Avantax Inc (AVTA) 2005 Q3 法說會逐字稿

Good day, everyone and welcome to the InfoSpace Q3 2005 earnings release conference. Today's call is being recorded. Now, for opening remarks and introductions I would like to turn the conference over to Nancy Bacchieri, Vice President of Investor Relations. Please go ahead.

Thank you, Audrey. Good afternoon and welcome to our third quarter call. With me on the call today is David Rostov, Chief Financial Officer. Before we get started I would like to remind you of two things. First, this is an investor conference call. Accordingly, we will only be taking questions from the investment community.

Second, this conference call contains forward-looking statements relating to the development of the company's products and services and anticipated 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, our dependence on companies to distribute our products and services. The performance of our system, the effectiveness of the development and implementation of our strategy, possible changes to that strategy, the ability to retain key contracts and personnel, and the ability to successfully integrate acquired businesses.

A more detailed description of certain factors that could affect actual results of operation is contained in the company’s most recent annual report on form 10-K and quarterly reports on form 10-Q as filed from time to time with the Securities and Exchange Commission in the section 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 the 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, I'll turn the call over to David. Following his comments we will open up the call to your questions.

Thanks, Nancy and welcome to the call today, everyone. I wanted to start by giving you an update on our CEO Jim Voelker. As we announced, Jim underwent coronary bypass surgery earlier this month. His surgery was successful And he is now home recuperating. His recovery is going well and we are look looking forward to his return to work in the coming weeks.

Overall, we are pleased with our results for the third quarter. Revenues were up 24% year-over-year and in line with the second quarter. This was driven in part by sequential growth in mobile media downloads. In terms of highlights, we are particularly encouraged with the progress we've made in hiring on the mobile side. Over the last couple of months we've added significant media and entertainment expertise to the team.

We hired Steve Davis as our new President of mobile media. Steve will be responsible for managing our mobile entertainment business worldwide including content licensing and production, marketing, public relations, promotions, sales, and product development. Previously, Steve was President of Grenada America, the U.S. based development and production division of ITV, one of Europe's largest media companies.

Prior to joining Grenada America, Steve was President and CEO of Carlton America, a leading distribution, video, and book publishing company. Steve's experience in content management and production will be invaluable to the company as we build on our leadership position in mobile. We look forward to his contributions.

As we continue to increase our focus on mobile media, we also -- we are also pleased to welcome Jules Haimovitz to our Board of Directors. Jules is a seasoned entertainment executive whose media and content expertise and relationships will be a tremendous asset to our company. Jules is currently the Vice Chairman and managing partner of Dick Clark productions. Prior to Dick Clark Productions, Jules held the position of President of MGM networks. Switching to the product side, we continue to leverage our search and directory capabilities into the mobile arena.

Most recently, we introduced an innovative new mobile local search product, which allows subscribers to easily and quickly find everything from nearby restaurants and movie times to maps and driving directions. InfoSpace's mobile local search product leverages our knowledge in the online space and ability to design location based mobile products. For example, a user wanting to catch a movie can look up nearby theaters, choose a film, pick a time, and get directions to the theater -- all from one application.

Finally, during the quarter we continued to strengthen our metasearch offering. We added Microsoft's MSN search, becoming the only search provider to combine results from the leading search sites including Google, Yahoo!, MSN and Ask Jeeves. As the only provider to have relationships with all of the most popular engines, we are able to offer a search solution uniquely designed to provide users with the most relevant results.

Now, on to the financial results and outlook. Our revenues for the third quarter were $83.2 million, an increase of $16.1 million or 24% from third quarter '04. We had another strong quarter of profits, generating net income of $11.3 million or $0.32 cents per share. Weighted average fully diluted shares was $34.8 million for the third quarter of 2005.

For the third quarter, adjusted EBITDA was $14 million, a decrease of $3.1 million or 18% year-over-year. The adjusted EBITDA margin for the quarter was 17%. And as of September 30 of this year, we had approximately 600 employees.

Now, let me turn to our segments. In the third quarter of '05 search and directory revenues were $44.2 million, up $2.2 million or 5% from the third quarter of '04. As we expected, relative to second quarter, revenues were down mainly due to the loss of the Verizon Yellow Pages subscription business. This is partially offset by a full quarter of revenue from Yellowpages.com. On a positive note, in the quarter we added Yellow Book merchants to our Yellow Page listings.

During the quarter total paid searches in North America for both, search and directory, were approximately $182 million. Average revenue per-page search was approximately $0.20, an increase of 18% over the prior year third quarter. Segment income was $16.5 million and the segment margin was 37%.

As we discussed on last quarter's call, we expected the margin to be in the 35% to 40% range due to the loss of the Verizon Yellow Pages revenue, as well as greater spending on marketing. As we had planned, we increased our marketing spend over the prior quarter. Although we had good success driving more users to our site, we did not see the impact we had hoped for on the revenue side.

As such, in the fourth quarter we have scaled back our marketing spend to a level similar to earlier periods. In the third quarter, search distribution revenues in North America continued to account for over 60% of the portion of search and directory revenue coming from search.

Now, turning to the mobile business. Revenues for the third quarter were $39 million, an increase of $13.9 million or 55% from the third quarter of '04. Relative to second quarter, revenues were up $1.9 million or 5%. We saw a favorable increase in our mobile downloads relative to the second quarter. Mobile segment income totaled $6.8 million for the quarter down $300,000 or 4% from the same period last year; and the segment margin was 18%.

In line with our guidance our margin was impacted by continued shift to label tones and continued investment in next generation products and services. Regarding the balance sheet, the company ended the quarter with approximately $362 million in cash and marketable investments. During the quarter we repurchased 2 million shares for approximately $51 million. Since we initiated the $100 million repurchase program in the second quarter, we have repurchased a total of 2.3 million shares at a total cost of $62 million. Excluding the stock repurchases in the quarter, our cash would have increased by over $6 million sequentially.

Now, let me turn to our fourth quarter outlook. On the mobile front we are pleased with the pickup in media downloads and expect additional growth in volumes in the fourth quarter, due to a seasonally stronger period for handset sales, music sales, and greater promotional activity by the carriers. On the search and directory side, revenues will be down sequentially due to continued efforts on our part to improve the quality of our distribution traffic network.

On the margin side, we expect segment margin percentages to be in the same range as we discussed in the prior earnings call:15% to 20% on the mobile side and 30% to 40% on the search and directory side. As a result of these factors and for the fourth quarter, we expect revenues to be between $84 and $86 million. We expect adjusted EBITDA to be between $13 and $14 million and net income to be between $9 and $10 million.

On a fully diluted basis, earnings per share is expected to be between $0.25 and $0.28. This assumes our effective tax rate in the fourth quarter remains in the low single digits. In our prior outlook, we had assumed a 38% effective tax rate in the fourth quarter.

For the full year 2005, we expect revenues to be between $337 and $339 million. We expect adjusted EBITDA to be between $68 and $69 million. And net income to be between $53 million and $54 million. On a fully diluted basis, earnings per share is expected to be between $1.46 and $1.49. This guidance excludes the gain from the first quarter litigation settlement. It also assumes that the company maintains its current effective tax rate in the fourth quarter.

Looking at 2006, and consistent with our comments last quarter, I would encourage you to assume a full tax rate of 38% in your models for 2006. Of course, given our significant NOL, our cash taxes in 2006 will be very modest. In conclusion, it is important to keep focused on the tremendous opportunity before us. Mobile devices and high speed networks are combining to form a new global media network.

Today's personalization and entertainment services will continue to evolve and broaden. As the industry continues to develop, it will expand into local information, commerce and advertising services similar to what we have seen on the Internet. We intend to capitalize on this growing opportunity by continuing to invest in the next generation of products and services.

Our goal is to improve the mobile experience and help our partners solve critical problems. With our strong cash flow and balance sheet, search expertise, critical partner relationships, extensive content catalog, and experienced team we are uniquely positioned to exploit the convergence of mobility, search, information and entertainment.

This concludes our prepared remarks. I will now turn the call over to the Operator and I'll be happy to take your questions.

Thank you. [Operator instructions] And our first question will come from Mark May with Needham and Company.

Hi, thanks a lot. Thanks for taking my questions. I would like to ask two at this point. As we are going through this, what we are calling cleanup process in the search and directory business, can you just give us a sense of what the baseline revenues for that business may be in 2006 and how long will that process last? And then secondly, in the mobile business -- I think it is still relatively small -- but can you give us a sense of how much of your revenues are coming from applications other than ringtone downloads? Thanks.

Sure, Mark. Thanks for the question. On the cleanup traffic side, I guess which is your first question. We've focused and have been as proactive as possible in really addressing kind of what has become a -- what I would say a changing and evolving landscape both in terms of the advertising online market as well as, you know, the relationships with partners. And so, you know, it is a process that we talked about a quarter ago and it's something that we have embarked on and have been as proactive as we can be in that area. And so it is just hard for me to speculate on kind of, you know, the exact extent of that and when and what happens in that field other than to say that we're out there being very proactive about the quality of traffic and we will continue to be proactive there. And I think, you know, you should see our guidance for fourth quarter reflecting as we had indicated earlier, reflecting in part the impact of kind of this improvement on the traffic side.

Switching to your second question on the mobile revenue applications, really I guess maybe I could sort of briefly explain kind of the key areas of revenue for us. One is the ringtones area, which has been kind of our biggest area of revenue and revenue growth. The other area is kind of graphics, or what some people call wallpaper. A third area, and not necessarily in any order other than top of mind here, is the games and the products sets we have in games. There is a whole other set of content type that we introduced over the course of the last year plus, that are like voice ringers and other genres within those categories. And then obviously, another important area for us as a company is around the services and infrastructure we provide for key carriers such as, the Portal for Verizon as an example and portals -- or some people call those the WAP decks for other carriers as well like Cingular, and Key Mobile, etcetera.

Can you give us a sense of the breakdown there?

We haven't -- you know we haven't -- It is not something that we have broken out separately. In part because, a lot of our work in that area -- the latter area that I just mentioned -- is reflective of our broader relationships and deeper relationships with carriers, so in many cases the importance to us of doing that revolves not just around a separate business opportunity, but more importantly a way to drive business for us as well as for the carriers.

Thanks a lot, congratulations. Thank you.

Next we'll hear from Sasa Zorovic with Oppenheimer and Company.

Indeed. Could you please tell us about on your -- for your ringtone sales, what would be the percentage of those that would be labeled tones or polyphonics and how that has evolved since the last quarter?

Hi, Sasa. On the ringtone side, we haven't broken out specifically for competitive reasons. And because each of our carriers have slightly different breakdowns in that area. What I can tell you and what we have talked about over the last few quarters is the label tone product -- well I guess maybe taking a step back, the whole ringtone business is very, very new.

For us at InfoSpace, it started in late 2003 through an acquisition. But really the whole industry started -- in the United States anyway -- started in the 2003 time frame, late 2003. And in early 2004 label tones were launched by a few carriers. And some people call that label tones and some people call it true tones or something like that. And really that has been a much higher quality product, a much higher quality service. And not surprising we have seen significant growth on the label tone side fueled by new handset sales and fueled by the fact that it is a superior product.

We continue to think the bulk of the growth, as we have seen and the bulk of the growth going forward, will come from the higher end products like label tones. And with that in mind that is one of the reasons we embarked on a much broader content strategy, which includes adding games, adding other kinds of content. I mentioned some of it earlier -- things like comedy, things like movie type content, also graphics and wall paper, and other types of content that you will see over the course of the next few quarters and hopefully years.

Great. Question really specifically relating to the games. I understand that you are not breaking sort of specifically what the revenue is coming from those, but now that you had, you know, coming up just about a year, three acquisitions that you have made basically. What has been sort of your learning from having those and what do you think your strengths are with the games and what is your strategy particularly focusing to games for going forward?

Sure. Well, I think kind of, you know, the main thing we did just to remind everyone, is we purchased three relatively small and young companies over the course really of late 2004 and into really early part of 2005. So it has been a pretty recent entry for us into the games business. Also our acquisitions were relatively small and young companies, and what we focused on is primarily, to date, really getting the different groups better integrated with each other. So we are doing some sales here in the U.S. from games that were developed in Europe and then taking games that were developed here over to Europe, and so we have embarked on that.

And really kind of the other major area of initiative for us and kind of it's consistent with some of the hiring that we just recently announced -- in particular around the kind of content and media expertise -- is really around the licensing for games. And so we are actively working as we speak on unique and interesting licenses that will add, I guess greater richness to our games catalog. And between that and kind of a continuing to enhance on the product set, that has been our main focus.

And as we talked about one or two quarters ago that business has been -- in kind of been in the 5% to 10% range of our mobile revenues and continues to be the case. And we will continue to use the games and the games development as one of many content strategies that we have as we continue to grow the mobile business, and as we continue to work with carriers on a broader set of products to sell them.

And to your question about what is our strength in that area. I think our biggest strength, or two biggest strengths, I would say are around really the ability to have strong and deeper relationships with multiple carriers across the world. We find that when we meet with content owners or games producers or others, our ability to potentially get them onto other carriers decks is very interesting to them. And then the second area is around core expertise on developing a product for a mobile environment. Those are pretty complex tasks and that is what we spend most of our time working on that.

Great. Thank you very much.

You're welcome, Sasa.

We'll now here from Stewart Barry with Thinkequity.

Hey, David, congratulations.

Thanks, Stewart.

Can you explain why -- or elaborate a little bit on why paid -- volume of paid searches was down sequentially from 214 to 182. And then also why you saw an increase in revenue per search from $0.18 to $0.20?

Sure. On your first question, about the paid volume decrease, remember our metric is a combination of both our search and our directory -- paid searches, but includes both search and directory. The loss of Verizon in Q3, which happened late in the Q2 time frame and we talked about this last quarter, had a significant impact in that sequential comparison that you are look at relative to paid volumes. Obviously, we are working hard to try and find other sources of traffic to replace that, but it happened late in the quarter and it takes time and we made some progress there with the addition of Yellowbook, but more work to do there. And then similarly, the increase in the revenue per paid search is primarily driven by the fact that the mix of business on the search and directory is more heavily weighted now towards search than directory relative to second quarter. And that had an impact on the ratio or the -- that number that you asked about.

And just one follow-up. You had mentioned the second quarter that you expected to spend $5 million on sales and marketing behind your wholly owned websites. It looks like you increased spending there $1.5 million. I guess what did you see in your sales and marketing efforts and are you concerned that not spending there might hurt the long-term sort of awareness or demand for those sites?

I think a couple of things on that, Stewart. In terms of the spending, not all of that 1.5 was an increase in the search and directory site, but a big chunk of it was. And kind of, as we talked about last quarter, we had been experimenting and continue to experiment with marketing spend on our own site trying to see kind of what works and how to most cost-effectively drive users to our site. And so in Q3 we did increase our spending as you noted and as we had planned. What we found was we had pretty good success at getting users or visitors to our web sites. We didn't have as good of success as we had hoped in terms of driving revenues from those searches and from those searchers. And so as a result, in Q4 we will go back to levels of spending that were closely related or more like what you had seen in past periods; past meaning, before Q3.

In terms of the long term, you know, we are working on plans for 2006. I think it would be probably too early to really comment on that and beyond. Obviously, we continue to work on different initiatives to improve on the product set and to continue to look for ways to enhance the value of those assets.

Thanks, David.

Sure.

Next we will hear from Gordon Hodge with Thomas Weisel Partners.

Hi, good afternoon. A couple of questions. I think you mentioned a percentage of clicks that came from affiliates at 60%, but if I misheard, you know, please correct me there. I didn't know what that 60% number was you mentioned. Also, curious if there had been any change in the tack rate paid to affiliates. Any trend there that you can speak to? And then on the mobile side, could you comment on the local search offering? Have you launched it with any carriers yet? And then also, if you could talk about the paper call deal that you have announced and the timing of how that might be integrated into your mobile offering? And then lastly, whether you have plans to launch a direct consumer site for games, thanks -- or games and mobile content?

I'll try and see if I can remember all those questions.

Yeah, if you can.

On your first question, the 60% is actually 60% of our search revenues that are from our distribution partners. The portion of our search and directory revenue, the search portion of that portion of revenue, 60%, over 60% came from our affiliate.

Okay.

Which is consistent with past periods. Kind of following on that, if I remembered most of these questions right. On the tack rate, I would say no real change in terms of that.

Okay. I didn't know if Microsoft in the mix made any change or --

We haven't seen that yet.

Okay.

So no change there. On the mobile side, you know, we just launched it. Actually at CTI we featured our mobile local search product. I would say it is early and we have been pleased with the response we have gotten both from the industry and from potential customers. We are actively working as we speak on trying to, you know to make some successful sales in that area and that is probably all I could say at this point.

Okay but --

But again, It is early and you got to create the product before you can sell it in this part of the industry and that is what we are doing and we are working hard on selling it. We think it as great product.

Okay.

Pay per call is again very early in the world of pay per call. It is an interesting model. We have talked about it before in the context of search. I know in the search world there is a number of companies out there working on pay per call and it is something we will continue to pursue as a potential -- one of many potential vehicles for sales and growth. And then finally, direct to consumer, you know, obviously it's -- I guess with regard to direct to consumer you are probably referring to the mobile side -- mobile –and/or games. I think it is fair to say that, you know, as a company we need to continue to explore all possible avenues of the opportunity for our business, but other than that I can't really speculate any more on kind of which initiatives you know we may pursue in the near term or over the course of '06 and beyond.

Fair enough, thanks. Thanks Gordon.

Next will come from Scott Sutherland with Wedbush Morgan.

Thank you. Good afternoon, David.

Hi, Scott.

On the mobile side first. Can you talk about the growth in the mobile downloads whether you saw it from organic growth, from existing customers, or was it from some new carrier launches? And also, if you could talk about where you saw some stronger growth by content -- was it ringtones, games or graphics or can you give at least ordering(ph) where you saw bigger growth?

Sure, on your first question in terms of organic or new. Most if not all our growth came from our existing partners and our existing partner relationships. And as you know, Scott, we have relationships with most of the major carriers certainly in North America and then many outside North America and in particular in Europe. So, no real change there. And, you know, it was a nice change for us from I guess a sequential standpoint to see the pickup in third quarter. On the second question about which type of content really, you know, in the third quarter we saw a favorable pickup in a variety of our content sets. But I would say -- I would say to date the main demand for content is still around the music categories, so the --, you know, the ringtones being the main driver of customer usage.

Okay. Have games increased as a percentage of the content revenue? I think you said about 5% last quarter, mobile? I said last quarter and I think even the prior quarter games has been about in the 5% to 10% percent range of our revenues and that continues to be the case this quarter as well. Okay. Remind us what the loss of Verizon impacted you this quarter maybe on a net basis? I know you got this other customer to monetize some of the traffic, kind of what you got back from that customer if that was anything this quarter so far?

We had said at end of second quarter that the loss of Verizon in second half of the year would have about a $9 million impact on the company in terms of that -- that was quantifying the loss specifically there. I prefer not to disclose for obvious reasons the benefits we have gotten from other potential partners and so I kind of leave it at that. You can see that our decline in revenues quarter-over-quarter wasn't -- it was less than $4.5 million, so I think that will help you a little bit on that front.

You seem to imply that there is still potential opportunities to monetize that traffic in other ways?

I think that's right. I guess I’d say that is always the case with all of our traffic, but yeah, absolutely.

Okay. And just a couple last -- financial questions. Any ideas on the use of your cash balances and any 10% customers?

Well, on the 10% customer list, no change from prior quarter.

Except for Verizon.

No, 10% customers -- Verizon wasn't a 10% customer. They were an important customer, but not a 10% customer.

Their mobile is still there, but their directory fell off?

That's correct.

So the rest are ones are still there?

Correct.

And the cash use?

I guess as you could see in the last quarter we were very active on the repurchase front and obviously you know we continue to look at and explore potential ways to best use our balance sheet to enhance shareholder value. The main one being, possible acquisitions in our industry.

Okay, great. Thanks, David.

We will now hear from Safa Rashtchy from Piper Jaffray.

Can you briefly comment on your relationship with Cingular? And also, on the balance sheet, can you comment on the increase in receivables sequentially?

Sure. I mean I'm not totally sure I know how to answer your question on Cingular if you have a specific question?

Just some color in terms of when we were at CTIA we saw a lot of companies trying to get placement in the Cingular stack and just relative -- are things going better or worse? Just a little bit color of what is your relationship with them?

Cingular continues to be a very important customer to InfoSpace and we work very hard at really all levels of the organization to meet or exceed their needs as a company. I would like to say I think we made great progress and we continue to make good progress, but really that might be a question best posed to Cingular. We certainly -- that's why we're here. To do a great job for our customers, and I would say that any of our customers whether it is Cingular or any other ones it is, you know, it is an important part of the company's sort of focus is around keeping the customers happy and meeting their needs.

Great.

On the balance sheet front; on the receivables question. Really, you have to remember that our -- as a company our top ten customers make up a significant amount of our revenues, so sometimes if those customers were to pay slightly faster or slightly slower that can have an effect on our receivables. Again it's really more a reflection of timing rather than anything more than that. And also, keep in mind that the types of customers we deal with, our top ten customers are all really -- most if not all of them are very blue-chip companies. So it's not something that concerns us if we get paid a few days earlier or later. And again the receivables were up only slightly, relative to prior periods.

Okay, thank you.

Thank you.

We'll now take a question from Jason Wylie with Morgan Cabot.

Good afternoon, David. Couple questions. The first is, I was wondering if you would go through kind of contracts from key customers that are up for renewal in 2006. And then also, any kind of guidance you could give on the individual expense lines for the fourth quarter?

Sure, why don't I start with the first one. Contract renewals and specific dates isn't something that -- that I'm prepared to break out for obviously for competitive reasons and for confidentiality reasons. From time to time we've disclosed kind of customers and when the ending dates of those contracts are, but it is not something that I like to break out in detail here. Other than to say, as I said on the Cingular one as well, that our customers are very important to us and we work hard to try to meet or exceed their needs. When you only have a few major customers as we do, you try to get feedback from them day in and day out rather than waiting for some arbitrary date when a contract ends -- in terms of feedback.

On the expense lines, I think the main comment I would make, which is consistent with the comments I made on the call was we expect the margins to be similar to the range of guidance that we provided last quarter; that being 15% to 20% on the mobile side and 35% to 40% on the search and directory side. And I think that that's probably the most helpful thing given the revenue guidance we gave and the other guidance for you to kind of work on your models.

Can you make any comments longer term about what you are kind of looking for in terms of segment margins?

Yeah, I think it would be premature to do that. We are actually, as we speak, -- we're working on our 2006 plan and kind of consistent with what we have done in past years I would expect that that plan and kind of our outlook for '06 -- or more detail in '06 -- we’ll provide that at the next earnings call.

Thank you.

You're welcome, Jason.

Operator, I think we have time for one more question.

And our last question today will come from Imran Khan with J.P. Morgan.

Hi. This is Derek Newman calling in for Imran Khan. Two quick questions. The first, can you give us an idea on how the traffic trends have done on your owned and operated sites? And then secondly, can you give us a sense of how much of your traffic distribution deals are coming up in '06?

Hi, Derek. That level of specificity isn't something we typically break out. The traffic trends -- our own sites have been – they’ve performed I guess sort of in line with kind of what we had seen for the last few quarters. Obviously, as you know, Q3 tends to be and Q2 as well tend to be some what seasonally weaker than other parts of the year. In terms of traffic and or partners, again for competitive reasons we don't break out specifics and when those deals are up for renewal.

Okay, thank you.

You're welcome.

With that I think we would like to thank everybody for joining us on the call today and please don't hesitate to call any of us with follow-up questions.

And that does conclude today's conference call. Thank you for your participation.