INUV: Q2 Shows Inuvo Moving to a Higher Margin Model

By Lisa Thompson

NYSE:INUV

Inuvo (INUV) reported revenues on target with its pre-announcement but exhibited higher than expected gross margin as it reduces revenue from owned and operated and increases sales of higher margin business in part due to NetSeer sales. However the reduction of locations and data center consolidation is not yet finished, and its full effect will not be in force until December. This will reduce expenses even further improving operating margins. The company had approximately 21 of its 92 employees (as of the end of June) in Sunnyvale. They relocated to new facilities in San Jose as of the end of July.

Revenues totaled $18.3 million for Q2 2017 up 17% from Q2 2016. Q2 last year had a drop off in revenues due to customer confusion caused by the pending acquisition of Yahoo! on July 25th, as well as an internal algorithm problem. This 2017 quarter was with first full quarter with NetSeer revenues. The company no longer breaks out business segments since integrating with NetSeer. Mobile was 58% of sales in the quarter, higher than the 2016 average of 52%.

Gross margin was 58% in the quarter compared with 75% in Q2 2016, but an improvement from 54% in Q1 2017. The company expects gross margin to trend up and expects a few more percentage point of improvement in the second half of 2017.

Loss for the quarter was $1.4 million versus a loss of $600,000. Taking out one-time expenses for the acquisition and stock-based compensation, adjusted EBITDA was $167,000 versus $288,000 last year. We had been expecting a loss, so the company is making better progress than expected.

The company reported a loss of $0.05 versus a loss of $0.02 last year, but on a non-GAAP basis, taking out one-time expense and stock-based compensation, the EPS loss was $0.02 versus a loss of $0.01.

The NetSeer acquisition has been initially dilutive, but the company expects it to begin to be accretive by the second half of this year. This is an improvement from its initial expectations of it to be accretive to adjusted EBITDA within 12 months. NetSeer revenues are at much higher gross margins than historical Inuvo revenues and its contribution is expected to increase as a percentage of sales going forward. Its technology is extremely useful to Inuvo and it brings technology expertise while Inuvo provides management discipline making the acquisition highly synergistic.

Forecasts

On the call the company reduced its guidance on annual revenues to a range of $84 million to $89 million from a range of $88 million to $93 million. Since the company is now focusing on higher margin revenues rather than low margin digital publishing revenues, guidance for EBITDA was maintained. Most impactful is the guidance to higher gross margins, which will meaningfully increase either profitability or the ability to further invest in the business. The company has no plans for any further acquisitions this year and plans to devote resources to selling. We are reducing annual revenues to $84.5 million and adjusting the quarters. Due to another earnings beat in Q2 we are reducing our non-GAAP EPS estimate to a loss of $0.07 per share versus a positive $0.01 in 2016. We believe that the company will continue to invest cash in marketing to grow revenues.

In 2018, we believe the company may pursue other acquisitions. The current state of its balance sheet may make that difficult, but many opportunities are available. Once the company reaches over $100 million in sales, which we expect it to reach in 2018, we believe it could be an attractive acquisition to a larger company and the management would be willing to entertain discussions.

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