Avantax Inc (AVTA) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2099 InfoSpace earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Stacy Ybarra, Senior Director of Investor Relations. Please proceed.

Thank you. Good afternoon, and welcome to InfoSpace's third quarter 2009 earnings conference call. I'm 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 fourth quarter 2009. Other statements, which may be in response to questions which refer to our beliefs, plans, expectations or intentions, are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. Because these statements pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from InfoSpace's expectations and beliefs.

Factors that could cause and contribute to such differences could include, but are not limited to, the risks assessed in InfoSpace's most recent quarterly report on Form 10Q on file with the Securities and Exchange Commission. InfoSpace assumes no obligation to update any forward-looking statements, which speak only as of the date of the statement is made. 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 will turn the call to Will Lansing. Following his comments, David will review the third quarter results and fourth quarter outlook. Then we'll open up the call to your questions.

Thank you, Stacy, and welcome to the call today. I will start out with an update on the business and then David will provide an analysis of the financials. We posted another strong quarter, with good performance across all of our key metrics and top line growth coming from our distribution business. We continue to see stable rates in our advertiser network. Digital advertising is one of the most efficient channels to reach consumers, so we're not surprised that search advertising is strengthening as the economy recovers. We continue to believe that the search market is a strong one, and that the long-term prospect is continued solid growth. On the owned and operated side of the business, the team is focused on launching new sites and optimizing traffic on our legacy sites. We have a direct relationship with over four million unique visitors per month. We continue to believe there are opportunities to grow, focusing on targeted consumer groups and through leveraging the traffic to our sites.

We are beginning to see progress on some of the growth initiatives put in place earlier this year. While the numbers are not particularly meaningful to the bottom line yet, we have seen signs of success with organic growth. These early results validate our micro segment strategy. We will continue to invest to leverage our metasearch platform for growth. Additionally, throughout the year we have been able to reduce costs and operate more efficiently as an organization while continuing our development efforts on new products. Specifically, we are exploring ways to leverage our traffic and skill set to launch other products. Our distribution business continues to confirm our view that we have a unique and attractive value proposition. During the quarter we closed nine deals. Our distribution network remains stable with high quality traffic for advertisers remaining an emphasize. We offer good [modernization] and we provide value-add by proactively working with customers to grow search revenue and frequency. We work closely with our distribution partners, which has helped us successfully launch new products into markets such as portal and DNS.

Many of our large partners look for ways to manage costs, and our products allow them to increase modernization while lowering the cost of maintaining and building search-related products. This partnership philosophy is evidenced by our extremely low churn rate. We are proud that our team has not lost significant renewal in 18 months. In addition, we have a strong pipeline for future growth. We intend to continue to invest in and grow this side of the business. Now turning to our acquisition strategy, the use of our cash for an acquisition continues to be an important part of our long-term strategy. As we've said in previous calls, our focus is to acquire profitable businesses that can help us monetize our NOLs. We will likely diversify our business model. While we have applied significant resources in this area during the past quarter, we are not prepared to make any further announcements at this time. With that, I will turn the call to David to discuss the financials.

Thanks, Will, and good afternoon. I will start today with a review of our third quarter earnings, including a discussion of our ending cash position and then provide our guidance for the fourth quarter. Total revenue in the third quarter was $54.4 million. This represents an increase from the prior quarter of 24% and a year-over-year increase versus the third quarter of 2008 equal to 38%. While revenue from our owned and operated business remained relatively flat versus the prior quarter, we saw significant top line growth and performance that exceeded our expectation from the continued strength in our distribution business. In the third quarter, 77% of our total revenue came from distribution, up from 71% in the second quarter and up from 69% in the first quarter of 2009. Growth came from increased volumes through new partners that we've launched over the past 12 months, as well as from our established legacy partners. Gross profit in the third quarter, measured as our total revenue less payments to our distribution partners and content providers, was $20.3 million, up $0.9 million from the second quarter and equal to 37% of revenue.

Adjusted EBITDA in the third quarter was $7.1 million, up $1.7 million from the second quarter of 2009, and equal to 13% of revenue. This sequential increase is driven partly by the growth in gross profit and partly by reductions in our overall cash operating expense. We continue to see benefits from the steps we taken throughout this year to rationalize our cost structure. While we have increased our profitability we have also maintained the appropriate level of investment in initiatives to grow our business. Net income in the third quarter was $1.8 million compared with net income of $2.9 million in the second quarter of 2009, and equal to $0.05 per share. This sequential drop in net income is primarily attributable to an increase in stock-based compensation of $2.5 million. Our average fully diluted share count for the third quarter was 35.8 million, and we ended with 35.3 million shares outstanding. Now turning to the balance sheet, we ended the quarter with $214.1 million in cash, short and long-term investments, equal to $6.07 per share and up by $5.9 million from the second 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. First of all, we expect a one-time gain from a tax refund in the fourth quarter. This will benefit our adjusted EBITDA by $2.4 million, and our net income by $3.3 million, and will only affect our results in the fourth quarter. More importantly, our guidance considers the continued strength in our distribution business and fairly stable rates and volume on our owned and operated properties. As a result of these trends and including the one-time net tax benefit, we expect fourth quarter revenue to be between $57 million and $60 million, adjusted EBITDA to be between $7.4 million and $8.4 million, and net income to be between $3.3 million and $4.3 million, equal to [between] $0.09 and $0.12 per share. Excluding the one-time net tax benefit, we would have expected adjusted EBITDA to be between $5 million and $6 million and net income to be between break-even and $1 million. With that, I will turn the call over to the operator to take your questions.

(Operator Instructions). And the first question comes from the line of Mr. Clay Moran with Benchmark. Please proceed.

Good afternoon, and thanks. A couple of questions. I mean, clearly the most obvious one is the guidance. You're guiding towards a significant -- a pretty significant boost in revenues sequentially, but a down tick in EBITDA. Can you just explain where that profitability goes?

Sure. Thanks, Clay. So the guidance considers a pretty strong growth coming from distribution, which obviously comes at a lower gross margin percentage. We also believe that the cost structure that we've achieved in the third quarter is the one that we will have going forward, maybe a slight uptick in our cash operating expenses. And so you're effectively seeing the percentage of revenue coming at a lower rate because of that shift toward the distribution business.

But in the current quarter the shift was to distribution as well. So I mean the profitability in the current quarter drove $7.1 million. You didn't really see any sequential change on the O and O business. What's changing 3Q to 4Q besides a slight uptick in cost? Am I missing something?

It's that uptick in our cost structure.

Okay. If you could, Will, maybe give a little more color on how things have progressed on the acquisition front, specifically maybe if you could go into sort of what type of candidates you are looking at. Just want to see if that's changed. You did mention, I think for the first time, specifically saying you will likely buy something that would diversify the model. Can you give any color as to why you are being definitive in that today? And then also, as we've seen for awhile now, public market prices have gone up. Do you think that your thought process on that has changed again as well?

Sure. And obviously on this subject, there is very limited amount of stuff that we can share at this point since we don't have deal to announce. But it is no secret and it's's consistent with everything we said in the past that we are extremely focused on trying to find an acquisition or a series of acquisitions that will let us monetize the NOLs. We've talked in the past and it remains true today, that it is likely that an acquisition would be adjacent to or outside of the search space. And that there is a preference for doing something in the internet space, but it's not necessarily limited to the internet space. That's a broad range of things that we have been looking at and are looking at. There is a preference to applying our skills and management skills to what we buy, and that takes us in the direction of consumer and internet. But I think that is as much color I can give you on it at this time. With respect to the prices, it is absolutely the case that in the public markets at least, and probably the private markets too, prices have come up. We continue to see opportunities, and we are working on opportunities and we continue to believe that we will be able to buy profitable businesses at a reasonable price. Reasonable is a relative term, and I think when the whole market moves then our notion of reasonableness will probably move up a little bit with it. But I don't think that we are talking about any kind of dramatic changes. I think we are still focused on buying something that has the kind of characteristics that are going to let us get us to modernization of those NOLs. I hope that's helpful.

Can I just follow up? Can you just talk a little bit about the deal [flow] that you have seen. Does it roughly match the desired characteristics that you are looking for? At least maybe can you comment, is there opportunities around internet properties that sort of use your marketing background?

The answer is yes. I think we are seeing a lot of very interesting opportunities and we are in the middle of looking at some right now. I don't think we are looking for the empty set.

One more question if I could. Since distribution is the big driver these days, can you disclose the total number of distribution partners? And can you disclose any concentration with anyone or a few partners?

So we don't go into a whole lot of detail behind the make-up of those partners. We have not lost a significant partner for well over a year, and we continue to sign up new partners. We announced nine new deals signed this quarter. So we don't go into a whole lot of detail on that concentration.

Okay. So then we can assume there is no one that is 10% or more?

There -- We are seeing a couple of partners that are over that threshold. If one gets over our 20% threshold we will likely disclose that.

Okay. Thank you.

And the next question comes from the line of with Brian [Berken] with Craig-Hallum Capital. Please proceed.

Good afternoon. With -- leave it to Google and Yahoo, are -- is each still monetizing at historical levels, or are you seeing any foreseeable changes to Yahoo contracts since it began its Microsoft relationship?

We do see periodic shifts in the monetization of each of the different networks. A lot of it is based on what they are doing to measure the quality of traffic and how they monetize or pay us for that quality of traffic. We haven't seen any significant shift. There has been a little bit of movement in the quarter. But nothing that has materially impacted our overall results from each of the two partners. So nothing very dramatic.

And then I think you had mentioned that you -- the nine new partners came from portal and DNS. When you are seeking out new distribution partners, is one portal or is DNS -- is one more preferred than the other when you are trying to seek out new distribution partners?

We really like the portal and DNS products because they add a lot of quality traffic and they are very sticky good partners because we are providing a lot of value-add service. To the extent of bringing in good high-quality organic traffic we definitely value those two products very highly. That being said, we still are launching new partners who provide content and application. And those have showed to be very high-quality traffic as well.

Okay. And then I hate to beat a dead horse, and you are not going to speak much more to it. But do you think you can [bind] an acquisition target at five to six times than you mentioned in the past? And are you willing to wait out to the point where you find something at that price?

I think it remains to be seen. I don't want to commit to a specific multiple. I think that we are committed to a reasonable range. And could it be higher than five to six times? It could be. I think that you can be confident that we're not out making wildly speculative bets on companies that have potentially tremendous opportunities ahead of -- [oh and yes] that pay a very high multiple to take advantage of that. I don't think that's the game we're in. But I couldn't say specifically that five to six times is the magic number. It could certainly be a multiple a little bit higher than that.

And then finally what was your headcount exiting Q3?

We're around 150.

Thanks, guys.

(Operator Instructions). And the next question comes from the line of Mr. Ross Sandler with RBC Capital. Please proceed.

Hi, there, this is Whitney Goldstein for Ross Sandler. Thanks for taking my question. How have CPC trends been in 4Q so far relative to 3Q? Are they they improving, or are they just the same? Is there any way to quantify that?

Sure. Thanks, Whitney. We have seen the rates be relatively flat, maybe slightly down, but nothing very dramatic, down typically with the seasonal trend we had seen in the past few years prior to 2008. If you remember, 2008 was -- it ended roughly with a lot of advertiser pull back in CPC rates dropping. We have not seen anything like that this year, and we are continuing to see stability with a little bit of seasonality in it.

Okay, great. Thank you.

For us sort of a steady participation from the advertisers.

Super. Thank you.

You're welcome.

(Operator Instructions).

Operator, if there are no more questions. we can end the call.

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would like to hand the call over to miss Stacy Ybarra for any closing remarks.

Thanks for joining us.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.