Avantax Inc (AVTA) 2008 Q4 法說會逐字稿

Good day, and welcome to the InfoSpace Incorporated, fourth quarter 2008 earnings results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Karen Van Vleet. Please go ahead, ma'am.

Good afternoon, and welcome to InfoSpace's fourth quarter 2008 conference call. I am Karen Van Vleet in Investor Relations. On the call today are Will Lansing, President and Chief Executive Officer and David Binder, Chief Financial Officer.

During the course of this call, InfoSpace representatives will make certain forward-looking statements, which may include statements regarding InfoSpace's expectations relating to its online products and services, outlook for the future of our business and growth initiatives, and anticipated financial performance for first quarter 2009. 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 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 the press release, which has been posted on our website, we present GAAP and non-GAAP results along with reconciliation tables and the reasons for our presentation of non-GAAP information.

Now I'll turn the call over to Will Lansing.

Good afternoon, and thank you for joining us. I'm pleased to being on the call with you today and I look forward to meeting each of you in the near feature. Infospace finished the year with another quarter that met management's expectations. With fourth quarter revenues of $36.7 million, down 6% from the prior-year quarter, and adjusted EBITDA of $3.7 million. Revenues for the year were $156.7 million, which was up 12% from 2007. Adjusted EBITDA for the year was $27.1 million.

In a minute, David will review with you in some detail the operating results for the quarter, and then we'll open it up for your questions. But before we do that -- before we take you through the numbers, I wanted to take this opportunity to share with you a little of my philosophy and just say a word or two about why I joined InfoSpace. If you've seen the press release from last week, you know I have done different things in a number of different companies. Through my varied roles as a management consultant, private equity partner, Board member, CEO of various businesses, there are reoccurring themes. My life's work has been to build and grow strong Internet businesses that use the science of direct marketing to target specific consumer segments, and to do so profitably.

So a couple of things about InfoSpace that are especially attractive to me. First, I really like the online search business. It's just a great business with tremendous undeveloped potential. I'm impressed with InfoSpace metasearch technology. More importantly I'm impressed with InfoSpace skill in monetizing search results. Another thing that I like about the search business is that it continues to be a very efficient and measurable form of customer acquisition. So, if you believe that a lot of less efficiently spent dollars in the offline world and going to move online, we will be beneficiaries of that trend. And if you believe that within the online world, that search spend is more efficient than display spend, we will be beneficiaries of that trend.

I do think that even as advertising and promotional spending is dampened because of economic trends, online and search in particular will be hurt less than the offline world. Now obviously in search, we're not the number one, two or three player, but I am convinced there is plenty of opportunity in this market for a Company in our position. I have been on the job a week now, so it is a little too early for me to lay out strategic plans for you, but I know there is a lot we can do to drive traffic to our sites and increase the lifetime value of our users while holding down cost of customer acquisition. The second thing that makes this job so interesting to me is our balance sheet and cash position, which translate into extraordinary flexibility as we seek to augment or complement our search business. And 2009 is shaping up to be a buyer's market.

I'm very interested in growing this Company both organically and through strategic inorganic opportunity. You should know that I am an old-fashioned business guy who likes transactions that are quickly accretive to shareholder value. Like me predecessor, I'm focused on expanding the top line and the bottom line, and I'm always going to do the right thing for shareholders. So I am fortunate to join a Company that has been very well run over the past six years. And that boasts a set of valuable Internet franchises producing substantial cast flow. A highly talented pool of employees, and a balance sheet with over $200 million in cash, another $800 million in off-balance sheet-type NOLs, and no debt.

This is not a turn around story, I certainly wasn't brought in to fix something that was broken. But we are at a pivotal point, and I'm eager to help guide this Company to the next level of growth and profitability. My team and I are hitting the ground running, and you should watch for good things to come out of InfoSpace this year.

With that I'll ask David to review the results for the fourth quarter and then we'll take your questions.

Thanks, Will and welcome to our call today. Before I go through the numbers, I would like to spend a few minutes to give you an update on some of our product and marketing initiatives.

In our last conference call, we outlined a number of investments for the fourth quarter, designed to grow our owned and operated lines of business, and also to reduce our ongoing cost structure. In the fourth quarter, we launched our search and rescue campaign, a targeted marketing program that appeals to pet lovers by offering an easy way for them to make a difference, by helping us contribute towards animal welfare. With this campaign we are donating a portion of the revenue from our related sites and downloadable products to pet charities. Through our partnership with the ASPCA, we have donated $200,000 so far, and have a stated goal to donate $1 million before the end of this year.

Simply by visiting dogpile.com, and using the search features on the site, and our related downloadable products, our users are contributing in a meaningful financial way. And to reinforce this message, users are tracking our progress to this financial goal in real time by following the donation counter on the top of the dogpile.com website and embedded in our search and rescue tool bar. So far we are encouraged by the level of engagement we have seen from new users to this site, and we are increasingly focused on creating greater awareness to grow this program to scale in a cost-effective way.

Also in the fourth quarter, we launched our nation branded tool bar. To date we have four content verticals live, including wall papers, recipes, trivia, and a rotating seasonal offering. We are excited about the possibilities that this unique technology brings. Leveraging the dynamic look and feel of the silver light platform to offer tool bars that are a step above the rest of the industry. The critical success metrics of this business are the efficient acquisition of users, the rate of retention of customers maintaining the tool bar and related features in their browsers, and the usage of our search products associated with these applications.

It's still early in the development of this initiative, and frankly, we had hoped to be operating by now at a greater scale. However, we continue to believe that the combination of our technology, targeted content, and superior search monetization will yield a product that succeeds in all of the key metrics. While we are in investing with these initiatives to grow our owned and operated business, our distribution team continues to close deals, launch products, and drive revenue. In the fourth quarter we launched with 12 new partners, successfully deployed our new portal product with two partners, and generated significant new revenue growth from our DNS service. The success of our distribution team this year has truly been impressive and we ended the fourth quarter with solid momentum.

Now turning to our financial results. Revenue for the fourth quarter was $36.7 million, which is slightly above the high end of our guidance of $34 million to $36 million. As expected, we saw pressure from declining PPC rates in the quarter, but exceeded our forecast through better performance from our distribution business. For the full year we recorded revenue of $156.7 million, representing a sequential growth rate from 2007 of 12%. Gross profit in the quarter was $18.9 million, equal to 51% of revenue. In the quarter our distribution business represented 64% of total revenue, up from 61% in the third quarter.

For the full year, gross profit was $80.8 million, equal to 52% of revenue. Our margin percentage is greatly influenced by the mix of revenue between our owned and distributed products. For the full year distribution represented 65% of our total revenue. Adjusted EBITDA in the fourth quarter was $3.7 million equal to 10% of revenue and above our guidance of $2 million to $3 million. Included in this result is approximately $2.5 million in operating expense associated with investments to both grow our owned and operated products, as well as provide future cost savings.

For the full year adjusted EBITDA was equal to $27.1 million or 17% of revenue. In the fourth quarter, we recorded a net loss of $7.9 million. This result includes $6.4 million in unrealized losses on investments, which is most significantly associated with our holdings and auction-rate securities. At the end of the quarter, we held $13.9 million in book value associated with these investments. For the full year, we recorded a net loss of $18.7 million, included in this result are charges associated with the unrealized losses of our auction-rate securities, equal to $23.6 million. As I mentioned the book value of these investments at the end of 2008 was $13.9 million, which is equal to 34% of the original par value. While the auction market is still frozen, and the issuing and ensuring entities behind these securities are distressed, we continue to receive interest or dividend payments on 88% of the full par value.

Now turning to the balance sheet, we ended the year with approximately $205 million in cash, short and long-term investments, equal to $5.90 per share. This balance includes $191.5 million in cash and short-term investments, plus $13.9 million in long-term investments, consisting of the auction-rate securities that we have marked to current market. The average basic share count in the fourth quarter was 34.5 million, and we ended the year with 34.8 million total shares outstanding.

Now turning to our outlook for the first quarter. We expect revenue in the first quarter of 2009 to range between $38 million and $40 million, adjusted EBITDA to be between $2.5 million and $3.5 million, and the net loss to be between $1.5 million or $0.5 million or between $0.04 and $0.01 per share.

With that, I'll turn the call over to the operator to take any questions.

Thank you. (Operator instructions). And we'll pause for just a moment to allow everyone the opportunity to signal. We'll take our first question from Ross Sandler with RBC Capital Markets.

Hi, guys. Welcome aboard, Will, and thanks for taking the questions. I've got a few questions. First is on the guidance. So the mid-point of the 01/02 guidance implies about a 7.5% year-over-year decline in revenue, which is more or less in line with the -- the 6% decline you had in the 4Q. So are you guys -- are you not seeing a material drop-off in search RPQ in 1Q or are you modeling in some pick up in query growth or new distributions? Can you help us understand kind of where -- where the lack of deceleration [or where do you see any top growth] in the 1Q coming from? And then I have got a couple of follow-ups.

Okay. Well if you look at the guidance relative to the performance in the fourth quarter, and even if you go back to compare that to how we did fourth quarter of 2007, versus Q1 of 2008, we're showing a pretty good stabilizing or even a slight uptick in revenue from the fourth quarter to the first quarter. In the fourth quarter of '08, we did see the PPC declines that we expected and factored into the guidance. Going in to the first quarter, we're seeing those rates fairly stable so that the sequential decreases are not continuing. And we're expecting a little bit of pickup, mostly coming from the distribution business in the first quarter.

Margin guidance for 1Q, it seems around -- I think it's 7.6% EBITDA margin at the midpoint, that's down year-over-year sequentially. Is that simply mix shift on partner versus L&O or are there investments you guys are looking at in 1Q?

It is a combination of mix shift. We expect distribution to be a relative larger share of the business in the first quarter. And we are continuing to invest in some of the initiatives -- some of the aspects of the owned and operated initiatives that we have seen succeed so far in the fourth quarter.

Okay. And just two more quick ones. On the new tool bar products, how do the economics in this business? Is it a pay per install, and if so, what kind of lifetime value do you see per install or when do -- how many months before these tool bars physically become profitable post install? And then I have just one last quick one.

I think the way you asked the question, I think you are thinking about the business the right way, it's a cost per acquisition, and a lifetime value from there on out. It's very early for us to say what the dynamics we're experiencing or even what we're expecting to experience. It's something that as this business grows to scale, we'll be able to share a lot more about.

And, Will, on the M&A side, what can you tell us about the pipeline. Are you guys close to completing any transactions? What are you seeing in terms of multiples in the private market, have they come down far enough? And what kinds of businesses are you looking at, potentially of what size?

Okay, so. Let's start with your first question. Close to completing a transaction? No. I feel like I have been on the ground about a week, so it will probably take a little longer than. But in terms of the kinds of places we are looking, I think it's fair bet that we're in the Internet space. To the extent that we can strengthen our core search business, that's great; that's in the category of bolt-on for the most part.

But then beyond search, I think we are looking at other interesting areas, and a little too early to share the investment thesis with you, but -- but we do have a couple, and we're working on them. And as soon as they are ready for prime time, we will share them. I would say that in terms of evaluations, obviously [public] market valuations have come down a lot. Private market valuations - late stage private, have not come down sufficiently in my view. And -- and those are still in the process of adjustment, but that all works in our favor as time goes by those things will become more affordable. And we're looking both, public and private, and we'll see where it takes us.

Okay. One quick last follow-up, if I may. On the pricing issue, you guys said things have kind of stabilized as you come in to 1Q per your guidance. There -- that's a little bit of a disconnect from what some of the other large -- Google partners have been talking about. It is it a case of we have the metasearch, are you seeing some offsets from other monetization outside of Google, or is it that your quality [for much of the year --spot prices core] might be better? Can you talk about why you might be seeing different trends than potentially other partners or search partners?

Okay. So it's hard for us to draw the comparison, because I'm not really sure the -- the composition of traffic that's generating the PPCs that you are comparing us to. I would say that our search business has very, very high quality. It is an organic search customer comes to these sites. And that may be one of the reasons our PPC's might be a little bit better than syndicated partners for Google. But I don't really have a great insight as to how we compare to some of those guys.

Alright, thanks for taking my questions, guys.

Alright, thanks Russ.

Thanks.

We'll take our next question from Kerry Rice with Wedbush Morgan.

Hi, guys. Couple of questions. The first one going back to -- it's kind of a two-part question, your owned and operated sites. I know you guys have been investing in that. Based upon those investments, and maybe it is too early, but I kind of would have expected not such a drop-off in revenue from Q3 to Q4, and maybe even year-over-year. Can you talk a little bit why we haven't seen some more of the benefits from those initiatives? And then maybe talk a little bit about those initiatives, as you indicated you were going to continue investing in those at least in Q1?

Hi, Kerry, it's Will. Let me speak to that. I can't speak so much about the history, but I can tell you a little bit about where the initiatives stand right now. It's early days. What we know is that -- we need some -- some cost-effective mechanisms for cost acquisition to grow that O&O business. There's lot of direct marketing science that I think we can apply to this party. Some of it has to do with default search setting and some of it had to do with tool bars and some of it had to do with other things, and we are in the process of learning that.

We have -- we have good progress to date, and we have more to come. I think it is important that we apply science to it, we have the ability to do multiple variate testing and AB testing, and figure out what works and what doesn't work. And so we're in --there's a certain amount of experimentation that is going on, but it is being done with a pretty clear view to applying the science of what works and what doesn't. And we fully expect to see some results out of it, but it's early. So you are seeing the expense ahead of the revenue. I mean, that's frankly where we are right now.

Okay. And then -- you mentioned that -- and maybe it was David that mentioned -- the tool bars, you kind of were hoping to be a little bit at greater scale at this point. What is kind of slowing that down?

For us to put a lot of advertising muscle behind the product, we have to see that we're getting efficient acquisition. We're getting a relatively low cost per acquisition. And that we're getting enough usage of the search-related features off of the tool bar. And frankly, we haven't seen ether of those at the level that we're ready to really put the marketing spend behind it. I think that it's a matter of refinement in the installation process, it's a matter of refinement just in terms of how the product works on the desktop.

Okay. And then one final question, you mentioned you had 12 new distribution partners, which is great. You guys, I think usually add about five, so double what I think the average quarter is. When do we see the impact? Are we seeing that impact in Q4 already? Or we're going to see a bigger kind of percentage of revenue coming from distribution in Q1?

Well, I think you are seeing it in the results. You went from 61 to 64% of the revenue from distribution. And the distribution partners are seeing the same macro factors around the PPC rates. So for them to be able to stabilize revenue and even to grow in this environment, is in part indicative of the volume of new partners we have. The sequentially -- what I think is sequentially good guidance going into the first quarter of top line is in large part reflective of those launches.

Okay. Very good. Thank you.

(Operator instructions). And we have a follow-up question from Ross Sandler with RBC Capital Markets.

Welcome back, Ross.

Sorry to bombard you with all of these questions. Is the environment much easier around the tool bar distribution side? Like are there -- is it less competitive than it was, maybe six, 12 months ago to get those deals going? And, and are -- are the -- are you looking for like the affinity verticals to get that distribution, or it is more broad-based, sites or platforms where you can kind of get a tool bar attachment deal or something like that for distribution? Can you just talk about the strategy there? Thanks.

Ross, we're going to be looking at both. I mean there's an opportunity for us with tool bars to move traffic to our owned and operated sites. And there's an opportunity to use tool bars in conjunction with the affinity marketing where essentially we skim what we do for others. The whole thing boils down to the classic, what is your cost to acquire and how does that relate to your lifetime value?

And tool bars obviously have tremendous impact on the lifetime buyer, because we have a lot of stickiness there and a lot of search comes out of the people who put the tool bare. And we are in a position to put a little more marketing energy behind getting the tool bar put in in the first place. But that's always -- I mean doing it for your own account versus doing it for partners, it is nice when the partner is contributing traffic, members, consumers, people in their world to our traffic. And so we'll be doing both, and we'll see where the economics take us .

And we'll go next to Clay Moran with Stanford Group.

When you are talk about the operating investments, and -- is that showing up, essentially all in sales and marketing? I guess we would have thought to see more in research and development, but it looks to be sales and marketing, and what is that? Is that marketing of search and rescue, or what is driving that And then also I'm curious, in the release tonight, you had -- it looks like a writedown for the auction-rate securities, and then another writedown of about $2 million for carrying value of certain equity investments, are those related or what is that second writedown? Thanks .

Hi, Clay, this is David. First of all on the geography of the investment in the initiative, it is mostly in the sales and marketing line. That will include direct marketing spend as well as headcount related to the development of some of those products. So you wouldn't see it in our research and development line item. You would see it more in the sales and marketing.

Regarding the writedown, so auction-rate securities was most of the writedown, and we also had a debt invest investment in a small private company that was placed about three years ago. And we wrote that down as that company is now struggling a little bit to -- to make it by.

Okay. Thank you.

At this time, there are no further questions. Ladies and gentlemen, this will conclude today's conference call. Thank you for joining, and have a wonderful day.