Live Ventures Inc (LIVE) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the LiveDeal, Inc. second quarter 2009 earnings conference call. My name is Louellea and I will be your coordinator today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions). As a remind, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. John Evans, please proceed, sir.

Good morning, I'm John Evans. Thank you for your interest in LiveDeal. With me today are the Chief Executive Officer of LiveDeal, Mike Edelhart, and the Chief Financial Officer, Rajeev Seshadri. Some of the questions of the discussion today will involve forward-looking statements and I will read to you the following warnings about reliance on forward-looking statements. During the course of this presentation we may discuss LiveDeal'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. The actual results may differ materially. Please refer to our periodic filings on Forms 10-K and 10-Q made with the Securities and Exchange Commission 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 today's call 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. This conference is being webcast and will be available on our website for replay following the call. Now let me turn it over to our Chief Executive Officer, Mike Edelhart.

Thanks, John. And thanks to everyone for taking time out to listen to our conference call. I'm pleased to discuss the second quarter fiscal 2009 results and especially excited to discuss LiveDeal's ongoing transition toward new opportunities that I and the other Board members and the Company's management team see as substantial. We have a number of significant developments to discuss with you today. To begin, it's important that we look backward to the situation the Company faced 10 months ago when I came on-board as Interim CEO. At that point, the Company had seen several quarters of shrinkage in revenue from its Yellow Pages directory and classified businesses. It had seen one major distributor in the yellow pages business go bankrupt, impacting revenue and locking up Company reserves. The Company had seen an ongoing stream of litigation related to various aspects of its Yellow Pages directory business, cash was low and falling, website traffic was down, and costs were up.

The situation looked quite bleak. We continued to operate our Yellow Pages directory and classified businesses. However, we came to believe that the new direct sales line of business needed to be nurtured, toward becoming the future growth engine of the Company. The direct sales line of business delivers marketing and advertising services to small businesses. It uses sophisticated telesales to reach customers and an expanding base of technology to deliver services to them. We continually monitored the needs of this direct sales business and we saw significant development possibilities for it based on the early customer interactions. In Q1, 2009, we hired the management and technology personnel who were acquired to deliver the products and services to the growing sales and customer base of the direct sales business.

It was against this background that management decided in Q2, 2009, that the best course for bringing LiveDeal back on track to growth and profitability was to shift our strategy away from the Yellow Pages directory and classified businesses and toward the direct sales line of business, which while young and small was showing signs of solid growth and a potential for a sustainable profitability. Over the course of Q2, 2009, as we examined our Yellow Pages directory and classified businesses, our sense of the rightness of that course deepened. We concluded that many assets related to these long standing lines of business no longer served the needs of the emerging strategy, and in some cases actually stood in the path of its development. In our last conference call, our Chief Financial Officer, Rajeev Seshadri, indicated intent to reexamine certain of our assets in the light of our Company's ongoing transition, from our traditional Yellow Pages directory business toward our direct sales business.

And in January, 2009, the Company began this re-evaluation. As a result, the Company's management made significant changes to its business strategy during the second quarter of fiscal 2009 and has adjusted the goodwill associated with a number of assets. Rajeev Seshadri will talk more about these adjustments in a moment. We said on our last call that we expected Q2, 2009 to be operationally challenging as well, because of the continuing erosion of the Yellow Pages directory and classified businesses. We also said that we believed it would be a step forward from Q1. For these reasons, revenue produced by our direct sales operation continues to grow as planned. Net revenues of direct sales in the first half of fiscal 2009 were $1,694,546 versus $219,842 in the first half of fiscal 2008.

With each month the revenue from this line of business will be a larger percentage of overall revenue. As this channel grows, it brings greater revenue predictability, stronger margin performance, and much-improved cash performance. We have implemented cost reductions related to our recent shifts in strategy. Cost reductions include some $454,000 in costs for the call center and inbound customer service operation based in the Philippines, with the closing of this Philippines' call center during Q2, 2009, and the bringing in of inbound customer service in April 2009. These costs should decline significantly in future months. In general our Yellow Pages directory business has had a high fixed support cost structure, which was fine when account levels were stable or rising. More recently, however, these fixed cost have acted as a drag on our profitability.

In Q2, we completed the sale of a large portion of the customer list from our Yellow Pages directory business for approximately $3.4 million. We also initiated the shutdown of operations associated with those accounts. We also continued to emphasize cost containment in our direct sales business and are building a technology foundation that allows us to scale that business, while still containing costs, such as headcount. And we are retaining approximately 25,000 high closing accounts in our Yellow Pages directory services business, along with the support structures necessary to maintain necessary levels of customer service for those accounts. And by doing this we retrain -- we retain a predictable revenue stream from our traditional business that is nearly pure contribution.

As we move forward with our plans, the net margins for the direct sales business will grow and so will its contribution. Our direct sales business had gross margins of 45% in Q2, 2009, which is lower than our traditional business, but which we believe will rise overtime as our technology efforts take hold. This was a challenging quarter that represented the next essential step in transitioning from the Company's Yellow Pages directory and classified businesses to its direct business. We are encouraged by the continuing growth of the direct sales business during difficult economic times and by our ability to translate parts of our previous business in to cash. We believe these changes give us a healthy foundation for future growth and value creation. Now I would like to turn the call over to Rajeev Seshadri, our CFO, to discuss the financial results of the quarter and the decisions we have made about adjusting the value of some of our assets. Raj?

Thanks, Mike. In January, 2009, the Company re-evaluated its business and adopted a new strategy that moved away from the integration of the Yellow Pages and classified business to one which addressed each of its business segments as separate entities. This re-evaluation was necessitated by a number of factors, first, the growth of the Company's direct sales business line, which provided web based advertising and marketing services for small business. A second factor leading to our new strategy was declining revenues from the Company's traditional business line, that is the directory services and classified. As a result the Company's management made significant changes to its business strategy during the second quarter of fiscal 2009. Management has decided to move the Company's strategic focus away from the directory services and classified and the efforts to fuse them together into a single business entity.

Because of this change in direction, the Company discontinued the operations of its Philippine's-based call center, which has historically provided telemarketing services to support its directory services business, specifically those which were sold during the quarter that ended March 31, 2009. These strategic changes impacted the Company's condensed consolidated financial statements during the second quarter of fiscal 2009 in the following manner. First, impairment charges of $16,111,494 were recorded related to the write-down of the Company's goodwill and other intangible assets. Second, the Company entered into a plan to discontinue its classifieds business and initiated shutdown activity and has reflected the operating results of this line of business as discontinued operations in the unaudited condensed consolidated statement of operations. Third, the Company sold a portion of its customer list associated with its directory services business and recorded a gain of $2,815,952.

There was another portion that was sold for about $600,000 aggregating about $3.4 million in all. The Company established a valuation allowance of approximately $9.5 million related to its deferred tax assets that ended up reducing the net deferred tax assets to $1,189,290. The Company's new strategic focus is on providing [red] marketing and advertising services to small business. These services are sold by telemarketing and supported by our website and the technology platform we have been developing. Now I would like to review the financial results for Q2, 2009. Net revenues for the second quarter of fiscal 2009 were $3.5 million, down from $6 million during the same period of fiscal 2008. Most of the change is due to a decrease of $3.3 million in sales of directory services products. This change was partially offset by approximately $880,000 in direct sales revenue.

The change in directory services revenue stems primarily from the sale of a large part of the Company's yellow directory -- Yellow Pages directory customer list as it transitions out of that business and focuses its efforts on its direct sales line of business. Net loss for the second quarter of fiscal 2009 was $19.1 million or $3.19 per share compared to the net income of $3,338 in the second quarter of fiscal 2008 and a net income of $887,000 in the first quarter of fiscal 2008. Net revenues for the first six months of fiscal 2009 decreased to $8.6 million from $12.4 million in the first six months of 2008 for similar reasons. The Company expects revenues to continue to migrate to our direct sales business as we continue to emphasize our direct sales for the Yellow Pages directory business.

We note that LiveDeal's change in net revenue for the second quarter of fiscal 2009 reflects the continued shift in the Company's focus away from adding new customers in its basic directory business and towards producing and selling a new suite of small to medium business internet audience acquisition services led by our LiveSites, LiveAdvisor and LiveClicks products. This line of business has grown from accounting for less than 1% of our revenues in the second quarter of fiscal 2008, to 25% of revenues in the second quarter of fiscal 2009. Currently the Company has more than $3.1 million in gross deferred revenue from this direct sales business, an increase from the $2.7 million reported in the fourth quarter of fiscal 2008. Cost of services -- I'm sorry, that was $2.7 million reported at the end of the first quarter of fiscal 2009. Cost of services increased $385,000 in the second quarter of fiscal 2009, as compared to our second quarter of fiscal 2008.

While we experience a decrease in cost related to our directory services and classified of approximately $15,000, we included a deep -- deep cost of directory services, included costs that were due to increased regulatory requirements and an increase in per-customer charges billed to us our a third-party service providers, as well as increased -- increased costs related to search engine marketing, which is a key component of our small business marketing services offering. And the amount of that was approximately $400,000 related to the search engine marketing. The increase in costs surrounding a search engine marketing services was consistent with our revenue growth in this product line. For the first half of 2009, cost of services increased by approximately $0.99 million as compared to the first half of fiscal 2008 for similar reasons, with an increase of $227,000 in costs related to our directory services and increased costs related to our customer acquisition services of approximately $849,000.

Gross margin decreased to 59% of net revenues in the second quarter of fiscal 2009 from 82% in the second quarter of fiscal 2008. Our current product mix is more heavily weighted to its sales of our LiveClicks and other related products, which currently have a lower gross margin than the historically high margin directory services business line. These margins improved to 45% in the first half of fiscal 2009 from 21% in the first half of fiscal 2008. We expect the margin attributable to the LiveClicks and related products to improve as this business matures. General and administrative expenses increased in the second quarter of fiscal 2009, as compared to the second quarter of fiscal 2008, primarily due to the following. First, increased compensation costs, which included the costs of operating inbound customer service of $365,000; decreased payroll from directory classified and corporate operations were offset by higher costs related to the direct sales operations, which were about $747,000 higher in the second quarter of fiscal 2009, compared to the second quarter of fiscal 2008.

Second, increased software expenses of about $224,000, primarily related to direct sales operation. Third, increase professional fees of approximately $220,000 related to increase legal expenses incurred in response to certain legal actions brought against us and fees incurred for Sarbanes-Oxley related consulting services. Fourth, an increase of approximately $73,000 of depreciation and amortization expense relating to additional fixed assets, which was in turn related to the relocation of our corporate headquarters to Las Vegas and additional capitalized software development costs relating to new product offerings and accelerated depreciation on certain amortizable items that have a limited useful life. Fifth, these increases were offset by decrease of about $443,000 of stock-based compensation charges, including a $258,000 expense reduction in the second quarter of fiscal 2009, resulting from an increase in our estimated forfeiture rate on stock awards, partially offset by hiring an additional sales force and technical personnel in light of the development of our Las Vegas operation.

Sixth, another offsetting factor was a reduction of about $325,000 in general corporate overhead. For the first six months of 2009, G&A expenses increased for similar reasons outlined below. Increased compensation costs, which included costs of operating in-bound customer service, of about $1.031 million. There was -- while there was decreased payroll from directory classified and corporate operations, if was offset by higher payroll costs related to the direct sales operations, which are about 1 million 4 -- $1.4 million higher in the first half of fiscal 2009 compared to the first half of fiscal 2008, increased software expenses of about $280,000, again, primarily related to the direct sales operations. Third, increased professional fees of approximately $397,000, related to increased legal expenses incurred in response to certain legal actions brought against us and fees incurred for Sarbanes-Oxley-related consulting services and increased recruitment fees to hire key personnel in response to our change in strategic direction.

An increase of approximately $154,000 of depreciation and amortization expense relating to additional fixed assets, as related to our relocation of our corporate headquarters to Las Vegas, and for additional capitalized software development costs, which related to our new product offerings, and for accelerated depreciation on certain amortizable items that have a limited useful life. And these are partially offset by a decrease of $543,000 of stock-based compensation charges, which were, again, in turn partially offset by hiring an additional sales force and technical personnel in light of the development of our Las Vegas operations. Another offsetting factor was a reduction of about $419,000 in general corporate overhead.

Moving to sales and marketing expenses. In the second quarter of fiscal 2009, as compared to the second quarter of fiscal 2008, these decreased due to the following -- with $543,000 of decreased telemarketing and other customer acquisition costs as we began transitioning away from marketing activities geared towards a directory services business; about $37,000 of reduced branding and miscellaneous sales and marketing expenses, partially offset by an increase of $221,000 for increased expenditures for click traffic, which we belief is more cost effective than online advertising. For the first six months of fiscal 2009, sales and marketing expenses decreased by $1.1 million, due to the following -- about $708,000 of decreased telemarketing and other customer acquisition costs as we, again, began transitioning away from marketing activities geared towards a directory services business; and $77,000 of reduced branding and miscellaneous sales and marketing expenses, partially offset by $390,000 of increased expenditures of click traffic, which we believe is more cost effective than online advertising.

Our expenditures for click traffic have dropped in the second quarter of fiscal 2009 as compared to the first quarter of fiscal 2009, as we have refined our strategy and have negotiated better contracts with our vendors, resulting in a more focused and cost effective approach to marketing our business. We reported an operating loss of $18.8 million for the three months ended March 31, 2009, compared to an operating income of $32,472 for the three months ended March 31, 2008 as a result of the impairment charges, decreased gross profit, and changes in operating expenses described earlier. During the second quarter of fiscal 2009, we entered into an agreement to sell a portion of our customer list associated with our directory services business, resulting in a gain of $2,815,952. We also amended another directory services contract in consideration of accelerated payments on our outstanding accounts receivables and some anticipated future billings, which resulted in an increase in other income of $642,268 and these are for the three and six months ended March 31, 2009, respectively.

The change in our income tax provision is due primarily to corresponding changes in our pre-tax income, coupled with an establishment of a valuation allowance of $9,474,683 in the second quarter of fiscal 2009, such that the net deferred tax assets were reduced from the five -- I'm sorry, were reduced from the $5.1 million at the end of December 31, 2008, to $1.2 million at the end of March 31, 2009, and our income tax expense was increased to $3.7 million in the quarter. While we have optimistic plans for our new business strategy, we determined that such a valuation allowance was necessary given the current and expected near-term losses and the uncertainty with respect to our ability to generate sufficient profits from our new business model. Therefore, we established a valuation allowance for all deferred tax assets in excess of those expected to be realizable through the application of operating loss carry backs.

LiveDeal had cash on hand of $10.1 million and $11 million of total working capital as of March 31, 2009. During the quarter, the Company used cash in the amount of $615,226 in its operations. The Company has no long-term debt and the stockholders equity was $17.7 million as of March 31, 2009. Now I would like to turn the call back to Mike Edelhart.

Thanks, Raj. Well, profitability for fiscal 2009 is not something we have visibility into today. We do believe we will move toward profitability as the direct sales business continues to grow and as we clean out all of the dead wood from our Yellow Pages directory and classified businesses and scale down their operations cost to the needs of our emerging direct sales of business. As these changes occur we believe profitability will emerge. In addition, we believe the direct sales business has the capacity for sustained profitability that comes with predictable growth, elements that have become hard to depend upon from our Yellow Pages directory and classified businesses. In short, we continue to feel that we are on target to transition LiveDeal to a much better market position and a much more stable, predictable and growth oriented financial posture. I'm sure that was a lot of information to digest, so now let me open it up for questions.

(Operator instructions) Your first question comes from the line of Jon Hickman with MDB Capital.

Hello.

Hi, John.

Hi. I got a couple of questions. First of all, you mentioned some products by name, LiveAdvisor, LiveClicks, and there was one other one that I didn't catch. Live something.

LiveSites.

LiveSites. Okay. And then going through all of the changes in SG&A and the expense lines, is there any kind of -- well, no, let me ask this question first. Are there going to be any other adjustments, or did you -- for the third quarter or have you cleaned everything -- I mean is there anymore impairment charges, anything like that that will carry over to the third quarter or is this all done?

This is is Raj, John, there will be some related to the continued -- discontinuation of the classified business.

But that should be relatively small, right or -- ?

I won't speculate on the size, but, yes, the classified business was from the smallest piece of the business lines that we have, so relatively speaking that should be correct.

Okay. So, now going forward is there any kind of -- like a percentage of revenues or do you expect expenses to continue to decline or are the expenses from the direct sales effort in Las Vegas, are they going to continue to kind of offset any further declines from what is going on -- from what you did in the Philippines?

The expenses related to the direct sales business will climb, I guess, in proportion to the revenues that go up. As far as the fixed cost portion of the overhead related to direct sales, that is more or less in place. So we do not expect that to increase as a percentage of revenues.

So -- so your operating expense line is kind of where it's going to be. We shouldn't anticipate further declines there, then?

Yes, I -- that should be correct. We are also -- as we had said earlier, we expect the gross margins related to the direct sales operations business to increase as -- as we continue growing the business, so you should see that fall into place as well.

Okay. And then could you just go through the -- what was the actual revenues from the direct sales from the Las Vegas side were $880,000 in Q2, is that right?

Right.

And $1.694 million for the first six months.

For the first six months. Okay. You want to project any type of growth rate there?

We don't give guidance on -- on the future, but we do believe we are building an exciting business and we do, certainly, have additional products that we hope to introduce, so it is difficult to make projections, but we expect the trend to continue.

Okay. Then we have had discussions of this topic before, but what are you going to do with your cash?

Well -- (Multiple Speakers )

Hi. I -- I will -- will defer that question, at this point.

This is Mike. I think we have no specific no announcements to make about the cash we've accumulated on this call. We have a business to support the growth of and we're working hard to develop the plans to understand just what the needs of that business are and we're aware of a number of potential uses for the cash and the Board will continue to evaluate.

Okay . Okay. That's it for me.

Thanks, John.

Your next question comes from the line of Colin Gillis with Brigantine Advisors.

Hi, good morning, everybody.

Hi, Colin.

Good morning.

Just going forward, what are the key performance indicators or the metric that we should be monitoring to try to gauge success of the new direction?

I think that's a great question. I think there are a couple. One is revenue per customer, which in the direct sales business has been in the $3,500 per customer range and generally rising about 8 times, I think, the average revenue that the Yellow Pages directory traditional business got us. I think a second to pay close attention to is churn. As our business expands, we have only been working in the new directory services business, really, since last spring, so we're only now coming up on the first full-year cycle, but the initial indications we see are that churn in this customer base, where we're focusing on very small businesses and we're interacting with them by telemarketing, is modest and much lower than we believe has been seen in other segments of the market by others. So if we can acquire efficiently and we can grow the amount we get per customer and keep churn modest, this business grows crisply and accumulates cash as it grows.

Mike, just drilling down on that, I think you made a great point, on the directory services, you're bringing in a multiple higher [earn] business model. Can you just talk about the revenue per customer? The delta between acquiring that customer via the phone versus having an in-city presence?

Well, I don't know that we have specifically modeled an in-city presence, but if you think about traditional sales approaches, hundreds of offices, potentially hundreds of folks in those offices, the relatively high salary base that comes with that kind of operation along with the fixed costs that come with it, our telesales are hourly employees and they are flexible, in a sense that we can through telesales target specific geographies, specific verticals that our analysis shows have the right characteristics to be fulfilled efficiently, that have the right characteristics to be sticky, in other words to have low churn, in a way that fixed physical structure doesn't allow us. The universe of very small businesses is quite vast and one of the requirements in making a successful business around it is to not attempt to be everywhere at once, but to focus the business where the opportunities are greatest and that's -- if there is a single advantage we see with the telesales approach that stands out, that's it.

And just one last one. How do you compete against some of the other established companies out there, like a reach local?

Yes, it's a great question. I think in the main our focus is in an area of the market where theirs is not of. They all have to speak for themselves, but our focus is rigorously on very small businesses. The companies that have ten and under employees where we essentially stand in for them as the -- a partner. They need to use the internet to acquire customers, get business in the door. We perceive most of the competitors as being focused on the -- the larger small business, the medium in the small/medium business segment, where the campaign sizes are larger, the businesses are larger, and we're focused where the companies are smaller and the campaign sizes and the level of services they are buying would tend to be smaller.

We favor that segment, because we believe it is harder to reach and by reaching it, we are putting ourselves in a unique space in the market and we believe it will have lower churn characteristics. That these businesses are looking for a partner and when they have a partner that works for them, they will stick with them. And that their needs are clear and more straightforward to delineate them. Those are some of the larger small businesses.

And then just to reiterate, right, even though you are focusing on the smaller segment of the small businesses, still a multiple higher of revenue per customer then what you were seeing on the directory services business?

Yes, it was. One of the issues we saw in the directory services business that we inherited when we got here was an extreme inflexibility. So what we were selling in that line of business was a very limited, very simple product, internet directory listing, and because of the nature of that business, because the billing was largely handled through the local exchange channel, our capacity to bring new products into that channel was exceedingly limited. So essentially, we were locked in with a sort of bare-bones relationship with our customer and a very low yield per customer in a channel that had a great deal of friction and turbulence in it and we were unable to bring products, new forms of communication with the customer, into play to change that situation. Whereas in the new direct sales business, we control the customer relationship directly, we provide the services. The services are more varied right from the get-go and our capacity to bring new products into the customer base is much greater. That is one of the reasons why we see the growth potential as greater.

Yes, makes a lot of sense. Thank you.

At this moment, I am showing we have no further questions. I would like to turn the call back over to management for closing remarks.

Well, this is Mike. I just want to thank everybody for joining us this morning, particularly those on the West Coast who were up really early. We always stand ready to address questions and talk about the business with any of you and we look forward to future conversations with you all. On that, I'll turn it over to John.

Thank you, Mike. The conference call will be available for replay and a transcript will be available at some point today following the call. Thank you so much for your interest and we look forward to seeing you on our next call. Thank you.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.