Citigroup's Mahaney On Audible: 'Getting Modestly Louder' (ADBL)

Citigroup analyst Mark Mahaney on Audible's (ADBL) Q1 2006 results (see full conference call transcript):

Summary
* ADBL reported a Revenue Beat But EPS Miss Quarter -- ADBL reported rev. of $19.7MM vs. $19.1MM Street/$19.9Citi & non-GAAP EPS loss of ($0.08) vs. ($0.04) Street/($0.01)Citi. Key metrics were good -- new subs at record high 79K, churn at lowest level since Q1:05, SAC at lowest level of past 9 quarters, and record growth in deferred revenue.

* Fundamentals were mixed. Revenue growth decelerated to 53% Y/Y from 77% Y/Y in the December quarter. However, the EBITDA loss improved sequentially from $3.2MM in December to $1.5MM in March.

* Our 2007 estimates are largely unchanged. '07 EBITDA trims from $23MM
Revenue from Apple’s iTunes reached a record high of $4.4MM, up 144% Y/Y and up 33% sequentially. Audible’s revenue from Apple was 23% of total content revenue in the March quarter vs. 19% in the December quarter. Audible’s A La Carte revenue from Audible.com
was approximately $1.1MM. During the quarter the total new customers reached 98,700
(79,000 gross new subscribers plus 19,700 A La Customers on Audible.com), up 40% Y/Y
and down 30% Q/Q.

Did Audible’s fundamentals improve?
Fundamentals were mixed. Revenue growth decelerated to 53% Y/Y from 77% Y/Y in the December quarter. However, due to accounting changes last quarter, a more pure organic way of looking at revenue’s growth is revenue + changes in deferred revenue, which grew 66%Y/Y, a deceleration from 86% Y/Y in the December quarter.

The EBITDA loss of $1.5MM declined significantly from the $3.2MM EBITDA loss of the December quarter.

Were fundamentals better than the Street expected?
Yes and no. Revenue of $19.7MM came in higher than the Street expectations of $19.1MM. However, non-GAAP EPS loss of ($0.08) was higher than Street’s estimate of EPS loss of ($0.04).

Did the company raise guidance relative to the Street?
No. Audible did not provide any guidance for the June quarter and 2006. However, the company committed to achieving non-GAAP profitability for the full year.

Positives From the Quarter

1. Continued commitment to operating loss declines - Though Management did not
provide 2006 guidance again, it did commit to improving operating losses in 2006.
Specifically, the company committed to achieving non-GAAP EPS (excluding SBC)
profitability for the full year of 2006. That said, based on this quarter’s results, this may
prove more challenging that previously expected.

2. Intrinsic strength in underlying metrics – Most of the key underlying metrics improved
during the quarter – a) the monthly churn rate during the quarter declined to 4.6% from 4.8%
in the December quarter, b) SAC cost declined sharply from $95 in the December 2005
quarter to $52 in the March quarter, and c) the gross new subscribers at 79K were up nicely
from 63K during the December quarter.

3. Strengthening iTunes revenue – Audible’s revenue fromApple’s iTune grew 144% Y/Y
to reach $4.4MM or 23% of total content revenue. Audible revenue from iTunes was 19% of
the total content revenue in the December quarter and 14% in the September 2005 quarter.
We think the popularity of iTunes music store and the continued strong shipments of Apple
iPods should continue to benefit Audible in 2006.

4. Deferred revenue increased – During the March quarter, deferred revenue increased to
$8.6MM, up 31% Q/Q from $6.6MM in Q4:05 and up 236%Y/Y. Given the accounting
changes due to roll-over credits in the December quarter, the deferred revenue number is an
increasingly important number to track, and it trended healthy during the quarter.

5. Customer services improvement – We liked Management’s update on how user
experience and customer service improved during the quarter.We particularly note that - a)
page download time has been reduced, b) thru-put has improved, 3) call center hold time has
gone down and finally d) email response time has improved. In the past we had heard about
mixed customer experiences at Audible and, therefore, view this update as an incremental
positive

Negatives From the Quarter

1. Operating expenses higher than expected – The EBITDA loss of $1.5MM came in
$800K higher than our estimate at $700K EBITDA loss. The higher than expected royalty
costs and technology & development costs drove the higher than expected EBITDA losses.
We view the rising royalty costs as a potentially significant structural issue for ADBL. We
view the ramped up tech & development spending, however, as likely a good investment into
improved company performance and results.

2. ARPU Trends – We estimate that ARPU for the subscriber business declined to $17.53 in
the March quarter from $19.01 in the December quarter. As expected a product mix shift to
the new $9.95 plan continued to decline the ARPU. However, we note that given the
accounting changes due to roll-over credits in the December quarter, ARPU is becoming a
less useful metric to track.

3. No guidance – December was the first quarter in which Audible did not provide any
guidance. The company did not indicate when it would begin providing guidance again.