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Operator
Good afternoon, everyone, and welcome to IZEA's Q3 2021 earnings call. I'm Ryan Schramm, President and Chief Operating Officer at IZEA. And with me on today's call is IZEA Chief Financial Officer Peter Beery and IZEA Chairman and Chief Executive Officer Ted Murphy. Thanks for joining us. Earlier this afternoon, the company issued a press release with details pertaining to our third quarter performance for 2021. If you'd like to review those details, all of our investor information can be found on our investor relations website at IZEA.com forward slash investors. Before we begin, please take note of the Safe Harbor paragraph included in today's press release covering the company's financial results, and be advised that during today's earnings call, our management team will discuss IZEA's business outlook and made forward-looking statements. These statements are predictions based on our team's expectations as of today that are subject to inherent risks and uncertainties and should not be unduly relied upon. Actual events, results, or trends could differ materially from our forecast due to a number of factors, including those mentioned in our most recently filed periodic reports with the SEC. The company and our management team assume no obligations to update any forward-looking statements made in today's call. In addition, our update today will also refer to a non-GAAP financial measure, adjusted EBITDA, and other business metrics such as gross billings and bookings. A detailed explanation of these measures is disclosed in our earnings release and in our most recent form, 10Q. With the appropriate disclosures taken care of, I'd now like to turn the call over to my colleague and Isaiah's Chief Financial Officer, Peter Beery. Peter.
Ryan Schramm
Thank you, Ryan, and good afternoon, everyone. I'd like to highlight our results for the quarter ended September 30, 2021. Total revenue for the third quarter of 2021 was $7.6 million, or 88% higher when compared to Q3 of 2020, with $7.2 million coming from our managed services business and $454,000 coming from our SaaS offerings. Managed services revenue increased by $3.7 million, or 104%. while SAS revenue declined by 68,000, or 13%, both compared to the prior year quarter. As we've previously announced, managed services bookings, a key metric which measures sales orders received less than any cancellations or refunds given during a period, topped 11 million for the third quarter of 2021. This all-time record represents an increase of 181% compared to Q3 of 2020, and continues the growth trend that we've seen since late last year. The trend towards larger brands increasing their marketing spend with IZEA also continued during the quarter, as we added several new Fortune 500 customers and repeat business from three Fortune 10 partners. These factors, taken together with efforts put forth by our team to fulfill campaigns, resulted in the increase in managed services revenue. As a reminder, we recognize revenue on our managed services contracts over time based on the percentage of completion and delivery timing can vary greatly. Historically, bookings have converted to revenue over a six to seven month period on average. However, since late last year, we've been receiving increasingly larger and more complex sales orders, which in turn has lengthened the average period for revenue recognition to approximately nine months, with the largest contracts taking even longer to complete. Planning for larger contracts takes more time up front, which can also cause further delays. For these reasons, managed services bookings, while an overall indicator of the health of our business, may not be used to predict quarterly revenues and could be subject to future adjustment. SAS revenue, which consists of license fees, self-service marketplace spend fees, and other fees, was comparatively $68,000 lower for the third quarter of 2021. Licensee counts continue to grow on all platforms. However, average license fees are lower primarily due to changes made a year ago to our pricing methodology, namely in driving the improved price-to-value economics and being a first mover in transparent competitive pricing. We also lowered our pricing on select self-service offerings, which impacted our margins on marketplace spending during the current quarter. Gross billings from marketplace spend in the third quarter were 31% lower than the prior year quarter, leading to lower fees revenue. Our cost of revenue exclusive of amortization was $4 million in Q3 of 2021, or 52% of revenue, compared to $1.7 million, or 42%, in the prior year quarter. Cost of revenue was higher primarily due to a heavier mix of larger deals that carry lower overall margins. Accordingly, gross margin in the current quarter averaged 48% compared to 58% in the prior year quarter. Expenses other than the cost of revenue totaled $5.5 million for the current quarter compared to $3 million for the prior year quarter. Sales and marketing costs were $2.2 million during the quarter, $1.4 million or 60% above the comparative quarter due to sales compensation, which varies with higher bookings and increased marketing costs associated with driving customer growth. General administrative costs totaled $2.7 million during the quarter, $844,000 or 46% above the prior year quarter, due primarily to higher compensation, as well as contractor costs to support operations and IT investments. Our net loss for the third quarter of 2021 totaled approximately $1.5 million, or negative two cents per share, compared to a net loss of $1.3 million in the prior year quarter, or negative three cents per share. Adjusted EBITDA was approximately negative $1 million for the third quarter, compared to negative $725,000 for the prior year quarter, a difference of about $275,000. Booking's growth over the last four quarters has outpaced our growing managed services revenue, driving our unearned revenue backlog to over $22 million at the end of Q3, and higher sequentially by 30%. We anticipate that revenues will increase during the fourth quarter of 2021 as we deliver end-of-year and seasonal promotions. As of September 30, 2021, we had $74.5 million of cash on hand, down about $500,000 from the end of Q2, and we have no debt on our balance sheet. As previously announced in June 2021, the company entered into a new two-year at-the-market sales agreement under which it may offer up to $100 million of its common stock from time to time. That agreement provides IZEA with financial flexibility moving forward. The company has not sold any shares in the open market under that agreement to date. With our cash on hand and a potential additional financing vehicle in place, We are in a strong position to execute on business growth, both in front of us and opportunities that may lie ahead. With that, I'll turn the call back over to Ryan.
Operator
Thanks, Peter. It's wonderful to be delivering continued strong results for our shareholders and clients alike. While 2021 has been a record-setting year for IZEA on several fronts, one of the shining examples comes from our managed service work group. For those of you not familiar, this unit of integrated marketing professionals works on behalf of brands and their agencies to concept, strategize, and execute world-class influencer marketing programs. By leveraging IZEA's technology platforms, it allows our team members to have a unique advantage in delivering both highly innovative and highly effective work with unparalleled efficiencies. Such an offering is a key element in our strategy to unlock incremental value for our clients, resulting in larger dollar-sized commitments, broader geographic access, and more substantive relationships overall. And it's working. Since 2019, we've more than tripled the number of clients who are trusting IZEA with million-dollar-plus budgets, while at the same time increasing the absolute number of new managed service clients by more than 2x over the last year. Obviously, these are terrific numbers that our team is proud of, and they should be. But for our shareholders, it also underscores the continuing shift within the broader advertising and marketing investment trends that were exacerbated by the COVID-19 pandemic. Compared to old, established bastions of media such as television, radio, and print, influencer marketing not only is more cost-effective, but it delivers a longer lifetime value through highly measurable results. As we look toward 2022 and beyond, there's even more opportunity ahead of us. From new types of client engagements to provide strategic planning pre-campaign, to offering best in class data science personnel to provide insight and analytics on campaign performance in new and exciting ways. We see IZEA's future thriving at the intersection of our talented team members, our passionate creators, and our proprietary technology. When paired with a healthy growth mindset entrenched across the company's personnel, by having the advantage of technology-backed solutions, adding more clients doesn't necessarily mean having to add proportionately more cost. While we remain steadfastly committed to securing and consolidating the very best talent across the influencer marketing industry in both our sales and service organizations, we believe that IZEA will continue to enjoy an increase in revenue per full-time employee over time as we seek to enhance and automate lower value aspects of the campaign fulfillment process. That way, our valued team members can spend more time surprising and delighting our clients, driving increased retention and larger investments in return. Doing so also unlocks greater opportunities for the broader creator economy as well, with increased deal flow and higher diversity of brand collaboration opportunities to engage against. Now for some additional perspective on IZEA's performance year to date, as well as commentary on the road ahead for the company. I'd like to turn the call over to my colleague and IZEA's founder, chairman, and CEO, Ted Murphy. Ted.
Peter
Thank you, Ryan. At the end of 2020, our team set forth a goal to deliver at least 30% annual revenue growth per year for each of the next three years, or a 30% compound annual growth rate. Revenues in 2020 were $18.3 million. Based on that rate of 30% growth per year, our goal was to achieve revenues of approximately $23.8 million in 2021 and $31 million in 2022. We are on pace to significantly beat our revenue goal in 2021. our managed services bookings in 2021 have far exceeded our initial targets. Q3 to date is $28.8 million in bookings versus $10.7 million for the same period last year, a 170% increase. As a result of strong bookings this year, we are going to materially exceed our 30% revenue growth target in 2021. Year-to-date revenue through Q3 of this year already totals $19.5 million, and we are heading into a historically strong quarter for IZEA bookings and revenue recognition. We saw a large year-over-year spike in bookings in Q1, Q2, and Q3, which can make it difficult for investors to anticipate what Q4 may look like from a revenue perspective. To assist investors, we have included a chart in our latest earnings press release that illustrates the historical correlation between managed services bookings and revenue. If you refer to the chart, you will see that there has been a divergence from the bookings and revenue trend lines over the past few quarters. The bookings trend line has far outpaced the revenue trend line for the past three quarters, as IZEA has been awarded larger contracts that span greater periods. That gap is best reflected in our unearned revenue backlog, which grew to $22 million in this quarter. We expect the revenue line to catch up to bookings over time and anticipate sequential revenue growth from Q3 to Q4, as bookings from prior quarters are recognized in the holiday season. However, it is important to note that the average revenue recognition period is still in the range of nine months, so some bookings in Q2, Q3, and in the current quarter will cross over into 2022. Team IZEA is off to a great start in Q4, continuing the momentum of previous quarters. October was the best October we have ever had for managed services bookings, and our team is focused on closing our 2021 on a strong note. We recognize that we remain amid a global pandemic with supply chain and labor shortages that have impacted many of our customers in a variety of ways. Some of those customers, particularly those in the travel industry, are still far from pre-COVID operations, and it is unclear if or when they will fully recover. With that said, our overall outlook for 2022 today is incredibly positive. We are bullish on continued growth based on the early indications of renewals from some of our larger clients. Let's move on from managed services and on to software. I am pleased to share that we saw record customer counts for software licenses once again this quarter, driven primarily by increases for IZEA X Discovery, our self-service offering. We also saw record new customer starts for Unity Suite, as a result of increased demand generation investment, coupled with the new influencer discovery features we launched in May. The discovery features we launched are resonating with customers, both large and small. Finding and vetting influencers is a key step in any influencer campaign, and our improvements are being rewarded with new customer wins and existing customer renewals. We are already working on the next generation of discovery, and we will continue to iterate to make the experience even better. We are still absorbing the pricing and overall strategic change we made with Unity Suite last year, when we lowered pricing on all tiers and introduced a starter tier to appeal to smaller brands and agencies. While the majority of our clients have been transitioned to the new pricing, there are still some that remain on the old pricing structure until their contract renews. SAS licensing revenue and overall SAS revenue grew from Q2 to Q3, but we expect to see some fluctuation in Q4 as we get fully through that pricing adjustment with the last set of customers. We should see some normalization and revenue growth that reflects the steady climb in software customer counts on the other side of this year. On our last call, I spoke about some of the challenges and opportunities associated with Shake, our newest platform. We continue to make platform changes to impact the success rates for our buyers and sellers. On the positive front, we have seen a dramatic increase in first-time Shake approval rates. For context, in January of this year, only 22% of submitted shakes were approved without change requests after initial submission. In October, that number was 90.73%, a massive improvement in success rates and a testament to the effort our team has made to improve the process. We have also seen a large increase in organic search traffic coming to Shake. a 16x increase in September of this year compared to September of last year. As we add more listings, we expect our organic search traffic to continue to increase alongside it. We still have far too few shakes listed in the marketplace, and we know the buying process could be better, so these are opportunities we're focused on. During our Q2 conference call, I shared that we had a three-phase approach to address our inventory problem. Phase two rolled out in August, and we expect phase three to roll out by the end of this year. Phase three has some technology integrations with IZEAX that will make the Create Shake process even faster, particularly for creators focused on Instagram and TikTok. You will be able to create a shake with two clicks from inside of IZEAX. The Shake team is working on a complete redesign of the Shake purchase process based on what we have learned since launch. The increase in traffic and Shake creation success rates is encouraging, but the bottom line is we need to make it easier to buy and sell on Shake. We aren't where I want us to be yet and continue to evaluate ways to improve and transform the platform to increase conversion rates and revenue. Over the past several months, our talent team has kicked their efforts into overdrive. Recruiting new IZeans help us scale our company and take it to the next level. We have added multiple director-level leadership personnel in both product and marketing, as well as supporting engineers and specialists to focus on strategic implementation and execution. The investment in product and marketing will continue into 2022 and beyond as we grow the company and the customer base we serve. Our demand generation efforts through paid media, paid sponsorship, and our recently launched affiliate program will also benefit from more aggressive allocations in 2022 as we seek to capture more market share and grow at a rate that well exceeds industry averages. IZEA will also make additional investments in marketing automation, content creation, and social media. You likely have already noticed the increased cadence in publishing. Over the past several months, we've been building out our marketing team to ensure a steady stream of communication with our customers as well as our investors. We are making these strategic investments in the tailwind of robust growth in an industry that continues to expand double digits each year, with eMarketer predicting 12.2% growth in influencer marketing spend industry-wide in 2022. Beyond 2022, I believe the industry is still in its nascency. The long-term opportunity for IZEA and the ecosystem we serve is growing as global adoption of digital lifestyles perpetuates. The industry we operate in will continue to evolve, and we intend to persistently pioneer new types of influencer collaborations on emerging platforms as it does. I'm particularly excited about the opportunities that will develop over the next five to 10 years with the metaverse. While Facebook's announcement is certainly exciting, we believe the future potential for virtual worlds is as vast as the web itself. One could argue that the worlds of TikTok and Instagram are already alternative universes of their own. But when interconnected virtual worlds become mainstream, it will fundamentally alter what a brand collaboration is and how it is executed. Sponsorship of the future will go far beyond the photos and videos we see today. I see a future where creators are paid to build virtual brand experiences within a virtual world. Imagine a virtual spaceship in the shape of a Nike sneaker built by an influencer transporting the influencer's followers to an exclusive virtual party. The technology is being built around us to allow those types of activations to happen in the future. Data, artificial intelligence, cryptocurrencies, and a flexible workflow for brands and creators will become increasingly important in that world. And our strategy today is reflective of what we think tomorrow will become. The future is certainly exciting, but the present is as well. In 2021, we captured more than our fair share of industry growth, and we intend to do the same in the coming year. 2021 was a pivotal year for us. We continued to see explosive growth in customer counts and bookings. We saw the addition of new Fortune 500 clients with plenty of room for growth and the release of a whole new set of software tools for our customers. not to mention adding $35 million in fresh capital to our balance sheet to enable all of the investments we've been making. We will continue beating the growth drum in 2022 with aggressive customer acquisition efforts through sales and marketing and the development of new software and services to surprise and delight our customers. Our leadership team remains committed to growth and we have never seen a greater opportunity in our industry. As we enter into the final weeks of 2021, we are thankful for your support over the past year and look forward to reaching new heights in 2022 and beyond. Thank you all for joining us today. I will now open up the call for Q&A.
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