Avantax Inc (AVTA) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2012 InfoSpace earnings conference call. My name is Regina and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session. (Operator Instructions). Today's event 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.

Good afternoon and welcome to InfoSpace's first-quarter 2012 earnings conference call. On the call today are Bill Ruckelshaus, President and Chief Executive Officer, and Eric Emans, Chief Financial 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, and anticipated financial performance for second quarter 2012. 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 annual report on Form 10-K, 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 was made.

In addition, during our 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 present GAAP and non-GAAP results along with reconciliation tables and the reasons for our presentation of the non-GAAP information. We have also provided supplemental financial information to our results on the investor relations section of our corporate website at www.InfoSpaceInc.com. Now I'll turn the call over to Bill. Following his comments, Eric will review the first quarter results and second quarter outlook. Then we will open up the call to your questions.

Thank you, Stacy. Good afternoon everyone. Today we're pleased to discuss financial results for the first quarter of 2012 and provide an update as we approach the midpoint of the year. Performance in both our search and tax preparation businesses exceeded our expectations. With total company revenue of $115.7 million, adjusted EBITDA of $31.7 million, and non-GAAP net income of $28.5 million, our first-quarter results began to highlight the momentum, profitability and strong cash generation of our consolidated company. Let me spend a few minutes for our search and tax preparation businesses during the period.

Search revenue for the first quarter was up 46% from the prior year, driven by strong growth in distributed search. Search distribution revenue posted an impressive 75% growth rate this quarter, continuing a momentum uptick that began for us early last year. We are seeing growth across the board in distribution, from long-standing partners, newly signed partners, and across our partner categories. As I detailed on our last call, momentum in the distribution business reflects broader market dynamics, but also reflects the hard work and execution of our search team. Over the past year, this group has sharpened its focus on meeting the evolving needs of our global search partners. We are now seeing the benefits of this focus delivering on multiple fronts including product, search content and mobile enhancement.

In product, we recently launched our new portal offering that provides ISP customers a hub of adaptable, localized content including news, weather, sports and entertainment. This information is delivered through a flexible user interface that adapts seamlessly to different devices including mobile phones, tablets, laptops and PCs. Our new offering is being rolled out to our current portal customers and also gives us access to a new set of addressable market.

To deepen our search content, we recently signed with Yandex, the leading search engine in Russia, to deliver Yandex results into our network of search properties and affiliates. Yandex adds to our long standing partnerships with Google, Yahoo and Bing, and increases the relevance of our result sets in servicing international partner traffic. Additionally, we are extending our platform to allow partners to reach and monetize their audiences in mobile. We are encouraged by the results thus far. As the mobile search market matures, we will continue to refine our offerings here to capitalize on the significant trend.

Moving now to our TaxACT business. We are pleased with the performance of TaxACT during the 2011 tax season. The team executed well and exceeded our expectations. On a preliminary basis, results for the 12 months ending April 30, 2012 show 10% year-on-year revenue growth, supported by 8% growth in, in season consumer digital do-it-yourself e-file. For the season, TaxACT generated over 5 million consumer electronic filings and grew roughly in line with the category. Including filings generated by paid preparer's using the Company's professional product, TaxACT accounted for over 6.2 million e-files in 2011, up 10% over tax year 2010.

The 2011 tax season and TaxACT performance bolsters our view of the strong secular shift to digital do-it-yourself within the tax-preparation market. Demographic trends are driving increased familiarity with the Web. Software development investments are resulting in meaningful usability gains and digital do-it-yourself tax preparation. Sustained marketing campaigns and education efforts by category leaders are increasing awareness of the relative advantages of DIY tax preparation alternatives.

TaxACT is extremely well positioned to both contribute to and capitalize on these tailwinds, a great product, superior value proposition and an outstanding customer service. TaxACT is an online pure play, unencumbered by legacy off-line or desktop software concentrations and thus singularly focused on optimizing the web-based tax preparation experience for consumers and paid professionals. The market is coming our way and we're extremely excited to be working with a great team at TaxACT in planning for the coming season and beyond.

Overall, I'm pleased with our performance this quarter and I believe we are just beginning to tap our true potential. We have an efficient corporate entity coupled with two great businesses and growing markets. Our strong cash flow profile will allow us to pay down our debt promptly, reinvest in our businesses, and selectively evaluate further options for enhancing value for shareholders.

In closing and to mark our transition this year, we have selected a new name for our company, (BlueCora). We believe the BlueCora name provides an umbrella under which we can build a unique and strong corporate identity, and allows us to create separation between parent company and our individual business units. Our existing operations, InfoSpace and TaxACT, will retain their current brand. We plan to roll out the new name in June following our shareholder meeting scheduled for May 31, 2012. With that, I'll turn the call over to Eric for more details on the financials.

Thanks, Bill. Good afternoon. Before I get into the details, I would like to note that with the acquisition of TaxACT, we will now present the business in two segments, search and tax-preparation. The segment income from these two businesses, less unallocated corporate operating expenses, comprised adjusted EBITDA. With that, I'll start with an overview of the consolidated performance, then talk a bit about a segment results and end with our second quarter 2012 outlook.

Our first quarter 2012 financial performance includes the results from TaxACT for February and March, as the transaction closed on January 31. As Bill mentioned, consolidated revenue for the first quarter was $115.7 million and adjusted EBITDA was $31.7 million. Non-GAAP net income was $28.5 million, or $0.70 per diluted share. It should be noted that with the acquisition of TaxACT, we have revised our non-GAAP net income and EPS methodology to exclude certain additional non-cash items. GAAP net income was $11.4 million, or $0.28 per diluted share, and was impacted by one-time stock based compensation charges of $5.2 million associated with the TaxACT acquisition.

Our consolidated results are up significantly on an absolute dollar and percentage growth basis versus the first quarter 2011, due to the continued growth in our search business and the acquisition of TaxACT. As a reminder, TaxACT is a highly seasonal business which contributes the lion share of its revenue in the first four months of the calendar year.

On a trailing 12 months basis, including TaxACT and ignoring the impacts of purchase accounting and certain non-operating expenses, we generated pro forma consolidated revenues of $336.4 million, adjusted EBITDA of $76.8 million and non-GAAP net income of $64.3 million, or $1.63 per diluted share. Pro forma levered free cash flow for the same period would of been $68.9 million. These figures highlight the underlying performance of our combined company and our ability to convert adjusted EBITDA into free cash flow. We exited the quarter with cash, cash equivalents and short-term investments of $129.9 million, or $3.17 per diluted share. Cash, cash equivalents and short-term investments of net of debt are $44.9 million.

Turning to our segment performance, the search business had another strong quarter with revenue of $75.3 million, up 46% versus the prior year and up 13% sequentially. Revenue growth continues to be driven by strong performance of our distribution business, which now makes up 87% of search segment revenue. This is the fourth consecutive quarter of accelerated revenue growth in our distribution business. Looking ahead, we expect continued year-over-year growth, albeit at a moderated rate, as the comparisons get more difficult for us beginning in the second quarter of this year. Search segment income was $13.4 million, up 21% from the first quarter of 2011, fueled by distribution revenue growth. Segment income was also up 5% sequentially, again on the strength of our distribution business.

Turning to the tax-preparation business, our quarterly results reflect our ownership of the TaxACT business for February and March 2012. Revenue was $40.4 million and segment income was $22.1 million. These results were impacted by purchase accounting, which reduced revenue and segment income by $650,000. Pro forma revenue for the entire first-quarter 2012 was $61.9 million, up 9% versus the first quarter 2011. Pro forma segment income was $30.6 million, up 7%. The pro forma results exclude the impact of purchase accounting of certain non-operating expenses.

Before turning to outlook, I want to touch briefly on our unallocated corporate expenses which were to [$3.8] million. This figure includes professional service fees of $1.1 million recorded in the first quarter associated with the TaxACT acquisition. Now for the outlook.

For the second quarter we expect consolidated revenue to be between $92.5 million and $96.5 million. Adjusted EBITDA between $20 million and $21.5 million, non-GAAP net income of $16.9 million to $18.3 million, or $0.40 to $0.44 per diluted share. And net income of $5.5 million to $6.5 million, or $0.13 to $0.16 per diluted share. In an effort to provide some context on the consolidated guidance, we expect search revenues to be flat to slightly up and search segment income to be flat to slightly down based on continued mix shift towards distribution.

Tax-preparation revenue will come down significantly from our first quarter reported revenue, which is to be expected based on the seasonality of the business. Tax-preparation margin is expected to be approximately 60%, up over our reported first-quarter margin of 55%. This growth is a result of expected revenue for April driven by marketing dollars spent in the first quarter, partially offset by losses in May and June as the tax-preparation business will generate limited revenue and will post losses outside of the tax season months of January through April. We expect unallocated corporate expenses to decrease, but will not return to pre-acquisition levels as we will have modest investments in infrastructure needed to support multiple businesses at the corporate level. With that, I will turn the call over to the operator and we will take your questions.

(Operator Instructions). Clay Moran, Benchmark Company.

Two questions on search and then one other afterwards. Bill, in your prepared comments you mentioned that the broader market dynamics are driving this search momentum. Can you explain what those dynamics are? I guess you are calling for search revenue to flatten out, IAC said similar things. Is there something within the broader market dynamics that is driving that or is it truly just the tougher comps?

Secondly, on search, interesting that you mentioned Yandex and international, just wondering what percent of traffic is from international sources and what percent of revenue currently and is this a significant opportunity going forward?

The market dynamics that we are approaching and speaking to with respect to our search business, I provided some details on these during our last call. It's really with respect to our distribution business. We have over 85% of our revenue currently being generated by partners that we work with, global partners. It is a network of over 100 global partners that work with us for reasons related to search functionality, search content, monetization.

There is a substantial portion of those partners that are now going through a momentum surge that's really begun for us at the beginning of last year. We think that we are not alone in experiencing that uptick, so I think it is something that's going on in the broader market. I think we're benefiting disproportionately because we've been in the business of servicing partners in this way for a long time and have a lot of this stuff down to a science. I do think that we are being very optimistic and hopefully taking greater than our fair share of this market upswing.

I do think it's important to point out that a lot of the innovation that's going on out there that we think is behind some of the market momentum is coming from smaller partners that are entrepreneurial that, in many cases, aren't search players themselves but are generating content and applications that they are bringing to market and looking to search as a way of supporting that go to market and contributing revenue to that go to market.

We are enabling their business plan from a monetization standpoint through the introduction of search as it relates to the distribution of their content. That speaks to the market dynamics.

As it relates to the leveling off or the moderation that Eric spoke to, I think there's nothing sinister that we are outlining there. You can see it as it relates to the second-quarter guidance. The momentum continues. Some of the issues for us here relate to the fact that this business started to uptick at the beginning of last year. We are now having overlaps where the growth rates aren't going to continue to increase sequentially, indefinitely and for us, as Eric mentioned, that has been four quarters in a row.

It is natural that as we start to overlap a time when the market really started to move upward, the growth rates would moderate. Nevertheless, if you look at what we did in the second quarter of last year, you'll see that the momentum is still there; it is just at a more moderate level.

Your last question was with respect to international and that's not something we provide. We do have a global partner base and think that's a real advantage, particularly as it relates to some corners of the market that are more concentrated internationally in terms of some of these growth surges that are going on. We don't provide break out between domestic and international.

Are we going to start to see any impact from currency swings in your search revenue?

No.

Getting back to the market dynamics. I think in the past you said applications have been a contributor, but not the driver of -- not the main driver of the momentum. Is that still the case? If so, can you give us an example of what the other type of partner that's driving this momentum is?

One of the things I said earlier in my comments is that -- actually it's very favorable is that the way -- the areas we are sourcing growth, and I will just take the most immediate quarter as a point of illustration, is really from every corner of our distribution network. We have partners during the quarter who have been with us for five years plus that are been performing quite well. We have partners that we have recently signed within the last 12 months that are growing dramatically, that we're helping do so. In some cases in local environments.

We also have partners really across all of our categories of partners. I think as we've shared before, we work with partners that would fall under any number of four or five different categories that are all growing. It really isn't -- to the extent that your question is addressing whether there is a dependency with respect to one bucket or another, that's not the case.

You mentioned you could or you would, not sure which one it was, pay down debt promptly. Can you update us on your thoughts around uses of cash thereafter?

I think really the point to be made is I guess first and foremost pay down debt on time and promptly. We are now at a point where we are generating a lot of cash flow as a company, which I think puts us in a very advantageous position as it relates to thinking proactively about how it is we put that cash to work.

Certainly de-levering is one path and we will do so in accordance with the schedules outlined by our creditors and reserve the right to do so on a more accelerated basis. There are other things that we can be evaluating as well and it's a good position to be in.

I'll sneak one word just because you referenced it, but the taxes reported GAAP were higher I assume the cash taxes were. Can you highlight what the cash taxes were for the quarter?

Obviously we paid a much smaller amount than what is reported on the page to P&L. Just over $800,000 in cash taxes we're estimating, but that is an estimate. It's based on a full-year forecast as you get into the nuances of all the fun that goes along with GAAP accounting around taxes.

Kartik Mehta, Northcoast Research.

You indicated that your consumer DIY e-files grew 8% to 5 million. The press release indicates that total TaxACT products assisted 6 million filers the season. How much of that 1 million difference reflects DIY v-coder turns and how much is from your professional prepared returns?

That is a professional difference. The all in number is including -- TaxACT is not strictly a consumer tax preparation business. They have a professional product that is doing quite well and the aggregate number of 6.2, I believe, is inclusive of that.

The total difference is all from professional. I just wanted to make sure of that. As far as the marketing budget goes for TaxACT, just wondering, did you increase that budget this season and if so, how much compared to last year?

We're not going to get into specifics as to year-on-year increases in marketing, but it is worth noting that the company, which we didn't really speak to in any of the opening commentary. But not only did they perform in excess of our expectations, both with respect to filings growth, as well as revenue, but the same was true with respect to their profitability during the season.

In the face of that good top-line growth that they were able to generate, were also able to hold margins. You can imagine that an important part of that equation is marketing and marketing efficiencies. That was a good year in that regard as well.

Now that TaxACT is a part of the whole company and a part of InfoSpace, what do you think you could do different next season in terms of promoting the product?

The dust is settling on the season, but nevertheless, the team is already beginning to think about the coming season and how they might prepare for it and take lessons from things that were observed during the season. I would say -- I would address that from two perspectives. One is how do we see the market evolving. What is the backdrop as it relates to planning what we want to do?

I think, absolutely we see the trends continuing that we've seen over the last several years. Broadly, those are continued moderate growth in overall filers in the US, continued movement out of prepared into DIY, which we think a recent report from the IRS gives some indication as to those trends over a multi-year basis through 2010 at least. Within DIY, growth in digital.

Running throughout that are some demographic shifts that we've talked about before and that others in the space have talked about. The roughly 50 million millennials, ages 18 to 29 years old, in this country who tend to be better educated, tech savvy, online connected and that's, in our minds. a great cohort group to be adopting DDIY tax prep solutions.

With that as a backdrop, as I said, we are encouraged about the performance this season, particularly given the inevitable distractions of an acquisition in the middle of the season at the front end of the season. Together with the team, as we start to think about the future really looking to lean into the trends that we are seeing.

It may go without saying, but we believe that we acquired TaxACT as a high-performing profitable business and the season reaffirms our thesis in that regard. As it relates to going forward, without getting into too much specifics and we are in the beginning stages of this, but I will break it down thematically.

Definitely we think there is some evolution of the product that is going to be important to address and that's going to be based on customer feedback and some of the trends that are going on in the market, user behavior observations. That will be front and center.

Bringing new filers to the TaxACT product is always an opportunity in any season. Further taking advantage of the shifting that we see going on. Getting our message out to filers at the right time. Word-of-mouth is critical in this regard.

Fortunately, the TaxACT product has very high net promoter scores that I think position us well as it relates to word-of-mouth. Search is a big piece of customer acquisition within the digital world. The good news is that InfoSpace has been in the search market for 15 years. We are already starting to have conversations about how we can bring some of those learnings to bear to improve the standing of TaxACT in the search channel.

Lastly, and certainly not least, is remaining relevant and bringing increased value to longtime TaxACT customers. That falls in the category of making their annual tax preparation easier, streamlining the effort involved to put their taxes together. And also engaging with them in interesting ways outside of the tax season. Those are the thematic buckets that we are going to be exploring and we are really excited to get started.

Joe Fadgen, Craig-Hallum.

First thing, I noticed in the press release, it looked like you said you were expecting 10% growth in TaxACT revenue for the tax season. Now is that number you think that can apply to the full year as well or is that just the season?

The way to think about that is TaxACT fiscal and looked at the opportunity in the acquisition with a 4/30 year end. We are really talking to that as a tax season as the 12 months ended April 30. That's what we are seeing and expecting that 10% growth.

The way I'm looking at it here is you reported your $40.4 million worth through quarter-end. We assumed here internally, we assumed about $15 million in January, which brings us to about $55 million net worth that we're assuming through the first three months of the year.

Assuming that you still expect 70% to 75% to be represented in those total revenues for the year represented in those first few months, that brings us to a total range for the year of mid to upper 70s. Does that sound like I'm thinking about it the right way? Does that sound like a range that you are comfortable with for that segment?

We figured it was going to be a little hard to get arms around the seasonality and especially considering that we had two-thirds of a quarter during the busiest time. We provided some supplemental schedules on our website that provide pro forma comparisons for Q1 year-over-year, as well as historical calendar quarters to help you piece through that. On a fiscal year calendar year ended 2011, this business did about $78.8 million in revenue.

Do you feel like you are accelerating the rate at which you are acquiring new partners in the distribution business? And how long do you think your runway is in ramping up new relationships?

Partner signings is something that we've talked about in prior calls and it's certainly an important driver of the business, but by no means the only driver of business momentum. As I had made reference to earlier, the quarterly -- the Q1 performance within our distribution business within the search business overall has been a byproduct of long-standing partners performing very well, in some cases driven by their movement to mobile. Also new signings within the last year or since the beginning of 2011.

There can be some variability as to revenue per newly signed partner. Because, by definition, we are catching a lot of them at an earlier stage and their ability to bootstrap into much bigger accounts tends to be somewhat less predictable.

What we're actually going to move toward in the future is less of an emphasis around new signings and more of an emphasis around how is the health of the overall network. How is the pace of our revenue and performance contributions of newly signed partners? The good news is that on a period to date basis in 2012, the benefits we are getting from newly signed accounts this year are actually significantly outpacing where we were last year. We feel good about that.

Michael Millman, Millman Research.

I apologize if you've discussed this but I was wondering if in TaxACT you've had any call and what you are thinking about some of the call-in services that Turbo Tax has and Block has?

I'm sorry Michael, would you mind repeating the question?

I was wondering if you -- if you're thinking about, if there is some call for a telephone line or a chat line to get so-called professional advice when people run up with some sort of tax problem as they are filling out their return on the web?

That's a key piece of the TaxACT business model is support. This year was no exception. They have a very well-run call center that essentially doubled its capacity during the peak season and is integral to allowing consumers to get their filing done.

I think there is another question maybe behind your question as it relates to broader level advice that isn't so tactical related to somebody's filing. I think there is probably going to be a role for that type of consultation service going forward and certainly it's something that somebody who is not in the off-line prepared world might be conjuring up as a way of introducing themselves to people who have in prior periods filed in prepared manner.

We see it as a trend that's probably here to stay and the good news is that the TaxACT team has a lot of experience in phone support and assisting filing customers through the process of getting their tax returns prepared.

Whether you have seen any nipping from some of the smaller tax companies that have followed TaxACT.

It's interesting, that question has come up from time to time and I would say we don't. It may be a point that is a little lost on people, but we think about the market we address, we think it's a very big addressable market. It's probably not all of the 140 million filers in the US, but a substantial portion of them ultimately are candidate TaxACT customers. As we think about how do we perform this year, how do we grow our customer base and expand the number of filers that we are working with, we really do think of it in terms of a very broad market opportunity.

Even more narrowly with digital do-it-yourself, which is comprised of both desktop and online filers, it is worth noting that in DDIY, TaxACT is 20% larger than the next 10 largest competitors combined and roughly as large as the next 150 largest competitors combined in DDIY. We don't necessarily see the nipping at the heels as you put it in the sense that we feel like we have, in DDIY, it's a pretty clear competitive set and I think we are very well established in the value segment of that.

Ladies and gentlemen, this does conclude the question-and-answer portion of our broadcast today. With that, we would like to thank you for joining us and you may disconnect at this time. Have a great day.