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spk05: Good day and welcome to the ANUVO Second Quarter 2021 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 KCSA Strategic Communications. Please go ahead, sir.
spk03: Thank you, Operator, and good morning. I'd like to thank everyone for joining us today for the ANUVO Second Quarter 2021 Shareholder Update Conference Call. On today's call, ANUVO's Chief Executive Officer, Richard Howe, and Chief Financial Officer Raleigh Woodreese will be your presenters. We would also like to remind our shareholders that we anticipate filing 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. 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 using this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to ANUVO are, as such, a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by ANUVO at this time. In addition, other risks are more fully described in ANUVO's public filings, with these U.S. Securities and Exchange Commission, which can be reviewed at www.scc.gov. With that, I'd now like to turn the call over to CEO Richard Howe.
spk02: Thank you, Walter, and thanks, everyone, for joining us today. We had a strong second quarter. 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 break even on an adjusted EBITDA basis when monthly revenue run rates exceed $5.5 million, which we expect to be able to deliver before the year ends. Adjusted EBITDA in the second quarter was a loss of $965,000, which was roughly flat sequentially. The 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, the ValClick 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, ValidClick's services have been materially revised post-pandemic, and this is most evident in the mix of revenue, where of the three main clients for ValidClick, 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. a strategy we believe offers the most attractive growth prospects. I will remind our shareholders that this client relationship for Anuvo goes back more than a decade, more on ValidClick later in the conference. The IntentKey platform contributed roughly $2.9 million of revenue in the quarter, growing 50% year over year and 37% sequentially. The 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. Let me now provide some additional insights for both the intent key and valid click. As a result of the continuing performance results associated with the Intent-Key platform through the first half of 2021, we have seen a 56% increase in the number of prospective client presentations given and a 70% increase in the number of deals won as compared to the same period in 2020. Market momentum appears to be building. We had 18 new campaigns launch within the quarter, including a first deal sold by our sales rep in Canada as part of our announced expansion into that market. We 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 1 return on ad spend. 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'm 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 in monthly gaming revenues. We are currently working on an additional proposal for this client And Casino International, a leading publication within the gaming world, will be highlighting our technology in a September article. Within the quarter, we added state agencies looking to promote COVID and vaccination awareness, a financial services company, a healthcare company, a recreational vehicle company, a large retailer, and some tourism clients. We are in active implementations associated with the SAS version of the intent key 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 its advertising decisions, we have been experiencing increased interest from prospects resulting from this competitive differentiation. as those 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 platforms. With a growing list of clients and prospects, hiring within the intent key to support clients and sales has continued throughout Q2. We now have 20 people in sales, account management, and sales support roles. Anuvo 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 pulls 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 humanity's knowledge. It also interprets millions of new web pages every single day. We are working towards enhancing this crawler 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 it can understand these new language constructs. Turning now to ValidClick, where as I mentioned earlier, we had a strong 8% compounded monthly growth since the COVID low in May of 2020. Increasing scale within ValidClick's 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's a good example of the power 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. While 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 value of revenues by about eight to 10% using this continuous experimentation capability. This increase enables us to better promote websites, be more competitive in the marketplace, and ultimately serve the needs of our clients while scaling our services to those clients. A second focus I'd like to highlight this quarter was a set of enhancements to our proprietary media buying tools, a 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 every day. 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 ValidClick 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, ValidClick 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.
spk01: Good morning, everyone. I'll recap the financial results of the second quarter of 2021. As Rich mentioned, Inuvo reported revenue of $12.6 million for the quarter that ended June 30th of this year. This compares to $7.6 million reported in the second quarter of last year. Both platforms, ValidClick and IntentKey, exceeded the prior year. Valid click revenue exceeded the revenue of the second quarter of last year by 72%, and the intent key revenue for the quarter ended June 30th 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 predicted by the intent key, and to a lesser extent, by payments to website publishers and app developers that host advertisements that we serve through ValidClick. The majority of ValidClick's costs are 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 served through ballot claim. Innuvo 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 intent-key gross margins to increase as the SAS version as the SAS version, where margins are expected to be significantly higher as a result of mostly fixed costs associated with operating just the AI, the modeling, and the 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 ValidClick. It's the largest expense associated with the ValidClick 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 that's due to higher stock-based compensation expense this year and to higher employee salary costs. Our full-time employment at June 30th of this year was 73 compared to 66 at June 30th last year. The majority of the increase in this headcount occurred within sales, sales support, and account management for the intent key. We also hired track acquisition professionals within ValidClick to support a strategy to bring that function in-house. Selling general and administrative expense decreased $104,000 in 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 expense. 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 $200,000, the highest meeting cost in recent memory, part of which 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 a vote is pending. Proxies not returned to the broker may be voted by the broker. Since the returns from retail holders is often under 25%, the broker's discretionary vote becomes very significant, particularly to small cap companies. The decline in discretionary voting by brokers is a real concern for many issuers, as it's becoming increasingly difficult and expensive to obtain enough votes to reach a quorum and pass specific proposals. INUVO 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 $8,000 in the second quarter of this year compared to $73,000 in the same quarter last year. We had other income of $25,000 in the second quarter of this year due to unrealized gains from marketable securities. The other net expense from the second quarter last year was due to the conversion of convertible debt securities. We reported a net loss of $2.4 million, or two cents per basic share, compared to $1.4 million net loss, or two cents per basic share, in the same quarter last year. The adjusted EBITDA for the quarter ending in June was $965,000 loss, compared to a loss of $140,000 last year. At June 30th of this year, we had cash and cash equivalents of $17.3 million, marketable securities of $889,000, and a net working 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 equity incentive plan. With that, I'd like to turn the call back to Rich for closing remarks. Thank you, Wally.
spk02: We had a strong second quarter with 66% year-over-year growth and 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 Intenkey's remarkable client performance to continue alongside a growing pipeline with improving win rates. At over $18 million in cash and marketable securities and 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?
spk05: 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 speakerphone, 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'll go first to Brian Kinslinger with Alliance Global Partners.
spk04: Hi, good morning, guys. Thanks for taking my questions. It sounds like you're having a lot of success with new logos for IntentKey. Can you quantify how many customers you ran campaigns for in the second quarter of 2021? What was that number for 2020? And then based on the trends, it sounds like you have more RFPs with new logos than ever and you're winning more. Where might the possible range of outcomes be at the end of the year customer account for campaigns for IntentKey?
spk02: 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, and the IntentKey was up 50% year over year, so the number of you know, campaigns run a year earlier is at least half, if not more than half of what it was, you know, in this quarter, Brian, because we do see growth, you know, from existing clients as well, but we are adding new clients. And like I said, you know, in my script, We do – look, building a product and a market, which is kind of what we're doing, is not easy. And there's sort of a momentum point, the tipping point, at which point the market starts to assimilate your technology and how you're doing it and why it's different. And I think we're starting to see that is the good news. And I think that's 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%. It's a big deal. If it means we're winning 70%, more of the deal counts we have this year than we did last year. So what was the other question, Brian?
spk04: I guess I'm just curious, do you have 25% more clients than the year ago? Is it more like 50% more clients? I know there was a time that customers weren't looking for new ad tech, right? So I'm just kind of curious. with some of those metrics. It's about 2x. Great. And then describe the evolution of a new customer. Do most start with a small campaign and then the second's 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, ranges.
spk02: It's pretty much the same every time. Call it anywhere from three-month to nine-month sales cycle. We do close deals within three months, but typically three months of the sales cycle, three to 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're using, and that's our competition. And and and when the test is implemented and we go head-to-head against whoever the incumbent is You know when we win those tests, and I will tell you I'm not aware of us ever losing one You know they start spending money with us on a more regular basis in its incremental And and I think when you look at the number I gave in my script, which I said we beat and our clients' performance goals in the second quarter by 74%. And throughout the first two quarters of 2021, we've beaten our client goals by 60%. Look at that and think that's how much we're beating our competitors because that's what that is. The goals we get are our competitors' performance.
spk04: And when you say beating competitors, that's click-throughs and getting customers to their sites or that's closed-loop purchases?
spk02: Every customer's got different goals. A retail customer selling a retail product is more likely to care only about how many of the product they sold, a return on their ad spend. Like the retailer we talked about in our script, which happens to be a furniture retailer, a well-known one. You know, where we delivered 88 to 1 return on ad spend, right? And, you know, just think about that number, right? It's a staggering number. You know, we basically, for that customer, by the way, that was the test we did with them. So the initial test with that customer is where that 88 to 1 return came in. But they gave us 50 grand to basically spend, and we delivered, you know, $4.5 million worth of sales of furniture. I mean, it's staggering, you know, 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 towards. They care about how many people are actually clicking through to whatever it is that they're promoting. They could definitely use that as a goal. Our AI doesn't, frankly, care what the target goal is. It will optimize automatically and learn to that goal. And they do vary.
spk04: Right. And then... How should we think about the introduction of the SaaS model from a P&L perspective? Will this lead to slower revenue growth given SaaS is generally recognized over time whereas campaigns, you know, are all at once? But is this maybe at a higher gross margin? And then the second part of that is does each client going forward have the option for SaaS or pay-per-campaign?
spk02: There's two flavors of the product. One is fully managed service and the other one is 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 a product better than we do. And so, you know, for the, I would say, sophisticated client, the most sophisticated clients, they recognize that and they're willing to sort of acquiesce their responsibilities for managing the campaigns to us, recognizing that we're probably going to be doing a better job of it than they are. So we see that continuing. The services piece of our business is still the biggest one, and the majority of deals we're closing right now are the fully managed service components. So I don't see – it's not like an and or. It's 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 to these sort of agencies who want to use the technology that way. And, of course, you know, what that ends up being is the driver of the bottom line. You know, the more of that we can do, you know, 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, you know, components of the business for the intent key run anywhere between 40% and 60%. And, you know, probably average around 50%. So that's, yeah. Yeah.
spk04: And then on search, your 2Q... is still about 25% below 2Q19. Is the market still in recovery, or do you think the market has shrunk and budgets have shifted away from search and into other mediums?
spk02: No, it's not that the market shrunk or the opportunity size for ValidClick has shrunk. It's more about you can't scale back up as fast as you scaled down. It doesn't work that way. And so, you know, what you're seeing with the growth trajectory of ValidClick is a return and then, you know, if our projections are correct and exceeding of, you know, where it was prior to the pandemic. So, you know, what the market should or our shareholders should look at when they're looking at our ValidClick is that that business has bounced back and is recovering very, very strongly. And it's, as I said in my script, it's recovering with a different mix of that we believe will allow us to actually scale that business beyond where we were scaling it before.
spk07: Great. Thank you, guys. Thank you, Brian.
spk06: 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 Kinslinger.
spk04: Well, 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 know, you've highlighted your strong balance sheet. Talk about the M&A landscape and kind of your high-level strategy on M&A.
spk02: Yeah, that's a good question, Brian. And we've, you know, I guess opined on this on prior calls, and I think our shareholders are well aware we're sitting on $18 million, and it's not our objective to sit on that cash. I think our shareholders gave us that money to put it to use. And we are operationally because we're still, you know, burning cash on a just EBITDA basis, but that's going to probably end, as I've said, towards the end of the year. So, you know, as a result, yes, we are actively, you know, in market looking – you know, for assets, you know, that could help with our growth objectives. But I will say this. We are not in need of technology. You know, the intent key, you know, is already the most sophisticated, you know, advertising technology in the country. And we know this. So we don't need to buy technology. So our focus... is more around looking for companies of varying sizes. We looked at some that are as small as $2 million a year in revenue. We've looked at some that are as much as $50 million in revenue. We're focused, when we look at those companies, at who are their clients. We care more about the client portfolio associated with the company we're evaluating than we do the other things they may or may not do. For obvious reasons, because we know the performance of the intent key is so strong, we really believe that if we can buy a company that's got a great client list, we will be able to grow that client list and do a better job of performance for each of those clients. So that's the focus.
spk04: Great. Those are all my questions. Thanks.
spk07: Thank you, Brian.
spk05: And there are no further questions in the queue at this time.
spk02: Thank you, Operator. And thanks, everyone, who joined us today. We appreciate your continued interest in ANUVO.
spk05: And that concludes today's conference. Thank you for your participation. You may now disconnect.
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