Move, Inc. Q3 2008 Earnings Call Transcript

Move, Inc. (MOVE)

Q3 2008 Earnings Call

November 5, 2008 5:00 pm ET

Executives

Todd Friedman - Investor Relations

W. Michael Long – Chief Executive Officer

Lorna M. Borenstein – President

Lewis R. Belote, III – Chief Financial Officer

Analysts

William Morrison – ThinkEquity

Mark May – Needham & Co.

Jason Helfstein – Oppenheimer & Co.

Presentation

Operator

Good afternoon, my name is Antoinne and I will be your conference coordinator. At this time I would like to welcome everyone to the Move, Inc.’s Third quarter 2008 Financial Results Conference Call. (Operator Instructions) Todd Friedman will begin the call.

Todd Friedman

Good afternoon and welcome everyone to our third quarter 2008 earnings call. On the call today are Mike Long, our Chief Executive Officer; Lorna Borenstein, our President; and Lew Belote, our Chief Financial Officer.

Today’s call is being webcast from the Investor Relations section of our website, www.investor.move.com, and will be available for replay shortly after we conclude. A copy of our press release issued earlier this afternoon is also available on our website.

Please be advised that some of the comments that will be made today constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act that involve potential risks and uncertainties concerning Move’s expected financial performance as well as Move’s strategic and operational plans. These potential risks and uncertainties include, among others, decreases or delays in advertising spending and market acceptance of new products and services. Additional factors are discussed in the company’s annual and quarterly reports which are filed with the SEC and available on our website. All information discussed on this call is as of November 5, 2008, and Move undertakes no duty to update this information. Results projected on the call today may differ materially from actual results and should not be considered as a guarantee of future performance.

On the call today we will also be discussing non-GAAP financial measures in talking about the company's performance. Reconciliations of those measures to GAAP measures can be found in the table attached to our press release.

I’ll now turn the call over to Mike Long.

W. Michael Long

Thank you all for joining us today. Our third quarter results demonstrate how Move is leveraging the significant advantages and benefits of our market leadership, comprehensive industry knowledge, and deep customer relationships in the most difficult real estate market in a generation.

The unprecedented and rapid deterioration of the real estate market during 2008 makes comparisons with prior year results less meaningful. Because the market has changed so quickly, we have focused the company on real time adjustments to market conditions while preserving our strategic investments that will protect and extend the company’s leadership position when real estate markets recover.

Revenue in the third quarter was $61.2 million, essentially the same as last quarter, as was EBITDA, coming in at $5.7 million. Our balance sheet is strong with $114.0 million in cash with positive cash flow from operations.

In addition during the quarter we took a one-time charge totaling $22.0 million consisting of a $4.0 million restructuring charge associated with the expense reduction program we announced last quarter and an $18.0 million write-down of the value of Welcome Wagon, which we previously announced we are selling.

We achieved these revenue and EBITDA results in the face of the housing meltdown, the mortgage freeze, government bailouts, and global economic uncertainty. Both Realtor.com and Top Producer grew quarter-over-quarter. Our rentals business was up slightly from last quarter as well, while not surprisingly, our new homes business declined from last quarter due to weakness in the new home sector as homebuilders substantially reduced their ad spending.

Maintaining this level of financial performance in these challenging market conditions far exceeds our competitors and is due to the strong support of our industry partners and the commitment of our employees to deliver the best products and services to meet the needs of both consumers and real estate professionals during these extraordinary times.

During the third quarter we made significant progress towards our goal of adjusting Moves business operations to optimize our financial performance, while retaining our focus on assets and capabilities and development initiatives that are essential to our strategic health.

Three of the major examples of this commitment are first, the expense reduction program we announced last quarter is proceeding according to plan. We expect to achieve our goal of reducing our annual cost by $20.0 million by year-end. The full benefit of these savings will not be realized until the first quarter of 2009. Lew will share with you in a moment more specifics of this program and our progress to date.

Second, we have made progress towards the sale of our Welcome Wagon subsidiary. We are working closely with our investment bankers and are in discussions with potential buyers. Welcome Wagon’s principal markets are small businesses in communities across America.

Small businesses have been particularly impacted by the economic disruption of the last several months. We cannot confirm when or if the sale of the business will occur at this time but we have decided to take a conservative view by essentially writing down the full value we had been carrying for Welcome Wagon in our financial statements.

Third, last quarter we said we would make smart expense reductions while continuing to make investments necessary to sustain and grow our market leadership today and after the real estate market recovers. I am pleased to announce that on October 23 we launched in full production the most comprehensive new design of Realtor.com and Move.com in the company’s history.

The early market results of this radical redesign of our network of sites are extremely positive. Lorna, who personally led the business and development team, will share with you in a moment the extraordinary reception the new sites are receiving from both consumers and advertisers.

We cannot predict when real estate markets around the country might return to normal. However, we can commit to offer consumers and our advertising customers the best products, services, and accurate information to help them make the best decisions regardless of market conditions.

Consumers have accelerated their shift to relying on new media and technologies to inform themselves about buying and selling real estate. Real estate professionals have been slow adapting to these changing consumer behaviors, however, the billions of dollars that they have historically lavished on inefficient newspaper and offline advertising are being permanently dislocated by the current economic turmoil.

As this dislocation gets resolved and real estate markets begin to recover, we are committed to positioning Move as the category leader to be the primary beneficiary of these market changes.

I would now like to turn the call over to Lorna to share with you the specifics about our new websites and an update on operations.

Lorna M. Borenstein

I believe that our ability to maintain stability during these extraordinarily difficult times speaks volumes about the underlying strength in our business. And most importantly, it gives me great confidence in our ability to drive significant growth when our market recovers.

Current conditions have provided us with a consumer environment ripe for the launch of our new and improved Realtor.com and Move.com websites. This re-launch process has also been a tremendous opportunity to engage more of our partners in strategic conversation and deepen these customer and advertiser relationships.

As other competitors have been forced to retrench in this market in order to survive, we have been focused on the most ambitious product launch in our company’s history. We have spent thousands of hours in development and with consumer focus groups to ensure that we deliver a consumer experience that addresses the needs of all our audiences. The result is the most comprehensive and most valuable online real estate experience that you will find in the market.

I will spend a little bit of time talking about some of the positive metrics we are seeing on the new site, but first I will remind you of the three pillars of our strategy that guided this initiative.

They are: one, providing the best online real estate search experience; two, delivering unique proprietary content to extend our relationship with consumers throughout the news cycle and convert them into recurring users; and three, understanding consumers behavior and intent so we can improve the relevance and effectiveness of our advertising.

In past quarters we have talked about the features of the new site. Today I would like to share some metrics and talk about how exactly we have followed those three pillars. First I will start with how we measure our success, providing the best online real estate experience. The best measure of this success is always going to be our user engagement. Not just the sheer volume of traffic, but the quality of that traffic as measured by how much time they spent on the site and what they do while visiting.

Since the launch of the new site we have seen an increase of 8% in the minutes onsite per visit. We have also experienced a 12% increase in the number of listings that each visitor views per visit. This is translated into a 63% increase in the number of times that someone prints out the listing brochure on a listing detail page. This creates a valuable online/offline connection for Realtor.com where the consumer takes our customer’s listing page with them beyond the computer screen.

On additional metric that is worth noting is how our focus on providing online real estate experience translates into consumer satisfaction and likelihood to recommend. It is an accepted marketing axiom that if you give someone a good experience they will tell one person but if you give them a bad experience they will tell ten. Well, we see a 21% increase in the number of times someone sends information from our new site to a friend, reflecting success in viral recommendations achieved by providing a truly valuable experience that people want to share.

The second pillar relates to providing unique proprietary content and how it is helping us create and retain loyal users. The best example of this lies in our registration process. Through a combination of the simplified user interface on the new site that makes registrations easy and the enhanced content we offer via e-mails and newsletters that consumers want access to, we have greatly improved our performance.

Since Q1 we have increased the percentage of unique users who register by 35%. In fact, over the past year the number of users saving items has doubled and registrations have increased by 50% and when consumers are given the chance to opt in to receiving more marketing offers and other communication from Move, they are opting in at 10 times the rate as one year ago, a remarkable improvement and a very critical metric.

Lastly, when we talk about understanding consumers’ behavior so we can increase the relevance of our advertising we have taken a very proactive approach to gathering information. Primarily we have focused on understanding who our customers are and where they are in the real estate life cycle.

There are buyers and sellers but there are also pre-buyers, renters, and of course, people who are simply looking to compare home valuations. Understanding where consumers fit into these groups and their needs is the key to providing a rich medium for our advertisers and effectively monetizing the whole Move network.

It is also important to recognize that in many cases consumers may inhabit multiple categories, like the renter who wants to buy in the right market, or the seller, who also wants to buy in a different area. For a real estate agent the most valuable customer, of course, is the one who wants to do a transaction today.

We know that one third of our consumers are looking to buy a home within the next 90 days and 40% are looking to buy within the next months. But when we stretch that time frame out to one year, our demographic jumps to 2/3 of all of our users. Two thirds. That’s a very powerful number when you consider it in connection with our user engagement metrics.

Because we have consistently demonstrated that we are the dominant player in this market and clearly the most trusted advisor for consumers in the home-buying cycle, advertisers know that if they want to keep their fingers on the pulse of consumer behavior in this market, they need to do it with us. So while they all want the consumer who is looking to make an offer next week, they also know that staying in touch with the two thirds of consumers who want to buy a home in the next year is the key to long-term success.

The site we designed gives realtors greater access to motivated consumers. In fact, agents are seeing increases in the amount of e-mail inquiries from consumers per visit and a sharp increase in the number of consumers who transfer from our site to the agent’s or broker’s personal site.

On a personal note, this re-designed launch is particularly rewarding for the team here at Move. One of our top priorities for the past 12+ months has been to transform our consumer experience to reinforce our position, both as the most trusted name in real estate and as the dominant leader in this industry.

Capturing the input of consumers, advertisers, agents, and brokers and meeting their rigorous needs required a deliberate and expert process but the results speak for themselves and although we will continue to evolve the websites with enhanced features and functionality, I believe our entire team deserves credit for delivering an outstanding product.

The launch comes at an important time for Move. Our consumer engagement metrics continue to improve and demonstrate how we are extending our leadership position. In September, for example, we experienced a 17% year-over-year increase in total minutes spent on Realtor.com, even as the overall category experienced a 5% decline, according to comScore media metrics.

In fact, consumers spent more time on Realtor.com than the next seven competitors combined. These numbers show that consumers rely on and trust the Move network and Realtor.com more than any other source for their real estate information.

We are confident that the greatly improved consumer experience will serve to further extend our market dominance. In down markets it is imperative that companies protect their existing customers and selectively spend critical resources when targeting new customers. This is where our deep relationships with our customers and the National Association of Realtors really comes into play.

We already know that consumers are coming back to us repeatedly for their needs and we are able to generate a significant amount of new traffic simply by being the standard for online real estate.

Home sales are down and will continue to be down for some time to come. There is still at least a two-year supply of excess inventory sitting in many markets. But during this time consumers will stay on top of the market, whether it is deciding the right time to buy or sell or just to monitor the value of their largest investment. Our engagement metrics show that through this downturn, the Move network is by far the preferred destination for anyone looking for meaningful information about the market.

The large portals may be able to generate unique visitors through various promotions, but they just don’t have the content or relationship to keep consumers coming back or staying on the site once they are there.

As we saw the market begin to tighten last year, we took the initial steps that have enabled us to weather this storm better than most companies. It began with our re-design that started over a year ago and has continued with the elimination of non-performing businesses and the rationalization of our cost structure.

And while we are cognizant of the market and economic head winds we are facing, we believe that with focus on our consumer and customer needs, as well as our operational structure, we are laying the foundation for future success.

One thing that remains constant is our clear market leadership in all-important metrics and we are committed to extending that leadership position through the end of this year and beyond.

I will now turn to Lew for a discussion of the quarterly financial results.

Lewis R. Belote, III

Our third quarter revenue was $61.2 million compared to $63.4 million in the third quarter of last year. The decline in revenue was primarily due to our new homes business, however, we were pleased with sequential growth in Realtor.com and Top Producer over last quarter in this difficult market.

Through May of 2008 our sales and renewals, net of cancellations, in Realtor.com were flat compared to 2007. However, from June through September we saw an increase in net sales averaging $800,000 per month, or 7%, compared to 2007. Now I’m not prone to hyperbole but this a phenomenal performance in the current market as our Realtor.com’s sales and marketing team continues to show our realtor customers the value of our advertising solutions.

For the quarter Realtor.com revenue declined 2% from 2007 but it increased 1% from last quarter. Top Producer grew 8% compared to last year and 5% from last quarter.

Rentals was up slightly compared to last year and last quarter but our new homes business declined 29% from the same quarter last year and 16% from the second quarter.

The consumer media business was down 9% compared to 2007 and 7% from the second quarter. In the third quarter our sales efforts were hampered by the overall market slowdown for online advertising.

Our operating loss from continuing operations for the quarter was $4.1 million compared to $4.1 million in 2007 and an operating profit of $651,000 last quarter. Without the effect of a $4.0 million restructuring charge due to the implementation of our cost reduction initiatives in the quarter, we would have been break-even from continuing operations this quarter.

Our loss from continuing operations for the quarter was $2.0 million compared to $1.0 million in 2007. The primary reason for the decline over 2007, other than the unusual charges I just mentioned, were the decline in interest yield on our investments in 2008.

Our net loss for the quarter was $22.6 million compared to $3.3 million for the same quarter last year. The net loss in the current quarter includes a $19.3 million loss from discontinued operations, which includes a $15.9 million impairment charge of long-lived assets as well as a write-down in the value of operating assets of $2.1 million in Welcome Wagon.

As Mike mentioned, we are progressing through the sales process of Welcome Wagon but we cannot determine the actual timing of a sale or the proceeds we will receive so we are being conservative, given current market conditions.

EBITDA for the third quarter was $5.7 million, or 9% of revenue, compared to $7.3 million, or 11% of revenue, last year and $5.7 million, or 9% of revenue, in the comparable quarter last year.

Even in this difficult market, especially as we introduce significant change to the company, we continue to be encouraged by our ability to generate positive cash flow from operations.

Let me update you on the results of our cost reduction measures. Last quarter we announced our intention to take $20.0 million in annual costs out of the business by year-end and we remain on track for that goal. In the third quarter we implemented $8.0 million of annualized cost reductions and of the date of this call have implemented $11.0 million.

For example, we began the process of rationalizing corporate expense such as surplus office space. We reduced our annual office expense by roughly $1.8 million and also reduced annual corporate travel by more than $1.5 million. This supports our comments last quarter that a large portion of our expense reductions will come from increased efficiencies throughout the business. We still expect to reduce our cost structure by $20.0 million by the end of 2008.

The reductions we achieved are partially masked in Q3 because of increased legal costs and SEM spend over the second quarter of 2008. We believe that our legal cost will begin to decline in the second half of 2009. In the quarter our SEM spend increased by $1.1 million over last quarter. We would expect the SEM improvement and the site re-design to allow us to reduce our SEM spend in 2009.

Our gross margin for the quarter was 81%, which is roughly consistent with last quarter but down from 83% in the same quarter last year. The increased costs were due to increased fulfillment costs in Realtor.com and lead generation costs in Moving.com.

Product development expenses were $6.8 million, or $1.8 million lower than the third quarter of last year and flat with last quarter.

Sales and marketing expense increased approximately $790,000, or 3%, from the third quarter of last year and $862,000 from the second quarter. When you back out the $1.1 million increase in SEM this quarter you can see that we actually reduced sales and marketing expenses by over $300,000 in the quarter.

As part of our overall cost reduction initiative, we are focused on reducing our SEM and on managing our remaining sales and marketing costs.

G&A expense decreased by $1.9 million, or 10%, compared to last year and $900,000, or almost 5%, from the second quarter. As I mentioned earlier, we incurred increased legal costs this quarter of $1.0 million compared to last quarter which offset the progress of our cost reductions. Our litigation expense continues to be unusually high but we expect this to decline by the second half of 2009.

In looking at our segments, our real estate services revenue declined 3% from the third quarter of last year but was relatively flat with last quarter. The operating margin in the quarter was 25% compared to 27% for the third quarter of 2007. The decline in operating income was primarily due to the increased online marketing expense I mentioned earlier.

In our consumer media segment revenue was down 9% from the third quarter of last year, however, the operating margin improved to 10% from 2% last year.

Our unallocated costs increased $4.0 million from the previous quarter but net of the re-structuring charge and increased legal costs, our costs decreased almost $1.0 million in the quarter.

Turning to the balance sheet, cash and short-term investments at September 30, 2008, were $114.3 million. Since last quarter we made a decision to draw down fully on the $64.7 million line of credit we obtained in May. All of our cash is invested directly in T-Bills with the exception of approximately $10.0 million that we hold in our normal operating accounts.

With that, I’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Morrison – ThinkEquity.

William Morrison – ThinkEquity

Lew, I was hoping you could walk us through the cost reductions again and also maybe elaborate on how we should think about modeling the reductions. For instance, I think you said you cut $8.0 million of annualized costs out of your cost structure in the quarter but when I look at your cash operating expenses they were, at least in my model, up quarter-over-quarter. So could you walk us through where the cost reductions were and what the offsetting cost increases were?

And how should we think about the cost cutting for next year? Are you saying you are going to cut $20.0 million of annualized cost out of the cost structure, excluding all other cost increases? Or should we assume that your cash operating costs are going to be down by $20.0 million in 2009 from 2008?

Lewis R. Belote, III

Just as a reminder, we said we would get $20.0 million in expense out of the business going into the first quarter of next year. So the $8.0 million in costs this quarter that we said we have taken out didn’t all occur beginning July 1. So you don’t see a net reduction of $8.0 million in the quarter, but of the $20.0 million that we have targeted, we have now implemented $8.0 million. So you will see at least that amount beginning next quarter. But as I said, we are up to about $11.0 million with some of the changes we made on the operating lease at the corporate headquarters and other things.

We will get the full $20.0 million out and as we said before, it’s primarily in sales and marketing and G&A expense.

Now, to your point about is it a number net of cost increase? It is going to be an achievement, excluding legal costs. And you and I had a separate conversation, but the legal costs are something that we don’t have absolute control over right now. We’re having to defend some of these patent lawsuits and we feel pretty strongly that we have to defend those positions. But absent any change in legal costs we will get a total of $20.0 million out going into the first quarter of next year.

William Morrison – ThinkEquity

If we assume your revenue is flat next year, if we just make that assumption and we exclude legal costs and you come in somewhere around $25.0 million to $30.0 million of EBITDA this year, we should expect an incremental $20.0 million of EBITDA next year, excluding legal costs? Assuming your revenue is flat.

Lewis R. Belote, III

If you take the second quarter cost structure as our base line, yes, you should see a $20.0 million improvement.

Operator

Your next question comes from Mark May – Needham & Co.

Mark May – Needham & Co.

Sort of along the same lines, although I was under the assumption you might just have some expense inflation next year given health care and all the other things. But the question is, given that some of those expense reductions weren’t fully realized in Q3, how much should cash expenses decline in Q4? What should we be modeling in the near future?

Lewis R. Belote, III

As you know, we’re not giving any absolute guidance on the future, but it is not unrealistic to expect that we said we’re at $8.0 million at the end of the quarter so that means we have $12.0 million more to go. I would skew it a little more towards the end of the quarter as opposed to assuming it will happen evenly through the quarter. That’s about all I can say.

Mark May – Needham & Co.

A few million dollars would be low-single-digit kind of number sequentially. Would that be unreasonable?

Lewis R. Belote, III

No, it wouldn’t be unreasonable.

Mark May – Needham & Co.

How has business trended in recent weeks or months? I would love to get a sense of during the quarter how business paced monthly. And then just in October, how has business progressed?

W. Michael Long

Actually, our realtor sales are strong in October. And I would argue surprisingly so given what was going on in the macroeconomic environment. But we achieved some record sales during the month of October. Of course those are sales in bookings and not revenues because revenues will be booked over a 12-month period. But sales were quite strong in October.

The only fall-offs of revenues significantly that we experienced in October was in the new homes category whereas homebuilders did pull their horns in pretty tightly during October. But we didn’t feel that in Top Producer, realtor, or rentals.

Mark May – Needham & Co.

Could you remind us, on the new site design, it’s pretty clear to me how this could positively impact use engagement on the site, but what are some of the direct monetization changes that the site is enabling? Besides the second derivative impact of higher engagement, are there any kind of first derivative impacts on monetization?

Lorna M. Borenstein

There are additional advertising placements that you will see, both in terms of graphical advertising and text ads that we have added on this re-design. And there are a couple of other things that we’ve done as well that enhance what you get, for example, in a showcase package.

So we believe, and I think that the sales that we are seeing now, the strong sales, in part are because the sales force is pretty pumped about the new product that they have to sell and there has been very strong response in the market by realtors who are pleased to see additional placements.

For example, in a showcase listing you now see not only the particular home on a listing detail page, that the consumer was interested in, but you also see other listings by that same realtor. So again, there’s sort of the difference of new, absolute new dollars in, those are the placements I talked about earlier. And then there’s greater value, in order to be able to list sales, things like this placement and others, beyond the graphical media and the text ads.

Lewis R. Belote, III

As you know, traffic on real estate sites in general declines in the fourth quarter so we won’t necessarily get a big uplift on the media business because of those additional ad placements until some time next year.

Mark May – Needham & Co.

On the Welcome Wagon, to the extent that you either don’t receive any firm offers or that the process stretches out for longer than you would prefer, I notice the losses in the quarter were similar to losses in recent quarters, would you tolerate continued operating losses at Welcome Wagon during 2009 and/or would you be willing to shutter, close the business down if the process doesn’t proceed as you had wanted it to?

W. Michael Long

Our intention is to sell the business and we are proceeding along that plan. However, until the business is sold, we will operate the business as efficiently as we can and if that means further adjustments in costs, we will take those actions as we would in the normal course of business. But it is our intention to sell the business.

Operator

Your next question comes from Jason Helfstein – Oppenheimer & Co.

Jason Helfstein – Oppenheimer & Co.

Can you give us the figures again, the year-to-date legal costs and the year-to-date SEM spending. And the SEM, is that included in the $20.0 million cost reduction or not?

Is there an opportunity to drive the rentals business given that basically people are being forced, in some cases, out of their primary properties, and in more cases out of their secondary properties, is there an opportunity to take advantage of that and drive the rental business more?

Lorna, you are currently without a contract and presumably with options that are well under water, as well as a lot of senior executives at the company. Should we expect the company to reprice options for senior, or all, executives?

Lewis R. Belote, III

Taking the first one on legal costs. We actually gave some consideration to giving a little more detail on some components of our G&A expenses but have concluded it just doesn’t make sense to give some pieces and not other. But we will update going forward as to how much that costs. Because we don’t officially control it, it will change from quarter to quarter.

On the cost cuts going forward, yes, the $20.0 million would include whatever savings we believe we will get out of SEM and as we get better performance from the new site we believe that we will get reductions in our SEM spend in the next year.

The rentals business, yes, we think there is opportunity there. Lorna.

Lorna M. Borenstein

We are taking a very hard look at exactly how we take advantage of rentals and have a bunch of different ideas that we are working on and testing to see how we can best do it in this market and how we can do it in a way that will show sustainable results as opposed to just any one-time spikes.

W. Michael Long

And answering your third question is that the compensation committee of our Board constantly monitors to make sure the appropriate incentives are in place for the executive team to perform according to the plans that we have internally. And so we serve at the pleasure of the Board and the compensation committee is providing adequate incentives such that the shareholder interests are well served.

Jason Helfstein – Oppenheimer & Co.

Can you go back, historically, in the history of this current Board, has there been any re-pricing, just going back to the last recession?

W. Michael Long

We don’t have a history of re-pricing options.

Lewis R. Belote, III

There would need to be shareholder approval in this environment to do that. I am speaking personal opinions, not really on behalf of the comp committee, I just don’t think they would entertain that. They might grant additional options in the current market but, no, I don’t think we would entertain re-pricing options.

Operator

There are no further questions at this time.

W. Michael Long

We would like to thank our shareholders and the analysts for participating with us on this call and we look forward to our next quarterly conference call where we will discuss our fourth quarter results.

Operator

This concludes today’s conference call.

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