IZEA Worldwide, Inc. (IZEA) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the IZEA’s Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Ryan Schram, Chief Operating Officer. Thank you, Mr. Schram, you may begin.

Good afternoon and welcome to IZEA's Q3 2017 earnings call. I am Ryan Schram, Chief Operating Officer at IZEA. And joining me today is IZEA's Chief Financial Officer, LeAnn Hitchcock; and IZEA's Founder, Chairman and Chief Executive Officer, Ted Murphy. On behalf of all those here at team IZEA, we are pleased to have you with us today. Earlier this afternoon, the company issued a press release with additional information regarding our third quarter performance. As a reminder, all of our IZEA’s Investor Relations information can be found under the corporate section of our website, izea.com. During the course of today's call, please be advised that our management team will discuss IZEA's business outlook and make forward-looking statements regarding the company that are pursuant to the Safe Harbor provided by 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 our management team assume no obligations to update any forward-looking statements made in today’s call. In addition, our update today will refer to certain non-GAAP financial measures, such as cash based OpEx and adjusted EBITDA. A discussion and reconciliation of these measures to the most directly comparable GAAP measure is available in our Form 10-Q issued today, which is available on our website. With the appropriate disclosures out of the way, I’m pleased to introduce my colleague IZEA's Chief Financial Officer, LeAnn Hitchcock, to provide a summary of the company's performance from the third quarter of 2017. LeAnn?

Thank you, Ryan, and good afternoon, everyone. I am pleased to share that IZEA continues to improve its operations and achieved new record milestones each period. IZEA reported third quarter 2017 revenue up 9% to $8.2 million compared to $7.5 million in the third quarter of 2016. This was an all time quarterly record revenue for the company and the first time revenue exceeded $8 million in the quarter. This increase was primarily due to organic growth in our managed service revenue, which is comprised of sponsored social and custom content. Our managed services increased 20% to another all time record of $7 million in Q3 2017 compared to $5.8 million in Q3 2016, accounting for 86% of total revenues in the quarter. Workflow, our self-service revenue from traditional news agencies and publishers decreased 28% to $1.1 million in Q3 2017 compared to $1.6 million in Q3 2016, accounting for 14% of total revenues in the quarter. Total net bookings increased 2% to $7.9 million in the third quarter of 2017 compared to $7.7 million in 2016. Bookings for managed services increased 12% and accounted for $6.7 million of total net bookings in the third quarter of 2017, compared to $6 million in 2016. Revenue backlog at the end of the quarter was $11 million compared to $9.2 million in the same quarter last year, an increase of 20%. This includes unbilled bookings of $7.2 million and unearned revenue of $3.8 million. Revenue backlog is increasing as a result of a large amount of bookings for longer term contracts that are up to a year in length. Revenue backlog consists of unbilled bookings for campaigns which have not yet started as well as unearned revenue for campaigns that have been built that are not yet complete. Gross profit for the quarter increased 23% by $826,000 as compared to Q3, 2016. The increase in gross profit is attributable to the increase in higher margin managed service revenue during the quarter. Gross margin for the quarter increased to 54%, up from 48% in the same period last year. Our higher margin managed service business accounted for 62% margin versus our lower margin content workflow business, which averages only 7% margin. Due to the higher revenue and higher margins thereon, our managed services contributed 98% of our gross profit in Q3, 2017 compared to 95% in Q3 2016. In early October, the company increased its gross margin guidance by 200 basis points. Annual gross margins are now expected to range between 50% to 51%, compared to 48% in 2016. This is largely dependent on the sales mix between our managed services and content workflow. Operating expenses in the third quarter of 2017 decreased by $10,000 compared to the prior year quarter. Total OpEx was $5 million in each period. Cash based OpEx in the third quarter of 2017 was approximately $4.2 million compared to $4.5 million in Q3 2016, a decrease of 5% year-over-year. The decrease in operating expenses were the result of strategic reductions in overall headcount, as well as spending on travel, public relations and marketing and our ongoing efforts to create near-term profitability. Net loss for the third quarter of 2017 was $559,000 compared to a net loss of approximately $1.5 million in the third quarter of 2016, an improvement of 63%. Loss per common share for the third quarter of 2017 was $0.10 compared to a loss per common share of $0.28 in the prior year quarter, an improvement of 64%. For the first time since becoming a public company, I am excited to share that IZEA is reporting an adjusted EBITDA positive quarter. This is a huge milestone for the IZEA team and our investors. Adjusted EBITDA for the third quarter was approximately $221,000 compared to a negative $886,000 during the same period last year. This is an improvement of $1.1 million year-over-year. As of September 30, we had $3.5 million in cash on hand, a positive working capital balance and stockholders equity of $5.8 million. Receivables at the end of the quarter were $5.3 million up from $4.1 million at the end of Q2 2017. We have access $810,000 of our $5 million credit facility with Bridge Bank to maintain a strong cash balance and Bridge the receipt of some larger receivable. I will now pass it over to Ryan to provide some additional commentary on the third quarter of 2017 and how the company achieved these result.

Thanks, LeAnn. When we kicked off the fiscal year with our Q1 earnings call, we spoke about the change in revenue groupings to discuss IZEA’s performance in terms of our managed service group and workflow as the two lines of the business. With the managed service unit being the growth vehicle of IZEA. Through a highly collaborative effort that involved every department across the company. Our team delivered a wonderful trisector of results in Q3, record quarterly revenue, record gross margin and the highest quarterly bookings to date in 2017. They achieved those figures by driving greater contribution across the board in both sales and service year-over-year, while also making up for the guided decrease in workflow bookings that have been realized as a legacy business line continues to wither along with the industry it was originally established to support. To create the 12% growth in sponsored social and content managed services quarterly bookings and to offset the 28% year-over-year quarterly declining workflow. Our team established three simple goals. Number one, drive net new business, with an emphasis on custom content and e-commerce content; number two, place an emphasis as a sharing renewals with an existing strategic accounts. And third, use economies a scale, become from our marketplace of creators to drive a favorable gross margin. I'm pleased to report this afternoon that the team accomplished all three. First, let's talk about new client wins. During the quarter, the IZEA family was pleased to welcome an incredible group of brands, including Amazon, Aviva, Igloo, Google and New Era amongst others. Driving the growth in bookings during Q3 was both an increase in average deal size of our managed service business, as well as an increase in the percentage of opportunities that included custom content, as part of their scope. IZEA’s average deal size in Q3 was up 36% in the same period in 2016. Custom content continues to pure play interest and contract commitment as successful brands today need to operate more like publishers than ever before. And that is a means of educating not just hard selling their customer base. Bookings for custom content in Q3 were an all time record, $2 million up from $1.7 million during the Q3 of 2016. As we look to the future, we expect that more and more of our business will be centered on content creation at the core with an influencer marketing related offering helping to amplify those assets and made the investment work harder for the brand to deliver targeted results. The reason we feel bullish about the future Custom Content is that it's a highly defensible offering. I guess the traditional means by which brands used to produce similar assets. For instance instead of hiring an expensive copywriters, illustrators and videographers through an old school agency model, often had New York or San Francisco prices of course. Our freelance creators to deliver the same or better work product at lower costs, faster speed and nearly unlimited scalability. When marry with our marketplace approach, IZEA's solution, content creation, allows brands greater flexibility with technology to assist along key portions of the workflow process. It was particularly notable is that with this operating leverage, the larger deal sizes that IZEA has to cheer throughout 2017 are even more profitable. For the third quarter reaching to 54% mark was a meaningful feed accomplish through a mix of market efficiencies, technology improvements and internal process innovation. We're proud of our team's accomplishment here. Especially when considering that margins in the marketing and services sector, are intend to 15% range on average. As we head into the final fiscal quarter of 2017, our client development organization continues to be focused on unlocking as much opportunity as possible, for customers of ours who committed their influencer and content marketing budgets on either it annual or semi-annual basis. Q4 is a peak time for contract renewals. And as a result substantial effort is being place if those deals signed and sealed prior to the hectic holiday season when clients are away from their office. And while 2017, we'll go into the history books, as another record year of hard-earned performance by team IZEA in many ways. We eagerly await this exciting things that 2018 has in store for the company. From new collaboration technologies being built into IZEAx for our clients to pursue entirely new lines of business. We believe the year ahead tends to be the best yet in the Company's history. Our plan just continue to strategically search your talent from class strategists, to sales people, to the incredible campaign and program management team members that drive customer success. IZEA has built a name for itself in the industry, as a place with the best talent lives. Thanks to our operational culture, unmatched technology and market leader position. It's our results only further that reputation in 2018 and beyond. Now for his perspective on IZEA's third quarter and an additional view on our path to profitability, I'll turn the call over to my colleague and IZEA's Chief Executive, Ted Murphy. Ted?

Thank you, Ryan. Earlier this year we set out to transform IZEA’s operations, realigning our focus to emphasize profitability and organizational efficiency as our number one objective. We established a goal of delivering our first EBITDA positive quarter by the second half of 2018. But I also challenged our team internally to see if it was possible to move even faster. Team IZEA rallied, immediately we've been into action and steadfast in their determination to accelerate results. Our departmental leaders analyzed every aspect of the organization through the lens of profitability. The mantra shifted from how can we get to our first EBITDA positive quarter next year, so what can we do to get to our first EBITDA positive quarter this year. The passion and motivation to achieve this goal wasn't limited to our leadership team. Everyone began looking at their job through a new lens. Opportunities for cost savings and revenue generation were surfaced by individual contributors across the organization. We empowered our team members to make change and gave them the time and resources they needed to create efficiencies with minimal impact to the ongoing operations. Some took on the mission to renegotiate contracts and vendor relationships. Others raise their hand to take on additional workload and responsibilities, while still others again building automation tools to save time and money. Our engineering team has historically been in a mode of building new features for IZEAx. We have relentlessly innovated, but with that innovation comes a natural level of inefficiency and bloat. There hasn't been much time to re-factor, work on back office projects or optimize infrastructure for cost savings. So earlier this year, we made the decision to slow down new feature development to do just that. We freed up some time for all of our engineers and we also established a team dedicated to streamlining internal operations. The impact of this investment has been remarkable. We've been able to re-factor our infrastructure, reducing our monthly hosting bill by two-thirds from its high point earlier this year, which will save the company hundreds of thousands of dollars moving forward. Our finance team will save hundreds of hours per year through new data automation tools that speed reporting and reconciliation. And with the introduction of CurationEngine, we’ve made the transition to an AI driven network curation. This is a huge step forward for us. And at one time was a process managed by six IZEA team members. While much of our engineering cycles this year have been focused on efficiency. We are still actively investing in innovative new technology as well. We believe innovation is a key component to grow and market leadership long-term. In Q3, we announced the launch of Augmented Sponsorship, bringing the magic of augmented reality to the influencer marketing industry for the first time. This marks yet another innovation milestone for IZEA. As we were the first company to launch a platform for sponsored blog posts, sponsored tweets and sponsored photos as well. Augmented sponsorship enables IZEA clients to programmatically distribute 3D assets to social media influencers. Influencers can use virtual objects and animations to produce sponsored photo and video content for brands across leading social platforms. This opens up a whole new way for influencers to engage with brands and produce compelling sponsored visual content for their audiences, an early response from our clients has been one of excitement. We launched our first Augmented Sponsorship campaign with court, a Berkshire Hathaway company and the nation's leading provider of transition services including furniture rental for home and office. Court is using IZEA's technology to provide 3D models of furniture to social media influencers. Allowing them to place the virtual furniture in their home and share that experience with their friends and followers. In addition to augmented sponsorship, we also launched ContentMine in early October. ContentMine provides markers with a visual tool to discover and repurposed the assets produced as part of an idea campaign. It enriches all of the content created in the campaign using a variety of artificial intelligence, machine learning and scoring algorithms to help catalog and surface all of the content programmatically. Just last week, we added a new complement of enrichments to ContentMine. One of those is a computer vision enrichment that allows us to extract Brain logos from photos and videos automatically. We're sitting on a tremendous amount of social content and data. And then only just begun to be able to service and utilize that data in a meaningful way. The creation and adoption of new technologies are increasing our features that while simultaneously driving costs down. As data processing becomes the less expensive and artificial intelligence becomes more capable. We will unlock even more value for the company, our customers and our shareholders. In the coming quarters, you will begin deploying our new big data service that leverages artificial intelligence and machine learning at even greater scale. It will make IZEAx features like ContentMine, ScoreSuite and CurationEngine even smarter and more powerful, while simultaneously reducing processing costs for IZEA's core data services. Technology as at the heart of IZEA and the ongoing development and integration of software is what gives us the ability to control costs in gain operational leverage. From marketing automation to digital contract management, the technology we build and utilize in our daily operations makes us a better company. Nowhere is the impact of our technology investment more evident than our primary measure of overall efficiency revenue per employee. In Q3 2017, we delivered the highest revenue per full time employee since becoming a public company $267,000 per employee up from $197,000 per employee in Q3 of 2016. That is an improvement of 36% year-over-year. For reference IBM’s revenue per employee is $189,000 per year as of the September quarter. Our operational efficiency is the key driver behind our first EBITDA positive quarter. We are doing more with less people and still delivering revenue growth. In the trailing 12 months, our managed services revenue is up 21% to $22.9 million versus $19 million in the same period a year ago. Total revenue is up 10% to $28.8 million on a trailing 12 month basis. It is amazing, what a team of likeminded people can accomplish when they’re all focused on the same goal. I want to thank the entire IZEA team for delivering outstanding results this quarter and helping us reach this important milestone. In my shareholder letter earlier this year, I made a commitment to reaching sustainable profitability. While, one EBITDA positive quarter doesn’t mean that we’re there yet, we are certainly making progress against that commitment. We’ve been able to demonstrate that the company can be viable at revenue levels of approximately $32 million per year our annualized run rate as of Q3. It is important to recognize that there is some variability in OpEx throughout the year with Q4 and Q1 typically having higher expenses relating to commissions, bonuses, marketing and professional service fees. We remain incredibly bullish on our space and believe there’s a huge amount of opportunities for us to grow. At our current size, we are nowhere near our full potential. IZEA will continue to invest in sales, marketing and technology to provide the foundation for long-term profitable growth. That said, we will temper our investment with an eye towards profitability, so that we are not reliant on or beholden to the capital markets. As we look to the last months of 2017 and beyond, we are excited by the road ahead. The company has never been more efficient, we have great technology in the pipeline, we continue to win direct relationships with the world’s biggest brands and we have an incredible group of royalty team members committed to our long-term success. Thank you for spending your time with us this afternoon. I would like to open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

Hey guys this is Eric Des Lauriers on for Mike. Thanks for taking my questions and congrats on reaching profitability solely.

Thank you.

So, I noticed that your managed services margins have been coming up sequentially for the past four quarters. And I know you guys have – obviously it is AI development that you’re working on. I’m just wondering you could talk to us a bit more about where you see managed services going or where they could be as we walk into 2018 and 2019.

Yes. I think as we work forward, we’ve done a fantastic job of getting managed services to the level that it’s at today. But I think, I would look at the future being pretty steady from this point moving forward. We do see greater margins on larger clients. But overall I think that the margins are probably going to be in the same type of range that they are today as we work forward.

Okay, great. And then your gross profit guide or your gross margin guide of 50% to 51% since you imply notable compression from Q3 to Q4 just taking everything at the midway point. Is there anything in there beside mix that’s really driving that? Or are you guys seeing anything else with managed services this coming quarter? Just trying to reconcile those a bit. Thanks.

Sure. Now we are expecting managed services margins to stay the same, there really is a mix of the content to those managed services to the extent that managed services revenue increases above that then the margin could increase above that prediction. But until we know where it falls out that really is we’re keeping with that 51% production for now.

Make sense. All right. Thanks guys.

Thank you.

The next question comes from George Kafkarkou, Private Investor. Please go ahead.

Hey guys. Can you hear me?

Hi, George.

Congratulations on a great quarter guys, great job.

Thank you.

Two very simple questions. The revenue backlog, which includes unearned revenue $11 million, I assume that’s the highest backlog you guys have had at any quarter is that correct?

No. It actually was about $11.4 million in the last quarter it has come – and it was $11.8 million in March. It has been coming down because as our annual renewal go down that will decrease but we will expect that to increase at the end of Q4, where we get a lot annual renewals for 2018.

Right but also – if I understand this correctly, one of the biggest drivers behind revenue backlog are the bigger deals, right? Because you can’t burn them all in the same quarter. Is that a fair statement?

Yes, so if you kind of think of it, we’re typically doing the larger deals and the annualized deals in Q4 and Q1 and then we kind of burn-off those deals throughout the year. We would expect that that number would go up here in Q4 and then as we look into next year it will kind of burn over time as well as we start chipping away at that revenue and begin to recognize it.

Okay. How do you guys think about the increasing numbers of the good deals? Do you see a ceding to that or – how do you guys think about that?

We’ve approached that in a couple of different ways George, it’s Ryan. Looking in the rearview, I think we’re in a very fortuitous place in the modern ecosystem right now. We want to be very opportunistic the fact that content and overall is an increasingly larger and larger demand as brands have to act more like publishers like I stated in my remarks. So I think by virtue of that we’re going to see thankfully even more of larger opportunities going to future. But that doesn’t mean that we’re just going real hunting. We’ve structured our client's development team in such a way where there is stratification of the types of businesses who do work with. And I think that’s also going to be a factor as well as the future in terms of being able to – a different pool customer base, a differ tiers of content creation. So for example, whereas today I would generalize our go-to-market strategy is really being a Fortune 500 or maybe even Fortune 1,000 sort of blends we certainly believe there’s plenty of room to play well beneath that into the future.

Very good. Okay, just one final question. You mentioned specifically the new customers; if I heard this correctly in the prepared remarks Amazon and Google can you talk to which kind of products they paid for? Was it the managed services? Can you talk about anything about those two specifically with Amazon and Google?

I can’t talk about each of them but some of those campaigns are not completely done yet. However, those are both managed service unit opportunities for both Amazon and for Google. And in certain cases where we’re working with them is to leverage a mix of both influencer marketing and content marketing.

And you can’t talk to the size of those deals? They’re not a certain figure deal or you’re alone from sharing them?

We’re now to disclose the deal size for those.

Is it the first time both Amazon and Google have become customers?

They are, they are both first time player.

Okay. Great quarter guys, great job, well done. Thank you. Thanks for taking my question.

Thank you, George.

You’re welcome. Thank you.

[Operator Instructions] There are no further questions registered at this time. I would like to turn the floor back over to Ryan Schram for closing comments.

Thanks to everyone for joining us this afternoon, this evening. And again if you like to follow more of our updates please do so on the Investor Relations section of our corporate website at izea.com, izea.com. Have a wonderful evening.

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