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INUV: The Purchase of NetSeer Should Return Inuvo to Growth

02/14/2017
By Lisa Thompson, CFA

NYSE:INUV

On February 7th the company (NYSE: INUV) announced the purchase of most of the assets of NetSeer, for 3.529 million shares of stock (or $5.8 million) and assumed $4.2 million in liabilities related to the business, comprised of debt to a bank, debt to a lender, trade payables, and severance. This totals $10 million. The acquisition is expected to add $15 million in revenue to Inuvo in 2017 plus 20 employees. The shares will be subject to a 180-day lockup. NetSeer, a provider of visual monetization solutions for advertisers and publishers, is based in Sunnyvale, CA and was founded in 2006. It had $14.4 million in venture funding.

This purchase adds new customers and partners as well as valuable data on consumer interest. NetSeer provides a visual monetization platform with in-Image ad technology, which will be incorporated into SearchLinks. It allows appropriate ads to be placed based on the photos and videos on a page, a technology Inuvo did not yet have despite increasing use of photos and videos on its owned sites. NetSeer’s “ConceptGraph” targets ads based on the reader’s intent, thus providing a more precise and predictive targeting solution for advertisers. Although the acquisition will be dilutive in 2017, the company expects it to be accretive to AEBITDA within 12 months. Inuvo is optimistic it will be able to cross sell and upsell product between the two companies’ customer bases.

Earnings Results

Yesterday the company reported 2016 results. 2016 turned out to be a disappointing year as algorithmic missteps and Yahoo drama kept annual growth flat. Revenues totaled $71.5 million versus $70.4 million a mere 2% growth. However the company did fair better than many in the industry where revenue was seen to decline. Once its Q2 revenue issued were resolved, Inuvo was back on track sequentially.

Q4 revenues came in at $19.7 million versus $21.0 million last year, down 7% year over year, but up 12% sequentially. Ad-tech (the renamed partner network) grew 58% to $9.8 million while Digital Publishing (the renamed owned & operated) fell 34% to $9.8 million.

Operating income was a loss $200,000 versus a profit of $729,000 in 2015 and a loss of $607,000 in Q2 2016. Loss for the quarter was $292,000 versus a profit of $621,000. More importantly the company reported a positive adjusted EBITDA of $612,000 versus $1.5 million last year. The company remains within its strategy of investing to grow revenues without burning cash. We expect the company to continue to remain cash flow positive.

2017 Estimates

For 2017 we are raising our estimate to $94 million based primarily on the acquisition of NetSeer. We do not expect the company to be profitable for the year, but expect it to remain adjusted EBITDA positive. Our non-GAAP EPS estimate is now a loss of $0.10 per share versus a positive $0.01 this year. Once the company reaches over $100 million in sales, we expect it will be an attractive acquisition to a larger company and the management would be willing to entertain discussions.

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