IZEA Worldwide Inc

NASDAQ:IZEA

Earnings Call Transcript 2023-Q1

[Operator]

Greetings, and welcome to the IZEA Worldwide First Quarter 2023 Earnings Conference 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, Ryan Schram. Please go ahead.

[Ryan Schram, President and Chief Operating Officer]

Good afternoon, everyone, and thank you for joining us for IZEA's earnings call covering the first quarter of 2023. I'm Ryan Schram, President and Chief Operating Officer at IZEA. And joining me on the call are IZEA's Chief Financial Officer, Peter Biere; and IZEA Founder, Chairman and Chief Executive Officer, Ted Murphy. We're glad to have you with us today.

Earlier this afternoon, the company issued a press release detailing our performance for the first quarter of 2023. If you like to review those details, all of our investor information can be found online on our Investor Relations site at izea.com/investors.

Before we begin, please take note of the Safe Harbor paragraph included in today's press release covering the company's financial results. And be advised that some of the statements that we made today regarding our business, operations and financial performance may be considered forward looking. And such statements involve a number of risks and uncertainties that could cause actual results to differ materially. We encourage you to consider the disclosures contained in our SEC filings for a detailed discussion of these factors.

Our commentary today will also include the non-GAAP financial measure of adjusted EBITDA. Reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued earlier today as well as in our publicly available filings.

And with that, I'm pleased to introduce IZEA's Chief Financial Officer, Peter Biere. Peter?

[Peter Biere, Chief Financial Officer]

Thank you, Ryan, and good afternoon, everyone.

I'll review our operating results for the quarter ended March 31, 2023, compared to the prior year's quarter, and I'll breakdown results for our Managed Services and SaaS license businesses, and then provide some balance sheet highlights.

Total revenue for the first quarter of 2023 was $8.7 million, 1.7% or $153,000 lower than the prior-year quarter. Our net cash loss, or EBITDA, was $2.2 million for the quarter, 3% below the prior-year quarter. Our net loss in the current quarter totaled $2.8 million or $0.04 per share on 62.4 million shares compared to a loss of $2.5 million or $0.04 per share on 62.1 million.

Turning to our Managed Services business, given our announcement on January 12 of this year regarding the unwinding of business with a particular Managed Services customer, it's useful to understand our bookings and revenue trends from our core customer base apart from the impact related to this large customer. I'll use references to the non-recurring customer and our core customers to make these distinctions.

This past April 10, we announced that our Managed Services bookings for the first quarter of 2023 totaled $6.1 million compared to $12.1 million for the prior year's first quarter, a 50% decline. Core customer bookings, which totaled $5.8 million for the first quarter of 2023 and which represented 96% of total bookings for Q1, declined 39% compared to the prior year's first quarter. Our order count was on par with the prior-year quarter and the average order size fell by about half, showing relative strength in demand, quantity and a pullback in spending commitments. Bookings from the non-recurring customer was approximately $250,000 in the quarter, down 91% from the first quarter of 2022.

Managed Services revenue totaled $8.5 million during the first quarter of 2023, which was about 1.6% or $130,000 above the prior year's quarter. Approximately $3.5 million of the quarter's revenue is related to the non-recurring customer, which was 95% greater than this customer's revenue for the prior year's first quarter.

Managed Services revenue from our core customers totaled $5 million during the quarter, which is 22% lower than the prior year's first quarter. The decline in these core customer revenues is primarily related to softer bookings in the second half of 2022.

The delivery time between bookings and revenues averaged over nine months during the past six quarters, compared to an average between six months and seven months prior to our business with this non-recurring customer. We expect that our time to revenue should decline to historic levels over the course of this year.

Gross margins for this non-recurring customer have averaged between 30% and 35% of our historical average margins. So, while we expect our comparative Managed Services bookings to decline in the short run during the unwinding process with this non-recurring customer, we anticipate our blended average gross margin will gradually return to historical levels.

Our Managed Services backlog, which represents the total of unrecognized revenue for contracts that are underway, as well as recent bookings that have yet to begin invoicing, totaled $16.1 million on March 31, 2023. Over $4 million of this backlog is related to our non-recurring customer and we expect to recognize this amount as revenue in the following two quarters. This non-recurring revenue will somewhat mute the top-line impact of this customer loss while we continue to add new higher margin customers.

SaaS Service revenue, consisting of license fees, self-service, marketplace spend fees and other fees, declined by $283,000 in the quarter or by about 55% compared to the prior-year quarter. Revenue from license fees declined by 49% from the prior-year quarter, while net marketplace spend fees declined 33%. The transition away from our legacy IZEAx platform to Flex brings with it a lower revenue model for self-service customers, which we believe will increase adoption over time.

Our total cost of revenue was $6 million in the first quarter of 2023 or 68% of revenue compared to $5.2 million or 58% of revenue in the prior-year quarter. Accordingly, our gross margin, including internal labor costs, in the first quarter averaged 32% compared to 42% in the prior-year quarter. The increase in the cost of revenue was primarily due to higher delivery costs on our non-recurring customer, which made up 41% of total revenues during the current quarter. The cost of revenue for our core customers was within the range of recent historical averages.

Expenses other than the cost of revenue totaled $6.2 million for the first quarter of both comparative periods. Sales and marketing costs totaled $2.4 million during the first quarter, down 5% from the prior-year quarter due primarily to reduced payroll costs that are tied to performance. General and administrative costs totaled $3.4 million during the first quarter, down 3% from the prior-year quarter, due primarily to lower overall compensation costs, partly offset by an increase in audit-related professional fees.

Our net loss was $2.8 million for the first quarter of 2023 or negative $0.04 per share, compared to a net loss of $2.5 million in the prior-year quarter or negative $0.04 per share.

Adjusted EBITDA was negative $2.2 million for the first quarter of 2023 compared to negative $2.1 million for the prior-year quarter. The change in EBITDA was primarily due to lower gross margin dollars, mostly offset by lower cash operating costs and higher interest income from our investment portfolio.

As of March 31, 2023, we had $67.5 million in cash and investments, $2.5 million lower than at the beginning of the quarter, primarily due to negative EBITDA. We earned $571,000 in interest on our investments during the first quarter. And lastly, we do not have any debt on our balance sheet. With cash on hand and liquidity from our investment portfolio as required, we believe that we are in a solid position to execute on business growth and opportunities that may lay ahead.

With that, I'll turn the call back over to Ryan.

[Ryan Schram, President and Chief Operating Officer]

Thanks, Peter, and hello again, everyone.

Since our last call roughly six weeks ago, our management team has continued to execute against our 2023 operating plan in line with the strategies shared in previous updates. While it's likely no surprise to anyone that the overall economic climate remains turbulent, there were a number of company highlights from our first quarter that I wanted to share.

First, on January 19, we kicked off the new year with the official launch of IZEA Flex, our next-generation influencer marketing platform. First announced during IZEA's Superchanged streaming event last fall, Flex allows marketers to directly track the impact of influencer marketing on sales down to the product and customer level in ways never available before. At the same time, we introduced an attractive price to value that lowered the barrier to entry for enterprise software for all marketers at a time when saving money is equally mission critical. In a little bit, Ted will share more about the exciting progress Flex continues to make.

Within our Managed Service business group, our focus remains on the things that we can directly control: thoughtfully growing our client base, driving innovation forward in the highly competitive category, and expanding our market share wherever and whenever possible with an opportunistic mindset.

During Q1, we saw a meaningful increase in the number of absolute deals won compared to the prior three quarters; in fact, from an opportunity [got] (ph) standpoint, it was one of the top two quarters from the last year and a half. The increase was driven by a surge of net new clients to IZEA, which, in the quarters ahead, we expect to yield additional recognized revenue and the broader opportunity to expand those client relationships, thanks to our award winning service experience that we provide to brands and agencies alike.

In a time of uncertainty, these positive dynamics also serve to diversify our client base, and therefore, our risk base as the overall business expands. This is a central goal as we sought to transition the business from being overly dependent on a handful of larger clients that could heavily impact a quarter or even a fiscal year in the event that something were to unexpectedly change. That boost of net new clients was due in part to our continued investment in demand generation activities, which we refer to internally as IZEA Everywhere.

As a shareholder, you may have seen some of these efforts recently, whether it is IZEA ranking highly on Google searches, both paid and organic, through programmatic display ad we're targeting, or even in digital out-of-home in major markets and airports. IZEA is influencer marketing and we are taking every opportunity to emphasize that positioner in places where clients and creators alike can receive and act on that message.

Also during the first quarter, in-person conference activations wrapped up at key industry events. These shows allow our client partners to spend quality time with leading marketers, while placing IZEA's thought leadership front and center in the places and spaces that matter most through keynotes, round tables and other high profile sponsorship. We were proud to showcase our team and our company at the Consumer Electronics Show in Las Vegas, South by Southwest in Austin, Social Media Marketing World in San Diego, Shoptalk and the Women in Influencer Marketing Best in Tech events.

Be on the lookout for IZEA elsewhere in the months and quarters ahead as we believe our persistent visibility is not only a key differentiator for the business, but a meaningful way to create outcomes that drive diversified long-term growth.

Last but certainly not least, our IZEA Insights initiative continues to deliver remarkable research studies focused on the creator economy, two of which were unveiled during the first quarter: The 2023 State of Influencer Equality and The State of Influencer Earnings. These findings are frequently cited in places far and wide, from trade publications such as eMarketer to other marketing blogs and even by Chuck Todd in NBC's Meet the Press recently.

Our investment in, not to mention the credibility we gain, from marketing research underscores while leading brands and agencies see IZEA as the most experienced, most trusted and most innovative influencer marketing company there is. It's not only a corporate point of pride, it directly equates to thoughtfully expanding our business and leveraging the totality of our talent.

With that in mind, I'd now like to turn the call over to IZEA's Founder, Chairman and CEO, Ted Murphy, to share his perspective on the quarter and our road ahead. Ted?

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

Thank you, Ryan.

I'll be concise in my remarks this quarter given our most recent call was just six weeks ago.

We continue the transition process from our legacy platform, IZEAx, to IZEA Flex and The Creator Marketplace. I'm pleased to share that we are on track to shutter IZEAx for customer use by the end of this quarter. Once fully complete, the shutdown of this platform will lead to significant infrastructure cost savings for the company and allow us to fully focus our product, support and engineering efforts on the technology platforms of our future.

We have migrated approximately 790,000 creator accounts from IZEAx to Flex. These users have the ability to log into the marketplace to create listings and make pitches to brands. The migration of marketer accounts will be completed by the end of next month.

The transition has impacted SaaS revenue and customer counts this quarter and likely will not stabilize until Q3 when we are optimistic that we can return to quarterly sequential growth. While our price points are significantly lower, the early indications are that Marketplace and Flex both enjoy lower churn rates and customer acquisition costs than we saw with IZEAx.

SaaS only accounts for a small portion of our revenue today. Our desire is to change that by offering the best price to value for software in the influencer marketing space. We want SaaS to have a broad and diverse customer base of not only marketers but creators as well.

To do that, we've altered our go-to-market strategy, with transparent pricing, a contract-free model and a quick path to "try before you buy," no need to speak to a salesperson, book a demo or go through contract negotiations, not knowing if you're paying more than other customers for the exact same software.

If you look at the broader martech software landscape from Salesforce to HubSpot, this is where mature software markets inevitably land: low cost per seat, high value delivered per user. Influencer marketing software is going to be force to evolve beyond high price solutions with opaque pricing models and arduous sales processes. It is going to be a painful reckoning for the industry at large. We have chosen to lead now by building a sustainable base that can grow.

Flex is becoming the new technology core for our operations. And the sooner we move Managed Services to Flex, the sooner we can optimize our legal, accounting, sales and service practices around our new operating platform. That transition is near completion. We are finishing out old campaigns, and all new campaigns are being run within the Flex platform.

Last month, we released the contracts module in Flex. It provides a central location for users to view, edit, sign and store all campaign related contracts and agreements. In the coming months, we will be releasing additional features in both the Marketplace and Flex, some of which will be built on top of generative AI, making it faster and easier for our marketers and creators to find each other and transact.

Our recent research indicates three groundswells we seek to capitalize on: 66% of influencers are using AI in their daily life; 38% of influencers are using AI to generate images; and 81% would be willing to pay more for a product or service that uses AI. Looking at how the broader economy impacts our marketplace, the macroeconomic environment continues to be challenging, especially when compared to the past two years. That said, we've seen some recent indications of positive momentum for our Managed Services team.

In early 2023, the market faced a significant level of uncertainty, leading to layoffs that impacted both brand and agency clients. However, as we progress into the middle of the year, there is a noticeable shift in customer behavior. We believe that customers are now displaying greater confidence in determining their budgets and staffing levels, which is translating into a surge of commitments being made.

Throughout this year, our Managed Services team has been observing gradual improvements in market conditions and client responsiveness. And April turned out to be the most successful month for Managed Services bookings so far this year.

During our last conference call, I announced that our Board of Directors had approved $1 million share repurchase plan. We are prepared to move forward with that plan soon after our blackout period ends on May 18. Any repurchases will be made only during open trading windows and only at times when the company is not in possession of material non-public information. IZEA's Board believes, as many of you do, that IZEA is significantly undervalued, trading at less than cash value and without credit for the business we are building.

Thank you all for your support and for joining us today. I will now open up the call for Q&A from the analyst community.

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question, Jon Hickman with Ladenburg. Please go ahead.

[Jon Hickman, Ladenburg]

Hi. Ted, can you hear me okay?

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

I sure can.

[Jon Hickman, Ladenburg]

Okay. Just two questions. I was wondering, I just want to make sure the significant customer that shall not be named, their -- that relationship will be over basically in the next two quarters. Is that what...

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

Yes.

[Jon Hickman, Ladenburg]

[indiscernible]

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

Yes, we're winding it down. There's still some small bookings that are coming in, but the intent is to have that completely wound down in the next two quarters.

[Jon Hickman, Ladenburg]

So, do you expect to do business with them in the future on a different more in line with your other customers, or are you just parting ways?

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

Right now, we are just parting ways.

[Jon Hickman, Ladenburg]

Okay. And then my second question is, so you seem to indicate that April -- well, the business has gotten better as the year has moved on and April was the best month of the year. You said it was the best month or the second best month in the last year and a half, is that also what you said?

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

I don't believe I said that. It was the best month so far this year.

[Jon Hickman, Ladenburg]

But Ryan said something about it too or maybe...

[Ryan Schram, President and Chief Operating Officer]

Yes, Jon, it's me. On number of opportunities basis, yes, it was one of our best of two months over the last year and a half.

[Jon Hickman, Ladenburg]

Okay.

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

Yes, that's count -- the count of opportunities.

[Jon Hickman, Ladenburg]

The count of opportunities, okay. So -- okay. One follow-up, I guess, is can you say anything about possible acquisition targets? Are you looking still? Are you intrigued with anything?

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

I think that the market has definitely shifted from the past couple of years. There are a variety of targets out there that are at varying size, but we're not in a position to comment on anything right now. I will say that the economics have made M&A more attractive, but we still have to find the right fit for the company.

[Jon Hickman, Ladenburg]

Okay. Thanks. That's it for me.

[Ted Murphy, Founder, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Thank you. We've reached the end of the Q&A session. I would like to turn the call over to Ryan for closing remarks.

[Ryan Schram, President and Chief Operating Officer]

Thank you, Stacy, and thank you everyone for joining us this afternoon.

As a reminder, all of IZEA's investor information and press releases can be found online on our Investor Relations website at izea.com/investors. Thanks again for joining us, and we'll talk to you soon.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.