Great quarter, guys! Inuvo edition

Posted on November 12, 2021 by Florian Buschek

Inuvo Inc INUV (disclosure: long) is a core holding of many Breakout Investors and part of Aaron Warwick’s room on the Breakout Investor platform. We have also hosted management for a public call and several Breakout Investors had the pleasure to meet management at LD Micro coming away very impressed.

Yesterday the company reported its 3rd quarter earnings and even beat their own preliminary numbers.

Richard Howe, CEO of Inuvo, stated, “Revenue for the third quarter grew 83% year-over-year and 33% sequentially driven by significant growth in both platforms. We signed in excess of $10 million worth of IntentKey orders within the quarter that we expect to deliver over a nine-month period beginning in the fourth quarter and as we had been messaging throughout the year, we achieved a positive Adjusted EBITDA in September. We expect to continue growing throughout the last quarter of 2021.”

Inuvo experienced higher year-over-year revenue for the three and nine months ended September 30, 2021 as compared to the same periods in 2020. Net revenue for the third quarter and first nine months ended September 30, 2021 totaled $16.8 million and $40.1 million, respectively, an increase of 82.8% and 26.3% as compared to $9.2 million and $31.7 million for the same period the prior year.

So why did the stock sell off?

Let’s get the one negative point out of the way: IntentKey gross margin dropped from 49% to 36%. However that was mostly due to “product mix” ie different services customers required and to a lesser degree the company’s efforts to gain market share. As CEO Richard Howe confirmed to me, we should expect this to revert back into the 40-50% range.

The rest is good news:

  • Revenue growth is off the charts and we can expect sequential growth into Q4 while EBITDA positive. That way even $100M revenue in 2022 is not out of question for this $83M market cap company.
  • In response to an analyst question the CEO made clear that this was not an exceptional quarter for IntentKey, rather that this level of growth is just the normal way it is.
  • They “signed an agreement with a business development partner to provide referral and support services“. This brings them into the “big league” and help them accelerate client acquisition and building their reputation for the IntentKey side of the business. As an industry expert comments:” Good old fashioned relationship brokering is sometimes the fastest way to get your foot in the door. Given their recent trajectory of winning more clients and delivering on those campaigns I think this is going to start snowballing pretty rapidly from here.
  • They are starting to integrate aspects of IntentKey and ValidClick with each other (IntentKey AI into ValidClick; inventory acquisition capabilities from ValidClick to IntentKey, etc ). This should bring cross synergies.
  • Hence: “our artificial intelligence, combined with this multichannel capability, puts us in a position to win more and larger deals.”
  • They got into partnership with Twitter and Twitter is allocating internally resources for the partnership.
  • The RFPs increased 70% to 87% in year-over-year in terms of the dollar amount.
  • They are stepping up to sign bigger deals in 2022 where they can be the sole vendor.
  • Still lost only a miniscule amount of customers and only via agencies.
  • Increased the no of campaigns from 84 in Q2 to 95 in Q3, 25 of these campaigns were new and 70 were renewals of existing business. (Note campaigns don’t necessarily align with reporting periods and a customer without campaign is not automatically lost customer)
  • Customers are currently early adopters and as we come closer the 2023 “cookiepocalypse” there will be tremendous tailwinds in addition to the tailwinds in terms of privacy.
  • To that end: “we ran 2 large cookieless tests for our clients where we achieved a 50% lower cost for the same return.”
  • An acquisition is no priority right now because the company is growing very strongly on its own.
  • Hiring is a challenge but no obstacle to current growth.
  • On the ValidClick side improvements in automation were implemented leading to a “50% reduction in this time spent optimizing campaigns because of these continuous enhancements to the platform.
  • The business is highly diversified with new clients in “insurance, online gaming, pet technologies, education, a number of state COVID initiatives, real estate, e-commerce, investing, winemaking, urgent care, DNA screening, gym memberships and personal lending, to name a few.”
  • Across the client base, they outperformed goals by 40% on average within the quarter.

So an excellent quarter (almost) all around. Significantly, IntentKey is growing much faster than ValidClick, which has very low gross margins of 13-15% (one has to adjust for marketing costs). So the true economic margins should rise rapidly and there is upside from the IntentKey SAAS version.

All that is yours for 1 times next year sales or less. The company is not easy to fully model out because the margins can vary and due to the rapid growth but it is not unlikely that the current forward multiple on EBITDA is in the range of 5-10. That for a fast growing company with massive tailwinds, an extremely large addressable and serviceable market and experienced and very capable management team.

What is not to like?

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