Avantax Inc (AVTA) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the InfoSpace Q3 earnings release conference call. Today's call is being recorded.

At this time for opening remarks and introductions I'd like to turn call over to Nancy Drucarry (ph), Vice-President of Communications, please go ahead.

Thank you. Good afternoon and welcome to our third quarter 2003 earnings conference call. I'm Nancy Drucarry, Vice-President of Communications and Investor Relations for InfoSpace. With me on the call today is Jim Voelker, Chairman and CEO, and David Rostov, Chief Financial Officer.

Before we get started I must advise you this conference call contains forward-looking statements relating to the company's business 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 effect the company's actual results of operations include, but are not limited to progress and cost 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, effectiveness of the development and implementation of our strategy, possible changes to that strategy, the ability to integrate acquired businesses successfully and the ability to retain customer contracts and key personnel.

A more detailed description of certain factors that could affect actual results of operations is discussed in the company's most recent quarterly report on Form 10-Q filed with the SEC in the section entitled "factors affecting our operating results, business prospect and market price of stock". Listeners are cautioned not to rely on to 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 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, we'll turn over to Jim, following his comments David will review financial results for the quarter and open up to your questions.

Thank you and welcome to the call today. One of our key goal for 2003 was to know the company's focus and develop a strategy for long-term sustainable growth. Through the year we have made significant progress as we divested four businesses and streamlined operations into three distinct business units.

Last week we took another important step by announcing we are further tightening our focus to Search and Directory and Mobile. As the result we are exploring strategic alternatives for Payment Solutions business, which enables merchants to authorize settle and manage electronic transactions via our IP based payment gateway Authorize.Net. This action underscores the strong potential of both the mobile and on-line Search and Directory industry. Payment is a growing profitable business, we believe it is in the best interest of our shareholders, customers and employees to focus our resources on fewer opportunities. We have engaged Thomas Weisel Partners to assist in this process and to hope to complete the transaction in the first quarter of 2004.

Earlier this year we also indicated our desire to improve market position, particularly in the Mobile services area and our acquisition of Moviso, one of the leading provider of mobile media content entertainment and personalization services in North America is a major step forward.

We are excited about this transaction for three primary reasons, additional content, strong carrier relationships and expanded end-user range. First, on content, Mobile Media, consisting of ring tone, graphics, video and games is one of the fastest growing segments of the wireless data market. A key factor driving growth in the mobile media market is penetration of download enable or J-2 ME or blue enabled phones. Frost and Suliven estimate 15 million download enabled handsets in North America in 2002 and that's growing to over 75 million in 2006.

In Europe the market is even larger. Estimated to grow to nearly 300 million download enabled phones in 2006. with thousands of titles from 250 licensed stores, Moviso offers largest license catalog of Mobile media today. The addition of Moviso's content om offerings to InfoSpace mobiles existing library will allow us to offer broad array of content application and services to branded content providers and carriers alike.

Second to carrier relationships, Moviso has strong relationships with major North American carriers such as Singular wireless, Horizon wireless and T-Mobile. Several of these customers are also current InfoSpace customers, but others such as Horizon, Midwest Cellular and Virgin U.S. are incremental. We look forward to delivering greater value to current customers and building on Moviso's relationships with new ones. Finally expanded end-user reach.

One of the most challenging problems in delivering wireless data applications is cost effectively rendering content to hundreds of different handsets in the market. Moviso's technology platform currently supports mobile content publishing to nearly 300 different types of handsets and new handsets are added each week.

Clearly the more handsets capable of accessing and downloading our content, the greater the opportunity. Combining the relationships and technologies to offer content across multiple networks, multiple carriers and multiple handsets is significant step forward in eliminating barrier to mobile data delivery.

In summary we are excited about the opportunity to add Moviso's team, products, technology and relationships to InfoSpace Mobile and become a larger player in the mobile data market. With extensive content library, broad carrier relationships and expanded subscriber reach, we will be able to offer compelling marketing and promotional opportunities to content brands and media companies, helping to get their content and application quickly and easily into many subscriber hands as possible. We hope to close the transaction and begin the integration process by the end of the year.

Moving to our Search and Directory business, during the quarter we made a number of product enhancements. First, we launched new user interface for three meta search sites, Dogpile, MetaCrawler and WebCrawler. For those of you who have not yet familiar with our search technology, Metasearch engines simultaneously query several leading search engines including Google, Hoover, (inaudible) and Look Smart and return the most comprehensive results in the industry.

Our Metasearch technology allows us to cover more of the web, deliver broader advertiser reach and offer a higher likelihood of returning a pay result than any individual search engine. Our renovated search sites all have a new look and feel, are easier use and provide more relevant results. Users can choose whether to view their results sorted by relevance or by search engine.

Additionally, the sites offer better integration with our yellow pages and white pages services and new refinement feature called clustering that organized results into focused categories allowing users to quickly find the results most relevant.

In September, we also launched new infoSpace.com directory site, the revamped site which is faster, simpler and easier to use is one of the leading Internet destinations for yellow pages and white pages information that offers easy access to popular directory related services such as maps and directions, reverse look-up, web search and public records. Please check it out at www.infospace.com and let us know what you think.

On the sales side, we continue to see strong growth from distribution channel. For those who have not familiar with this side of our business, we private label our Search and Directory capabilities for others to offer on their own Web site. Our customers include Verizon Broad Band, Cable Vision and ABC News.com.

With the broad advertiser reach and high modernization rates we deliver through our Metasearch capabilities, we can offer compelling value proposition to potential distribution partners making this a growing and profitable business. However, as our distribution is growing faster than our operated sites, overall margins on a percentage basis will decline since the revenue growth is share with our partners. But absolute margin dollars should continue to grow. David will discuss this in detail in a few minutes.

Overall, we continue to see momentum in the online Search and Directory industries, total paid searches are increasing and revenue per search continues to trend upward. Search and Directory businesses generated approximately $140 million total paid searches during the quarter, up from 136 million last quarter and average revenue per paid search was up nearly 8% quarter-over-quarter to approximately 14 cents. We are proud of our new search and directory products and we believe we deliver a greater experience for users, advertisers and distribution partners.

We ended quarter with strong balance sheet with 0 debt and over 317 million in cash and marketable investments. As David will discuss in more detail, we increased our cash balance by over 16 million in the third quarter, making this the fifth consecutive quarter in which we added to our cash position.

Our strong balance sheet provides us flexibility to support continued growth by investing in our businesses, total organically and true acquisition. With that, I'll turn the call over to David to provide you with more detail on our financials and look forward to your questions at the end of the call.

Thank you, Jim. Let me start with review of our income statement. As reported today, our revenues for the third quarter were $38.3 million, an increase of $4.7 million or 14% from the third quarter of 2002. This increase was due to growth in our Search and Directory and Payment Solutions businesses. Cost of revenues for the third quarter was $6.4 million this represents a decrease of $2.3 million or 26.5% from the prior year third quarter.

Product development for the third quarter was $5.3 million, representing a decrease of $3.1 million or 37.1% from the third quarter of 2002. The decreases were due mainly to reduction in size of the workforce and lower depreciation expense. Sales general and administrative expense for the third quarter was $21.4 million, up $1.8 million or 9.3% from the prior year third quarter.

Savings and salaries, professional services and facilities were offset by increase revenue sharing cost as a result of strong growth in search distribution revenues. Taken together, these three expense lines for the third quarter totaled $33 million, a decrease of $3.6 million or 9.8% from the third quarter of 2002. Included in the $33 million of expenses for the quarter was total of $2.7 million in depreciation expense.

In the third quarter of 2003, we took a $1.2 million intangible asset impairment charge for certain obsolete technology. Additionally, we reported other net charges of $1.5 million, these included a $7.5 million charge for a pending settlement related to the Mobile business, partially offset by gain of $3.9 million related to disposition of certain non-core services and a gain of $2.2 million for tax refund. We are pleased to report that at the end of the third quarter, we have disposed of four out of the five non-core services and expect to dispose of the final one in the fourth quarter.

On a GAAP basis we generated positive net income for first time since 1999. Net income for the third quarter was positive $1.6 million, versus loss of $26.6 million in the third quarter of 2002. EPS for the third quarter of 2003 was a positive 5 cents for basic and diluted share versus loss of 87 cents for the prior year third quarter. The per share numbers for both periods reflect 1-for-10 reverse stock split that took effect in September of 2002. As of September 30, 2003, we had a total of approximately 450 employees.

Now, let me turn to our segments starting with Search and Directory. In the third quarter of 2003, Search and Directory revenues were $23.8 million, up $7.9 million or 49.5% from the third quarter of 2002. This was due to increase in number of paid searches and the average revenue per search. Including both our Search and Directory businesses, we generated approximately 140 million total paid searches during the quarter up 3% from 136 million in the prior quarter and average revenue per paid search was up 7.6% sequentially to approximately 14 cents.

As a reminder, the revenue per paid search is weighted average of two businesses, Search and Directory and may look different than you are seeing with pure place search companies. The online directory industry has typically lower revenue per search but has lower cost structure than the web search business.

Segment income was $12.3 million, up $2.9 million or 30.2% from the third quarter of 2002. Search and Directory segment margin was 51.7%. Now, turning to our Mobile business.

Revenues for the third quarter were $5.7 million, a decrease of $2.8 million or 33.2% from the third quarter of 2002. The 2002 results include one major customer the company is no longer serving and a one-time gain from the discontinuance of the company's Brazilian operations in 2002.

The company's operating expenses decreased $2 million year-over-year, due primarily to reductions in the workforce. Mobile segment income totaled $0.8 million for the quarter and segment margin was 14.7%.

Finally, turning to Payment Solutions. In the third quarter, revenues for Payment Solutions were $7 million, an increase of $1.7 million or 31.7% from the third quarter of 2002. The revenue growth is due to a growing overall merchant base and increased transaction volume. At the end of the third quarter, Payment Solutions had approximately 88,000 merchants using Authorize.Net credit card payment Gateway.

For the quarter, these merchants generated averagely revenue of approximately $22.80. Payment Solutions segment income was $1.6 million, up $1 million from the third quarter of 2002, resulting in a margin of 23.1%.

Regarding the balance sheet. The company ended the quarter with $317.4 million in cash and marketable investments. This represents increase of $16.3 million from the second quarter and is primarily due to cash generated from operations, favorable changes in working capital, and the proceeds from the sale of certain non-core services.

Finally, let me comment on our outlook. We have a limited history in which to predict future trends and as such are cautious about the near-term outlook. For purposes of our outlook, we assume the Moviso transaction closes at year-end and Payment Solutions remains part of continuing operations throughout the fourth quarter. The actual timing of either transaction could have an impact on our results.

On the wireless front, we expect to see further declines in fourth quarter revenues due to industry-pricing pressure. In Search and Directory we continue to experience favorable growth coming in large part from our distribution business where we provide search results to other Web sites. As discussed earlier, this is a profitable and growing business, but has lower gross profit margin than our own sites. In addition, we expect to spend modestly in marketing and advertising to drive traffic to our owned and operated sites and to better understand our customers.

Finally, non-core services revenue, which was $1.8 million in the third quarter, will decline significantly in the fourth quarter since we have now sold four of the five services. As a result of these various factors, for the fourth quarter of 2003, we expect revenue to be between $36 and $39 million, excluding any one-time gains or losses, we expect to have net profits in fourth quarter in with the third quarter 2003 net profits.

Finally, you will likely see a drop in our cash balance at the end of fourth quarter due to closing of the $25 million Moviso purchase and resolution of the $7.5 million settlement discussed earlier. This will partially be offset by cash generated from operations.

In summary, we were please wide our third quarter results. We generated strong revenue growth, achieved profitability, increased our cash position and tightened our strategic focus. This concludes our prepared remarks. I will now turn the call over to the operator and we would be happy to take your questions.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question, you may signal pressing the star followed by the digit 1 on your touch-tone telephone. For those of you who are joining us today using speakerphone, please release the mute function in order for the signal to reach our equipment. Again its star, 1 to ask a question. We will pause for a moment to assemble the roster. Again, it is star, 1 if you have a question.

If there aren't any questions we'd like to thank everybody for joining us today.

We have a question from Scott Southerland (ph) with Wedbush Morgan Securities.

I will get a few questions in here.

Hi, Scott.

Good job on the quarter. I want to talk about what kind of steps once Moviso closes and you sell the Authorize.Net, will you take on your expense structure? What kind of operating margin do you think you will have immediately after the two close?

I think, Scott, this is David. The Authorize.Net business, the cost and operating margins are largely reported separately as part of segment operations, so, generally speaking I wouldn't expect any change other than the assuming a transaction closes other than those operating margins will be taken off of our P&L on a going forward basis. In terms of Moviso, we are still working on the next phase, which is working on coming up with integration plan and working on our 2004 plans for that business, so, probably little early to comment on that.

OK. Talk about Moviso, do you see with some of your carrier relationships in Europe, do you see leveraging Moviso in the near future?

We certainly hope to, Scott. We think that the products and the technology platform that Moviso has is applicable, you know, certainly deeply in North America and across Europe, as well where the markets are more robust. It is also a more competitive market there. But, we have again a great library of licensed content with Moviso and a very good technical platform in terms of quick deployment. So, we certainly are counting on being able to expand the services at least a couple countries in Europe.

OK. Couple other questions and then I will come back. Notice that your cost went down for the quarter for delivery of your services. So, maybe you could talk about why that went down despite revenue being flat and the sequential decrease in wireless quarter-to-quarter and what's been driving that?

Looking specifically at cost of revenue line, Scott or which line are you looking at?

Cost of revenue went down from about $7.4 to $6.4 million and revenue is flat.

Yes, biggest change there, we continue to focus the people and the efforts in that group. The biggest change there is we had a number of years ago had made -- the company made significant investment in a data -- not a data, data center. The depreciation on that is coming toward the tail end of that. You are seeing the tail end of pretty large data center depreciation on a downward slope. So, you will continue to see the further declines there.

Regarding the wireless trend, we talked about this at the last call, we have seen price pressure in wireless business and so the main thing you are seeing in third quarter is slightly lower revenues because of that price pressure and that's obviously translating into the bottom-line result.

OK. Great. Thanks.

Are there any other questions on the line operator?

We'll hear from Noah Ekles (ph) with Clovis Capital (ph).

Good job in the quarter.

Hello, Noah.

You guys had a lot -- as you mention in the your press release and remarks, a lot of new changes, a lot of changes to your Search and Directory, the product. Is there any one-time expense items associated with all the new products that you had that will go away going forward? Thanks.

No, it's David. If you mean are there future charges as a result of the invests we made -

Just wondering -- you made so many changes in the last quarter, I was just wondering what there extra expense associated with those items that will go away going forward?

No, this is really the ongoing team efforts to continue to enhance the products and they will continue to further enhance them overtime. I don't expect any additional savings after this phase on that front.

And the other question was on Authorize.Net. For both modeling purposes and in terms of trying to coming up with a best guess on what's our approach you could realize from a divestiture of that segment. What sort of corporate expense should we to that segment? Is there any? Should we be modeling 0, how do we look at that? Thanks.

Specifically the Authorize.Net business as we report it is a separate segment, obviously you can get the detail from the earnings release. Noah, we've tried to put all the revenue and all the expenses that are directly attributable to that segment in that specific segment results. So, I think the best assumption you ought to make, that is largely indicative of the impact of any change there and there aren't any other significant or material costs and/or revenues for that matter that would be somewhere else on the P&L or balance sheet.

Great. Thank you.

Now, we'll hear from Stuart Berry (ph) with Dollaph Field Hambrackt (ph).

Good afternoon. I'd like to talk about your Search and Directory business. As I look at growth over the long term I want to get some evidence of its consumer appeal. And so, the connection the brand is making with consumers. Look at increase in searches done through your various Web sites, it is up modest sequentially versus very strong amortizing demand, reflecting in the penny increase. How should I be looking beneath those numbers?

Stuart, this is Jim. It's a little bit early for us to tell to be able to predict the impact, if you will, of the changes we've made on the Web site. We kind of think of this two ways. The distribution sales are going well. But, one of the other efforts that is important to us is to really start to generate growth on our owned and operated sites. Over the course of the last year or so, you know, say a quarter ago, we were looking at something that was decreasing. We were seeing decreased -- not usage, but visitors. The changes we've made to these sites have at least appears to stem that tide. Now what we are doing in the fourth quarter is we are doing marketing experiments. In (inaudible) Seattle, watch the buses, you might see one of our add there.

Indeed I have.

One exposure, then. We are doing experiments to try and see what we can do to move users over. Frankly, that's the challenge. We're very, very proud now as a group and as an organization of what we've done to the products. We've improved them dramatically and we think the experience is above market average, if you will. Above-average experience. Now the challenge is a way to cost effectively move people over to give our products a try. Once that happens, we will get our fair share. It is still early to be able to see what kind of investment we are willing to make there and results we will get.

One way to look at it was September, which was the first month where you kind of re-launched the Web site and did your product enhancement, was that a stronger month versus August and July in Search and Directory? Were you getting nice upside there?

It's a little -

Is it too early?

Too early and shift. We don't have great data from years past. So, we're really collecting that data and trying to understand it better. But, I will say we are encouraged. We certainly thought we would have - we certainly thought it was possible because any time you make a change on a Web site, very strong possibility of driving away more people that like what they came to. We have not seen that. So, we're quite encouraged, but not ready to declare victory or make any bold predictions.

Fair enough. How should we think about sequential decline in gross margin? Looks like it went down about -- talking about Search and Directory, 300 basis points. Second question has to do with wireless and I think a lot of people want to better understand, how you make money there, what the revenue model is like and what has it been and where will it go?

The first one is really just the mix between distribution and owned and operated. Our owned and operated sites are more profitability to us than absence extreme marketing cost, but are more profitable to us on user basis because we don't share that revenue with a distribution site. However, I hasten to add that the -- if all you did was distribution, you valid a very nice business here with 40% plus margins.

OK.

So, what we're looking to do, we'd love to get these growing in tandem and operated faster, but willing to grow either line happily here and concentrate on growing absolute dollars of profit and margin there. In terms of wireless, what we -- the way you have to think about it and the way we think about it, this is a market that -- I'll say the wireless data delivery market and content distribution market is -- the market we see all the elements of terrific growth or content.

Hand sets are getting smarter and faster and getting deployed at a fast rate now data enabled handsets and the networks are in good shape and the content providers are actually seeing response that makes them want to invest to fix their content for and to think in terms of Mobile distribution. All those things are good. Where we've been focused as a company is what I call low-value content. That's news, weather and sports, which hasn't proven to be something that subscribers are willing to pay a lot for. What you are seeing is really a resetting of the market there to what the real value is and one of the reasons that the large reasons we went out to do the acquisition of Moviso is to get ourselves into really higher value content and be able to be a leader in that space. We think the combination of that will be very interesting and give us a good platform to build off.

With Moviso, you now have your own content, tell me if I am wrong, but unique than what you have now, it is just your own enabling technology. Can we expect you to be looking to make more acquisitions of kind of content providers moving forward?

I think it is a mischaracterization to say Moviso we have our own content. We're not creating music here for Ring Tones. We are licensing and what Moviso has done is built a couple of machines. One is a licensing machine. They know how to go out and license very high value content. They've got the largest library in the North American industry and of license content and they're effective at that. They have been effective at the merchandising of that content to get the once popular now for the top of the list for the carrier so they get really good pull-through on that.

The second thing is they have the capability of rendering that content to a variety of handsets and can have been by working closely with handset manufacturers, really have a capability of very quickly taking any kind of new handset and getting it downloadable ready for the kind of content. So, I don't think you will -- I won't rule anything out, but don't think we are out to buy content libraries or necessarily bottom an application developer. We're certainly going to be in a position to aggregate and aggressively aggregate content.

Last question. I would be remiss if I didn't ask. You have a mountain of cash, all investors realize the use of the cash is growing every quarter now. I know it may come down in fourth quarter due to Moviso. You still have more cash than your operations, working capital requirements, obviously. Can you give us any idea what you might do with it?

Well, certainly I think you can think of the options might be here. Mountain is tough for everybody's definition.

Fair enough.

It is obviously significant. We think it is significant amount of cash to enable us to invest in growing this business either through direct operations or through acquisitions. And you know, we believe that not only do we have our focus tightened down to these businesses and I look at commonality of these businesses in terms of we serve consumers and bringing them together with information content they requested. We are in a better position to focus on things that might help aggressively grow our business. That's what we're all here for is to grow the business, grow shareholders value.

Thanks a lot, guys.

Moving on, Michael Prober (ph) with Clovis Capital (ph).

Can you expand more on advertising and marketing plans for your owned and operated Web sites beyond the bus in Seattle and -- that's the first question? Second, are you able to measure return of invested capital on what you are getting for your dollars that you are spending in that program? Thanks.

Sure, Michael. I would characterize this as experiments, really. And we -- I'll tell you, we have two programs right now that are running. One is the DMA program that you mentioned. We are running that in two cities, Seattle and Phoenix. It is awareness campaign. We are using buses, some radio spots and little bit of kind of alternative newspaper print ad media. And we will -- we've also augmented that with campus related programs on five campuses across the country, again awareness kinds of campaign to make people aware of Dogpile, specifically in this case and see if we cannot measurably increase people who come.

Yes, we think we have set the metrics up so that we can really track new, unique visitors. Once we see new visitors or if we see new, unique visitors or if we will see new unique visitors that will be able to see the metrics on how those visitors behave. Do they search at the rate of the norm, do they search below that, above that, and by that look back and do analytics of the lifetime value of the customers might be.

Are there plans for any other program other than these two programs or you are to per see how this two programs do?

We will see how these two do. We need to prove to ourselves that we have ROI on this and we are bringing customers in at a price we believe is yields that is worth the investment, if you will. That's what we are going to do.

Thank you.

Now we have a follow-up from Scott Southerland with Wedbush Morgan Securities.

Couple follow-ups. Wireless segment, how would you think of modeling it by metrics, something watching the downloading through on java and the messaging market or what kind of metrics are you looking at in this segment?

As Jim discussed, we see the business evolving and evolving from more larger-scale contracts that are more fixed fee in nature to more of a per transaction model and in some cases subscriber model. Primarily more of a per transaction model. So Moviso, as example is driven by they get paid for each download that an individual cellular user does.

So, we see on a going forward basis that models we think are more and more moving towards more of a per transaction type of model. And so that's kind of how we started thinking more and more about the business and we are trying to make sure we align cost with the more transaction concept.

Is that how you will align current products and a lot of the segment on a (inaudible) downloaded transaction model?

In many cases yes, not in all cases. It depends on the type of services. We also provide number of services to carriers that is not a per transaction type service. We see business migrating toward economic model driven by transactions or the services, if you will.

OK. Two last quick questions. On 10% customers and can you update on the litigation?

10% customers same as last quarter. No change there. No change in concentration of our top 10 customers. Jim, do you want to handle the litigation?

Sure. We made some real progress on the litigation side. We entered into agreement to settle litigation relating to Mobile business we mentioned today, including the buyout of minority stake what was called Sereied, we went to a agreement to settle Boxlot litigation for approximately $5 million. That is funded entirely from insurance proceeds and we settled litigation relating to purchase of Authorize.Net by Goto.net back a number of years ago for a million and a half.

OK. Lastly, can you talk about have you seen Newness on the potential settlement from the former founder?

16 BKs? Yes. You know, as you might imagine that's being appealed. We really can't predict the outcome of that and really just don't have much to say about it.

OK. Great. Thanks, again.

As a final reminder, if you have a question for our speakers press * 1 on your touchtone telephone.

If there aren't additional questions, I think we would like to thank everybody for joining us today and please don't hesitate to call any of us if you have any follow-up questions. Thank you.

That does conclude today's conference call. We thank you for your participation and have a great evening.