Inuvo, Inc (INUV) went through a painful corporate restructuring process in recent years. Over the last 24 months, it has demonstrated compelling growth prospects and has reached profitability. We believe this microcap turnaround company will continue to grow and has substantial potential to deliver value to investors.

Business Model

Inuvo, Inc., is an Internet marketing and technology company. It is engaged in developing cloud based software and analytics technology for online advertisers and website publishers. Inuvo’s platforms provide a mechanism for advertisers, publishers and consumers to easily and openly connect, thus facilitating the execution of online marketing programs.

Inuvo, Inc., operates two segments: performance marketing and web properties. The performance marketing segment is an open, fraud filtering, lead generation marketplace designed to allow advertisers and publishers to manage their transactions in an automated and transparent environment. The web properties segment generates revenue from the sale of products, services, data and advertising. Some prominent Inuvo web properties include the Yellowise.com directory, the BargainMatch.com consumer product comparison portal, the Kowabunga.com consumer daily deals portal, and Alot.com, which delivers highly relevant content to visitors.

As a diversified company, Inuvo’s products compete against industry giants such as Google’s (GOOG) ad network, Groupon’s (GRPN) daily deals & Nordstrom’s Hautelook. However, Inuvo’s products offer a customized approach to online marketing that provide them certain competitive advantages. For example, its Validclick ad network offers niche targeting that yields more revenue for online publishers. It also offers flexibility in terms of custom implementations that larger ad networks (i.e. Google AdWords) cannot, due to their larger size. That same tailored approach extends to Inuvo’s MyAP, which is an affiliate management platform. It specifically targets large online merchants who want customization and private labeling at a lower cost compared to the big networks.

Background

Incorporated in Oct 1987, Inuvo has been around for a while. During the last decade, its management almost drove the company out of business by lavishly spending debt financed capital on acquiring businesses apart from its core products. This extravagant spending was extended to buying $35,000 worth of office furnishings for the former CEO.

Since Richard Howe took over the company in late 2008, he has been working to turn the company around. Mr. Howe got rid of the existing management team, dismissed its board of directors, and rebranded the company. He also started hiring new talent in management positions.  His previous experience in corporate restructuring has helped him to hire the right people, who he knew would play critical roles.

Growth Catalyst

As the Chief Executive Officer and Chairman of the Board, Richard Howe has streamlined the business by selling its non-core products. That included 16 companies his predecessor acquired over the five years before he joined Inuvo. He then used those proceeds to reduce the company’s bank debt, which had come close to being called early in the restructuring process.

After completing the corporate restructuring, Inuvo now focus on its two remaining core segments which it calls “direct and exchange.” It represents the two operating wings of the company, the performance marketing (exchange) and the web properties (direct) segments.

The management turnaround helped Inuvo to survive. However, the acquisition of Vertro™ and the integration of its products at the end of 2011 provided the company with the cash flow it badly needed to deliver growth.

According to Inuvo’s SEC filings (8-K), it met NYSE  regulatory compliances on June 2, regarding the listing requirements. Prior to that, on May 28, Taglich Brothers Inc has initiated coverage of Inuvo Inc as a “speculative buy” with a price target of $1.45 in next 12 months. Then, Inuvo’s stock was upgraded by TheStreet from sell to hold amid an impressive record of earnings per share growth, compelling growth in net income and notable return on equity.

Financials

The acquisition of the ALOT™ product portfolio in November 2011 helped Inuvo to increase its quarterly revenue by 125% within a year. While the company generated only around $7 million revenue in the last quarter of 2012, by the end of 2013 that figure reached near $16 million However, since then its revenues have fallen. In last 12 months (YTD), Inuvo’s quarterly revenues decreased by 11.5 percent.

Inuvo’s gross profit also increased significantly after the acquisition of ALOT™. In fact, its gross profit margin outpaced its revenue growth during 2012. Compared to the $1.5 million gross profit in the last quarter of 2011, Inuvo’s gross profit reached $8.75 million at the end of 2012, representing a 583% increase. Over the past five years, Inuvo’s revenue has increased by 70.47% on average.
According to Ycharts, Inuvo’s sales estimates for current and next three quarters suggest that Inuvo’s revenue will continue to grow over the course of 2014 and its quarterly revenue will likely climb back above $16 million by the first quarter of 2015. Such potential growth will help Inuvo to avoid raising additional funds through financing.

Inuvo’s has $7.14 million in current assets, where $2.72 million of it is in cash and equivalents. Inuvo generated $0.68 million in net income and $1.13 million of EBITDA last quarter. As long as the profitability continues, Inuvo will not require further financing.

During the last two year’s triple digit increase in gross profits has transformed Inuvo into a profitable one. It has generated $1.81 million in positive cash flow in the year 2013. Despite the slowdown in revenue growth in the last few quarters, it still managed to end the first quarter of 2014 with $0.38 million of cash from operations.

Risk Factors

Although Inuvo’s revenue seems to be falling on a quarterly basis over the last 12 months, it has generated $0.675 million of net income against $10.12 million of revenue last quarter. Most of it was generated via its core business or operating income of $0.671 million.

Currently, Inuvo’s book value is around $5.35 million, and based on its current stock price of $0.84/share ($19.74 million Capex), it is trading at 3.26 times its book value. The downside risk is further reduced by the fact that it generated $1.81 million in positive cash flow last year. This is rare among these kinds of turnarounds.

Going forward, the biggest challenge for Inuvo management will be managing its growth. Inuvo’s current growth strategy has heavily evolves around the ALOT products. In 2014, they are also planning to focus on the mobile channels. However, to generate more revenues from its websites, Inuvo will need to attract visitors from organic channels such as search engines. Recent search engine algorithm updates from Google have put a lot of high value websites in distress as their page views declined considerably. Investors need to be aware of such sudden external effect on Inuvo’s current operations.

Conclusion

MicroCap Intelligence uses a proprietary quantitative model and strict investment criteria to identify small and micro cap companies that have a high potential for price appreciation with less potential for loss. As a microcap turnaround, Inuvo meets the MicroCap Intelligence investment criteria on both growth prospects and profitability.

The new management of the company has provided the needed leadership to deliver continuous revenue growth over the last 24 months and managed to turn it into a net cash flow positive company. We believe that its impressive record of earnings, convincing revenue growth, net income, and notable return on equity will continue to act as a catalyst for delivering further value to microcap investors.