Inuvo, Inc.

Good day, ladies and gentlemen, and welcome to the Inuvo Inc. 3rd Quarter 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. And this call is being recorded on Friday, November 8, 2024. I would now like to turn the conference over to Natalia Rudman, Of Crescendo Communications, please go ahead.

Thank you, Liyue, and good morning. I'd like to thank everyone for joining us today for the ANUVO Third Quarter 2024 Shareholder Update Call. Today, ANUVO'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 morning. Before we begin, I'm going to review the company's safe harbor statement. The statements in this conference call that are nondescriptions 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 Nouveau Inc. are as 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 Nouveau at this time. In addition, other risks are more fully described in Nouveau'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. In addition, today's discussion will include references to non-GAAP measures. The company believes that such information provides additional measurements 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 out of the way, I'll now turn the call over to CEO Rich Howe. Please go ahead, Rich.

Thank you, Natalia, and thanks, everyone, for joining us today. We are pleased to report that for the quarter ended September 30th, 2024, we delivered 23% sequential growth. We were down roughly 9% year over year, having come off of the strongest quarter in our history in the third quarter of fiscal year 2023. And that quarter was driven in large part by our largest platform client. For the nine months ended September 30th, we are up approximately 9% year over year. The fourth quarter is shaping up nicely with the first five days of November having averaged roughly $290,000 per day in revenue. We are currently estimating double digit year over year growth in the fourth quarter. Adjusted EBITDA improved $310,000 sequentially at a loss of $357,000 in the third quarter of this year. We expect adjusted EBITDA to be near breakeven in the fourth quarter. We have no outstanding debt at the end of September. and we have cash and availability from our $10 million receivables facility sufficient to meet our working capital needs. In the second quarter, I had mentioned that we were in the process of completing a master services agreement with a large retailer, and I'm pleased to report that we signed that agreement. We have consistently delivered exceptional results for this client, and consequently, we do expect this relationship will continue to thrive well into the future. As we have discussed in prior calls, the process for approval by this client was extensive, having taken approximately one and a half years from the initial interest. Let me now provide some information about our industry, our clients, and our products. Let's begin with the industry. Our platform products and the services we deliver are focused on a very specific component to the advertising ecosystem. This market is roughly $6 billion annually, and typically it's designed to extend the reach of these platforms to niche websites they do not themselves own or control. Over the past year and a half, this large market has experienced changes. And those changes were driven, have been a driver of the growth within our platform clients. These platform companies we work with have had a concerted effort to improve the return on advertising spend resulting from this marketplace on behalf of their advertisers. Now to accomplish this goal, These platform companies have reduced the number of companies they work with, choosing instead to focus with a finite set of partners on improving quality through better technology, better content, and compliance.

Inuvo is one of those partners.

This shift towards prioritizing quality over quantity along with the finite nature of the players in this marketplace, gives us confidence that this component of our revenue has significant potential to scale. Among our agency and brand clients, the major shifts continue to center around consumer privacy. The browsers that enable that privacy and an advertising industry that has long some would say too long, relied on a business model dependent on the exchange and sale of a consumer's private information. As a reminder, our AI was designed to find audiences without using this consumer data. The debate within the industry on this issue is probably best summarized by a statement that goes something like one person's tracking, consumer tracking, is another person's consumer personalization. Regardless of the debate, the movement towards a digital advertising marketplace where tracking consumers is no longer possible continues to accelerate, both legislatively and technologically. Apple, with their Safari browser, is already there. And as I've mentioned on prior calls, they control over 50% of mobile browser market share. Google, with their Chrome browser, has been slow to change. In August of this year, they announced a shift in their approach to consumer privacy, stating their intention to empower consumers to make their own choices. They have yet to announce exactly how they plan to do that.

Moving now to our clients, across

Our platform, agency, and brand clients, we are now actively working with over 100 small and medium-sized agencies. As it relates to the agencies and brands we serve as part of our AI intent key products, we signed four new agencies and two new direct clients within the quarter, while also adding six new brands with existing agencies. These new clients were in sectors that included healthcare, entertainment, education, some nonprofit, and technology. Across those agency and brand clients, we outperformed our KPIs for those clients on average by 43% in the third quarter, growing this component of our revenue by 15% year over year. One of our larger clients, an auto manufacturer, is currently forecasted to be up roughly $1.3 million this year. The large retail client I had mentioned earlier will be up tenfold in the fourth quarter as compared to the first quarter of 2024, which was when we first started working with them. Based on our current booked business, we are forecasting this agency and brand component of our revenue to be up sequentially in the fourth quarter. Our platform relationships remain a strong driver of our growth and working capital for our company. While revenue from these clients was down 12% this quarter compared to last year's strong performance, this part of the business is scaling well. And as we head into Q4, it's also forecasted to be up sequentially in that quarter. We also made progress selling our intent key self-service product during the third quarter. This aspect of our product strategy allows clients to generate and target audiences within their own campaign platforms. While this remains a small component of our overall revenue today, in the quarter, we secured a number of notable brands within hospitality, technology, and the auto sectors. As we have mentioned in prior calls, along with growth, this self-serve product is an important component of our drive towards being cash flow positive because the margins in this part of our business are significantly higher than when we deliver our technology along with campaign services.

Let me turn now to our products.

Early in the first quarter of 2025, we plan to announce and launch enhanced capabilities within this self-serve AI product.

Offering media buyers

an unprecedented set of tools and an ease of use within advertising. These new capabilities should allow a nouveau to scale more easily across both the upper and lower ends of the ad tech market. As I have discussed on prior calls, our AI is a disruptive technology within advertising. It's an intelligence that has and continues to capture the wisdom of humanity as represented in the billions of pages of content available across the internet. Consequently, it already knows things about any product, service, or brand. However, to implement this technology, the AI also needs to be seeded with information that guides but does not define ultimately its audience choices. Prior to this new launch, which is being tested now, when a self-serve client has signed up, Anuvo itself would have to seed the AI with information captured as part of the discussions with the client.

This, not surprisingly, caused some bottlenecks.

In this latest version of the self-serve product, clients will now be able to themselves either describe the audience they wish to target verbally and or provide the AI with a series of URLs that have content in them that may describe their product, for example, or their competitive landscape, or for that matter, any other contextual information that they can provide related to the target market's they want to attack. With this information alone, which is captured now in this new version of the self-serve product in an easy-to-use interface, the intent key will now be able to immediately generate an audience for any product, service, or brand and be instantly able to action that audience within the client's platform of choice. There is simply no other ad tech competitor even close to providing this level of efficiency, flexibility, ease of use, and as we've seen now for quite some time with the performance of the intent key and market, the actual performance for those clients. We will definitely talk more about this on our year-end call. 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. Wally?

Thank you, Rich. Good morning. I'll recap the financial results for our third quarter of 2024. NUVO reported revenue of $22.4 million for the third quarter of 2024 down from $24.6 million for the same period last year. That's a 9% decrease year-over-year as we had expected. However, revenue in the current quarter is 23% higher than the previous sequential quarter. Through the first nine months of 2024, we're up 8.5% year-over-year. The higher revenue in the third quarter last year was due to a new product launch with our largest platform client, which experienced rapid growth during the third quarter last year before being scaled back in the fourth quarter in an effort to improve advertiser performance. We continue to focus on scaling revenue from platform clients as well as signing on new midsize agencies and brands. In the third quarter of 2024, 83% of our revenue came from platform clients, with the remaining 17% from agencies and brands. This represents a slight shift from the third quarter of last year, where 87% of the revenue was from platform clients and 13% from agencies and brands. We expect revenue from agencies and brands to increase as a percentage of the total for the remainder of this year. Cost of revenue was $2.6 million in the third quarter of 2024, compared to $2.3 million for the same period last year. Cost of revenue is primarily composed of media payments made on behalf of our agency and brand clients, and to a lesser extent includes payments made to website publishers and web developers that host our advertisements. We reported a gross profit of $19.8 million compared to $22.3 million for the same quarter last year. The gross profit margin for the third quarter of this year was 88.4% compared to 90.7% for the same period last year. The decrease in gross profit this year was mainly due to lower revenue. We anticipate a slight decline in gross margin in the fourth quarter of this year due to a higher proportion of revenue coming from agencies and brands. Operating expenses for the third quarter of 2024 total $21.7 million compared to $23.5 million for the same period last year. All components of operating expenses were lower this year compared to last year. Marketing costs were $17 million in the third quarter of 2024 compared to $17.6 million in the same quarter last year. Marketing costs were lower primarily because of lower revenue from platform clients. This quarter's marketing expenses included a one-time non-cash impairment charge of $600,000 related to a 2021 referral and support services agreement That's no longer in use. Compensation expense for the third quarter of 2024 was $3.1 million compared to $3.5 million in the same quarter of the prior year. Compensation expense was lower in the third quarter of this year compared to the same quarter last year due primarily to lower stock-based compensation, lower incentive expense, and lower commission expense. At the end of the second quarter, we eliminated 13 positions in an effort to reduce expenses through the elimination of redundant roles. Our total employment, both full and part-time, was 82 at the end of the third quarter of 2024, and that's compared to 86 people at the end of the third quarter of the prior year. We plan to add three salespeople by year end. General and administrative expense for the third quarter of 2024 was $1.6 million compared to $2.3 million in the prior year. The reduction reflects collections resulting in lower doubtful account expense, improved collections, along with lower professional fees and amortization expense, lower amortization expense. Net interest expense was approximately $101,000 in the third quarter of 2024 compared to a net interest income of approximately $20,000 in the third quarter of last year. Net loss in the third quarter of 2024 was $2 million or one cent per basic and diluted shares compared to a net loss of $1.2 million or one cent per basic and diluted shares for the same period last year. The net loss this year includes $1.6 million of non-cash expenses. For the first nine months of 2024 compared to last year, the net loss has improved by $2.1 million. Adjusted EBITDA loss in the third quarter of this year was $357,000 compared to an income of $32,000 in the same period last year. For the first nine months of 2024 compared to last year, adjusted EBITDA has improved by $2.4 million. As of September 30th of this year, we had cash and cash equivalents of $2.6 million. And in July, in the third quarter of this year, we secured a $10 million asset-based working capital line of credit. And as of September 30th, there was no debt outstanding. Our capital structure is composed of 140 million approximately common shares, outstanding, and 12 million employee restricted stock units, outstanding. The company has reduced its cash burn during the nine months of 2024 compared to the nine months of last year by 227,000 and expects further improvements in the fourth quarter. With that, I'd like to turn it back to Rich for closing remarks.

All right. Thanks, Wally. We grew roughly 9% in the first three quarters of 2024 compared to the prior year. And while we were down year over year in the third quarter, coming off a strong prior year comp, we expect to be back up year over year at double digits in the fourth quarter. Over the first five days of November, we have, in fact, averaged unaudited over $290,000 per day. We continue to execute on a multifaceted strategy that includes the expansion of our markets, which is noted in my earlier remarks, we are achieving by offering both self and full service offerings. We continue to lean into our market advantage, which is the ability to quickly identify and target audiences without using a consumer's personal information. Additionally, we continue to enhance our sales and service teams by upgrading the former and better organizing the latter in a manner that incentivizes both growth and retention. We have strengthened our enablement and marketing functions, putting ourselves in a stronger position to support sales and better communicate our value proposition. Furthermore, We have refined our messaging to clearly highlight our strengths and value proposition to clients and investors alike. I will now turn the call over to the operator for questions. Operator?

Thank you so much, presenters. And ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please press the star followed by the number two. And if you're using a speakerphone, please lift the handset before pressing any keys. And one moment, please, for your first question. And our first question comes from the line of Brian Kinslinger of Alliance Global Partners. Please ask your question.

Great. Thanks so much. I have a bunch. Maybe I'll ask a few and then get back in the queue. You talked about the retailer and the car manufacturer. You touched on them. The last quarter, you also mentioned a large technology company as a new mega brand customer. Can you provide any updates on that third customer that you discussed?

Give me some more context on the technology, the technology one.

Last quarter, you talked about three mega brands using N10Key. And so you were kind of highlighting how you had to penetrate those, and that was the key. So I think we talked about two of them, which I'll get to, but I kind of wanted to understand if there was any progress on that large technology brand.

Yeah. So, Brian, I'd have to go back and look exactly at what my comments were there. But based on the way you're phrasing it, I think I was really referring there to our largest platform client, which is a large technology company, one of the largest in the world. Got it.

Okay.

Now, with that said, you know, we are making progress and we have signed up actually some other what might be called, you know, in fact, they more than be called. They are large technology companies. They're still small, you know, in terms of their let's call it revenue contribution to a new vote. But we are definitely working in the technology sector.

Well, then let's touch on the retailer and the car manufacturer, which you kind of touched on, their growth and kind of expectations. What are they communicating on performance? And if it's going really well, which I assume it is based on the metrics and KPIs you're performing against, are they already from a high level talking about increased market share in the years ahead?

Budgeting for...

clients tends to happen in the fourth quarter, late in the fourth quarter, early in the first quarter for any given year. So, yeah, there's always ongoing dialogue with clients about what could be, let's just say in 2025 as compared to 2024. But most of the time at this time of the year, you know, everybody's just focused on maximizing the return on investment associated with the so-called Halloween, Thanksgiving, and Christmas seasons, which are typically the largest parts of the year for people. What I will say is what I've said continuously. The KPIs we're delivering for clients, including these ones that you're mentioning, are outstanding.

And I will go on record once again, in head-to-head, in fair head-to-head testing against any, any, capital any, other technology used to find and target audiences, we will win. So it begs the obvious question I think I've asked so many times, what will it take for

your client base that's already using Anuvo and outperforming the competition to dramatically increase their usage of your technology? What do you think? When and how does that happen?

Two things are necessary to accelerate that. One is relationships. So, you know, in spite of the fact that we're living in a digital world where you know, and, and consequently people are less likely to want to have face-to-face meetings, the relationship with a client, um, you know, it's probably the biggest catalyst to, you know, accelerating, um, the relationship. So that's why we've been investing in that with our sales teams, um, and with other relationships we have, we know, you know, if we can get, you know, in, in with people and build a relationship with them, um, where we're not being thwarted by the plethora of competitors, those relationships will grow. And then the second thing is fear of change. So whenever you've got a disruptive new technology and whenever you've got markets changing, the people involved in those decisions have this aversion to change. So those are the two things, Brian.

And we're working on both. That leads to the obvious next question. And then I'll get back in the queue because I do have other questions. But you talked about looking to hire three new salespeople. Have you hired any yet in the fourth quarter? And talk about the ideal candidate and how you find that person.

I'm not sure if we've hired one in the fourth quarter. I think we probably did. Wally might know the answer to that. So after I'm done talking, he can he can opine on that. But we've hired, you know, a number of new ones and we've You know, we've changed out some other ones, you know, as I mentioned, and, you know, we've been trying to do the best we can to get the best people possible. The combination of skills, you know, that we look for, well, there's a plethora of things you look for when you're trying to hire the right, you know, the best salesperson. But going back to the prior question you asked, one of the things that, you know, that we look for quite extensively is, you know, what kind of relationships do they possess? And are those relationships longstanding and trusted? Because that matters. So we care a lot about those relationships that salesperson comes to the table with. And then the second one would probably be categorized in the bucket of skills that I'll describe as being consultative. If you're going to position You know, technology within the ad tech world, it's unfortunately for salespeople complicated. You know, there's data and there's analytics and there's segmentation and there's, you know, there's campaign platforms and there's there's IP addresses and cookies. And I mean, the list goes on and on and on. And so to do a really good job, you know, selling any product in this industry sort of demands that you understand. how things work and those skills are hard to come by. So, we kind of look for the two is the answer. The long drawn out answer to your question is, you know, a strong relationship and an individual who has a strong understanding of how things actually work. That would be the two main characteristics. Great.

Thank you. I'll get back in the queue. Okay, Brian.

Thank you so much. And your next question comes from the line of John Hickman of Zetterberg.

Please ask your question.

Yeah, Rich, I was just wondering, um, like what the, um, I don't know, like the M&A, um, landscape looks like in, in your portion of the ad tech world. Um, Is there a lot of activity going on? Do you feel like there's targets for you to acquire, or are you a target?

I'll answer the last one first. I think it could be both. Of course, the sort of limitation for us to be an acquirer is, is our balance sheet doesn't allow us freely to be able to do that. And there, of course, would be dilution associated with that, which we're very sensitive to on behalf of our shareholders. So acquiring things, yes, we look, and there are targets out there that are interesting, and we're having ongoing dialogue all the time with potentials for that. The latter, you know, us being acquired, I think, is also, you know, a possibility. So, you know, if you look at, you know, the capability we have and the disruptive nature of it, and quite frankly, the patents we've got and the reality that we're the only large language generative AI built for this use case, solving probably the industry's biggest problem. Yes, I think, you know, in the next you know, whatever period and however a person wants to define it. There'll probably be increased interest. With that said, you know, there's been, you know, companies that we talk to all the time who, you know, want to talk to us, you know, or trying to learn about what we have. So I think it's both, John. There's nothing imminent, right? But as you would expect, as our shareholders would expect us to do, we're always having those conversations.

Okay. One more for me. You have 140 million shares outstanding, give or take. Is there any discussion at the board level of maybe a reverse split so that the share count was a little less and the share price maybe a little higher?

I think – so as you would expect, the answer is yeah, we talk about these things on a routine basis. you know, in our board meetings. And, you know, the analysis for that is not simple. So, you know, contrary maybe to folks who haven't, you know, taken a look at this and looking at the history of it, you know, and the history being defined by companies that have done it, there's sort of mixed results in terms of, you know, whether or not it worked out in a positive way or in a negative way. So the answer to your question is if we ever do choose to do this, we would do it under the guise of very comprehensive analytics that sort of makes sure that when and if we do do it, that it doesn't yield, I guess, a bad outcome.

Okay. Thank you. You bet. Thanks, Joan.

Thank you so much. And we have a follow-up question from Brian Kinslinger. Please go ahead.

Yeah, great. Over the last few quarters, I think you and I in this call talked about advertising and obviously you have limited capital, but the importance of the effectiveness. I wonder, looking backward, if you could talk about maybe over the last 12 months, the effectiveness of your marketing and advertising efforts And do you need to make changes? Do you need to keep doing what you're doing because it's working? Just maybe talk about that, please.

Yeah, sure. Well, so we've already talked about the fact that, you know, one of the key components to that is the people we have out in the field. And so, you know, we brought, you know, Barry, you know, former CEO of an agency into the help us with that. And he has done a great job at, I'd say, you know, improving the professionalism of this part of our go-to-market. Now, there are lots of other things we can be doing on the sales side that we are in fact doing. One of which points back to the other question you asked about some of the things that matter and relationships matter. So I will say this, Brian, you know, we have, we have contracted with recently some other individuals you know who let's just say have broad relationships within the advertising ecosystem and so we brought them on as consultants to help us make introductions you know leveraging you know the strength of their relationships to to help us do that recognizing that that's so important you know to this to this scalability, if you will, of what we can do. With marketing specifically, the marketing stuff, one of the things that we find effective in this new world we're living in where, as I said earlier, it seems like buyers don't want to have face-to-face meetings, or at least not as many as they used to. We have found that conferences work pretty well for us because while people don't want to have face-to-face meetings, they do attend the conferences. So these conferences become a really good place for us to network and make those relationships. And I'm pretty sure we attended six of them in the third quarter, just as a side note to give you some sense of the scale of the operation there and us leaning into that part of our marketing activity. In addition to that, we've been quite successful at getting ourselves published in industry, reputable industry trade magazines who have a desire to talk about artificial intelligence and advertising. And we're clearly, if not the quintessential company, one of the quintessential companies at that intersection, And so I think in the third quarter, if memory serves, we had three of those articles published about us. So that's an increase. We've also seen a pretty strong increase in the number of people who have subscribed to Anuvo on LinkedIn. We've been pretty active within LinkedIn at trying to reach marketing and advertising professionals. And consequently, that's working. So I think we have, I don't know, 7,000-ish subscribers now who we push information about a new vote to. I mean, in fact, we have a newsletter that goes out. I think it's monthly. And there's 1,000 or so people, 1,000 advertising and marketing professionals subscribe specifically to that newsletter alone globally. that we push that to. And all those numbers are going up, if you will. So forgive the long answer, but I wanted to be thorough. Great.

The last question I have, I think you said you added 60 brand customers to agencies and two new direct logos. How many customers or brands are you actively serving maybe on a quarterly basis right now?

Can you share that?

Yeah, that's a good question. I'm not sure I know the answer to that. We probably should follow up afterwards and tell you that so I don't say something wrong. Okay.

All right. Great. Thank you. You bet. Thanks, Brian.

Thank you so much. And there are no further questions at this time. I would like to turn it back to Richard for closing remarks.

Thank you very much, operator, and thank you, everybody, who joined us on today's call. We appreciate your continued interest in our company.

Thank you so much, presenters and gentlemen. This concludes today's conference call. Thank you for participating, and you may now disconnect. Have a great day.