Avantax Inc (AVTA) 2008 Q3 法說會逐字稿

Good day, everyone. Welcome to the Infospace Incorporated third quarter 2008 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Stacy Ybarra, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Infospace's third quarter 2008 earnings conference call. I'm Stacy Ybarra, Director of Investor Relations. With me on the call today are 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 expectations relating to Infospace's expectations relating to its online products and services, outlook for the future of our business, business and growth initiatives, anticipated financial performance for the fourth quarter 2008 and transition plan. 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 that are subject to various risks and uncertainties and actual results could differ materially from Infospace's current expectations and beliefs. Factors that could cause and contribute to such differences include, but are not limited, to the risks in discussed on Infospace's annual report on form 10-K for the year ended December 31st, 2007 and quarterly reports 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 for -- as well as the reasons for our presentation of non-GAAP information. Now I will turn the call over to Jim. Following his comments, David will give the third quarter results and fourth quarter outlook. Then Jim will wrap up with closing remarks. Then we will open up the call for your questions. Jim?

Thanks, Stacy and welcome everybody to the call today. We have quite a bit to discuss today. Of course, we will go over our third quarter results. We also have some exciting marketing and product initiatives we want to discuss in some level of detail and then some thoughts around our overall strategic position. So for the third quarter, it was a very strong third quarter for us and the third consecutive quarter in a row that we exceeded expectations. And that's really great, considering that this has been a transitional year for us. If you think back a year ago, we had three businesses and we were in the process of divesting two and our search business actually had shrunk from ' 06 to ' 07. So we focused this year on revitalizing the business kind of from top to bottom. We have done a lot of work in our infrastructure. In this last week, we opened the second of two new data centers. Those data centers are outfitted with the brand new technology platforms, based on the latest and greatest virtual technology which allow us not only lower operating costs but more velocity in terms of doing product releases and a better standard of service as well.

We have increased our site performance pretty considerably, about 100% over the last six months or so. We have also increased our capability around analytics with a new platform there. We have introduced several new product features and we have been very focused on user engagement and of course on growth and financial performance. We made real progress on all fronts this year and the result of that is not only reflected in our financial results here but also in the confidence that we are gaining. So in the third quarter results the revenue was $39.5 million, which is up 17% year-over-year. Both our owned and operated and our distribution segments improved sequentially and year-over-year and owned and operated had an increase of $1.6 million or 12% from ' 07. That continues a growth trend from the second quarter. So to have two quarters in a row where O and O has grown is something we haven't seen in quite a long time. As usual, if the top line does well, the bottom line does well and our EBITDA was very strong at $6.6 million which reflects an increase of 114% from '07. We have a strong cash position of over $200 million and no debt.

The performance of our business model and our financial position really provide us an opportunity to not only think about in period investing, which we have done this year, but also to invest over the longer term. One of the things we have to consider there is what kind of market we are investing in and, of course, the search market has been consistently strong for at least the last six or seven years. In this last year we saw it grow in double digit and time will tell regarding the continuation of that, particularly over the medium term, but there are lots of reasons to be optimistic about search. It is still the most targetable and measurable advertising available. And actually, that measureable has increased over the course of the last year with new tools that our partners have been able to roll out. We have seen some outside sources such as Jupiter Media, [Covario] and Search Ignite all report positive outlooks for search spending in the next 12 months. Advertising spending overall is going to be under some pressure, but I think we all -- most people feel that the last money out of that will be search advertising. Now, all that being said, we have seen some softness in rates that have kind of started this quarter and that is reflected in our outlook for Q4.

Now the other thing we think about when we invest is what are we investing in really? And really we are investing in our owned and operated traffic. We have long held the belief that our owned and operated traffic is of very high quality and really, over the course of the last year, our partners with their measurement tools have really validated that via the kind of conversion scores, which means -- conversion is roughly what happens for an advertiser not just getting a click-through, but do they get some other activity, either a form filled out or time spent on their site or of course hopefully some kind of transaction. So that means that that traffic that we have, which has very high conversion scores, is very valuable not only as a means of generating margins for us, but it's valuable for advertisers who want people to see their brands, see their products and ultimately buy them. So we think it is a very, very good place for us to invest. And we have been pleased with the initiatives we have used so far this year. And so we are going to increase our investment this quarter in two areas and we're going to maintain it in a third.

Now the question is how to invest? And while our metasearch product has long delivered a really good user experience and that has been validated by us winning the JD Power award a couple years in a row, really as a marketing concept, it's been very difficult for us to message and execute on in a consistent manner. So earlier this year, we began to focus on a more personal engagement with the site and particularly with our mascot. Bringing Arfie to life and we have done that via the website and have him celebrate holidays, movie openings, even the Mars landing and of course we got some mileage out of that never-ending political season which hopefully for all of us is behind us now. And the results there have been very good. We did a recent survey of our users and 88% of respondents were either favorable or very favorable about Arfie's antics, if you will, and look forward to more. And on a more tangible to revenue kind of statistic, click activity per searcher has improved across the year. While that was a good start, we really felt we needed something that was more sustainable and something that was a specific kind of a program and we looked backwards to a short program that we ran at the end of last year that was raising money for animal shelters. And so we decided to expand that concept to a longer term program that we are calling search and rescue.

We have partnered with the ASPCA which is the nation's largest animal welfare organization to raise around $1 million over the next 12 months. And it's very simple. As we can attract people to use Dogpile, we will donate a portion of the revenue to assist animals. This is a really easy way for our users, our new users, to connect and to make a difference without reaching into their own pockets. I think our timing here is good as well. Across this next year looks to be a little tougher economic time, and so a way people can feel good about donating without having to do it directly we think is a nice message. We also like the fact that animal lovers are a very large and very targetable segment. And what I mean by that is, there is enough animal lovers and it is large enough to make a real impact on Dogpile, yet it is one that is a small enough, if you will, and focused enough that we can make an impact with our somewhat limited budget levels. So some numbers to think about here, 63% or 71 million U.S. households own pets. And within those households, the feelings run from general indifference to the pet to incredible and deep passion for the pet.

At that end -- that end is the end we are going to target and we can look and see that 5 million unique visitors come to pet charity websites on a monthly basis. And on an annual basis, people donate over $500 million to these kinds of sites. So our online ad programs will focus on those pet related sites, as well as some general sites, but everything with a call to action, either a click to come see our site and land on Dogpile and get the feeling there or download a tool bar or a widget. That way we can really take a look at each kind of campaign and on a very measureable basis decide on how it is producing. We are also going be able to leverage close to 1 million ASPCA members through their newsletters and mailing lists. And we'll be launching a national PR effort, featuring a celebrity spokesperson who has been associate with animal causes and I was hopeful we could use the name today, but we are just not quite there, to do a real media outreach program, television shows, radio spots, newspapers and the like. Again, everything to underscore the fact that there are pets in need and Dogpile is the place to come if you want to help them. We are very, very excited about this. This is something that we can really engage people in emotionally around a great cause and we know we can generate long-term Dogpile users.

So the second initiative we have is to really -- is to get ourselves and increase our activity in the lucrative downloadable market. This is the one spot in search where Google is not incredibly dominant. They are still dominant, but they only have about half the market here. And we have seen and studied and watched a lot of smaller players such as IAC have considerable success here. Downloadables not only make it easy for users to search. They capture the navigational searches such as DNS areas and default traffic that can be lucrative for the provider. We wanted to do something a little bit different here and so we have been working with Microsoft on a downloadable application that really features and utilizes their SilverLight technology, which is a Flash type of technology only really a couple generations ahead.

And the result we will launch is a totally new kind of browser application that delivers a -- I think is an extremely engaging multimedia experience. This is -- I like it. It's a kind of a mini portal almost as a tool bar on your desktop. I won't do a great job of describing it here. But when you get to see it, I think you will be excited by it. We'll start with a variety of verticals -- news, weather, wallpaper, celebrity gossip and many others under a new brand we're calling nation.com. And we'll be able to measure our performance from each channel and then decide which ways are the most lucrative. I'm not often given to real technical fascination or hyperbole on things, but I will tell you this new product is very different. It is the best thing that I have seen us build here over the six years I've been here, and we believe users will find this very attractive and valuable. It is very exciting. We will be launching later this month with a significant effort behind it and we will plan then to ramp faster after the first of the year.

The third agenda we have to just grow O and O is one we've been running all year and it's our direct marketing program. In this program, we leverage our high page ranks on WebCrawler and MetaCrawler to use SEM and SEO to drive traffic and users to those sites and it has been very successful in not only driving revenue but contribution and we will continue to invest here but more on an in period return basis. So to sum it up there, we have three programs to drive O and O traffic, each with very measureable campaigns. In total this quarter we spend to plan -- we plan to spend $2.5 million, which will obviously affect our bottom line, but we are very confident in our ability to monetize and increase traffic once we get it and we believe this is the best route to build long-term cash flow and value.

Now on to our distribution business. Distribution continues to be a strong contributor for us, and we've got a very successful year and this quarter actually we are up 20% year-over-year. We have done that by signing five new portal contracts this year, all based on our web 2.0 technology. We have launched two in the third quarter and the remainder will launch in the coming months. We have also launched DNS Assist with Cablevision and Telnet in the third quarter and we have a very solid pipeline in place there. Overall we signed another five partners in this quarter, which seems to be the right number for us because it brings the annual number to 15. So all in all, very good there. So good quarter and really a very good year for us so far. We have exceeded the street's and our own expectations frankly. We have really strengthened our capabilities and operations significantly and we kept our costs in line and the bottom line shows that. I'm very proud of the team here. The effort and the performance this year has been astounding. The change out of those data centers alone and our entire technical platform with very de minimus problems associated has been a superhuman kind of effort and I want to definitely congratulate them. We have also recently strengthened our management team by the addition of Stuart West as V.P. of Copr Dev and Strategy. So Stuart is joining us from Yahoo, where he managed business operational and financial aspects of two units and he also has experience at TIVO and with JPMorgan as well. His charge will be to lead our efforts to invest our cash in creating value for shareholders. Right now I am going to turn the call over to David for financial details and then I will return for a few closing remarks.

Thanks, Jim. And welcome to our call today. I will start with the review of our third quarter earnings, including a discussion of our cash position and certain balance sheet items, and then provide our guidance for the fourth quarter. In the third quarter, we exceeded expectations on all of our key operating metrics. As Jim mentioned earlier, revenue for the third quarter was $39.5 million, which is up sequentially from the second quarter by 3% and up from the third quarter of 2007 by 17%. Both our owned and operated line of business as well as distribution experienced strong growth from prior period, with owned and operated up by 12% from the third quarter of 2007 and distribution up by 20% versus the same period last year. Our owned websites continue to benefit from product improvements that enhance monetization of queries as well as direct marketing initiatives that drove new traffic to the sites. In addition, our distribution business grew from the continued strength of new partners we added at the end of last year and the beginning of 2008.

Gross profit in the quarter was $21.2 million, equal to 54% of revenue. In total, gross profit dollars grew by 5% from the second quarter of this year and by 14% when compared to the same period last year. The sequential increase is primarily driven by strong revenue growth in owned and operated, which was equal to 39% of our total revenue, up from 37% in the second quarter. Adjusted EBITDA in the third quarter was $6.6 million, equal to 17% of revenue and up by $3.5 million or 114% from the third quarter of 2007. In comparison to the same quarter last year, we grew our gross profit by $2.6 million while reducing our direct cash operating expenses. While we achieved a greater than expected performance in adjusted EBITDA this quarter, we posted an overall net loss of $9.9 million. Included in this total, we recognized $11 million in unrealized losses from investments primarily from our holdings in auction rate securities. At the end of the quarter, the book value of our ARS investments was $18.2 million, which is $9 million lower than the booked amount from the prior quarter of $27.2 million. While none of our ARS investments have defaulted and we continue to receive interest payments on their full par value of $40.4 million, the markets to trade these securities continue to be frozen. The loss we booked this quarter is a reflection of the lack of immediate liquidity, the negative trends in the financial markets and the significant reduction in value.

Regarding the balance sheet, we ended the quarter with $210.4 million in cash, short and long-term investments equal to $6.09 per share. This cash balance includes the current book value of our illiquid ARS investment of $18.2 million. The weighted average basic share count in the quarter was 34.5 million and we ended with 34.6 million in total shares outstanding. Now turning to our outlook, for the fourth quarter we expect revenue to range between $34 million and $36 million, adjusted EBITDA to be between $2 million and $3 million and a net loss to be between $1 million and $2 million or $0.03 to $0.06 per share. This top line guidance reflects declining trends in the PPC rates we are seeing at the beginning of the quarter, which impacts both our owned and operated as well as our distribution products. Additionally we are investing this quarter with initiatives that will both increase the amount of quality traffic we drive to our owned websites as well as more efficiently align our cost structure into next year. As Jim detailed earlier, we launched our search and rescue initiative and will launch an enhanced tool bar later in the quarter. We expect the total investment for these initiatives to be $2.5 million in the fourth quarter and to yield positive financial results next year. Additionally, we are shifting and reducing some of our resources that support the European distribution business. As a result, we will incur $700,000 in one-time expenses, which is reflected in our guidance and will position the company to lower operating expenses by more than $2 million annually at the start of 2009. With that, I will turn the call back over to Jim.

Thanks, David. So to wrap up here, our business has been strong, but we definitely have some caution about rates particularly in the fourth quarter. Now we gained real confidence this year that we can grown our owned and operated sector profitably and that has been important and we have also gained capabilities in that way. We have two new initiatives focused in that direction with significant investment behind them. From a strategic standpoint, we think we are in an enviable position considering today's economic circumstances. We have cash, we have a currency and we have a very large NOL which allows us to keep the cash we produce.

We also have a very strong track record here of creating value for shareholders by acquiring assets at the right price, managing them effectively for cash production and in some cases divesting them for significant gains. We believe that there will be opportunities in the coming year to invest at prices that are below recent values and to start that cycle over again. We have a strong experienced leadership team in place who know how to evaluate, acquire, integrate and grow businesses. This management team has over 25 combined years of experience at Infospace doing just that. During the last six years, we've created over six times return for investors and we are very proud of that record. For me, it is time for me to transition from my current dual role as Chairman and CEO that of Chairman as the next phase of my career and moreover my life. To that end, we have launched a search for my successor and have hired Spencer Stuart to manage the process and when that culminates in a hire, I will shift to Chairman. I think by continuing in that role, I can help the company achieve a seamless transition and continue to build on the strong foundation we have in place. And with that, we will take any questions that you might have.

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

Nice quarter. You know, I want to talk a little bit more about the guidance and make sure I understand when you are talking about the pay-per-click rates coming down. You get paid by Yahoo and Google and those contracts are in place until 2011. So I just want to make sure I understand how the lower impacts impact you because I would assume the rates from Yahoo and Google are staying the same.

Well, I can start with this, I think what you are referring to it TAC rates. And those percentages have not changed. That's correct. This is really referring to what I guess you consider the absolute rates that we see advertisers paying. And so that's where we have seen some erosion in rates. I will also say that so far it doesn't look a lot different than it did last year, but the economic outlook is a lot different than it was last year. So we are -- we are proceeding with caution.

Okay. And then regarding the auction rate securities, you guys have been kind of slowly writing these down each quarter and you have got about an $18 million balance left. I guess -- I don't know what the strategy is and maybe try to better understand that with writing it off a certain amount each quarter or do you think that you go back and reevaluate how it's impaired each quarter or I guess, ultimately what I'm getting to, why not just go ahead and write the rest of $18 million off?

The value we recognize for these investments is based on the market condition and the inputs we can see or some inputs tend to be less observable than others. But we are recognizing what the market is telling us these investments are worth.

And you have to go through that evaluation each quarter, correct?

You do and we don't do this alone. We do this with the help of our auditors and other consultants.

Okay. I will step out of line and let some other people ask a question. Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from Mark May with Needham & Company.

This is Clark Wong in for Mark May. I was wondering if you can give a little more color on why the EBITDA guidance is coming down -- margin at the midpoint is 7%, that's down from 17% all year. And even if you take out the $2.5 million in the marketing spend you guys are expecting due, you are still going to be below previous margins. So I was wondering if you could give some color on that.

You have to keep in mind that we are investing what in aggregate is $3.2 million in these initiatives both to grow traffic on our sites as well as reducing costs in 2009. So the total investment is $3.2 million. And that's really -- if you were to adjust our guidance with that investment level, the total EBITDA performance would be in line with what our top line guidance is.

And the $3.2 million will include the moves you are making in Europe?

That's right. You take the $2.5 million plus the $700,000.

I was wondering what do the new data centers mean to expenses? You have spent this money on these new data centers. What does it do?

Going forward, it will be a marginal decrease in our ongoing operating expenses. What it does more significantly for us is it improves our ability to expand -- ability to serve our business better, to improve the performance of our sites.

And a lot more stability in our situation. So a little background there. When we sold our two businesses last year, in one of those transactions we sold our existing data centers along with those and we did that obviously consciously and part of the planning on that was that we could really do a very -- call it a clean -- free start there with an entirely new technology base. Also helped us clean up some things that anybody who has lived in a house for ten years knows that you have (inaudible) is put in different places in your house and this is a good way to clean it up. And so we got that done and also give us again some more room to expand, et cetera. It has worked out really quite well.

So I guess CapEx expectations for fourth quarter will come down significantly from what it was the past two quarters?

That's right. Our CapEx spend has been ramping throughout the first through the third quarters and that is really driven by this data center build out.

Great. In terms of the downloadables that you guys were talking about. I guess how will that be monetized?

How it gets monetized is through search traffic. So the downloadable sits inside the browser and again, as I mentioned, it can -- it gets searches or generates searchers, if you will, from a few different ways. One is it will have a search box on it that people can just type searches into. It also will grab default searches and any kind of errors that get typed into the address bar. In terms of the way the revenue mix on that goes, it is pretty evenly distributed across those three. So we've done a lot of work. We looked at actually -- we looked at a number of companies this year in terms of acquisition targets to try and get a concept of this and learn more about it and we really like the business and felt we could start from scratch here and do a really good job.

Is there a launch date on that?

There is a launch date and it is this quarter.

Are we talking about front half of the quarter, back half of the quarter?

We are kind of midway there now so --

And I was wondering if you could share some -- it looks like O and O has grown pretty well over the past couple of quarters. I was wondering if you could share some traffic numbers and how those have grown.

So we haven't historically and we are not now preparing specific traffic numbers. I would say that growth has come both through incremental new traffic to owned and operated, primarily driven by our direct marketing initiatives. And then has grown also from increased monetization. So the conversion from a query to a paid click has been a big factor in growth as well.

So you guys mentioned that CPC rates were pressured. You started to see some pressure towards the end of this quarter. So would it be safe to say that traffic was the main driver for growth in O and O in 3Q?

What I would said was at the beginning of the fourth quarter we are seeing that trend and it is really more of a reflection in the fourth quarter guidance than in the performance.

Thank you.

(OPERATOR INSTRUCTIONS) We will pause for a moment.

If there are no more questions, I think we can end the call.

We have no further questions at this time.

Thanks for joining the call today