Executives
Michael R. Stanfield – Chairman of the Board, Chief Executive Officer
Analysts
Kevane Wong - JMP Securities
Intersections Inc. (INTX) 3Q08 Earnings Call November 10, 2008 5:00 PM ET
Operator
Good afternoon ladies and gentlemen and welcome to the Intersections Inc. third quarter 2008 earnings conference call. (Operator Instructions)
During this call, Intersections will make forward-looking statements including without limitations, statements relating to the company’s future revenues and earnings, plans, strategies, projections, expectations, and intentions. These projections and forward-looking statements are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements are inherently subject to risks and uncertainties many of which cannot be predicted with accuracy and the actual results could differ materially from the results projected in these forward-looking statements.
For some of the factors that could cause actual results to differ materially, you should review the SEC filings at our corporate website at www.intersections.com. We do not intend to or undertake any obligation to update any forward-looking statements or projections we may make. For financial highlights and non-GAAP measures on performance discussed during this call are also available in the press release Intersections distributed this afternoon which is available currently on our website at www.intersections.com.
I will now introduce Michael Stanfield, Chairman and Chief Executive Officer of Intersections Inc. Mr. Stanfield, you may begin.
Michael R. Stanfield
Thank you.
Good afternoon. First of all, I would like to mention that we provided our press release to PR Newswire at 2 o’clock and it’s still not out. I can’t do anything about it other than switch providers again. With that, we will proceed. The 10-Q is filed and you may have that. If you don’t, hopefully you will have the earnings release very soon. I’m not going to sit here and wait on it and neither are you. We’ll get started.
We all know that the economic realities of the world have changed dramatically since our last call. As it’s true with most businesses, the impact of the economic meltdown on our business is not yet fully understandable. It is an unprecedented and unpredictable time.
When will the weakening economy and the credit and financial market crisis impact Intersections’ results and opportunities? That will be the primary topic of this call.
We will not spend much time reviewing the third quarter other than saying we’re pleased with third quarter results which were largely consistent with our expectations on the last call.
To provide you some perspective on how Intersections will operate and grow in the current economic environment, I am going to discuss the economy’s impact on our near-term results in our different businesses, what we have done thus far and what we will do to position our company to manage through the recession so we will be well positioned when it ends. Then we will open up the call to questions.
Let’s first address our core client-based endorsed business. We expect the weakening economy to have three main impacts here. First, we expect new card issuance at our bank partners to slow which in turn translates into the softening of subscription sales for us. We’re seeing this and our clients are telling us to expect it to happen. Second, we expect delinquencies and card cancels to increase. Third, our relationships with some banks may change to more direct programs as they look to invest less in marketing. This can bring both opportunities and challenges to us, also consolidation in the banking industry creates opportunities and uncertainties and further concentration in the business.
Regarding the first item, our subscriber sales in the third quarter were down from a high in the second quarter. This was partially driven by Discover, substantially driven by Discover. Looking at total subscribers, if we were to remove Discover from the account, subscribers increased in the third quarter over the second quarter. In our latest subscriber forecast created in consultation with our bank partners, we forecast some softening in subscription sales in the fourth quarter and early part of 2009 due to the weakening economy.
As we mentioned on prior calls, we have been anticipating an increase in attrition and declines for non-payment as the economy weakened, consumer credit tightened and unemployment increased. So far, we have seen only a slight increase in declines but no meaningful impact on attrition in our subscription business. However, we must expect that change in continued forecasts and expect a negative impact on this front. The increase in canceled subscribers after the first 90 days of subscription in the third quarter results relates to Discover.
There are more noticeable increases in attrition and delinquencies in the small number for mortgage subscribers we acquired as part of the Charter Marketing acquisition several years ago. Again, this is a small population and it has been discussed on prior calls.
On the bank consolidation front, the good news is that so far, our key clients are well-positioned going forward with “well” being a relative term. What the acquisition of Washington Mutual by Chase will mean to us is still unclear however Washington Mutual is a small client at this time.
Our bank business has shifted more towards the direct model in the last couple of years where we pay for subscription acquisition either marketing and/or pre-paid commission bounty. It is likely that in the current volatile financial industry, some of our bank clients may look to us to increase our investments in subscriber acquisitions. Within capital restraints, these are opportunities we welcome as they will enable us to invest in and grow our business and may provide an excess in new subscriber growth.
The challenges depend on the size and amount of investments needed in our ability to fund such programs either from operating cash flows or possibly raising additional financing, if possible.
We also have several new prospects launching soon that we expect will be less affected by the unfolding economic issues some of which may produce meaningful volumes. Our new client acquisition efforts are still fruitful moving forward and have some promising prospects.
For 2009, we currently expect to grow our client-based business, top-line and bottom-line even with sales softening in the near-term with some planned increase in attrition and declines in the absence of discovered revenue. With the ever-changing landscape with our bank clients and their card bases, they make it too early and too murky to provide any more specific guidance.
Let’s move to consumer-direct. While we’re seeing a softening in new enrollments in our bank-based business, we are experiencing modestly increasing enrollments in our consumer-direct business. Not only did consumer-direct sales increase in September and October, but we have been able to manage and lower our acquisition costs per order for the web-based marketing programs which are predominant marketing channels at this moment. Attrition rates remain extremely attractive in our consumer-direct business aided by a higher percentage of enrollments directed at our most advanced best consumer-value identity theft products.
Additionally, delinquencies as with the client-based are only show very slight increases in the consumer-direct area. We are very encouraged by these results. We have a very full fourth quarter testing new marketing channels to build on this momentum.
With the success outlined above coupled with the ongoing changes in the financial and banking sector, it is important for us to develop consumer-direct faster and more aggressively as an alternative source of long-term growth. We plan to increase our marketing spend more than we would have thought just a few months ago. We will push the consumer-direct infrastructure changes discussed last call more aggressively to leverage the opportunities unfolding in the consumer-direct space.
In 2009, we expect a growing, recurring revenue stream from consumer-direct efforts, a substantial increase in marketing and infrastructure spend which will drag profits near-term but will drive long-term growth.
Next, let’s talk about business services. This group of businesses has been and will continue to be especially affected by the ongoing economic distress. In the Background Screening segment, business hiring and accordingly unemployment screening has slowed. Global expansion and infrastructure improvements that we have been putting in place the last couple of years will hopefully help mitigate the economic downturn by reducing our operating costs and enabling us to take advantage of hiring growth in areas less affected.
In the other segment, businesses interested in Net Enforcer’s corporate identity theft solutions must look at all of their spending needs more closely and therefore may delay the purchase decision from Net Enforcers. We continue to like the prospects and margins in this business but it is clearly being hurt by consumer products companies’ own sales problems.
Finally, Captira, also in the other segment, will find it more difficult like any business trying to get off the ground in this economic climate. Captira’s data management solutions are new and revolutionary for the bail bond industry. We are seeing good response from early adopters but slower growth than we would like. The economic downturn has extended the revenue ramp for Captira.
We remain committed to growing all three of these businesses. Over the past year, we worked hard to reformat and refocus the business services organization and this effort, we feel, will help enable these businesses to survive through this difficult economic time and strive post-recession. We expect the business services group to grow the top-line in 2009 and to move to become a profitable contributor to EBITDA in 2009.
In summary, our view of the overriding question, what is the impact slowdown on Intersections is one; we believe the fundamentals of the client-based business are still as strong. We believe we are well-positioned with clients and in adding new clients. Our consumer-direct efforts are gaining strength and improving themselves. Our business services group is moving in the right direction but is obviously hampered by the recession.
The weakening economy and the financial industry’s turmoil will certainly present tough challenges in the fourth quarter and 2009. Intersections is well positioned to deal with such times and expects to continue to produce positive results and remain well positioned for the post-recession period. We plan to enter the post-recession period whenever it commences with a sound balance sheet, continued growth and a stronger position.
We have already started taking prudent actions which we will build upon in 2009 such as curtailing spending of overhead items like hiring, travel, offsite services, and other more discretionary items with tightly managing headcount. The only meaningful G&A growth we expect will be infrastructure improvements previously discussed to aid the consumer-direct business. These expenditures are crucial elements of our consumer-direct strategy.
We are delaying capital improvements in pushing vendors and suppliers to lower costs. We are taking a hard look at R&D spending and product development efforts with the goal to optimize the new products we have already introduced to the market recently and improving our consumer-direct infrastructure to enable greater subscriber growth.
Finally, we are reevaluating and streamlining their organization and intensifying efforts to engineer costs out of our systems and processes. While cost management is always part of our management process, special times call for special emphasis. We are currently reevaluating our long-term strategic plans in light of the economic downturn. Our overall objective for the remainder of 2008 and for 2009 is to grow cautiously and optimistically so we will enter 2010 with a stronger consumer-direct business enabled by better systems, a well-positioned business services group contributing to the bottom-line and the core subscriber-based client business continuing to grow through new clients and new products and by maximizing opportunities with existing clients.
Finally, let me update you on targets for 2008. We maintain our 2008 revenue guidance of $365 million or better. We expect 2008 EBITDA for the year-based compensation guidance to be about $45 million. We expect EPS to be about $0.68. Intangibles amortization, we still expect to be approximately $10.9 million. Stock expense, we still expect to be about $4.3 million. Customer acquisition spend will be considerably greater than the $50 million previously discussed, probably closer to $65 million due to the commencement in the third quarter of a new bounty program with an existing client and because the consumer-direct spend is expected to be higher than previously planned to take advantage of opportunities and developments we see. We still expect capital expenditures to be around $10 million.
Primary factors impacting the lower results in EBITDA are lower sales volumes than previously expected in the endorsed arena, higher spend on direct marketing programs replacing wholesale programs and higher spend on consumer-direct. Of those three elements, we consider the last two positive and the first one somewhat negative.
On the last call before the dramatic meltdown of the credit and financial markets, we provided preliminary views for revenue and EBITDA growth in 2009. Because of the ongoing economic and market uncertainty, we no longer maintain those initial preliminary 2009 targets. We cannot determine with any reasonable degree of certainty the full impact on our company in the recession and the credit market’s distress. Nevertheless, we do have a positive outlook for 2009. We expect revenue growth and we expect EBITDA growth in 2009 but it is difficult and frankly, imprudent, for us to provide more specific targets at this time.
Thank you for your continued support and I again apologize that we find it difficult to get our press release out on time and I will open it to questions.
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Kevane Wong with JMP Securities. You may proceed.
Kevane Wong - JMP Securities
Just a few things. When you are looking at the guidance, it is actually staying where it was in September and October when it was really melting down. How much when you are talking about your caution here, how much is it concern about what might be versus what you are actually seeing. Are things actually getting better and you’re just being cautious about it? Also, I am sort of curious about how much is additional spending that you are putting in, sure there are a lot of pieces to move around, but I just wanted to get color on those factors for a cautionary look.
Michael R. Stanfield
On the cautionary side, I would say a couple of things. One, there is without doubt, a reduction in the new enrollments versus our expectation from ongoing clients. That is partially reflective of the reduction in new credit card issuance that is ongoing in the market. Often, our sales occur at the time of new credit card sales or shortly there after. That is definitely there and it is hurting in a small way.
Secondly, we have not yet seen any significant reduction in attrition, but as unemployment goes up and as credit tightens, we just have to anticipate that it will occur, that we have not yet seen it. With respect to decline rates which are sort of a subset to the attrition issue and a revenue issue, we have not seen a significant falloff yet. I just saw the numbers for October today and our decline rates are holding better than we expected. Both of those are good.
The other thing is we are spending significantly more on customer acquisition than we had planned at the beginning of the year. The new bounty program that we commenced with one of our clients is significant and the consumer-direct spending is higher than we expected. The consumer-direct spending is for the most part, written off as spend because it is often not trackable for purchases, what is that, for the accounting rules to be able to directly contribute the spend to a particular sale. So we write that off.
All in all, considering the world we’re in, we’re not in an unhappy mode. We’re just cautious.
Kevane Wong - JMP Securities
As far as what you are actually seeing, it is only pieces of that, and the other stuff you are trying to be cautious on. It wouldn’t surprise you, right?
Michael R. Stanfield
Right.
Kevane Wong - JMP Securities
I am also curious on cash flow is still positive, have you given any thought on buybacks considering where the stock is? I know those other two you want to invest a share of the business but just wanted to get your opinion on that as well.
Michael R. Stanfield
There are two things that would drive us not to spend money on stock and one thing to drive us to want to. I think the two outweigh the one. The one is we find the stock price pretty cheap despite the fact that the stock’s held up pretty well versus the rest of the world for the last 12 months. But we find it cheap.
However, we have a lot of opportunity to spend money and acquire customers both in the direct and in the bounty world with our endorsed clients. We would not want to be in a position that we had to raise money in this environment. So we think the safer route is to not buy stock because we want to conserve cash for opportunity.
Kevane Wong - JMP Securities
One more while I am thinking of it. Before with the new products, you talked about having better attention to the higher-end products which seem to be selling well. Has anything changed on that front when you are looking at any of the changes that you are having in new enrollments or anything of that sort? Is there a difference between high-end products versus low-end products that you are seeing or is it really more across the board caution?
Michael R. Stanfield
We have found over the last year, as we intensify the capabilities of our IDENTITY GUARD Total Protection product and about 10 days ago, we came out with the newest version of it which is called Total Protection with IDVault. When we stick a bigger and better product up, customers go to it. That’s what’s happening there. We have found that the higher-priced products or I should say the more robust products have better retention rates than the less robust and the more credit-oriented products. We really feel that the more robust the product, the better it is going to sell and the better it’s going to stay.
Kevane Wong - JMP Securities
I think you mentioned that at some points you are seeing issues with new enrollments partly due to lower card issuance, etc., is that in any way reflecting a difference in customer base, in other words, the higher-end customers that are going for these higher-end products? Is there a less issue that you are actually seeing new enrollments for some of the lower-end products? I am sort of curious if you are seeing any differentiation by product.
Michael R. Stanfield
No, it’s just that the endorsed customers, as they slow their own customer acquisition efforts, it slows our efforts with them because so much of our business is tied to their new customer acquisition.
Operator
It appears there are no additional questions.
Michael R. Stanfield
Okay, great. Thank you.
Thank you very much, everyone. If you have any questions, give us a call.
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