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Operator
Good day and welcome to the ANUVO Inc. 2021 Third Quarter Financial Results Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Walter Pinto, Managing Director of KCSA Strategic Communications. Please go ahead, sir.
Walter Pinto
Thank you, Operator, and good afternoon. I'd like to thank everyone for joining us today for the ANUVO Third Quarter 2021 Shareholder Update Conference Call. Today, ANUVO'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 10Q with the Securities and Exchange Commission tomorrow morning. 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 using this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to a new voting 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 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.
Richard Howe
Thank you, Walter, and thanks, everyone, for joining us today. We had a very strong third quarter where for the three months ended September 30th, 2021, we delivered $16.8 million in revenue, which was up 83% year over year and up 33% sequentially. As we have messaged throughout the year, we expected to be back to positive adjusted EBITDA in the back half of 2021. I'm pleased to report that adjusted EBITDA in the month of September was in fact positive. For the third quarter, it was a loss of $338,000. The balance sheet remains strong with no debt and roughly 14.6 million in cash and marketable securities, along with an unused $5 million financing facility. The company is not currently in need of additional capital. Of the 16.8 million we delivered, the ValleyClick platform contributed approximately 11.7 million, which was up year over year by 88% and up 21% sequentially. The platform's growth rate has been a steady 8% compounded monthly through September of 2021 off the COVID related low in May of 2020. ValidClick's services include multichannel media buying in support of our largest clients. The product line has continued to enhance these competencies, having recently added Twitter to the stable of social media relationships. Much of the technological enhancements within ValidClick revolve around automating the numerous traffic sources under management. which are necessary to ensure the best quality consumers are delivered to our clients at the lowest cost. This automation continues to have a positive impact, most notably on the time resources spend manually adjusting campaigns. We've seen a 50% reduction in this time spent optimizing campaigns because of these continuous enhancements to the platform. Additionally, We've continued to enhance our publishing technologies within PalidClick. Within the quarter, we were able to dynamically insert related articles into content at a time when our systems detect a user's engagement is declining. This feature now allows us to reignite engagement at the time of declining interest, and as a result, improve the opportunities to further monetize that engagement. Further, and in combination with our largest ValidClick client, we began in-market testing of an innovative advertising unit that leverages the search intent of users on pages so it can customize content and advertising in a manner that improves a page's overall yield. While this program is in the initial test phase, it is showing positive results with significant upside opportunity. Consequently, we see this as a significant growth driver in 2022. Most notably in the quarter, and for the first time, we leveraged the services of ValidClick in combination with the services of the intent key to win larger direct clients, where we now manage the entire multi-channel online advertising spend across channels that include social, search, connected television, video, display advertising, streaming audio, and linear TV. This is a significant advancement of our strategy to sell directly to clients where the competitive differentiation of our artificial intelligence combined with this multichannel capability puts us in a position to win more and larger deals. This quarter's wins, which I will talk more about later, gives us confidence in this strategy. One of the advantages of this approach is our ability to incorporate our AI into channels such as social and search, where we are confident that we can outperform existing performance within those platforms through this integration. We started executing on this capability in the third quarter as part of the larger media budgets we are now managing. Of the $16.8 million delivered, the Intenke platform contributed approximately $5.1 million, which was up year over year by 71% and up 75% sequentially. The platform's growth rate has been and continues to be strong based on the product's core value proposition, as a replacement for third-party consumer data, which the industry uses today universally. In the third quarter, we signed more than $10 million worth of orders across a collection of businesses, both direct to client and through agencies. We anticipate that these orders will deliver over a nine-month period. Our sales outreach continues to improve. which has resulted in 31% more RFPs submitted compared to the same period last year. In addition, the dollar volume of RFPs submitted has also increased by 75%. This reflects our strategy to go after larger clients and to sell further up the chain. It's worth noting that not every deal we go after requires an RFP. We've signed a diverse range of clients over the last three months. These include companies within insurance, online gaming, pet technologies, education, a number of state COVID initiatives, real estate, e-commerce, investing, winemaking, urgent care, DNA screening, gym memberships, and personal lending to name a few. Across the client base, we outperformed goals by 40% on average within the quarter. We ran 95 campaigns within the quarter, which is up 13% sequentially. 25 of these campaigns were new and 70 were renewals of existing business. We continue to find clients who understand that the future of online advertising is one where consumer data is no longer used as a part of a company's prospecting activities. The intent key, as you are aware, uses no consumer data as a part of its artificial intelligence, rather than trying to identify who the people are that match a product service, or brand interest, it determines why that interest exists to begin with. This intelligence is considerably more valuable and strategic to the clients adopting us as their go-to-market technology for this privacy-first future. At its core, the cookie is in effect the mechanism through which consumer data is onboarded for use within digital advertising. We believe strongly that the era of who based marketing that uses this consumer data is coming to an end and believe we are well positioned to win market share as companies and agencies accelerate their acceptance of this new reality. Apple has already adopted this future. We believe others will follow. We are often asked to prove that our cookie list solution works as part of our sales cycle. In one such example, within the quarter, we ran two large cookie list tests for a client where we achieved a 50% lower cost for the same return. This not only means we can in fact deliver advertising effectively in this privacy-first future, but we can do so at a level of performance that already exceeds the best of the existing WHO-based methods currently in use. As mentioned in my comments related to ValidClick, we are now managing cross-channel advertising activity for a handful of clients. As a result, we are also building out reporting and performance tools required to support those campaigns. These new clients are preparing us for a revised sales strategy in 2022 where we sell a managed service directly to clients and our SaaS solution to agencies. Across the company, we are hiring to ensure delivery of existing and future business with a continued focus on sales, account management, and campaign operations, along with select positions in development and marketing. We currently have 77 full and part-time employees. As we enter 2022, we are increasing our brand-building activities in support of our efforts to increase the awareness of our company and its solutions. We plan to complement this awareness with a direct-to-CMO marketing plan that uses the intent key to identify and message to those CMOs so as to create a funnel of qualified leads using the very technology we are selling to them. I would now like to turn the call over to Wally for a more detailed assessment of our financial performance within the quarter.
Walter
Thank you, Rich. Good afternoon. I'll recap the financial results of the third quarter of 2021. As Rich mentioned, Inuvo reported revenue of $16.8 million for the quarter ended September 30th. 2021. This compares to $9.2 million reported in the third quarter of last year. Both platforms, valid click and intent key, exceeded the prior year. Valid click revenue exceeded the revenue in the third quarter of last year by 88%, and the intent key revenue for the three months ended September 30, 2021, exceeded the prior year quarter by approximately 71%. primarily due to the acquisition of new customers. In 10 key revenue represented 30% of total revenue in this year's quarter compared to 32% in the same quarter last year. This year's quarter is a bit of an anomaly in that valid click being the most affected by the COVID-19 pandemic last year came roaring back starting in the second quarter this year. However, Due to the strong growth we are seeing in the intent key, in the fourth quarter, we expect the intent key revenue to continue to grow as a percent of the total revenue. Renewable gross margins decreased in the third quarter to 78% compared to 82% in the same quarter last year. The intent key gross margins were 36% in the third quarter compared to 49% in the same quarter last year. Our new customers are requiring us to deliver ads in a multi-channel environment. The different channels have different gross margins. Though we attempt to optimize gross margins, we want to deliver to the customers the multi-channel campaigns that they want. Going forward, intent key gross margins may increase due to the increased use of the SaaS version of intent key, where margins are expected to be significantly higher as a result of the mostly fixed costs associated with operating just the AI, modeling, and decision components of the platform. The majority of ValidClick's costs are traffic acquisition related and not reported as a cost of revenue, rather as a marketing expense. ValidClick's gross margins were 96% in the third quarter compared to 98% in the same quarter last year. This also is due to the multi-channel environment we are now operating in. As Rich mentioned, we have started to integrate the ValidClick services with the intent key customers, and we expect the ValidClick gross margins to stabilize. Operating expenses were $14.8 million in the third quarter of 2021 compared to $10 million the prior year, an increase of $4.8 million. The largest component of operating expense is marketing costs. Marketing costs are predominantly traffic acquisition costs associated with ValidClick. It is the largest expense associated with the ValidClick platform. Marketing costs were $10.2 million in the third quarter this year, compared to $5.7 million in the same quarter last year. The $4.5 million higher expense this year has mostly to do with the reduction of traffic acquisition activities last year in response to the unusually low valid click revenue last year, again, associated with the COVID-19 pandemic. Compensation expense was $2.8 million in the third quarter this year compared to $2.5 million in the prior year, primarily due to higher stock-based compensation expense and to a lesser degree, higher employee salary costs. Our full-time employment was 73 at September 30th, and that compares to 66 at September of last year. The majority of the increase in headcount occurred within sales, sales support, and account management for the intent key. We also hired traffic acquisition professionals within ValidClick to support a strategy to bring the function in-house. Selling general and administrative expense decreased by $45,000 in the third quarter. This compares to the prior year. This is compared to the prior year. And that's due to lower professional fees and IT costs this year where we consolidated operating facilities. Net interest expense was $6,000 in the third quarter of this year compared to $26,000 last year. This year's expense is associated with the leasing of IT equipment, and last year's expense was primarily related to the outstanding debt on our line of credit. We had other expense of $79,000 in the third quarter of this year due to an unrealized loss from marketable securities. The other gain of $54,000 in the third quarter of last year was associated with the recognition of deferred revenue from a contract to license ValidClick technology. We reported a net loss of $1.8 million or two cents per basic share compared to a $2.4 million net loss or three cents per basic share for the same quarter last year. Non-cash based expenses totaled approximately $1.5 million in the quarter. The adjusted EBITDA for the quarter ended September 30th of this year. was a loss of $338,000. That compares to a loss of $1.2 million for the same time period last year. As mentioned, we had a positive adjusted EBITDA in the month of September. We believe we should be positive EBITDA for the fourth quarter. On September 30, 2021, we had cash and cash equivalents and marketable securities of $14.6 million and a net working capital of $13 million, in addition to having a $5 million working line of credit, which currently has no outstanding balance. We maintain a simple cap structure with only common stock, employee-restricted stock units through an equity incentive plan, and 300,000 warrants to purchase common stock. With that, I'd like to turn the call back over to Rich.
Richard Howe
Thanks, Wally. We had a very strong third quarter with 83% year over year and 33% sequential growth. We signed over $10 million worth of intent key orders within the quarter, an all-time high. We expect to report strong year over year growth in the fourth quarter. We expect both product lines to show sequential growth in the fourth quarter. We are forecasting adjusted EBITDA to be positive in the fourth quarter, coming off a positive month in September. We expect the intent key's notable client performance to continue alongside a growing pipeline with improving win rates. 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 plans to raise capital. With that, I will now turn the call over to the operator for questions. Operator?
Operator
Thank you. To signal for a question, please press star 1 on your telephone keypad. Also, if you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, it is star 1 at this time for questions, and we'll pause for just a moment to give everyone the opportunity to signal. We'll take our first question from Brian Kinslinger with Alliance Global Partners.
Brian Kinslinger
Great, thanks. The third quarter seemed to be a breakout quarter for IntentKey. I'm sure it's very satisfying as it's been a long time coming. As you mentioned, the leverage on ValidClick that you're using, as well as the clear changes in privacy that drove some of the performance. Can you talk about the number of RFPs in the fourth quarter you're bidding or tracking? Is it tracking higher than the third quarter? And just maybe... from a higher perspective, talk about how the pipeline's building.
Richard Howe
I don't know the exact number of where we stand today, Brian, for the fourth quarter. But the third quarter's RFP counts, I think, were somewhere near 100-ish, if memory serves. And it has been increasing sort of steadily. I think I referred to that in the in the call notes uh so you know we feel good about the you know the way the pipeline um is evolving for the product and you know i don't know if i would categorize the intent keys quarter as a breakout course certainly was a good quarter uh but the intent key has you know grown pretty much continuously since it was launched in um 2019. So, sure, it took a bump up in Q3 of this year, but it really has not ever grown since it was launched at that point.
Brian Kinslinger
Okay. I guess I look at it differently. It went by far the best quarter in revenue, and I think more to come, but we'll see. You guys have been preparing for new privacy rules by Apple and others for some time on first-party data. Can you talk about how your offering is resonating with customers? And so I guess with that and how demand and more RFPs are being bid on, maybe what's a reasonable goal for either 12 or 24 months of growth for Intent Key with these trends?
Richard Howe
Yeah, so I think like any change that affects customers, an industry, there are individuals within, you know, clients that we will sell to, whether it be directly or agencies who are ahead of the curve. Let's call them early adopters, and then there will be others who aren't. And I would say, you know, to a large degree, we're getting the early adopter phase of the disruptive changes coming. And as privacy rules continue to get more stringent, and as the cookie issue comes to a head in 2023, and as companies like Apple continue to basically just forge ahead and try to create the world that they want created, you know, people are going to be forced to have to deal with the situation. And, you know, good news. We'll be ready, willing, and able to help when they get there.
Brian Kinslinger
You gave $10 million and 10 key orders for the third quarter. I can't remember, or I didn't look quickly through my model. Can you provide what that was in the second quarter and the first quarter just to see how that's progressed?
Richard Howe
We didn't give it in those quarters, so I actually don't even know what it is.
Brian Kinslinger
But it was significantly larger.
Richard Howe
What did you think?
Brian Kinslinger
Yeah.
Richard Howe
Yeah, it's significantly larger. That's why I said it's the largest, you know, we've had on record. Right. Okay. So I'm sorry. I can't give you those. I don't know what they are.
Brian Kinslinger
We didn't track it back then. So the last question is that on the seasonal spring for the fourth quarter, and if you're seeing the impact at all from supply chain issues to demand for CPM to demand or CPMs. I mean, some companies have said ad budgets will not be as strong as usual in the fourth quarter. Others are saying it's unimpacted. I guess I look at it as it's portfolio specific on which companies are suffering. So maybe you can talk about how, if at all, you're seeing any impact of the supply chain challenges on your customers.
Richard Howe
It's really hard to predict these things leading into Thanksgiving and Christmas. they do have some variability to them. It's not really affecting us. If you mean like companies in auto or whatnot that have chip problems or a sort of other, we're, I don't think we're seeing, you know, the, the impact of that. If anything, it seems like advertising is coming back and coming back nicely from our perspective. Most of the people we're talking to either as prospects or clients, you know, are, trying to figure out, you know, how to increase their budgets, not decrease them. Now, with that being said, I think, as you know, Brian, our business has seasonality in it, you know, and it's typically, you know, weaker in the first half of the year and stronger in the second half.
Brian
Okay, great. Thank you. Thank you, Brian.
Operator
And once again, it is star one for questions. Moving on, we'll go to Aaron Warwick with Breakout Investors.
Richard Howe
hey rich and wally i hope you're doing well today one quarter hey i wanted to ask you uh a little bit more about the twitter deal if you could comment on that maybe expand just in terms of what you expect in terms of the potential there compared to the previous and current business you have like with with some of your other clients on valid click yeah maybe importantly for context that I think we know we live in this sort of digital modern world where, you know, there are a lot of places you can advertise. And so, you know, the more, I guess, adept you are at, at understanding the nuances of the, of each channel, Twitter being one of them, obviously it has a number of uniquenesses to it that are different than other social media channels. Then, you know, the better you'll be at meeting that needs your clients. So that the, you know, the answer is, you know, we, we, You know, we've been adding, we add new channels, you know, on a, I don't know, a semi-regular basis because, you know, you can't do everything. But we did in Twitter find, you know, a pretty responsive company, Twitter, you know, interested in working more with companies like ours and actually allocating, you know, internally resources that could help us become better at using their channel. And that's not as common. in the other larger social media platforms where we have relationships. So as a result, you know, we've seen good performance, good results, and we expect to scale it. Wow, that sounds very promising. Thank you. With IntentKey, you know, you mentioned that $10 million sounds really good, and then the additional, you know, whatever it was, 77% in RFPs year over year in terms of the dollar amount. What do you see, though, in terms of client retention and then even current clients expanding their campaigns? Are you pretty well keeping all of your clients and getting them to expand? What do you see in there? Yeah, the interesting thing about media is clients can actually come and go. And, of course, they don't always spend their money online. continuously. They might spend it in one quarter and then take a pause for another and then start up in another quarter. In fact, we've had clients, I think, who spent maybe for two quarters and then stopped and then started back up the next year. It's a little difficult to figure out what constitutes a lost client versus a not lost client. We have certainly lost some clients, but there's so few of them that I don't even remember who they are. How's that? And when we do lose clients, we've tended to lose them because we're working with an agency and that agency lost them. Because, you know, when we work with agencies, they maintain the relationship with the client and we're really just a service provider in that environment. So I think, as I've said, maybe time and again with the intent key, the performance is strong and the, approach we have produces such valuable strategic insights because it's really honing in on the reasons why people are doing things as opposed to who they are that we tend to keep the clients because they see things they've never seen before and it opens up the ability to market to things they've never been able to market to before because of the constraints of the existing consumer data.
Brian
Okay, thank you for that. I appreciate that.
Richard Howe
Did I hear you correctly? I know you've been saying here recently that you can sort of leverage some of the clients that IntentKey, get them over to ValidClick. But did I hear you mention something in your opening remarks about integrating certain aspects of IntentKey and the AI into ValidClick, or was that a misunderstanding on my part? No, that's exactly right. Social and search. So, you know, ValidClick has an extremely robust competency in media buying in social and search. We've been doing that for many, many years. And so now we're offering that in combination with all of the other channels that the intent key, you know, provides, the connected TV and the display and video and streaming audio, et cetera. And yes, and we've now incorporated, you know, the AI directly into the social and search-based media campaigns that we're running, which was, you know, pretty cool to be able to add, you know, that value add, you know, into those channels. And as a result, identify audiences like within those platforms and then market to those audiences, you know, using, you know, identifiers created by our artificial intelligence. So that was a big step in our minds towards our desire to want to go in and sell directly to clients, recognizing that we have a huge competitive differentiation within the so-called programmatic space, but recognizing also that when you try to sell those bigger deals, you've got clients who don't want to have multiple vendors, right? It becomes difficult for them to manage. Let's just say I do my social buying somewhere and my search buying somewhere else. And I do, you know, I don't know, video somewhere else and programmatic somewhere else. There's a lot of sort of, you know, call it half billion to a billion dollar a year companies who would rather just have a single provider of those services. And we find as a result of the clients that we were able to sign and work on in the third quarter, we now have this ability to which we've wanted to have to go out and sell these bigger deals, which we plan to start doing in 2022. Yeah, fantastic. Sounds like you're set up for that. I guess the final thing for me then would be you had talked on the last one or two calls, I think, about potential acquisition with the cash that you have and just wondering what you're thinking is on that right now. Is that something that's still on the radar or is it something that you kind of pushed aside for now? We did push it aside, Aaron, but not because we don't want to do it. It's more like the growth, as you can tell, has been so strong that, you know, we find ourselves, I guess, in a good position of, you know, having to be 100% focused on not dropping the ball on, you know, client relationships that we've now closed. And so we don't want to be distracted by And we don't want the resources of the company to be distracted to have to work on an integration as a result of the acquisition of a company. Not right now. With that said, we still believe that an acquisition of some kind should be in our future. And I think as I've said on prior calls, my preference right now would be to acquire marketing and advertising, digital marketing and advertising consultancy in large part because the resources in those consultancies tend to be more knowledgeable about the complexities associated with advertising and as a result tend to be more successful at selling bigger deals where clients, you know, value the sort of consulting that comes with a sale.
Brian
Well, guys, I appreciate your time, and I'm looking forward to the end of this year in 22.
Richard Howe
Keep up the good work. Thank you. Thanks, Aaron.
Operator
And that does conclude the question and answer session. I'd like to turn it back to management for any additional or closing comments.
Richard Howe
Thank you, operator, and I'd like to thank everyone who joined us on today's call. We appreciate your continued interest in our company.
Operator
Thank you, Ann. That does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.
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