Avantax Inc (AVTA) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to today's Infospace fourth quarter 2007 conference call. Today's call is being recorded and at this time for opening remarks and introductions, I'd like to turn the program over to Ms. Stacy Ybarra. Please go ahead, ma'am.

Good afternoon, and welcome to Infospace's fourth 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 David Binder, Chief Financial Officer.

Before we get started I want to remind you that during the course of this call, Infospace representatives will make certain forward looking statements. These forward looking statements include statements regarding Infospace's expectations for our online business, expectations regarding its marketing and strategic initiatives, expectations for financial performance, for the first quarter 2008, and expectations regarding the future for the Company's business. Other statements which maybe made in response to questions which refer to our beliefs, plans, expectations, or intentions are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act. Because these statements pertain to future events they are subject to various risks and uncertainties and actual results could differ materially from Infospace's current expectations and beliefs. Factors that could cause or contribute to such differences include but are not limited to the risks discussed in Infospace's annual report on Form 10-K for the year-ended December 31, 2006, and its quarterly reports on Form 10-Q which are filed with the Securities and Exchange Commission. Infospace assumes no obligation to update its forward-looking statements.

Now I'll turn the call over to Jim, following his comments David will review the fourth quarter results and first quarter outlook, then Jim will wrap up with closing remarks and we'll open up the call to your questions.

Thank you, Stacy and good afternoon, everyone. 2007 was an eventful and positive year for Infospace shareholders about stakeholders. Two transactions unlocked substantial market value and we distributed that value and more to shareholders while retaining our online search business and a healthy balance sheet. A brief review of the events is in order before we move on to fourth quarter results and a discussion of our search business.

When the Board appointed a new management team five years ago, Infospace was a Company searching for direction and mired in legal issues. As we progress, we strive to optimize our assets by divesting non-core businesses, making acquisitions to bolster growing businesses and driving cash flows. It's been anything but a straight road, marked by successes and disappointments. On the plus side we've driven over $230 million in cash flow and yielded $440 million in asset sales. On the other side, we entered and exited the mobile content business over a three year period, enjoyed extreme growth in profit and suffered certain decline. Yet when viewed as a whole, enterprise value has grown from 126 million to $826 million and $1 invested five years ago has yielded 650% return, that's a record we're proud of.

The latest transactions were completed in the fourth quarter. The sale of our directory assets to IDR for $225 million and the sale of our mobile assets to Motricity for $135 million both in cash. In each case, we believe we extracted top value. The directory assets were purchased in 2004 for $108 million contributed over $50 million of cash flow in subsequent years, about then sold for a multiple of 11 times cash flow. The mobile assets have yet to yield a profit, and sold for over two times revenues. In addition we were able to shield virtually all of the gain from these sales by the application of our NOL, saving over $ 100 million in cash taxes.

This led to a special dividend of $300 million or $9 per share, following our May dividend of $208 million or $6.30 per share. Overall, the Board and management have been and remain focused on maximizing our assets and delivering share shareholder value and liquidity.

We're excited to move forward focused on a single business, online search. We have several assets in place, over 4 million unique searchers per month, 100 plus distribution partners, strong, committed monetization partnerships with Google and Yahoo! and many others and a differentiated award winning product. We also have a proven highly scalable business model and experienced and talented team focused solely on search, and we're off to a good start. Fourth quarter revenues and adjusted EBITDA were well ahead of expectations. Revenues were $39 million, up 15% year-over-year and 15% sequentially. It's important to note that our operating results are profoundly impacted by the many events in the fourth quarter, specifically the divestitures, dividend, restructuring, and tax accounting.

At this point I'd like to turn the call over to David Binder, our new CFO to walk through the details. As many of you know David has been with Infospace for four years as our Vice President of Finance. His appointment follows Allen Hsieh's planned departure in connection with the sale of our mobile and directory business. I want to thank Allen for his services to Infospace over the years. He's been both a good friend and great colleague and we wish him well in his endeavors. Now I'll turn the call over to David and after his discussion I'll finish with comments on our priorities and opportunities. David?

Thanks, Jim and welcome to our call to the. Along with the performance of our search business, our fourth quarter financial results are greatly impacted by the sale of the directory and mobile businesses, the shareholder dividends, and the previously announced reduction in staff. I will start to review the numbers first with a look at our net income for the fourth quarter and full year and then turn to the revenue margin and adjusted EBITDA performance of our search business.

Given that there are several important items to call out, we have posted a table on our website to highlight some of the key data. Net income in the fourth quarter is $57.8 million or $1.74 per share up by $30.2 million from the prior year. This result is comprised of income from discontinued operations of $131.5 million offset by a loss from continuing operations of $73.7 million. Within the results of our continuing operations, we recognize employee costs associated with the dividend in restructuring, equal to $45.6 million, stock based compensation of $16.9 million, and a GAAP tax expense of $16.4 million. Within discontinued operations, we recognized a net gain from the sale of our directory and mobile businesses equal to $139.9 million, partially offset by a loss from discontinued operations of $8.4 million. For the full year, we recorded net income of $16.9 million or $0.52 per share up by $32 million from 2006. This result is comprised of income from discontinued operations of $114.6 million offset by a loss from continuing operations of $97.7 million.

For the year, continuing operations includes employee related expenses associated with dividends and restructuring equal to $65.8 million, stock based compensation of $34.1 million, and GAAP tax expenses of $26.7 million. Within discontinued operations for the year, we recognized $139.9 million from the net gain of the sales partially offset by a loss from discontinued operations of $25.3 million. Overall, in 2007, we booked a GAAP tax expense of $125 million, however by utilizing our NOL carry forwards the Company will pay less than $6 million in cash taxes. In addition, the Company maintains an NOL balance of $789 million.

Now, I will turn to a closer review of the performance of our continuing operations, the online search business. As Jim mention the earlier, revenue for the fourth quarter was $39.1 million, which exceeded our expectations by 4 million to $5 million. Gross profit in the fourth quarter was $20.1 million, an increase of $1.5 million from the third quarter and a decrease of $1 million from the fourth quarter of 2006. Gross profit margin in the quarter was 52%, down 3% sequentially from the third quarter. In the fourth quarter, we experienced growth from both our owned and distribution lines of businesses; however, the rate of growth was higher from distribution. In the quarter, distribution represented approximately 64% of our total revenue, up from 60% in the third quarter.

Adjusted EBITDA in the fourth quarter was a negative $42.6 million. Included in this amount is the expense of $45.6 million I previously mentioned resulting from employee costs associated with the shareholder dividend and restructuring. Excluding these costs, our adjusted EBITDA would be $3 million in the fourth quarter, exceeding our guidance by 2 million. The average basic share count in the fourth quarter was 33.3 million, however it's worth noting that we ended the quarter with $34.3 million outstanding. For the full year of 2007, revenue was $140.5 million, a decrease of $13.3 million or 9% from 2006. In looking at this trend, our distribution business represented 82% of the sequential annual decline. We saw significant volatility from our partners, most notably in the second quarter of 2007. Since then, we've seen sequential quarterly growth in both our distribution and total revenue.

For the year, gross profit was $78.8 million down $12.7 million from 2006. Gross profit margin for the full year was 56% down 3% from the prior year. Adjusted EBITDA for 2007 was a negative $47.6 million which includes employee costs associated with both dividends and restructuring charges of $65.8 million. Excluding these charges adjusted EBITDA would have been $18.2 million in 2007. Average basic shares for the year were 32.6 million, again we ended 2007 with 34.3 million shares outstanding.

Now, turning to the balance sheet, we ended the year with approximately $575 million in cash, short and long term investments, an increase of $360 million from the third quarter. This total includes the cash received from both directory and mobile transactions and does not reflect the cash dividend we paid on January 8, of approximately $300 million. Given the dividend, deal related fees, cash taxes, and the employee expenses associated with the dividend and restructuring, we expect our cash balance to be between 210 million and $215 million.

Within our investments, we hold 37.4 million in option rate securities. In the fourth quarter, we moved this balance from short-term to long term investments, in recognition that we would be unable to liquidate if we were to choose to do so today. In addition we recorded a loss of 2.2 million in our statement of operations resulting from an impairment to the value of these investments.

Now, turning to our outlook. For the first quarter of 2008, we expect revenue to range between 35 million and $37 million, adjusted EBITDA to be between 2.5 million and 3.5 million and net income to be between breakeven and 1.4 million or up to $0.04 per share. Now, I'll turn the call back over to Jim to wrap up.

Thanks, David. We have a solid set of search assets, the foundation being our MetaSearch technology which is becoming more relevant every day. Over the past five years, the web has grown exponentially now with over 100 million sites, naturally as web search has emerged as the most important tool for discovery, the investment in technology has grown exponentially as well with Google, Yahoo!, Microsoft, and Ask, taking fundamentally different approaches to indexing and organizing information. In addition the advent of specialized or vertical search engines that focus on a certain topic such as health or travel have added a new dimension for users. All this activity underscores the value of our MetaSearch technology, which has continued to evolve with the industry at large. We developed the capability to understand the strengths of various engines, the intention of users around specific queries, and methods to distill the best result set. This is borne out in our industry leading success rate as tracked by Com Score and by the JD Power award for highest customer satisfaction two years running. We have an excellent and improving product and we need to be more aggressive in increasing exposure to it.

We're focusing our efforts on Dogpile where the lion's share of our users reside by adding more verticals to our index, launching a new user interface and later in the year, innovations focused on the intersection of social networking and search. Additionally, we will boost direct-to-consumer marketing to support the Dogpile brand and educate audiences on the unique benefits of Dogpile. Specifically, we expect to increase the marketing spend by 50% in 2008, to lead these efforts, Bruce Allenbaugh was recently hired to the newly created position of Chief Marketing Officer. Bruce is a seasoned marketing executive with a proven record of developing high impact brands such as Pepsi and SafeCo. While our mascot Arpy didn't make his appearance at the Super Bowl this weekend, Bruce nd his team will be increasing his about Dogpile's visibility.

On the distribution side, we benefit from having more than 100 private label partners, including six new partners signed in the fourth quarter. Among these partners are content sites such as Real Networks, community sites like MyPoints.Com and connectivity sites like Verizon DSL. And we've recently launched two products that significantly broaden our appeal to the connectivity market. Private label portal and DNS Assist. In the past year or so there's been movement by ISP's away from internally developed portals to private label or outsource arrangements. Reasons include improved access to content and advertising and scale and the non-linear step to web 2.0 technologies.

Our portal product features an Ajax based user personalized homepage which offers standard content such as news, weather, sports, and stocks, as well as a broad menu of user configurable content modules for easy access to RSS feeds, widgets about applications. The widget catalog, user defined tabs, and drag and drop functionality make it simple to organize a personal homepage. It's built on an extensible platform that allows for cobranding while also projecting a high degree of customization for our distribution partners and their content and services.

Importantly, the portal includes our MetaSearch service providing strong monetization as well as fixed modules for contextual display advertising. We're pleased with the initial market response and will launch two partners in the first quarter.

Another trend in the ISP market is DNS Assist which resolves user typing errors and replaces the standard 404 error page with helpful suggestions, corrections, and related search terms. We developed filtering technology as well as the landing page designs and integration of text based relevant adds. This is a relatively untapped, high volume market, and we're currently testing with several ISP's with very encouraging results. As our overall goal is to grow quality searches, these products help expand and strengthen relationships with our distribution partners. Along with the revenue initiatives we're focused on rebalancing our operating structure and reducing costs in line with the new size of our business. We've reduced our staff by approximately 35 positions during the fourth quarter and expect to realize approximately 7 million to 9 million in annual cost savings.

In summary, Infospace is in a dynamic market that has substantial growth ahead of it. We have a talented team, a solid direct customer base, growing distribution network, great partners for monetization, leading technology assets, financial strength and a high leverage business model that generates strong cash flows. We're proud of our record of creating value thus far, and the game is far from over. With that, we would be pleased to take your questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Kerry Rice with Wedbush Morgan.

Hi, guys, nice quarter. A couple questions, one which I assume you're somewhat anticipating is the impact of Microsoft's potential acquisition of Yahoo! and how that consolidation could be positive for Infospace and then I have a couple follow-up questions.

Sure, Kerry. Well, this is something that we've been waiting for I guess and we might think of it as a reconsolidation of that network. If you look at, if you go back a few years for us and of course, just to set the stage a little broader here, we, by virtue of the structure we run with MetaSearch and we send every query to a variety of engines we're in a pretty interesting position to look at the different monetization levels and the way the different engines and beyond engines, the ad networks work on queries and how they monetize those, and if we go back a few years, there really wasn't much to choose between the kind of monetization we saw from the Yahoo! network or the Google network. They were fairly similar. And if we go back and look at the time where Microsoft determined they would build their own network and began to take traffic away from the Yahoo! network, on a relative basis, the gap got wider and Google continued to get stronger. That hasn't necessarily been bad overall for us but we certainly prefer having much more competition in that space for advertisers and would like to see, we believe that that consolidated network between Microsoft and Yahoo! will help their monetization and will help us overall in the long term. I think in the short to medium run, it probably doesn't mean a lot.

Does that mean that they will pay that -- I think Microsoft doesn't use a lot of distributors today but does that mean you think Yahoo! will pay more higher rates or?

Not necessarily higher rates, but as you know, these add networks have a tremendous network effect. They draw more -- the more eyeballs you have the more advertisers you're driving the higher your keywords get bid, et cetera et cetera, right. So we would look at that and it will also help, frankly, it will help stabilize what you're talking about, tack or rev share. If we looked out a couple of years and we continued on the road we were on an we saw greater diversions, it would be by the time our contracts came up in 2011, Google would, again if this trend had continued in astatic way, Google would have much more pricing power in terms of revenue share, so we think this serves two ways, a larger network will monetize better and it will also serve to keep everybody honest on rev share.

Okay, about then on operating expenses, obviously you said you'll be spending more on sales and marketing about the restructuring is 7 million to $9 million in annual cost savings. When should we see the roughly $2 million a quarter kick in? Should I think about it in Q1 about then maybe longer term, what other restructuring efforts or maybe cost cutting efforts do you think about to bring down G&A even further?

So we're looking at the lion's share of the effect of the cost savings to be completely into the income statement in the third quarter and fourth quarter of this year, and to see EBITDA reflected that way.

And I'd say on the second part of it, Kerry, we will take a little bit of a wait and see, remember we went from running three businesses here to one. There were certainly some shared services, if you will, that we went to work on here, and cut back on. We're pretty comfortable with the size of the business right now. We're pretty comfortable that we could grow revenues fairly substantially here with very minimal ads to hedge, so we feel really good about the leverage in the model. Could there be a few more positions as time goes on and we learn to do things a little bit more efficiently? Yes, but it's not going to be a substantial amount.

Okay, so are you still looking for 15% EBITDA margins exiting the year?

Yes, that's a good way to look at it, Kerry, exiting the year.

Okay, and then one final question. Now that you've done the 300 million distribution related to the directory proceeds or sale of the directory business, have you thought any more about doing another kind of special dividend related to the sale of the mobile business?

Well, I'd say that first of all, I'd say that the overall dividend was related to both sales. I mean, it's really a matter of looking at what your cash needs are going forward and the like. At this point, we -- remember we have a few different ways to look at this. One is we have a buyback in place. So we kind of watch and see how the equity performs here and if we think that this frankly, we think this stock stays real cheap, that might be a little bit more attractive. So we will look at all of the different opportunities we have here.

Okay, thanks a lot.

Our next question will come from Clay Moran, Stanford Group.

Hi, this is James Dobson asking a question for Clay. My first question is can you talk a little bit about the pricing trends you see? Is it stabilized or is it increasing a little? And then second, I know you mentioned you're going to try to concentrate on Dogpile. What about your other owned properties, maybe WebCrawler and Excite, if you can give us maybe trends of what you're seeing there? Thanks.

So James, I could do the first part and then I'll kick it over to Jim for the second. In terms of pricing, I think you're referring to the rate that we're seeing how we're monetizing our traffic. Is that right?

Yes.

And we're seeing those continuing to grow. They grew throughout 2007 and the early indications in 2008 they seem to be fairly strong.

And on the second part of it, if we look at our owned and operated sites as a whole, out of our 4 million users, the lion's share, some 70% plus are at Dogpile so that gives us kind of if you will critical mass to work off of and that's really where most of our efforts will be concentrated. We do use WebCrawler and MetaCrawler and aim them at slightly different audiences and frankly use them a little bit as a test bed to try different kinds of marketing efforts to test different kinds of features, things of that nature, but Dogpile is where we are going to concentrate most of our effort.

Could you give me a reminder again of how big the buyback in place is?

100 million.

Great. Thank you.

We will take our next question from Ali Mogharabi with B. Riley & Company.

Hi, guys, just want to make sure the 39 million in revenues, that's all search; correct?

That's correct.

Yes, everything within the mobile and directory business is discontinued operations.

Got you, so I was wondering, I am actually pleased with the guidance for Q1 but I'm wondering if you could just explain why we might be seeing a little dip in there? I know seasonal factors are involved.

That's really it.

Yes, that is it. We typically see first quarter down.

Okay. And then I think someone else asked this but I just want to make sure, so I'm assuming that you're still looking for gross margin of 55 to 60 and 50% EBITDA margin basically going out of the '08?

On the EBITDA margin, yes. Exiting 2008, the gross profit margin is really going to be affected by the mix between distribution and our own the sites.

Yes, because I saw now that you have 64% of the revenues coming from distribution so I'm assuming it might be more likely to the low end of that range.

If the mix between owned and distribution continues in that trend then we would expect the margins to come down, respectively and we do, I would expect that that mix is going to have some volatility throughout the year.

But remember, Ali, our focus is on the absolute dollars we can drive here to the bottom, and whether or not -- revenue mix is somewhat unimportant to us, right? We prefer -- we would like to see both of them growing real fast, but both of these are profitable businesses and so either way, it's pretty much fine with us.

Of course, and then with that of course it adds to increase your cash balance. Besides the stock buyback possibly and potentially let's say dividend distribution, are you looking to make any acquisitions? Is that part of the strategy going forward?

We really like the business model we have. If we could find, we said this all along we could find really high quality search traffic to add right on top of our business model we would be very very interested in it and I'll tell you we haven't found a lot of that out there yet, but we keep scratching for things, but in terms of kind of some type of more broad diversification, no. We want to stay, we like the business model we have here. We think it's highly leverageable, want to stay very focused on it and that will be the, that's what we're looking to do.

Got you, all right, thanks, guys.

Thank you.

Jeff Shelton with Natixis, your line is open, please go ahead.

Jim, I was hoping you could go into a little bit more detail about the strength on the distribution side on the sequential basis, was most of that growth from I would say your core partners or was it some related to some of the more gray areas which caused some variability earlier in the year?

I don't know, David, do you want to, I don't know how much more detail we really want to get at that and I'd just tell you it wasn't one or two partners, it was distributed across the distribution chain here.

And in the past we've talked about sort of the mix between our organic and SEM partners and I would say that in the fourth quarter the sequential growth was pretty much shared across those two buckets, and we didn't see a significant mix between those two type of partners.

And how much of the five or six new contracts that you said you signed on showed up in the fourth quarter?

To a very little extent, a little bit of the sequential growth was coming from new partners, most was coming from dates that had been in there in the third quarter.

And the distribution as a percentage of total was 64% in the fourth quarter. What was it in the fourth quarter of last year?

I had it around 60.

It was a little bit under 60%.

Okay. And so that would imply that you're fairly flattish on the Dogpile and on an offside from a revenue perspective year-over-year?

That's right.

So given the initiatives that you're undertaking in terms of driving traffic, we should expect to see some growth there in '08 versus '07?

That's the plan.

Yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS) We go now to Derrick Wood, Pacific Growth Equities.

Thanks. You talked about increasing marketing spend by 50%. Can you give us a sense for what you spent on Dogpile in '07?

Well, so our overall marketing spend is below 10 million in '07, so we're looking to grow 50% off of that base.

Okay, thanks, and in terms of the ARS that you classified, I'm not sure how much cash that was but that's moved to long term securities, can you give a little more clarity on that and why you may have not written down more of that?

So we actually assess the value, the fair value of the option rate securities and will do so again at the end of the first quarter. What the amount that we wrote down was reflective of the difference between the par value of those securities and what the fair value is, as of the end of December. The other than temporary piece of that is what we reflected in our income statement, that 2.2 million that I referenced earlier.

Okay. And in terms of looking at depreciation going forward, are we at a pretty good run rate here? It was 1.4 million in the quarter.

Yes. You'll see in our guidance, one of the factors in our guidance is pretty flat on depreciation.

Okay. And just to reiterate so the upside versus your expectations on the top line really came from more upside from distribution partners and it was both organic and SEM?

That's correct.

Okay. Thank you.

Operator? We have time for one more question.

Our final question will come from [Kelly Hudler] Central Square Capital.

Hi, guys, thanks for taking my call.

Sure.

Jim you talk about exiting the year at 15% EBITDA margin which is great, but given the inherent cost structure of the business is there any reason why we look at it a couple years this couldn't be a 25% plus margin business or are there more investments that you feel like you need to make?

No, I think, the thing we love about this business model is -- well a of couple things. We've already seen what it looks like at 150 million of revenue. Unfortunately, that was a couple years back, but so we know that it produces, it takes, if you will, particularly organic traffic that comes to our owned and and operated sites and turns that into bottom line cash flow very very efficiently. So that's really the leverage that we're pushing for here, and as I mentioned earlier, I think the kind of size of the Company in terms of the cost infrastructure right now is appropriate for where we are and where we want to go but it can can also carry a lot more revenue. It's again a very highly leverageable kind of a model, so we this year want to be very aggressive on trying to grow that owned and operated base and we think we have the products in place and with new enhancements behind that, and some good communication programs and smart add spend here in order to do that.

Sounds exciting, guys. Thanks.

Thank you.

An we conclude our question and answer session. At this time I'd like to turn the conference back to our speakers for any additional or closing comments.

Thanks for joining the call this afternoon.

Thank you, everyone, for your participation in today's conference and you may disconnect at this time.