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TheStreet (NASDAQ:TST)

Q4 2012 Earnings Call

February 21, 2013 4:30 pm ET

Executives

Erica L. Mannion - President

Elisabeth H. DeMarse - Chairman, Chief Executive Officer and President

Analysts

William Martin

Michael Mauskopf

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the TheStreet's Fourth Quarter and Full Year 2012 Financial Results Conference Call. The date of this call is February 21, 2013.

This call is being webcast live on the Investor Relations section of the TheStreet's website at www.t.st. This call is the property of TheStreet, and any recording, reproduction or transmission o the call without the expressed written consent of the TheStreet is strictly prohibited. As a reminder, today's call is being recorded. You may listen to the webcast replay of this call by going to the Investor Relations section of TheStreet's website.

I will now like to turn the call over to Erica Mannion of Sapphire Investor Relation, Investor Relations for TheStreet.

Erica L. Mannion

Good afternoon. Thank you for joining us to discuss TheStreet's financial and operating results for the fourth quarter and full year 2012. With me today is Elisabeth DeMarse, Chair, President and Chief Executive Officer. Today, Elisabeth will review the fourth quarter and full year financial results and discuss the industry and market dynamics.

All statements made on this call, other than statements of historical facts, are deemed to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, including those described in the company's filings with the Securities and Exchange Commission that could cause actual results to differ materially from those reflected in the forward-looking statements. Although the company believes that the expectations reflected in the forward-looking statements are reasonable, the company cannot guarantee future results or occurrences.

The company disclaims any obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise. You may obtain copies of the company's filings with the SEC at the commission's website at www.sec.gov. Additional information related to matters discussed today will be set forth in the company's quarterly report on Form 10-K for the fourth quarter of 2012, which the company expects to file shortly.

Now, I will turn the call over to Elisabeth Demarse.

Elisabeth H. DeMarse

Thank you, Erica, and good afternoon. As we announced in our press release, the company recorded revenue of $50.7 million for the full year, $38.2 million in Subscription Services and $12.5 million in Media. .

Fourth quarter revenue was $13.8 million, representing a decline of 3% compared to the fourth quarter of 2011. Revenue from Subscription Services was $11.1 million, and revenue from Media was $2.7 million.

The company recorded a net loss of $2.2 million for the fourth quarter compared to a net loss of $2.4 million the previous year. Excluding restructuring charges and the disposition of assets, our net loss was $1.7 million for the quarter.

Our adjusted EBITDA continues to be positive at $500,000 for the quarter. Excluding The Deal acquisition and restructuring payments, the company generated more than $700,000 in operating cash flow for the quarter.

Now let me review our strategy and outline how this all unfolded to date. TheStreet has a leading position of providing news, data and analysis about the financial markets. We are fortunate to have dual monetization models: our subscription model, through The Deal, our institutional business, along with our stock newsletters and Rate-Watch Subscription Services and ad-supported Media, primarily through our free site, thestreet.com.

Since I joined in March 2012, we've built out the management team, rightsized the cost structure and acquired an institutional subscription and sales platform for growth. This March, I've made several key hires to build out the team, including: Bill Inman, Editor-in-Chief of thestreet.com; Stephan Chopin, our CTO; Erwin Eichmann, General Counsel; and Rocco Pendola, Director of Social Media. We've also welcomed The Deal's leadership team: Kevin Worth, President; Michael Crosby, Chief Operating Officer; Jeff Kanige, Editor-in-Chief; and Tony Baldo, Managing Editor.

The most recent addition to our team is our new CFO, John Ferrara, which we announced 2 weeks ago. I know John well, have worked with him in the past and think highly of his skills. He has more than 25 years of experience in strategy, finance and operations. We're excited to welcome him to TheStreet.

This past September, we were able to take advantage of weakness in the marketplace and pick up The Deal at a very attractive price. The Deal is performing very well for us. The Deal is a digital institutional subscription data and news business that delivers sophisticated coverage of The Deal economy, primarily through The Deal pipeline. A big achievement in Q4 was the seamless integration of The Deal business into ours. The Deal pipeline's customer renewal rates are on track, with a solid increase in year-over-year unit and pricing growth.

In November, we hosted a successful Deal Economy conference at the New York Stock Exchange, featuring Jim Cramer and the CEO of Hostess as keynote speakers. We are continuing to invest in product at The Deal and have signed up an institutional provider of futures concept so that we can leverage our institutional direct sales force to reach hedge funds and prop trading audiences. Just to reiterate, we expected The Deal to be accretive to adjusted EBITDA in 2013.

In December, we successfully moved TheStreet and our Subscription Services business to the Amazon cloud. With this change, we expect to employ significant savings and CapEx reductions while moving to a more flexible, scalable hosting environment. We have made other smart and cost-saving adjustments. These include eliminating OpenX from our ad-serving stack, transitioning our video player from Brightcove to Kaltura, which is open source, and switching from Omniture to Google Analytics.

Moving to Subscriptions, in Q4, we lost traffic in Subscriptions during Superstorm Sandy but TheStreet kept running. Even with this challenge, our subscription Newsletter business has been improving and [ph] in quarter, as new and better marketing techniques are bearing fruit and we stick to our strategy of placing the right person and the right product.

We continue to leverage our free site to drive leads to our subscription business. And as a result, we are seeing a much larger percentage of new subscriptions coming from thestreet.com, now around 20%. We have an asymmetrical competitive advantage when it comes to monetization of our free site because we have dual monetization, Advertising and Subscription revenues. We are now successfully applying that advantage. As a reminder, our free site offers premium previews and resource [ph]of our subscription concepts, including highlights from Jim Cramer and Stephanie Link's Action Alerts PLUS, as well as Doug Kass' RealMoney Pro, which are used to entice thestreet.com readers to tap into the additional information that they can't get for free.

We also held our first open house in December, giving visitors access to our entire Newsletter content for a weekend. We have stabilized the number of subscriptions in our Newsletter business during the fourth quarter and are seeing positive subscription trends as we enter 2013.

In January, our free trial levels are approximately double those of the prior year. Subscriber churn has also remained at the low end of our typical range for several quarters, as we continue to put the right person and the right product while improving the overall user experience. For example, we recently launched Ask AAP, an opportunity for subscribers to ask Jim Cramer and Stephanie Link questions about investments in the Action Alerts PLUS portfolio. We established a Twitter feed of AAP alerts and a weekly video series where Jim and Stephanie discuss developments in the Action Alerts PLUS portfolio. Improving user experience leads to increased product usage and positively impacts our renewal rates.

In January, we launched Dividend Stock Advisor, a portfolio of products run by David Peltier. Dividend Stock Advisor fills an important and obvious gap in our product suite. It has been immediately successful with hundreds of people signing up for the product prior to launch. This success is important not only because we now have a dividend and an income product for which there is significant demand, but we have been able to redirect our marketing channel successfully towards a new product launch. Our marketing prowess is growing and becoming sustainable.

Our products continue to show strength. Action Alerts PLUS, the charitable trust portfolio of Jim Cramer and Stephanie Link, gained 16.72% in 2012, beating the S&P's 500 risk dividends reinvested by 72 basis points. This performance comes after trading fees and is extraordinary because subscribers receive advanced notice of each trade and markets often move between the time that an alert is sent and a trade is made. We believe that Jim and Stephanie's track record of outperforming the S&P 500 and returning 16.72% to investors will attract new subscribers.

The Media business remains in flux, under pressure from programmatic buying and declining CPMs as advertisers shift to mobile and social. While our traffic remains strong, our move to the cloud now enables us to address the front-end rendering and redesign of the site, including our taxonomy, which will make our sites ever more discoverable by Google and other search engines.

Free traffic derived from search engines has tripled year-over-year. In our last call, we reported that approximately 50% of our traffic, including direct type and SEO is free. Going into 2013, nearly 70% of our traffic is coming from free sources. We are using the growth of free traffic to moderate our expenses and acquire traffic. We will not see a dramatic growth in comScore because we are shifting our audience from partner traffic, where we share revenue, to free sources of traffic. In other words, improvement in SEOs, combined with our strong brand name and direct-type traffic, allows us to decrease ROIs on traffic partners and reduce partner payments.

Again, we have an asymmetrical competitive advantage because we have dual monetization opportunities of our audience coming to thestreet.com. As I mentioned earlier, in December 2011, only 8% of our subscriptions originated from thestreet.com. Now it is around 20%, with roughly 30% of our monetizable inventory dedicated to our subscription products.

Moving to social. Social is becoming an important channel for us. We hired Rocco Pendola in Q4 as Director of Social Media to revamp our social media strategy. If you Like us on Facebook, add us on Google+ or follow us on Twitter, you now see more and better content leading to more social conversations and more visits to TheStreet. Our Twitter traffic and our Facebook Likes have increased 30% in the quarter, and Google+ is showing hypergrowth off a small base. Google now recommends TheStreet as the suggested account to follow on Google+ for new and existing members. We are responding to the shifting consumption patterns by actively managing social as a new channel, and tablets and smartphones as a new platform.

Looking forward to 2013, we are excited about the potential for The Deal pipeline business. We see multiyear highs in the DOW and the S&P 500, combined with CEO confidence and lots of cash on balance sheets, setting the stage for an uptick in M&A volume.

We have several feature rollouts on The Deal pipeline, which I cannot describe for competitive reasons, but they will improve future experience and should be well received by our audience and M&A professionals. The Deal is a respected brand, with terrific cache and a little wind in our sails from an uptick in M&A activity will help drive growth on renewals and new customers.

Moving onto our subscription Newsletter business, I mentioned Dividend Stock Advisor, but we also have a very exciting marketing calendar for 2013. We launched our weekend open-house events in Q4 and experienced good success. We applied our learnings to our second open house over Super Bowl weekend and tripled our sign-ups. We will double down on another open house for March Madness and so forth throughout the year.

Our OptionsProfits product is highly respected in the marketplace and we are having our first Options conference dubbed TheStreetMONSTER conference on June 7 and 8 in New York, featuring an all-star lineup of Jim Cramer, Stephanie Link and Jon and Pete Najarian. We also have several initiatives for our free site, which delivers a large reliable audience of poised-to-transact consumers through our brokerage advertisers and captive subscription products.

In 2013, we've attracted advertisers such as Range Rover and Ally Bank with our high impact creative offerings, such as site skinning and homepage takeovers. We are building a brokerage center and implementing a programmatic offering with a private ad exchange to enhance the monetization of our very valuable audience.

We will continually streamline our home page, article and quote pages to create better experiences for both our audience and our advertisers. For example, we've reduced the number of brokerage partners which simultaneously creates a more effective advertising environment with improved performance for our partners, while providing our audience with a better user experience. We've received feedback from several of our brokerage partners who have observed improved ad performance and ROI.

Regarding editorial, our goal is to dominate our core beats through expansion of new contributors and recruitment of new voices. Our most important project this year is rebuilding our content management system with a WordPress solution. Our new CMS is designed to include a robust contributor platform, allowing us to recruit news contributors and increase the number of voices on our site.

Our Business Desk product, which powers market news for local newspaper websites, is profitable and generates quality subscribers for our newsletters. Most recently, we announced that we will be pairing fully.com. We are not just thinking about producing quality content, we are thinking about the ability to distribute content from incredibly powerful brands like TheStreet, MainStreet and The Deal regardless of platform. Plus, we are relaunching our mobile apps for the free site and The Deal during the spring using HTML5 with iOS and Android wrappers. Additionally, we will launch our subscription apps in late Q2 or early Q3.

And now, I will review our financial details for the fourth quarter and the full year. Please note, our consolidated results for the fourth quarter and full year 2012 includes The Deal's operations, unless I mention otherwise.

In the fourth quarter, the company reported revenue of $13.8 million, which represents a decline of 3% compared to the fourth quarter of 2011. Within this revenue from Subscription Services was $11.1 million and revenue from Media was $2.7 million. The performance of our Subscription and Media businesses in Q4 was partly reflective of the investing environment.

Regarding the macroeconomic environment, Daily Average Revenue Trade volumes, or DART, as reported by certain online brokerages, experienced high-single-digit declines in Q4 2012 from the prior year period. Google Investing Index, which mentions online category interest in the investing vertical, declined in Q4 2012 by approximately 15% from the prior year quarter and 4% sequentially. Both of these measures signal that retail investors remained on the sidelines during the quarter.

Revenues from Subscription Services increased 13% in the fourth quarter of 2012 compared to the prior year period. Sequentially, Subscription Services revenue increased 22% from the third quarter. Within Subscription Services, our existing base of subscribers performed well. The following metrics exclude The Deal: Subscriber churn, which is typically higher in the fourth quarter due to seasonal fluctuations, remained flat from the third quarter. Our average monthly churn for the quarter was 2.6% compared to 3.8% for the fourth quarter of 2011. This resulted from getting the right subscriber into the right product and improving our user experience.

Monthly average revenue per user increased 6.1% in the fourth quarter of 2012 compared to the prior year period. This is further evidence that we are building a subscription machine, increasing customer satisfaction, which can justify higher prices.

Revenues from Media for the quarter declined 38% compared to the fourth quarter of 2011. It's worth noting that Media was up 10% sequentially. Overall total operating expenses for the quarter, which included The Deal for the entire period, were $16.1 million. Excluding restructuring and other charges and disposition of assets, this represents an increase of 4% compared to the same period last year.

The company reported a net loss of $2.2 million for the fourth quarter of 2012 as compared to a net loss of $2.4 million for the same period last year. Excluding the restructuring and other charges and disposition of assets, net loss was $1.7 million for the quarter.

Adjusted EBITDA was $500,000 for the fourth quarter of 2012 as compared to $1.2 million for the prior year period. For the fourth quarter of 2012, the company used $400,000 in cash from operations, and the net decrease in cash and investments was $900,000 from the prior quarter. Excluding payments made for restructuring and other charges, the company generated over $700,000 in operating cash flows during the fourth quarter.

Moving on to our financial results for the full year. The company recognized revenue for the full year of $50.7 million, which is a decline of 12% compared to the full year of 2011. For the full year of 2012, revenues from Subscription Services was $38.2 million and revenue from Media was $12.5 million. Revenue from Subscription Services for the full year declined 3% compared to the full year 2011. Excluding The Deal, monthly average revenue per user for the full year increased 6.3% in 2012 from the prior year, while churn was 3.5% for full year 2012, a slight increase year-over-year. Media revenue for the year declined 32% from 2011.

As for the expense side of the business, we continue to reap the benefits of our cost-cutting efforts made since my arrival. In 2013, we will see a full year's benefit of the restructuring we did in 2012. In addition, we will continue to look for opportunities to operate TheStreet more efficiently. For those of you that know me, it is in my blood to run a business as efficiently as possible. With that said, our focus in 2013 is driving revenue.

Total operating expenses for the year were $63.8 million, a decrease of 4% compared to 2011. Excluding $6.4 million related to restructuring and other charges and gain on disposition of assets, operating expenses declined 11% compared to 2011.

For the full year, TheStreet reported a net loss of $12.7 million as compared to $8.2 million for the full year 2011. Excluding the restructuring and other charges and gain on disposition of assets of $6.4 million, net loss from ongoing operations was $6.4 million.

Adjusted EBITDA was $1.3 million for 2012 as compared to $2 million last year. For the full year, the company used $6.2 million in cash from operations, including $4.1 million in payments made throughout the year related to restructuring and other charges. Excluding these payments, cash used in operations for the year was $2 million.

We expect to continue to reap benefits of last year's cost-cutting efforts and our acquisition of The Deal. This, combined with a new and energized management team and our improved marketing strategy, should drive revenue in 2013. In addition, I would like to mention that we continue to maintain an active M&A program, but have nothing new to report at this time.

In closing, as we enter 2013, we are focused on 3 core objectives: drive lucrative subscription revenue through The Deal and our subscription products; optimize our free site by recruiting more contributors, growing our audience and selling our audience to advertisers or turning them into lucrative high-lifetime-value subscribers; modernize our technology infrastructure to streamline workflows internally and harness the power of social mobile and video. We are very optimistic about the changes we have made over the past 9 months to position our company, and we are well positioned for 2013.

We strive to have a no-nonsense but collaborative team-oriented culture with minimum politics. We have fewer people doing smarter things. The Deal provides us with a strong platform for both organic and bolt-on growth through acquisitions.

In our subscription Newsletter business, we are seeing the optimization of our acquisition funnel and user experience starting to bear fruit. We have a successful new product launch with Dividend Stock Advisor, and we have a powerful options conference coming up. We plan to launch a new CMS, invest in bolt-on acquisitions for The Deal, and invest in our subscription businesses. Will this all happen overnight? I can tell you it can't happen fast enough for me or for the rest of the team.

With that, operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of William Martin with Raging Capital.

William Martin

I was just curious, can you break out the amount of sub revenues that came from The Deal?

Elisabeth H. DeMarse

We're not going to do that. So I can't. But to your point, The Deal revenue was in for the full quarter.

William Martin

Do you plan to break out greater metrics around The Deal moving forward or...

Elisabeth H. DeMarse

What I'd like to do is wait for John Ferrara to come in. And he and I will discuss it and we'll probably take a poll of our investors as well and see what makes sense. So I want to get everybody comfortable. I'm waiting for John to help do that.

William Martin

Understood. And then, I assume the bulk of The Deal's subscription terms are one year. So once you lap the one-year anniversary of the transaction, should you get a little bump up in revenue as the purchase accounting impact rolls off? Or...

Elisabeth H. DeMarse

That is such a great, perceptive question and the answer is yes. And it -- we -- will happen throughout the entire year. So we are being penalized a bit with the purchase accounting right now.

William Martin

Understood. And then on the traffic growth, you mentioned that, that had picked up. What do we need to see and what does the team need to do to translate that into better advertising performance?

Elisabeth H. DeMarse

Sure. So no, you're right again, we do have the inventory to do much better than we are doing. And we just need to focus and go back to our core advertisers and make sure that we're giving them a good experience and that they're experiencing a good ROI. Part of this strategy of reducing the number of brokerages we have as premiere partners is something that is part of that pathway. And it's actually working quite well. We're seeing the ROIs for the participating brokers come down to very reasonable levels because we have decreased the competition but also increased their share of voice on our site, so it's been a good system so far.

William Martin

Great. And just one final question, were you able to complete the bulk of the integration of The Deal in terms of restructuring costs in Q4? So should we have a clean 2013 or are there still ongoing ...

Elisabeth H. DeMarse

That's my closing -- my closing statement is going to be that 2012 is over and we worked really, really, really hard to enter 2013 with a clean slate. But I'll remind everybody of that at the end.

Operator

Our next question comes from the line of Mike Mauskopf with MRM Capital.

Michael Mauskopf

When The Deal transaction was done, I recall they had about $10 million in revenues, or that's what the ongoing was. So would it be safe to say that at least a quarter of that or $2.5 million is in this subrevenue number?

Elisabeth H. DeMarse

The purchase accounting is very, very complicated, Mike. And we're not -- we're not breaking out the business segments within Subscription Services. So it's almost impossible to answer your question.

Michael Mauskopf

Last quarter, you had average unique visitors up 30% year-over-year, I believe. What was it this quarter as -- on a year-over-year basis.

Elisabeth H. DeMarse

Yes, so we -- as I said, we've begun to undergo a process more where we're shifting from paid partnerships to SEO-driven traffic. But we were up 7%, I believe, quarter-to-quarter in unique.

Michael Mauskopf

Okay. And regarding the ChatOnTheStreet product, how is that in relation to -- you had talked about that last quarter and moving that with The Deal, with hedge funds or what have you. What's the ongoing status with that?

Elisabeth H. DeMarse

So we were unable to consummate a productive relationship there. Great people, Jamie's wonderful, but it just wasn't fitting with what our sales team could really accommodate. So I don't know if you realize it, but we did strike a relationship with a futures professional who's going to amplify us through the futures community and that's a wonderful sort of replacement for that initiative.

Michael Mauskopf

When does the ChatOnTheStreet -- did it terminate or it will terminate once your subscription is over? Or how does that, how is that...

Elisabeth H. DeMarse

It's so -- it was such a small part of our business. It was very immaterial so I'm not entirely sure exactly where we landed on that. But I guess, yes, we'll certainly fulfill the subscription requirements.

Michael Mauskopf

Okay. And it seems like the operating expenses went up. When I looked at it last quarter, obviously, The Deal was -- was The Deal the sole reason for that?

Elisabeth H. DeMarse

It was 100% the reason. But you have to understand, we're very proud of the numbers just because we really successfully integrated and were able to take costs and duplicate -- take the duplicated costs out very quickly.

Michael Mauskopf

The last 2 questions is, one is, this quarter is almost 2/3 done. How is it going? And the second question is, from a profitability point of view, do you believe you'll be profitable and you can -- and can you guide a little on that or...

Elisabeth H. DeMarse

So sadly, we can't give guidance, but I can look over my shoulder and let's say, looking back to halfway through the quarter, everything is on track. Everything is completely on track and so we just have to keep focused and deliver the quarter.

Michael Mauskopf

And as far as the year, profitability wise?

Elisabeth H. DeMarse

We're not saying anything about that, Mike. But it can't happen fast enough for me. As fast as I can.

Operator

[Operator Instructions]

Elisabeth H. DeMarse

Well, in the absence of further questions, I want to thank everybody for being with us today. As I said earlier, 2012 is over and we've worked really hard to enter 2013 with a clean slate. Still, I was reminded that we do have a lease obligation out there that may muddy the waters a little bit in 2013. But again, we worked very, very hard to enter 2013 with a clear -- a -- cleaner balance sheet.

There's been so much activity. There's been a lot of stuff moving around. There's been a lot of stuff moving around in our business, on the balance sheet, and on income statement. So hopefully, it's our goal that we are in a position to put most of that behind us. So when we get together at Q2, it'll be easier to see the real operational results for the company. And as I keep saying, it can't happen soon enough for me. So we'll work hard to have a good productive conversation in Q2. But thank you, and have a good evening.

Operator

Thanks, Miss DeMarse. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. Have a wonderful day. You may now all disconnect.

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