InfoSpace Inc. Q4 2008 Earnings Call Transcript

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InfoSpace Inc. (INSP) Q4 2008 Earnings Call February 11, 2009 5:00 PM ET


Karin G. Van Vleet – Investor Relations

William J. Lansing – President, Chief Executive Officer

David Bradley Binder – Chief Financial Officer


Ross Sandler – RBC Capital Markets

Kerry Rice – Wedbush Morgan Securities, Inc.

Clayton Moran - Stanford Group Company


Good day and welcome to the InfoSpace Inc. fourth quarter 2008 earnings results conference call. Today’s conference is being recorded.

At this time I would like to turn the conference over to Ms. Karin Van Vleet.

Karin G. Van Vleet

Good afternoon and welcome to InfoSpace’s fourth quarter 2008 earnings conference call. I’m Karin Van Vleet in Investor Relations. On the call today are Will Lansing, President and Chief Executive Officer and David Binder, Chief Financial Officer.

During the course of this call InfoSpace representatives will make certain forward-looking statements which may include statements regarding InfoSpace’s expectations relating to its online products and services, outlook for the future of our business and growth initiatives, and anticipated financial performance for first quarter 2009.

Other statements which may be made in response to questions which refer to our beliefs, plans, beliefs, or expectations or intentions are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act. Because these statements pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from InfoSpace’s current expectations and beliefs.

Factors that could cause to contribute to such differences include but are not limited to the risks discussed in InfoSpace’s annual report on Form 10-K for the year ended December 31, 2007 and quarterly reports on Form 10-Q which are on file with the Securities and Exchange Commission.

InfoSpace assumes no obligation to update its forward-looking statements. In addition during this call, our management will discuss GAAP and non-GAAP financial measures. In the press release which has been posted on our website, we present GAAP and non-GAAP results along with reconciliation tables and the reasons for our presentation of non-GAAP information.

Now I’ll turn the call over to Will Lansing.

William J. Lansing

Good afternoon and thank you for joining us. I’m pleased to be on the call with you today and I look forward to meeting each of you in the near future. InfoSpace finished the year with another quarter that met management’s expectations, with fourth quarter revenues of $36.7 million down 6% from the prior year quarter and adjusted EBITDA of $3.7 million.

Revenues for the year were $156.7 million which was up 12% from 2007. Adjusted EBITDA for the year was $27.1 million. In a minute, David will review with you in some detail the operating results for the quarter and then we’ll open it up for your questions.

Before we do that, before we take you through the numbers, I wanted to take this opportunity to share with you a little of my philosophy and just say a word or two about why I joined InfoSpace.

If you’ve seen the press release from last week, you know I’ve done different things in a number of different companies. Through my varied roles as a management consultant, private equity partner, board member, CEO of various businesses, there are recurring themes. My life’s work is to build and grow strong internet businesses that use the signs of direct marketing to target specific consumer segments and to do so profitably.

So a couple of things about InfoSpace that are especially attractive to me. First, I really like the online search business. It’s such a great business with tremendous undeveloped potential. I’m impressed with InfoSpace metasearch technology. More importantly, I’m impressed with InfoSpace skill at monetizing search results.

Another thing I like about the search business is that it continues to be a very efficient and measurable form of customer acquisition. So if you believe that a lot of less efficiently spent dollars in the offline world are going to move online, we will be beneficiaries of that trend. And if you believe that within the online world that search spend is more efficient than display spend, we will be beneficiaries of that trend. I do think that even as advertising and promotional spending is dampened because of economic trends, online and search in particular will be hurt less than the offline world.

Obviously in search we’re not the number one, two, or three player, but I am convinced that there’s plenty of opportunities in this market for a company in our position. I’ve been on the job a week now so it’s a little too early for me to lay out strategic plans for you, but I know that there’s a lot we can do to drive traffic to our sites and increase the lifetime value of our users while holding down cost of customer acquisition.

The second thing that makes this job so interesting to me is our balance sheet and cash position, which translate into extraordinary flexibility as we seek to augment or complement our search business. 2009 is shaping up to be a buyer’s market. I’m very interesting in growing this company both organically and through strategic inorganic opportunities.

You should know, though, that I’m an old-fashioned business guy who likes transactions that are quickly accretive to shareholder value. Like my predecessor, I’m focused on expanding the top line and the bottom line, and I’m always going to do the right thing for shareholders.

So I’m fortunate to have joined a company that’s been very well run over the past six years and that boasts a set of valuable internet franchises producing substantial cash flow, a highly talented pool of employees, and a balance sheet with over $200 million in cash, another $800 million balance sheet NOLs, and no debt.

This is not a turnaround story. I certainly wasn’t brought in to fix something that was broken, but we are at a pivotal point and I’m eager to help guide this company to the next level of growth and profitability. My team and I are hitting the ground running and you should watch for good things to come out of InfoSpace this year.

With that, I’ll ask David to review the results for the fourth quarter and then we’ll take your questions.


David Bradley Binder

Thanks, Will, and welcome to our call today. Before I go through the numbers I’d like to spend a few minutes to give you an update on some of our product and marketing initiatives. In our last conference call we outlined a number of investments for the fourth quarter designed to grow our owned and operated business and also to reduce our ongoing cost structure. In the fourth quarter we launched our Search and Rescue campaign, a targeted marketing program that appeals to pet lovers by offering them an easy way for them to make a difference by helping us contribute towards animal welfare.

With this campaign we are donating a portion of the revenue from our related sites and downloadable projects to pet charities. Through our partnership with the ASPCA, we have donated $200,000 so far and have a stated goal to donate $1 million before the end of this year.

Simply by visiting and using the search features on the site and our related downloadable products, our users are contributing in a meaningful financial way. To reinforce this message, users are tracking our progress to this financial goal in real time by following the donation counter on the top of the website and embedded in our search and rescue tool bar.

So far we are encouraged by the level of engagement we’ve seen from new users to the site and we are increasingly focused on creating greater awareness to grow this program to scale in a cost-effective way. Also in the fourth quarter we launched our nation branded toolbar. To date we have four content [vernacles] live including wallpapers, recipes, trivia, and a rotating seasonal offering.

We are excited about the possibilities that this unique technology brings, leveraging the dynamic look and feel of the silver light platform to offer toolbars that are a step above the rest of the industry. The critical success metrics of this business are the efficient actuations of users, the rate of retention of customers maintaining the toolbar and related features in their browsers and the usage of our search products associated with these applications.

It’s still early in the development of this initiative and frankly we had hoped to be operating by now at a greater scale. However, we continue to believe that the combination of our technology, targeted content, and superior search monetization will yield a product that succeeds in all of the key metrics.

While we are investing with these initiatives to grow our owned and operated business, our distribution team continues to close deals, launch products, and drive revenue. In the fourth quarter we launched with twelve new partners, successfully deployed our new portal product with two partners, and generated significant new revenue growth from our DNS service. The success of our distribution team this year has truly been impressive and we ended the fourth quarter with solid momentum.

Now turning to our financial results, revenue for the fourth quarter was $36.7 million which is slightly above the high end of our guidance of $34 million to $36 million. As expected, we saw pressure from declining PPC rates in the quarter but exceeded our forecast through better performance from our distribution business.

For the full year we recorded revenue of $156.7 million representing a sequential growth rate from 2007 of 12%. Gross profit in the quarter was $18.9 million equal to 51% of revenue. In the quarter our distribution business represented 64% of total revenue up from 61% in the third quarter.

For the full year, gross profit was $80.8 million equal to 52% of revenue. Our margin percentage is greatly influenced by the mix of revenue between our owned and distributed products. For the full year distribution represented 65% of our total revenue.

Adjusted EBITDA in the fourth quarter was $3.7 million, equal to 10% of revenue, and above our guidance of $2 million to $3 million. Included in this result is approximately $2.5 million in operating expense associated with investments to both grow our owned and operated products as well as provide future cost savings.

For the full year, adjusted EBITDA was equal to $27.1 million or 17% of revenue. In the fourth quarter we recorded a net loss of $7.9 million. This result includes $6.4 million in unrealized losses on investments which is most significantly associated with our holdings and auction rate securities.

At the end of the quarter we held $13.9 million in book value associated with these investments. For the full year we recorded a net loss of $18.7 million. Included in this result are charges associated with the unrealized losses of our auction rate securities equal to $23.6 million.

As I mentioned, the book value of these investments at the end of 2008 was $13.9 million which is equal to 34% of the original par value. While the auction market is still frozen and the issuing and insuring entities behind the securities are distressed, we continue to receive interest or dividend payments on 88% of the full par value.

Now turning to the balance sheet, we ended the year with approximately $205 million in cash, short and long term investments, equal to $5.90 per share. This balance includes $191.5 million in cash and short term investments plus $13.9 million in long term investments consisting of the auction rate securities that we had marked to current market. The average basic share count in the fourth quarter was 34.5 million and we ended the year with 34.8 million total shares outstanding.

Now turning to our outlook for the first quarter, we expect revenue in the first quarter of 2009 to range between $38 million and $40 million, adjusted EBITDA to be between $2.5 million and $3.5 million, and a net loss to be between $1.5 million and $0.5 million or between $0.04 and $0.01 per share.

With that I’ll turn the call over to the Operator to take any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Ross Sandler with RBC Capital Markets.

Ross Sandler – RBC Capital Markets

[inaudible] On the guidance, can you [inaudible] 7.5% year-over-year decline in revenue which is more or less in line with the [60%] decline you had in 4Q. Are you not seeing a material drop off [inaudible] 1Q? Are you modeling in some [inaudible] distribution? Can you help us understand kind of where the lack of deceleration [inaudible] 1Q is coming from and I have a couple follow ups.

David Bradley Binder

If you look at the guidance relative to the performance in the fourth quarter and even if you go back to compare that to how we did fourth quarter of 2007 versus first quarter of 2008, we’re showing a pretty good stabilizing or even a slight uptick in revenue from the fourth quarter to the first quarter. In the fourth quarter of ’08 we did see the [PPC] that we expected and factored into the guidance. Going into the first quarter we’re seeing those rates fairly stable so that the sequential decreases are not continuing and we’re expecting a little bit of pick up mostly coming from the distribution business in the first quarter.

Ross Sandler – RBC Capital Markets

[inaudible] guidance in 1Q [inaudible] simply a mixed shift on partners [inaudible]?

David Bradley Binder

It is a combination of mix shift. We expect distribution to be a larger relative share of the business in the first quarter and we are continuing to invest in some of the initiatives, some of the aspects of the owned and operated initiative that we have seen succeed so far in the fourth quarter.

William J. Lansing

Ross Sandler – RBC Capital Markets

Two more quick ones. On the new toolbar product, how are the economics [inaudible], is it a pay per install and if so what kind of [life on] value do year you see for when the... how many months before these toolbars [inaudible] install and I’ve just got one last quick one.

David Bradley Binder

I think the way you ask the question I think you’re thinking about the business the right way. It’s a cost per acquisition and a lifetime value from thereon out. It’s very early for us to say what the dynamics we are experiencing or even what we are expecting to experience in something that as this business grows to scale we’ll be able to share a lot more about.

Ross Sandler – RBC Capital Markets

On the M&A side, what can you tell us about the pipeline? Are you guys close to completing any transactions or what are you seeing from the multiples and the private market, I just wanted to [inaudible] what kind of businesses are you looking at to potentially [inaudible]?

William J. Lansing

Okay, so let’s start with your first question. Close to completing a transaction, no. In fact I feel like I’ve been on the ground about a week and so it’ll probably take a little longer than that. But in terms of the kind of places we’re looking, I think it’s a fair bet that we’re in the internet space to the extent that we can do things that strengthen our core search business, that’s great, that’s in the category of bolt on for the most part, but then beyond search, I think we are looking at other interesting areas and a little too early to share the investment thesis with you, but we do have a couple and we’re working on them. Then as soon as they’re ready for prime time we will share them.

I would say that in terms of valuations, obviously public market value valuations have come down a lot, private market valuation [inaudible] private have not come down sufficiently in my view and those are still in process of adjustment, but that all works in our favor. As time goes by, those things will become more affordable. We’re looking both, public and private and we’ll see where that takes us.

Ross Sandler – RBC Capital Markets

On the [currency] issue, do you guys feel that [inaudible] kind of stabilized and become into [inaudible] guidance, there is a little bit of a disconnect from what some of the other large Google partners have been talking about. Is it a case where the meta search you’ve seen from offsets from other monetization how [inaudible] Google or is it that your quality is [inaudible]? Can you talk about why different trends and potentially other Google partners [inaudible] search partners?

William J. Lansing

So it’s hard for us to draw the comparison because I’m not really sure the composition of traffic that’s generating the PPCs that you’re comparing us to. I would say that our search business has very, very high quality. It’s an organic search customer coming to the site and that may be one of the reasons why our PPCs might be a little bit better than some of the other syndicated partners for Google, but I don’t really have a greater insight as to how we compare to some of those guys.


Your next question comes from Kerry Rice with Wedbush Morgan.

Kerry Rice – Wedbush Morgan Securities, Inc.

Couple questions. The first one going back to, it’s kind of a two part question, your owned and operated sites. I know you guys have been investing in that. Based upon those investments and maybe it’s too early but I kind of would have expected not such a drop off in revenue from Q3 to Q4 and maybe even year-over-year. Can you talk a little bit why we haven’t seen some more of the benefits from those initiatives and then maybe talk a little bit about those initiatives as you indicated you’re going to continue investing in those at least in Q1.

William J. Lansing

Kerry, let me speak to that. I can’t speak so much about the history but I can tell you a little bit about where the initiatives stand right now. It’s early days. What we know is that we need some cost effective mechanisms for sot acquisition to grow that O&O business. There’s a lot of the [inaudible] that I think we can apply to this party and some of it has to do with default search setting and some of it has to do with toolbars, and some of it has to do with other things, and we’re in the process of learning that.

We have good progress to date and we have more to come. I think it’s important that we apply times to it. We have the ability now to do multi testing and AB testing and figure out what works and what doesn’t work and so we’re in... there’s a certain amount of experimentation that’s going on but it’s being done with a pretty clear view to applying the science of what works and what doesn’t and we fully expect to see some result out of that. But it’s early so you’re seeing expense ahead of the revenue. That’s frankly where we are right now.

Kerry Rice – Wedbush Morgan Securities, Inc.

Then you mentioned that, and maybe it was David that mentioned the toolbars, you kind of were hoping to be a little bit greater scale at this point. What is kind of slowing that down?

William J. Lansing

For us to put a lot of advertising muscle behind the product we have to see that we’re getting sufficient acquisition, we’re getting a relatively low cost for acquisition, and that we’re getting enough usage of the search-related features off of the toolbar and frankly we haven’t seen either of those at the level that we’re ready to really put the marketing spend behind it. I think that it’s a matter of refinement in the installation process, it’s a matter of refinement just in terms of how the product works on the desktop.

Kerry Rice – Wedbush Morgan Securities, Inc.

Then one final question, you mentioned you had 12 new distribution partners which is great. You guys I think usually add about five so double what I think the average quarter is. When do we see the impact? Are we seeing that impact in Q4 already or we’re going to see even a bigger kind of percentage of revenue coming from distribution in Q1?

William J. Lansing

I think you are seeing it in the results. You went from 61% to 64% of the revenue from distribution and remember that the distribution partners are seeing the same macro factors around the PPC rates. So for them to be able to stabilize revenue and even to grow in this environment is in part indicative of the volume of new partners we have. What I think is sequentially good guidance going into the first quarter on top line is in large part reflective of those launches.


Your next question is a follow up question from Ross Sandler with RBC Capital Markets.

Ross Sandler – RBC Capital Markets

[inaudible] is the environment much easier on the toolbar distribution side than [inaudible] less competitive than it was maybe 6 or 12 months ago to get those deals going? Are you looking for [inaudible] vertical to get that distribution or is it more broad based sites [inaudible] kind of get a toolbar attachment deal or something like that for distribution? Can you talk about the strategy there?

William J. Lansing

We’re going to be looking at both. There’s an opportunity for us with toolbars to move traffic to our owned and operated sites and there’s an opportunity to use toolbars in conjunction with the [infinity] marketing where we’re essentially we skim what we do for others. You know the whole thing boils down to the classic what’s your cost to acquire and how does that relate to your lifetime value and toolbars obviously have tremendous impact on the lifetime value because the stickiness is there and a lot of search comes out of the people who put the toolbar in and we’re in a position to put a little more marketing energy behind getting the toolbar put in the first place, but doing it on your own account versus doing it for partners, it’s nice when a partner is contributing traffic, members, consumers, people in their world to our traffic, and so we’re doing both and we’ll see where the economics take us.


Your next question comes from Clay Moran with Stanford Group.

Clayton Moran - Stanford Group Company

When you’re talking about the operating investments and is that showing up essentially all in sales and marketing? I guess we would have thought to see more in research and development but it looks to be sales and marketing and what is that, is that marketing of search and rescue or what is driving that? Also I’m curious in the release tonight you had it looks like a write down for the auction rate securities and then another write down of about $2 million for carrying value of certain equity investments. Are those related or what is that second write down?

David Bradley Binder

So first of all on the geography of the investment in the initiative, it’s mostly in the sales and marketing line. That will include direct marketing spend as well as head count related to the development of some of those products so you wouldn’t see it in our research and development line item. You’d see it more in the sales and marketing. Regarding the write downs, auction rate securities was most of the write down. We also had a debt investment in a small private company that was placed about three years ago and we wrote that down and that company is struggling a little bit to make it by.


At this time there are no further questions. Ladies and gentlemen, this will conclude today’s conference call. Thank you for joining and have a wonderful day.

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