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Executives

Alex Wellins – IR, The Blueshirt Group

Hussein Enan – Chairman and CEO

Kiran Rasaretnam – CFO

Analysts

John Lewis – Osmium Partners

Richard Fetyko – Merriman Curhan Ford

InsWeb Corporation (INSW) Q3 2008 Earnings Call Transcript October 23, 2008 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the InsWeb Corporation third quarter conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator instructions) This conference is being recorded today, Thursday, October 23, 2008. I would now like to turn the conference over to Alex Wellins from The Blueshirt Group. Go ahead, sir.

Alex Wellins

Good afternoon. Thanks for joining us today on InsWeb’s third quarter conference call. This call is also being broadcast live over the web and can be accessed from the Investor Relations section of the company’s website at www.insweb.com.

With me on today’s call are Hussein Enan, Chairman and CEO of InsWeb, and Kiran Rasaretnam, the company’s Chief Financial Officer. We’d like to remind you that during the course of this conference call, InsWeb will make forward-looking statements including predictions and estimates that involve a number of risks and uncertainties. These forward-looking statements are based on current information which we have assessed, but which by its nature is dynamic and subject to rapid and even abrupt changes. Actual results, therefore, may differ materially from any future performance suggested in the company’s forward-looking statements. We refer you to the company’s SEC filings, including Form 10-K, for the fiscal year ended December 31, 2007 for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statement. We expressly disclaim any obligation to update this forward-looking information.

And now I’d like to turn the call over to Hussein Enan. Hussein?

Hussein Enan

Thanks, Alex, and thanks everyone for joining us today.

While we posted modest improvements in revenue and net loss on a sequential basis, Q3 delivered more unforeseen challenges to us in the form of declining demand for personal lines insurance products and additional cutbacks via direct auto carrying [ph], which could not be offset by the very strong progress we made in signing up new agencies and carriers. Specifically, revenues were $9 million, up from $8.8 million in the immediately preceding quarters. Net loss narrowed to $552,000 while just the EBITDA, which is defined in our earnings release, was a loss of $432,000.

On the consumer side, we began experiencing reduced demand for our product in August and September. As fuel consumers bought cars or houses and fewer people moved. The three primary reasons for shopping for insurance when rates are stable as they have been for the last several years, so we have to spend more for quiet consumers, particularly for display advertising, although we are not seeing the consistent trend of reduction in the cost and availability of display advertising. In addition, we were negatively impacted by the broadcast of the summer Olympics.

On the provider side, last quarter we indicated the two direct freighters [ph] that shut down their lead flow in large phase while they revise [ph] rates. We experienced the first fourth quarter impact of this disruption in Q3. This was compounded by the fact that one of those carriers responds insurance, agreed to be quiet and shut down the three purchases pending the sale, while the other carriers implemented additional cutbacks across the country with more expected in Q4. The third direct carrier also significantly reviews their lead flow in September for a bunch of various reasons.

While we are making significant in-roads and reducing reliance on individual carriers, these developments continue to impact our monetization rates in the fourth term. It is important to know that these steps apply to all aggregators with whom those carriers work, not just in the web.

During the quarter, we attracted 2.9 million consumers, a 45% increase over Q3 ’07 and up 4% from the 2.7 million consumers in the immediately preceding quarter. Third consumer acquisition costs were sequentially flat but down 24% versus the same period last year. Third consumer revenues were also roughly flat sequentially but down 32% year-over-year. This reflects the direct carrier’s case that I’ve mentioned earlier and their significant impacts on our third consumer monetization. Thankfully, somewhat mitigate us by the solid progress we made in signing up additional agencies and additional carriers.

During the quarter, Geiko and Esurance, long time customers of ours on the TPC side of the business, started advertising to reach the remainder of our shoppers. When consumers at InsWeb are presented with a list of providers interested in getting a little quote, they now have the option of clicking our links to one or more of those carriers. This significantly improves the consumer experience within our largest core business offering and help support the offset the cutbacks made by other direct providers.

Early this month, two additional CBC customers, Progressive Direct and Insurance.com, joining Geiko and Esurance as advertisers for our standard and preferred business, and we are in discussions with a few more providers. As I indicated earlier, we continue to be successful in signing up new agencies to our agent inside of platform. An effort designed to both increase our monetization level and reduce our reliance on individual carriers.

We ended the quarter with a net increase of 373 participating agencies for the total of almost 6,800, a 6% sequential increase and a 38% increase on the Q3 ’07. During the quarter, we made it much easier for agencies to manage their bids on our platform by implementing a maximum bid feature, which enable the agencies to indicate the most they are willing to pay for a lead. If there are no other bidders, the agency will get the lead for a minimum price. If others are bidding, the system will adjust bids in $0.50 increments up to the maximum indicated by each bidder.

Also, as previously announced, we integrated with Quote Burst, which is used by all-state agencies, to instantly send auto or homeowners insurance quote via email to perspective consumers on behalf of the agency. Quote Burst also seamlessly integrates the information into the agency’s computer. I am pleased to report that we are currently finalizing a similar project for Farmers Agencies.

We also continue to make steady progress in ramping up participation within our agents’ directory. With the help of our expanded sales team, we increased the number of subscribing agencies during the third quarter by 22% to 1,072, from the 882 reported on our last conference call. We now have subscribing agencies in 3,443 unique zip codes, reaching approximately 30% of US consumers. The modules in this business, although it’s still small, continue to improve. More importantly, the directory is enabling us to engage agencies with a much more familiar product and then cross our leads, one reason for our success in growing our agency force.

TPC metrics for our funds of web links business were flat on a sequential basis. These prices were an average of $6.30, compared to $6.26 in the immediately preceding quarter. It should stay at that level or it’s slightly higher during Q4.

Turning now to those initiatives focus on lowering our customer’s acquisition cost, one of our strategies to acquire consumers at more attractive margins is to widen the scope of our dealings with other aggregators. Essentially, this means making our large distribution networks available to businesses with a different marketing focus that ends well. Who had the needs to better monetize their traffic.

We added two new aggregators during the first quarter, expanding our existing pool of aggregator partners, which include network [ph] and others. Several additional aggregators are in the development queue, and should go live in the coming weeks.

As I previously mentioned, another initiative design to help generate traffic and reduce our customer acquisition cost involve enhance content creation and syndication as well as providing consumer friendly tools to our potential businesses.

During the quarter, we released the tool allowing consumers to find out whether there had been any recalls on their car. And we’ll be releasing additional tools in the near future. We currently have four full-time writers on staff in addition to several freelancers. And we now have three syndication partners benefitting from InsWeb knowledge base, in exchange for directing inexpensive or free traffic consumer website bringing the total to five. I’m also pleased to know that we have sign contracts with three additional content syndication partners with three more in the contract final vision [ph] stage.

We are also working on an exciting new initiative designed to take more control about traffic to a social networking approach. In Q4, we will be launching a new broad and advance sight called freeinsuranceadvice.com. This destination would not only leverage the rich content we have available for our consumers but will also allow to interact with people looking for advice on any type of insurance. We have contractors with a very experience broader to run this publication.

Ultimately, traffic generators from the site will be directed to insurancerates.com, a domain we purchased last quarter that is currently under development. Insurancerates.com is expected to launch in the first quarter of next year as a consumer centric site. Consumers visiting the site will be able to view rates for almost all carriers that best fit their criteria, whether or not we have a relationship with those carriers. The data will be pulled from the weekly updated database that contains rates filed by over 95% of US insurance companies with the Department of Insurance. Consumers would be in the driver seat with respect to deciding whether or not they want to send their information to any carrier.

Later in 2009, the site will feature agency as one of the carriers. In addition to providing a very positive consumer experience, leads generator to insurancerates.com are expected to be highly desirable because of the greater likelihood of closing a transaction. Most importantly, the site will be unique and that it will interact with agencies in a manner that will be close r to the way they’re accustomed to doing business. That is talking to consumers who are ready to buy. As opposed to our current model which engages consumers earlier than the process. Thus, creating a more competitive environment which requires agencies to change the way they typically operate without thinking high turnover rates.

We expect to ramp traffic up to autoinsurancerate.com over the course of 2009. While generating pure leads overall, the site will allow us to monetize those leads at very favorable economics. It will complement our existing efforts at insweb.com, while further strengthening our competitive position. InsWeb invented online insurance shopping in 1995. We are spending most of 2008 investing in reinventing it, and we are very excited about the opportunities it will open up for us.

Now, I’d like to make a brief comment on our outlook as we enter the last quarter of the year, which is seasonally our slowest. Due to the current economic conditions and the carrier cutbacks we discussed earlier, and given the difficulty of predicting the extent to which they would be offset by the new carriers, agencies and aggregators we have recently added and continued to add to our platform, we are unable to effectively gauge our revenue potential for the quarter of 2008. Therefore, while we are confident that InsWeb will post double-digit revenue quote over 2007. It is likely that we will forward fought [ph] of our previous goal over 25% annual revenue gross.

In closing, as InsWeb largest shareholder, I would like to reiterate and I strongly believe that we have a fundamentally sound and scalable business model. We are working on the white [ph] initiative and making excellent progress in implementing them. Importantly, we accept to exit the year with a clean and strong balance sheet, A healthy cash position and no debt, all of which our strong assets in these uncertain time. While we have been affected by the current economic condition, and the deep but mostly temporary carrier cutbacks, I remain very excited about the future of our business and the initiatives we have in place to drive revenues and profits.

I will now turn the call over to Kiran, who will dictate financial results for the third quarter. Kiran?

Kiran Rasaretnam

Thank you, Hussein, and good afternoon everyone.

Revenue for the third quarter of 2008 was $9.07 million. This represents a decrease of 2% compared to the third quarter of 2007 and an increase of 2% sequentially. GAAP net loss for the third quarter of 2008 was $552,000 or a loss of $0.12 per diluted share compared to GAAP net income of $464,000 or $0.08 per diluted share in the same period last year. These figures compare to second quarter 2008 net loss of $977,000 or $0.21 per diluted share.

In evaluating our business, we consider and use adjusted EBITDA in non-GAAP financial measure has been an essential component of our internal planning process, and as a supplemental measure of operating performance. We define adjusted EBITDA as net income excluding interest, taxes, depreciation, amortization, share-based compensation expenses, severance [ph] and other one-time gains and losses that are not related to our continuing operations. Adjusted EBITDA for the third quarter of 2008 was a loss of $432,000, this compare to a gain of $692,000 in the third quarter of 2007, and compares to a loss of $518,000 in the immediately preceding quarter.

In the third quarter of 2008, we acquired 2.9 million consumers including nearly 400,000 consumers to our agent directory. Excluding consumers to the agent directory which was launch in the first quarter of 2008. This represents an increase of 26% versus a year ago period. Including the agent directory consumers, this represents increase of 4% compare to the second quarter of 2008.

On our revenues which accounted for 85% of total revenues was $7.6 million for the third quarter of 2008. This represent a decrease of 6% compared to the third quarter of 2007, and a decrease of 4% sequentially.

In the third quarter of 2008, homeowner revenues were $862,000 compared to $554,000 for the same period one year ago, primarily as a result of a number of consumers increasing from 150,000 to 212,000. There was a sequential decrease in homeowner revenue of 15%.

Term life revenues for the third quarter of 2008 were $377,000, a decrease of 38% compared to the third quarter of 2007 which benefitted from commissions we receive on business previously written in our agency which was closed in April 2007. There was a 5% sequential increase in last revenues [ph].

Revenues from the agents directly were $134,000 in the third quarter of 2008 compared to $105,000 in the second quarter of 2008, an increase of 28%.

In the third quarter of 2008, direct marketing expenses totaled $6.5 million or $2.27 per consumer, a decrease of 24% compared to a year ago and essentially unchanged from the preceding quarter. Excluding the agent directory, direct marketing expenses for the third quarter of 2008 was $6.4 million or $2.59 per consumer. This represents a 14% reduction in per consumer acquisition cost compared to the third quarter of last year, and a 5% decrease compared to the second quarter of 2008.

Excluding direct marketing expenses, operating expenses for the third quarter of 2008 were $3.2 million. Operating expenses excluding direct marketing expenses for the third quarter of 2007 were $3 million. Operating expenses excluding direct marketing expenses for the second quarter of 2008 were $3.6 million including $410,000 in nonrecurring expenses.

For the third quarter of 2008, our gross margins were 28%. This compares to gross margins of 36% in the same period last year and compared to 27% for the immediately preceding quarter. Share-based compensation expenses were $164,000 for the third quarter of 2008 compared to $264,000 for the third quarter of 2007, and $78,000 for the preceding quarter.

As of the end of the third quarter of 2008, we had 89 employees, up from 84 at the end of the immediately preceding quarter. Cash and cash equivalents at the end of the third quarter of 2008 were $9.1 million. Our balance sheet remains clean and we have no debts.

That concludes our formal remarks, and we would not return the call over to the operator to start the Q&A sessions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from John Lewis with Osmium Partners. Go ahead please.

John Lewis – Osmium Partners

Hi guys, how are you?

Hussein Enan

Hi John.

John Lewis – Osmium Partners

Just a couple of quick questions for you. First of all, I think you mentioned in your opening remarks that you have seen average come down during the fourth quarter – early in the fourth quarter. Can you give any feel for how much or just a ballpark, how meaningful that is?

Hussein Enan

It is – it has come down – they have come down and that we see fairly significantly in the 20% to 25% range on average, and I don’t know whether this is going to continue. I mean we are entering the Christmas period and the hungry period, so I don’t know whether this will continue.

John Lewis – Osmium Partners

So – I mean, obviously, in the click-through rate are relatively the same or –?

Hussein Enan

No. Click-through rate have gone down, that’s the problem. So it’s stuffing us more to attract the same number of consumers but if the rates go down then it works.

John Lewis – Osmium Partners

Got it. Can you talk a little bit about freeinsuranceadvise.com that’s going to launch in the fourth quarter?

Hussein Enan

That is correct.

John Lewis – Osmium Partners

Okay, I guess just a few other items here. So your head count is up 50% year-every-year?

Hussein Enan

Yes.

John Lewis – Osmium Partners

Revenues up obviously about 2% and most of this hires were done by June 30, and I guess the vast majority – you guys just a few questions there, you guys what are average does an employee make per quarter? We also made – with all the benefits around $20,000 a quarter, is that ballpark correct?

Hussein Enan

That would probably be a little high. That would be an $80,000 on average for our employee. That may have been true – it may have been true last year because what we’ve been doing this year is we’ve been blossoming [ph] the rank and size positions with highly level safe people who are not as expensive as the average portfolio we have before.

John Lewis – Osmium Partners

Yes. I’m just trying to figure out would you be profitable if you didn’t have – I mean obviously the huge bet here on InsWeb is your head count is up 50%, you’re building out all these initiatives that should really drive value, but on apples-to-apples [ph] basis without the head count and all this issues, it looks like you would have been essentially break even on a year-over-year basis without the hiring. We’re just trying to get a feel for that.

So I guess part B to the question, given InsWeb on pays to spend close to 150% of the market cap on direct marketing dollars, I guess we’re – and the opportunity on insurancerates.com it seems like that’s a pretty significant opportunity to reduce cost, I guess my question would be why is there not a more aggressive roll out phase for insurance rates given it can significantly reduce the direct marketing expense?

Hussein Enan

Well, we’re rolling it out as prudent – as quickly as we can prudently do, John. It is a very, very complex exercise. We’ve been at it for eight months. We’re mentioning it now because we’re close launching it but it is very complicated. We are reinventing essentially the ways that online shopping for insurance is made and nobody has ever gone there before. So we need to tread pretty carefully and more I would like to caution is once we launch it, it is not going to be an immediate drastic call because it’s going to take time to get enough volume into insurancerates.com before it really becomes very significant and all of the other initiatives that we’re talking about, the social networking, pre-insurance advice, and so on all of those are designed to drive traffics to insurancerates.com. So it is a global exercise that we’ll launch within the next few weeks, a few couple of months, three months, and we’ll gear – we’ll ramp up over the course of 2009.

John Lewis – Osmium Partners

So are you – so do you like a January, you’re targeting a January launch or –?

Hussein Enan

The Q1, hopefully early Q1.

John Lewis – Osmium Partners

Okay, I guess just a few other issues. Obviously, InsureMe was acquired by bank rate for somewhere between $65 million and $85 million. As you mentioned, they were a little smaller – they were smaller than InsWeb, and that’s on an EV basis at 68 times the current value of InsWeb today. And I guess I’m curious on the thought process of – given the optimism and excitement in the prospects of where you can take this business. I’m not asking for a $9 million buyback but on some level, why isn’t there a share repurchase given the stocks valued at $10 million today note of cash?

Hussein Enan

Well, this is a question that we’re examining with our board on an ongoing basis, and when – or if it is appropriate, we will take action on it. I can’t comment any more than that. It is – I agree with you that the share price is very attractive today, and if it will end the board deems that it’s the right time to do it for all of variety of reasons, we’ll act upon it.

John Lewis – Osmium Partners

Right. I guess on the agreement, but I guess I’m just perplexed does it – I mean, is it worth – I mean, if the stock get $3 or $2.50, does that speed up the decision or –? What, is it something internal that you have to hit in terms of seeing more progress? Or just, I guess it’s perplexing to an outsider just looking at the valuation and the opportunities that you guys, you had why there hasn’t been a buyback given the, what we think is an absurd valuation.

Hussein Enan

Yes, I mean, you’re right. That’s – looking from the outside in, it appears to be a very simple decision, but we have to examine other factors. And as I said, we are continually talking about it at the board level and when the timing is right, we may, we may do it. I can’t – I’m sorry, I really can’t comment any more than that.

John Lewis – Osmium Partners

Okay, that’s all I have.

Hussein Enan

Thank you, John.

Operator

Okay, thank you. And our next question comes from Richard Fetyko with Merriman Curhan Ford. Go ahead please.

Richard Fetyko – Merriman Curhan Ford

Hey, Hussein.

Hussein Enan

Hi, Richard.

Richard Fetyko – Merriman Curhan Ford

A few questions. I know that the consumer traffic was up about 10% sequentially, but you had mentioned in your remarks that you’re seeing some weakness in the consumer demand. Is the weakness towards the end of the quarter? And that’s why, I mean, it’s just – it seems contrary to what you reported in terms of consumer traffic in the trends.

Hussein Enan

Well, there are many sources of traffic. Some of them have produced better, larger amounts of consumers than others. But the issue is that in order to generate that traffic, we have to spend more. And that’s compounded by the fact that we’re not making as much as we used to, so now it will still put the traffic. I’m not saying this right. The more you make, the less, obviously, the traffic is – the less the traffic costs you per consumer and, therefore, the more you can spend. As you – as the monetization of each consumer diminishes, you have to per – on a per consumer basis, you end up spending more and that erodes your margin.

Richard Fetyko – Merriman Curhan Ford

So the number of consumers that you reported, that’s actually number of applications or number of views of the consumers who have visited your website?

Hussein Enan

No, those are completed applications that you have to remember.

Richard Fetyko – Merriman Curhan Ford

Okay, that makes a difference.

Hussein Enan

Not all the applications also are generated by InsWeb. We have, as I mentioned, we have a significant flow from other aggregators who may have other sources of business that are not as sensitive to the economic conditions.

Richard Fetyko – Merriman Curhan Ford

Yes, I know. Once, I understand that it’s applications, not necessarily unique visitors. That makes total sense. And then you mentioned that you’ve had about two or three carriers pull back in terms of their underwriting for a variety of reasons. What percentage of revenues did these three carriers represent in the past?

Hussein Enan

We don’t disclose the exact percentage for competitive reasons but suffice it to say, it was a significant percent.

Richard Fetyko – Merriman Curhan Ford

Okay. And then just a follow up on John’s question on the ad rates decline that you noticed towards the end of quarter, perhaps, or fourth quarter. Just curious what types of websites are you talking about? What channels that you’re seeing some ad rates declines?

Hussein Enan

The across the boards from –

Richard Fetyko – Merriman Curhan Ford

Really?

Hussein Enan

-- from the very large portions to other – they have less significant ad network.

Richard Fetyko – Merriman Curhan Ford

Okay. And the click-through rates that you mentioned, you talked about click-through rates on the ads?

Hussein Enan

Right.

Richard Fetyko – Merriman Curhan Ford

Okay, that was also the two.

Hussein Enan

The state advertising, in general, has been affected. So – and that’s, I mean, that’s understandable because that’s the portion of traffic that we tried to stimulate into interacting with us as opposed to the traffic that comes from search, for example, where that consumer, it comes from search, obviously, is already predetermined than its equity [ph].

Richard Fetyko – Merriman Curhan Ford

Yes, okay. And with your respected carriers, one of the carriers you mentioned that cutback because of budgetary reasons. Just curious, I mean, I guess I just wonder. I mean, if you were offering carrier an application, why wouldn’t he take it? I mean, its performance phase, advertising are most like and for them, it doesn’t seem like there’s much downside.

Hussein Enan

From your mouth to God’s ears, we’re just – we’re dealing with very large corporations. And if we did it with an entity at the company that has a budget of X and their budget is defeated, then they cut back. It really doesn’t make sense but what can you do? Say, “Hey, my budget’s done for the year or that’s all I can afford to spend for the next three months”. That’s the problem.

Richard Fetyko – Merriman Curhan Ford

There’s no indication of any market share losses or some new entrance who are being very aggressive with pricing and perhaps of –?

Hussein Enan

No, the pricing in itself is not something that you can modify overnight.

Richard Fetyko - Merriman Curhan Ford

I mean, pricing of leads, not necessarily benchmarks.

Hussein Enan

Pricing of leads. Well, yes, I mean we have been, obviously, trying to turn on to our inventory by lowering price but that again affects your margin.

Richard Fetyko - Merriman Curhan Ford

Right. Got it. All right, well, thanks.

Hussein Enan

Thanks, Richard.

Operator

Okay, thank you. (Operator instructions) And one moment please for our next question.

And gentlemen, we have no further audio questions at this time. I would like to turn the conference back over to management for any closing statements.

Hussein Enan

Thank you everyone for being with us today and we look forward to updating you on our results for the fourth quarter in January. Goodbye.

Operator

Ladies and gentlemen, this concludes the InsWeb Corporation third quarter conference call. You may now disconnect and thank you for using ACT Conferencing.

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