Avantax Inc (AVTA) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 InfoSpace Inc. earnings conference call. My name is Angela and I will be your coordinator for today. At this time, all participants are in a 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.

And now I would like to turn the conference over to your host for today, Ms. Stacy Ybarra, Senior Director Investor Relations. Please proceed.

Good afternoon and welcome to InfoSpace's second-quarter 2011 earnings conference call. On the call today are Bill Ruckelshaus, President and Chief Executive Officer, and Eric Emans, Chief Accounting Officer.

Before we begin, I would like to remind you that 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 2011.

Other statements 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 on Form 10-Q 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 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 8-K, we present GAAP and non-GAAP results along with the reconciliation tables and the reasons for our presentation of the non-GAAP information.

Now I will turn the call over to Bill Ruckelshaus. Following his comments, Eric will review the second-quarter results and third-quarter outlook. Then we'll open up the call to your questions.

Thank you, Stacy, and good afternoon, everyone. InfoSpace posted a good quarter with financial metrics coming in within our expectations. Revenue was $54.3 million and adjusted EBITDA was strong at $9 million. We are pleased with the revenue growth both when compared to the prior quarter and prior year. We continue to execute on our key initiatives for the year and are encouraged by our progress to date.

Before we go into details on the financials, I wanted to give you a quick update on the business and our operating highlights during the quarter.

Following a thorough analysis of available options, we sold the Mercantila e-commerce business in June of this quarter. We made a tough decision to reverse course on an acquisition completed in the second quarter of last year. This was the right call for shareholders and will allow us to redouble our focus on search operations going forward. As a result of this divestiture, our financial results now clearly reflect the value of the core search business.

During the second quarter as part of our recently extended Google search agreement, we began testing a new advertising implementation. We have now chosen to adopt the new approach for the remainder of the term and although our implementation of these changes is ongoing, we continue to believe the overall impact of this decision to be neutral and that we will maintain similar economic results to those provided under the previous agreement.

The majority of the revenue growth in the second quarter came from our distribution business. We signed 13 new distribution partners in the period, underscoring the continued value proposition of a search offering to a diversity of publishers and partners around the world. Revenue from distribution accounts signed in 2011 is starting to contribute meaningfully to overall results and we are encouraged by the pipeline as we look ahead to the second half of the year.

Our progress on the distribution side in large part indicates that small and medium-sized companies continue to find innovative ways to drive users to their sites and applications. Search is a great way to monetize those users. We serve an important role for our partners offering monetization, content management, and value-added services, and proactively work with our customers to grow their businesses overall.

We continue to be optimistic about the long-term growth prospects of our syndication business and are focused on developing additional products, tools, and applications to help our partners grow and acquire new users.

One example of this is our new content experience platform that we launched in beta in June. This new portal solution offers ISP customers a hub of adaptable localized content including news, weather, sports, and entertainment, delivered through a flexible user interface that adapts seamlessly to different devices including mobile phones, tablets, laptops, and PCs. The platform helps our customers evolve their content as end-user consumption patterns change and enables new monetization opportunities for our partners.

Looking ahead, we will continue to innovate and invest in our search offering through product enhancements and future development.

And finally turning to our acquisition strategy, we continue to focus on acquisitions as a way to create value for shareholders. We have an exceptionally strong balance sheet and resources with which to make acquisition and we remain focused on businesses with good growth profiles and strong cash flow. We have the right processes in place to surface and evaluate opportunities and we continue to be optimistic about what we are uncovering and about our prospects for executing transactions in the future.

Before I turn the call over to Eric Emans, I would like to express how pleased I am that Eric has agreed to step up and serve as interim CFO. Eric has done a terrific job over the last three years as Chief Accounting Officer and prior to that as our Corporate Controller. Eric's deep understanding of the business will help to ensure a smooth transition and I look forward to working with him in his new role. Eric?

Thank you, Bill, and good afternoon. I will start today with a review of the financial results in the quarter and end my comments with guidance for the third quarter.

As Bill mentioned, we completed the sale of our Mercantila business and therefore will present financial results from the ongoing business on a continuing operations basis. Historically these results have been primarily presented as the core segment. The financial results of the Mercantila business have been presented as discontinued operations, which historically has been presented as the e-commerce segment.

Now onto the results. Revenue for the quarter was $54.3 million, up $1.9 million or 4% versus second-quarter 2010 and up $2.6 million or 5% for the first quarter 2011. The sequential revenue growth is a continuation of positive trends we've seen since mid last year.

Additionally, we are starting to see growth versus prior year, which is an encouraging trend driven by our distribution business which returned to growth beginning in the fourth quarter last year. The distribution business saw an increase versus the second quarter 2010 equal to $9.8 million or 30% and a sequential increase from the first quarter 2011 equal to $4.9 million or 13%.

When comparing our performance to the same period last year and the prior quarter, the growth has primarily been driven by long-standing distribution partners. While the lion's share of our growth is coming from these legacy partners, we are beginning to see meaningful contribution from distribution partners we launched this year. These partners have generated $1.3 million in the second quarter and a total of $1.6 million in the first half of the year.

Our owned and operated properties represented 22% of revenue in the second quarter, down $7.9 million or 40% from second quarter 2010 and down $2.3 million or 16% from the first quarter of 2011.

Versus the second quarter 2010, the decrease is driven by the expected decline of $5.2 million from Make the Web Better; a drop-off of $1.1 million from our direct marketing initiatives; a decline of $1.1 million from our non-search product initiatives related to the shutdown of our auction website, Haggle; and a decrease of $500,000 from our organic search sites.

Versus the first quarter 2011, the decrease was driven by a drop of $2.1 million from our direct marketing initiatives and to a lesser extent, a decrease of $500,000 from Make the Web Better. Partially offsetting this sequential decrease was an increase of $300,000 from our organic search sites.

Adjusted EBITDA for the quarter was $9 million, down $2.3 million or 20% versus the same quarter last year and virtually flat versus the first quarter 2011. Versus the second quarter 2010, the decline was driven by a decrease in contribution from Make the Web Better, which was partially offset by increased contribution from the distribution business and lower operating expenses driven by lower professional service fees and reduced marketing spend.

Compared to first quarter 2011, we remained flat. As expected, we saw a decrease in the contribution from Make the Web Better, which was an offset -- which was offset by increased contribution from the distribution business.

Income from continuing operations in the second quarter of 2011 was $4.4 million or $0.12 per diluted share, up $3 million versus the same period last year and $0.08 per diluted share. Compared to the prior quarter, income from continuing operations was up $620,000 or $0.02 per diluted share.

Income from continuing operations in the second quarter 2011 included non-cash income tax expense of $1.9 million, primarily related to the expected utilization of our net operations loss carryforward. Excluding this non-cash income tax expense, our non-GAAP net income was $6.2 million or $0.16 per diluted share, up $4 million or $0.10 per diluted share versus the same period last year, and up $800,000 or $0.01 per diluted share versus prior quarter.

In total, net loss for the quarter was $3.9 million or $0.10 per diluted share and is driven by the loss on the sale of discontinued operations of $7.7 million or $0.20 per diluted share. This loss was driven by the write-off of goodwill and the sale of intangible assets of the e-commerce business.

We ended the quarter with $263.4 million in cash and short-term investments, equal to $6.94 per share and we continue to hold no debt. The fully diluted share count for the quarter was $38.1 million and we ended the quarter were 38 million shares outstanding.

Now for our outlook. In the third quarter 2011, we expect revenue to be between $55 million and $57 million; adjusted EBITDA between $7.5 million and $8.5 million; and net income of $3 million to $4 million or $0.08 to $0.10 per diluted share.

For our topline guidance, we expect growth primarily driven by greater revenue in our distribution business as well as sequential improvement in our direct marketing initiatives. These positive trends will be partially offset by the continued and expected attrition of Make the Web Better as well; our owned and operated organic search properties typically experience a seasonal slowdown in usage during the third quarter.

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

(Operator Instructions) Clay Moran, Benchmark.

Thank you, a couple of things. Could you talk a little bit more about why you decided to change the strategy and divest of Mercantila?

Yes, this is Bill. I think we like the Mercantila business. We had been at it about a year, as I had said. It was not performing in a way that we thought was consistent with the long-term outlook and the long-term expectations. I think the end year performance was within a range of acceptability, but the long-term outlook was something that we had spent a lot of time looking at at the time that we did the acquisition and of course revisited monthly and quarterly to sort of recalibrate where we thought it was going. And the conclusion that we came to that led to the divestiture was that the resources required to support and build to the long-term vision were better to be deployed elsewhere.

Okay, and you mentioned good momentum in the distribution business. Can you give us some examples of the new distribution partners? And then maybe as well examples of some of your more sizable partners that have been the big contributors over the past few years?

Yes, so we have -- we don't disclose publicly about the nature of our partners other than I can tell you that as it relates to the existing partners that have performed well, it is not necessarily concentrated in any one group. We have different types of partners, as you know, and the performance has been on the upside across all the segments. And so we are pleased with that and I think consistent with my opening comments, there is just a lot of innovation going on out there in the marketplace.

In the search market generally I think with the emergence of Microsoft and Yahoo, there has been a lot of innovation in the category and I think that's also spilling over into the types of partners that we work with on the syndication side. There's just a lot of innovation, a lot of application innovation, and a lot of marketing innovation that we think is ultimately translating into performance around our syndication business.

Okay. Lastly, just quickly, we don't see interest income on the P&L in the press release. Why not?

Clay, this is Eric. It's in other income. We do have interest income. It is considering how conservative we are in our investments, it's relatively small.

Okay, thanks.

Eric Martinuzzi, Craig-Hallum.

First off, congratulations, Eric, on your promotion. The question I have is about the growth rates. If we look at year-on-year, your 4% in the core, if I look sequentially, we are up about 5% quarter on quarter. And if I look at the guidance at the midpoint, that's about 3% sequentially. So I'm just trying to get my arms around how to take the quarter-on-quarter growth, which is solid, and translate that into a longer-term outlook. Would you care to comment?

Sure, this is Eric. I think as we look ahead into the third quarter, we mentioned a little bit of a seasonality impact in our other owned and operated properties. As well as we have the continued headwind of the attrition of Make the Web Better. And looking at our SEM business and distribution business, there's somewhat volatility in their growth patterns. So I think with the mix shift and some of the seasonality change along with the decline in Make the Web Better, that's kind of how we are looking at the growth.

Okay, and I haven't a chance to pick apart all the financials. Is there -- do we have a way to capture -- I know we've got the first two quarters of this year and last year. Is their way to capture all six quarters, not just the four? Probably have to take that one off-line.

Yes, we can talk about that.

Okay, but is it something that is going to be addressed in the Q for sure?

Yes.

Okay, back to the M&A, I see the cash balance rising nicely here. We are up to $263 million. What in M&A has your attention right now? Obviously I'm not talking about specific deals. We know you're not interested in e-commerce. What are you interested in?

So I think we've had discussions around this topic before, but the environment right now is -- I don't know whether it's a bubble, but there are some businesses out there that are trading at very hefty valuations, and so we are having to think carefully about where it is we're looking. But our immediate skill sets are in and around the Internet. That's a business and a market segment that we have been operating in for years now and understand and that is an area that we are looking at, but it's not confined to that.

So there are technology, software businesses, information businesses that are on the radar screen that we think could be interesting for the Company and as we've talked about before, the financial opportunity that we have and the set of assets that we can bring to bear to the acquisition effort I think also argues for us not to be necessarily even confined to say the broader technology space, but to think open mindedly about opportunities and what they might do for our shareholders.

So that's not a direct answer to your question, but the other way to think about it is it relates to private companies, public companies, the opportunity right now for a private company to go public I think is probably a bit mixed. And so there's a variety of companies out there that may like the idea of teaming up with an existing public company as a way of in effect accomplishing the same thing to the extent the IPO window is not open to them. That's certainly an interesting avenue for conversation.

But I suspect that sounds consistent with what we've talked about for I think the efforts are, as I had said, producing some pretty interesting situations and we are hopeful that we are going to consummate here something in the near term.

So still pretty well wide open?

Yes, I think the best way to characterize it is our skill sets at the Company are going to point us into a certain direction because those are businesses that we can understand and in many cases, relationships and conversations that are pre-existing. So that I think is a very natural place to expect us to be evaluating acquisition opportunities.

And in addition, there are adjacent segments in and around the technology sector that I think also offer a lot of interesting opportunities for us and we're looking at those as well.

Thank you.

Ned Davis, Wm Smith & Co.

Hi, Bill and Eric. A couple of questions. First of all, can you give us a sense for how big the universe is of potential partners since that seems to be a pretty strong growth initiative for you? Are a lot of potential ones out there?

Yes, I would say that absolutely there are. In terms of the number count, that's probably a somewhat elusive thing, piece of information to provide. But the value proposition that we offer is the place on the -- in the search market where you have publishers and application providers that are offering value-added services to consumers and during the course of consumers consuming that content, they are generating search query volumes. And those providers, those partners are looking for monetization solutions. Because essentially what they are in the business of doing is acquiring users and developing audiences of consumers who are in search of that content, and we are the monetization solution for many of those providers, not all of them. We are adding to that list of within our network and the market we think is wide open.

As I had mentioned earlier, the innovation that is going on is resulting in a lot of new partners materializing. Many of the guys that we are now working with may not well -- may not have been in existence two to three years ago. So it's a pretty rapidly evolving landscape and one that we think is pretty exciting.

Just following up on the M&A question, can you give us a generalized idea as to whether the company could do a transaction where it could issue either common stock or converts of some sort as part of a deal with cash and still maintain the NOL, applying it to the earnings of the Company you are acquiring? Is that possible? Could you -- as much as let's say theoretically a third of the purchase price of a company be in stock so that you could be more competitive with the multiples that are being paid by both private equity and venture capital today?

Yes, I think that's a good question. I think it will have less to do with the size of the target and more to do with the equity and the amount of equity that we can issue within the confines of the NOL and not impairing the NOL, which is a 382 change of ownership measurement that will dictate equity issuance any upside potential for us.

I think the other point to make is we would want to strike a balance between equity consideration and a way for us to structure a proposal to make it attractive to an ownership group that's selling, while on the other hand being pretty conservative about issuing our equity at these levels because there is a view that issuing at the current valuation levels is not ideal from a dilution standpoint.

Unless the seller was willing to recognize that also and just wanted to participate in the upside of the combined companies.

Certainly, certainly.

So you could do some stock equity as well as cash or maybe some debt depending on --? (multiple speakers)

Yes, yes.

Thank you very much.

Operator, if there are no other calls, we can go ahead and end the call.

Ma'am, you have a follow-up from Clay Moran with Benchmark.

Yes, just thought I would ask since I got the chance, last quarter you mentioned briefly about looking for another Board member and you had mentioned it could possibly be a shareholder. Could you update us on the status of that and what your thinking is there? And as well, what is the plan for finding a permanent CFO?

Clay, this is Bill. So first question is that continues to be the plan and we are progressing in our discussions, but we don't have anything to announce at the moment.

And as it relates to the permanent CFO, as I had mentioned, I am very pleased that Eric is stepping in as interim and I have a lot of confidence in Eric. I have during the course of the time that I've been involved the Company first on the Board and now on the management team, worked a fair amount with Eric and have full faith and confidence in him and his ability to step in not only as the interim but ultimately as the full-time CFO. We do not have anything to announce on that front at this point. But we will be sure to communicate when decisions have been made in the future.

Okay, thank you.

Ladies and gentlemen, I would like to turn the call back over to Stacy Ybarra.

Thanks for joining today. This will now end the call.

Thank you. Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a wonderful day.