Alloy, Inc. Q1 2006 Earnings Conference Call Transcript (ALOY)

Jun. 6.06 | About: Alloy Inc. (ALOY)

Alloy, Inc., (ALOY)

Q1 2006 Earnings Conference Call

June 6, 2006, 5:00 p.m. EST

Executives:

Matthew C. Diamond, Chairman and Chief Executive Officer

James K. Johnson, Chief Operating Officer

Gary Yusko, Chief Financial Officer

Analysts:

Bryan, Analyst

Michael McCormack, Bear Stearns

Operator

Good afternoon. My name is Luanna and I will be your conference operator today. At this time, I would like to welcome everyone to the Alloy First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time simply press “*” and “1” on your telephone keypad. Thank you. Ms. Smith, you may begin your conference.

Jodie Smith, Investor Relations

Good afternoon. Thank you for taking the time to join us for our conference call on Alloy’s First Quarter Fiscal 2006 Earnings. Participating in today’s discussion are Matt Diamond, Chief Executive Officer; Jim Johnson, Chief Operating Officer; and Gary Yusko, Chief Financial Officer. Alloy reported its first quarter fiscal 2006 earnings after the close of the market today. If you have not previously received a copy of the press release, it is available on Alloy’s website at alloymarketing.com. Gary will begin by providing a discussion of our financial results and position followed by Matt who will provide a discussion of our operational highlights and an update on recent events. We will then open the session up for questions and answers.

Our press release and this presentation reference several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow, and excluding stock option expense in 2006. We have included these non-GAAP measures because we believe that they are important in evaluating the company’s operating performance. Because they are not calculated in accordance with GAAP, they should not be considered an isolation of or as a substitute for net income as an indicator of operating performance or net cash flow provided by operating activities as a measure of liquidity.

At the end of our press release, we have provided supplemental disclosures to reconciled and non-GAAP financial measures to their GAAP counterparts in accordance with the SEC’s Regulation G. Certain remarks that we may make during this call about future expectations, plans, and prospects for Alloy constitute forward-looking statements for purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those that are discussed in our annual report on Form 10-K for the fiscal year ended January 31, 2006, and in our other periodic SEC filings which are on file with the SEC. Please refer to our filings for a full description of those factors. I will now turn the program over to Gary Yusko.

Gary Yusko, Chief Financial Officer

Thank you Jodie. Good afternoon and thank you for joining Alloy’s First Quarter Fiscal 2006 Conference Call. I will begin by reviewing our results for the first quarter.

In this quarter, the company adopted the provisions of Statements Financial Accounting Standards of 123R share-based payment using the modified perspective application method. Accordingly, prior trade results have not been restated. In addition, as a result of completing the spinoff of dELiA*s in December 2005, results of the company’s former merchandising business now presented as discontinued operations.

Revenue for the first quarter of fiscal 2006 increased $1.6 million or 4% to $44.8 million from $43.2 million in the fist quarter of fiscal 2005, driven by 44% increase in media segment revenue. Adjusted EBITDA, which we defined as operating loss plus depreciation in amortization, non-cash stock-based compensation, and special charges increased approximately $200,000 or 13% to $1.5 million from $1.3 million in the first quarter of fiscal 2005. While adjusted EBITDA in both our media and placement segments grew handsomely, our promotion segment EBITDA fell by nearly $1.1 million due to a loss of a mall marketing sponsorship program and lower sales in our spring break promotions.

Our growth in EBITDA was also adversely affected due to approximately $200,000 of expenses attributable to the __ book that was pulled from the shelf in the quarter. Operating loss in the quarter decreased approximately $240,000 or 36% to $432,000 from $676,000 in the first quarter of fiscal 2005. In the quarter, our non-cash stock-based compensation expense increased $691,000 from last year’s first quarter $436,000. The increase was attributable to non-cash stock option expense and $255,000 of the increase was attributable to expenses from restricted stock grants.

As I mentioned earlier, we used the modified perspective allocation method when adopting FAS 123R, which meant that we did not retake prior period results. Accordingly, if the stock option expense was excluded from this quarter’s results, our operating loss would have been eliminated. Depreciation in amortization expense decreased over $700,000 in this year’s quarter compared with last year’s first quarter. We expect depreciation and amortization will be higher in the remaining quarters of fiscal 2006 as a result of amortization attributable to our March acquisition of Sconex.

Special charges in the quarter were attributable to fees incurred to re-audit fiscal 2003 as a result of spinoff of dELiA*s.

Our free cash flow, which we defined as net income or loss from continuing operations plus depreciation and amortization, amortization of debt discount, non-cash stock compensation, and special charges less capital expenditure for the first quarter of fiscal 2006 increased approximately $150,000 or 58% to $399,000 from $252,000 in the first quarter of fiscal 2005. We believe free cash flow is the most important measure of any company’s operating performance and it represents the amount of cash available for debt service, acquisition and stock repurchases. Free cash flow per share in the first quarter of fiscal 2006 was $0.03 compared with $0.02 per share in the comparable period of fiscal 2005.

Finally, net loss attributable to common stockholders on a reported basis in the first quarter of fiscal 2006 decreased approximately $15.1 million or 93% to $1.2 million or $0.10 per share from $16.3 million or $1.52 per share in the same period of fiscal 2005.

The first quarter of 2005 included a substantial loss in discontinued operations and dividends on redeemable preferred stock.

Turning to our balance sheet. Our balance sheet is strong. Cash and marketable securities at April 30, 2006 was $32.4 million. Our working capital on April 30, 2006 was $45.7 million and our 5.375% senior convertible debt outstanding was $59.3 million. As we informed you in our last conference call, our convertible debentures are convertible into both Alloy and dELiA*s common stock. We are responsible for paying interest on the full face amount of debentures and if not converted to common stock are responsible entirely for the repayment of the debentures. We are investigating all options available to us to cause the conversion of the debentures, which if successful would eliminate our debt and the related $3.8 million of annual interest expense allowing us to use our significant cash position for strategic acquisition, stock repurchases, and/or the payment of dividends.

With that, let me turn the discussion over to Matt.

Matthew Diamond, Chairman and Chief Executive Officer

Thanks Gary. Our improved financial performance in the first quarter was a direct result of a reinvigorated and more selective sales effort, improved product offering, the continued success of a number of cost reduction efforts, and the successful implementation of our strategy to focus our investment in revenue and possible on our company owned media asset. Although there is still room for improvement, we are pleased with our first quarter results and we believe that the company is in good position to turn in an improved year-over-year adjusted EBITDA and cash flow performance.

In our first quarter, we experienced significant revenue growth in our profitable media business segment as out-of-home, interactive, print, and educational businesses continued to deliver positive results for our advertisers. As I stated in our last conference call, we believe that continuing to expand our media business segment will be critical in improving profitability and increasing shareholder value and our March acquisition of Sconex, a high school focussed social networking site, will further fuel the media segment growth.

Our promotion segment experienced a decrease in revenue and profitability during the quarter as a result of a loss of revenue in our mall marketing businesses and reduced first quarter spending, a double promotion focus to advertisers. While we were disappointed in the first quarter results, we do believe that these issues are short term correctable issues and most importantly we believe that this business is positioned well for the year and beyond. We believe our media focussed growth strategy combined with the strategic importance of our promotion and placement business is proving successful and positioning the company well for the future.

In the quarter, we continue to improve our product and service offering allowing us to obtain long-term renewals for existing clients including McDonald, Axe, and Dermex as well as attracting new clients including Excedrin, USA Networks, and Wal-Mart. We continue to improve awareness of the Alloy Media Marketing brand and of our capabilities with major advertisers and agencies.

Going forward, we will focus on increasing shareholder value by, one, improving sales for productive and increasing our total revenue year-over-year, particularly in our media business segment. Based on our sales management system, we continue to see a year-over-year increase in demand based on contracted and projected sales for the year. Two, we will identify opportunities to lower our cost structure. Although much of this work has been done, we believe there still remains some opportunity and we look forward to improving margins and lowering corporate cost as much as possible. Three, we will invest in and/or acquire high-margin company proprietary media assets. We believe that expanding our media business segment is the best way to build long-term shareholder value.

Finally, Alloy media marketing has established strong operating momentum over the last 12 months. We have over $30 million of cash on hand and our free cash flow for the last 12 months was nearly $13.5 million or $1.14 per share. Our objective is to continue to increase this number.

In addition, as Gary mentioned, we believe that the conversion of our convertible debenture into equity will create significant shareholder value and we are working towards that end.

With that, operator, I would like to open the call to questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone, in order to ask a question please press “*” then “1” on your telephone keypad. Please limit yourself to one question at a time. Again, to ask a question, please press “*” and “1”. Your first question comes from Doug.

Bryan, Analyst

Hi, this is actually Bryan, I work with Doug. I was wondering if you could just provide a little more detail on what’s driving the growth in the out-of-home business, whether it’s coming from utilization or pricing. Thank you.

Matthew Diamond, Chairman and Chief Executive Officer

Sure, this is Matt. It’s generally coming from utilization. What’s happened over the last few years is we’ve had a combination of efforts all towards increasing utilization, a more focussed sales force, one dedicated two out-of-home has contributed to the improvement renewals. We’ve had an effort to get renewals up so that every year you’re starting with some of your products already sold, so that’s certainly helped us this past year. Awareness, getting out there, allowing both the out-of-home community as well as the advertising community in general to realize that we have this very unusual network that really is something that no other company has. Most media businesses have broad-based out-of-home but for us to be so targeted in the youth space is unusual and we’ve done a lot with the Alloy Media Marketing brand, and all of those things have contributed to the improvement in that business.

Operator

Your next question comes from Michael McCormack with Bear Stearns.

Michael McCormack, Bear Stearns

Hi Matt, I have a couple of questions. If we could just go over the promotion business. I know you’ve been de-emphasizing promotions but focussing on the more profitable accounts. This looks like you lost a big sponsor. Can we get a little bit more detail on what occurred and why you feel comfortable that that business is going to turn?

Matthew Diamond, Chairman and Chief Executive Officer

Let me clarify a little bit. I wouldn’t position it as de-emphasizing necessarily the promotions business. I think we’re careful to say, and in fact I said it in the script, it is a key part of our strategy and I think it will continue to be a big part of our strategy as we sell cross platform media and events and other things. You know, advertisers right now…one of the hottest segments is broadly classified as non-traditional marketing and often times they talk about promotions. What’s unique about us is we can do a promotion but that promotion can be an event on a college campus or in a ball that can have media surrounding it, which of course are high-margin assets. So, we will continue to position our promotions business as a strategic component of a broader hopefully sell which will include media assets. I think that first we need to be careful that we don’t extrapolate the timing of one quarter to the business, which as you’ve seen over the last six quarters or so and I think beyond as the ship progresses, you’ll see that you have the timing of anyone thing that takes place is shifting from a month to month and you could see we’ll be very smooth over a year or even over two years, we’ll look funny quarter to quarter. Having said that, what we want to focus on and give a little more color for you for this quarter are really two events that I referenced in my script. One was spring break. There were some shifts this year in spring break and we expect next year to be even stronger, the largest spring break advertising company, and we expect that to continue as I said. However, there was a fragmentation of some of the events that went on where a lot of smaller I would say extreme non-traditional marketing efforts went on and those are sort of on the fringe and we didn’t necessarily get a lot of that this year. We’ve done somethings to get our fair share next year, but that impacted our business. We also did some efforts earlier in the year to expand to other locations including Cancun, and Hurricaine Wilma wiped out really any spring break opportunities there. So, we lost any revenue upside there despite the fact that fixed costs were already in place. So, there are some isolated I would say year-over-year comparisons to spring break that are not favorable for us. The other thing that happened as far as a specific advertiser is a year ago, as you anniversary the promotions business, we did some large programs in our mall-based operations for XM that were I would annual programs and if you look at it year-over-year, particularly quarter over quarter I should say from a year ago, that’s going to be down, but I think it’s important to emphasize if you look at the whole year, we feel confident in promotions and actually it looks solid for the year.

Operator

Again, to ask an audio question, please press “*” and “1” and please remember to please limit yourself to one question at a time. You have a followup question from the line of Michael McCormack with Bear Stearns.

Michael McCormack, Bear Stearns

Hi guys, I’m not sure what happened there, but there was no Sconex in the first quarter?

Matthew Diamond, Chairman and Chief Executive Officer

It was very small. The transaction took place so late in the quarter, it’s a pretty small impact for the quarter.

Michael McCormack, Bear Stearns

Give us a rough idea of revenue and expenses that might be incurred in the second quarter and could you quantify a little bit on the second quarter guidance, you mean topline won’t be as good or EBITDA performance?

Matthew Diamond, Chairman and Chief Executive Officer

Michael repeat your first question, I don’t think I understood it.

Michael McCormack, Bear Stearns

You’ll have a full quarter in the second quarter of Sconex, and since you didn’t have that business the prior year, could you give us a rough idea of sales and expenses related to the Sconex acquisition in the quarter or for the year, however you want to do that so we can have some idea on how to measure that. The other is could you clarify second quarter guidance, is it the topline guidance won’t do as well as last year or is it EBITDA performance?

Matthew Diamond, Chairman and Chief Executive Officer

Okay. To your first question of Sconex, we did the transaction and we still feel very comfortable with this. We said it would be slightly EBITDA positive for the year and we were not breaking that down by quarter. However, I think given the nature of the business being targeted on use, obviously it’s going to follow similar seasonal patterns that we do, but it doesn’t make sense for us to break that up by quarter including for competitive reasons, and it’s small as we’ve indicated. As far as your second question in clarifying our guidance, what we said is it’s all related to EBITDA and no reference was made to revenue, and the references that we made in the past I would say were still consistent as far as what revenue and EBITDA expectations.

James K. Johnson, Chief Operating Officer

And just to clarify, Mike, this is Jim Johnson. I think what we said is as we go through the year, we’ll update you as it relates to full year EBITDA expectations looking like we’re tracking at a positive trend versus last year. We expect that to be the case. We’re a little bumpy as we’ve always been from quarter to quarter. Second quarter looks more in line with first quarter and slightly improved from the first quarter, but not as good as last year’s second quarter. But again, our view right now is that the full year looks better than last year from an adjusted EBITDA and cash flow perspective.

Michael McCormack, Bear Stearns

Yes, I just wanted a clarification because I wasn’t 100% certain, thanks.

Operator

Again, to ask a question please press “*” and “1”. At this time, there are no further audio questions.

Matthew Diamond, Chairman and Chief Executive Officer

Thank you all. We appreciate you participating in our first quarter call and we look forward to updating you after our second quarter.

Operator

Thank you. This concludes today’s Alloy First Quarter Earnings Conference Call. You may now disconnect.

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