Key points:
- IZEA’s been around a long time and not always entirely successfully
- There’s been something of a search for a viable business model
- It’s possible that one has now been found – what next?
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IZEA Worldwide (NASDAQ: IZEA) shares jumped 40% yesterday and premarket this morning off the back of a surprising earnings beat in their results. IZEA’s been around a long time in internet years and it would be fair to say that there’s been a certain search for a viable business model along the way. It’s possible that it might have found one which is why this earnings beat.
IZEA actually started out as a brokerage for paid for backlinks to improve search engine rankings. They were one of the first in that market in fact, first in a formal manner that is. Competition rather destroyed pricing there and then remedial action by the search engines made that a difficult business to remain in. Since then there have been varied attempts at interesting business models. Some have worked better than others over the couple of decades but none have really broken through.
Except now with the rise of social media influencers it appears that IZEA does have something that makes money. Being a broker of – effectively, even if this isn’t quite what they call it – advertising on social media.
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The results are good as they are surprising. Revenue rose 62% to over $10 million for the quarter for the first time. This was off the back of a 69% jump in “managed services” revenue to $9.9 million. The software as a services business saw a decline in revenue but as that’s a trivial part of the business now no matter. Managed Services are what they call what is effectively being a brokerage for advertising on those social media sites through influencers.
As costs only rose 37% (and that’s largely cost of sales) that then tipped the company over into profit. Sure, only $300k but that’s an awful lot better than the $1.1 million loss this quarter last year.
As to what that cost of sales is. That’s the payment going out to the influencers for the sponsorships and so on. So what’s really happening here is that the volume of such advertising is rising fast, with IZEA having a certain overhead and cost of running the system. But the charges by influencers aren’t rising – and are possibly falling – as much as the desire to advertise on or with them. That means the margin between what an advertiser will pay and what must be paid for placement widens.
This is a good place to be in for a brokerage. Which then gives us a good idea about wh the share price rose as it did. It’s not the trivial level of profit, it’s the underlying economics which leads to it.
The big question though is what happens next for IZEA. The original business, backlinks, ended up dying because the search engines themselves took action against the idea. But here? Who thinks that advertising with influencers is going to get shut down? Or even decline?
That then leaves the question of how well IZEA might manage that process and that’s an exercise best left to the investor.
