Inuvo, Inc. Q2 FY2025 Earnings Call

Good day, ladies and gentlemen, and welcome to the Inuvo, Inc. Second Quarter 2025 Earnings Call. This call is being recorded on Thursday, August 7, 2025. I would now like to turn the conference call over to Katie Cooper, Director of Marketing. Please go ahead.

Thank you, operator, and good afternoon. I would like to thank everyone for joining us today for the Inuvo Second Quarter 2025 Shareholder Update Call. Today, Inuvo's Chief Executive Officer, Richard Howe; and Chief Financial Officer, Wally Ruiz, will be your presenters on the call. We would also like to remind our shareholders that we plan to file our 10-Q with the Securities and Exchange Commission this evening. Before we begin, I'm going to review the company's safe harbor statement. The statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Inuvo, Inc. are such 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 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. Today's discussion will include references to non-GAAP measures. The company believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's news release on our website. With that, I'll now turn the call over to CEO, Richard Howe.

Thank you, Katie, and good afternoon, everyone. For the second quarter of 2025, Inuvo has delivered robust year-over-year growth with revenue up 25%. While seasonality and some fluctuations in client spend did lead to an expected sequential decline of 15%, our 5-year compounded annual growth rate through the second quarter of 2025 now stands at approximately 24%, reflecting sustained momentum in our business as we approach our goal to break through the $100 million in sales this year. Gross profit, adjusted EBITDA, net income, and free cash flow all improved year-over-year. While operating expenses were up because of increased revenue, they were not up at the same rate as revenue, which highlights our ongoing focus on cost controls. Notably, financing and other income improved year-over-year, reflecting favorable external factors, and operating cash flow was $144,000 in the quarter. Wally will discuss our financials in greater detail in a few minutes. Let me now turn to a discussion about our go-to-market and client activities. IntentKey self-serve adoption is accelerating with 18 new deals set up in the quarter and 300% quarter-over-quarter growth. Our managed services pipeline remains healthy, and we are seeing more direct clients interested in leveraging our IntentKey measurement, artificial intelligence, or channel-level performance insights. We signed 4 new managed service deals in the quarter. I'd like to remind shareholders that our self-serve IntentKey product was designed to be a scalable, easy to use and deploy media technology that any company of any size can use. It's also the highest margin product we possess. It does not take many millions of dollars in self-serve revenues to materially improve the Inuvo bottom line. Within media, there is a market that's referred to as curation. This refers to a process of selecting, organizing, and packaging advertising inventory curated to meet specific needs of these audiences. Inuvo's AI can curate instantly any audience an advertiser wants to place their ads against. There is literally no other technology on the planet that is as easy to use, flexible, and performs as well. Last Friday, for example, we had 12 of our newer self-serve clients continue their campaigns in a single day. While the media spend against these IntentKey AI-curated audiences remains modest, the scaling and retention indicate a significant opportunity for future growth and margin. Connected Television is an area of rising interest with more clients including our solutions in their RFPs. CTV remains our highest services margin channel. Feedback from clients continues to validate our privacy-compliant, concept-based targeting as a clear differentiator with several reporting substantial lifts in conversions and campaign performance. The platform product line was defined by substantial volume expansion and disciplined investments in quality throughout the quarter. Although revenue per click declined sequentially due to seasonal and geographical mix, the strategic direction of the market favors higher-quality lead generation, a trend that plays well and directly to Inuvo's strengths and long-standing investments in compliance and quality advertising. As the market increasingly rewards trusted, transparent suppliers, we are exceptionally well positioned. Operationally, we made significant enhancements to our IntentKey reporting dashboards, which we've now rolled out to most clients receiving overwhelmingly positive feedback. We've also increased our sales support activity, which in turn has driven more local market engagement and in-person meetings as well as the hiring of our first sales development representative focused on direct client outreach. Our 2 largest IntentKey services clients both grew sequentially and year-over-year. Let me now discuss product and technology activities. The second quarter of 2025 was defined by strong operational growth and deliberate investments in both the quality and scalability of our platform product line. We experienced over 60% quarter-over-quarter growth in leads delivered to advertisers, an important indicator of both demand and the efficiency of the marketplace we've created with this product. However, it's important to note that this impressive growth was managed with a disciplined approach. We deliberately constrained the onboarding of new ad campaigns within the quarter to ensure compliance and safety and ultimately, the long-term scalability of our platform product. Our marketplace for this product is most easily categorized by proprietary advertising technology coupled with publishing capabilities. To support this expansion of the platform product, we launched more than a dozen new high-quality websites into the platform network in the quarter with a particular focus on vertically oriented content. This represents a 50% increase over the first quarter and directly strengthens our ability to attract higher-value advertisers. Leveraging advanced AI tools, we've also significantly increased the pace, scale, and quality of our content creation and deployment within the platform product line, allowing us to now create original unique images and explore niche verticals like we've never been able to before. These investments are deepening both the breadth and the depth of our content, further elevating the overall value of our offering to our clients. Despite the strong operational indicators, we did see a decline in revenue per ad click, which we attribute primarily to seasonality and a change in geographic mix as impressions from developing markets grew strongly within the platform product line portfolio. This is a common trend in this industry, and our focus remains on building a high-quality, resilient marketplace that can deliver for advertisers across varying market cycles and geographies. We are also seeing a notable shift across the broader market ecosystem towards higher-quality advertising standards in general. One of our major clients has implemented stricter and more targeted quality enforcement mechanisms specifically designed to reward high integrity suppliers in an effort to improve advertising outcomes by filtering out lower quality leads. We have seen this kind of focus in the past and it has historically favored suppliers like Inuvo who are always committed to compliance, transparency, and ultimately client results. As the market raises the bar, we are well ahead of the curve due to 2 years of investment in compliance-oriented infrastructure, lead quality monitoring, and a scalable set of technologies. On the Agencies & Brands product line development front, our team continues to expand and refine the commercial application of our predictive media mix modeling artificial intelligence. What previously took significant manual analysis can now be accomplished in a fraction of the time, allowing us to deliver actionable channel level performance insights to both agency and direct clients. This is especially valuable to direct clients who are increasingly leveraging this technology to optimize spend and evaluate true channel effectiveness against actual business goals as opposed to a collection of what might be called convoluted marketing metrics. As discussed earlier, the self-serve adoption continues to accelerate because we are providing customers with easy-to-deploy, low-risk access to our audience modeling capabilities, which in turn is also driving strong engagement with our audience discovery and targeting platform. We are actively developing the next generation of our self-serve portal, which will provide clients with an improved set of insights and a more intuitive interface to understand those insights. For those listeners unfamiliar with the IntentKey product line, like other large language-based artificial intelligence technologies, the IntentKey audience discovery process begins with a simple prompt. For our self-serve customers, we've now also introduced automated optimizations that have already produced tangible performance improvements. These enhancements are designed to further streamline the client experience and drive higher margins for Inuvo. Finally, we are pursuing new integrations with additional demand-side campaign platform providers, a move that will increase our flexibility for managed clients and facilitate future international expansion and new product innovation. Across our product portfolio, the clear differentiator remains IntentKey's privacy-compliant large language concept-based targeting. Clients consistently cite this capability as a primary reason for choosing Inuvo, with some reporting significant lifts in conversion rates and performance following their adoption. The introduction of enhanced client reporting capabilities has further strengthened our value proposition by delivering greater transparency and actionable insights. In terms of industry validation, it's worth highlighting a unique perspective that emerged this quarter. We recently tasked several leading AI systems, including Gemini, Grok, and ChatGPT to independently research and evaluate Inuvo's IntentKey technology against what they considered to be 9 of the world's top programmatic advertising solutions on the market. Each AI was asked to assess effectiveness in a forward-looking world, taking into account critical privacy trends like the deprecation of cookies, VPN adoption by consumers, and consumer tracking limitations with companies like Apple. Now across all 3 AI systems, the research results were the same. Inuvo's IntentKey was recognized as the best solution. This was an amazing outcome. This external unbiased endorsement by the latest generation of artificial intelligence chat technologies underscores the differentiated value our technology provides to clients facing the evolving challenges within digital advertising. In short, Inuvo's product suite continues to evolve rapidly, supporting both operational scale and the strategic shift towards higher quality, privacy-first solutions that we believe will define the future of advertising. At this time, 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. Good afternoon, everyone, and thank you for joining us today. I'm pleased to share our financial results for the second quarter of 2025, which was marked by strong revenue growth, client expansion, and operational efficiency. Revenue for the quarter was $22.7 million, representing a 25% increase year-over-year. The growth was primarily driven by sustained demand from our platform clients, which generated approximately $19.7 million in revenue. Our 2 largest platform partners expanded their engagement, one scaling a successful product launched in 2023 that focused on improved technology, high-quality content, and compliance, and the other ramping a new campaign introduced in the fourth quarter of last year. Revenue from Agencies & Brands totaled approximately $3 million for the second quarter. We onboarded 22 new clients in the second quarter, 18 of whom adopted our self-serve solution. This builds on the 20 new clients that we added in the first quarter of this year. While individually small, these clients represent future growth potential as they scale their advertising budgets. Cost of revenue increased to $5.6 million, up from $2.9 million in the second quarter of last year. This was driven by the new campaign with one of our platform partners. As a reminder, cost of revenue primarily reflects payments to website publishers and app developers who host our ads as well as media costs for our agencies and brand clients. Gross profit was $17.1 million, an increase of 12% year-over-year. Gross margin declined to 75.4% from 84%, which was anticipated due to the scaling of the new platform campaign, which is accounted for in the cost of revenue. Operating expenses totaled $19.1 million, up 12% year-over-year. The largest driver was an increase in marketing costs aligned with our platform revenue growth. Compensation expenses increased by $170,000 primarily due to accruing incentive expense. Headcount remained stable at 82 employees at quarter end versus 83 a year ago. G&A expenses increased $260,000 largely due to the absence of a $255,000 allowance reversal that was recorded in the second quarter of last year. Other income was $560,000 compared to 0 in the same period last year. In June, we received an IRS refund of $606,000 related to the employee credit from the second quarter of 2021. Of that, $525,000 was recognized as other income and $81,000 was recorded as interest income. Net financing expense was $18,000, down from $42,000 a year ago and includes the $81,000 in interest income, I just mentioned. Adjusted EBITDA improved to a loss of $629,000 compared to a loss of $667,000 in the second quarter of last year. The net loss narrowed to $1.5 million or $0.10 per share versus $1.7 million or $0.12 per share in the year-ago period. We ended the quarter with $2.1 million in cash and no outstanding debt. In June, we completed a 1 for 10 reverse stock split. This strategic action was intended to improve the marketability of our shares and better position Inuvo to attract institutional investors. Following the reverse split, our outstanding shares totaled 14,473,843 shares as of June 30. With that, I'd like to return the call to Rich for closing remarks.

Thank you, Wally. In summary, the second quarter of 2025 showcased both the resilience and adaptability of our business. Despite the expected seasonality in the quarter, we continued to build on our multiyear trajectory of robust annual growth and operational improvements. Revenue for the first half of the year is roughly $49.5 million, which is up 40% year-over-year. We are successfully driving adoption of our highest margin products. We're expanding our footprint with both agencies and direct clients, and we're gaining some meaningful traction into emerging channels like connected television, where our IntentKey solution is increasingly being recognized as a market leader. Looking ahead, Inuvo remains exceptionally well positioned as industry dynamics continue to shift towards privacy-first, high-integrity digital advertising. Our investments in compliance, scalable technology, and predictive analytics are all paying off. This is enabling us to anticipate and meet the evolving needs of our clients while setting the bar high for the marketplace generally. We continue to see strong momentum in our pipeline and a growing number of new deals, particularly in self-serve, with overwhelmingly positive feedback from clients leveraging our enhanced reporting and AI-driven insights. Our team remains focused on executing our strategic roadmap and delivering best-in-class results for both advertisers and partners. And as always, I want to thank our shareholders, clients, and employees for their ongoing support and commitment. With our technology team and strategy, we believe Inuvo is uniquely positioned to drive continued growth and lead our industry through this next phase of its transformation. With that, I will turn the call over to the operator for questions.

Your first question is from Brian Kinstlinger from Alliance Global Partners.

Great. First question is, is there anything that has occurred in the last 3 or 4 months since we last were on one of these calls in the market or particularly as it relates to Inuvo that gives you more or less confidence in your ability to hit that $100 million annual target this year?

Yes, Brian, we feel pretty good about the $100 million. I mean, it's not like we're not without some view of where the clients are and the growth rate on the clients. So sitting here right now, I think the $100 million looks good this year. Generally speaking, within the market or the industry as a whole, every quarter that's going by, I guess we're getting more confident that people are starting to realize that there's better technology out there to improve the marketing activity and maybe better understanding of the nature of the problem that exists. So those are all in our favor.

Yes. And then maybe talk about the evolution these days of a new customer, especially with this new technology that they're taking, you've signed a bunch of new customers. Is it very small day 1, a little bit bigger? Just take me through the evolution of when some of the campaigns by new customers become a little bit more meaningful and impact the results.

Overall, the process for acquiring new customers has been fairly consistent over the past few years, Brian. When we onboard a new client, particularly in services, they typically start with a smaller budget. As they experience improvements in performance, they tend to increase their spending. In previous instances where we lost a client, it was usually due to the agency they were working with losing them. On the self-serve side, we have gained several new clients recently, including around 18 this quarter with approximately 15 last quarter. While these clients are generally small, we are observing a significant increase, with revenue growth around 300%. This indicates that they are effectively using our models and are increasing their media spend. However, since we earn revenue based solely on the net results, it tends to be lower compared to services clients, which makes it a high-margin product for us. That’s the best I can provide, Brian.

Is there a scenario where a larger self-serve customer decides to transition and see the benefits of you taking over, or is it rare to see the opportunity for these self-serve customers to transition?

It hasn't happened yet, but I think the question is a good one, and I would expect that, yes, we'll have some of those as those self-serve customers grow. Particularly, I would say if those self-serve customers are maybe on the bigger side, they may decide, hey, why don't we just let Inuvo run these things for us, maybe that's more efficient. I could see that happening, although it hasn't happened yet because we've only been effectively selling self-serve for, I don't know, maybe less than a year.

Yes. Okay. My last question is year-over-year revenue grew by more than $4 million, almost $4.5 million in the June quarter. Your operating loss is about $300,000 to $350,000 more. So I'm wondering why, with that scale, I get the gross margin is lower, but that's supposed to be offset by what I thought was lower marketing costs. So I'm wondering why the marketing costs are going up on price? I'm just curious why that higher revenue has brought a lower operating profit.

Yes, Brian, you hit the nail on the head. The gross margins are lower compared to last year for several reasons. One factor is the change in our product mix, which is different from last year. Additionally, our marketing costs have increased a bit. When you look at other operating costs, they are higher as well; compensation is approximately $200,000 more this year compared to last year. This increase is mainly due to our not accruing an incentive expense last year, which we are doing this year. General and administrative expenses have also risen by about $200,000 to $250,000, partly due to a reversal of an allowance that we had last year, which is not the case this year. So, it's a mix of these factors contributing to the higher costs and the lower gross margin.

And I might add something, Brian, to what Wally said is like, I think you know this, Brian, because you've followed the company for quite a while. There's always 1 quarter in the first half of any year that's like, let's just call it, a down quarter in this industry we're in. And down can be like top line is down, but down can also be like the demand-supply economics are such that the margins are down. We saw that in Q2, particularly in the platform business, right? Growth was still robust, but margins were a little compressed there. We would expect that to reverse.

Potentially demand supply economics in June were more favorable in buying marketing space, whereas in the June quarter, it was less favorable. And that's why the marketing is growing while the margins come in. Is that right?

Yes. To some degree, yes, and I think the answer is we expect those margins to improve, right, as the seasonality of that quarter. It ended up being Q2 this year. In some years, it's Q1, some years it's Q2, I don't know. We would expect margins to improve somewhat.

Your next question is from Scott Buck from H.C. Wainwright.

Just one question for me. As demand appears to be accelerating, I'm curious whether or not you guys are seeing opportunities to improve your selling process and maybe even optimize pricing at more attractive levels.

Always. It's likely a significant part of our time, Scott, considering how we can optimize our approach. These AI systems available today, not just ours but others as well, function like highly effective consultants. Anyone on this call can inquire and receive answers comparable to ours if they pose the right questions. We are confident that our product is the best in the market for discovering and targeting audiences on the open web. There's no doubt in my mind about this. Therefore, we consistently evaluate how to unlock its value. Our brand recognition is decent, but it's not yet a household name. Additionally, we acknowledge we have a limited number of salespeople in the field, primarily because we're restricted in hiring due to our balance sheet and liquidity reserves. We are continuously exploring ways to enhance this situation, and we invest considerable effort in it.

Your next question is from Jack Codera from Maxim Group.

This is Jack Codera calling in for Jack Vander Aarde. I have a quick clarification question regarding the numbers of new clients. You mentioned 18 new self-serve deals and 4 new managed service deals. Are those the correct segments? And are all of those new customers, or do any of them represent repeat deals?

Those are all new.

Yes, they're all new, and they're all on the Agencies & Brands side, Jack.

Okay. Wonderful. And then you mentioned something at the very end there. I just wanted to clarify, so there's some sort of partnerships that maybe can get you to expand a little bit more, and you kind of hinted at it. I don't know if you can give any more clarification on what that meant.

I'm going to guess at what you think that question might be. I did mention in my notes that we've been working on some new demand-side platform integrations. For people in the audience listening to this who don't know what that is, just think of it like the campaign systems. There are a number of companies that have developed great campaign systems. We try to get our AI technology, which finds audiences and targets audiences integrated into those. We're working on a new integration with a new demand-side partner that we think could offer us some new opportunities. We already have some of those, but we're working on a more direct one right now.

Okay. Yes. That's why I just wanted to clarify. That's right.

I don't know if that was what you were asking, Jack. I wasn't sure; I was kind of guessing a little bit of what you...

Yes, precisely. And then I had one more kind of general question. It might be a little bit strange. But given some of the antitrust suits that I think people are kind of assuming there may be some shake-up with kind of Google standing with Safari. I think some newer users in search may think that some of the LLMs may become like the default search engine. Do you have any view as to how that may affect the ecosystem and how that may affect your business?

It's a good question, but it's very difficult to answer at this point because it's so evolving. I don't think there's any doubt that the AI chats, the Gemini, Grok, and GPT, they are growing in popularity, maybe is a good way to say it. Now if you look at the big player on the block there, it's always been Google and it continues to be Google. Gemini is a great AI just like the other ones are. They've now integrated that into their browser, figuring out a way to be able to sort of co-mix both the AI capability and the regular search capability in a way that still monetizes for them. So that's a long way of saying, I don't know at this point. It's not impacting us now, but it will certainly impact, I guess, what conventionally has been thought of to be a browser, but I think we'll have to wait and see.

There are no further questions at this time. Please proceed.

Thank you, Jenny. And of course, I want to thank everyone who joined us on the call today. We appreciate your continued interest in our company.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.