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GuruNet (ticker: GRU) CEO Bob Rosenschein used his company's Q4 earnings conference call to describe Answers.com's growth potential, partnerships and competitive position. The GURU conference call transcript isn't available elsewhere, so here are the prepared remarks in full (minus the standard legal disclaimers)

Bob Rosenschein

Welcome, everyone, to our 4th Quarter conference call. I’m excited today to be updating you on our progress—in plain talk—and to give you a chance to evaluate what we promised, and what we’ve delivered.

I’m going to start with the bottom line. We’ve got a new launch, of Answers.com, fresh partnerships, a compelling model, exceptional technology, helpful press, and we are creating happier users. In Q1, we did exactly what we said we’d do. We launched a new brand with a new business model We built traffic, entered into key strategic relationships, and took our first steps towards monetizing our new offering. It’s about the potential, and we are starting to see the fruits of that potential, in new deals, traffic and revenues.

Our remarks will be divided into three parts:

  1. Overview: who we are: GuruNet’s corporate vision, mission, and our positioning in the marketplace;

    A financial presentation of the unaudited results for Q4, which was our last subscription-based quarter, by Steve Steinberg, our CFO;

  2. Deeper elaboration of recent developments in Q1, including a new announcement we’d like to make today.

Q4 was a pivotal quarter for GuruNet, in the birth of both the public company and the new product. We successfully completed an IPO plus green-shoe, giving the company the resources to execute our plan. Late in the quarter, after much deliberation, we decided to advance our business model to one more proven in today’s Internet search space. And we prepared, as promised on our November conference call, our new launch of Answers.com. So, the more interesting progress is actually in Q1. Steve Steinberg will be explaining this in more detail shortly.

GuruNet’s mission is to deliver concise information more conveniently to Internet users. Now, maybe, some of you wonder if that isn’t every search engine’s mission. The difference is this. Search engines, by definition, are web-page finders. They give you lists of links, sometimes long lists of links, to Web pages that may or may not contain the information you’re seeking. Our product, Answers.com, actually gives you quick explanations and definitions from over 100 integrated resources.

This is sometimes easier to demonstrate than to explain on the phone. If you don’t get what we do, I urge you to actually try our product, at www.answers.com, and see the difference for yourself. Try looking up a public company, like Intel; or a celebrity, such as Hilary Swank or Hillary Clinton, for that matter; or maybe just your hometown, and notice the difference between answers and searches.

We believe that this new approach enhances, in a dramatic way, the Web experience. The potential of doing things more easily is a significant one…

The wild card in our product is its simplicity—and its significance in creating happier users. We believe that simplifying the information retrieval process for end-users, and enhancing that value proposition, are the keys towards generating new traffic and revenues based on that traffic.

I’ll give you more of an update on Q1 shortly, but, now, I’d like to turn the floor over to Steve Steinberg, our CFO. Steve…

Steve Steinberg

Thank you, Bob. My objective for this portion of the call is to provide you with highlights of our financial performance for the fourth quarter and full year ending December 31, 2004. For a more detailed review of our financial performance during those periods, please review our audited financial statements and the MD&A, which will be included in our SEC FORM 10-KSB, to be filed later this month. While we do not expect the numbers that I will now discuss to change, they are “unaudited” until we file our 10K-SB, which will contain our audited numbers.

Let’s begin with some important background information that will help you understand the 2004 numbers and put them into perspective, given where we are today, March 16th, 2005. On January 3, 2005 we announced the release of Answers.com. Our revenue model for Answers.com is based on advertising revenue. When a user searches sponsored keywords, a link to an advertiser’s Website is displayed in a premium position and identified as a sponsored result to the search. The key business metrics that will drive Answers.com’s success will be the volume of traffic and how well we monetize that traffic. Bob will talk more about this after I finish reviewing 2004.

In contrast, in 2004 and 2003 we were primarily in the business of selling subscriptions. Although, in selling subscriptions, we did offer free access to dictionary, thesaurus, encyclopedia and other basic reference information… our basic free product was our way of encouraging users to upgrade to our subscription product and increase our subscription revenue. Our business model at the time strongly encouraged subscriptions, and we limited the amount of content available in our free product. This approach did not facilitate the amount of traffic we needed to earn significant amounts of ad revenue.

A desire to gain more expansive, ubiquitous growth led to the launch of our free-to-consumer product, Answers.com, in January 2005. As we discuss our 2004 results, please bear in mind the change in our business model that transpired in January 2005.

Let’s begin with our Consolidated Statement of Operations

Revenues in the fourth quarter of 2004 grew to $76,000, an increase of 43% over the previous quarter in 2004. Revenues for the full year of 2004 were $193,000, an increase of $164,000 over 2003. The primary reason for the year-to-year increase stems from the nature of our subscription agreements during those years. Prior to December 2003, we sold lifetime subscriptions. Since the obligation to continue serving content had no defined termination date and we could not estimate the time period over which the service would be provided, we did not begin to recognize revenue from those sales, at such time. Thus, revenues during 2003 resulted almost entirely from maintenance contracts on the corporate enterprise systems that we sold in 2002. However, in December 2003 we began offering defined-term subscriptions, and converting certain of those lifetime subscriptions to defined-term subscriptions. Defined-term subscriptions are amortized over the life of the related subscription. Revenues during the fourth quarter and full year of 2004 resulted primarily from subscription license revenue, and, to a lesser extent, from maintenance contracts on our corporate enterprise software, and advertising revenues.

Beginning 2005, we stopped selling new subscriptions. Although we no longer offer new subscriptions to GuruNet, we continue to support the subscriptions we sold.

Now… let’s move on to Operating Costs. The salaries, benefits and overhead costs of personnel, and other operating costs relating to research and development, sales and marketing, and general and administrative activities comprise our operating expenses. Operating expenses in the fourth quarter of 2004 were $965,000, an increase of $312,000 over the previous quarter. Operating expenses in 2004 were $3,091,000, an increase of $1,023,000 over 2003. The increase in operating expenses on a year-to-year basis stems from a number of factors, including:

  • Compensation-related expense increases as our R&D team grew in order to develop our newest products
  • Increases in advertising, promotion and marketing consulting costs due to our increased focus on promoting our product, and an increase in sales and marketing compensation expenses due to the addition of employees and agents. And finally….
  • The costs associated with being a public company

Net Loss. The net loss for three months and full year ending December 31, 2004 was $855,000 and $6,591,000, respectively, compared to $660,000 and $2,809,000, during the same periods in 2003. The primary reason for such increases is the increase in operating expenses noted earlier and the fact that, in 2004, we incurred significant non-cash interest charges, less offsets for non-cash gains, in connection with the amortization of note discounts and deferred charges relating to $5 million of convertible bridge notes that we incurred in January 2004. The impact of these non-cash charges and gains, on our 2004 loss, was a net charge of approximately $2.5 million.

Now, let’s review some summary balance sheet data

As of December 31, 2004, we had $8.9 million of assets including $7.4 million in cash and cash equivalents, and working capital of $6.7 million. Long-term liabilities were $1.1 million, and we had shareholder equity of $6.8 million.

As many of you know, in February 2005, the Company entered into an agreement with certain warrant holders, under which, those warrant holders exercised 1,872,000 of their warrants. As a result, we raised $12.2 million, net of costs. Also, in 2005, to date, we’ve raised in excess of $1 million from other exercises of options and warrants. Naturally, since these are post December events, such fundraising activities are not reflected in our December balance sheet. Bottom line – as a result of the IPO and our fundraising activities in Q-1 2005, we now have sufficient cash to enable us to meet our current, planned, operating needs and roll out Answers.com.

Thank you for your time. And now…back to Bob…..

Bob Rosenschein

Thanks, Steve. In the last third of our prepared remarks, I’d like to cover some other progress:

  • How we generate traffic,
  • Specific deals & distribution,
  • Competition,
  • Traffic,
  • Q1 trends, and
  • Hiring

Let’s start with how we generate traffic. There are six ways. The first way is partnering with search engines and other popular Web properties to offer their user better information on demand. More on that in a minute.

Second, there’s press, and the buzz it generates. When the Wall Street Journal writes, in a full Personal Technology column, “Answers.com is also a start toward a new search paradigm... real instant information, not just links to pages... I urge you to try it” or Forbes says “Let me just come right out and say it. Answers.com is the most useful, smartest, coolest, easiest-to-use Web innovation to come around in years”, or the other positive mentions we’ve gotten, be it PC Magazine, the Chicago Tribune, the Washington Post, Baltimore Sun, Philadelphia Inquirer, or Investors Business Daily, or today’s front-page interview on C¦Net’s News.com, it unleashes new product awareness, new deals, and greater usage. And we hope there’s more to come.

Third, there’s word of mouth. This is informal, of course, but it takes two forms. The first is just people telling people about Answers.com.

I’m going to quickly share a couple of letters received in the last week. You might say, who cares, but I’ll tell you: long-term, satisfied users is the point!

“This project is simply superb. Thank you very much for providing knowledge to us which is otherwise time and hence money consuming to search on web.”

“Your website is one of the greatest innovations I have ever seen. It is what the Internet was meant to be. I have made everyone in my company download the free "1 Click Answers" tool to their computer… Thank you!”

“You guys are absolutely the best. Ever since I’ve downloaded your Answer Bar on my computer, a fantastic tool by the way, there has not been a single day that I haven’t referred to the info that you provide. It feels as if I’ve developed a new addiction... a healthy one… Your idea to summon all of the necessary facts into a single page, and with that free the users from the endless hours of clicking on the hundreds and hundreds (at times useless) links, is very genius and very timely. You actually have turned the learning into an entertainment.”

The other way we get word of mouth going is by making it so easy to link to our results pages. On Sunday, for example, there was an article in the Toronto Star about Warren Buffett. The author wrote, “Mr. Buffett, like all celebrities, has attracted what I refer to as "investment groupies." According to Answers.com, a groupie can be…” We even saw an article in USA Today about Bill Gates receiving knighthood, link to an Answers.com page about knighthood.

Fourth, we’ve created Webmaster tools and blogger community tools that encourage sites not only to talk about Answers.com, but link to us.

Fifth, now that the product has come together so nicely, we’ll start marketing it in broader ways, including limited advertising.

The sixth and last way we generate new traffic is something called SEO, or Search Engine Optimization. It means crafting our very content-rich results pages so they are likely to appear, on their own, higher ranked in the search engine indices. In other words, how do we show up in the top 10 when you look up a subject on Yahoo or Google. We are pleased with our progress here, with plenty of upside. For example, try looking up on Google: Howard Hughes biography, or list of fruits, or omega definition, and you’ll see what I mean.

Deals and Distribution. We’re interested in partnering, formally and informally, with search engines, portals, Internet Service Providers, online newspapers, etc.

Our first major distribution partner was Amazon’s A9.com. If you look at A9.com, you’ll notice that the reference ‘column’, as they call it, is powered by Answers.com. Yesterday, A9 announced a new version, with extensible ‘columns’, and we’re already hooked up to the Dictionary and Encyclopedia terms, also.

Let’s talk for a minute about Google. As many of you know, we enjoy an informal arrangement with Google, where they point their definition link to Answers.com. For example, if you look up DVD or New York City in Google, in the upper right hand corner, there should appear a link that says definition, which will take you, without passing Go, to the Answers.com explanation.

We have a second relationship with Google, this one contractually defined, which we announced just last week. Google supplies us AdSense ads to better monetize our queries, both queries that originate from Google and others. There’s another part to this contract. You may realize that our Answers.com product itself includes Web search—to cover two cases: (1) when you actually want to search the Web for more results, and (2) when your query doesn’t match any of our topics. In those cases, we have a Search-the-Web page, and it is powered by Google, including a Google logo, and monetized again with Google ads.

On Monday of this week, we announced another partnership, this time with the new Accoona.com search engine. Accoona has a powerful approach to tuning your queries, something they call Super-Targeting. They’re also interesting, because they enjoy a relationship with ChinaDaily.com.cn, one of China’s largest portals. We expect them to launch in June, and we are proud to be partnering with them.

And there are more deals in the pipeline.

Competition. I’d like to mention competition. First of all, expect some! You can’t have a hot idea today on the Internet, without others taking some of your ideas. We recently saw an interesting site, which Andrew Beal described in WebProNews as, “The best way to describe it is ‘not quite Google, not quite Answers.com’.”

There are other good online encyclopedias, like Encyclopedia Britannica and Microsoft Encarta, and even Wikipedia (which we also utilize). The problem is that they are just several sources. We integrate over 100, at your fingertips. Think of Answers.com as a total reference shelf on demand.

Traffic. Alexa.com had us yesterday as the 312th most popular Website on the Internet—and climbing. We announced several weeks ago that our traffic rose 1000% since the beginning of the year, for our combined GuruNet and Answers.com properties, to over 1 million queries per day, on the average. I can tell you that we’re over 1300% now. We expect this to grow, but we do not necessarily expect that it will keep rising quite as dramatically. Try comparing, on Alexa, by the way, our page views, say with Ask Jeeves. We are well on our way to building critical mass in traffic. Our next important challenge is…

Effective Monetization. For the first several weeks of the year, we did not have any ads on Answers.com; we literally showed a Red Cross public service announcement. Since then, we have started working with several different ad network providers, including Kanoodle, ContextWeb, and, beginning February 28th, Google, of course. There may be others, as well, because we are at a stage of testing and optimizing performance.

March is actually the first month the ads are starting to perform well, and I can tell you that the Google contract is helping. As I mentioned earlier, under our contract with Google, we are able to monetize our queries and monetize Web search to cover cases when users want to search the Web for more results within our website, or when the user’s query doesn’t match any of our topics. We did not have the monetized web search part in place until February 28.

Now, how do we further build those numbers? Obviously, there’s traffic building. But we also intend to add more commercial content to our system, content which both monetizes better and enriches the user experience, content which is broader in coverage and targets high performance advertising. Which brings me to our next subject…

Hiring. I have some important and good company news to announce on this call. After a retained search and considerable interviewing process, I am most pleased to announce that we have hired a senior executive to run our New York office. We will be issuing a press release shortly after this call.

Jeffrey Cutler has been hired as our new CRO, Chief Revenue Officer, and will be reporting to the CEO. His primary responsibilities will be generating traffic and revenues, and business development, including content partnerships.

Jeff began his career years ago with eight years at CompuServe, managing their products for the financial services industry. He then was Director of Trading Services at Thomson Financial Services’ CDA/Spectrum. He then went on to become VP Sales & Marketing at N2K Telebase, a leading channel for premium business content. He later was General Manager & COO of Office.com, a leading online business service, co-owned by WinStar and CBS/Viacom. He then became President & CEO of Inlumen, where he oversaw the sale of the company to Pinnacor (now part of the MarketWatch division of Dow Jones). And he most recently served as General Manager of the Software Information and Industry Association’s Content Division.

I interviewed many talented executives for this position, and I can tell you that Jeff’s deep sales and deal-making experience in the Internet content space was precisely what we were seeking to execute on our new business model. I am very excited about his rounding out our management team, and we expect great things from and with him.

Jeff’s first job will be to expand our deals and distribution. But his real job will be to help take us to the next level, even beyond the deals we’ve managed to do without him. We anticipate seeing these results in coming quarters.

Product Development. I won’t say much this time about product development, except that we are constantly enhancing the product: its content, simplicity, responsiveness, and performance. But there will be new functional directions unveiled, wireless for instance. Can you think of a more natural application for mobile computing than easy, quick answers? In other words, why would you ever want 100 search links on a handheld device?

Conclusion. In conclusion… the bottom line. We’ve got a new launch of Answers.com, fresh partnerships, a compelling model, exceptional technology, helpful press and we are creating happier users. In Q1, we did exactly what we said we’d do. We launched a new brand with a new business model. We built traffic, entered into key strategic relationships, and took our first steps towards monetizing our new offering. It’s about the potential, and we are starting to see the fruits of that potential, in new deals, traffic and revenues. We look forward to realizing the potential more fully in the coming quarters.

That ends our remarks. I’d also add that we work hard to be responsive to investors. Please see our corporate Website, www.gurunet.com, and you can communicate with us at ir@gurunet.com. We’ll be very pleased now to answer some questions. Landon…

Question-and-Answer Session

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Source: GuruNet on partnerships, growth and competition (quotes from the 4Q04 conf call)
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