Avantax Inc (AVTA) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the InfoSpace Q2 earnings release conference call. Today's call is being recorded. At the end of today's presentation, there will be a question-and-answer session. At that time, you may press star 1 to ask a question. And now for opening remarks and introductions, I would like to turn the call over to Mr. David Rostov, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to InfoSpace's second 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 be taking questions from the investment community.

Second, I must advise you that this conference 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 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 these factors is discussed in the company's most recent annual report on form 10K and quarterly report on form 10Q, filed with the Securities and Exchange Commission in the sections entitled "Factors Affecting Our Operating Results", "Business Prospects" and "Market Price of Stock". 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 call.

The company undertakes no obligation to update publicly 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 for the quarter, and then open up the call to your questions.

Thank you, David. Welcome to our call. We are pleased with our progress during the second quarter and we're seeing the benefits of the steps we've taken over the last few months.

As discussed on our last conference call, our 2003 goals are to optimize our businesses and to establish the foundation for long-term sustainable growth. To accomplish this, we focused on four key initiatives during the second quarter. Number one: Get the right team in place. Number two: Concentrate on three businesses; search and directory, payment and solutions and wireless. Number three: Focus on serving our customers and delivering great products and services. And number four: Drive cash flow.

First, we've done an outstanding job at assembling our team. We added another key member in May, when Kendra Vandermuellen [PHONETIC] joined us as Executive Vice President of Wireless. Kendra has deep experience managing and advising companies across the wireless data industry.

Most notably, she led the formation of the wireless data business at AT&T Wireless in 1994 and managed it for six years. Kendra and her team actually pioneered the mobile data market at AT&T, leading the development of wireless pact data, services and applications. In other areas, we made significant progress filling key positions at both the corporate and business unit level.

We added a new Chief Accounting Officer to lead an important part of David's team, added product and marketing talent in search and directory, and added strong engineering talent to the wireless and payment solutions teams. These new hires are working to continue building our brands, improving the products and increasing focus on customers and their needs. We've made significant progress in narrowing the business lines down to three -- search and directory, payment solutions and wireless.

As we told you last quarter, any business falling outside of these would be identified for disposition or exit by the end of the year. We're ahead of schedule. As of the end of July we've sold three businesses, generating over $3 million in aggregate proceeds and we expect the remaining two businesses to be sold by the end of the year.

This unit has managed the sale and disposition process in an orderly and efficient manner and has been successful in maintaining good customer relations throughout all the changes. Great businesses are built by understanding the needs of your customers and constantly improving the products and services you deliver. Therefore, much of our energy has been and will continue to be focused on customers and products.

One recent accomplishment in this area is in our search and directory group. The search and directory business primarily includes on-line search properties, such as dogpile.com and minetacrawler.com and our on-line yellow and white page directory businesses. In June, we launched the dogpile tool bar, our first client side software product. The tool bar lives on your web browser and makes it really easy to search for any information, person, or place. With web results, Yellow Pages, White Pages, dictionary capabilities and more, it's a fully-featured product which compares favorably to any tool bar on the market. Since launch, the dogpile tool bar has received positive reviews by the Washington Post and Boston Globe, as well as by the web search industry analysts at Search Engine watch.

We also offer a private label version of the tool bar, and recently announced ABCNews.com as our first customer. I encourage you to go to the www.dogpile.com website, download the tool bar and check it out. Let us know what you think. I would really love to hear your feedback. Overall, we continue to see momentum in the search industry.

The number of searches is increasing and revenue per search has trended upward. In payment solutions, our payment solutions group continues to be well-received in the marketplace. This division markets internet-based payment gateway services under the authorized dot net brand.

Payment gateway services make it possible for on-line merchants to accept electronic forms of payment, and we have served approximately 83,000 active merchants at quarter-end, using the authorized dot net payment gateway and average revenue per merchant was over $23. We continue to look for ways to expand market reach, add new merchants and improve our product and services. The e-commerce industry is growing steadily and we're well positioned to serve that market.

Our wireless business offers data solutions to carriers and content providers, allowing them to provide revenue-generating wireless data to customers. We have seen several positive trends in the wireless industry; in particular, the rapid acceleration and capability of networks and handsets, is laying a foundation for the delivery higher value applications. While essential to the success of mobile data, the frequent introduction of these new capabilities adds to the time and cost required to develop and deploy new applications. Solving this problem is critical to the success of mobile data, and we believe delivering solutions that remove these complexities can create significant value.

We have put together a great team to build and drive our wireless business, and we are positioning ourselves to become a leader. In summary, we continue to make progress in establishing the foundation for long-term, sustainable growth. As we discussed last call, we have aligned costs, revenues, resources, and opportunities, narrowed our focus, put an outstanding people -- team in place, and have a strong balance sheet behind us.

We are working to consistently build great products and services while providing an outstanding customer experience. Overall, we've made great progress over the last six months, but we still have a lot of work ahead. We ended the quarter with a strong balance sheet with zero debt and over $300 million in cash and marketable investments to support our continued development and growth.

As David will discuss in more detail, we increased our cash balance by over $13 million in the second quarter, making this the fourth consecutive quarter which we've added to our cash position. With that, I'll hand the call over to David to provide you with more detail on our financials. I look forward to your questions at the end of the call.

Thank you, Jim. Let me start with the review of our income statement. As reported today, our revenues for the second quarter were $38.3 million. That's an increase of $5.1 million or 15.2% from the second quarter of 2002. This increase was due to growth in search and directory and our payment solutions business. Cost of revenues for the second quarter were $7.4 million.

This represents a decrease of $2.3 million or 23.9% from the prior year second quarter. Product development for the second quarter was $5.5 million, representing a decrease of $4 million or 42.1% from the second quarter of 2002. SG&A for the second quarter was $21.8 million, down $.9 million or 4% from the prior year second quarter. Taken together, these three expense lines for the second quarter totalled $34.7 million, a decrease of $7.2 million or 17.3% from the second quarter of 2002.

The main reasons for the decline in these operating expenses were a decrease in the size of the work force and lower depreciation expense, partially offset by our investment in marketing. Included in the $34.7 million of expenses for the quarter was a total of $3.6 million in depreciation expense. On a GAAP basis, net income for the second quarter was a loss of $15 million versus a loss of $13.7 million in the second quarter of 2002. As we discussed in the last earnings call, in the first half of this year we completed an extensive review of all of our businesses.

This resulted in a change in how we operate our businesses and a change in our overall strategy. As part of this change, the net loss for the second quarter includes net charges of $18.3 million. This is comprised of a restructuring charge of approximately $10.5 million for the work force reduction and excess facilities. $12.6 million related to the write-down in carrying value and disposition of certain equity investments, and a gain of $4.7 million on the settlement of certain litigation and other matters. On a GAAP basis, earnings per share for the second quarter of 2003 was a loss of 48 cents versus a loss of 45 cents for the prior year second quarter.

The per-share numbers for both periods reflect the 1-for-10 reverse stock split that took effect on September 13th, 2002. As of June 30, 2003, we had a total of approximately 460 employees.

Now, let me turn to our segments. As we discussed the last earnings call, starting this quarter we are breaking out our three key segments differently than what you have seen in the past. This new segment reporting reflects the way we are now running our business.

For comparative purposes, and in order to help you in building your models, at the back of this quarter's earnings press release you will see a table showing what our segments would have looked like if we had been running them based on our new focus. Starting with search and directory: In the second quarter of 2003, search and directory revenues were $21.4 million, up $5.2 million or 31.8% from the second quarter of 2002. This was due to an increase in the number of paid searches and the average revenue per search.

Including our search and directory businesses, there were approximately 136 million paid searches during the quarter. Average revenue per paid search was approximately 13 cents. The revenue per page search is a weighted average of our two businesses, and hence may look different than what you are seeing with pure play search companies.

The on-line directory industry typically has lower revenue per search, but also a lower cost structure than the web search business. The revenues associated with search and directory -- in other words, multiplying the revenue per search by the number of searches -- makes up over 80% of search and directory's total revenues. Remaining revenues come from our on-line advertising business and other services. Segment income was $11.8 million, up $4.1 million or 52.9% from the second quarter of 2002.

Search and directory segment margin was 54.9%. Now let me turn to payment solutions. In the second quarter, revenues for Payment Solutions were $6.6 million, an increase of $1.5 million or 27.9% from the second quarter of 2002. The revenue growth is due to a growing overall merchant base and higher revenue per merchant.

At the end of the second quarter, payment solutions had approximately 83,000 merchants using authorized dot net's credit card payment gait gateway. For the quarter, these merchants generated average monthly revenue of approximately $23.40. Authorized dot net credit card revenue accounted for over 85 percent of payment solutions' revenues in the quarter. The remaining revenues came from our e-check product and other services.

Payment solutions segment income was $1.3 million, up $.9 million from the second quarter of 2002, resulting in a margin of 19.5%. Now I'll review the Wireless segment. Revenues for the second quarter were $6.9 million, a decrease of $.6 million or 8.3% from the second quarter of 2002.

The 2002 results include one major customer that the company is no longer serving. The wireless groups' continued efforts to lower operating expenses led to positive segment income of $2 million for the quarter, up from a loss of $1.2 million from the second quarter of 2002. Wireless segment margin was 29.7%. Regarding the balance sheet, the company ended the quarter with $301.1 million in cash and marketable investments.

This represents an increase of $13.2 million from the first quarter, and is primarily due to cash generated from operations, and $4.4 million from the sale of certain equity investments and a litigation settlement. Finally, let me comment on our outlook. We continue to be cautious about the near-term outlook for revenues, and expect third quarter revenues to decline on a sequential basis.

As Jim indicated, we have sold three of our non-core services and expect that a significant portion of this group's revenue will be eliminated in the third quarter. On the wireless front, we will see a drop in the third quarter revenues, due to industry pricing pressure. In the search and directory and payment solutions businesses, the summer months tend to be seasonally weak, relative to the first half of the year.

As a result of these various factors, for the third quarter of 2003, we expect revenue to be between $32 and $34 million. Due to the declines in revenue, and excluding any one-time gains or losses, we expect a net loss in the third quarter. At this time, the company will not be providing any additional forward-looking guidance for 2003.

This concludes our prepared remarks. I will now turn the call over to the operator and we would be happy to take your questions. Operator?

Thank you, sir. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order you signal us, and we will take as many questions as time permits. Once again, please press star 1 to ask a question. We'll pause for one moment. Our first question comes from Scott Southerland of Webb-Bush Southern Communities.

Good afternoon.

Hi, Scott.

Couple of questions. First, can you provide apples to apples metrics for Q1, as far as the number of paid searches and number of active merchants on the gateway, as well as revenue per search?

Hi, Scott, this is David.

As we discussed on the beginning of last quarter -- or I guess at the end of last quarter, I should say -- we've changed how we're looking at the business and these metrics that we released today are metrics we expect to continue to release going forward, and that's how we're planning on managing the key parts of our business. However, it's not how we looked at the business in the past, so you'll just see these metrics going forward rather than historically.

Great. On the search and directory piece, in the comments in the press release, you mentioned an increase of $5.2 million, but later in the financials there's only an increase from $20.1 million -- or $20.34 million. So is it a discrepancy there or something that's not in the comments?

No, there -- shouldn't be. I'm trying to see what you're referring to.

I think on segment information, an increase, of $5.2 million, but when you break out the segments near the end of the financials you indicate search and directory revenue of $20.4 million for the March quarter.

Oh, okay,

That comparison is year over year, Scott. So if you look at a year ago second quarter, that's the $5.2 million.

I apologize for that.

No problem.

Two more questions. The litigation you guys are going through to -- potentially to rid a lawsuit for over $2 million in revenue, where does that stand? And any 10% customers in the quarter?

Why don't you take the second part David, then I'll do the first part.

Our major customers as of year-end are -- continue to be our major customers that you've seen in the past -- you know, that you saw in the quarter. So no change there.

They're both still over 10%?

I'm not sure which ones you're referring to, but yes.

Okay.

In terms of the litigation, remember that just -- one thing to remember here is that the $200 million is a newspaper number, not a court number. So we don't have any further clarity on that. And as in any litigation, you know, there's an appeal process, etc.. You know, our view would be that we can't determine really with any certainty the amount, the timing, or any payment that we might receive. So obviously the company's involved in the process, but that's really all we can comment on.

Okay, great, thanks.

Thank you.

You're welcome.

Once again, that is star 1 to ask a question. We'll pause another moment. We'll go back to Scott Southerland with a follow-up.

If I'm the only one asking questions, I did have a couple follow-ups here.

Sure.

You broke out a line of revenue due to merchants, so kinda wondering what that is, and also, I was surprised to see SG&A up on a sequential basis quarter over quarter. What went into that number?

Scott, it's David. In our business on the payment solutions side, part of our business is what we call e-checks, where merchants can actually you know, take on-line bank money from other customers, and so for a short period of time it's really a timing issue, we hold the full retail value of those transactions. So that's why we break it up.

It's really the merchants' money and it's due to the merchants. It's just a timing issue. Typically in that business, there's a couple days for settlement and that's what you're seeing there. With regard to your second question on --

SG&A was up sequentially quarter over quarter.

As you saw the revenues increased significantly sequentially, and so the single main contributor there was just we're continuing to invest in marketing in order to drive revenues. And that's the main reason for that.

Okay, great, thank you.

And there are no further questions.

Okay, operator, I think if there are no further questions, we'll thank everyone for being on the call and look forward to next earnings call.

And that concludes today's conference call. Thank you everyone for your participation