Avantax Inc (AVTA) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the InfoSpace Q2 2007 earnings release conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Stacy Ybarra for opening remarks and introductions. Please go ahead, ma'am.

Good afternoon, and welcome to InfoSpace's second quarter 2007 earnings conference call. I'm Stacy Ybarra, Director of Investor Relations.

With me on the call today is James Voelker, Chairman and CEO, and Allen Hsieh, Chief Financial Officer.

Before we get started I want to remind you of two things. First, this is an investor 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 not limited to the progress and costs related to the developments 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 the (inaudible).

A more detailed description of certain factors that could affect actual results of operations 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 "Risk Factors."

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 Jim. Following his comments, Allen will discuss the third quarter and full-year outlook, then we'll open up the call to your questions.

Thank you, Stacy. Welcome to the call today.

The second quarter was (inaudible). We paid $208 million, or $6.30 per share special dividend and we largely completed the restructuring plan around the mobile media business that we announced last fall. The exit of that business was completed on time and without disruption to customers and I'm very proud of Steve Elfman and our mobile team.

We significantly reduced costs, and most important, have generated strong growth in our mobile services business as we delivered new products and projects. The growth is being fueled by increases in users, user activity, and the benefits of contract extensions from our largest customers, AT&T and Verizon.

Users of our core products increased 34% year-over-year, and we served approximately 35 million mobile users in the quarter. In the last few weeks we implemented mobile search services on Verizon and Virgin Media, joining AT&T as search customers, and today I'm happy to report that we've signed Sprint as well. We're proud to provide mobile search to the three largest carriers in the U.S.

We've also launched a series of content applications on T-Mobile, a version of our successful mobile local search product InfoSpace FindIt! for Apple's iPhone, and Virgin Media's Catch Up TV, an innovative new service that lets users mobilizer their favorite TV shows. Catch Up TV is an exciting example of the on demand concept entering the mobile domain and is yet another illustration of how the mobile phone is becoming a centerpiece of entertainment and information.

We've also introduced our Managed Web solution, a new product that addresses the increasing demand for a more user-friendly mobile Web experience. Managed Web combines transcoating and Web capabilities to provide users access to virtually any Web site while allowing the carrier to maintain a cohesive portal experience. Our first implementation with Virgin Media has seen search queries and page views rise appreciably.

As these developments demonstrate, we're playing a significant role in shaping the user experience across multiple carriers. And, you know, given the initial shock last fall with the mobile media business and the ensuing demands of that restructuring, our mobile business is performing extremely well.

While our overall online results were consistent with our expectations for the seasonally slower second quarter, traffic from SEM partners declined at a faster rate than anticipated. SEM arbitrage is the practice of buying ads within search or contextual networks with the purpose of directing the visitor to a page that hosts further ads. Recently Google, Yahoo! and Live have all taken steps to reduce this traffic and though we expect to retain some level of SEM, we're discounting this traffic in our guidance.

Where we are seeing solid growth is in high quality organic distribution traffic. This traffic is generated from ISPs such as Cablevision, Windstream, InSite, RCN and other kinds of destination sites.

This is the best type of distribution traffic in terms of stability, growth, and monetization. Year-over-year this segment has grown 17%, and this quarter we signed seven new agreements include Free, the third largest ISP in France. We've worked diligently to gain a reputation as a quality value-added provider to this segment and have gained momentum and market share in the last two years.

Revenues from our owned and operated sites were flat sequentially in the second quarter normally a slower season. We improved our owned and operated sites with new product enhancements including a partnership with blinx, the world's largest video search engine to offer video search on all of our meta search brands including the award winning dogpile.com.

As consumer demand for online video content continues to grow, this partnership allows us to offer users the same breadth and relevancy of video search as it does with text-based Web search results.

Our mission is the creation, delivery and monetization of content discovery solutions be it through portals or search to both stationary and mobile devices. Across our businesses we remain focused on improving our core products, attracting new users and retaining our existing audience base. And we now serve over 50 million online and mobile users through our own brands and those of our partners.

In summary, this quarter we've completed the restructuring and have shown significant growth in our mobile services business. We're seeing double-digit growth in our organic distribution traffic despite seasonality in search, our owned and operator sites have produced stable revenues.

We've paid a $208 million special dividend and reauthorized our $100 million buyback plan. As we head into the second half of the year with our restructuring behind us, I'm confident that we can grow our businesses.

With that, I'll turn the call over to Allen.

Thanks, Jim.

I will start with a review of our second quarter results and then discuss our outlook for the third quarter and full-year of 2007. As expected, total revenues have decreased largely as a result of our exiting the mobile media business.

Our revenues for the second quarter were $70.5 million, down compared to $95.8 million in the second quarter of '06. Of that decrease $19 million was directly related to the exit of the media business.

Sequentially, we were also down from the first quarter revenues of $86.6 million. Again mobile media playing the largest part, however, our revenues have been impacted by a reduction in traffic from our SEM distribution partners.

Adjusted EBITDA for the second quarter was a negative $17.5 million compared to $8.9 million in the second quarter of '06 and $9 million in the first quarter of '07. Excluding charges of $22.3 million for payments made to employees related to our $208 million cash distribution, and net adjustments of $1.7 million related to our media operations, adjusted EBITDA was $3.1 million ahead of our expectations.

We continue to see the positive results from our restructuring and expect to achieve our $30 million in annualized savings by the fourth quarter.

Net loss in the second quarter was $28.1 million, or $0.86 per share compared to second quarter '06 net income of $1 million and the first quarter net loss of $540,000. Our second quarter '07 loss includes a $22.3 million charge related to the cash distribution, stock-based compensation of $8.8 million, and approximately $4 million in professional and advisory fees related to our proxy initiatives and cash distribution. Weighted average shares outstanding for the second quarter were 32.6 million.

Turning to our segments. Mobile revenues in the second quarter were $30.8 million comprised of $13.4 million in mobile service revenues, an increase of $4.3 million from the second quarter of '06, and $17.4 million in mobile media revenues, a decrease of $19 million from the same quarter. Sequentially, mobile service revenues were increased 12%.

We had a segment loss of $3.6 million in the second quarter of '07 compared to segment loss of $7.7 million in the second quarter of '06. Sequentially, our segment loss was in line with the first quarter. With the media content business behind us, we expect our mobile business unit to be profitable by the end of the year.

Moving to online. In the second quarter revenues were $39.7 million compared to $50.4 million in second quarter of '06 and were sequentially down 12%. The sequential decrease in revenues is a result of reductions in search revenues from our search SEM distribution partners and the anticipated termination of a non-core legacy contract in our directory business.

Approximately 80% of our online revenues come from search business with the balance coming from directory. Within search in the second quarter approximately 45% of our revenues were derived from our own sites and in absolute dollars were in line with first quarter.

Distribution search revenues were approximately 55% of total search revenues in the second quarter of '07 compared to approximately 60% in the first quarter. The decrease as an overall percent and in absolute dollars were principally due to the decline in traffic coming from our SEM distribution partners partially offset by traffic coming from our higher quality organic partners like Free.

We are starting to see the impact of our efforts to increase the number of higher quality distribution partners as this (inaudible) business has grown 17% year-over-year. While we expect to retain a certain amount of SEM traffic, it is becoming a lower percentage of our search distribution revenues having declined 50% year-over-year.

Segment income was $15.8 million in the second quarter of '07 compared to $22.8 million in the second quarter of '06 and sequentially down compared to $18 million in the first quarter. Regarding the balance sheet, we ended the quarter with approximately $198 million in cash and marketable investments and we have no debt.

In turning to our outlook, we expect full-year online revenues to range between 160 and $164 million. This is consistent with our expectation of growth in revenues from our own sites and from organic distribution partner sites. However, we expect continued declines in revenues from our SEM distribution partners.

We expect full-year mobile services revenues of $53 million and, with the addition of the $47 million of mobile media revenues this brings our full-year 2007 revenue guidance to a range between 260 and $264 million.

For the year we expect adjusted EBITDA to range between a negative 1 and $3 million, and our net loss to range between 55 and $57 million, or $1.68 to $1.74 loss per share. This guidance includes the impact of the $22.3 million payment to employees as a result of the cash distribution and non-cash stock-based compensation of approximately $43 million which approximates $2 per share assuming 32.7 million shares outstanding.

For the third quarter of '07 we expect revenues to range between 49 and $51 million. We expect adjusted EBITDA to be between 1 and $2 million, and our net loss to range between 16.5 and $17.5 million, or $0.50 to $0.53 per share.

With that, I will now turn the call over to the operator and we'll be happy to take your questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Clay Moran of Stanford Group.

Thank you.

Can you tell us what percentage of search revenue is from your organic distribution partners?

And then also, can you talk a little bit about the expense line items, specifically G&A expense was up meaningfully higher than we expected. Can you talk about what was included there, what caused that and is that a sustainable rate? Thanks.

Clay, this is Allen. I can take them.

For competitive reasons we don't break out the amount of organic versus SEM traffic in our search distribution results. That being said, it is, SEM is going down, as I mentioned earlier, we're going down by 50% year-over-year.

In terms of the operating expenses by the various [SEC] line items, what you see there is the increases year-over-year as well as sequentially is due to the $22.3 million that we pay to our employees as a result of the cash distribution. That is spread out amongst all the various line items there so that's why you see those all increase.

There's a table. If you look at the earnings release, there's a table there below that that shows which line items those $22.3 million were allocated to.

I think we've backed that out, and if I'm correct, the first quarter G&A was about 10.7 and the second quarter about 13.7. Does that sound about right?

And then I don't know exact numbers, but they sound reasonable. The other one is, remember that we, as I mentioned earlier, we had about $4 million of advisory and professional fees related to the proxy initiatives and the cash distribution that were recorded in the fourth quarter, in the second quarter.

Okay. And then can you explain why the $22 million payment to employees flows through the P&L?

You can talk to my auditors about that. They view it as being part of the charges that you have to take through the P&L. They view it as compensation much like stock-based compensation, so we're required to include it in our net income.

Okay. Thank you.

Next we'll hear from Scott Sutherland of Wedbush Morgan Securities.

Great. Thank you. Good afternoon. Hope you can hear me okay.

Yes, we can hear you.

Hi, Scott.

Maybe trying to get the SEM traffic a different way. I know you're not going to break out the percentage, but how do you expect this to play out over the next year? Do you expect it to settle down to a small percentage of the overall online revenue or do you think it'll be a more material amount long-term?

I think it is going -- Scott, this is Jim.

I do think it is going to be a relatively small amount. I mean, it's already a relatively smaller amount, and I think it is going to be. What we're seeing in the marketplace is that the Google, Yahoo! and to some extent Live are looking at, particularly Google and Yahoo! are looking at the conversion value of these kinds of sites, and anything that is really, they don't view as converting very effectively, and they measure that by sell-through, transaction sell-through as well as just some other more, call it, qualitative measures that they use, they're going to eliminate these guys from the chain out there, so (inaudible) continue to see-- there is background noise on your end.

We're going to continue to see, I think, a pressure on those kinds of players. Now, there are some players that have, I call them fairly robust content sites, that will continue to be valid in the marketplace, but it's definitely getting changed.

Okay. I have two other questions. I'll will ask them both right now and put my phone on mute so (inaudible) this background noise.

But first question is, you're doing good selling more products into (inaudible) in the North American carriers you have relationships with, how do you see the opportunities expanding that international or to other carriers that you don't have relationships with?

And secondly, what's you're, with $200 million in cash I know there's some buyback left. What do you see as the prime uses of cash beyond operations?

Okay.

I think on the carrier side, we have had some success, a little bit of success starting in Europe. We've been able to really implement most all of our products at Virgin which has proven to be for us a pretty good carrier in terms of a showplace for things.

We have some other, we didn't really announce them [in this] but we've done things recently with 3 Italy, with SFR, which is part of Vodafone, on search, so we have some other agendas there. Absent or outside of western Europe, though, our concentration is here in the U.S.

And I'd also just highlight in the U.S. that we have managed to gain some ground here with Sprint on today's discussion here of search, and that's something we're pretty excited about, too. And again, moreover, we've had really good penetration at AT&T and now at Verizon launching search with Verizon was another big issue for us.

I think that business is, as I mentioned, not only rebounded really well has been, is on a very nice trajectory at this point. The key for us is going to be able to turn those search relationships into something that monetize via sales of content or via advertising as time goes on and it's still too early to tell what those models are going to look like.

In terms of cash, the uses of cash, you're right, we have the buyback in place. We're always on the lookout for opportunities to expand the businesses or strengthen the businesses.

I think in the last year-and-a-half or so, with the debt markets being what they've been and, frankly, access to cash pretty easy and pretty cheap, we've seen prices be fairly robust out there. Now that that's reversed a little bit, we'll see if there's maybe a little bit less private equity willing to go out and pay big prices for things when they have to write bigger equity checks with smaller debt available. So I guess we're a little bit hopeful on that side.

Great. Thank you.

Thanks, Scott.

Thank you. We'll take our next question from Jeff Shelton of Bleichroeder.

Thanks. The mobile service revenue is growing nicely. What do you think the long-term growth prospects for that business are?

Well, Jeff, I think, this is Jim, again. I think I just kind of talked about that with Scott.

I think it's on two levels. We continue to see users grow petty rapidly, and that's obviously good as the devices get better.

I have to say that while we don't have anything to do with it other than the FindIt1 product that we developed for the iPhone, I think the iPhone sent a jolt right through all of the manufacturers out there to show them their devices simply have to get better and that the kind of Web experience that you can have on a device if you have the right device and the right structure out there can be pretty significant, and because that's what we do and build for people, we're pretty excited. We think that's going to help push the devices forward and allow us to build onto better platforms.

So we think on that side of the world, you know, many more users to be had and found and much more activity. I'd say we're still kind of, if you will, in the dial-up world there when equating it to what's happened online and we're soon to get into the high-speed world, so I think that's good.

The big issue for us and the big question that we don't have an answer for yet, but the big opportunity, is to kind of take if you think of it, our online distribution model in terms of delivering ads through our relationships with Google and Yahoo! and deliver those through to the mobile device or other advertising networks through to the mobile device by managing the search boxes. And today, as of today we manage the search box on Verizon's portal, we manage it on and we provide it on AT&T's portal.

We've just announced something with Sprint that you'll see coming out a little bit later, and so that puts us in front of an awful lot of end users, and any kind of monetization that we can do above and beyond what we're doing today will be highly scalable, so I'd say overall we're pretty excited about it.

It's a good time. We've got great market share there both on our portals and our search box, and I think we're well positioned to do well. It's just a little bit early in the game to figure out exactly what the business model's going to look like.

And you mentioned you're going to be exiting the year with a, at a positive EBITDA run rate ultimately what sort of margins do you think you can see?

You know, at this point I'm not providing overall guidance there. We still have a little bit of the, some costs left to trim out of the business here, so we're looking at that.

I think again, it's really going to depend, Jeff, on how much, you know, you can see this -- I won't get numbers here, but you can just take a look at the different kinds of businesses. Today our business is structured as a hosting and ASP kind of model with a, it's dependent on the number of users you have and you get paid on that.

You will imagine, though, that as users grow, while your revenues will increase, they won't be totally incremental, right, as incremental users will get cheaper, if you will, for the carrier to add, so you can see that kind of model and you can compare that to other kinds of models out there like that software models and the like, ASP types of models. But if we can layer over that, something more akin to what we see on the search advertising side online, then it can be pretty significant.

And on the online side, you first saw this SEM issue in the fourth quarter, but then you recovered nicely in the first quarter only to see it go down again in the second quarter. Is this something that's going to be volatile up/down but with the general trend being down or is it just sort of down from here?

I think that's a pretty good way to put it, up/down with the general trend being down I think. As I said before, this is just, this has been, I won't call it [quite] it's been an, let's call it an opportunity in the marketplace, but everybody has been from Google and Yahoo! and ourselves and the SEM players themselves been happy to take advantage of, but as the market gets more efficient and there's more tools for advertisers to look and see what their real end yield is and ROI is (inaudible) certain ads through certain places that they appear, this is going to get, you know, squeezed out.

Last question. Why is stock comp expense going up so much in the third quarter?

Jeff, this is Allen.

Stock compensation if you remember, we, as part of that make whole we gave out to employees cash for their vested equity and for their unvested equity. As part that far we gave out new RSUs. That, coupled with our normal annual grant during July that increased the amount of stock compensation in the third quarter as well in the fourth quarter.

Okay. Thank you.

Thank you. Moving on we'll hear from Gordon Hodge of Thomas Weisel Partners.

Good afternoon. Just a couple of questions.

One, you kind of touched on it but maybe you can just go through it again. Just the trends in price per click and then owned, you mentioned owned revenues were flat Q to Q but just curious if there's dynamic there pricing versus traffic and then sort of overall click trends. And then if you could comment on tack rate trends that you're seeing with your affiliates as the base there shifts. Thanks.

Actually, let me take the second one first. The tack rates, you know, tack rates continue to be dictated basically by volume, right, what kind of volume you bring us, so the larger volume customers that we (inaudible) Free happens to be an example of a pretty large volume customer, so their tack rate is a little better than someone who is a smaller volume customer obviously.

However, the SEM guys, actually, because of the nature of their business model and that they had to spend money to drive traffic, they actually demanded a pretty high tack rate so, to some and although it sounds a little odd here, the higher quality partners with the more stable traffic, actually, the tack rate isn't quite as high as it has been on the SEM. That perhaps will be at least a settling trend if not necessarily a trend where we see our tack rate -- our tack payments go down as a percentage but we don't see them going up dramatically either.

In terms of rates et cetera on the O&O, you know, O&O traffic on a seasonal basis was pretty normal as what we've seen before and we continue to see rate increase in that quarter be helpful there.

Allen, I don't know if you want to add anything.

That's about right. Yes.

So price per click was up, but clicks were seasonally down?

Right, right.

Got it. Thanks.

Thank you. We'll take our final question from Derrick Wood of Pacific Growth Equities.

Hi. Thanks.

Just looking at the mobile services which has been growing pretty fast over the last couple of quarters, it looks like year-over-year kind of in the 45 plus percent range. Can you talk about, I know you've talked about increased number of users driving that. Is that from your existing carrier relationships, so is that all organic growth or is that also due to some new partnerships that you've signed?

Well, let's see. In a year-over-year sense, there was some, there'd be some new activity, I guess, a small amount, but most of it is really just organic growth on both Cingular and Verizon, and while I can't break those down, they've both been, both of them are growing well.

They're, you know, as we said overall as a group they're up 34%. That doesn't really tell you who has how many users or what have you, what rates are [going], but both of them are growing at a really good pace.

Okay. And what other contract terms with any kind of color you can get with these carriers?

Well, they're multiple years. I mean we've signed Verizon I think it was in our press release through 2010.

And when we renewed AT&T it was multiple years.

Yes, we renewed AT&T I want to say in March of this year, and that was for multiple years as well. And I'd also just mention that we've been in these relationships for quite some time in both cases, so we've been the, partnered with these guys for quite a while.

Right. Is there any kind of color you can give on, is there any seasonality with this business or is it on a pretty good growth trajectory going forward?

Haven't seen much of that yet, anything, Derrick, that would really tell us there's a big seasonality issue. My guess is as we, that you'll always see a little bit of, you know, we did in the media business in any case. You saw some peaks around the holiday time when new phones get sold.

I think you'll see we see a little bit of the same thing here, and you see some usage valleys probably when the base gets matured similar to the Internet, maybe not quite as drastic because people are mobile and they can use it, but nothing there yet that's really raised its head.

Great. Thanks. And on the content side, do you expect any more revenue going forward or is that completely done?

No, it's completely done.

No, no, nickels and dimes.

Last question. Did you guys do any buybacks in the quarter?

We did not do any buybacks in the quarter.

Okay. Thank you.

Thank you.

Operator, I think we have one next caller or a question.

Thank you. We'll take our next question from Imran Khan of JPMorgan.

Hi. It's actually Lev calling in for Imran. Just a couple of quick questions.

First of all, this is kind of a nit picky question. Looking at payables, they went up to about 19% of revenues versus 13%. Just curious if there's anything to look at there?

And the other thing is I'm wondering how to think about the content and distribution costs for the mobile business going forward?

So I'll take that.

On the payables side, it's just timing of when we make our payments out there. It's nothing fundamentally changes, it's more of a timing of payment patterns.

In terms of the, on the margins, if you look at the business that we do, the gross profit margin from our mobile services business, you don't have that content heavy type cost. It's really more of the operations of the folks and the systems and network operations, so the margins on that business will be relatively high.

Okay.

The gross profit margins will be relatively high.

Right. And as far as looking at the operating margins on the online business, do you see those staying in sort of the high 30s range where they are or do you think that you could see them bounce back into the low 40s maybe going forward?

It is somewhat depend end upon the traffic and the revenues that we drive here, but that's not an unreasonable range where you're talking about.

Okay. Thank you.

Thank you. At this time there are no further questions. We'd like to thank you for joining today's conference, and have a wonderful day.