Inuvo, Inc. Q4 FY2021 Earnings Call

Good day ladies and gentlemen, and welcome to the Inuvo Fourth Quarter and Full-Year 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Valter Pinto, Managing Director of KCSA Strategic Communications. Please go ahead, sir.

Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today for the Inuvo fourth quarter and full-year 2021 shareholder update conference call. Today, Inuvo's Chief Executive Officer, Richard Howe; and Chief Financial Officer Wally Ruiz will be your presenters on the call. We'd like to remind our shareholders that we anticipate filing our 10-K with the Securities and Exchange Commission this evening, March 17, 2022. 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 related 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 or are such are 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 Inuvo at this time. In addition, other risks are more fully described in Inuvo's public filings with the U.S. Securities and Exchange Commission, which can be reviewed at sec.gov. With that, I'd now like to turn the call over to CEO, Richard Howe.

Thanks Valter and thanks everyone for joining us today. We had another very strong fourth quarter where for the three months ended December 31, 2021, we delivered $19.7 million in revenue, which was up 53% year-over-year and up 17% sequentially. Revenue for the year was also up significantly at 34% to $59.8 million for the year. Now, what is particularly encouraging about revenue within the year 2021 is how it accelerated between Q2 and Q4, where the company's growth rates year-over-year were 66%, 83%, and as previously mentioned, 53% in the fourth quarter. Overall, gross margins remained strong at an average of roughly 73% for the year. On a revenue basis, both the ValidClick and the IntentKey platforms were up materially year-over-year. Additionally, and as we had been messaging throughout 2021, we were successful in delivering a positive adjusted EBITDA in the fourth quarter of 2021, and I'm pleased to report that that adjusted EBITDA was $466,000. The balance sheet remains strong as of December 31, 2021, with no debt and over $13 million in cash and marketable securities. The company has access to an unused $5 million line of credit and we are currently in the middle of renegotiating that with new terms and conditions with a number of different vendors that we're talking to, and we expect to be able to talk about that more, probably on the Q1 conference call. The company is not currently in need of additional capital. Now, we had a number of significant firsts in the company's history in 2021, and I'd like to talk through a number of those with you here today. At the end of 2019, just before the pandemic, approximately 60% of our company revenue was concentrated in a single client. We had a strategy to reduce that risk and I'm pleased to report for the first time in the company's history revenue was more evenly distributed across clients. In fact, in the fourth quarter the top five clients amounted to roughly 22%, 19%, 13%, 12%, and 8% respectively of the revenue in that fourth quarter. As was mentioned in my opening remarks, we also grew an impressive 66%, 83%, and 53% year-over-year in the second through fourth quarters, and this was in part because we also had an average cash balance of roughly $16 million in the year. Both of these growth rates and the availability of cash to fund those growth rates were firsts for Inuvo. Strategically, we've long recognized that the solutions provided by the ValidClick and IntentKey platforms were not all that dissimilar. As such, we knew we could command larger media budgets by packaging a media and technology service that included the social and search channels of ValidClick with the programmatic channels of the IntentKey. In 2021, the ValidClick team delivered over $3 million of revenue that was attributable to client shared with the IntentKey. This was a first for our company. Additionally, and as part of serving these multi-channel solutions to several clients in 2021, we learned that many of those clients wanted to also place ads within traditional television. We saw this as an opportunity to ensure as traditional television continues to migrate to connected television that we would be the company that could move that budget across those channels for that client. We delivered roughly $2.5 million of linear television for clients in 2021 using the power of the IntentKey’s artificial intelligence to help us make decisions about program placements. This was a first for Inuvo. Now, one of the consequences of running multichannel media solutions is the development and management of the various client-based data warehousing, reporting, and optimization technologies associated with reporting on the performance of these solutions for those clients. These capabilities were successfully deployed for our clients in 2021 and this in turn has given us the confidence that we can now scale these services. The deployment of systems necessary to support this level of media complexity was also a first for our company in 2021. Larger media clients all have creative agencies they work with who provide us with the creative assets necessary to deliver our service using our artificial intelligence. As the IntentKey has grown, so too has our involvement with these creative agencies, where we are routinely being asked by our clients to present the insights from the IntentKey to these creative agencies, so they can have ideas from which to develop those assets. This shift from creative assets focused on who people are to creative assets using the IntentKey based on why people are interested is having a meaningful effect on our clients' businesses and is another significant differentiator associated with our technology. This level of creative involvement was yet another first for Inuvo. As it relates to the marketing of our own company, we signed a deal in 2021 where Inuvo will be a premier sponsor for a new category of conference within advertising, built specifically around artificial intelligence. We expect this event to occur around mid-year and in New York. This will be a first in our company's history. Shifting now to a few technical firsts. As you all know, the IntentKey brain works much like a human brain, in that our brains are giant libraries and the neurons in our brains are the books in that library. We make decisions by linking together these books. Now, while the human brain is limited to understanding only the things it had ever been taught, the IntentKey understands the collective knowledge contained within the Internet, because the Internet was in fact its teacher. Updating the core IntentKey brain is not something that needs to happen frequently as it already possesses trillions of individual connections between known concepts. So while, for example, the IntentKey would be able to link an iPhone with Apple, it might only be able to indirectly link the newest iPhone 13 with Apple, because that direct connection had not been trained. In 2021, we expanded the number of concepts understood by the IntentKey and in so doing, also designed a framework for enhancing yet again the IntentKey, in a way that would allow it to be able to understand some of the newer elements of our lexicon. We are talking about things like hashtags and emojis for example. This major revision to the brain behind the IntentKey was a first for us. In 2021, we also deployed and signed new clients for the SaaS version of the IntentKey. This product was primarily designed to serve the needs of the agency market where media agencies typically want to run campaigns for their clients directly. This was a first for Inuvo, and it has provided a means to expand our markets and our gross profits. Within our ValidClick platform, we have recognized that media buying opportunities in search and social tend to be opportunistic and of limited duration. This meant that we needed to develop technologies that could adapt to these opportunities by automatically accelerating and decelerating media purchasing on behalf of clients so we can take advantage of these just-in-time changes. We implemented this technological capability in 2021 and it was a first for the ValidClick platform. Now, we also had some client firsts in 2021. In the fourth quarter, we delivered an IntentKey driven multi-channel media program for our Universal Pictures adaptation of a successful book. This was particularly challenging because the marketing program itself required execution over a short period of time. It was a great test of the IntentKey’s ability to deploy quickly and a testament to the AI proficiency at identifying and marketing to prospective moviegoers in real time. This was another first for Inuvo. In addition to this movie client, we had several other wins in the year, that included an electric vehicle manufacturer, a PET technology provider, an enterprise software vendor, universities, a bank, an online game manufacturer, a high-end gym and many more. Across all these and other customers, the IntentKey continued to exceed expectations having delivered on average roughly 50% improvement over the goals these clients set for us within the year. What our performance and these firsts should signal is that we have a technology, we have the people, we have the services, and the market required to build a large company. When this readiness is complemented by a once-in-a-decade consumer privacy driven catalyst for which our technology has a solution, we get excited about our potential. The use of consumer data has been the foundation of advertising for decades. Privacy concerns among consumers is going to eliminate the use of that consumer data for prospecting new clients. And when it takes hold, it will impact $200 billion of media spend. We have a solution to this industry challenge.

Thank you, Rich. Good afternoon, everyone. I want to provide a summary of our financial results for the fourth quarter of 2021. As Rich mentioned, Inuvo achieved revenue of $19.7 million for the quarter that ended on December 31, 2021, an increase from $12.9 million in the fourth quarter of the previous year. Both platforms, ValidClick and IntentKey, saw improvements compared to the prior year. ValidClick's revenue increased by 26%, while IntentKey's revenue grew approximately 121% primarily due to the acquisition of new customers, some of whom Rich referred to earlier. IntentKey's revenue accounted for 41% of the total revenue this quarter, up from 28% in the same quarter last year. We anticipate that IntentKey's revenue will continue to grow as a percentage of our total revenue. Inuvo's gross margins fell to 57% in the fourth quarter from 83% in the same quarter last year. IntentKey's gross margins were 37% compared to 45% in the same quarter last year. Our new customers require us to deliver ads across multiple channels, which have varying gross margins. We are focusing on optimizing gross margins while providing the multi-channel campaigns that our customers need. ValidClick's gross margins were 71% in the fourth quarter, down from 99% in the same quarter last year. We have integrated ValidClick services with IntentKey services to enhance this multi-channel capability for our clients. In the previous year, most of ValidClick's costs were related to traffic acquisition and were not classified as cost of revenue. In 2021, for clients receiving a multi-channel solution, media expenses were included as cost of revenue. Operating expenses for the fourth quarter of 2021 were $12.3 million, a slight decrease from $12.6 million in the prior year. The largest portion of these expenses came from marketing costs, which are primarily associated with traffic acquisition for ValidClick. Marketing costs totaled $7.4 million this quarter, down from $8.3 million in the same quarter last year. Compensation expenses increased to $2.9 million this quarter from $2.4 million in the prior year, mainly due to higher stock-based compensation and, to a lesser extent, increased employee salaries. We had 75 full-time employees as of December 31, 2021, compared to 71 on the same date in 2020, with most of the increase in sales, sales support, and account management for IntentKey. Selling, general, and administrative expenses rose by $50,000 this quarter, primarily due to depreciation and amortization expenses. Net interest expense for the fourth quarter of 2021 was $50,000, up from $2,000 in the same quarter last year, which includes around $11,000 for leasing IT equipment and other commitments, alongside about $39,000 due to the re-class of marketable securities for fair market value change. We faced other expenses of $158,000 this quarter due to an unrealized loss from marketable securities, partially offset by an unrealized gain of $54,000 from debt securities now included in the other comprehensive loss. We reported a net loss of $1.2 million or $0.01 per basic share, compared to a net loss of $715,000 or $0.01 per basic share in the same quarter last year. Non-cash based expenses were approximately $1.5 million this quarter. Adjusted EBITDA for the quarter ended December 31, 2021, was $466,000 compared to $347,000 last year. As of December 31, 2021, we had cash, cash equivalents, and marketable securities totaling $13.3 million, with net working capital of $12.4 million. Additionally, we have a $5 million working capital line of credit with no outstanding balance. Our capital structure remains straightforward, with 119.5 million common shares outstanding, around 4 million employee restricted stock units through an equity incentive plan, and about 300,000 warrants for purchasing common stock.

Okay. Yeah. Thanks, Wally. We had a very strong year with a compounded quarterly growth rate between Q1 and Q4 of approximately 23%. We had a year-over-year overall growth rate of 34% and we had accelerated growth rates between Q2 and Q4 of 66%, 83%, and 53% year-over-year. We had a positive adjusted EBITDA in the fourth quarter of $466,000. We expect year-over-year growth in the first quarter of 2022 to remain strong. With this once-in-a-decade opportunity associated with privacy, we plan to run the businesses close to breakeven on an adjusted EBITDA basis for the year, so we can optimize towards capturing market share over the next few years, while enterprises are open to a change in service providers because of the challenges facing this industry. Our balance sheet is currently strong enough to accommodate the working capital needs of the growing business. And as a result, we have no immediate needs to raise capital. I will now turn the call over to the operator for questions.

Thank you. We will take our first question from Brian Kinstlinger with Alliance Global Partners. Your line is open. Please go ahead.

Hi, this is Matt in for Brian. So first of all, how many active logos did you have running campaigns with IntentKey during the December quarter compared to the end of 2020?

I don't know the answer. I think we had roughly 90 or so different ones, I don't know how that compares against the prior year, Matt. Up to around 90 now.

Yeah, understood. And a second part of that question is, can you possibly quantify how much of IntentKey’s growth is related to these new logos compared to larger campaigns or increased usage from existing customers?

A lot of the growth is on the back of new clients, not existing clients. By the way, existing clients are growing as well, but yes, the growth rate has been accelerated in large part by signing up bigger clients with bigger media budgets.

Understood. Thank you. And what's the average size of campaign that, like, IntentKey would be running today? And have you seen growth in the average size of a campaign from 6 or 12 months ago?

I don't know what the average size is, but it's definitely bigger now than it was 12 months ago.

Okay. With the changes that restrict cookies, how are potential brands reacting to the AI ad tech that utilizes first-party data, and what actions does the company need to take to accelerate that?

I'm going to clarify the question. We don't utilize any data at all, which is a significant advantage of our technology. When mentioning first-party data, there’s a misconception that having ownership of the data gives you unrestricted access to use consumer data. While there are technical workarounds and some companies may be developing solutions around that, we firmly believe it goes against the wishes of the consumers themselves. Therefore, we have never pursued that route. Our technology operates without any consumer data, regardless of whether it’s first-party, second-party, third-party, or any other type. That is its benefit. Consequently, the growth rate you are observing indicates our message is resonating with clients and prospects, as they recognize two key points: one, there is a significant privacy issue; and two, our solution effectively addresses the problem and performs better than relying on consumer data. This raises the question of why everyone wouldn't want to adopt it.

Great. Thanks so much.

You bet.

We take our next question from Jack Vander Aarde with Maxim Group. Your line is open. Please go ahead.

Great. Hi, Rich, hi Wally. Congrats on the strong results. Thanks for taking my questions. So last quarter you announced 10 million plus of new IntentKey orders during the third quarter, I think that was new customer orders received, which are expected to be delivered over the next 9 months or so. Just a couple of things on that. Can you provide what new IntentKey orders were for this fourth quarter? And then of the $10 million from last quarter, how much of that was recognized during the fourth quarter?

I don't know how much of it was in the first quarter. Wally, you might know that. I don't know. Can you answer some of these questions of the $10 million we signed, how much of it was Q2 and Q1? I don't know the answer to that question.

A small portion was recognized in December, which was just a small percentage of the $10 million. By February, we will probably have recognized less than 50%. This means there is still 50% to 60% of the $10 million left to be recognized.

Got it. That’s helpful color.

If I could add something to that, in at least one situation I'm aware of, we have already signed a renewal for an additional number of months. So I don't want people to think that we signed these deals and they're just going away. That's not how it works. We've done a good job for these clients, and we fully expect to renew them. In fact, I know we are currently renewing one.

Got you. Understood, understood. And then, as far as IntentKey SaaS. I think you guys mentioned some comments on it, I didn't quite catch that. So can you just provide maybe a summary recap of what's going on with the IntentKey SaaS from a revenue perspective, client demand for it and then how you see that growing, IntentKey SaaS going forward?

Yeah. It's a non-material component of our overall revenue at this point, but we've had a number of clients that we delivered the service for within the year to basically understand what are the nuances associated with having to do that. So that is a bit of a different beast. Our primary demand right now seems to be coming from direct clients who want us to run the service ourselves. And I think candidly over the next little while that’s probably the best idea for us, because if we're in control of the deployment of our own technology and the running of the campaigns associated with our own technology, we're probably going to do better than turning it over to someone else to do that. So we will sell and continue to sell to the SaaS version of the product, but that component won't be growing probably as fast as we might have thought earlier, simply because we think the demand right now is coming from the full-service side.

Okay, understood. And then just maybe are you noticing any pickup in new clients, potential clients knocking on your door because of this looming kind of upcoming cookieless future with Google? Are you starting to get a sense, like if there is any sort of panic or there's just confusion or any change in behavior from potential clients and existing clients and how they're going to run ad campaigns when they can’t use third-party cookies?

I think the word you used, confusion, is probably the best word. I don't know, most of the people that we deal with and the clients we deal with are pretty sophisticated. So panic is probably not a word that you see. But I do think there's a lot of confusion. And in part, I think that confusion is coming from the existing vendors who are telling them that maybe the problem is not as bad and they've got a pretty good solution for it, and maybe that's reducing the panic. But confusion, yes, and an increased discussion, like an increasing amount of clients who want to have a discussion specifically about this, I would say absolutely on that. But it's kind of what we're leading with these days, so that we lay it right out there on the table that we do have something that can work here.

Got it. Where would you say you are in the overall integration or merging of the technologies, IntentKey and ValidClick? There may not be a definite plan, but using a baseball analogy, how far along are you in merging their capabilities? What have you started to realize they are capable of achieving?

I don't want to say we're completely there, but we are currently serving multiple clients successfully with both sides of our operations. We have recently signed up another client where we are utilizing both services, and everything is functioning well. Both teams are performing their roles as expected. While I don't want to claim that we have everything fully figured out, I am no longer concerned about it. That's why I mentioned in my remarks that we are now quite confident in our ability to scale this without issues. This means that if I were to find another client tomorrow, or even multiple clients, our teams know how to handle it and manage any related personnel concerns. I believe we have a solid grasp on this.

Excellent. That's great to hear. That's it for me. I appreciate. Congrats again on the results. Thanks.

You bet, Jack.

It appears there are no further questions at this time. I'd like to turn the conference back to you, Richard Howe, for any additional or closing remarks.

Thanks, Kyle. And of course, as always, I would like to thank everyone who joined us on the call today and we appreciate your continued interest in our company.

This concludes today's conference. Thank you for your participation. You may now disconnect.