Live Ventures Inc (LIVE) 2006 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the YP Corp. 2006 fourth quarter earnings conference call. My name is Cammie and it will be my pleasure to be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct 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 call over to Mr. [John Evans]. Please proceed Sir.

Good afternoon. Thank you for your interest in YP Corp. With me today are the Chief Executive Officer of YP, Mr. Daniel L. Coury, Sr.; Chief Operating Officer, Mr. John Raven; and the Chief Financial Officer, Mr. Gary Perschbacher. They will be discussing the Company's financial results for the fourth quarter and year end of 2006. At the conclusion of their prepared remarks, we will open the conference for questions.

Some of the discussions today will involve forward-looking statements and I will now read to you the following warnings about reliance on forward-looking statements.

During the course of this presentation, we may discuss YP Corp.'s business outlook, which contains forward-looking statements. These particular forward-looking statements and all other statements that may be made during this presentation that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our periodic filings on Forms 10-K and 10-Q made with the SEC for more information on the risk factors that could cause actual results to differ.

Important factors that could cause actual results to differ materially from the Company's expectations include but are not limited to those factors that are disclosed under the heading Risk Factors and elsewhere in the Company's documents filed from time to time with the United States Securities and Exchange Commission and other regulatory authorities. Forward-looking statements made during the call today are only made as of the date of this conference call and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events.

Now, I'm going to turn the call over to Daniel Coury, [Senior] Chief Executive Officer of YP.

Thank you, John, and welcome everybody to our first conference call. This conference call is being web cast and will be available on our website for replay following the call.

The year 2006 was a year transition for YP Corp. In 2006, our revenues and customer base grew from 2005 and we were able to continue to position the Company for future growth. On this call, we're going to explain our strategy to sustain this performance over the long run. For the fiscal year, we generated we generated a net loss of approximately $1,051,000, or $0.02 per share on a diluted basis, which includes non-recurring expenses totaling $4.1 million, or $0.09 a share, primarily consisting of approximately $3.7 million of settlement-related matters with the Attorney Generals. This number also includes a $1.6 million net charge for a change in accounting principles for customer acquisition costs, or approximately $0.03 per share.

Our non-GAAP net profit was $3.3 million. We are projecting fiscal 2007 gross revenues of $45 to $47 million,with a net income of $6 million to $7 million. Please refer to our press release, which is posted on our investor relations web page.

Gary and John will go over the financials and other events of the year. We believe that after a long year of work and changes, YP is positioned well as a premier internet yellow page company.

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The Internet Yellow Page market that we operate in is expected to grow as more companies see the advantage of Internet Yellow Page ads versus print Yellow Pages ads. We believe that we can grow with this market, and with our Web 2.0 and strategic relationships, we hope to increase our market share over time.

We expect to launch our Web 2.0 version over the next couple of months, and this should add functionality and features to our website and our customers' Yellow Page listing.

It is important to note that the consumers spend of about 80% of their income within 50 miles of home, and about 30% of all Internet searches are commercial. Research shows that about 25% of all searches on the Internet are looking for local companies. These are the poised-to-transact customers that small businesses are looking for. Our goal is to increase the number of small- to medium-size businesses who have a YP.com Yellow Page listing and drive customers to those businesses. We believe that, given the price point of our product and the value to the consumer, it is hard not to show value add to these customers.

Our overall strategy during 2007 will be to implement strategic initiatives that will add customers to our Yellow Page business, provide more value to those advertisers and make our directory available everywhere the consumer is -- both in mobile and across the Internet. We will do this by delivering a best in class solution for our customers and value for our shareholders.

Now I will hand it over to our Chief Operating Officer, John Raven.

Thank you, Dan. As we said before, the year 2006 saw improvements in both sales and earnings from 2005, but also we have taken steps to ensure that our Company is positioned to grow in the future without the issues of the past surrounding some of our former customer acquisition strategies.

As you all know, during fiscal 2006, we received inquiries from the Attorney General offices of several states investigating our use of our check mailer for customer activation. On October 30, 2006, we voluntarily ceased the use of the check mailer. On December 14, 2006, we again voluntarily entered into a settlement with 34 states' Attorney Generals to address their inquiries and bring finality to the process.

As a part of the AG settlement, we're to provide, only if requested by the customer, two months worth of refunds to any subscriber acquired solely through our direct-mail marketing program. Refund notices were mailed mid-December and will be available to the subscriber through February 28, 2007. Past response activity to this type of mailing trended between 3% and 6%. While our inability to utilize activation checks may cause a near-term disruption in our marketing efforts, we expect that we can quickly ramp our telemarketing efforts to continue to attract new customers.

This settlement limits our exposure to significant legal fees and costs that may have been otherwise incurred had we decided to dispute these inquiries. Further, as the effectiveness of the check activator has been waning, we have been transitioning a significant amount of our marketing efforts away from the use of activation checks towards the use of telemarketing and other marketing channels beginning in the fourth quarter of 2005. With this settlement, we will accelerate this transition away from the use of activation checks and focus our marketing efforts toward improving the effectiveness and efficiency of our telemarketing campaigns and other marketing efforts.

In fiscal 2006, we also began the fulfillment business segment. We're partnering with other companies to provide Yellow Pages listings and Web hosting services on a revenue sharing basis. We anticipate that this segment of our business will grow significantly in 2007. We have also begun business development projects, such as strategic alliances with independent yellow page directories, small-business Web services companies and other services-related companies that will increase our product offerings to our customers and increase the number of partner customers that we may have at YP.

Most of the Internet search business has been focused on search outside of the local market. Only about 1% of businesses are search advertisers today and a small percentage of the small- to medium-size businesses today have any Web presence or an Internet Yellow Page listing. We have a directory of about 17 million small- to medium-size businesses in the U.S., of which a small percentage are advertising on the Internet. These numbers show we're still at the very beginning of Internet Yellow Page growth and local Internet search.

Our sales projections reflect changes in our pricing model for 2007. Expect individual unit sales increases as we restructure our basic monthly subscriptions. In the past, the basic monthly subscription included a city-wide search result. Going forward, the subscriber will now pay a basic fee for each ZIP code to be included in. Each subscription will be sold in a tiered format again with one to five ZIP codes of $39.95 each. Additional units can be purchased at a discount rate above the basic package.

We also plan to introduce additional products which will be sold at higher initial entry price points beginning at $49.95 and $99.95 per unit, respectively. Again, these additional products will have incentives and discounts for volume and longevity.

Now that we have built a telemarketing infrastructure, we plan to increase the number of sales by opening markets in Qwest and Verizon territories.

In generating leads for sales, we are shifting and optimizing our list from mail marketing to telemarketing which requires more accurate information and contact information about key decision-makers which should increase the likelihood of a sales conversion. Our new lead list will now include unpublished new businesses as well as businesses that only operate by cell phones.

As we mentioned earlier, we are finalizing several strategic partnerships which will provide an opportunity to cross-sell into each other's customer base. We plan to collect fees for each customer placed on our directory from these partnerships and as a part of the cross-selling process, up-sell additional services from both companies.

Now let me turn it over to Gary Perschbacher, our Chief Financial Officer, to discuss the financials.

Thanks, John. Net revenues for the fiscal 2006 increased 46.3% to approximately $37 million from $25 million in 2005.

For the quarter, revenues were approximately $10 million versus $6 million in fourth quarter 2005, or a 60% increase. This increase was primarily due to increased customer counts as a result of our expanding market efforts. At the end of the fourth quarter of 2006, our average customer count was 130,627 as compared to 81,342 in the fourth quarter of fiscal 2005.

As Dan indicated earlier, YP incurred a net loss of $1,051,000, or $0.02 a share in fiscal 2006. This loss included non-recurring charges of $4.1 million, or $0.09 per share, primarily related to the AG settlement. It also included a net charge of $1.5 million, or approximately $0.03 a share, for the change in accounting principle for the recording of customer acquisition costs.

In the fourth quarter, gross profit grew to $7 million from $6.5 million in 2005, or 8%. Gross margins, however, decreased as a percent of net revenue to 70% from 82% in the fourth quarter of 2005. For fiscal 2006, gross profits grew 38% to approximately $29 million from $21 million in 2005. Gross margin percentage, on an annual basis, also decreased to 78% versus 84% in fiscal 2005. The lower gross margin percentages were due to increased utilization of LEC billing channels, our most expensive billing channel. While LEC billings is efficient, and as I said earlier, expensive, we intend to emphasize in 2007 other billing channels, such as ACH and credit card, and thereby reducing cost of sales numbers which obviously increases gross margins and gross margin percentage, but it also impacts cash flow in a positive way.

Fiscal 2006 operating income grew 62% after adjustments for a change in accounting principle to $2.1 million from $1.3 million in fiscal 2005. For the quarter, operating income was approximately $1.2 million versus a loss of about $616,000 in the fourth quarter of fiscal 2005. These increases were the result of increased revenues offset by the increase in cost of services, again, because of LEC billing channel utilization.

Cash and cash equivalents increased by $1.1 million, working capital increase to $13.9 million from $13.4 million in fiscal 2005. Accrued liabilities grew because of the AG settlement and we accrued roughly $3.6 million.

Net cash provided by operations was $2.4 million, as compared to $7 million in fiscal 2005, again, the result of increased LEC utilization and our net loss. On a forward-looking basis, as John indicated, we expect revenues to grow due to improved marketing methods and strategic partnerships. We anticipate decreasing utilization of LEC billing channels, which will again reduce our cost of service and increase cash flow. And because of our financial model being leveraged, operating income will increase in real dollars and as a percent of revenue.

We're now open for questions.

(OPERATOR INSTRUCTIONS). Juan Noble, Taglich Brothers.

Hi, good afternoon everybody. Question I guess for John. If you don't mind, John, if you could just briefly go over the change in your pricing structure for fiscal '07. It sounds like the average revenue per customer is going to go up, and I just wanted you to briefly run by that again.

That's correct. You can expect the ARPU to increase in 2007. As I mentioned, there is a general price increase and we're adding new product lines. We have also restructured. In the past, we had sold the product on a monthly subscription basis where the results set of the subscribing business would be included in every city-wide search result. We find that it is to our advantage and it makes more sense to reduce that to a ZIP code level. It is consistent with how some of our competitors price their product lineup, so it just made logical sense for us to do the same.

When you say a general price increase, John, what percentage are we talking about?

We billed on an average of $29.95. We're looking to increase anywhere from $4.00 to $10.00, depending on the area. We have not firmed that up yet, but on average for the basic subscription model for the year, you can expect around a $39 number.

That will be the average?

That would be -- not the average, but that would be the average monthly subscription cost for the base package of our services.

I see. So the overall average should be higher than that, of $39 (MULTIPLE SPEAKERS) as you say, right?

Absolutely, yes.

Okay, thank you, that is helpful.

[Eric Walton], Grand Slam Asset Management.

Hi, guys this Eric. I guess also following up on that last question, will these price increases apply to just new customers, or also old customers?

On certain price increases where we're just incrementally adding the price; in other words, going from 29 to 39, that may apply to our current customer base. But, yes, all new customers -- new acquisitions, we will apply the new pricing model. As I had mentioned earlier, the results usually ended up in a city-wide search result. Now, we're going to ZIP code. For instance, in Mesa, Arizona, there are five ZIP codes here. So as an example, we would charge $39.95 for one ZIP code. If they wanted to be included in the search results for all five ZIP codes in the Mesa region, then it would be $39.95 times five. And of course, there would be the usual volume discounts.

If I can ask one more follow-up question. The AG-related letters -- have they already been sent out?

That's correct. Mid-December, we started that. The bulk of them are out.

Have you seen any initial response from that mailing?

We have had a response, yes. Within a week of mailing them, we have had some response coming in. We have not measured it directly yet. We're going to do that later this week.

Great, thank you very much guys.

(OPERATOR INSTRUCTIONS). Berna Barshay, Ingleside Investors.

I actually have a few questions. The first one is just about the ARPU that you were just talking about, the reasons that it's going to go up. It has been going down for four straight quarters now, basically all year. So, I wanted to sort of understand whether or not these pricing increases will actually translate into a realized ARPU, because in the past, it just seems like the discounting has been increasing, or maybe it's getting somebody to buy 12 months by paying for nine upfront, and then they get a discount, or whatever. My other question -- I had a couple of other questions that we get to after.

Gary, would you like to answer that?

In respect to the decrease in average revenue per customers, yes, it has been decreasing largely because of a couple of things. One, we've been doing some market research on pricing points and we have had some sales at $19, others at $9.99, and the bulk of them have been at the $29.95 level. We have also increased the fulfillment market, which is a revenue share, and our price to those customers is still, in this once instance, $29.95, but we get $3 back to our partner in that market. So we're at $26.95, $27.95.

I'm sorry -- what kind of partner was that that you were paying the $3.00 to?

We have a strategic partner out there that is a Web hosting company, and we collect -- we bill out $29.95 to them and we -- the revenue share is $26.95 to us, or $3.00 to them.

Okay, got it. And then, in terms of the shift to a 100% telemarketing from some reliance on the check mailer, you guys don't disclose any more of what your gross adds are. But whatever they are, assuming they have to be at least -- on a net basis, they've been running a few thousand or so a month. And the gross adds are obviously higher. Of those gross adds, what percentage for the year had been garnered through check mailers versus through telemarketing? And, can you give that breakout for Q4 so we can sort of see how the migration to telemarketing was working?

Right. You are referring to I assume the 2006 fiscal year -- this is John Raven. For 2006, it was roughly 50/50, throughout the year.

Okay (MULTIPLE SPEAKERS) Q4 had that shifted at all?

Yes. We started shifting actually as early as June.

Right. I know you had been working on it, but I was wondering what run rate were you at, at the end of the year before this thing happened with the Attorney Generals?

We kept it pretty flat, around a 50/50 mix, because we had deliberately planned on -- again, it was -- we started it out as a pilot in early 2006, then we went to putting infrastructure to scale it in the bottom half of 2006. And we just wanted to run enough throughput through there to prove the concept. And so now, we are going to, in light of this new development, we're going to focus exclusively on telemarketing going forward. So it's just a matter of scaling the process now.

Okay. So I guess it would not be crazy then to expect that we could see a dip down in customer count, average customer count, in the early quarters of the year?

That would probably be a reasonable assumption.

Just until you sort of get the full shift over into the telemarketing (MULTIPLE SPEAKERS)?

The nature of acquisition is going to be slightly different, but we still intend to do it in volume, and we are doing it in volume right now. Again, at the same time, trying to balance it out with a couple of things. One of them was stick to your customers, for one. As you mentioned, there is a difference, noticeable difference between the gross adds versus the net adds, so we're trying to get that as closer together as possible going forward. Not to mention the overall average revenue per unit. When the sales opportunity presents itself, we're going to extract as much out of that sale as possible and then continue to forge a relationship for follow-on cross-selling.

Berna, in light of what you're asking there, I would like to mention that the new marketing we're doing, we're already seeing and we're monitoring it on almost a weekly basis, the customers are staying longer. And the higher criteria we have now with the telemarketing is creating a much stronger customer base. The new alliances that we're putting in place are creating very, very sticky customers. And so as we are transitioning and adding, as they say, seats; in other words, we put more telemarketers on. As that is being ramped up, we're seeing positives on both ends. One is the customers are staying longer; and number two, as we've added seats and utilized new leads, we feel very comfortable that through this year, we will be able to obtain all of the 100% and obtain the growth we want through telemarketing without doing the check activator. So we're ramping it up to make sure we're verifying the -- we do a lot of testing on the wording, what we're saying, how we're qualifying them, and it has been very positive and we feel very good about it.

Okay. And then, you said that gross margin was down in the quarter because of a higher mix of LEC -- is that correct?

Yes, the LEC costs more, but it's very good. A lot of people prefer to pay on their LEC. And so we're not stopping the LEC, but we're doing a lot of marketing now toward using ACH and the credit card, which creates quicker cash and we get to keep more of it.

Okay, understood. The last thing is the prior caller had asked about the Attorney General letters. I was not familiar with those. What exactly is in those letters? Are those e-mailed to all customers who were garnered through check mailing?

Yes. What we did was the customers that we have that were brought on through the check activator, not just mail marketing, just check activator, we sent them out a letter offering them, if they felt somehow that they had acquired this account and did not know they were on the account, then we offered them 60 days of their payments back, up to $60. And our research shows that there is a small percentage that will ask for their money back, and we anticipated that in the financial statement. And from what we have seen so far, that is right in line with what we expected.

Okay, great. That's all my questions. Thanks very much.

(OPERATOR INSTRUCTIONS). Juan Noble, Taglich Brothers.

Just a question for Gary. The number of seats in telemarketing that you plan to ramp up to, Gary, is 40 still a good number, or has that shifted?

I will John answer that. He's more familiar with it than I am. Right now, we're at less than 40.

That's right. Internally, we're at less than 40, but the intent to ramp that in the next quarter.

To 40?

To 40. We've already ramped with our offshore call centers to over 100. It's somewhere around 120. So we intend to run the programs at both locations.

Okay. So you have the equivalent of 120 seats offshore, and you'll have 40 in-house?

That's correct.

Okay, great, thank you.

[David Mau], Montgomery Street Research.

Good afternoon, gentlemen. I appreciate your taking the call. I just had a question on your 2007 revenue guidance after the discussion about the price increases. And I'm wondering maybe if you can talk about customer acquisition rates, what is going into the guidance in terms of the price increase versus new customers?

Let me see if I clearly understand your question. You're asking about, on our new customer acquisitions, how we're utilizing the price increases?

No, no. You've given the 2007 guidance of $40 to $45 million top line, which is a descent increase over 2006. And you have talked about a price increase, which seems to be $4 to $10 dollars off a $30 charge, which is 8 to -- I don't know, is it 18% or so? And I'm curious as to what percentage of that increased guidance on the top line are you expecting due to the price increase that you're implementing, versus new customer acquisitions, and if you've ever talked about customer acquisitions in the past. Can you talk about how that is going year-over-year?

What we're looking at on that increase is mostly on the new customers, and with the new customers coming on, we don't have a big part of that as geared towards that. That number is geared mostly towards what we feel of every department, every division that we've planning on doing our marketing in, what we feel that we can do, of course with a lot of hard work, what we can achieve. But there is not a huge part of that that is geared towards the increase in price. We have left ourselves very open there so that we can continue to do the testing and know exactly as we do -- we've done some testing already -- of where the price points are and how much the packaging needs to be to do the strategic partnerships that we're lining up at the present time.

To add to that, the pricing is in effect for all new acquisitions in the model or in the guidance. The other that might not be apparent in there, but will state it, is the average number. The number of products per customer is going to increase, which we're not prepared to disclose right now. But, you can expect that. And again, consistent with the new pricing structure, we're going to be pricing, again, by ZIP code, so you're naturally going to increase the average revenue per unit.

Okay. Am I correct in understanding that the new pricing model is for new clients only, or are you grandfathering in the clients that you already have?

Yes; the first part, yes. All new customers, we will apply the new pricing model with the new pricing structure with the increase. We do, however -- I would also like to comment that also, as a part of that -- in that model or in the guidance, is we are expecting the customer to also grow as well. So it's not going to be flat, definitely.

Certainly, okay.

So it's a combination of a couple of things. So you have increased customer count growth, you have an increased price per unit sale, and then you have an increased number of products per customer.

Okay, excellent. I also have a question on the gross margins involved with the CLEC billing model versus your new revenue model of telemarketing and getting clients to pay versus -- with ACH or credit cards. What does that mean as you turn customers towards the new model, in terms of percentage points on gross margins?

To do business with a LEC, we're paying roughly, depending upon the LEC and the CLEC, somewhere between 12% and 16% of gross revenue. If we do it with an ACH, that drops down to 3 or 4%.

Jim Gentrup, Meadowbrook Capital.

My question really is just about the confidence in your numbers for '07. You're basically saying double the net income using just like the midpoint. And with the changes in the marketing scheme, I guess I'm a little bit -- I guess I want a little more color as to how the visibility you have into doing this and I guess the level of confidence to come out with this kind of guidance, so that is where I wanted to start, if you don't mind.

We're very confident with the team that we have here to achieve this. We would not have put them out. And a lot of it is driven in several ways. Not only in just our basic marketing that we have online, but also because of some of the strategic alliances that we're working on that are not even put into this model. So let's just say there are potential backups for anything that might be slow, and so we feel very comfortable. And that doesn't even take into affect the cost cuts. And that is why we're focusing on both ends of it -- cost cuts and the strategic alliances.

Okay, fair enough, Dan, that's a good answer. Also on your operating expenses, I know that the fiscal year '06 has some nonrecurring items in there. I was wondering if you guys could give us a little bit more help on where that is going to normalize now on an annual basis. It looks like it could go as low as $10 million, but I know you have some initiatives going on too. I guess those will fall in the sales and marketing. But could you kind of run down the normalized expenses that you expect going forward?

Sure. Again, we did a forecast and we got all the call center managers involved in the process, so it was bottom-up, and we really put together the forecast knowing that we could no longer do the check activator [that] we went way back and re-did our original forecasted numbers. The biggest impact is going to be the check mailer. We were spending roughly $0.5 million a month on mailing. That cost is not going to go way in its entirety, but it is going to be shrunk considerably and will be redirected towards buying traffic or some other value add to the customer, or buying different lists. So, if you look at the sales and marketing budget for 2007, we're looking in the neighborhood of somewhere between $7 and $8 million for the year.

So that's actually going to drop quite a bit then?

Yes. I think this year, we were at -- we ended up at $11 million, which there was $5 million in there for the telemarketing cost. $2.5 of that would have been thrown into 2007, had we not written -- run the accounting change. But, yes, it's going to drop. And, not only due to the absence of the check mailer, but also, it reflects a reduction in the cost of telemarketing too.

So -- and that is probably because you're bringing more of the telemarketing in-house, and you're saying that that's --.

Well, that's part of it, I would like to say, John did a very good job initially trying to develop contracts with these telemarketing houses, but we got burned. And we've found one or two houses now that we work with, and they it at a very reasonable cost. They expect to increase their throughput as we buy a better list for them, a list that is more geared towards telemarketing than the check mailer, because this information will [halve] the decisionmakers' time, so the throughput should increase because they are spending half of their time or a third of their time just trying to figure out who the decisionmaker is. And once they find out who that decisionmaker is, the conversion rate is significant.

So it sounds like your customer acquisition costs are going to be much better then going forward?

Yes. We expect them to go down significantly.

But you didn't really talk about the G&A then on a normalized basis.

G&A is going to be pretty flat to what it was in 2006.

Okay. I guess that's a little bit -- 2006 was $13.8 million, so I guess why I'm confused there is that I thought that included a lot of non-recurring stuff there, that is all.

The nonrecurring is in sales and marketing, and it's in the below-the-line.

Alright, fair enough then. Thank you.

At this time, there are no more questions in queue. I would now like to turn the call over to Mr. Dan Coury for closing remarks. Please go ahead, sir.

I would like to thank you all for attending our call. I really do appreciate that, and from all of us here at YP in Mesa, Arizona, you all have a fantastic weekend and let's make it a great year.

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