Avantax Inc (AVTA) 2008 Q1 法說會逐字稿

Good day, and welcome to the first quarter, 2008 earnings results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Stacy Ybarra, Director of Investor Relations. Please go ahead, ma'am.

Good afternoon, and welcome to InfoSpace first quarter 2008 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 this -- the course of this call InfoSpace representatives will make certain forward-looking statements. These forward-looking statements include statements regarding InfoSpace's expectations that over the next few quarters we will introduce product enhancements and marketing initiatives designed to expand our business, expectations that we will be introducing two portals for customers in the future, expectations that we will continue to grow, expectations that we will complete certain restructuring activities by the third quarter of 2008 and expectations for our financial performance for the second quarter of 2008.

Other statements which may be 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 or 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 10K for the year ended September 31, 2007, and quarterly reports on form 10Q which are on file with the Securities and Exchange Commission. InfoSpace assumes no obligation to update its forward looking statements.

In addition, during this call our management will discuss GAAP and nonGAAP financial measures. In our press release, which has been posted on our website, we present GAAP and nonGAAP results along with the reconciliation tables, which highlight this data as well as the reasons for our presentation of nonGAAP information. Now, I'll turn the call over to Jim. Following his comments, David will review the first quarter financials and second quarter outlook, then we'll open up to your questions. Jim?

Thank you, Stacy, and good afternoon, everyone. I'm pleased to report a strong quarter and a great start to the year. Revenue was $42.2 million up $6.3 million or 18% over the first quarter of 2007, and up $3.1 million or 8% over the seasonally strong fourth quarter. In addition, we began to realize the benefit of cost reductions announced late last year, and as a result adjusted EBITDA came in well above our expectations of $7.1 million, demonstrating the operating leverage in our business.. Regarding the balance sheet, we ended the quarter with over $220 million in cash and no debt.

Our overall goal is simple, increase the number of quality users and searches through owned and operated properties as well as distribution partner sites. To that end we are investing more resources in the product and marketing than at any time in the company's history, and that's yielding results. Last week we announced key upgrades to improve the user experience and modernization on our flagship site, Dogpile.com. Our research indicates that Dogpile users indicate above average in their tendencies to shop online and the product improvements are designed to leverage and capitalize on this knowledge. Specific changes include: a visually enhanced and more intuitive home page, easy to read search results page that's been simplified based on itracking research, improvements to the meta algorithm to ensure the most relevant results, deep links within search results that direct users to specific sections of websites, enhanced content integrated in the traditional search results and the launch of a SearchSpy social networking widget which allows users to catch a real-time glimpse of current Dogpile searches from their personal start pages at Netvibes or iGoogle.

Over the next nine months we will continue to add vertical content and improve functionality and relevancy, yet traffic acquisition is the key initiative. Over the next few quarters, we'll implement a three-pronged attack, building brand awareness with strategic PR activities and a targeted online spending, increasing our presence in client side applications such as tool bars and widgets and leveraging our high page rank with SEO and SEM campaigns. The first agenda relies heavily on bringing Arfie, the Dogpile mascot who lives on the site, to life. While Dogpile delivers great search results, we're positioning the site as the fun place to discover the web with Arfie at center stage. We experienced great customer involvement with Arfie whenever he dresses like Elvis, celebrates a holiday, or makes a statement. By expanding this activity we can further engage our users and attract new ones. We're expanding Arfie's range, letting him off his leash, so to speak, and deploying viral marketing initiatives to bring Arfie to other places on the web where people congregate. The goal is to make an emotional connection with people either on Dogpile or elsewhere and increase search activity as a result.

Next, client side applications such as tool bars and widgets provide fertile ground for traffic acquisition and retention. Leveraging the audiences of content aggregators and social networking sites such as Netvibes, iGoogle, MySpace and Facebook, as well as more aggressive direct marketing efforts will enable us to target and require a steady stream of new users. Widgets such as SearchSpy and Favorite Fetches and even a roving Arfie bring our search capability and our brand experience to users in an variety of online environments.

Finally our high page rank provides an opportunity to use SEO and SEM effectively to drive traffic with good contribution margin and user retention. This initiative has been successful in its early stages this year, and we will ramp it up during the remainder of 2008. For these programs we've increased our marketing budget 50%, from $8 million last year, to $12 million this year, although the spending will be heavily weighted toward the latter part of the year. We've had success with online campaigns and believe we can attract users at a positive ROI.

Our distribution network is an important part of the traffic acquisition strategy, and we continue to have success in this arena. In the third quarter we signed five new partners and extended our agreement with Insight Communications, a broadband ISP that supplies service to more than 650,000 users. We're providing Insight a new web portal featuring user define cabs and drag and drop capability making easy for consumers to organize and engaging a personalized home page. Of course the portal will include our search results. Our new portal and search offering has enjoyed a successful start in the market and we have two additional launches in the near future.

The DNS market continues to develop. DNS is a server side set of applications that capture error traffic and provide end users a helpful set of suggestions for navigation. This is an early stage market and we have several trials in the U.S. and Europe and are very encouraged by the results. As with our owned and operated initiatives, client side applications are important in distribution as well. We've had good results with MyPoints, a united online site where users earn points for online purchases. The customized My Points tool bar tracks point totals for users and is a persistent desktop presence that makes search convenient. The penetration, retention and usage have been above our expectations and we believe similar programs can be effective for many of our customers.

To close, we had a productive and financially strong quarter, we have a proven scalable business model and have reduced costs to position ourselves for profitable growth. We significantly improved our product and are focusing our attention on growing traffic. In addition to organic efforts, we have a strong balance sheet that allow us to be opportunistic regarding acquisition of quality sources of traffic. I'm encouraged with the progress we've made this quarter, but we have a lot of hard work ahead of us. With that I'll turn the call over to David Binder for more details on the financials. David?

Thanks, Jim. I'll start today with a review of our first quarter earnings, including a discussion of our cash position and balance sheet, and then provide our guidance for the second quarter. As Jim mentioned earlier, revenue for the first quarter was $42.4 million [Sic-see press release] which exceeded our expectations by approximately $6 million. This represents a sequential growth from the fourth quarter of 8% and an 18% growth rate from the first quarter of 2007. Gross profit margin was 48%, down 3% sequentially from the fourth quarter. In the first quarter we experienced growth from our distribution line of business, which represented 69% of our total revenue, up from 64% of our revenue in the fourth quarter.

Adjusted EBITDA in the first quarter was $7.1 million, equal to 17% of revenue and exceeding our guidance by approximately $4 million. In the quarter we began to see some results from the restructuring initiated at the end of last year. As a result, we reduced our cash operating expenses while growing top line revenue. On a normalized basis excluding deal, dividend and legal fees in the fourth quarter, we reduced our cash operating expenses by $1.6 million. In the quarter we recognized a loss from continuing operations of $2 million. Within this amount, we recorded a $6.7 million loss relating to an unrealized reduction in the fair value of our auction rate securities. In addition to this charge, we also recorded stock-based compensation expense of $3 million.

Including the results from our discontinued operations, total net loss for the quarter was $2.8 million. We recorded a $700,000 loss associated with the wind down of certain assets that were not assigned in the sales of our directory and mobile businesses, we expect to complete these types of activities by the end of the third quarter of 2008. Net loss per share for the quarter was $0.08, our average basic shares for the quarter were 34.3 million, and the ending basic share count was 34.4 million.

Now, turning to the balance sheet. We ended the quarter with $220.7 million in cash short and long-term investments, a decrease of $354 million. During the quarter we paid approximately $360 million in shareholder dividends, severance and other deal costs related to the sales of our mobile and directory businesses. At the beginning of the year, we expected the cash balance, including the effects of these costs to be between $210 million and $215 million, and we ended the quarter $5 million to $10 million above that mark. Within our long-term investments we're holding $29.7 million in auction rate securities versus a par value of $40.4 million. In total we've reduced the fair value of these holdings by $10.7 million, of which we booked $7.7 million in the first quarter of 2008. While we continue to receive interest income on the full par value, these investments have failed to provide us with an opportunity to liquidate through the design option process.

Now, turning to our outlook, as we enter the second quarter, we are beginning to see some positive results from our product and marketing initiatives. However, the period has been historically seasonally weak for our properties. On the distribution side, while we continue to win new deals, we also expect that some existing partners will adjust their marketing spend through the period. For the second quarter, we expect revenue to range between $34 million and $36 million, adjusted EBITDA to be between $2.5 million and $4 million, and net loss to be between $1.9 million and $.4 million, or a loss of $0.06 to $0.01 per share. Now, I'll turn the call back over to the operator for questions.

Certainly, sir. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble the queue. And we'll take our first question from Kerry Rice with Wedbush Morgan Securities.

Hi, nice quarter, guys. Two quick questions. One is, on the auction rate securities, make sure I understand, you've written off, I think you've mentioned seven -- a little over $7 million. So did you mean there's another $3 million that you'll write off sooner or later, or just maybe explain that better so I can -- re-explain it so I can better understand. And then the second question is, excluding the write-off like you mentioned, EBITDA bumped up to 17%, and you had a goal of exiting '08 with 15% EBITDA margins. So do you see this coming back down a little bit next quarter and do you see it then growing, bumping back up gradually, or how do you see that as we get to the second half of the year?

Okay. So I'll start with the auction rate security. Over the past two quarters we've recognized impairments on the holdings, so including the write down that we did in the fourth quarter, the total reduction in value is $10.7 million. In the first quarter, the reduced value was $7.7 million of that $10.7 million.

Okay. And then do you foresee having to write off more of this, or can you give us any insight into that?

This is something that we'll assess every quarter with the given market conditions.

Okay. Okay.

And then regarding the EBITDA margin in the first quarter, it was a great quarter for us, and obviously exceeded our guidance and expectations significantly. We are seeing second quarter or anticipating that it will come down off of that 17% mark, we're still targeting the exiting 2008 at the 15% EBITDA or greater.

Okay. Actually just one final question. I think, Jim, you've mentioned not as guidance, but you've previously talked about revenue growth being -- you would like to see revenue growth around the overall search industry growth rate of 15%. Is that kind of what you're looking for for the year, or can you give us kind of any indication just kind of year-over-year growth for '08?

I think that would be called guidance. Okay?

Well, I think you've said in previous --

I think at some point here we definitely believe that's kind of the first goal out there to achieve that growth rate. I can't put a time limit -- a time stamp on that for you. And that's definitely the first goal that we ought to be able to achieve is to grow along with the market.

Okay.

We're not there yet, obviously, so --

And moving on to Ali Mogharabi with B. Riley and Company.

Hi, guys. Again, a pretty good quarter. Can you give us a little more info on the portal clients? I'm trying to figure out if you signed any or you think you will sign any as big as the one you lost last year?

The port -- oh, the portal?

Yes.

Is that what you're referring to?

Yes.

Okay. So -- let's see, we have three customers now that will be launching this year, and have several out there in the pipeline. But at this point I wouldn't want to speculate on who will be signed and who will not be signed. There -- and there are some that are at that same size of the folks that went away at the end of the year.

And Ali, I would add that we did see some terminations at the end of last year. The new customers that we've signed have more than made up for the revenue that has terminated.

Okay. That's what I wanted to know, okay.

And it's -- I would characterize it as not necessarily all associated with the portal project, but it's the distribution business in total.

Got you. And then your thoughts -- might be a little bit difficult, but can you give us your thoughts on this Microsoft/Yahoo battle that's going on? And actually, I guess both parties have remained pretty much silent for a while.

Well, I guess it's only others who will comment on it, right? Others of us who are the uninformed but who are willing to comment on it. As we said before, we think that just from an industry standpoint, and then definitely from a selfish standpoint, we would welcome a much healthier second network out there, if you will, Google being the first network. And we think that the only way that that's going to be accomplished is if you see the two traffic bases of Yahoo and Microsoft coming together either strategically or commercially in some manner to form a large enough audience that drives a good competition there. We don't have any -- or I don't have any particular insight. I heard all the same rumors. You probably hear some rumors. You hear rumors I don't. I hear rumors you don't. I would be -- on the surface of it, I don't quite see how it benefits Yahoo or its shareholders to walk away from this deal. So I think somewhere along the line it gets done.

Got you. And just to follow-up on that one, let's say if it doesn't go through, how can that impact you and have you thought about that? What would be your strategy going-forward if that does not take place?

It's called, what's it been like for the last three years. It's not anything new. The new thing would be the changes would be if it does go through. We'd be in the same position we are now with doing business with three of them instead of with two of them. Again, we get a benefit if it goes, it's not necessarily a detriment if it doesn't.

Got you. Thank you.

And moving on to Lloyd Walmsley with Thomas Weisel and Partner.

Great. Thanks. I was wondering if you could just comment on any plans you have or might have to do with your cash balance, and then if you have any interest in acquisitions, where you may be looking? And then I have some follow-ups.

Well, Lloyd, this is Jim. We're always looking, right, for opportunities to build the business. We -- right now, I'd say our focus is, the kinds of things we're most interested in are things that have either quality search traffic or the ability to drive quality search traffic and add to that. So at this point in time we're not interested in diversifying, if you will, into other kinds of businesses. We see that our business model works really well. I think this quarter is very demonstrative of it. We can raise -- we raise the top line a little. We raise the bottom line pretty well too. So it's really things around that nature where we can find quality search traffic that we would be interested.

Would you think about buybacks with the cash balance?

That's possible if we go some period of time and I wouldn't exactly -- can't define it. It's probably less than two years and more than next month, where we're not able to find something more productive to do with the cash, then we'd look at that. The only thing I'd say about a buyback is, if you recall before, from our discussions around dividends, is with the NOL's we have, buybacks are a little bit tricky because you don't want to impair the value of that asset. So it would likely, if we got to that point, it would likely come in the form of a dividend as opposed to an NOL -- a buy back, so we could preserve the NOLs.

Yes. And then looking at the DNS redirect business and some of the portal deals, how are incremental [tack] rates that you all pay out on your affiliate deals? Is there much change there, or is it pretty stable?

That's kind of stayed -- first of all it gets balanced depending on how you structure the deals, particularly with portal. Okay? So we may take a much higher tack rate, in other words, we would take a greater percentage depending on what kind of fees we would charge for the portal. So those can slide, actually, a number of points back and forth that way. Put tack rates kind of follow what the big guy in the industry does, and they've stabilized tack rates pretty well over the last year, and so they're staying pretty stable.

Great, thank you.

And we'll take our next question from [Carl] Wong with Needham & Company.

Hi, guys. Thanks for taking my questions. I guess I'm just wondering why the proprietary -- the owned and operated business was down year over year after, I guess in 4Q showed some good trends there. And also, on the flip side what drove the distribution business to accelerate in growth?

So in terms of owned and operated, in the first quarter we did see good volume growth versus the prior quarter. However, overall, we were slightly down versus fourth quarter. And as we come out of the holiday shopping season, we tend to see rates get a little bit weak in the second quarter, in the first quarter, and that's really the driver of the trend for owned and operated. Now, your second question on distribution, could you state that again?

I guess there's a bit of an acceleration in terms of year-over-year growth, and even if you look at the revenue mix between distribution and owned and operated, kind of what drove that acceleration and distribution?

Alright. In distribution we really had two effects, one our new partners that we signed through the fourth quarter and even in the first, and they contributed to a good portion of that growth. We've also seen a lot of growth in the partners that are using marketing to drive volume. And that is a source of year-over-year growth as well as the reason why we were so far ahead of our guidance and expectation.

And I guess you've mentioned in the past that you guys want to focus more on the [other] side, what kind of revenue mix do you kind of expect to see exiting the year?

So, it's hard to gauge that. Mostly because of the volatility we see within some of our distribution partners. We've been in the mid 50%s to now upper 60%s of distribution as a percentage of our total. It would be great if we continue to grow and bring that mix more to 50/50, but it really depends on how much growth we get out of the distribution business.

Yes. And I think for us, it's not so much the mix that's important, it's the fact that both lines are moving in the right direction and growing. So it's not -- again, we're focused on driving absolute dollars to the bottom line, not so concerned about percentages above it.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll move on to Clay Moran with Stanford Group.

Thanks. This is James Dobson for Clay. You mentioned in your comment that Dogpile users tend to shop more. Have you seen any effects on their search habits based on the economic conditions that's been taking place?

I can't say that we have. I think that in the range of error we couldn't -- we can't really see anything that looks any different.

Alright. Thank you.

Operator, I think we have time for one last call -- or question, sorry.

Thanks you, ma'am. And moving on to Ross Sandler with RBC.

Hey, guys. Two questions on the distribution side. First is, it looks like it grew about 35% year-over-year, and apologies if someone already asked this. But can you tell us how much of that growth was on a same store sales basis versus new client wins? And then I have one follow-up. Thanks.

So we don't really break out the distribution business that way, I would say, though, that you're getting good contribution from both types of revenue, existing accounts grew pretty well, as well as the edition of new ones.

Okay. And then if we think about that piece of your business longer term. I mean, I know Google has kind of looked at some of the intermediaries out there that use marketing both on Google and Yahoo to drive traffic to their landing pages. And they allow some of it, they frown upon some of it. Do you view this as a risk longer term with the more marketing-oriented distribution partners that you guys are facilitating on the back end? Thanks.

Well, Ross, I think we've been along that same curve with Google and Yahoo now for the last couple years, and I think it stabilized quite a bit. Our feeling is we stabilized quite a bit in learning exactly what Google and Yahoo both feel is good traffic. Just in the simplest terms, good traffic versus bad traffic. So ours has been pretty stable, and we now have -- if we look across the last three years, we've had really good growth in it. We have some partners who are very, very -- most of our partners, actually, the older partners are very stable. Got to say, they go up and down, depending on the season and how they feel like their marketing spin can work, but they've been pretty stable.

That being said, there's -- and this didn't really affect us as you can see in the first quarter, we had a strong quarter, we saw just from market activity a lot of folks in the domain name space where we didn't really -- weren't really handling any traffic. We saw a lot of people in that space get shut down or severely curtailed. So that -- I guess just to say that the sand is always shifting there, you never know where it may come next. But at least at this point with the folks we've had, we think that we have come to terms on the right formulas to make sure that our traffic's good and accepted and works for our partners and it works for us.

Okay. Great. Thanks.

And that does conclude today's question-and-answer session. I'd like to you to now close the conference. We thank you for participating, and you have a wonderful day.