Avantax Inc (AVTA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Infospace earnings conference call. My name is Alicia, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session towards the end of this 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, Stacy Ybarra. Please proceed.

Good afternoon, and welcome to Infospace's second quarter 2010 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 forward-looking statements including, but not limited to, statements regarding Infospace's expectations about its products and services, outlook for the future of our business, and growth initiatives, acquisition strategy and anticipated financial performance for the third quarter 2010.

Other statement that refer to our beliefs, plans, expectations or intentions, which may be made in response to questions, 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 our current expectations and beliefs. Factors that could cause or contribute to such differences include, but are not limited to, the risks and other factors discussed in Infospace's most recent Quarterly Report of Form 10-Q on file with the Securities and Exchange Commission.

Infospace assumes no obligation to update any forward-looking statements, which speaks only as of the date 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 and filed with the SEC on Form 8-K, we'll 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. Following his comments, David will review second quarter results and third quarter outlook. With that, I will open up the call -- and then we'll open up the call to your questions.

Thanks, Stacy, and good afternoon. I'm pleased to report that Infospace had another solid quarter. Revenue was $59.4 million, up 36% from the prior year and adjusted EBITDA was strong at $10.9 million (Sic -- see press release). Both our core Search business, and the newly purchased E-Commerce business grew compared to the same period last year. Before I turn the call over to David to discuss the quarter in detail, I would like to give you a quick update on our businesses and reiterate our strategy for growth through acquisitions.

First, our businesses -- the biggest piece of our core business is distribution. As expected, our distribution business has stabilized and is showing signs of growth after the declines we saw in the first and second quarters. We are pleased with the quality of traffic in the network, and believe we have a strong value proposition for our customers. In the second quarter, we signed six new distribution partners and have deals in the pipeline for the second half of the year.

Regarding our E-Commerce segment, we recognize that Mercantila is not at the scale or profitability that we are looking for in a transformational acquisition. That said, we're extremely pleased with the assets, the team and the growth prospects of the business that we purchased. Our E-Commerce segment is performing much better than expected on the top line. We are seeing growth rates at over 50% compared to last year. We are investing in the business, and are currently focused on platform development to improve margins as well as category extensions.

We believe there's a tipping point where we have enough scale that we recognize -- that we start to optimize margins and maintain our strong growth rate. While we're pleased with the growth in both of our business segments, we believe the real value is going to be created on the acquisition front. We remain committed to our strategy of deploying the roughly $223 million in cash to buy a business or businesses that let's us use the $800 million in NOLs faster. What we look for are businesses with high profitability and good growth profiles -- ideally, not heavily dependent on Google or any other particular player, but where the success for the business lies largely within our own control. We continue to have a wide aperture for the types of deals we might consider. Of course, E-Commerce is one area for expansion, but we continue to look beyond E-Commerce.

With that, I'll turn the call over to David to share with you the quarter's financial details.

Thanks, Will, and good afternoon. As Will mentioned, we completed the purchase of Mercantila's E-Commerce business in the second quarter. Because of this transaction, we revised our presentation of the financial results and now report in two segments.

The first segment is our core Infospace business, which includes our search services as well as our new initiatives such as Haggle and WebPosition. The second segment is E-Commerce, which includes the newly acquired Mercantila business. I'll start today with a review of our financial results in the quarter for the entire business, and then give greater details on the performance of each of the segments. I'll end my comments with guidance for the third quarter.

Total revenue in the first quarter was $59.4 million. This represents an increase versus the same quarter last year of 36% and a decrease from the prior quarter of 4%. Growth from the prior year was driven by better performance of our search business, as well as the acquisition of Mercantila. Versus the prior quarter, declines in our core segment were partially offset by the revenue generated by Mercantila and our E-Commerce segment. Adjusted EBITDA in the quarter was $10.6 million, nearly double the performance from the same quarter last year and higher than the first quarter of 2010 by 68%. These positive trends were primarily driven by our acquisition of assets from our distribution partner, Make the Web Better.

Net income in the second quarter was $670,000, equal to $0.02 per diluted share. This result includes a charge of $3.5 million, associated with the acquisition of Make the Web Better. This charge reflects our current expectation that the performance of these assets will be better than was expected when we first completed the acquisition. The expectation of greater revenue and cash flow also leads to higher earnout payments, which is reflected in this charge. We ended the quarter with $223.4 million in cash and short-term investments, equal to $6.21 per share, and we continue to hold no debt. The fully diluted share count in the quarter was 37.4 million, and we ended the quarter with 35.9 million basic shares outstanding.

Now, turning to the details of our two segments, I'll start with our core segment, which includes our search services, as well as our new initiatives such as Haggle and WebPosition. In the quarter, our core segment generated $52.4 million in revenue, representing a 20% increase versus the second quarter of 2009 and a decrease of 15% versus the prior quarter. Growth versus the prior year was driven by better performance in both our owned and operated and distribution products, with the lion's share of growth coming from our owned and operated properties. Versus the first quarter of 2010, we saw an increase in revenue from owned and operated. However, this was more than offset by a decrease in distribution.

In the second quarter, our owned and operated sites represented 35% of our core segment revenue, up from 29% in the second quarter of 2009 and up from 19% in the first quarter of 2010. This increase is driven by the addition of Make the Web Better as one of our owned and operated websites. These acquired assets generated $7.4 million in the quarter, equal to 14% of our total core revenue. In comparison, our distribution business equaled 62% of the core segment revenue, down from 71% in the second quarter last year and from 78% in the first quarter of 2010. This decrease is driven by removing Make the Web Better as one of our distribution partners in the second quarter this year. In the second quarter last year, this partner represented 7% of the total core revenue and equaled 15% of total core revenue in the first quarter of 2010. Excluding the effects of Make the Web Better, our distribution business grew by 16% versus the second quarter last year and decreased by 16% versus the first quarter of 2010.

Gross margin from our core segment in the second quarter equaled $25.7 million or 49% of revenue. Versus the second quarter last year, this is an increase of $6.3 million and versus the first quarter this year, an increase of $5.1 million. The increase in gross margin dollars is driven by the acquisition of Make the Web Better, which represented approximately $7.2 million of gross margin versus $500,000 in the second quarter of 2009 and $600,000 in the first quarter of 2010. Income from our core segment equaled $11.3 million or 22% of core revenue. This is an increase in income versus the second quarter of 2009 of $5.9 million and versus the prior quarter of $5 million. Again, it's important to note the positive impact of the acquisition of Make the Web Better, which drove $7.1 million of core income in the second quarter.

Now, turning to the performance of our E-Commerce segment, in the second quarter we generated $7 million in revenue between the closing date of our Mercantila acquisition on May 10, through the end of the second quarter. Normalized for the full quarter, this would have equaled approximately $12 million of revenue. We are pleased with the growth in top line performance with this business, with volumes growing at a rate greater than 50% compared to the same period last year. Gross margin for our E-Commerce segment equaled $1.1 million or 15% of E-Commerce revenue. Included in this amount is revenue less the cost of product, shipping and credit card fees. The E-Commerce segment lost $700,000 in the quarter, in line with our expectations when we purchased the assets.

Now for our outlook, in the third quarter of 2010, we expect revenue to be between $61 million and $65 million, adjusted EBITDA between $7 million and $8 million, and net income between $500,000 and $1.5 million or $0.01 to $0.04 per diluted share. Our guidance reflects an expectation of lower revenue from our owned and operated search services, due to the continued attrition of the Make the Web Better assets. In contrast, we are seeing growth in our distribution services versus the second quarter, which will partially offset that decline. Additionally, we expect continued growth in revenue from our E-Commerce segment. However, as we're investing in infrastructure and personnel to support the long-term opportunity, we expect a loss from the segment between $1 million and $2 million in the quarter.

With that, I'll turn the call over to the Operator and take your questions.

Operator?

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

Thanks. Good afternoon. A couple questions. I guess I'll give them all to you up front. First, just curious, you said distribution was trending a little better this quarter. Just wondering if you've basically removed the distribution partners that you had planned to and if that process is done for the time being? Second question, is there anything more you can give us to help us get a recurring EBITDA number, given the seasonal aspects of the business? And then lastly, Mercantila, can you remind us if there is a significant seasonality to that business, and if so, do you think you're at the scale where in the fourth quarter that could actually be profitable? Thanks.

Clay, it's Will. With respect to the distribution, yes, we're pretty happy with the quality of our traffic today, and we feel like we've done the work we need to do on the partner side, and we're happy with where we are for now. I'll let David take the recurring EBITDA question and I'll just speak to the Mercantila point on seasonality.

It is a seasonal business. It's a fourth quarter seasonal business, and we also are benefited by tremendous upward trajectory on trends. So, the combination of seasonality and the overall growth trend bode pretty well for the fourth quarter. I don't want to represent that we will be profitable in the fourth quarter, but we're feeling good about the outlook.

Hey, Clay, this is David. On the seasonality of the core business, second and third quarter tend to be a little rough from us in terms of user use of the search services, and we would expect third quarter to reflect that. Fourth quarter usually bounces back with more volume and greater revenue per click. I think that for our business, we'll see some of that in the underlying trends. One thing to keep in mind, though, is that the Make the Web Better business that we purchased generated $7.1 million of revenue in the second quarter. And as we expected, that business is in a natural state of attrition, and I think those revenues will continue to come down through the third and the fourth quarter. That will partially offset some positive trend that we might otherwise see in the core business segment.

Yes, David, I know it is a question you might not be able to answer, but what I was trying to get at is sort of -- is there a level of recurring EBITDA, meaning excluding Make the Web Better, that you guys -- that you can share with us a little bit? Given all the recent changes, all the puts and takes we've had, it's a little bit more difficult to discern maybe what recurring EBITDA is on annualized basis. Is that something you can give us some color on?

One thing that I'll provide is that we have a core segment income that we reported this quarter, and we also tried to break out the impact, the total performance from the Make the Web Better business. If you normalize the total income less Make the Web Better, that's a little bit lower than we think is achievable from the core business today.

I would reiterate that we're hopeful that the distribution business is at a footing now where we will begin to grow again. So, looking at that math for the second quarter, we start to -- hopefully start to expand.

Okay. That's helpful. Thanks.

Sure.

Your next question comes from the line of Scott Kessler from Standard & Poor's Equity.

Thanks a lot. I have two questions. The first is, obviously, your business model is becoming more complicated, as was alluded to not only in the question but in your prepared remarks. I'm wondering what kind of benchmarks we should be looking for from you in terms of how you're managing these new businesses? And also, maybe give us a better way to think about what types of acquisition activity we can look for from the Company? My sense would be, maybe on the smaller size to help round out some of the businesses that you've been talking about. But any related details as to how these will grow over time, either through internal investment or, of course, acquisition.

And then the second quick question, is can you give us an update on stock repurchase activity -- if you have authorized shares, when it may expire and plans you might be considering along those lines? Thank you very much.

You take the acquisitions piece? Let me -- Scott, let me start with the second part of your question around the acquisitions and speak to that and then I'll turn it back to David.

Okay.

I think we are very much interested in building organically and building through small acquisitions and potentially bigger acquisitions, our E-Commerce segment. So, we are constantly looking at things that make sense either from the standpoint of technology or from the standpoint of category extension or completely new categories. So, I think that part of the question and statement is accurate. We're interested in rounding out, augmenting, building on the E-Commerce segment.

That said, I would not rule out either a bigger acquisition in E-Commerce or a bigger acquisition outside of E-Commerce. Because our real strategic goal, in terms of doing M&A, is to deploy the cash in a way that helps us to monetize the NOLs more rapidly and to build as much value as we can over the longer term. And in order to do that, we're looking for businesses that are growing nicely, that are profitable and can be more profitable that -- good growth trajectories. We're looking for attractive margins. We're looking for businesses that turn on our own skill set, as opposed to being as dependent and reliant as our Search business is on Google and Yahoo!, for example.

So, that's our goal, and that may or may not take place around E-Commerce. That could easily be an acquisition beyond E-Commerce. I wouldn't want you to think that we're just focused on E-Commerce.

No, no.

That said, we are committed to making that space successful, and we are looking at things in that space.

Because if I could just interject, I think a lot of folks, at least myself, believe that for a long time, even prior to your arrival, the thought was there was this considerable amount of cash, right, building, and there really wasn't a lot of activity around M&A.

Now, it seems like you've done a couple of deals, you've identified areas of focus, and it would seem that you already have a template in place, in terms of what you're looking to do; you've done some of these things before. You've brought in additional staff with expertise in this area. So, I think most people would argue that they expect more of the same from you guys, and are encouraged by that, because at this point, how much is your cash earning from a return perspective?

Not as much as we'd like. No, good point, Scott. We absolutely agree, and we're very focused on M&A as the biggest tool to unlocking value. I mean, we recognize that the NOLs are undervalued by the market today, because we don't have as clear a path as we'd like to have for monetizing them quickly.

Right.

So, deploying the cash is absolutely the way to go. And we are very focused on it and your point about building the team to support that is absolutely correct. We brought in Stephen Hawthornthwaite as a managing director from Savvian, came in to run our corporate development efforts. He's very strong and helpful there. And so, yes, we have a good pipeline, and we're pretty excited about the prospects there.

And if you could just provide an update on your thoughts related to another use of cash buyback, that would be great. Thank you.

Let me just speak to that for a moment. I think in the absence of our goal of monetizing the NOLs, a buyback would make a lot of sense because it's hard to imagine buying profits more cheaply than the two times EBITDA that our Search business goes for today. And so a stock buyback from that standpoint makes some sort of economic sense.

The challenge for us is if we buy back stock, it shrinks the shares outstanding and in so doing, it constrains our ability to do as much acquisition as we'd like to do, to -- both by using up cash and also by shrinking the denominator in the number of shares per equity for us to do the M&A that we'd like to do. So I think what it does, what it really does, is it pinches our ability to monetize the NOLs as quickly as we'd like to. I would say that while one should never say never, it's not in the immediate horizon.

Okay. Good to know. Thank you.

Scott, the first part of your question is around metrics and how we look at the (technical difficulty).

Yes.

And, obviously the business has become more complicated as we're now looking at two different segments, and we think about metrics for success distinctly across those two segments.

With our core segment, we're looking at the cash flow number or the income number, $11.3 million, and we think in the short run, that's coming down because of the addition of Make the Web Better. It is a naturally attriting business, but eventually, we want to stabilize that and get it back to a growth position. So, it's stabilizing and expanding that income.

On the E-Commerce segment, we're very excited about the growth opportunities. So, maintaining the growth rates, which we're currently seeing at about 50% year-over-year, and getting it first to a break even on an income basis and then getting it to a good margin, given the E-Commerce segment. So, maintaining growth first, but then getting it to a positive income position is how we think about the key metrics.

Okay. Thank you.

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

Hi. It's Eric Martinuzzi from Craig-Hallum. My question is on that growth, based on your commentary, I presume a 12 million run rate, even though you only got 7 million because of the stub period, but that 12 million run rate, that implies we were roughly 8 million a year ago, is that correct?

Yes, that is a good way to look at it. Now, keep in mind that we don't -- we're not reporting prior year revenue, so that's a good proxy.

Okay. So given that growth rate, and your desire to get the business to break even, are you investing on the cost side for the Mercantila, for the E-Commerce platform, such that if we just took a ruler out and took that growth rate and backed into a number from the gross margins of the business, I'm trying to figure out when this thing becomes profitable. If there's other investments, obviously, it pushes it out further?

We're definitely not investing at the same rate the revenue is growing. So, those two lines will cross, and we think they'll cross in 2011.

We think that we're reporting a 15% gross margin percentage. There's some upside to that metric as well, as well as growing to get it to scale of profitability.

Yes. And we're dealing with E-Commerce now. You're seeing the good growth there. Can you report on which products, which segments are most responsible for that?

There's a little bit of seasonality in it and it varies. In the earlier part of the year, you get a good fitness business and as you know, we're in treadmills and ellipticals and things like that. We had a pretty attractive business in trampolines recently, and then we expect that the business is going to shift. The product mix will shift in the fall with seasonal -- with where the consumer goes.

Okay. So, more maybe furniture and less fitness, that sort of thing?

A little bit, although we're growing nicely on all fronts, so I hesitate to say anything is falling off, but, yes, the mix will shift a little.

Okay. And then your current head count, where is it today? Where do you expect it to be year end?

We're around 170 heads right now. We're going to go up a little bit, as part of that investment in Mercantila, but we won't be over 200 people with both businesses combined. We'll be under that.

A little less than 200, December 31.

Okay. Thank you.

(Operator Instructions). Your next question comes from the line of Rich Tullo from Albert Fried and Company. Please proceed.

Hey. Good afternoon, guys. Did you say that there was a $3.5 million charge in relation to the acquisition of Make the Web Better because they were earning out at a higher rate?

That's correct. When we first acquired the business, there's -- there was an earnout in the consideration. We had to estimate the value of that earnout and the initial charge was low, given how the business has performed since we first closed. And so that $3.5 million charge equals the incremental payments we expect to make over the life of the deal.

And was that number included in the guidance you previously gave for the quarter?

That was not.

Okay. Thank you very much.

There are no further questions at this time. This concludes the question and answer portion of the call.

Thank you.

Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. Have a great day.