IZEA Worldwide, Inc. (IZEA) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the IZEA Inc. Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Mr. Ryan Schram, Chief Operating Officer. Thank you Ryan, please go ahead.

Good afternoon everyone and welcome to IZEA’s Q3 2016 earnings call. I’m Ryan Schram, Chief Operating Officer at IZEA and joining me for today's call is IZEA’s Chief Financial Officer, LeAnn Hitchcock and IZEA Founder, Chairman and Chief Executive Officer, Ted Murphy. We’re pleased to have you with us this afternoon. Earlier today we issued a press release with additional information regarding IZEA’s third quarter performance. As a reminder, all of our Investor Relations information could be found on our corporate Web site at corp.izea.com. Please note that during the course of today’s call, our management team will discuss IZEA’s business outlook and may make forward-looking statements regarding the Company that are pursuant with Safe Harbor provisions of the Federal Securities Laws. These statements are predictions based on our team’s expectations as of today. Actual events or results could differ due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. The Company and its management assume no obligations to update any forward-looking statements made during today's call. With the appropriate disclosures out of the way, I’ll turn the call over to IZEA’s Chief Financial Officer, LeAnn Hitchcock to walk us through a summary of the Company’s performance in the third quarter of 2016. LeAnn?

Thank you, Ryan, and good afternoon everyone. I am pleased to share that IZEA had another record quarter. IZEA reported all-time record quarterly revenue up 38% to 7.5 million compared to 5.4 million in Q3 2015. This increase is primarily due to organic growth in all of the Company’s revenue streams, including sponsored social revenue, content revenue and to a lesser extent service fee revenue. Sponsored social revenue increased 44% to 4.6 million accounting for 62% of total revenues in the quarter. Content revenue increased 28% to 2.8 million, accounting for 37% of total revenues in the quarter. Net bookings increased 14% to 7.7 million compared to 6.7 million in Q3 2015. Revenue backlog at the end of the quarter was 9.2 million including unbilled bookings of 5.5 million and unearned revenue of 3.7 million. Revenue backlog consistent of unbilled bookings for campaigns which have not yet started, as well as unearned revenue for campaigns that are not yet completed. Gross profit for the quarter increased 66% to 3.6 million, as compared to 2.2 million in Q3 2015. The increase in gross profit is attributable to the increase in revenue during the quarter, along with improved margins on that revenue. Gross margin for the quarter was 48%, up from 40% in the prior year quarter. This gross margin improvement is primarily due to improved profit margins on our sponsored revenue and the doubling of our profit margins of content revenue, as we have shifted the focus from a newspaper client base to brand. Our content gross margin increased 1,500 basis points to 26% versus 11% in the same quarter last year. We expect margins on content revenue will continue to improve overtime, due to growth in brand-centric content creation. Sponsored social gross margin was 60%, up from 58% in Q3 2015. While we are pleased with this margin improvement and our managed sponsored social and content business, we would like to remind investors that as we continue to add more SaaS partners it may reduce future margins. That said those reductions in margins should be offset by the operating margin improvement we gain from not servicing end-marketers on the revenue generated by the partners. Operating expenses in the third quarter of 2016 were 5 million, compared to 3 million in the same period last year. In 2015, the operating expenses were reduced by $1.7 million gain on the exchange in the fair value of business acquisition class related to the Ebyline acquisition in January 2015. Without this non-standard gain in our 2015 operating expenses the increase in our operating expenses was less than $3,000. Cash based OpEx in the third quarter of 2016 was 4.5 million compared to 4.3 million in Q3 2015. Operating expenses increased as a result of a $691,000 increase in personnel related costs due to a 33% increase in the average number of personnel to 152 members in the third quarter of 2016, as well as increased salaries for existing personnel in Q1 2016.These operating expense increases were offset by a $480,000 [ph] decrease in our legal fees as a result of the settlement of our patent lawsuit in the third quarter of 2015. Adjusted EBITDA for the quarter was negative $926,000 compared to negative 2.2 million during the same period last year. The improvement in adjusted EBITDA is primarily due to the increased revenue and improved margins there on, partially offset by continued investments in personnel. Net loss for the third quarter of 2016, was 1.5 million compared to a net loss of approximately 2.6 million in the third quarter of 2015. Loss per common share for the third quarter of 2016 was $0.28, compared to loss per common share of $0.65 in the prior year quarter. The improvement in net loss is primarily due to increased revenue and profit margins partially offset by the increase in expenses in the third quarter of 2016 compared to the same year ago quarter. As of September 30th, 2016 we had $6.6 million cash on-hand, a positive working capital balance and stockholders' equity of 10.6 million. In addition to our cash on-hand, we continue to have untapped $5 million credit facility with Bridge Bank and an open $75 million shelf registration. I will now pass it over to Ryan to provide a recap of the Company's operations during the third quarter.

Thanks LeAnn. Our Q3, results underscore our continued march towards the growth. Just as important though is our continued focus on prudent investment to drive responsible growth, not just growth any cost, across every facet of IZEA. From human capital delta office supplies, we look at the business holistically to make delivers decision on how to continue and optimize everything that we do. Our team fundamentally believes that our steadfast commitment to that end is one of the differentiating factors about IZEA that drives our success. Finding a better way is not only a somatic of the company's culture, it's expected as table state for every person within our organization. As I have mentioned in previous earnings calls. We divide several strategic initiatives, some substantial, other [ph] as experiments that are proven to make an endurable impact on our fiscal 2016 performance. For example, as the start of the year we committed to be building out and scaling up a world class champion management team to support our client, along with a strategic planning unit to help them dream of even bigger ways to utilize influencer and concept marketing as part of the broader mix. Those efforts included creating a non-traditional revenue units helmed by one of our long time team members Larry Beaman, to launch an entirely new set of up sell [ph] offering to boost and amplify the success of existing influencer in context marketing spend which clients were already making with the company. We’ll have more detail on that and other exciting announcements for our clients and creators, at IZEAFest in February. The ability for our teams to grow not only through a series of acquisitions of outside talent, but additionally from within, is another testaments for IZEA's belief system and our operational culture. In the third quarter, we are pleased to promote Kevin Blazaitis, formally a Managing Director in our east region to Executive Director of Worldwide Client Developments. In this capacity Kevin will bring his years of customer facing expertise in integrated media, promotion and content to IZEAs brand and agency clientele, who wish to engage with our business in a managed service capacity. Also this quarter we named James Michalak to Director of SaaS Business Development with a task of building our apartment, sales and support organization to sale our IZEAx Ecosystem on a software as a service basis to agencies and media companies across the globe. James was part of the beta team that worked on our SaaS rollout over the last two years to fine tune our offering quickly securing relationships with multiple high profile partners. When comparing the first nine months of 2016 to the same period of 2015, the company's average deal size grew 24%, combine this with the fantastic progress our team has made on gross margin profile in both of the core offering that LeAnn mentioned, signals the ability to not only unlock incremental demand, but it also demonstrates how our focus on leveraging the IZEAx platform technology can bring unmatched efficiencies to bear. Our existing versus new client bookings ratio for the third quarter was 57% existing 43% new another strong quarter underscoring the balanced growth profile that we sought to achieve. During Q3, we welcomed back loyal IZEA client, including Avocados from Mexico, ConAgra, Disney, eBay, Frito Lay, HP and Subway amongst many others. Also during the quarter, we extended a warm welcome to new members of the IZEA family of brand including BB&T, Dick's Sporting Good, [indiscernible] and Starbucks. IZEA’s commitment to thought leadership across the industry was furthered during Q3 with the company joining both the national retail federation, which one is highly popular shop.org digital commerce event and the association of national advertisers brand activation association. These membership allow us to share the extensive knowledge we’ve gained over the last decade with key marketers seeking to engage on those very same topics. Now for some additional commentary on the company and a look at the road ahead for IZEA, I’ll turn the call over to my colleague, and our Chairman & CEO, Ted Murphy. Ted?

Thank you Ryan. What is difference a year means, we have made a tremendous amount of progress in Q3 and a year-over-year comparison are impressive. The strong results in this quarter were driven by continued growth in organic revenue across all revenue streams. In addition to topline growth, we continue to see large gains in our custom content margins which had more than doubled from this time last year. These increases are in line with the assumption we made when we acquired Ebyline in 2015. And we will continue to see margin improvement on our content business as we focus on brand opportunity. While Q3 was a record, we have seen some unexpected delays in bookings over the past several months. The election cycle has had an impact on client commitments especially for our larger engagements while we are still expecting Q4 to be higher than in previous years the delays and political uncertainty will have a near term effect as many executives have taken a wait and see position. That position has started to warm post-election night, however we still have work to do this quarter. In addition to political headwinds one of our clients who made a large commitment in Q3 filed for bankruptcy protection this quarter and another Fortune 500 company recently announced lay off to the team which had engaged up. This resulted in two large bookings cancelation that have already impacted net bookings in Q4. These challenges combined with the management decisions we have made to reduce burn and slow hiring of new sales members will have an effect on our Q4 bookings outlook and as a result our overall fiscal '16 forecast. Our revenue forecast of $27 million to $30 million for 2016 remains unchanged while our gross profit margin forecast has increased to 46% to 47% up from our original outlook of 38% to 41%. We are reducing our fiscal '16 booking forecast to 29 million to 30 million given the smaller sales team, unforeseen financial issues the two large clients and political headwinds. I want to reiterate that we still expect to grow Q4 booking year-over-year, and the bottom line fundamentals will be stronger as a result of our active management and expense adjustments. Over the course of 2016 I've had discussion with many investors and potential investors in IZEA, through those conversations two themes have emerged and I'd like to take a moment to address them with all of you today. The first theme centers on profitability growth and cash needs. We've seen a change in focus from the investment community over the course of the year. While growth remains important to investors, we believe that responsible growth is even more important in the current climate. Investors want to be comfortable in their position and the balance sheet of the companies they invest in. The potential of future dilution in itself is not necessarily a bad thing. But ideally subsequent growth funding should be at a premium to previous investments. We're well aware of our cash burn and recognize that despite all of our growth it may concern some investors. We had made operational efficiency a focus since day one this year, but as the year has unfolded we've decided to increase this importance in our decision making process across the board. We've tightened new spending significantly and reduced the rate at which we plan to add headcount to allow ourselves to grow into these new hires more organically. Our cash based operating expenses have increased only 4% from Q3 2015. While revenue has grown 38% and gross profit has grown 66% during the same period. Revenue is up 57% to 26.1 million for the trailing 12 months. We have been able to achieve this through expense control, process refinement and a disciplined approach to our capital investments. Our team evaluated the spend of each dollar as if it is our own, because as shareholders it truly is. This doesn't mean we don't take risks. But it does mean that the spending is warranted and the risks are calculated. Nowhere can that be seen more than our investment in IZEAx. I believe that we're starting to see some demonstrable operating leverage in the business, largely due to the investments in this proprietary technology. Looking ahead we plan to continue to invest in growing our sales organization to support growth but at a more tempered rate given the macro economic climate. We had originally planned to employ 65 sales people by the end of 2016, we have reduced that target to 50 sales people this year in order to decrease our near term cash expenditure and optimize operations. The sales and engineering teams will continue to grow in 2017 while the other departments will remain relatively flat. The second theme is the performance of the stock. I believe now more than ever our company is undervalued. Whether you look at public Martech companies trading at approximately four times, trailing 12 months revenue or the private companies in our space valued between five and 20 times revenue, our current stock price does not reflect our size, growth, technology or leadership in the space we’ve created. In February 2014 we completed the $12 million PIPE transaction at a reverse split adjusted price of $7 per share. If we compare Q1 2014 to Q3 2016 our revenues have increased 283% and our booking have increased 352%. While at the same time we have demonstrated consistent industry leadership responsible expense management and margin improvement not to mention the advances in our proprietary technology and growth of the network. There is little doubt that the micro-cap space is a difficult one to navigate in general. In the current condition of the space it's even harder. It is humbling for our management team to see where our stock currently is, but we believe it to be a point in time. We cannot control the market but we can control the decisions we make as an organization. We will continue to execute and adjust to the world around us. I believe our stock price will ultimately reflect the value we have created and as in no way of reflection of our performance as of today. I remain extremely bullish on our long-term outlook we are in two of the hottest spaces in marketing with the right solutions that are constantly improving. We are seeing clients increase their spend and start to allocate significant budgets to both content and influencer marketing. I have personally been buying stock in the open market for the past four years and I had never sold a single share since inception. I plan to continue that practice for the foreseeable future as I can see few other companies that are as undervalued with so much potential. I recently celebrated my tenth year at IZEA. I came back from my summer vacation with even more passion and excitement about what we have built and more importantly what we are building. 2016 has been a huge leap forward, but what is really exciting is the stage we have set for 2017 and beyond. In February we will release IZEAx 2.0 at IZEAFest in Orlando. With that release will come a slue a platform refinements along with several new services designed to capture additional revenue streams for our company and the creators we served. This will be our most ambitious release since IZEAx went beta four years ago and I can't wait to share what we've been working on. I will continue to my travel to meet with investors in major markets around the country over the coming months. If you would like to arrange a meeting with me while I'm in your city please reach out to Ron Bolt at Liolios.

Ladies and gentlemen, at this time will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Jon Hickman with Ladenburg. Please go ahead.

Can you tell us how you know that some of the kind of push back in the quarter was due to the election?

What we are seeing is that clients are very slow to commit right now. We have a tremendous amount of -- starting to actually get a little bit better, but we had a tremendous amount of clients really kind of slow walking us and as we’ve talked to people in and around this space, we -- there has just been a general sense of uneasiness and hesitation to commit. Most specifically to the larger campaign that really impact us that span the greater amounts of time. So I think that it's political and micro economic which are kind of tied together, as people weren’t quite sure of what was going to happen on the other side of this election and I still think that there is -- there remain some uneasiness about what the future maybe.

So there is hesitancy to advertise?

I think there is [multiple speakers] well, I think that there is hesitancy to spend and to make large commitments in general right now.

Okay.

Marketing is one of the easiest expenditures for people to control.

Okay, so then just one -- I didn’t write this down fast enough, so I am sorry to ask you to repeat yourself, but you said you lost two large booking customers, one was the bankruptcy and the other one was? I didn’t get the other.

Yes there was the team that we were working with got laid off.

Okay.

And that was [multiple speakers] a Fortune 500 Company. That was Direct that we were working with Direct.

Okay. So one other things that I think you have been saying for while is that you are of size and maturity now that allows brands to actually put you in their budget?

Yes.

Instead of you buying [ph] -- instead of you are spending what was left over at the quarter or whatever. So can you talk about how that’s going versus what you said about the current environment and the election?

Yes, I mean I think that there is kind of two sides of that, for clients that we’ve been working for an extended period of time, those budgets we’ve seen have been allocated and here in Q4 we expect to see -- and I’ve already seen some sizable increases in those budgets. The challenge really remains when we are going after large dollars with new clients that there may be more of a hesitation to commit, because those maybe dollars that are being pulled from something else that they may not -- that they may just sit on, media dollars that they may just sit on, but they haven't necessarily been ear marked or allocated for us this year.

Okay. I guess that’s it for me thanks.

And our next question comes from the line of Matt Tiampo from Craig-Hallum. Please go ahead.

I have a question on the new opportunity pipeline, I think any color to take down on the quarter in size, but also a pretty significant pick up in conversion rate and maybe if you can just give us a little bit of color on what's -- what are the dynamics causing that, both the tick down in new opportunities and also the [technical difficulty]. I'm not sure if I fully understood, the down tick in the total numbers is from the election cycle or not? Thanks.

Hi Matt, it’s Ryan. This is actually what we had telegraphed in our Q2 remarks [indiscernible] this time, which is that we're really focusing on the curation of our growth pipeline and a real emphasis on quality as opposed to "Spray and Pray" putting everything under the sun in there. So I think that is directly attributable to the really nice 31% improvement in pipeline conversion going from 18.5 percentage points to 27 percentage points, we're really pleased with that. We’re going to continue to be very aggressive to look at those kind of things and you should expect that we we’ll see different effects over time where that pipeline number will adjust up and down, as first of all seasonality plays a role, perhaps in the business and secondarily as the balance continues to tip towards larger deal sizes, when you look at Q3, we had 24% increase in average deal size as well. So it wasn’t just the conversion improving, it was actually the access to client fund that we're improving by a quite a large margin at the same time.

[Operator Instructions] And now our next question comes from the line of George Kafkarkou, Private Investor. Please go ahead sir.

A couple of observations -- both conversions and the signs of deals are improving and Ryan you mentioned that you anticipate that’ll continue to improve, did I hear that correctly?

Correct.

And is that -- what's the secret sauce behind that? How do you guys think about improving that guidance?

I think for us George I think it goes back to the balance of the dynamics that Ted was talking about before. The mix between brands and agency. If you think about it in the macro sense of advertising and marketing, when you're working with the source directly, there's a higher line of knowledge about who’s actually buying and when and why which lends to a different amount of confidence and therefore impacts year conversion rate. We also see that concept marketing tends to enjoy larger commitment sizes, because it's longer term engagement more often than not. So, when you look at the numbers in aggregate, this is a positive byproduct of our focus on selling influencer marketing and content marketing. The one thing I would say to that extent is when you look at the business overall in the quarter, you had over 40% of the bookings coming from brands directly in Q3 which is a very handsome ratio and very unusual in sort of the March Hack Madness [ph] space. Ordinarily you would see that number be 80% or 90% agency based.

What bookings success have we seen from my last acquisition that tend to focus on the ecommerce content side of things?

We have actually seen a nice uptake in bookings here in Q4, not necessarily on the higher end -- on the higher side of in terms of deal size, but they have been breaking into a lot of customers that we previously had done zero business with. One of the adjustment that we have made with that acquisition is they have historically been open to doing very, very small transactions, literally hundreds of dollars, and we are basically retraining that sale force to think about the business in a whole new way. So when I look at what our opportunity was with e-buy line the opportunity on that was to increase the margins, the margins just weren’t there even though they were selling big deals. For ZenContent it's kind of the opposite the big deals aren’t there but the margins are there. So that’s really the opportunity with that acquisition to say look, let’s set our sights a little bit bigger, let's not go in there and position ourselves as a very low cost alternative, let’s go in there and what fell a bit more strategic and make a bigger ask and feel comfortable when doing that.

So overtime you see this improving even further at fortunes on the content side. Both in dealer size and profit both size in margin?

Yes, I mean you actually make see an impact on average deal size in Q4 because of the ZenContent customers that they’ve been bring in because those are typically smaller than the deals that we do. But overtime and we think relatively quickly that will swing the other way and be in line with everything else. But we think of that as a big opportunity because they are accessing dollars that we have never gone after and client, but we don’t currently have relations -- or didn’t have relationships with.

Certainly I was not modeling gross margins for this quarter 46% to 47%, so you’ve over achieved their. Are you offering guidance for Q4 for gross margin?

I believe that we offered some guidance for the year, we are not -- I don’t think we’ve given anything specific but what we think for the year it's going to be somewhere between 46% and 47%.

So how do you see that next year vis-à-vis, next year clearly you guys have been telegraphing IZEAx for quite a while now and even now IZEAx is -- if I could do my math correctly, its three months out. We are now saying we have new revenue generating products or services on the IZEAx platform which will be 2.0 then and it will be our boldest release to date. How -- you know you’re leaving a lot out there, so I think you’re inviting questions if don’t mind me asking Ryan. I mean respectfully, I mean it's a how would you characterize these new rep product revenue or services revenue offerings. I mean obviously I am not asking for combination information, it’s going to be a launching in February and we are all very excited, as indeed I am. But is this a new, an additional genre of category in advertising or is it a double emphasis down on even more [indiscernible] content? Is it a first string or forth string type or is a refining our one on two strings? I don’t think [multiple speakers] if I may, given the visibility you guys can plugged for IZEAFest and given its so far away still.

I’ll say that was we are going to release does not exist in the market today. We believe that they tap into entirely new budgets from our clients and in many ways new buyers from the test that we’ve already been running and the partners that we’ve already been early selling these solutions into. The goal overall with all of our software initiatives is to make our operations more efficient and to allow our clients to do more with less human interaction from our team and open up more recurring revenue streams for us. So without getting into the specifics of what those solutions are, I can tell you that the bottom-line for us is about efficiency and scale and creating new ways for us to earn revenue on an ongoing basis and always our creators and giving them access to a new type of relationship with the brand.

Yes, I mean suddenly dramatic improvements in self-serving, reduces friction enormously and that makes the thing more horizontal and more wide spread and if that’s one of the things you are alluding to, then that’s very exciting. All right guys, very good quarter. Thank you so much.

Ladies and gentlemen, this does conclude our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Thanks everybody for joining us here for Q3. And as George was mentioning in the last Q&A portion of the call, we welcome any and all IZEA investors and analyst to join us for IZEAFest 2017 that is the first full weekend of February, here in Central Florida, you can find our more details by going to izeafest.com or by reaching out to Ron at Liolios. Thank you for joining us everyone.

Thank you. Ladies and gentlemen, this does conclude our teleconference. We thank you for your time and participation. And you may disconnect your lines at this time. Have a wonderful rest of the day.