IZEA Worldwide, Inc. (IZEA) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the IZEA Full Year 2016 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ryan Schram, Chief Operating Officer. Please go ahead.

Good afternoon, everyone and welcome to IZEA’s Q4 2016 earnings call. I am Ryan Schram, Chief Operating Officer at IZEA. And joining me for today’s call is IZEA’s Chief Financial Officer, LeAnn Hitchcock; and IZEA’s Founder, Chairman and CEO, Ted Murphy. We are pleased to have you with us this afternoon. Earlier today, we issued a press release with additional information regarding IZEA’s fourth quarter performance. As a reminder, all of our Investor Relations information can be found in the corporate section of our website, 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 to the Safe Harbor provision of 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 am now pleased to 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 fourth quarter of 2016. LeAnn?

Thank you, Ryan and good afternoon everyone. I am pleased to share that IZEA continues to improve this operation and set higher record targets each period. IZEA reported record annual net bookings of $30 million in 2016, up from $24.5 million in 2015. This came in within our original 2016 guidance of $33 million to $35 million, but in line with our revised guidance of $29 million to $30 million we issued in Q3, after we experienced the pullback in Q3 customer commitments due to political uncertainties and large cancellations from two customers due to their financial difficulties. IZEA’s 2016 annual revenue was $27.3 million, up from $20.5 million in 2015, up 33% year-over-year increase and in line with the 2016 guidance of $27 million to $30 million that we provided at the onset of the year. IZEA reported 2016 annual gross profit of 48%, up 800 basis points from 40% in 2015 and greatly surpassing our 2016 guidance of 38% to 41%. IZEA also reported 2016 annual EBITDA of negative $5.2 million, which also exceeded our 2016 guidance of negative $6.5 million, a 20% improvement against our stated goal. All of these improvements and exceeding of expectations were a result of our focus on execution and tight control on our spending levels throughout 2016. IZEA reported fourth quarter revenue up 19% to $7.4 million compared to $6.3 million in Q4 2015. This increase is primarily due to organic growth in all of our revenue streams, including sponsored social revenue, content revenue and to a lesser extent, service fee revenue. Sponsored social revenue increased 22% to $4.7 million, accounting for 53% of total revenues in the quarter. Content revenue increased 15% to $2.6 million, accounting for 35% of total revenues in the quarter. Net bookings increased 11% to $8.1 million in Q4 2016 compared to $7.3 million in Q4 2015. Revenue backlog at the end of the quarter was $10.2 million, including annual bookings of $6.9 million and unearned revenue of $3.3 million. Revenue backlog consists of unbilled bookings for campaigns, which have not yet started, as well as unearned revenue for companies that are not yet completed. Gross profit for the quarter increased 36% to $3.6 million as compared to $2.7 million in Q4 2015. The increase in gross profit is attributable to the increase in revenue during the quarter along with improved margins on net revenue. Gross margin for the quarter was 49%, up from 43% 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 on content revenue as we have shifted the focus from a newspaper client base to brand. Our content margin increased 1,500 basis points to 29% versus 14% in the same quarter last year. We expect margins on content revenue will continue to improve over time due to growth in brand-centric content creation. Sponsored social gross margin was 59%, up from 58% in Q4 2015. We estimate that average gross margins for the year ending December 31, 2017 will average approximately 47% to 48%. Operating expenses in the fourth quarter of 2016 were $5.4 million compared to $5.1 million in the same period last year. Cash-based OpEx in the fourth quarter of 2016 was $4.8 million compared to $4.5 million in Q4 2015, a 7% increase year-over-year. Operating expenses increased as a result of an $886,000 increase in personnel cost due to a 22% increase in the average number of personnel as well as increased salaries for existing personnel compared the prior year. These operating expense increases were offset by a $581,000 decrease in our public relations and marketing expense in 2016. Net loss for the fourth quarter of 2016 was $1.8 million compared to a net loss of approximately $2.4 million in the fourth quarter of 2015. Loss per common share for the fourth quarter of 2016 was $0.34 compared to a loss per common share of $0.47 in the prior year quarter. Adjusted EBITDA for the fourth quarter was negative $1.1 million compared to negative $1.8 million during the same period last year. The improvement in adjusted EBITDA is primarily due to the increased revenue and improved profit margins there on partially offset by the continued investments in personnel. As of December 31, 2016, we have $5.9 million in cash on hand, a positive working capital balance and stockholders’ equity of $9 million. In addition to our cash on hand at the end of the year, we still have an unpacked $5 million credit facility with Bridge Bank and an open shelf registration. I will now pass it over to Ryan to provide a recap of the company’s operations during 2015 and quarter four.

Thanks, LeAnn. 2016 was all about operational excellence for IZEA. Heading into the year, our internal teams concentrated on four areas of optimization. Increasing average deal size for both new and existing clients, continued operational expenses, improving our gross margin profile, particularly in custom content and most importantly, showing improvement on the bottom line. I am pleased to report that we have made notable progress in each of those areas. IZEA’s average deal size increased 22% to $31.7000 on an annual basis by average compared to the 2015 level. Our cash-based OpEx to revenue ratios decreased 75% to 67% year-over-year and our margins increased 40% in 2015 to 48% in 2016. These factors all contributed to reducing our EBITDA loss by approximately $2 million year-over-year. Not only that we improved these metrics, we also delivered significant year-over-year growth while doing so. We grew both our influencer marketing and custom content businesses 33% from 2015 to 2016, with approximately 60% of the annual business coming from existing clients and 40% coming from the new members of the IZEA family. [indiscernible] the company is willing to benefit from increased customer budget in content and influencer marketing in a meaningful way. Here are some examples. Last year, we saw Fortune 100 clients of ours more than double their 2015 booking commitment of $1.2 million. It’s been another different Fortune 100 company, already grow the IZEA commitments 10x from 2016 in just the first few months of this year. It is clear that we have tapped into a growing area of interest for marketers. An increasing repeat business tells us that we are delivering value. Not only that we are selling more, we are selling more efficiently as well. Our gross pipeline conversion ratio reached new heights in the fourth quarter, with 29.7% of our $27 million quarterly pike converting to bookings versus our 4-year quarterly average of around 20%. We have put a strong emphasis on quality over quantity and allows our team to focus on opportunities of the highest probability to close and to drive repeat customers. As we look to 2017, one of the trends of seasonality in customer booking that have taken shape over the last 2 years to 3 years with quarter four reliably being the strongest and quarters one or two, typically being the slowest. This historically pick back up in quarter three, as marketers return from summer vacations and July through June budget year companies have fresh dollars to invest in influencer and content marketing. Quarter four is also driven by annual contract renewals that are renewed and sometimes increased at the end of the fiscal year consistent with the overall marketing industry. A guiding principle for our leadership team is the commitment to continual improvement in all aspects of what we do. And as we close our each fiscal year, our team takes a look in the proverbial rearview mirror and ask, what parts of the business are we excelling at now more than the year before. One of those areas that we are most proud of is the headway we have made in precision marketing. IZEA’s precision marketing team is focused on generating inbound need for our sales organization. That’s primarily driven through a combination of highly targeted paid advertising as the year optimization and influencer and content marketing, both of which are powered by our own network. In the same way, that we sell custom content creations to our client, we use our network of creators to power the very content that you see throughout izea.com and across all of the company’s social handouts. Through the efforts of this team, we have seen strong growth in qualified inbound leads, which contribute to higher pipeline conversion rate. The precision marketing team also played a major role in the redesign of our website last year, which debuted at IZEAFest in February. Since the launch of our new site, the traffic to izea.com has more than doubled with large increases and unpaid organic traffic. Speaking of IZEAFest, it is the company’s biggest event to-date. We hosted approximately 1,500 registered attendees from all over the world. 700 of which were the agency or incredible brand it’s been NBC Universal, Chipotle, Lenovo, Google, Yahoo, Siemens, HP, Tupperware, the list is on and on. The quality of thought leadership was palpable in the room. Culminating an hashtag IZEAFest becoming a trending topic on Twitter, regionally and nationally during the duration of the conference. During the IZEAFest address, Ted announced IZEAx 2.0, which included a slew of new features and product enhancements for marketers and creators alike. We are notably excited about the content app and promoted post from those announcements. Content app allows marketers to engage influencers in performance based mortgage campaign that syndicate quality content. Promoted post allows marketers to easily use media on platforms like Facebook and Twitter to boost and amplify influencer contact programmatically through IZEAx. Both of these new features have been met with a warm reception by our clients and they are already been included in campaign strategies for 2017. Two [ph], by a strong 2016 and inspirational IZEAFest, our team is focused, excited and ready for the year in front of us. On that note, I will turn the call over to my colleague, IZEA’s Chairman and CEO, Ted Murphy to share his thoughts on 2017 and the road ahead. Ted?

Thank you, Ryan. Midway through 2016 our Board challenged management to show a path of profitability, a side line that indicated some leverage in our model to demonstrate viability of the company at scale. That is what we set out to do. And we moved very quickly. We celebrated our first EBITDA positive month in Q3 and had a cash flow positive month in December. We were able to make some incredible progress inside a few quarters simply by adjusting some operational levers and slowing down the rate of new hires. The process caused us to reexamine everything we do, to question where we were efficient and where we were not. It gave us the moment to breath and look inward to do a full system check and make sure the IZEA rocket wasn’t leaking any fuel. We were able to tighten some gas kits, shed some store ways and deploy some much-needed software updates. Three quarters later, we are a better company for it and I am happy that the Board helped to push up in that direction. The delicate balance between growth and profitability is a tricky proposition for any technology company. Too little fuel and you may be passed by competitors who are heavily invested. Too much fuel and you may stay out of control, unable to slowdown and crushed by your own velocity. At IZEA we aim to strike a balance. While we are certainly entrepreneurial, we don’t believe in growth at any cost. We believe in responsible, sustainable growth. We look at fallen unicorns, like those media, as an example of what can happen when spending spirals out of control. That doesn’t mean we shouldn’t invest, raise capital or take risks. But it does mean that we need to always have this pipeline to profitability. And that we should only take gross capital from the right people, at the right time, at the right price. This isn’t an easy business to say you are in. Anyone can put up a website and say that they do influencer marketing for custom content. But it is a much more difficult business to scale. We had individual clients, representing larger revenue than many of our competitors’ entire businesses. We have already jumped through many of the hurdles that our competitors now state. And those jumps are more difficult than they look. $1 million to $5 million of revenue, $10 million to $20 million of revenue, they aren’t just numbers, everything about the organization changes; people, processes and technology. It’s easy to put numbers on paper, but much harder to continually execute and grow in an ever-changing landscape. Between content and influencer marketing, there are billions being spent each year with hundreds of direct competitors and thousands of agencies. We seek to grow our share of that pie and believe that investments in technology combined with award-winning service will enable us to dominate this landscape. We see a large maturing market for both influencer marketing and custom content. We have a capable management team that is growing this company at a 10-year compound annual growth rate of 59%. And we have proven that we get more efficient as our company grows. As we move to 2017, we intend to capitalize on the challenges facing our competitors. We see a growing pool of individuals with relevant experience in our space and intend to aggressively hire the most talented people we can. While our team never wishes failure upon others, we plan to fiercely decent and protect our leadership position in the industry we created. We will continue on historical margin growth with a watchful eye on the bottom line. We expect our top line revenue to grow approximately 20% in 2017 to $32 million to $33 million and our EBITDA loss to be approximately $3 million for the year. While we will be adding team members in sales and engineering, the additions will be at a slower pace than we had historically added headcount. This is a deliberate effort to tip the scales towards profitability and focus on efficiency. We ended the year with $5.9 million in cash and an open $5 million credit line. On our current growth plan, we believe we have enough capital to make it to profitability without the need for additional finance. That said, we continue to look for accretive acquisitions in the space and we are evaluating opportunities on an ongoing basis. In the event that we pursue a purchase, we may seek capital to consummate the transaction and provide additional working capital. Additionally, incremental capital would help us provide faster growth by allowing us to expand our sales operations sooner and be more responsive to customer needs through our engineering initiatives. We have a business that is running well in a large and growing addressable market. We are currently operating on a plan based on the capital resources available to us. Though, we know where to responsibly apply additional capital if we choose to pursue it in the future. At the same time, there is interest in IZEA from larger organizations. While we are not currently running a process to sell IZEA, the company recently received an unsolicited acquisition proposal from a publicly traded marketing technology company. While it is unclear as to the ultimate liability of this proposal, management is in an ongoing dialogue with the company to understand the opportunity, intent and structure in greater detail. In addition, the company has had discussions with private equity firms and others, who have interest in the company. We believe much of this interest is based on our currently rolled market cap, relevant to our private peers. It is highly premature to suggest that any such discussion may lead to negotiations or definitive agreement. No assurance can be given by the company that any transaction will be pursued or completed. Legally, we have created a valuable asset that would strongly complement media company, agency holding company or marketing technology firm. As dollars continue to flow into influencer marketing and custom content, our company should grow in value to these organizations. I recognize that market has been tough for our investors. But I am proud of what we have accomplished in 2016 as an organization. This team will continue to work tirelessly on a year and half as we always have. We were not right up, we will not stand down. I will continue my travels 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 am in your city, please reach out to our team via our website. Thank you for spending time with us this afternoon. I would now like to open the call for Q&A.

Thank you. At this time we will be conducting the question-and-answer session. [Operator Instructions] Our first question is from the line of Darren Aftahi with ROTH Capital Partners. Please proceed with your question.

Hi guys. Thanks for taking my questions. Just a few if I may, first on kind of your fiscal ‘17 guidance, can you talk about two elements, that one kind of, what is the assumption in terms of the cadence of new versus existing kind of clients with revenue composition. And then on kind of the incremental like roughly $5 million or so at the midpoint, how much of that is from existing products versus some of the new stuff you announced at IZEAFest? And I have got a couple of follow-ups.

Sure. Hi Darren, it’s Ryan. As we stated on previous calls, our goal is to have that ratio maintained similar to what we saw in 2016. We believe that 60% existing clients, 40% new would be the goal. I think on a quarterly basis, as we – some in the past as well, that can fluctuate call it 10 points in either direction depending on what particular quarter it is. But that’s what we were to see for 2017. As it relates to the new products that were announced at IZEAFest, I am assuming you are referring to primarily content app. The idea here is for us to start seeing that be the part of deals that are coming in. But as we have stated in the call, we just started including those in proposals that went out following IZEAFest. So we are basically call it a [indiscernible] out from that, so we have high hopes for it. But we will have more regular details on that in calls to come.

Great. And then just a couple of more. Your current sales headcount, I guess, quota-carrying sales headcount and then where do you see that number going by the end of fiscal ‘17? And then lastly, on your gross margin guide, it looks like gross margins are kind of guided flat, I think if I heard you right, you said that your custom content gross margins, actually the sponsored revenues increased pretty dramatically as this content. I am just kind of curious why that number seems captive if there is just conservatism or you feel like you have kind of hit an inflection point whether there is a lack upside, so to speak?

Sure. So, we finished the year with 44 quota-carrying sales personnel. I would say that over the course of 2015, we probably look to get that number ideally close to 50 or so based on where we currently are. And that would also be opportunistic if there is great chance to come along that makes sense for us. We think that there is a lot of opportunity for us to be able to secure the members of the team, that add direct experience in influencer and content marketing. I will let LeAnn weigh in a little bit more on the margin question. But what I would say to characterize with is that, our goal all along was to get somewhere in the hemisphere between 45 and 50 percentage points of margin. So we see this as being very much within that target and [indiscernible] sort of what we see for the future.

Right. And to the extent that, that range is depending on the mix of what we are selling during the quarter and the contributions of some of those self-service, people that come in and use our content applications at which those are at lower margins. So depending on when those trigger that can lead to fluctuations in that margins as to what – we are trying to take that mix where we believe it’s really ideal right now at 48%.

Great. That’s helpful. Thank you.

Thank you. Our next question is from the line of Mike Malouf with Craig-Hallum. Please proceed with your questions.

Hi, guys. This is Eric on for Mike. Thank you for taking my questions. I just wanted to touch on some of the new revenue streams that you mentioned at IZEAFest in February. I know some of them like IZEA Pay that were available today, but others were what should be ready in the coming weeks. I think you mentioned that Promoted Posts is first launching with Facebook and then you were looking to get other licensees. I was looking for an update on those and see if those are all rolled out or sort of what else do you guys have to do in terms of getting those rolled out for 2017?

So, IZEA Pay is out, content app is also out and people are able to go in and signups also with their credit card. And we are starting to see some benefit from that. Promoted Post is available through just to our advantage services clients right now. We have rolled that out inside of our – basically our instance of IZEAx and we are kind of burning that in right now. It is being included in campaigns and those campaigns are running.

Okay. And then I think LeAnn was mentioning that some of the margin pressure in sponsored was because of that self-service business. Do you see any of the – any of these new revenue streams like amp, I know you said with self-service, are any of these particularly weighing on the sponsored margins or is this just sort of a lot to do with the existing businesses as well?

It’s actually more because of margins that weigh it down from the existing Ebyline content customers that were there that used that platform on a self-service basis more than the new sponsored offerings.

Right. I think that early in the call, you mentioned that you expected the content gross margins to decline. And with revenues growing about 20%, I am assuming that the margin pressure will come from sponsored, so just wondering if that had to do with the new revenue streams in that IZEAFest if that’s just kind of – if they are just kind of just cresting where they are now?

No, it’s pretty much cresting where it is now.

Yes. I think that the only other part of that on the sponsored side is partners. People are licensing IZEAx, those people come in at a lower margin for the deal flow that they push through the system. So that’s really the only thing that could affect those sponsored social numbers. The content is really impacted negatively by the newspaper part of the business, but as the main part of the business grows that becomes less and less. So I would say there is still some room for improvement on the margin side. We made huge improvements from 2015 to 2016. It’s something that we are constantly looking at, but I think that 48% is a pretty safe number looking forward.

Alright, great. Thank you.

Thank you. [Operator Instructions] Our next question is from the line of Jon Hickman with Ladenburg Thalmann. Please proceed with your questions.

Hi. Just one quick question, Ted, you didn’t give us kind of a forward-looking number for bookings this year, could you elaborate on that?

I didn’t really see that. The bookings to revenue number, those – if you look at that you are talking about 10% to 15% above the revenue numbers is where that is leading right now.

Okay, thank you. Rest of my questions, have been answered.

Thank you. At this time, I will turn the floor back to management for additional remarks.

We appreciate everyone joining us this afternoon and thanks for your continued support of IZEA. For more materials on the company or the reason – or to research make sure you visit the company’s section of our brand new website izea.com. Thank you again.

Thank you. This concludes today’s IZEA conference call. You may disconnect your lines at this time. Thank you for your participation.