Avantax Inc (AVTA) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to the InfoSpace Q1 earnings release conference call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to Mr. David Rostov, the Chief Financial Officer of InfoSpace. Please go ahead, sir.

Good afternoon, everyone, and welcome to InfoSpace's first quarter 2003 earnings conference call. I'm David Rostov, Chief Financial Officer of InfoSpace. With me on the call today is Jim Voelker, Chairman and CEO of InfoSpace.

Before we get started, I want to remind you of two things: First, this is an investor conference call. The call is open to the press; however, we will only take questions from the investment community.

Second, I must advise you that this call may contain forward-looking statements relating to the development of the company's products and services and future operating results. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could affect the company's actual results of operations include but are not limited to the progress and costs related to the development of our products and application services, the timing of market acceptance of those products and services, the performance of our systems, the effectiveness of the development and implementation of our strategy, possible changes to that strategy, and the ability to retain customer contracts and key personnel.

A more detailed description of certain factors that could affect actual results of operation is discussed in the company's most recent 10-K, filed with the Securities and Exchange Commission. Listeners are cautioned not to rely on these forward-looking statements, which speak to the company's prospects only as of the date of this conference call. The company undertakes no obligation to update publically any forward-looking statements due to new information, events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

Now I'll turn the call over to Jim. Following his comments, I'll review the financial results of the quarter, and then we'll open the call up to your questions.

Thanks, David. Welcome to everyone joining us on the call today.

Shortly after I joined the company, in fact, in January, we brought in a team to analyze the long-term potential of each of the business units in InfoSpace. At the time InfoSpace was competing in nearly ten different businesses, and our attention resources were diluted. Critical to this analysis was the need to understand the overall market each business line addressed, the current market position that InfoSpace held, and the assets, skills and structures required for sustainable success.

The consulting team brought a broad range of operational, strategic, technical, financial experience and knowledge to the project. Along with the business unit leaders, this group delved into each area, gathered data from internal and external sources, particularly our customers and our business partners, compared our products and capabilities to the needs of the market as well as our competitors and delivered comprehensive reports and recommendations. The criteria to determine growth potential included the size of the overall market, the size of the currently addressable market, growth rates, current and likely competitive landscape, scaleability, cash flow and long-term business model sustainability.

As a result of this project, we are taking steps to streamline operations and sharpen our focus on three core businesses: search and directory, authorize.net, which is our gateway business, and wireless. We believe these businesses, which in the first quarter of 2003 generated 32.7 million of revenue, have the greatest potential for long-term growth and profitability. Businesses falling outside of these areas have been consolidated into a single operating unit charged with positioning them for future disposition or exit. In the first quarter of this year, these businesses generated approximately 3.9 million in revenue.

Let me share a few thoughts on each of these new business units. First search and directory. It is our largest current revenue stream, generating strong operating margins and is in a growing industry. However, we have many challenges ahead. Currently, our search and directory businesses are separate. We will combine them to leverage the resources, experiences, talent and expertise . We are a small player today, and we need to improve the experience of both our users and advertisers and focus on growing and building brand loyalty. Although it will be difficult, we believe we can build a significant business by being creative, aggressive, and combining our resources effectively.

Second area is authorize.net, a payment gateway services unit. This industry is growing and our market position is strong. As in search, this business is scalable, it generates solid operating margins at current levels, and we occupy an enviable segment of the market. We serve small to medium merchants, where the price service ratio yields healthy margins. By continuing to improve our distribution capabilities, we believe we can accelerate our growth and profitability and establish a leadership position in this market.

Analyzing the opportunity in the wireless arena remains a challenge. Unlike search and directory and authorize.net, the overall market trends in wireless are less clear, and the business models are changing rapidly. Factors that are restraining growth include slow deployment of 3G network technologies, a slow down in wireless subscriber growth, and the lack of standard protocols and software for devices. We've seen and continue to see severe price pressure in the market. Although the industry as a whole remains challenging, our position is strong relative to direct competitors. We serve over 25 carriers today.

In the near term, it is clear that our revenues are declining and the industry is realigning. As we redefine our strategy, it is imperative to us to control costs. However, there are positive signs in the market, faster networks and improving devices are on the horizon, and we need to be open to areas and geared to take action to reposition us for growth.

Finally, the Enterprise Solutions Group. In addition to the search and directory, authorize.net, and wireless, there are several areas where we had efforts. Overall they share several characteristics, single or very few customers, small revenues, little or no operating margins, and minimal synergy with our larger initiatives These businesses will be consolidated into a new operating unit called Enterprise Solutions, which will be charged with positioning each of these businesses for future disposition or exit. Our customers in this unit are valuable to us, so we will do everything we can to continue providing high-quality service and ensure their needs are being met during this process. The businesses in this unit represented approximately 3.9 million of revenue this quarter.

After completing the task of analyzing the long-term potential of each business line, the teams moved on to look at the organizational structure required to support our new focus. This resulted in management changes, shifting of people to more directly support the business units and unfortunately the loss of some jobs. In retrospect, InfoSpace was structured to support a much larger business than we are today. Going forward, we will strive to be quick, aggressive and decisive to achieve our goals and build an organization designed for these purposes. Over time we'll continue to build a culture of customer focus, team work and accountability.

To help lead these endeavors and help implement many of the changes just discussed, we've announced several additions and changes to the Board of Directors and senior leadership team. On the board we had one recent resignation, [INAUDIBLE] and two new additions, George Tronsrue and Vanessa Wittman. George is currently Chairman and Chief Executive Officer of Monet Mobile Networks, and Vanessa was recently appointed to Executive Vice President and CFO of Adelphia Communications. George's operating expertise and Vanessa's financial knowledge will be valuable additions to our board.

On the management side, the additions include Kathleen Rae as President and COO, David Rostov as Chief Financial Officer, and Brian McManus as EVP of Search and Directory. Kathy and I teamed for four years together at Nexlink, where she served as CFO. The company grew from 200 employees to more than 3,000 while Kathy was there, and we raised more than 4 billion in capital during our combined tenure. Kathy's intelligence, drive and business acumen are readily evident and I'm excited to work with her again. [INAUDIBLE], a premier venture capital firm here in the Seattle area and also spent nearly a decade at Alaska Air Group. Her last assignment for Alaska was President and CEO of Horizon Air.

David has deep experience as CFO of public companies, at drugstore.com and Nextel International. Prior to joining InfoSpace, David was CFO of Apex Learning. As you will experience shortly, David has a direct style and a keen understanding of business as well as financial issues. He provides a practical, strategic point of view to every aspect in the company.

Last but not least, Brian assumes responsibility of search and directory business. Brian is a former CFO of two companies, AccessLine and Intermind, as well as Vice President of Corporate Development for Epoch Internet. I've known Brian for five years and appreciate his leadership style and focus on results.

Although we made progress over the last months, we have much hard work ahead of us. We will continue to sharpen our focus, seek our growth opportunities and add talent in key areas to help us define and execute our plan. Fortunately we have a strong balance sheet with $283.9 million in cash and marketable securities to support us in these endeavors. I'll turn the call over to David now for more detail on the financials. I look forward-looking forward to your questions at the end of the call. David?

Thank you, Jim. Let me start with a review of the income statement. As reported today, our revenues for the first quarter were $36.6 million, an increase of $3.5 million or 10.4% from the first quarter of 2002. This increase was due mainly to growth in search as well as growth in our authorized.net payment gateway business. Cost of revenues for the first quarter were $8.2 million. This represents a decrease of $1.5 million or 15.5% from the prior year first quarter. Product development for the first quarter was $7.3 million, representing a decrease of $2.1 million or 22.8% from the first quarter of 2002. SG&A for the first quarter was $18.3 million down $8.8 million or 32.5% from the prior year first quarter.

Taken together, these three expense lines for the first quarter totalled $33.7 million, a decrease of $12.5 million or 27% from the first quarter of 2002. The main reasons for the decline were a decrease in the size of the workforce, decrease in professional service expenses and lower depreciation expense.

On a GAAP basis, net income for the first quarter was a loss of $1.3 million versus a loss of $240.5 million in the first quarter of 2002. For the first quarter of this year, the net loss includes a charge of approximately $4 million for the settlement with the Internal Revenue Service regarding the audit of our pay roll tax returns for the year 2000. The first quarter of 2002 includes a non-cash charge of $206.6 million for the accumulative affect of change in accounting principle.

On a GAAP basis, earnings per share for the first quarter of 2003 were a loss of 4 cents versus a loss of $7.88 for the prior year first quarter. The per share numbers for both periods reflect a one for ten reverse stock split that took affect on September 13, 2002.

As of March 31, 2003, we had a total of approximately 590 employees. In early April we announced a workforce reduction of 115 positions. In the second quarter we expect to report a restructuring charge of approximately $3 million as a result of this workforce reduction.

Now let me turn to our segments. We saw favorable revenue growth in our wireline and merchant businesses year over year. In addition, we saw even greater growth in the segment income coming from these two groups. This was due mainly to the in fact that we are operating more efficiently. In the wireless segment, we experienced a year over year decline in revenues of approximately 7.1%, due primarily to the loss of a key customer in 2002 and continued industry pricing pressure. Despite this revenue decline, the company's continued efforts to lower its operating expenses led to positive segment income of .$5 million for the quarter, up from a loss of $3.5 million in the first quarter of 2002.

As Jim indicated, starting in the current quarter, we have taken steps to narrow our focus and exit certain nonstrategic businesses. As a result, going forward we will be providing segment information that will be different from the current segment reporting. We expect that the new segments will be search and directory, authorize.net, wireless and enterprise solutions. We also are carefully reviewing our key operating metrics for each segment and plan to provide more information in the future.

Finally we believe that the best way to understand our business is on a GAAP basis. As a result we will no longer be reporting pro forma financials.

Let me turn to the balance sheet. The company ended the quarter with $283.9 million in cash and marketable securities. This represents an increase of $10.2 million from the quarter ending December 31, 2002. The increase in cash and marketable securities is primarily due to proceeds from the sale of certain equity investments in the aggregate amount of $7.8 million, as well as positive cash generated from operations.

Finally, let me comment on our outlook. I would like to caution you that as a result of continuing price erosion in the wireless segment, the exiting of certain businesses that Jim described, seasonality in Internet usage and weak economic trends, the company expects to realize a sequential decline in revenue. For the second quarter of 2003, we expect revenue to be between $32-34 million. These trends will also negatively affect net losses for the quarter.

The company will not be providing any additional forward-looking guidance for 2003. I would also like to caution you as we continue to evolve our strategy, we will continue to evaluate our balance sheet. This process may result in future restructuring costs. As Jim mentioned, we decided to exit or dispose of certain smaller lines of business not strategic to the company. The total revenues from this new segment, our enterprise solutions group, accounted for approximately $3.9 million in revenues in the first quarter of 2003. This concludes our prepared remarks. I will now turn the call over to the operator, and we will be happy to take a few of your questions.

Thank you. The question-and-answer session will be conducted electronically. If you have a question, Please press the star key followed by the digit 1 on the touch tone telephone. Please make sure your mute function is turned off your speakerphone to make sure your signal reaches our equipment. We'll take as many questions as time permits. Press star 1 to ask a question. We'll pause for a moment to give everyone an opportunity to signal for a question. Our first question from Victor Anthony from Bear Stearns.

I had a few questions. The first I was hoping you could talk a little bit about the growth rates in the new segments, new reported segments for next quarter. Also talk about, give us idea where your market shares are within those segments, that would be great. Also within the search and directory and authorize.net, if you could tell us exactly what the revenues are for this quarter. And last question I had is if you could tell me where the yellow pages business actually falls within your new lines of businesses?

Hi, Victor. I got three questions here. Growth rates, market share for businesses and the third area is where is the yellow page one?

Yeah.

I'll take the third one first. Yellow pages which is what we call our director business will be part of the search and directory business. A lot of what Wireline was plus the directory business. With regard the growth rates, as you can see from the numbers reported today, the merchant group and Wireline groups midteen growth rates around 15% each year over year growth, and as I mentioned the wireless group saw a decline of 7%. Jim, you want to comment on market share?

Market share is a little bit of a nebulous here. In the pure web search business, we are, you know, clearly a small player. We're sub 5% of market share depending on a variety of ways to measure it. We have a stronger market share in the directory business and in the authorize.net business depending on how you measure it, around 20% or so market share there. On the wireless side, simply no statistics available to really peg a number to.

Okay. I have one more question, the search and directory and authorize.net, can you tell me if you are able to, what the revenues are at this particular point?

Victor, starting second quarter, you'll be seeing those separate and broken out. As a practical matter we ran the business and looked at the business the way we worded it here. Rather than give you some historical numbers on this which we are still in the process of putting together, we'll focus on that starting in second quarter.

Okay. Thanks.

Once again that's star 1 if you have a question or comment. We'll move to Noah Echoles Globus Capital.

Two questions, one is backing out the charge from the IRS. I had you going 9 per profit. I wanted to make sure I had that correct. Two, if that is correct, seems like last quarter you were guiding down revenues and they came in sequentially up. You've gone done a great job cutting your costs, you've announced layoffs which probably have yet to hit the P&L so you've allowed these positive things. The stock is down 10-15% in the after market. People are having trouble understanding why you guys going back to a net loss on an ongoing basis. Why revenues going to be down? I wonder if you could give us clarification on some of those issues and maybe I'll have a follow-up. Thanks.

Hi, Noah. Two questions, one was a calculation of earnings per share. I don't know which calculation you did. I think you have all the data to there to make shows those calculations. We gave you the net loss, in the GAAP financials you can see the tax charge. If you want to add that back you're welcome to do that and divide by the number of shares.

In terms of second question about growth and net loss, we are obviously pleased with the fact that a lot of businesses that are seasonal in nature so we saw strong fourth quarter last year continued a favorable trend in first quarter and have the usual seasonal decline that we would have expected. You know, we continue the bottom line on the revenue forecast is sort of what we said which is we're going to be exiting a few businesses, the timing of that is to be determined. That can have downward pressure. We continue to see economic uncertainty as everybody does out there. We also continue to see that our businesses, many of our businesses our seasonal in nature as we move closer into the spring and summer months, you will see some seasonality there and across the industry in areas of search and traffic and continue to experience, as we said, price erosion across the industry in the wireless business and that continues to make us very cautious in that area.

Then I guess your comment on the net losses follows with the revenue. We continue to be cautious about revenue and cautious about the revenue for the next quarter and obviously decline in revenue will have an impact on the net loss. On top of that, as I mentioned, we are continuing to -- you will see the restructuring charge in the first quarter which you didn't see in the first quarter. Hopefully that helps your thinking.

If you back out that charge in the second, you think the company will generate an operating profit or break even or do we not understand -- or am am I not understanding?

I think we gave you as much guidance as we are prepared to give at this point and we'll continue to provide additional information as appropriate.

Great.

And there are no further questions in the queue. That does conclude today's teleconference. On behalf of InfoSpace, we thank you for your participation.

We look forward to talking to you soon.