Avantax Inc (AVTA) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 InfoSpace earnings conference call. and I will be your operator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Ms. Stacy Ybarra, with Investor Relations. Please proceed.

Good afternoon and welcome to InfoSpace's second quarter 2009 earnings conference call. I am Stacy Ybarra, Senior Director of 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, acquisition strategy, and anticipated financial performance for third 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 states pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from InfoSpace's current expectations. 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, 2008, 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 reconciled tables, and the reasons for our presentation of non-GAAP information.

Now, I'll turn the call over the Will Lansing; following his comments David will review second quarter results and third quarter outlook, then we will open up the call to your questions. Will?

Good afternoon, and thank you for joining us today. Overall, InfoSpace had a great second quarter, with all metrics coming in above expectations. Much of the success is due to strength in the Distribution business, and our efforts to rationalize costs.

Before David goes into details of the financials, I would like to spend a few minutes to give you update on our product and marketing initiatives. Our Owned and Operated strategy revolves around targeting multiple verticals and finding narrow audiences who will use the sites and products for their distinct unique feel and appeal.

During the second quarter, we launched two new sites that further this strategy. We launched Dogreatgood.com, a charitable giving site. When you search on Dogreatgood, a percentage of our revenues goes to charity.

The program is an evolution of the search and rescue program that we began last year on Dogpile, and with Dogreatgood, we're expanding the pet community to include charities focused on kids, health services, education, and the environment. These are charitable categories, where we know there's lots of user activity, and we can do a lot of good.

So far, we have been pleased with the results. We expect this program to grow gradually over time, and our marketing efforts are designed to drive awareness in targeted and cost effective ways.

We also continued to develop downloadable product. At the end of last year, we announced the release of nation.com, a Toolbar initiative that included content and features across multiple content verticals.

Since that launch we've had some early success with the Pet vertical, and our intent is to build out more of these verticals using the low cost Ning platform. This is an evolution of the Toolbar initiative that we have discussed in the past. The goal here is to attract specific audiences who will use these applications to search and help us to incrementally grow our Owned and Operated business.

Additionally, we re-launched InfoSpace.com in the quarter. Over the past few years, this site featured local directory search results. In May, we took the site over from [ID ARC] Media, and began to shift the focus to web search.

True to our namesake InfoSpace.com emphasizes features rich in the metasearch experience. Along with all the top search engines, we've added a feed from Twitter, so users can see current tweets, along with the blended web results from their query. We're delivering top search results in a feed based on realtime conversations.

As you all know, Google's [rrhythm] is based on calling the web and indexing the results based on ranking and recency. Twitter has realtime focus, built on the flood of constantly updated messages posted by people using the social networking site. Our team combined the technology of both search methods in InfoSpace.com, offering truly comprehensive results.

We've also added filtering functionality that allows users to choose which search engines to include if the query results. This feature lets our users configure their search experience, based on their individual preference. More importantly, it emphasizes the greater relevance we achieve by providing the results from multiple search engines on one page, really highlighting the value of meta.

While we are focused at InfoSpace on metasearch, we do have some insight into the overall Search market. When we look at the macrotrends over the past few quarters, we have seen that rates have really stabilized, and we expect this trend to continue.

We also believe that the Search market continues to be a strong one. More people are spending more time online and we are seeing the volume of usage increase.

More importantly, advertisers budgets are continuing to shift online. It's still the highest yielding, most measurable area of advertising spend, and even with recent softness in the market that was caused by the recession, we're seeing advertisers continue to pour money into this segment.

We think the long-term prospects will continue to show solid growth. We're in a really good position to leverage growth in Search.

Our business is founded on our partnerships with Google, Yahoo, Microsoft, and Ask. It gives us a very leveragable, solid model to offer great products in the Search area. The beauty of our business model, the Metasearch Model, is that we generate the highest monetization of any single search engine.

I would like to address last week's announcement that Yahoo and Bing are teaming up. Metasearch technology works best when there is a strong network of advertising and search. We've always felt that healthy competition for advertisers makes our meta-products and value proposition better. We have solid relationships with all of the major search engines, including Google, Yahoo, Microsoft, and Ask, and we're pleased to see the partnership finally happen.

As you know, our Search business is not just our Owned and Operated properties. We continue to be proud of our ability to grow through distribution partners. During the second quarter, we signed nine new distribution partners, and growth from both new and existing accounts is driving top line growth and profit.

Now turning to our acquisition strategy, I'm interested in growing InfoSpace organically, as well as through acquisitions. We have a strong balance sheet and cash with which to making acquisitions. We remain focused on businesses with a good growth profile and positive cash flow. We believe we have a smart acquisition strategy that makes sense; I'm reasonably confident that we will have some traction with M&A strategy within the year. With that I will turn the call over the David for details on the financials.

Thanks Will, and good afternoon. I will start today with a review of our income statement, including some of our key product trends, then give you an update on our balance sheet, and finally discuss our guidance for the third quarter of 2009.

Starting off with the income statement, revenue in the second quarter was $43.8 million. This represents a growth rate from the first quarter equal to 12%, and a 14% increase from the second quarter last year. Both our Owned and Operated and Distribution products showed growth from the first quarter, with the majority of incremental revenue coming from our Distribution business.

From our owned websites we benefited from higher volume, driven by our product initiatives and PPC revenue rates that stabilized from the declines we experienced at the end of the 2008. From our Distribution business, we continue to see strong revenue performance from our existing partners, as well as incremental revenue from newly launched accounts.

In the second quarter, 71% of our total revenue came from the Distribution business, up from 69% in the first quarter, and up from 63% from the second quarter of 2008. Overall, gross profit in the second quarter measured as our total revenue, less payments to distribution partners and content providers, was $19.5 million, up 760,000 from the first quarter of 2009, and equal to 44% of revenue. Adjusted EBITDA in the second quarter was $5.4 million, up $1.6 million from the first quarter of 2009, and equal to 12% of revenue.

We surpassed our guidance and expectations, due to both stronger than expected gross margins, and greater efficiencies in our cost structure, which yielded an overall reduction in our [non-tac] related cash operating expenses. Net income was $2.9 million in the second quarter, compared with a net loss of $5 million in the first quarter of 2009 and equal to $0.08 per share. Our average fully diluted share count for the second quarter was 35.1 million, and we ended with 35.2 million shares outstanding.

Now turning to the balance sheet, we ended the quarter with $208.3 million in cash, short, and long-term investments, equal to $5.91 per share, and up by $2.9 million from the first quarter. Included in this total is the current book value of our investments in option rate securities of $[8.2] million.

Now for our outlook, as we enter the third quarter, we continue to see strength in our Distribution business, both through our existing accounts and in our pipeline. Additionally we anticipate a continued stabilization of our PPC revenue rates. As a result of these trends, we expect revenue in the third quarter to range between $47 million and $49 million, adjusted EBITDA to be between $4.5 million and $5.5 million, and our total operating results to post between a net loss of $500,000, and net income of $500,000, equal to a range of $0.01 loss per share, and net income of $0.01 per share.

With that, I will turn the call over to the operator and take your questions.

(Operator Instructions). Your first question comes from the line of Kerry Rice with Wedbush. Please proceed.

Thanks a lot. Great quarter, guys. You know, I guess my first question is you're obviously doing really well in the Distribution channel. Should we think of this as the new level of revenue you should maintain?

I guess initially or historically, Q2 has been down and you guys actually did a really good growth year sequentially, and year-over-year, so the guidance being $48 million, should we kind of assume that that's kind of the new level of revenue growth, or is there some seasonality or can you maintain adding nine plus distribution partners a quarter?

Hi, Kerry, thanks for the question. This is David. First of all, the underlying seasonality in our business is still there. We typically see summer as being a relatively weak period for us, and we anticipate that the holiday seasons will see more activity on our sites and our partner sites.

The strength that we are seeing going into the third quarter, and what we have seen in the second quarter, is really driven by first of all, the new Distribution accounts, as well as the marketing campaigns on some of our existing accounts, performing in a very strong way that offsets that underlying seasonal weakness. On our Owned and Operated sites the initiatives we have, in particular, the direct marketing initiatives, are driving volume that has helped to offset that underlying seasonality trend.

Can you maybe expands. Is there one of your marketing initiatives doing better than the other?

I know you said you had early success with Dogreatgood, you mentioned Nation and InfoSpace, are we seeing any traffic growth on Dogpile.com as well, or is it primarily these new initiatives? And is there particular one of those new initiatives?

So we don't break out the revenue or traffic by site. I would say that our core trends on Dogpile have not changed a whole lot. We've seen a lot of good traffic growth coming to WebCrawler. And the initiatives are still relatively small, the other initiatives including Dogreatgood and InfoSpace.com are relatively small, and we are more looking forward to those initiatives creating future growth, and they're less of a factor in the second quarter performance.

Okay, and then just one final question. I know that Distribution revenue generally has a little bit lower margin structure than your Owned and Operated revenue, is there something, are we seeing a big up tick in operating expenses, maybe the marketing initiatives, to where we don't get as much leverage on the bottom line? Because you obviously had $43 million in revenue and $0.08 in profitability in Q2, you've got a much higher revenue number in your guidance for net income, or EPS is lower than it was in Q2.

So I would say that the margin profile going into the third quarter is mostly impacted by the product mix shift. Less so about an expansion in cash operating expenses, and more of a shift towards the Distribution business.

Okay. Thanks a lot.

Thank you Kerry.

Your next question comes from the line of Eric Martinuzzi of Craig-Hallum. Please proceed.

Thanks, and thanks for taking my question. We did have good success on the Distribution side, but I know it's not all wins, or typically isn't all wins, did you lose any Distribution partners in Q2?

We did not. We have not lost a major account this year.

Okay, and what do you attribute that to?

Well we believe very strongly in our value proposition; we provide greater revenue and margin per query than most of the alternative sources of Search for the Distribution partners, and we provide a very high level of service and support. So it's become a very rare occasion when we actually lose an account to a competitor.

Okay, I'm pleased to hear it. I just wanted to make sure I didn't miss anything on the other side of the coin. Just going through cash flow statement, I noticed a small acquisition, it looked like around $400,000, what can you tell us about that?

In the quarter, we purchased a company WebPosition Gold, they are an SEO Optimization Service that is offered to third parties to help improve the performance of SEO ranking. It's a technology that we are integrating into our products; it's a management team that we are very excited to bring over to us. It's a small acquisition, and we think that the technology and the talent will become a very significant asset for us.

So is that to say that there is going to be a greater services thrust? Because historically, maybe I'm not grasping the model here, but you're basically dependent on your partners for those advertising dollars to flow to you. I'm not sure what SEO does for you.

I think you shouldn't read too, too much into this acquisition. It was really a talent acquisition. It happens to have a product that we like and that is profitable, and will be more profitable with some of the things we intend to do to it. I would be careful about trying to extrapolate from that to a much broader M&A strategy.

Okay. That's where I was headed. I was wondering if we were tipping our hand as to where we were going with the M&A strategy. It is about the people we've brought in. Okay, and then lastly, what was your head count for finishing off the quarter in June, and then where do you expect it to be as you come out of Q3? We ended around 150 employees, we expect, if anything, a modest increase. Modest, in the neighborhood of five to ten?

Yes, nothing significant in the short run.

Okay, thank you.

Your next question comes from the line of Mark May, with Needham. Please proceed.

Thanks, just to ask a question on the Distribution business, in a different way. Just wondering what segments of your Distribution partners were driving a lot of the growth in the quarter, and what was that a function of?

Is this from partners that are in the ISP space, is it partners that are taking advantage of maybe depressed ad prices across the market, and the availability of inexpensive ad inventory? Just trying to get a little bit more color on what drove the upside growth there.

We have seen some growth across all the different types of partners; we have ISPs; we done pretty well with the DNS business, DNS Error Assist. I would say the majority of the growth is coming from people who are marketing applications and content to drive people to sites that also offer a search experience.

To be clear, in the past we've talked about SEM and organic, and that's not really how we look at the business anymore. Because what we're seeing is a lot of people who are either using social networking presence or other types of Gorilla or organic ways to drive traffic to applications, and then those applications bring a search experience. And I would say that a lot of the distribution growth came in that area. But across the board, we've seen a decent up tick.

And what about just more broadly across both lines of business. Can you give us any sense of the actual metrics that are driving the revenue growth, in terms of paid click throughs, and [ECPC]?

What we've pointed to is that the revenue PPC rates have been fairly stable. We had an issue coming out of 2008 entering into the fourth quarter and coming out that really became a dampening factor on our revenue.

That one factor has helped us going into 2009, but other than that, the performance of our products, both in Owned and Operated and Distribution, have not significantly changed.

Okay. And in terms of how your monetizing your surps, do you have any plans to change the layout format or whatnot of the surp itself, that could impact per page yields one way or another?

Mark we are constantly experimenting with that. I know we have a bright marketing team that is constantly exploring it. And we are testing some of the wisdom, the old wisdom, and testing it with data to see if it holds true. And I say it all points to we are willing to try other formats if we think they'll monetize better, but we don't have anything conclusive there yet.

What about how Yahoo and some of the other search folks are increasingly using Search data for re-targeting. What's your thinking in this regard?

We've looked into this as well. For us it hasn't presented a big opportunity, and so we are not currently active. It's always something that we will continue to look at and see if it makes sense, but right now we are not actively doing that.

Okay, great, thanks a lot.

Your next question comes from Clay Moran with Benchmark. Please proceed.

Good afternoon. Will, can you talk a little bit more about the acquisition strategy. Just would be helpful to hear you remind us of the characteristics that you are looking for, for a potential acquisition, if your view on valuation has changed at all, given the rally in the public markets?

And then I just want to make sure when you say within the year, is that this fiscal year, or does that mean within 12 months? And lastly, on that front, are there significant costs related to the acquisition review and procedure at this point in time? Thanks.

Okay. So taking each of those in turn. On the valuation, yes, we have seen, just like everyone has seen, a run up in values in the last few months. And so I think where we had really hoped to target things in the five to six times EBITDA range, we are probably pushed up in to the six to seven times EBITDA range now.

That's probably a bit more realistic to buy a profitable business with attractive prospects and the kind of future that we can get excited about. We continue to believe that eight or nine or 10 times for a major acquisition is on the speculative side.

We are actively looking at a lot of things right now; it's a very high priority for us. So from a timing standpoint, I wouldn't what want to be pinned down to a day, but I can tell you that we are putting an enormous amount of energy into it. We have tremendous deal flow. I am reasonably confident we're going to have some very interesting things to talk about in the not-that-distant future.

We haven't really changed our spec very much. I mean with the exception of the valuation moving up a little bit to reflect market conditions, we remain focused on businesses that are profitable, that let us leverage our NOL shield, businesses that have sufficiently attractive growth prospects, that we can get excited about getting behind them and then building a whole strategy around them, including additional tuck-in acquisitions afterwards.

And in terms of area, we like Consumer, we like Direct-to-Consumer, we like Direct Marketing businesses, we like Internet businesses. So it's concentric circles around our Search business, but it's not related necessarily to our Search business. We certainly have relaxed the constraint of it having to be tied directly to our Search business. But I think it's a fairly safe [bet] that we are in that Consumer, Direct Marketing, E-commerce, Internet space.

And then your last question around costs associated with acquisitions, we are for the most part, although we talked to lots of financial advisors and get deal flow from a lot of different sources, for the most part we are doing the work ourselves. We are very focused on being a self sufficient shop in terms of executing the deals.

Okay. Thank you.

Operator I think we have time for one more question.

Okay. Your last question comes from the line of Ross Sandler with RBC Capital Markets. Please proceed.

Guys, Ross here, sorry I've been hopping off and on the call, so you may have answered a couple of these, so just a few questions. Looks like your quarter over quarter O&O revenue was up like 5%; that outpaces Google's US revenue number. They don't break out O&O, but I'm guessing it probably outpaced their O&O. So what Do you think is driving that?

Second, and you may have already addressed this, so I apologize, but has there been any communication from Yahoo Microsoft, as to how potentially your agreement will change going forward, and then how that might impact our overall monetization? I know they're kind of a distant second to Google in terms of providing the ads, but any read through, that would be great.

And then third, just how things looked in the month of July and into the first couple of days of August, in terms of pricing. Thanks.

First, with respect to our performance relative to Google, we are proud of our performance, and I wish I could tell you all the reasons why we are stronger and better and doing better than Google. I really can't go there. But I can tell you that we are proud of the performance, and I think that we are getting some amount of benefit from the marketing initiatives that we put in place and then from the strong Distribution business, obviously.

On the Yahoo Microsoft front, we don't believe that our economic arrangements with either one are going to change in the short-term. We have long-term contracts that define our relationship, so in the short-term we are not looking for a lot of differences. In the longer term, we think it's a very good thing that they are together.

If they, by virtue of tied up together, wind up with higher advertiser rates, we will be beneficiaries of that, and so we look forward to that, and having a stronger competitor there in the space is good thing for everybody, well at least for most of us. So I would say that we are pleased about that partnership, and we expect it to affect us neutrally in the short-term and positively in the long-term.

In terms of business, just business beginning of this quarter so far, steady, feeling pretty good, and looking like the last quarter.

Great. Thank you, guys.

You have no further questions.

Thank you, operator. Thank you, all, for joining us, we appreciate it.

You're welcome, and thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day