MIVA Inc. (MIVA)
Q1 2006 Earnings Conference Call
May 8th 2006, 5.00 PM
Peter Weinberg, Vice President, Investor Relations
Peter Corrao, Chief Executive Officer
Seb Bishop, President
Will Seippel, Chief Financial Officer
Colin Gillis, Canaccord Adams
Matt Hedberg, Craig-Hallum
George Mihalos, Gilford Securities Inc.
Good afternoon ladies and gentlemen, welcome to MIVA’s Q1 2006 financial results conference call. Today’s call is being recorded. I would now like to turn the call over to Mr. Peter Weinberg, Vice President of Investor Relations. Mr. Weinberg, please go ahead.
Peter Weinberg, Vice President, Investor Relations
Thank you, Vicky, and good afternoon everybody. Welcome to MIVA’s Q1 2006 financial results conference call. Joining me on the call today are Chief Executive Officer, Peter Corrao, our President Seb Bishop is joining us from the UK, and Chief Financial Officer William Seippel.
I would like to remind everyone today’s comments include forward-looking statements. These statements are subject to risks and uncertainties and may cause actual results and events to differ materially. These risks and uncertainties will be outlined at the end of this conference call and are also detailed in MIVA’s filings with the Securities and Exchange Commission.
To comply with the SEC’s guidance on fair and open disclosure we have made this conference call publicly available via audio webcast at http://ir.miva.com/medialist.cfm and a replay of the conference call will be available at the same URL and on the company website for 90 days after the call. I would now like to turn the call over to our CEO, Peter Currao. Peter?
Peter Corrao, Chief Executive Officer
Thank you, Peter. Good afternoon everyone, and welcome to MIVA’s Q1 2006 conference call. We appreciate having you on our call today. For those of you who don’t know me, I was previously MIVA’s COO for approximately six months, and several weeks ago I transitioned to CEO, so this is my first quarterly conference call in the new role. I’m excited to be here and I hope by the end of the call you share in my enthusiasm. We believe we have a compelling turnaround value story and we are planning to actively speak with investors and analysts in the coming months. I look forward to meeting personally with many of you.
I’m going to start with an overview of recent events and then detail specific key tactical initiatives we have planned for the near term. I will then turn our call over to Will Seippel, our CFO, who will review progress n our financial results and detail our Q2 guidance. Our guidance will incorporate most of the same initiatives I’m about to cover. I’m not going to deliver a half-baked long-term strategy today. We believe e must first finish our course correcting steps before we set out in a new direction. However, you should know we are busy planning out our long-term vision, mission and strategy and we’ll be sure to share this with you in the coming weeks and months.
The tactical initiatives I will detail are currently either in progress or recently completed, and we expect these items to have an impact on our business starting in Q2. I want to begin by commenting on changes to our leadership structure that occurred in early April. Both Craig and the board felt that the time was right for a shift in senior executive leadership. Craig and Philip have served the company long and well and we want to thank them for their service. Further, MIVA simply wouldn’t exist if it weren’t for Craig’s specific dedication and effort. Larry Weber, who is now our non-executive chairman, is an established leader and visionary in marketing and communications. Seb is now our president in addition to a CMO role, Seb has a strong proven legacy in the industry, including founding Espotting, which is an important component of the MIVA family.
Will and I each have approximately 25 years of executive-level experience and between us we have been involved in several successful turnarounds. Together, we believe we have a strong and visionary leadership team that I’m certain will benefit all of MIVA’s constituents. We believe you will quickly come to recognize the positive changes that this new team brings to the table, starting today. I also want to address the effort we undertook earlier this year to explore a range of strategic alternatives. When we made the announcement, the board and management stated we did not believe our share price at the time reflected the inherent value of the company and its opportunities. As a result of prosecuting various strategic opportunities, our valuation discount became more apparent to us, not less. And our share price has declined since embarking on the process. Today we announce the board has authorized a $10 million share repurchase program. We believe the share repurchase program underscores our view on valuation and importantly, emphasizes our commitment to remain independent for the long term.
Let me further detail the next steps in our turnaround. The company’s stated goal is to drive margin expansion by streamlining our operations. The company expects to reduce cash operating expenses by approximately $4-5 million on a net annualized basis, with the majority of related charges occurring in Q2 2006. Much of this expense saving will come from an organizational realignment. We believe this initiative will position us so that incremental revenues become more meaningful to our bottom line. We believe restructuring the organization will enhance our ability to achieve sustainable growth in the long term. Our goal is to return to profitability as quickly as possible. Notably, we believe we can reduce costs without impacting our ability to continue to innovate. Q1 2006 global (clip buying?) increased by 13% sequentially, placing higher stress on the network environment In response to the increased volume, we are tackling the issues of managing network risk and increasing network productivity to a three-part optimization plan aimed at decreasing latency, increasing capacity and geo-routing traffic.
We believe a more productive network will lead to higher (match and fill?) rates and support fewer dropped queries. In turn, we expect to drive higher click-through rates, conversions and bid prices, enabling us to better serve our partners and advertisers alike. Let me explain.
First, we focused on reducing latency by increasing our server count to reinforce the network infrastructure. Then we tweaked the server applications to handle higher load rates. Secondly we focused on expanding capacities by introducing new data centers in Paris and in San Diego. We have now transitioned to distributed environment in many of our operations and we have increased our capacity by double digits in certain geographies where the network was previously under-performing due to higher volume loads. We are currently adding additional service to the network and we continue to work on the optimization. We believe that the hard work of our MIS and production operations group are yielding positive results and that the early data points look encouraging.
Finally, we introduced geo-routing in the US, which we believe allows us to better serve all of our advertising clients and distribution partners where we have coverage, either directly or though partners. Geo-routing has the potential to provide all-around better leads of our advertising clients and more targeted results for our distribution partners, both of which we believe will impact the overall quality and value of our network. Now I want to cover our positioning, which I can tell you has not changed. We continue to believe search portals are aggregating publisher content in an effort to increase the value of their own search portal, in essence cannibalizing the brand value of the publishers, while commoditizing the content.
Under this scenario, we believe the publisher is bearing the cost of generating the content without realizing the largest share of the benefits. At this crossroads is our unwavering opinion that publishers have a clear choice, continue to work with search portals that could eventually put them out of business, or they need to seek an alternative. We believe this dynamic has created a compelling advantage for MIVA. First, we believe our new product initiatives have improved our competitive position in key areas covering publishers and advertising tools, solutions and functionality. So we can now offer many of the same services as these portals and aggregators.
Second, we are not focused primarily on aggregating audience and media spend for our own search portal. As a result, we believe we are positioned to help publishers to compete online without threatening them the way search portals and aggregators do. Our objective is to capitalize on this opportunity. We believe we are capitalizing on this opportunity and recently have announced a number of new partnerships, including iCopyright, Iron Magazine(?), Intellex(?), NewSport, Group Hashef(?), Voyages SNCF and expanding relationships with the Sun, just to name a few. We also announced an exclusive partnership with The Number, Britain's leading directory assistance servicing company behind the high profile 118118 brand. Our new TXT//AD product enables advertisers to buy space within SMS, allowing them to reach highly relevant audiences, actively interested in their products or services.
This is a new and exciting application for performance marketing and the early response from the advertisers has been encouraging. We have a number of large-brand advertisers testing and some already buying the new product, including British Airways, Vodafone, The Automobile Association, Sky and 888.com. So at this point, I'll turn the call over to Will. Will?
Will Seippel, Chief Financial Officer
Thank you, Peter. To begin, we are pleased with the team's ability to execute the plan in Q1. We recorded sequential revenue growth and generated more than $1.2 million in cash. We delivered operating results in line with expectations and we believe our results demonstrate the progress we are making in our turnaround. We believe we are in the early innings of a 12-18 month turnaround cycle and we are planning for the full process to take up to another 12 months. Having achieved our prior objectives to grow revenue and generate cash, today we are outlining the next step in our turnaround driven by our stated goal to drive margin expansion. In order to reach our goal, we expect to reduce our cash operating expenses by approximately $4-5 million on a net annualized basis, with the majority of related charges occurring in Q2 2006. I will cover this in more detail when I discuss our outlook for Q2 for those of you who followed me at other public companies, you know I have a consistent track record for both long revenue and reducing expenses while positioning the company for a return to profitability.
I expect the same will be true here at MIVA. Today, we are also announcing a $10 million stock repurchase program that underscores our confidence in MIVA's future and demonstrates our optimism in maintaining the necessary liquidity to continue investing for growth and repurchased shares at the same time. We believe our current value is discounted to the market and repurchasing stock at these valuation levels is a prudent use of cash. Before I detail our results, let's review how we measure our financial performance. In addition to the standard GAAP measurements, we utilize certain profitability-based metrics to evaluate our period to period and YoverY performance. They are adjusted EBITDA and adjusted net income. Due to our adoption of the statement of financial accounting standards number 123R, effective January 1, 2006, we have modified our definition of adjusted EBITDA and adjusted net income to exclude non-cash stock compensation expense incurred as a result of our adoption of the standard.
We define adjusted EBITDA as EBITDA - earnings before interest, income taxes, depreciation and amortization - plus non-cash stock compensation expense and plus or minus certain identified revenues or expenses that are not expected to recur or to be representative of the future ongoing operations of the business. We define adjusted net income or loss as net income or loss plus amortization plus non-cash stock compensation expense and plus or minus certain identified revenues or expenses that are not expected to recur or to be representative of future ongoing operations of the business, in each case including the tax effects, if any, of the adjustments. We believe the use of these measures does not lessen the importance of GAAP measures.
With that said, let's discuss our results and expectations. In Q1 2006, MIVA achieved revenues of $44.4 million compared to $43 million in Q4 of 2005, representing 3% sequential growth and in line with our guidance. We recorded 248 million total paid clicks in Q1 2006 compared to 219 million in Q4 2005, an increase of 13% sequentially. In the US media network, excluding Private Label and B&B, paid click-throughs were up 16% sequentially from Q4 2005. However, the increase in US paid clicks was offset by a corresponding decrease in average revenue per click, or RPC. Overall, US media click revenue was down 6% sequentially. US media RPC decline slowed in April and has reversed course thus far into May. In the EU, media network paid click-throughs were up 17% sequentially from Q4 2005, offset in part by a decrease in RPC. Overall, EU media click revenue was up 6% sequentially. Consolidated EU RPC was flat to marginally up from February to May to date.
RPC in Q1 was weaker than we would like, although we have had signs more recently that suggest rapidly increasing click volumes have a negative effect on the optimization of our network, in turn pressuring RPC. The network optimization efforts Peter detailed earlier are yielding results and some of the early data points are quite encouraging. However, we would want to see a trend develop over a longer period of time before we factor a marked improvement in RPC into our current guidance for Q2. Overall, the US, which includes the media network, Private Label, B&B, MIVA Small Business, MIVA Direct, recorded $24.1 million in Q1 2006, or 54% of total revenue, while the EU recorded $20.3 million, or 46% of total revenue.
In the aggregate, BNB, MIVA Small Business and MIVA Direct recorded revenue of approximately $12.1 million in Q1 2006, up 10% over the $11 million recorded in Q4 2005. This compares to approximately $6.6 million recorded in Q1 2005. Before I continue, I want to highlight several exceptional items that occurred during Q1. We recorded approximately $800,000 in executive severance charges. These are all cash and paid over an approximate 6-12 month period. And we recorded $900,000 for the one-time gain on a lease termination. We also paid $1.1 million in an earn-out related to a company we acquired during 2004. We expect an additional earn-out payment to be paid in Q2 2006, totaling approximately $1.7 million and we believe no additional earn-out payment will be due.
Operating expenses excluding the non-cash stock compensation charge were $25.1 million in Q1 2006 compared to $24.6 million excluding the non-cash stock compensation charge for 2005 Q4. Amortization expense in Q1 2006 was $2.2 million compared to $2 million for Q4 2005. Amortization expenses included $1.5 million for acquired intangible assets and $700,000 for capitalized and purchased software. We recorded a GAAP net loss of $3.8 million, or $0.12 per diluted share in Q1 2006. This compares to a GAAP net loss of $4.7 million or $0.15 per diluted share in Q4 2005. Adjusted EBITDA in Q1 2006 was $500,000 compared to adjusted EBITDA of $1.2 million in Q4 2005. Adjusted EBITA includes $800,000 in severance charges and excludes $900,000 for the one-time gain on the lease termination and $1.6 million for non-cash stock compensation. We recorded an adjusted net loss of $0.03 per diluted share in Q1 2006, excluding the one-time gain on lease termination. This compares to adjusted net loss of $0.02 per diluted share in Q4 2005.
Now turning to our balance sheet review, our cash, cash equivalent and short-term investments at March 31, 2006 totaled approximately $39.7 million. This was an increase of more than $1.2 million over December 31, 2005. The increase is due primarily to a stronger working capital position fueled by improved accounts receivable management in collections in Europe, offset by the previously mentioned earn-out payment of $1.1 million. We expect cash to decline in Q2 prior to any impact from the repurchase by approximately $3.3 million. This is due to the aforementioned earn-out payment and existing 2004 tax liabilities in Europe. We expect the Q2 cash decline to be offset by approximately $3 million in Q3 from anticipated federal and state income tax refunds from our 2005 net operating loss carry back.
The company's employee count decreased throughout the second half of 2005 and continued over Q1 2006. As of March 31, 2006, we had an active base of 470 full-time employees, down from 483 at December 31, 2005 and down from 517 at June 30, 2005. As previously mentioned, the company's stated goal is to drive margin expansion by streamlining operations, though the incremental revenue drops to the bottom line. We expect to reduce cash operating expenses by an additional $4-5 million on a net annualized basis with the majority of related charges occurring in Q2 2006. We are estimating total related charges of $5.1 million in Q2, $2 million for executive severance, $2.1 million for non-cash stock compensation related to executive severance and $1 million for repositioning for future growth.
I want to emphasize these charges are for positioning ourselves for future growth and while we are restructuring in some areas we are acquiring necessary skill sets through key hires in other areas. These estimated charges are reflected in our Q2 2006 guidance. Adjusted EBITA and adjusted EPS guidance include the estimated $3 million cash portion of the total charges. Beginning in 2006, the company began expensing the fair value of stock options in accordance with GAAP. The company's net income guidance includes the impact of stock compensation expense which is estimated to be approximately $3.5 million in Q2 2006. Stock option compensation expense includes the impact of the accelerated vesting of restricted stock units of $2.1 million in connection with the severance for certain former executives.
The following adjusted EBITDA and adjusted EPS guidance excludes non-cash stock compensation expense. GAAP EPS and adjusted EPS guidance does not give effect to any potential repurchases of stock by the company during Q2 2006. Revenue Q2 2006 estimated range is $44-45 million. GAAP EPS Q2 2006 estimated range is minus $0.34-0.31 on 31.5 million shares outstanding. Adjusted EBITDA Q2 2006 estimated range is minus $3.4-2.4 million. Adjusted EPS Q2 2006 estimated range is minus $0.16-0.13 on 31.5 million shares outstanding. On a normalized basis, which excludes additional asset spend of $1 million by MIVA Direct, we are guiding to approximately flat QoverQ adjusted EBITDA margins in Q2. We re-emphasize going forward we can increase the margin by reducing our expenses while we grow the top line, in part through the optimization efforts we detailed earlier. Overall, we expect our efforts to yield tangible results exiting 2006.
Thank you, this concludes my review of our Q1 2006 financial results and our Q2 2006 outlook. I will now turn the call back over to Peter.
Thanks, Will. We hope you'll agree with our belief that Q1 2006 was a productive quarter for the company and the tactical initiatives we have outlined today will help put us in a position to drive margin expansion and growth over the long term. We intend to achieve margin expansion by reducing operating expenses any by continuing to diversify revenue. We are focused on increasing our margins so that incremental revenues become more meaningful to our bottom line. We believe this complements our efforts to continue growing revenue. Our goal is to return to profitability as quickly as possible and we've made significant progress in Q1 on multiple fronts to set a strong foundation for the remainder of 2006. We believe we have identified a definable and sustainable position in our marketplace, our publisher focus differs from that of our competitors and is something on which we intend to build.
We believe our products and sales efforts around our new solutions have already begun to bear fruit in the form of new bargain(?) momentum. Thanks for spending time with us, we look forward to updating you on our progress throughout the year.
Vicky, we can turn the call over to Q&A now.
Questions and Answers
Thank you very much. Operator instructions. We'll take our first question from Colin Gillis with Cannacord. Please go ahead.
Q - Colin Gillis, Cannacord Adams
Peter, it's a pleasure to speak to you on the call.
A - Peter Corrao
Hi Colin, nice to meet you.
Q - Colin Gillis, Cannacord Adams
So could you just discuss a little bit of what you feel is your most important initiative in the next 100 days? Give us some color about you know, your thoughts on that topic?
A - Peter Corrao
Yes. I think our most… we've got two types first, so let me share both with you. One is we want to get the company structured in a way that allows us to go ahead and begin to bring incremental revenue flow into the company. So that would be number one. Tied for number one would be what Will and I both talked about, with getting our efficiency and effectiveness up at our network operations center. So we clearly believe that you know, what we talked about today with adding servers, a middleware fix between our servers and our partners, we think that that can have dramatic effect on total number of clicks and our RPC, but are loathe to forecast any of that until we get a real trend out of it. So again, Colin, I think tied for first would be one, let's reorganize ourselves in a way that allows us to go get the revenue we deserve and number two, let's fix our network operations center so that we can recognize all of the revenue that we should be from the traffic that we already have.
And we'll now take our next question from Matt Hedberg from Craig-Hallum. Please go ahead.
Q - Matt Hedberg, Craig-Hallum
Yeah, hi. I'm curious as far as the strategic initiatives that were looked at previously. What was the rationale in going in that direction versus now taking that off the table and going back to a go-it-alone standpoint?
A - Peter Corrao
Well, there were, you know, multiple things that could have come out of our pursuit, Matt, when we first took on this strategy with Deutsche Bank. I guess it's been… how many months, Will, do you know?
A - Will Seippel
Four or five months, something like that.
A - Peter Corrao
From that, we got a lot of good input. We were satisfied with the input that we got, we continue to believe that the company's undervalued and we believe that we can do all the things that can get value back for the shareholders that we're talking about today. So with choices to be made, the choice for management and our board was to dig in, set new vision and strategy, get course corrected for the here and now, get cash turned around the way it ought to be all of which I think we were doing and dig in for the long haul to drive shareholder value which is exactly what we're doing now.
And we'll take the next question from George Mihalos, with Gilford Securities.
Q - George Mihalos, Gilford Securities Inc.
Hi. I was wondering if you could comment or if you could remind us as to how much of your European business is agency-based? And perhaps you can comment on SEM rebating overseas?
A - Peter Corrao
That would be a good one to turn over to Seb. Seb, would you answer that for George?
A - Sebastian
It depends on a territory-by-territory basis, but across the whole of Europe you can expect that our agency business makes up about 70% of revenue.
And I would like to remind everyone if you do have a question, please press *1 at this time. And we'll pause for just a moment. And we'll go to Colin Gillis with Cannacord, please go ahead.
Q - Colin Gillis, Cannacord Adams
Yes, could you just comment about if you're seeing improved traction on the publisher side and do you feel that you've scrubbed your partner lists sufficiently in both North America and Europe now?
A - Peter Corrao
Well, as you heard from our announcement today, we think we're doing a bang-up job of bringing new publisher partners to the table. What we don't think we're doing a good job of is once we get them, we don't think we're doing a great job in production operations to maximize all of the partner traffic that we could get from them. The consequence of that is lesser total click-throughs than we should be getting and lesser RPC than we should be getting. So on both fronts, you know, one is can we bring more to the table, and we've signed some pretty marquee names here in the last month even. Can we maximize those marquee names? Not today, but we think in future days and weeks, not even months, we will be able to do that. So that is sort of the crux, Colin, to the next quarter for us, right?
Yes, and Peter, if I could just add to that as well, I mean, I was given an interesting stat recently about how it takes currently about 100 users to a publisher's website to generate the same amount of revenue as one reader to their offline publication. And in terms of our role going forward, it's about eliminating the gap, by helping those publishers, and I think that as Peter mentioned, the deals that we recently announced, the 'Okays' of the world, the Suns, the Auto Expresses, the Maxims, the Daily Expresses, just to name a few that the group has share, you can clearly see that there's a growing need for those publishers to feel less comfortable to be working with our competitors and most of those publishers as well, feel uncomfortable placing our competitors ads on those websites simply on the basis that a lot of those publishers realize that our competitors can see their traffic volumes and page impressions once those ads are there. So again, we're starting to see a little bit of a turnaround which is why a lot of those marquee names are coming and working with us.
And one final reminder, if you have a question, press *1 at this time. And we'll pause for just a moment. It appears there are no further questions, I'd like to turn the conference back to Peter Weinberg for any additional or closing remarks.
This conference call contains certain forward-looking statements within the meaning of section 27-A of the Securities Act of 1933, and section 21-E of the Securities and Exchange Act of 1934. Words or expressions such as plan, intend, believe, or expect or variations of such words and similar expressions are intended to identify such forward-looking statements.
These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. Key risks are described in MIVA’s report filed with the U.S. Securities and Exchange Commission including Form 10-K for fiscal 2005 and its most recently filed quarterly report on Form 10-Q.
In addition past performance cannot be relied upon as a guide to future performance. The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements.
Potential that the information and estimates used to predict anticipated revenues and expenses were not accurate. The risks associated with the fact that we have material weaknesses in our internal control over financial reporting that may prevent us from being able to accurately report our financial results or prevent fraud. The risks that we have in the past and may in the future incur goodwill impairment charges that materially adversely affect our earnings and our operating results. The potential that demand for our services will decrease. The risk that we will not be able to continue to enter into new online marketing relationships to drive qualified traffic to our advertisers. The risk that our distribution partners will use unacceptable means to obtain users. Risks associated with our ability to compete with competitors and increased competition from distribution partners. Political and global economic risks attendant to our business. Risks associated with legal and cultural pressures on certain of our advertisers service and/or product line.
Other economic, business and competitive factors generally affecting our business. The risk that operation of certain of our technology infringes upon intellectual property rights held by others. Our reliance on distribution partners for revenue-generating traffic. Risks associated with our expanding international presence. Difficulties executing integration strategies or achieving planned synergies with acquired businesses and Private Label initiatives. The risk that we will not be able to effectively manage our growth. The risk that new technologies could emerge which could limit the effectiveness of our products and services. Risks associated with the operation of our technical systems including system interruptions, security breaches and damage. Risks associated with Internet security, including security breaches which, if they were to occur, could damage our reputation and expose us to loss or litigation. Risks related to regulatory and legal uncertainties, both domestically and internationally.
That concludes our call for today, thank you for listening.
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