Avantax Inc (AVTA) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the InfoSpace Incorporated 3rd quarter, 2007 earnings conference call. Today's program is being recorded. At this time I'd like to turn things over to Ms. Stacy Ybarra. Please go ahead, ma'am.

Thank you. I'm Stacy Ybarra. Welcome to Infospace's 3rd quarter, 2007 earnings conference call. I'm Stacy Ybarra, Director of Investor Relations. With me on the call today is Jim Voelker, Chairman and CEO, and Allen Hsieh, CFO. Before we get started I want to remind you of three things. First, this is an investors call, accordingly, we will take questions only from investment community. Second, this conference call contains forward-looking statements related to the development of the Company's products and services, developments and future of the Company's business, strategic transactions being pursued by the Company and future operating results. These statements are subject to certain risks and uncertainties 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 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 developments and implementation of our strategy, possible changes to that strategy, and the ability to retain key contracts and personnel. A more detailed description of the 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 report 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 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 the unanticipated events.

Third, please note that on this call, we will provide you with nonGAAP financial information. These items, together with the corresponding GAAP numbers and reconciliation to GAAP are contained in today's earning release, which we have posted on our web site at www.infoSpaceinc..com and filed with the SEC on form 8-k. We will also discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in the press release, and the remainder of the information will be available in a recorded version of this call on our web site. Now, I'll turn the call over to Jim. Following his comments, Allen will review the 3rd quarter results and 4th quarter outlook. Then we'll open up the call to your questions.

Thanks, Stacy and welcome to the call today. It's been a very eventful Fall. On an operating basis, we exceeded guidance in both revenue and adjusted EBITDA and we unlocked significant value for shareholders by executing definitive agreements to sell our online directory and mobile service units for a combined total of $360 million in cash. I'm pleased to announce that the directory sale to IDR for 225 million in cash closed yesterday, and we expect the mobile transaction will close in the near future. We also anticipate distributing a significant portion of these proceeds to shareholders in early January. I'll start by sharing some details on the transactions and the positive outcome for shareholders and then I'll discuss the ongoing search business.

Earlier this year, the Board and the management began to evaluate alternatives for closing what was a significant gap between our market valuation and the Company's asset value. We focused on a strategy in this we would sell certain assets to unlock value and still retain a majority of our revenue and segment income. We've consistently believed that the aggregate value of our assets, search, directory, mobile and our $1 billion NOL have not been recognized in the stock price, and in fact the proceeds from these transaction alone, are almost double the enterprise value in mid September. Enterprise value being defined as market cap less cash.

The recent announcements validate our strategy. As the $360 million proceeds are realized, we expect that these will be shielded from substantially all cash taxes at the corporate level, by the application of our NOLs and that our overall cash position will be in the range of $550 million or over $16.50 per share in cash. In addition, we'll maintain our highly scalable search business which we believe is our most valuable asset. Based on our results for the first half of '07, we retain over 60% of our core revenue, and the vast majority of our segment income.

Now, some details on the divested assets. Over 90% of the revenue in the directory unit was generated from the switchboard.com business acquired in 2004 for $103 million. In the first half of '07, directory represented approximately $17 million in revenue and $11 million in segment income. While this business is very profitable growth has been stagnant. Therefore, at an implied multiple of more than 10 times segment income, this was an attractive transaction.

On the mobile side, we've experienced good revenue growth from our mobile services business this year up over 50% from the 3rd quarter last year, and we believe the unit will be at break even in the 4th quarter. But it's an early stage business and as a component of our businesses, we did not believe it was garnering appropriate market value. At 2 1/2 times our annual revenue guidance, we believe this transaction delivers full value for our shareholders.

Now, on to our search business. Upon the completion of these transactions, InfoSpace will be a focused online search Company, well positioned for growth and success. As we move toward next year, we will further align our cost structure with the expected revenue from search, and while we will share more details in the near future, our financial objectives are for gross profit margins to be in the range of 55% to 60%, and adjusted EBITDA to be +15% in 2008. This refined focus will benefit our business and our shareholders.

The opportunity for search continues to be significant. Among our assets, a highly scalable proven business model, A JD Powers certified highest satisfaction product two years running, strong and unique modernization relationships with Google, Yahoo!, Live, Ask and many others, a broad distribution network of over 100 partners, and new opportunities in portal and DNS monetization and positive market trends as well. The latest market developments in vertical and human powered search serve to enhance our metasearch value proposition and search frequency and advertising rates continue to rise year over year. Post these transactions, and the return of capital to shareholders will maintain a strong balance sheet and increase our cash generation. Personally, I'm excited about the prospect of full focus on one business.

This has been a very positive year for InfoSpace shareholders. In May we paid a $208 million or $6.30 per share dividend. In the past few months, we've completed or entered into definitive agreements to unlock substantial value via the sales of our directory and mobile businesses. In addition, by utilizing our NOL assets, we expect to maximize the proceeds available for distribution, and we've retained the majority of our revenue and segment income in a dynamic growing market. Over the past five years, we have generated over a 6.5 times return for investors and we look forward to the next chapter.

And speaking of next chapters, in connection with these transactions, Brian McManus, Executive Vice President of our Online Division, will leave the Company by the end of the year. Brian's been a strong leader and he's chiefly responsible for the success we've had in our search and directory business for the past 4.5 years. We thank him for his considerable contributions and we wish him the best in his future endeavors. With that, I'll turn the call over to Allen for more details on the results.

Thanks, Jim. I will start with a review of our 3rd quarter results, and then discuss our outlook for the 4th quarter. Please keep in mind that for the 3rd quarter of '07 and all prior periods the operating results of the directory business has been presented as discontinued operations in our GAAP financial statements.

Revenues from continuing operations in 3rd quarter of '07, which include online search and our mobile businesses were $48.7 million compared to $88.3 million in the 3rd quarter of '06. As expected, total revenues decreased compared to prior year, primarily as a result of our exiting the mobile media business. Directory revenues of $8.7 million in the 3rd quarter of '07 are now treated as discontinued operations. Had directory remained part of our continuing operations, revenues would have been $57.5 million for the 3rd quarter of '07, which has significantly exceeded our expectations.

Third quarter '07 adjusted EBITDA from continuing operations, which includes adjustments to our restructuring reserve was approximately $400,000, compared to negative $56.2 million in the 3rd quarter of '06. Had we included the segment income from our directory business, adjusted EBITDA would have been $3.8 million which also exceeded our expectations. Net loss in the 3rd quarter was 12.3 million, or $0.37 per share compared to 3rd quarter '06 net loss of $46.7 million. Weighted average shares outstanding were 33.2 million for the 3rd quarter of '07.

Turning to our segments, in the 3rd quarter of '07, online search revenues were $33.9 million sequentially up 7% compared to 2nd quarter '07 revenues of $31.8 million. In the 3rd quarter of '07 approximately 40% of our revenues were derived from our own sites, and distribution search revenues were approximately 60%. As expected, revenue growth in the 3rd quarter of '07 was attributable to our search distribution network. We saw revenue growth from both our organic and SEM distribution partners. Segment income was $10.1 million in the 3rd quarter of '07, a decrease of 6%, compared to 2nd quarter of '07 of $10.8 million.

Moving on to mobile. Revenues in the 3rd quarter were $14.9 million comprised of $13.9 million in mobile services revenues and $1 million from our media content businesses. Mobile services revenues increased 4% from the 2nd quarter of '07 revenues of $13.3 million. We have a segment loss of $2.4 million in the 3rd quarter of '07, a more than 30% improvement from the second quarter of '07 segment loss of $3.6 million. Our mobile business is on track to be break even by the end of the year. Regarding the balance sheet, we ended the quarter with $214.8 million in cash and marketable investments and had no debt. With the addition of the $225 million that we collected yesterday from the IDR sale our cash balance is approximately $440 million.

Turning to our outlook, beginning in the 4th quarter of '07, the Company will present directory and mobile as discontinued operations and will only be providing guidance for online search business. Our guidance excludes our directory and mobile discontinue operations, gains from those sales of those two businesses and any other nonrecurring charges. For the 4th quarter of '07, the Company expects search revenue to be between $34 million and $35 million. Additionally, the Company expects adjusted EBITDA from continued operations to be approximately $1 million and GAAP net loss from continued operations to be between $7.5 million and $8.5 million or $0.22 to $0.25 per share. As we move forward, we are organizing around our online search business and we will align our costs appropriately. Our financial objectives are for gross profit margins to be in the range of 55% to 60%, and adjusted EBITDA margins to be in the +15% range. With that I will now turn the call over to the operator, and we'll be happy to take your questions.

Thank you. (Operator Instructions) We'll go first to Scott Sutherland, with Wedbush Morgan.

Great. Thank you. Good afternoon and good job managing through all the moving parts. So, first, since search is going to be your stand alone business, I wanted to focus there. You mentioned you saw some SEM growth and growth in the core business this SEM stuff has been kind of lumpy, and you've been guiding down over the long term, how do you see this playing out now?

I think SEM is going to continue to have some volatility in it. Although, it's -- how would I say this? I guess the legitimate portions of SEM, and we'll -- I'll characterize that, are really getting strongly defined now, so that we -- I think operators, SEM and marketing kinds of companies are seeing the exact parameters in which they can operate, in and, you know, basically what that means is, they have to enhance the content on their website and the landing pages, and they have to provide a high quality user experience that then translates into kind of high quality and high converting traffic. And, you know, like anything else, as the enforcements come, people come along to that, and figure ways to do it, so I think we're going to see it still remain volatile for a while, but it is narrowing down into an area where people know what they can and can't do, and how it's going to monetize.

You saw a kind of sequential growth in the online unit, but you saw sequential decline on the segment income. Did you invest here? Or did something else move around in the online unit?

Yes, Scott. This is Allen, we did invest in some initiatives in the 3rd quarter, and these are some of the opportunities we see in the future in the online search business.

And on a year I've over-year, that online search was down about 7 million. Was that all SEM, or could you say whether you had organic growth in the non SEM business?

Year over year, when you compare 3rd quarter '07 to '06, you had a combination and the primary drivers were declines in the SEM. But we had an uptick in the organic piece of our business.

Okay, just a couple of more questions here and I will be out of your way. Your guidance to1 million of EBITDA next quarter, but you did about $400,000 this quarter and the impact of moble is estimated to be about $2.5 million. It would imply you're doing $3 million of EBITDA and you're guiding revenue up. So, is there some other type of investment in Q4 that's going to keep EBITDA down for the quarter?

Yes, We're going to make some other investments, and looking at trying to drive distribution partner revenue growth.

Okay. The last question I had is, you know, if you dividend out most of the cash, but you're going to keep some cash on top of the X million you had before, $214 million, what do you see plans for that cash? Is it more buy backs or would it be strategic M & A would be the first priority of business?

Well, Scott, to be clear, we haven't determined how much cash we're going to retain in the Company, but we -- I would say we will be a smaller -- smaller entity now, so our cash needs that we've seen previous to be at a level of around 200. That may not need to be that kind of a number going forward. But we haven't made that decision yet. But, obviously, what we're looking for is to see, are there opportunities here for some kind of M & A that's really right on top. And basically what we're interested in is anything that would drive or provide quality search traffic. I mean, that's -- we're not looking to go spread out into any other kinds of businesses. We've kind of taken that class here on the mini conglomerate. But we definitely would be interested in acquiring quality search traffic. So that's what we would be looking at.

Okay, great, thank a lot, guys.

We'll go next to Derrick Wood with Pacific Growth Equities.

Hi, thanks, just wanted to clarify on the dividends, as an investor, do they get taxed on the dividends or are you somehow able to use your NOLs to make that a tax free dividend?

This is Allen. The NOLs that we have are -- those are really the Company's NOLs, so it cannot be applied or pushed down, if you will, to the shareholders, and the amount of the dividends that is taxable as shareholders it depends on a number of factors, how much accumulated profits we have. It is an annual type measure.

Okay. And now that you've carved out some of your NOLs, what's the kind of current NOL standing right now?

Well, you know, if I look at just kind of broad stroke basis, we had about a $1 billion NOL to begin with. We just recently, between the two transactions, roughly $360 million in gross proceeds, as you can tell, there's not a lot of -- if you will basis in those assets, so let's call it $300 million of those, we'll be in the gain range. And so you're looking at at least $700 million in -- or between $600 and $700 million in NOLs.

That's what's remaining?

It'll be between $600 million and $700 million.

Okay and then how many diluted shares outstanding do you have, if you didn't have an anti-dilutive situation right now?

You mean including all the outstanding RSUs and options?

Yes, if you were reporting profitability what would be the total diluted shares outstanding?

I don't have that right offhand, Scott. The one thing we'll have in our 10Q. It will be on file and that should be out by early next week.

And then on the EBITDA margins going to 15% Is there a timeline? Obviously it's not going to happen next quarter, given your guidance, can you get to that number fairly quickly, how are you thinking in terms of cost reductions and how long that's going to take?

Well, we think the cost reductions will be effected relatively quickly, however, you know, there's always transitional and even in these -- even in these deals we've done, transactions, we've had some transitional issues to deal with. We've taken three businesses and split them in -- split them up, so we have some issues that we will deal with in terms of small amounts of real estate, and some other issues that will carry through a little bit into next year. But we're looking at that number as an annual number for 2008.

Okay. And then if you could just kind of drill down a little bit when you -- without mobile, where are you going to see most of the savings in terms of the operating expense line, and actually moving above that, you did about 5 1/2 million in systems and network operations costs.

That's a pretty long, complicated answer, and I think at this point we just -- we'll put those details off until kind of the next time we get a chance to chat.

Okay. Well, thanks for the update.

(Operator Instructions) We appear to have no further questions. I'll turn the conference back to our speakers for any closing remarks.

Thanks, everyone, for joining.

That concludes this InfoSpace Incorporated conference call. You may now disconnect and have a good day.