Avantax Inc (AVTA) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2008 earnings results conference call. I will note that today's call is being recorded. At this time, I'd like to turn the conference over to Miss Stacy Ybarra, Director of Investor Relations. Please go ahead, Stacy.

Good afternoon and welcome to InfoSpace's second quarter 2008 earnings conference call. I'm Stacy Ybarra, Director of Investor Relations. With me on the call is Jim Voelker, Chairman and CEO and David Binder, Chief Financial Officer. Before we get started, let me quickly remind you of two things. First, this is an investor call. Accordingly, we will only take calls from the investment community. Second, during the course of this call, InfoSpace representatives will make certain forward-looking statements, these forward-looking statements may include statements regarding InfoSpace's expectations relating to its online products and services, growth initiatives and anticipated financial performance and growth for the third quarter and full year 2008. Other statements which may be 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, 2007 and quarterly report on form 10-Q, 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 non-GAAP financial measures. In our press release which has been posted on our website, we present GAAP and non-GAAP results along with reconciliation tables, which highlight this data as well as the reasons for our presentation of the non-GAAP information. Now, I'll turn the call over to Jim. Following his comments, David will review the second quarter results and third quarter and full year outlook, then we'll open it up to your questions. Jim?

Thank you, Stacy and good afternoon.

Last quarter, we discussed initiatives geared toward growing owned and operated revenues and our belief that we would see results beginning in the third quarter. I'm very pleased to report that positive results have been realized sooner than those expectations and our second quarter performance yielded robust top line and EBITDA growth. For the second quarter, revenue was $38.3 million, up $6.6 million or 21% over the second quarter of 2007 and approximately $3 million or 10% above our guidance. More important, our owned and operated business performed exceptionally well. Revenue for O&O increased by $1.3 million sequentially in a historically weaker seasonal period. Along with these positive revenue trends, we reduced costs and improved our operating structure and as a result, adjusted EBITDA was strong at $9.7 million compared to a loss of $15.2 million in the second quarter of '07 and up $2.6 million or 37% sequentially.

Regarding the balance sheet, we ended the quarter with $218.5 million in cash and no debt. The overall web search market remains strong as 2008 domestic growth should exceed 20%. We have a leverageable business model. In fact, we believe we monetize quality search traffic better than anyone due to our metasearch technology and favorable business agreements with the major ad networks. As our owned and operated traffic has high conversion rates, growth in this area is a major goal. To that end, we have several growth initiatives in place and as our second quarter results demonstrate, we've gained ground. One initiative is aimed at increasing Dogpile users. After researching user behavior, we've shifted the character of the site from strictly a metasearch experience to one of engagement with search in an entertaining way, leveraging Arfie, the Dogpile mascot.

During the quarter, we've significantly increased Arfie's presence on the site by bringing him to life with daily cartoons using themes such as politics, entertainment, current events and offbeat holidays. We recently featured Arfie landing on Mars, caught between Clinton and Obama and morphing into super hero alter egos. User feedback from these promotions has been uniformly positive, but more important, click behavior associated with the graphic has been excellent. On most days, the topic has generated the highest number of clicks on the page. In addition to bringing Arfie to life, we're building partnerships with pet related affinity groups to expand our reach and extend the Dogpile brand.

This morning we announced a strategic partnership with petfinder.com, the largest database of adoptable pets. The Dogpile search box will be prominently featured on the petfinder site, exposing petfinder's millions of visitors to the Dogpile brand and our metasearch technology. This also calls for joint promotions of widgets and tool bars which will increase awareness and drive traffic to Dogpile. We're also launching a joint marketing campaign with Pet Holdings, Inc., the parent company for some of the most popular user generated pet community sites on the internet, including icanhascheezeburger.com. The campaign mirrors that of Pet Finder as well as integration of daily user generated content on the Dogpile site. These alliances are part of a larger strategy to engage pet lovers and introduce them to Dogpile and Arfie through a broad range of access points. Direct marketing is another tool for user acquisition and the success of a program is dependent on optimizing creative media buys and monetization yields to create positive ROI. In this quarter, our efforts were successful across these factors and we delivered solid growth. We're encouraged with these results and our ability to drive quality traffic at a positive margin and will continue to increase spending in this area.

A third agenda is to increase our activity in client side application such as tool bars and widgets. During the quarter, we introduced a specialized search widget featuring Arfie and his dog house. This graphically rich and engaging desktop ad lets users play fetch and watch Arfie run around on their desktop. But more important, the widget is a persistent and convenient way for users to search on their desktop and initial search activity from these widgets has exceeded our expectations. We've been impressed with the overall market growth in this sector and plan to increase our emphasis here in the second half. Our high search monetization and DNS conversion capability position us favorably to exploit this opportunity. The distribution side of our business exceeded our expectations as well in the quarter. We signed five new partners and renewed two significant contracts. We're on target to launch three new portal customers in the second half and have commenced additional trials for our DNS product with clients in North America and Europe. In this context, DNS is a server side application for ISPs that captures error traffic and provides end users with navigation suggestions.

We've made good progress this year in developing our offering and have seen strong monetization in tests. Bundling search, portal and DNS gives us a strong product set for the ISP market. To close, I'm proud of our strong performance in the second quarter. It's a testament to the effort of our people in driving our initiatives and exceeding targets. In the second half of the year, we need to continue to broaden the funnel of quality traffic through product enhancements, marketing efforts, affinity relationships and distribution partners. We entered 2008 with a scaled back business that we believed we could develop. We've made significant progress so far, increasing revenue and generating good cash flow. We have a solid set of assets, including our 3.5 million unique searchers, a scalable business model, over 100 distribution partners and unique monetization relationships with Google and Yahoo that run into 2011, and we have over $6.30 a share in cash and a large NOL balance. We're encouraged by our first half performance and our potential to leverage these assets into increased shareholder value. With that, I'll turn the call over to David for more details on the financials. David?

Thanks, Jim and welcome to our call.

I'll start today with a review of our second quarter earnings including a discussion of our cash addition and certain balance sheet items and then provide our guidance. In the second quarter, we exceeded expectations on all financial metrics. As Jim mentioned earlier, revenue for the second quarter was $38.3 million, which is down sequentially from the seasonally strong first quarter by 9%. However, represents a 21% increase from the second quarter of 2007 and is above our guidance by about $3 million. The better than expected performance is attributable to our owned and operated line of business which has seen benefits from product improvements as well as increased marketing activity. Gross profit in the quarter was $20.3 million, roughly in line with the first quarter. However, the gross profit margin equaled 53% of revenue, up from 48% in the first quarter or 5 percentage points. The sequential increase is driven by strong revenue growth in owned and operated, which was equal to 37% of our total revenue, up from 31% in the first quarter. Adjusted EBITDA in the second quarter was $9.7 million, equal to 25% of revenue. This total includes the benefits of some one-time gains associated with the sale of non-core assets and favorable settlements equal to $3.3 million.

Normalizing for these items, we would have generated $6.5 million of EBITDA, equal to 17% of revenue and ahead of our guidance by approximately $3 million. This strong performance in EBITDA margin resulted from our ability to grow owned and operated while managing our overall cash operating expense. Income from continuing operations in the quarter was $2.7 million, which includes a $4.4 million charge associated with an unrealized loss from our investments in option rate securities. In total, net income in the quarter was $1.9 million, ahead of our guidance by approximately $3 million and equal to $0.06 per diluted share. The weighted average diluted share count in the quarter was 34.8 million and we ended with 34.4 million total shares outstanding. Regarding the balance sheet, we ended the quarter with $218.5 million in cash, short and long-term investments, equal to $6.35 per share. Within this balance, we hold $27.2 million in long-term investments, which reflects the current value of our auction rate securities. The par value of these investments equals $40.4 million and we continue to receive interest income on the entire amount.

Now, turning to our outlook. For the third quarter, we expect revenue to range between $37 million and $39 million, adjusted EBITDA to be between $4 million and $5 million and our total operating results to be between a net loss of $500,000 and net income of $500,000 or between a penny loss and net income of one penny per share. For the full year, we expect revenue to range between $156 million to $160 million, adjusted EBITDA to be between $26 million and $28 million and our total operating results to be between a net loss of $500,000 and net income of $1 million or between a penny lost and net income of $0.03 per share. Each of these metrics compares favorably to current consensus estimates.

Overall, we had a very good quarter. We exceeded expectations on all financial metrics and are executing well to our plan. 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) And we'll pause for just a moment to assemble our roster. And from Thomas Weisel Partners, we'll go to Lloyd Walmsley.

Great. Thanks for taking my question. I was wondering if you guys had more granular information on where the O&O query growth is coming from. Is it more from natural traffic gains from better product enhancements that you've made, or can you tell if it's more directly driven by the marketing spending? Any color you can give there would be helpful.

Well, Lloyd, this is David. We're seeing growth in both -- the areas both from product improvements yielding higher monetizable volume on our core sites as well as the direct advertising. I would say the direct advertising is driving a little more than half of that growth.

And are you putting more emphasis on any of your particular owned sites? We noticed that the WebCrawler traffic was up nicely in the last several months. Is there anything going on there marketing driven or is that more natural or product enhancements?

Well, the -- Lloyd, this is Jim. The WebCrawler is much more related to the direct marketing spends, but the monetization improvements, or the product improvements that we implemented in the quarter really go across all sites.

And touching on that, to what extent, I guess, it sounds like some of your product improvement was on the monetization front. To what extent has this growth been query driven versus monetization driven?

I think as David said, it's pretty much half and half. The direct marketing, of course, drives the queries and the monetization end of it converts those into dollars.

Okay. Great. Thank you.

Thank you.

And from Wedbush Morgan, we'll go to Kerry Rice.

Hi. Nice quarter, guys.

Thank you, Kerry.

You provided full year guidance, which is not typically what you do or you haven't done it for a couple of quarters here. What gives you the confidence in being able to provide that full year outlook?

It's a great question. If you recall, at the beginning of the year, we said we were giving just guidance for the forward-looking quarter and not for the full year. As we were beginning to ramp up some of the product and marketing initiatives. I think given where we are now in the year, in the calendar, as well as the status of those programs, we feel now is the right time to give a little bit more forward-looking guidance.

But is it that -- as in the previous question, is it the monetization and the new products that you -- you're seeing a lot of traction there, that you're feeling more comfortable with the second half of the year or is there any particular thing driving just that gives you that confidence level?

Well, I think, Kerry, across the board, we obviously know a lot more now than we did then, right? And whether it's relative to the distribution side of things where, we have been able to lock up contracts that, you know, we -- we felt we could lock up, but we didn't know for sure, so we've locked up some significant contracts there which give us a little more visibility and/or the experience we've had with some of our marketing initiatives here. All of that just gives us a little bit stronger base to build off of. And again we -- we're really only looking out two quarters here.

Yes. And then on the distribution revenue, I don't know if you usually provide this or not, but can you give us an idea, if not quantitatively, qualitatively the split between search engine marketing and sort of organic distribution?

So we're really not breaking out revenue by that. In part it's because across our partners, even within a partner they're using -- they may be using some marketing to drive volume as well as having organic, and we don't necessarily have great visibility into that break out. So it's not really something that we're breaking out on a regular basis.

I guess the one piece of data that we can give you is that our distribution revenue is very well distributed, if you will, across our base of partners and so that no single partner makes up even, what, 5% of our overall revenues, so we're -- we do have a good broad set of different kinds of partners, again, across about 100 partners.

And then one final question. I know, it was either during the quarter or last quarter you reinitiated your share repurchase program. I was curious whether or not you purchased any shares during the quarter?

So we have not purchased any shares in the quarter and if we do begin purchasing, you'll see through some disclosure statement, so it's authorized, but not active right now.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) We'll now move on to Ali Mogharabi from B. Riley & Company.

Alright, thanks. Good quarter, guys. Quick question on the loss of investments. Those are related to auction rate securities and how much do you see going forward in the next couple of quarters?

The loss reflects the fair value at the end of the second quarter, obviously, and will continue to affect them. We -- it's -- we're not forecasting those going forward. We'll just mark them to market at the end of the quarter.

Okay. And then you guys mentioned that you signed five new partners. Can you give us an idea who they are? I can't remember seeing too many press releases and also about the renewed contract.

So we actually don't go into the details of which new partners we've signed up, so we just disclosed five partners, but I can't give you the specific names.

Okay. Well, how about this, can you give us an idea about what's in the pipeline?

If you look historically every quarter of how many partners that we sign up, I mean it's been consistently between four and six and I think that's a good record for us in terms of bringing in new folks.

Got you. And then last thing, your thoughts on the Yahoo, Microsoft ordeal, that it appears to just continue, whatever what takes place or what the shareholders are voting for, and how that might impact you guys in the long run, let's say two, three years down th road.

You also have to ask, Ali, who's counting the votes, right? The scandal of the hour or --

Yes.

This is actually worse than the Brett Favre deal, so every call, I guess, has to discuss this, but, we would obviously look favorably on some kind of a combination that builds a much stronger ad network out there between the Yahoo and Microsoft networks. I think that would be something that would benefit advertisers, it would benefit, benefit companies like ourselves and marketers, in the -- over the next few years until 2011, it probably doesn't have a huge impact on us, but, as time goes on, we can -- we will have to continue efforts to find other ways to monetize our traffic and that's something that we have to look at on the horizon here.

Got you. All right, thanks, guys.

(OPERATOR INSTRUCTIONS) And there are no further questions at this time.

Great. Thanks for joining the call today.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a great rest of your day.