Internet Capital Group, Inc. Q1 2006 Earnings Conference Call Transcript (ICGE)

Internet Capital Group, Inc. (ICGE)
Q1 2006 Earnings Conference Call
May 4th 2006, 10:00 AM.

Executives:

Karen Greene, Vice President, Investor Relations and Corporate Communications
Walter Buckley, Chairman, Chief Executive Officer
Kirk Morgan, Chief Financial Officer

Analysts:

Robert Robinson, Supply Marketing
Jeff Van Rhee, Craig-Hallum Capital Group
Joseph Besecker, Emerald Asset Management

Presentation

Operator

Greetings ladies and gentlemen, and welcome to the Internet Capital Group Incorporated First Quarter 2006 Results Conference Call. Operator Instructions. It is now my pleasure to introduce your host Ms. Karen Greene, Vice President of Investor Relations. Thank you, Ms. Greene, you may now begin.

Karen Greene, Vice President, Investor Relation

Good morning, thank you. This is Karen Greene with Investor Relations, and I want to welcome you to Internet Capital Group's First Quarter Conference Call.

I'd like to remind everyone that we're going to use presentation slides to accompany our prepared remarks today. These slides can be found on our website at http://www.internetcapital.com/. Go to the Investor Information tab and you will see an icon for our first quarter conference call. The slides can be accessed through that icon. For those of you without immediate access to our web site, the conference call on the presentation slides will remain on our website, and be available for future reference.

On the call this morning, we will be discussing certain non-GAAP financial measures. For additional information on these non-GAAP financial measures, including a reconciliation of these measures to the most comparable GAAP measures, please refer to the press release we put out this morning, including the attachment to this press release. The press release is also available on our website, which again, is http://www.internetcapital.com/. To access the press release on our website, go to the ICG press release tab and select the May 4th press release. The attachments to the release can be accessed by clicking on the PDF file contained within the release itself.

On today's call, we will be discussing our core company results. In the first quarter of 2006, ICG acquired a 36% ownership stake on a primary basis in Vcommerce, to aid in the comparability of the ICG core partner company information, ICG is now presenting pro forma financial information assuming this event occurred on January 1st, 2005.

Our non-private core companies now consist of CreditTrade, Freeborders, ICG Commerce, Investor Force, Marketron, Metastorm, StarCite, Vcommerce, and WhiteFence. Our weighted average ownership position in these nine companies is 45%. We have recast the private core company quarterly operating results for all quarters of 2005 to reflect these companies on a comparable basis.

Before we get started, I would like to briefly review our Safe Harbor language. The statements contained in our press release and those that we make in this conference call, as well as the accompanying slide presentation, that are not historical facts, are forward-looking statements that involve certain risks and uncertainties including but not limited to risks associated with the uncertainty of future performance of our partner companies, acquisitions or dispositions of interest in partner companies, the effect of economic conditions generally, capital spending by customers, development of the e-commerce and information technology markets, and other uncertainties detailed in the company's filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those projected. Now, let me turn it over to Walter Buckley, ICG's Chairman and CEO.

Walter Buckley, Chairman, Chief Executive Officer

Thanks, Karen, and welcome and thank you for joining us this morning. I'll begin by providing you with an update on ICG and discuss Q1 highlights. Kirk Morgan, our Chief Financial Officer will follow with ICG's financial results and our view of partner company performance for the first quarter. In the first quarter 2006, we saw ICG execute against a strategy across the board. Our goal on the call today is to share with you this progress.

Now stepping back for a moment, our mission is to be a leader in the On-Demand internet software and services space by owning stakes in leading On-Demand software companies. This is a market we think holds terrific potential over the next three to five years, and we think many of our companies are well-positioned to capitalize on the emerging opportunities these markets present.

Listed on slide 4 are the main takeaways in the first quarter. Our nine core partner companies had aggregate revenue growth of 14% in the first quarter of 2006 versus 2005. However, excluding CreditTrade, which has a high degree of volatility quarter-to-quarter, and had a down first quarter, our remaining 8 core companies had aggregate revenue growth of 29% for the first quarter versus 2005. And frankly, this level of growth is more indicative of the momentum we are seeing at our partner companies. ICG Commerce and StarCite both had great quarters, with strong revenue growth with a number of large multi-year contract signings, and substantial pipeline growth.

Five of our nine core partner companies were EBITDA positive, and of the remaining four companies, two include our most recent acquisitions, WhiteFence and Vcommerce, and the other two are engaged in significant product development initiatives, which should wind down the second half of this year.

During the quarter, we acquired a 36% interest in Vcommerce. An e-commerce company that provides an On-Demand commerce platform for retailers and direct-to-consumer companies. We are excited about the company and I will elaborate on it in just a few minutes.

And finally, the quality and quantity of deal flow that we are seeing has increased measurably over the last two quarters. As we continue to demonstrate our deep expertise in the On-Demand software space to proactively expand our network. As I discussed earlier, ICG's mission is to be a leader in the On-Demand internet software market.

We have deep expertise in this space and have studied it closely, having worked with these companies as business models for over 10 years. Now for several consecutive quarters, we have seen an increasing trend across corporate America to adopt the internet and internet-related applications as a standard for communicating, gathering information, and conducting business.

Companies such as StarCite, ICG Commerce, Investor Force, WhiteFence, and Vcommerce are great examples of On-Demand software and service providers, that enable enterprises to generate demand, automate complex work flow processes, and drive efficiencies just to name a few. These applications deliver a meaningful and sustainable return on investment, thereby allowing companies to transact business more productively.

We think in 2006 we will see a continuation of this trend towards On-Demand solutions, and we are optimistic about the market and the ability of our companies to leverage this growing opportunity. To give you a sense of what our partner companies have accomplished in the past quarter, let me share some highlights of our core companies, which you'll find on slides 5 through 8.

Turning to slide 5, I'll start with ICG Commerce. ICG Commerce, a leading procurement service provider had strong revenue growth versus the first quarter of 2005. Backlog continued to grow, with the signing of a number of comprehensive multi-year outsourcing relationships with large enterprises, that I unfortunately cannot name, but will describe as a leading industrial manufacturer, a global beverage company, a software giant, and a global energy company.

ICG Commerce also launched a Buying Center, to support a Fortune 500 Consumer Package Goods company with purchasing across 80 U.S. plants. And finally, the company was selected by the International Association of Outsourcing Professionals as one of the world's Top 100 Outsourcing Service Providers.

StarCite, a provider of On-Demand global meeting solutions, closed out their first quarter of 2006 with record-breaking growth, and a record number of contracts with new and existing clients. New corporate customers include Unilever North America, CIGNA, CV Therapeutics, and a global pharmaceutical firm.

StarCite expanded the contracts with existing customers, Cisco Systems and Motorola, as well as a large financial services firm, amongst others. And on the supplier side, they extended a contract to provide technology and online marketing to Starwood Hotels & Resorts Worldwide.

During the fourth quarter, Metastorm, a leading provider of business process management software achieved strong revenue growth. This growth was driven by sales of its full business process management suite. The company also posted its 8th consecutive quarter of profitability. During the quarter Metastorm added 25 new BPM customers, including CONAIR, Duke Energy, Eppendorf, The U.S. Navy, and the U.S. Investigative Services.

In addition, existing customers who have substantially expanded their use of the Metastorm BPM suite this quarter, include AmerisourceBergen, IKON Office Solutions, and InBev (UK). Overall, this sector is gaining increasing attention from the market, and key entry players. This momentum along with the company's growth, reaffirms our decision to merge CommerceQuest into Metastorm, as we believe we are building a substantially more valuable asset.

WhiteFence, a leader in online transactions for essential home services, achieved an increase in orders of 35% from Q1 '05. The company continued to add a number of new service providers and channel partners, such as First Choice Power, DynaWatt, Citizens Communications, and USDTV. In addition, WhiteFence signed expanded cable contracts with nine of the top 10 cable operators in the country.

And finally and probably most importantly, the company recently announced that AT&T selected WhiteFence as a partner to launch the AT&T Mover's Advantage. This program will provide a one-stop moving solution to millions of its AT&T customers, who can now via the WhiteFence platform easily purchase their own AT&T bundled services for voice, high-speed internet, satellite TV, and Cingular Wireless as well as set up their own utility and other home services in one stop.

In addition to these proof points of progress, we are also enthusiastic about our ability to build value through the acquisition of companies that meet our investment criteria.

Now turning to slide 9, we are targeting On-Demand internet software companies, and believe that their margins, predictability of revenues, solid growth rates, and defensibility of their business models, make them very attractive acquisition candidates. We are looking to acquire initial ownership positions of 30% to 80% in firms generating over 5 million of revenue, and are at or near profitability.

As outlined on slide 10, the acquisition of a 36% interest in Vcommerce for $13 million, represents an excellent example of the type of companies we are targeting. Vcommerce offers a broad range of e-commerce function to its customers. From hosting an entire e-commerce suite to managing large scale supplier and drop ship relationships. Customers include Target, Overstock.com, eToys, and MTV Networks, just to name a few.

The company was looking for a partner with deep industry expertise and experience, and chose ICG as the best partner to help them meet their long-term goals. With a web-enabled platform that allows customers to rely on Vcommerce for both their front-end and back-end e-commerce initiatives, highly scalable solutions, and a large market opportunity, Vcommerce falls directly in the bull’s eye of our strategy.

As I previously mentioned, the level of deal activity has picked up considerably in the first quarter, as we continue to broaden the ICG footprint in the On-Demand sector. I would also note that a number of our partner companies are involved in potential M&A activity, and we are working very closely with many of them to help evaluate their options, and execute these transactions. These acquisitions should help strengthen their overall market position.

This quarter excluding CreditTrade, we experienced good revenue growth at our core companies. We effectively deployed capital through the acquisition of Vcommerce, and we saw a significant uptick in deal flow activity. We are satisfied with this progress, and we believe the remainder of 2006 will be an exciting time for our companies and for ICG. We look forward to reporting to you next quarter. And with that I'll turn it over to Kirk.

Kirk Morgan, Chief Financial Officer

Thanks Buck, and good morning. I'll begin with our first quarter 2006 consolidated income statement, as prepared under Generally Accepted Accounting Principles.

Turning to slide 13, revenues of our three consolidated companies ICG Commerce, StarCite, and Investor Force, totaled 15.9 million compared with 11.9 million for last year's first quarter, and our consolidated companies included ICG Commerce, Investor Force and CommerceQuest. ICG reported a consolidated net loss of 4.9 million, or $0.13 per share for the first quarter of 2006, as compared with a net loss of 3.1 million, or $0.08 a share for the first quarter of 2005.

Results for the quarter include 2.1 million of stock-based compensation expense, compared with 400,000 in the 2005-quarter. Additionally, our results for the quarter include 500,000 in net gains, primarily from an income tax benefit, compared to 4.6 million in net gains in the prior year, related to gains from sales of our marketable securities.

Let me next review our core company results. As Karen indicated, the makeup of our core companies has changed during the first quarter with the addition of Vcommerce. The information I'll provide about the operations of our core companies on slide 14 is on an apples-to-apples comparative basis. Aggregate revenue of our nine core companies was 52.7 million during the first quarter of 2006, an increase of 14% from last year's first quarter.

There were a number of companies that contributed significantly to this increase. ICG Commerce and StarCite had excellent revenue growth, and continue to stake out leadership positions in their respective markets. And Metastorm, which combined with CommerceQuest in 2005 is making significant progress in the business process management market.

CreditTrade's results were down from a strong Q1 of last year, and were affected by the variability in the credit derivatives market. Excluding the results of CreditTrade, Q1 2006 revenues for the other eight companies was up over 29% over Q1 of 2005. Our core companies reported an aggregate 3.2 million EBITDA loss during the quarter, versus an EBITDA loss of 3.3 million last year. Demonstrating the progress these companies are making in their respective markets, five of the nine core companies were EBITDA positive during the quarter.

Going to the bottomline, the aggregate net loss for the nine core companies was 6.2 million, down from 7.9 million last year. The EBITDA improvement we saw in Q1 2006 over Q1 2005 was offset by our two most recent acquisitions, which are still heavily investing in their technology platforms and infrastructure.

Slide 15 presents the movement of cash at the parent company level during the first quarter. We funded 14.8 million to partner companies, primarily related to the acquisition of our interests in Vcommerce. We had operating costs of 3.5 million, and we received 11.7 million primarily related to a federal income tax refund, and asset sales. We ended the quarter with $123 million of cash at the parent company.

I'll next comment on our liquidity situation at March 31, 2006, which is presented on slide 16. At the parent company level, we had cash of 123 million, and the value of our public company holdings: Blackboard, GoIndustry and Traffic.com, was 93.8 million, totaling 216.8 million of total liquidity. In addition, at the end of our quarter our nine core companies had cash balances totaling 59.5 million, and debt of 13.8 million.

Let me now provide a high level view of the company on slide 17. For illustration purposes, I will summarize the information as of March 31, 2006. Using the closing price of $9.42 on March 31, 2006, our market cap after considering the possible conversion of our convertible notes was 407 million.

Our cash, marketable securities and escrows as of March 31, 2006 totaled 231 million, including the GoIndustry and LinkShare escrows. By deduction, an implied value of our share of our nine core companies, which grew 14% during the first quarter of 2006 was 176 million representing a multiple on our trailing 12-month proportional revenue of 1.9 times. Additionally, these companies had net cash balances that aggregated 45.7 million.

As we look forward to the rest of 2006, we continue to expect that our current core group of companies will grow revenues at least 20% for the year. As you saw during the first quarter, our growth will not necessarily be achieved on a straight-line basis. There will be some quarterly variability.

We also expect improvement in the core companies EBITDA results, while supporting growth and developing their technology platforms. Our intent regarding the deployment of capital for 2006 is as follows: To increase ownership in our existing partnership companies; to facilitate M&A activity at our core companies; to acquire interest in new On-Demand internet software companies; and finally to continue to evaluate opportunities for debt repurchases.

On the monetization front in 2006, we will strategically monetize assets over the course of the year as the opportunity arises. In summary, we are very pleased with our overall quarterly performance, and we are on-track to meet our goals for the year. With that I'll turn this back over to Buck.

Walter Buckley, Chairman, Chief Executive Officer

Thanks, Kirk, and now let's open up to Q&A.

Questions & Answers

Operator

Operator Instructions Our first question is coming from Mr. Robert Robinson with Supply Marketing. Thank you sir, you may proceed with your question.

Q - Robert Robinson

Can you hear me?

A - Walter Buckley

Yes.

Q - Robert Robinson

Okay. I wanted to ask a question based upon the eight core companies and the 29% growth. Could you elaborate on that a little bit and give us a little more detail on where you think these companies are going in growth?

A - Walter Buckley

Yes, excluding CreditTrade as we mentioned earlier, the eight core companies grew 29% quarter-over-quarter, and really it's across the group. Obviously ICG Commerce and StarCite had good quarters, but we really saw growth across the group, and I think it's more indicative of what we're seeing at the company level, at the backlog level, at the pipeline level. And you know, we think that, you know, we will continue to see good growth throughout the remainder of the year, and I think these types of models once you get the ball going, they continue to show that type of growth. I also think that it's nice to see five out of the nine companies EBITDA positive, and I think that should only improve throughout the remainder of the year.

Q - Robert Robinson

Thank you very much. And good luck for next year.

Operator

Thank you. Our next question is coming from Mr. Jeff Van Rhee with Craig-Hallum. Thank you, sir, you may proceed with your question.

Q - Jeff Van Rhee

Good morning. Thanks. Buck, just a couple of questions, first on the EBITDA front, on the core consolidated companies, real nice sequential progress and year-over-year progress. What kind of progress can we continue to see there, and I guess, right to the bottomline, do you think we could get to EBITDA positive by next quarter?

A - Kirk Morgan

Yes, this is Kirk. We were very pleased with the EBITDA improvement for the quarter, I think with five of the nine companies being EBITDA positive, and really, you know, the improvement was offset by our two most recent acquisitions, as they continue to develop their platforms, I think as we look out to the rest of the year, with our revenue target of 20% for the year, which we're confident of, I think we'll also see some significant continued improvement on the EBITDA front.

A - Walter Buckley

Yeah, and I would just add, it's a little early to say anything about Q2, but I would echo in Kirk's overall sentiment, I think you'll see over the next three quarters improvement both at the consolidated level, and with all of the companies.

Q - Jeff Van Rhee

I guess I was-- I mean there was kind of mixture of comments there, I guess I was looking solely at the consolidated companies, you talked about ICG Commerce, and they have knocked down, for your descriptions a number of mega customers so --

A - Walter Buckley

Well, frankly, both of those guys were net income positive in Q1, we're not saying they'll be net income positive in Q2, but they're obviously close. And as they grow, you know, they should only – their EBITDA margins should only improve.

Q - Jeff Van Rhee

Was there anything abnormal in those numbers? Maybe I can ask it that way. Because it strikes me with what you have got. Let me back up, you gave backlog on ICG Commerce, growth in backlog last quarter do you have that this quarter?

A - Kirk Morgan

On the backlog front, that's a metric that we're going to disclose on an annual basis, I think just commenting on the EBITDA, there were no unusual items on the consolidated EBITDA. I think as we said ICG Commerce and StarCite had positive net income as well, and I think what we're seeing there is really just, Investor Force, as they continue to development their platform, you know, they are on an EBITDA loss situation, so we would continue to expect to see, as ICG Commerce and StarCite continue to perform, but their performance to outweigh Investor Force.

Q - Jeff Van Rhee

Right, because of the obvious size differential. I mean, at what point do you think we'll have this visibility and the confidence to put a line in the sand on EBITDA?

A - Kirk Morgan

Yeah. I think as we look out toward the second half of the year, I think we would be more confident at that point in time.

Q - Jeff Van Rhee

Okay. And Kirk, while I have got you then the corporate overhead was I think if I have it right 2.1 million in December, bumped up to 3.5 this quarter, what’s changed?

A - Kirk Morgan

Really the first quarter is, the bonus payments come through in the first quarter versus the fourth quarter of 2005.

Q - Jeff Van Rhee

Okay, so we should see sort of a reverse?

A - Kirk Morgan

Yeah. Yeah.

Q - Jeff Van Rhee

Okay. And then I guess lastly, just talk to me, if you will about the acquisition criteria’s, you are looking at companies. I know you prefer vertical markets with defendable niches, where you can build the dataset software as the service models, and hopefully at EBITDA positive or at least very, very close. As you kind of look at the adjustment to the pro forma numbers this quarter, as we have baked in Vcommerce and WhiteFence, versus when we didn't have them, looks like they had more than I would call it breakeven. I mean they had enough EBITDA loss there to be noticeable. As you look at the criteria how sticky are you going to be on making sure their EBITDA breakeven or positive?

A - Kirk Morgan

Let me just hit on WhiteFence specifically. WhiteFence's first quarter is by far their weakest quarter, just because of their focus on the move event. So you'll see a significant pickup there in Q2, Q3. So, I think that was somewhat seasonal. Our overall thesis from an acquisition perspective as you outlined, we're looking for On-Demand software and service companies, companies that are leaders in their markets, and we're emerging as leaders in their markets, and companies that we can take a significant stake in somewhere between 30% and 75% or 80%, and companies that are doing north, and you know sweet spot for us doing between $10 million and $20 million revenues, and that are very near or at breakeven, and these types of models, you know, we have fairly good visibility on, when we can anticipate or predict breakeven. So you know, I think we may go in with a couple of quarters or more of losses, but I think we have a pretty good sense of when these companies will turn, and frankly you can acquire them, I think at a significantly better valuation, if you catch them right before they turn the corner, than you can once they are making money, but it's a fine line, and obviously something we pay a lot of attention to.

Q - Jeff Van Rhee

Okay. Lastly and I'll let somebody else jump on. You mentioned there were a couple of the core companies that are really in investment cycles, specifically you said two. Who are the companies that are really in investment cycles?

A - Kirk Morgan

Yes. Investor Force and Freeborders continue to invest heavily, as they are developing their technology platforms.

Q - Jeff Van Rhee

Thank you. Thank you very much.

Operator

Thank you. Operator Instructions. Our next question is coming from Mr. Joseph Besecker with Emerald Asset Management. Thank you sir, you may proceed with your question.

Q - Joseph Besecker

Good morning, guys.

A - Walter Buckley

Morning Joe.

Q - Joseph Besecker

Looking forward, if you look in at adding to the portfolio, what is the environment like? And how competitive is it, and the prices of this stuff? Is it a good environment to be buying? And if so, are you looking to buy now? And what can we look forward to, to adding to the portfolio?

A - Walter Buckley

Sure, Joe. It's a good question. I think there's a couple of questions in that question. Let me sort of break it down. Just from a deal-flow perspective, as we talked about, deal flow is up significantly over the last couple of quarters. I think a couple of reasons, first it's our focus, really making a stake in the ground that we want to be a leader in the On-Demand market. Obviously, I think we bring expertise, and that's becoming getting to be recognized in the market. We have been very proactive in building out our network of contacts out in the market in general, and frankly I think some of the transactions that we have done both on the sales side, the Blackboard's, The LinkShare's, the Go's, on the sale side, and our two new acquisitions in WhiteFence and Vcommerce have helped to contribute to just overall increase the visibility for us, which I think is very positive. Regarding pricing, you know it's a little bit like real estate nationally. There are some markets where it is getting more expensive. And there's certainly markets where we think we can make acquisitions at very reasonable valuations, and will be very selective and frankly in both of our most recent acquisitions, we were not the highest bidder, and in a number of cases we have walked away when we felt that valuations were too high. And we're seeing competition, you know, in just about every transaction, but I think our positioning, we're completing against DCs on one side, and strategic on another. I think we compete against both pretty well. And primarily because our focus and our experience, and so overall, you know, I think it's a good market and we have to be careful about valuations, but I think with our deal flow we're seeing some very interesting and exciting opportunities.

Q - Joseph Besecker

Okay. Thanks, good luck guys.

A - Walter Buckley

Thanks, Joe.

Operator

Thank you. Mr. Buckley, there are no further questions at this time.

Walter Buckley, Chairman, Chief Executive Officer

I would like to thank everyone for being on the call today, and we look forward to reporting our Q2 results in a couple of months. Thank you.

Operator

Ladies and gentlemen, this concludes today's telephone conference. Thank you for your participation and you may disconnect your lines at this time.

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