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INUV: Improving Margins and Accelerating Revenues Portent Double Digit Growth in 2018

By Lisa Thompson


Inuvo (NYSE:INUV) reported a strong Q4, which evidenced improving margins and accelerating revenues. Even more auspicious were its January results that showed a year over year increase in revenues of 37%, or 22% organically (eliminating the affect of the acquisition of NetSeer last February.) By simple arithmetic, if that organic growth rate keeps up for February and March, that would point to a $21.9 million quarter, up 27% year over year. Since the addition of a Chief Revenue Officer in June, the company has been adding staff in sales and marketing. It now has a group of 15 including four new salespeople who were added mostly in the fourth quarter. These new hires are up and running and should contribute significantly in 2018. The company is also amenable to adding more personnel in this group once they have had time to evaluate the results of these recent hires. Inuvo believes its sales have been helped by the trend of advertisers consolidating the number of vendors they use to those will a wider range of products. In Q4 the company had a dramatic rise in available pages, which grew sequentially from 6.8 billion pages in Q3 to 7.2 billion pages in Q4, at a price of  $3.30 RPM for Q4, up from a $3.00 RPM in Q3 2017. 

Inuvo reported Q4 2017 revenues of $20.8 million, up 21% from last year. Gross margin was down from last year at 52% versus 59%, and down a percentage point sequentially. However, the more important number to look at is the margin after marketing spend. This percentage increased to 20.2% from 10.6% last year, and 17.2% in Q3 2017. Since marketing expense is used to buy revenues (TAC), the more important result is the profit off of those revenues. That profit was up 360% from last year to $4.8 million from $1.0 million. This compares with $3.5 million in Q3 2017. So on a 17% sequential improvement in revenues, the company has a 37% improvement in profit after marketing expense. Dollar wise we expect marketing expense to increase as the company further refines its ability to translate those dollars into higher margin profits at its owned and operated web sites. Marketing spending in Q4 was reduced to $7.5 million versus $8.8 million last year. In 2018, the company expects profit after marketing expense to continue to tick up and for the year they could be up as much as a “point or two higher.”

The NetSeer acquisition did turn accretive in Q4 2017 as expected as cost savings kicked in and revenues increased. For the year, revenues from mobile advertising were 62% of sales, versus the 2016 average of 52%. NetSeer went from contributing $0.8 million a month in revenues in February to $1.9 million in December.

Compensation expense increased to $3.1 million versus $1.9 million a year ago as the number of employees grew to 90 from 70 due to the purchase of NetSeer. The company does not expect compensation cost to increase in 2018 and in fact expects it to be lower than $3.1 million on a quarterly basis as this number included some year end accruals.

SG&A was again $2.0 million (versus $1.2 million a year ago) and flat sequentially the whole year taking out one time costs in Q2. The full reduction of locations and data center consolidation will be fully felt in Q1 2018. This will reduce expenses even further and improve operating margins. 

The company had a gain on taxes of $1.5 million as the new tax laws kicked in and this pushed the company reported net income to a positive $1 million versus a loss of $309,000 last year. Even with the new tax laws, Inuvo still has nearly $78 million in tax loss carry forwards.

Taking out stock-based compensation, and the one-time tax gain, adjusted EBITDA was $768,000 versus $253,000 in Q3 2017 and $612,000 last year. 

The company reported a gain of $0.03 versus a loss of $0.01 last year, but on an adjusted non-GAAP basis, taking out stock-based compensation and the tax gain, the non-GAAP EPS was breakeven, same as last year. We expect the company to continue to deploy all its excess cash to generate profits while remaining EBITDA positive.

Inuvo management continues to be optimistic for 2018 as it now has capabilities beyond much of its competition and believes customers will continue to reduce the number of companies they work with. It is now calling its platform INUVO Exchange and believes it has the “end-to-end technology foundation necessary to disintermediate smaller niche players, and compete with bigger players.” It will also begin a push into video advertising, which has higher margins than its average. In 2018, Inuvo may open a small office in Beijing with support from local government, as it seeing interest from customers in China.
The strategy for Inuvo investors and management has always been to grow the business large enough to be attractive as an acquisition. Once the company reaches over $100 million in sales, we believe it could be large enough to be an attractive acquisition to a larger company.


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