IZEA Worldwide: Confused Business Model (NASDAQ:IZEA)

Summary

IZEA Worldwide, Inc. (NASDAQ:IZEA) was a pioneer in influencer marketing, but the company’s offerings have fallen behind and become confused, and annual revenues have fluctuated between $27 million and $19 million over the last five years, with substantially negative bottom lines. There are also accounting concerns. The stock price has collapsed from $500 at the start of 2012 to $0.30 in late February 2020, just before the COVID-19 crash. There is a lot of potential here, but not on the company’s current course and speed. (Timeline)

Business Model

Influencer marketing is when advertisers (or their ad agencies) pay someone to use or endorse that advertiser’s products on that person’s social media channel. The social platforms with the most influencer marketing, according to Mediakix, are Instagram (69%), YouTube (NASDAQ:GOOG) (NASDAQ:GOOGL) (11%), independent blogs (7%), Facebook (NASDAQ:FB) (5%), LinkedIn (NASDAQ:MSFT) (5%), followed by Twitter (NYSE:TWTR), Twitch (NASDAQ:AMZN), and Pinterest (NYSE:PINS) (1% each). The most common forms of influencer marketing are variations on sponsorships, reviews, and product placements.

IZEA’s primary business model is to use technology to scan social media platforms for influencers (influencers can also sign up on IZEA’s site), categorize them, and then match them with advertisers. It then brokers a deal, tracks performance, collects money from the advertiser, and pays the influencer. IZEA makes money by selling tech tools for finding influencers and for tracking brand sentiment to agencies and marketers, by selling managed services (acting as an agency) to marketers, and by taking a percentage of the ad spend paid to influencers. An influencer search tool sells for $149 a month, but the company doesn’t disclose the typical price of any of its other products or services.

IEZA operates a second and unrelated business, matching freelance “content creators” with marketers. A content creator produces “…Articles, Infographics, Videos, and Images that are delivered directly to the brand without distribution on your social channels.” The freelancer uploads links to their portfolio. Behind the scenes, IZEA matches them with marketers. Most freelance matching sites let the participants make their own matches in an open market. IZEA takes a percentage of the fees paid by the marketers.

Of IZEA’s revenues in calendar 2019, 81% came from managed services, which is the company running the system for its clients as an agency, 18% came from SaaS, which is all the self-service fees. The company refuses to disclose how much of its revenues are from influencer marketing and how much are from matchmaking for content creators, but it appears the latter is a very small number.

Market and Competition

Influencer marketing has become big business. According to Adweek, the industry will be $10 billion in 2020. According to Mediakix and Business Insider Intelligence, the market was $8 billion in 2019 and will reach $15 billion by 2022.

Influencers can make a lot of money. According to Mediakix, payments on Instagram can be up to $500 per post with 10,000 followers to $150,000 per post with a million followers. The number of followers is only partly the measure of value. There are dozens of other variables including engagement rates, type of content, and subject matter. The Instagram Rich List for 2019 from HopperHQ, tracks the top 100 influencers on Instagram and their cost per post.

IZEA’s most important direct competitors are Linqia, Collective Bias, AspireIQ, and Upfluence. But this is an extremely crowded market. According to Influencer Marketing Hub’s The State of Influencer Marketing 2020: Benchmark Report, in 2019, there were 1,120 influencer marketing platforms and agencies, including 380 new ones created just that year. It isn’t a surprise that most players are very small, with no one company dominating. $10 billion in estimated revenues for 2020 divided by 1,120 is only $8.9 million per company, after all. See Competitors.

Our takeaway is that, as the industry matures, there will likely be consolidation, and a very high death rate among those companies not acquired in a roll-up. Or Facebook could step in, offer influencer marketing as a sideline, and create an extinction-level even for the rest of the industry (see below).

The freelancer match-making business is a totally separate market, at least as it applies to piece-work (it makes sense that an influencer might want to license their entire broadcast). By our estimate, the size of the freelancer market (revenues for the match-making platforms, not the total gig economy) is roughly $2 billion. The two public companies in this space (Upwork (NASDAQ:UPWK) and Fiverr (NYSE:FVRR)) are both losing money. There are just too many ways freelancers can connect with clients.

Analysis

Opportunities (external)

Influencer marketing will continue to grow. According to Influencer Marketing Hub’s The State of Influencer Marketing 2020: Benchmark Report, 91% of advertisers believe influencer marketing is an effective form of marketing and 78% intend to dedicate a portion of their budget to influencer marketing in 2020. We also find it interesting that the most used social platforms, Facebook, YouTube, LinkedIn, and TikTok all significantly lag behind Instagram in influencer marketing. The market could grow if they started to catch up (even though Facebook, which owns Instagram, would be competing with itself).

Increasing supply of influencers. The number of influencers making money will increase as marketers go after smaller but more focused social followings, paying “micro influencers” who have 10,000 to 50,000 followers and even “nano influencers” who have fewer than 10,000. Dealing with such small influencers is only practical on an automated platform.

Threats (external)

The influencer marketing market is extremely crowded. It’s hard to get attention when you have 1,120 competitors.

Facebook could enter the market. Facebook with Instagram controls by far the largest share of social media. If it got into influencer marketing with its existing agency connections, even if it didn’t require its influencers to post exclusively on their sites, the third-party industry would be in big trouble. But it hasn’t, and a discussion of why is beyond the scope of this profile.

The Federal Trade Commission may impose additional regulations on influencer marketing. Ethically, influencer marketing only works with disclosure. The FTC has already posted guidelines for influencers here. New regulations would further benefit consumers but cut industry revenues.

Strengths (internal)

IZEA has a lot of influencers signed up. The company says,

“As of December 31, 2019, we had more than 885,000 user accounts in IZEAx. These accounts have connections to over 986,000 social media accounts with an approximate aggregate reach to 8.5 billion non-unique fans and followers of IZEAx creators.”

These number are large because the company has been around a long time and made some acquisitions, but they are soft because influencers tend to sign up for many platforms and then settle on one or two.

Not dependent on one customer. IZEA had no customer that accounted for more than 10% of its revenue during the twelve months ended December 31, 2019, or 2018, according to the company’s last 10K.

The company has cash and credit. As of December 31, 2019, the company had $5.88 million in cash and an untapped credit line of $5 million. This is important during the COVID-19 slowdown.

As a public company, IZEA can use stock for acquisitions. IZEA is the only public company in influencer marketing. Theoretically, it could acquire its way to dominance, but the company would have to be turned around first to get the share price up.

The cap table is clean. Insiders own 8.87% of the shares and institutions own less than 10%. See Cap Table.

The CEO is popular with lower-level employees. On the review sites, newer and younger employees often complain about the substandard pay, but they like the relaxed atmosphere and the fun work culture. The CEO, Ted Murphy, has a 91% approval rating, and 82% of the employees would recommend a job at the company, according to Glassdoor.

The new Brand Graph product looks promising. This is a brand sentiment measuring tool, released just before the COVID-19 crash. It makes a lot of sense to give clients a way to measure the effect of their campaign spend.

Weaknesses (internal)

The company’s business model for influencer marketing is self-cannibalizing. It sells tools, platforms, and services to both brands and agencies. Each of those offerings vitiates the others and confuses everyone. On GlassDoor, one IZEA employee said management needs to “… Refine the core product of IZEA. Decide what it actually is. We currently make the majority of our money as an Agency even though we swear up and down we’re not one.” Another employee said,

“IZEA is constantly sending a conflicting message about its corporate identity and has really been overcomplicating things to the point of confusing employees and clients. … I’d venture to say we’re completely an agency given what we mainly focus on in managed services, but the ‘A-word’ is totally shunned here. … people struggle to understand what we do.”

Although these comments are from 2017, they appear to be just as valid today.

The company’s second business, content creator matchmaking, is very confusing and is unrelated to influencer marketing. The supply is different, the demand is different. One business doesn’t help the other. And the similar language confuses everyone. Even the company can’t keep straight the distinction between influencers and content creators, posting,

“We are IZEA: The Creator Marketplace. Our cloud-based technologies connect Brands and Publishers with content Creators who blog, tweet, pin, and post on their behalf.”

To be fair, a competitor is also dabbling in this side business (see AspireIQ here), but it still makes no sense.

The engineering is mediocre. On the software review site G2.com, there were only 15 reviews of IZEA, and the consensus was that its platform is “Buggy but gets the job done.” A review on another site said,

“If a company or agency has more money, I’d recommend a platform that is more user-friendly and is similar to the way MuckRack actively updates and improves their platform. IZEA could use … improvements.”

On another site, an IZEA employee anonymously said,

“…the Engineering team is becoming increasingly unstable. This could spell disaster for the rest of the company.”

The company’s acquisitions were not worth the dilution. The TapInfluence purchase for $7.08 million in July 2018, ended up with a $418k impairment charge. The company laments the “churn” in TapInfluence customers, but churning implies lost customer are replaced, which they weren’t. They were just lost. And one would think the technology could have been developed in house. The Ebyline acquisition for $8.85 million in January 2015, and ZenContent for $4.5 million in July 2016, bought a business (the content creator sideline) the company didn’t need.

The company will probably have to do a reverse stock split. On December 11, 2019, NASDAQ granted the company an additional 180 days (extending an earlier deadline) to comply with the minimum bid requirement.

Something is odd in finance. The audit committee corrected revenues for 2015 and 2016, decreasing each by about $6 million, and the first 3 quarters of 2017 (discussed in this 8-K). There are three recent shareholder lawsuits discussed in the most recent 10-K. There was a patent infringement case (discussed in this 10-K 2014 and concluded in 10-K 2015) . The company’s stock was listed on a foreign exchange without (we are told) the company’s prior knowledge (as stated in this press release). And, the company has had three CFOs in the past two years, with the current CFO being interim, rehired after having left in 2018 (discussed in the most recent 10-K).

The company lost its first-mover advantage. The company says,

“We believe that we pioneered the concept of a marketplace for sponsorships on the social web in 2006 with the launch of our first platform, PayPerPost, scaling our product and service offerings ever since…”

But according to Influencer Marketing Hub’s list of platforms for 2020, IZEA ranks only 22 out of 30.

Conclusion

IZEA had an early and promising start in influencer marketing, and the CEO is truly an impressive fountain of new ideas, but the company lurched after one shiny, new idea to another, tangling its strategy along the way. This company has released more new products than any other $19 million company we have ever seen. That’s reflected in the stock price. From the outside, it looks as if the board – which has some accomplished members – provided little discipline to a hyper-creative chief executive, to the massive detriment of the shareholders. In the meantime, the market became extremely crowded. See People.

IZEA’s existing business could be squared away, and the company could then be used as the nucleus of a roll-up. But we don’t think that will happen without major changes in oversight.

Engagement

We have spoken to the company about its future and what we see as necessary changes, and we will continue the discussion. In the meantime, we’re staying out.

If you support this course of action – or don’t – please let us know and tell us why.

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The Accord Partners Strategy. This document explains our approach to investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: All information in this company profile is from Accord Partners’ research using public sources, including SEC filings, the company’s investor relations department, industry analysts, conversations with company competitors, and public online posts by customers and employees. This information is believed to be but is not warranted to be accurate. Nothing in this report is insider information as defined by Sections 16(B) and 10(B) of the United States Securities Exchange Act of 1934. Accord Partners welcomes any corrections, additions, or amplifications to facts or opinions expressed in this document. Accord Partners Fund LP may now or in the future have an equity interest in this company. www.AccordPartners.com

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