and while this was more than expected. We would expect this to improve heading into the fourth quarter.

Adjusted EBITDA in the quarter was impacted mostly by lower revenues.

The company's core strategy continues to be a growth oriented strategy.

As we have messaged on previous calls we believe the industry. We serve is not prepared for the implications of a consumer privacy led future.

In fact, Mckinsey <unk> company reported on this issue as early as April of 2021.

Where they suggested that this shift would begin to threaten the $152 billion annual U S digital advertising industry, starting in 2022, because that industry would lose access to consumer data.

It is well known that incumbents rarely make the transition from one technological paradigm to another rather they continue to hang on and or adapt the services and technologies. They currently use in variably leading to lost market share to companies like a new vote.

So we're not burdened by using outdated methods not aligned with the future.

The next few years will define the winners from the losers within the advertising industry and renewable is well positioned to be among the winners.

Our opportunity remains to take market share during this period, where these incumbents continue to use outdated technologies and therefore why growth remains our number one priority.

We have continued to deliver exceptional results for clients within the <unk> platform, where in the third quarter, we performed on average 44% better than our clients Kpis.

We have yet to lose a client due to performance when.

When we do lose a client it is almost always related to campaigns, we are providing to an agency who owns the client relationship.

Most of U S digital advertising spend occurs through these agencies.

In Q3, we lost an estimated $2 million because of such a situation.

In this case our client the agency lost accounts, we were servicing the competing agency.

The frustration associated with this case was that one of the brands in question experienced the best months performance and the history immediately preceding the transition to the new agency.

That performance was the result of the intensity and yet the account was still up.

We have remained in contact with the brand directly and while they signed a 12 month agreement with the New agency. We may yet have an opportunity to win this brand back directly in 2000 22023.

As the performance delivered by the New agency continues to decline alongside the changes that are occurring within the advertising industry overall.

On the sales and marketing front, we continue to build out a team of go to market executives capable of capitalizing on the opportunities resulting from changing industry.

We're supporting their efforts through marketing activities that raises the profile within that industry, while aligning our brand with this privacy future.

Universally we see growing concern related to performance within prospects, particularly those who rely heavily on traditional platforms for that performance.

We increased the size of the sales and account management teams by approximately 20% in Q3 and they have been busy submitting proposals in preparation for next year's media cycle.

As our brand is becoming more recognized we are seeing larger potential deal opportunities emerge.

We noted in our Q2 call.

How we had started to deploy yet another artificial intelligence based technology designed to solve an industry challenge itself, an additional consequence of privacy and the deprecation of the cookie.

We now possess and make available generally to our client technology. They can determine the contribution of each channel being used as part of the overall media mix to the performance metric being optimized.

This technology can find the pattern and the historical performance related to individual channels and then suggest for any given future period.

What's the optimal mix of media should be without using any consumer identity based mechanisms.

This inability to understand and improperly measure the interactions between channels is a common reason brands failed to expand.

And why they choose to limit the number of channels they use.

For example, we currently have clients for whom we are using this technology.

Who market their products across as many as 10 different advertising environment, both online and offline.

The complexity of determining how to optimize across these channels is beyond the scope of most of our industry because it required significant data science and data warehouse competencies, which are nouveau possesses.

For our brand.

It is imperative in this multi channel advertising world that they can move advertising budget away from channels, where the demand and supply characteristics are not optimal to channels, whether it where they are and then back again, when those demand and supply metrics return.

This must be done scientifically and just in time.

We see this new capability is a significant investment within the industry and has a substantial differentiation as we continued to build and advertising and technology services company capable of meeting the needs of the future.

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

Thank you rich and good morning, everyone.

Recap the financial results for our third quarter of 2022.

As rich mentioned <unk> reported revenue of $17 $1 million for the quarter ended September 32022.

An increase of 1% compared to $16 $8 million reported in third quarter last year.

Both platforms valley click and turnkey serve our multichannel solutions for our clients.

In turnkey revenue exceeded the prior year by approximately 12%, primarily due to new customers expanding their media spend.

Valid click revenue declined by 3% compared to the prior period of 2021 due to incidental issues, resulting from the invalid advertising media acquired in the second quarter of last year.

Revenue split between the <unk> Valley click was 33% at 67% respectively.

For the quarter that ended.

The third quarter that ended September 32022, and that compares to 30% and 70% respectively for the same period last year.

Our revenue was less concentrated in 2022.

Then before our largest client represented 33% of the total revenue in the same quarter last year, our largest clients of different client then from this year represented 36% of our revenue.

Gross profit for the third quarter ended September 30 of this year totaled $10 3 million as compared to $13 1 billion for.

For the same period last year.

Gross profit margin for the third quarter. This year was 60% as compared to 78% for the same period last year.

The turnkey platform has a lower gross margin than the valid click platform, but it has a greater overall net margin.

The Nouveau gross margin decreases as intent key revenue becomes a greater percentage of the total revenue.

In quarters past cost of revenue was predominantly payments to website publishers and App developers that hosted advertisements that we serve through the valley click platform.

Yielding a very high gross margin.

As the programmatic channels associated with the 10th Tee intend to grow continue to grow they have become a larger percentage of our revenue and cost of revenue.

In turnkey cost of revenue was predominantly payments to advertising exchanges that provide.

Access to a supply of advertising inventory into which we serve on behalf of our clients advertisements using information predicted by the a turnkey artificial intelligence.

This is a greater cost than the historical payments, we have made directly to publishers, but at the same time on a net basis. It is more profitable.

Very high valid click gross margins also have a high cost of traffic acquisition, which is accounted for in operating expense as marketing cost.

Turnkey does not have these costs associated with it.

Our gross margins are also dependent upon the mix of advertising channels.

We used to serve our clients.

Many of our clients require a multichannel digital media solutions.

One of our advantages is the ability to serve highly targeted prescriptive ads across multiple channels such as video mobile connected TV linear TV display social search and native.

Each of these channels youll varying gross margins, depending on supply and demand.

The optimization of the media mix for clients can vary from client to client and overtime.

Generally search and social are lower margin channels as we work within the walled gardens of large internet platforms that support these channels.

Better opportunities for margin expansion and other channels related to the open web.

We expect gross margins for the remainder of the year to be roughly in line with the gross margins that we reported in the first three quarters of this year.

Operating expenses were $14 $1 billion in the third quarter of this year compared to $14 8 million in the prior year a decrease of 5%.

The largest component of operating expenses marketing costs note as I previously mentioned marketing costs are predominantly traffic acquisition costs associated with valid click mark.

Marketing costs were $8 $6 million in the third quarter of this year compared to $10 2 million in the same quarter last year.

The lower marketing cost is due to the overall lower valid click revenue.

Going forward.

We expect marketing cost as a percent of revenue to continue to decline as revenue from the turnkey platform continues to grow in overall share.

<unk> <unk> revenue.

Yeah.

Compensation expense was $3 two.

$2 million in the third quarter of this year compared to $2 8 million in the prior year, primarily due to higher employee salary costs higher stock based compensation expense and accrued incentive pay.

Our full time and part time employment was 92.

At September 30 of this year and that compares to 77 at September 30 of last year.

The majority of the increase in head count occurred within sales sales support and account management related to the in turnkey.

General and administrative expense increased $381000 in the third quarter this year compared to the prior year due to higher doubtful debt allowance professional fees and travel and entertainment expense.

This was partially offset by lower facility expense and amortization expense.

Net financing expense was approximately $13000 in the third quarter of this year compared to $6000 last year.

The expense was a net of $22000 of finance charges, partially offset offset by $9000 of interest and dividend income from marketable securities.

Turning now to other income and expense we reported an expense of $79000 that is associated with unrealized losses on trading securities as the securities are mark to market at quarter end.

We reported a net loss of $3 $8 million or <unk> <unk> per basic share compared to $1 8 million net loss or <unk> <unk> per basic share in the same quarter last year.

The greater net loss in the current year quarter over the prior year is due primarily to $2 $8 billion lower gross profit offset only by $765000 of lower operating expense.

Net income in this year's quarter also includes $1 2 million of noncash items, including depreciation amortization and stock based compensation.

The adjusted EBITDA loss for the quarter ended September 30 of this year was $2 6 million compared to a loss of $338000 last year.

At September 30 of this year, we had cash and cash equivalents in marketable securities of $7 7 million and a net working capital of $5 9 billion.

In addition, we have a $5 billion working line of credit, which we currently have no outstanding balance on.

We maintained a simple cap structure capital structure with a 120 million common shares outstanding.

$4 9 million.

Employee restricted.

Restricted stock units outstanding.

And 300000 warrants to purchase common stock.

With that I'd like to turn the call back over to rich.

Thanks, Wally at 45% year over year growth through the first three quarters of 2022, we anticipate delivering solid revenue growth for the year on a year over year basis, and believe 2023 2023 will be even more transformative for the company.

Consequently, we remain laser focused on increasing the brand awareness and adoption of our intent key AI technology, which is garnering extremely positive feedback.

And is gaining traction within a market where current identity based targeting technologies can no longer scale.

Overall, we are building a highly scalable model and expect to generate positive cash flow during the latter half of 2023 as we continue to grow revenue.

We believe our balance sheet remains strong enough to accommodate the working capital needs of the growing business.

I will now turn the call over to the operator for questions operator.

Ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off July your signal to reach our equipment.

Again, Please press star one to ask a question, we will pause for a moment to give everyone an opportunity to signal for questions.

We'll take our first question from Bryan Kipp Swinger with Alliance Global Partners. Please go ahead.

Hi, there this is <unk> on for Brian .

I have a few questions here.

Want to start with if you could talk about the pressure on advertising budgets and if it's hurting both of your segments for turnkey is it small campaign sizes or fewer campaigns and on valid quick does the pressure on AD search budgets.

You're seeing more or less pressures in the corporate overall ad budget.

Could you ask the second question again, please I got the first one but I didn't catch all of the second one on.

Valid click do you see the pressure on search.

AD budgets.

Generally having more or less pressure than the overall corporate ad budgets.

Okay. So let me start with the first question, which was do we see pressure on budget.

And is that represented in the campaigns that we're running and the answer is both yes and no.

We see an economic situation that is uncertain and we believe our clients.

See the same things that we see now as a consequence of that we did start to see.

Not in a big way, but in a smaller way the number of campaigns being run.

Dropping.

For clients. So the answer that question is yes, we did see fewer campaigns.

In the quarter relative to the prior quarter.

As it relates to whether or not its search or social or.

Or the other channels.

We cover.

We see it generally throughout so.

Both all of them, if you will to some degree being impacted by this.

I don't want.

To mislead it.

It is an uncertain period like we are.

Not quite sure.

This is going to continue or go away at this point, but there are some let's just say some.

Early indicators that.

<unk>.

Maybe something.

Housing advertisers too.

Pause for a second and see whether or not the economy is going to continue.

In an upward fashion or downward fashion related mostly to the issues related to inflation.

But for the most part of those you said, maybe slightly fewer campaign overall have remained consistent.

Yes, they shrunk with the reduction in it okay.

Thank you.

That's helpful second call.

Whats the percentage.

Alright.

Could you share the number of new logo wins for turnkey during the third quarter.

And.

And then at a high level, how is new logo wins trended in the fourth quarter, I guess I'm trying to get at during a recessionary period.

Enterprises.

Will they be trying new AD tech or should we expect new logo wins to be modest in the near term.

The answer the question is we haven't disclosed how many of the new logos that we have so I won't do so right now if I could have to go look it up to see what it is but I will answer it generally.

In almost every seasonal cycle within the advertising industry.

You sign up most of the new logos actually.

Adding into the new year.

Most companies.

Do not want to make changes to.

To whoever it is that providing their advertising.

Technology and services in the third and fourth quarters of the year because those are typically especially in the e-commerce realm.

The most significant.

Quarters related to their financial performance.

So there is generally a slowdown in the number of new logos, we signed in the back half of the year compared to the front end of the year.

Thank you that's helpful.

So the fourth quarter is usually seasonally strong can you provide anything to help us understand how you see this coming fourth quarter will the fourth quarter would be the strongest of the year in terms of revenue or will there be that pressure. If we're talking about so the fourth quarter will be below the third quarter any any details would be helpful.

In my comments.

Summary, I gave some guidance for this so based on where we are today November 15th.

The revenue we've seen through November 15th we're projecting revenue in the fourth quarter somewhere between $19 million to $20 million.

Okay.

And then you mentioned that your top clients.

<unk> client decreased from 36% of your total revenue to 33% of your total revenue have they communicated anything to you in terms of its near term AD strategy related to in turnkey.

Yeah.

Well, we talked to them all that time so yes.

Go ahead, while I was just kind of I was just going to say rich that boat.

Those are different clients right there wasn't the same clients from last year.

Right.

But the general answer to the question is we're in dialogue with our clients all the time about.

The various components of the medium mix.

Associated with.

The deliverable.

And of course, as I mentioned on the call today.

Yes.

Highlighted it's actually in the second quarter I mean, we we have.

Some incredible technology itself again artificial intelligence space that allows us to actually optimize.

Media mix across channels in a way that.

As far as we can tell has not been done before and the impact of it is is yet again cigna.

Significant.

Optimizing the media cross channels is probably one of the hardest things to do in advertising, particularly as the number of channels growth.

Alright, thank you so much.

Thank you.

Ladies and gentlemen, as a reminder, star one for questions or comments. Please star one.

We'll take our next question from Jack Vander <unk> with Maxim Group. Please go ahead.

Hey, guys. This is Jack Cordero, calling it project better already.

I just had one question I know you guys mentioned already you are still focusing on growth, which is nice to hear I'm wondering on adjusted EBITDA basis is the goal.

Operator close to breakeven adjusted EBITDA and I'm also wondering if you could share some color.

If you think the macro environment adds any randomness to that so that's my only question. Thank you so much.

Jackie.

Yes kind of broke up I didn't hear it.

The entire question what was it about.

Adjusted EBITDA that you were asking Jacques.

Sorry, yes, so wondering if youre operating goal is to operate close to adjusted breakeven.

The EBITDA and then also if theres any color on how macro effects any randomness.

Yes.

Absolutely thanks for the question.

Jack.

We're focused on growing as quickly as possible.

As rich had mentioned in his comments.

This is an opportunity for us it's a window that we see over the next two years, that's giving us an opportunity to get market share. So we're growing as quickly as we possibly can within the constraints of.

Tempting to be.

EBIT.

Neutral.

We're at a negative now but.

We have hit quarters, where we have been positive and we believe we can continue to be positive in the future. So the focus is growing as quickly as we can but to remain neutral to positive and adjusted EBITDA as quickly as possible also so yes that is our goal.

Thank you that's that's amazing.

Another question I had thank you.

Ladies and gentlemen, this does conclude today's question and answer session. At this time I'd like to turn the conference back to rich Howe for any additional or closing remarks.

Thank you operator and of course I'd like to thank everyone, who joined us on our call today. We appreciate your continued interest in our company.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

[music].

Yeah.

[music].

Yeah.

Okay.

Okay.

Yes.

Okay.

Thanks.

Okay.

[music].

Yes.

Yes.

Okay.

Yeah.

[music].