Internet Capital Group Q4 2008 Earnings Call Transcript

Feb.25.09 | About: Actua Corporation (ACTA)

Internet Capital Group, Inc. (ICGE) Q4 2008 Earnings Call February 25, 2009 10:00 AM ET

Executives

Karen Greene - Vice President, Investor Relations and Corporate Communications

Walter W. Buckley, III - Co-Founder, Chief Executive Officer and Chairman

Kirk Morgan - Chief Financial Officer

Analysts

Jeff Van Rhee - Craig-Hallum

Operator

Good day, ladies and gentlemen and welcome to Fourth Quarter 2008 Internet Capital Group's Earnings Conference Call. My name is Francine and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Ms. Karen Greene, Vice President of Investor Relations. Please proceed ma'am.

Karen Greene

Thank you. Good morning. This is Karen Greene with Investor Relations and I want to welcome you to Internet Capital Group's fourth quarter conference call.

I would like to remind everyone that we're going to use presentation slides to accompany our prepared remarks today. These slides can be found at our website at internetcapital.com. Go to the Investor Information tab and you'll see an icon for our fourth quarter conference call. The slides can be accessed through that icon. For those of you without immediate access to our website, the conference call and presentation slides will remain on our website and be available for future reference.

On the call this morning, we will be discussing certain non-GAAP financial measures. For additional information on these non-GAAP financial measures, including a reconciliation of these measures to the most comparable GAAP measure, please refer to the press release we put out this morning including the attachment to this press release. The press release is also available on our website, which, again is www.internetcapital.com. To access the press release on our website, go to the ICG Press Release tab and select the February 25th press release. The attachments to the release can be accessed by clicking on the PDF file contained within the release itself.

Before we begin, I would like to briefly review our Safe Harbor language. The statements contained in our press release and those that we make on the conference call as well as the accompanying slide presentation that are not historical facts are forward-looking statements that involve certain risks and uncertainties including but not limited to risks associated with the uncertainty of future performance of our partner companies, acquisitions or dispositions of interests in partner companies, the effect of economic conditions generally, capital spending by customers, development of the e-commerce and information technology markets and other uncertainties detailed in the company's filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those projected.

Now let me turn the call over to Walter Buckley, ICG's Chairman and CEO.

Walter W. Buckley, III

Thanks Karen and welcome and thank you for joining us this morning.

I'll begin by providing you with an update on ICG and its partner companies for 2008 including fourth quarter highlights and Kirk Morgan, our Chief Financial Officer, will follow with ICG's financial results and a review of partner company performance for the fourth quarter and year end.

Against the backdrop of a very challenging economic environment, ICG and its partner companies demonstrated solid progress on both the top and bottom lines in the fourth quarter.

Turning to slides four through six, let me share with you some of the following highlights.

In the fourth quarter, our partner companies were in aggregate EBITDA positive exclusive of stock-based comp and unusual items. This significant improvement in Q4 EBITDA was led by ICG Commerce, Channel Intelligence and Freeborders. We achieved core company aggregate revenue growth of 16% in Q4 and annual aggregate revenue growth of 23%. In addition, a number of our companies enter 2009 with strong backlog of booked business.

Regarding additional 2008 activity, we ended 2008 in a strong financial position. As we reported earlier, we sold Creditex to IntercontinentalExchange or ICE and realized over $60 million in cash proceeds as a result of that transaction. And during the year, we reinvested in ICG and our partner companies, demonstrating our confidence in the value they can deliver.

We completed three major financings: First, in Channel Intelligence, a $6 million funding, increasing ownership from 40 to 47%; secondly, StarCite, a $14 million financing, increasing ownership from 26 to 34% and finally, GoIndustry, a $10.5 million funding to help facilitate its acquisition of DoveBid, the number two player in the used equipment auction market.

We also repurchased 1.9 million shares of our common stock for $9.3 million, pursuant to our $25 million share repurchase program. We continue to increase our deal flow both in quality and quantity, but remain prudent and disciplined regarding valuation expectations.

And finally, our partner companies hired three outstanding executives during the year, Greg Dukat, our new CEO of StarCite; Bob Tuttle, the CEO of Vcommerce and John Gregitis, President of Investor Force, significantly enhancing the potential of all three companies.

Now slide seven through 14 reflect partner company highlights from all our core companies, and I'll hit on a few of them, starting with Channel Intelligence.

Channel Intelligence, a provider of enterprise e-commerce solutions for manufacturers and online retailers reported strong fourth quarter growth with revenues up 46% and full year revenues up 36%. The company accomplished this growth despite a very challenging economic environment, a slow holiday season and poor consumer sentiment.

Additionally, the company demonstrated strong EBITDA improvement during the year. New customers during the fourth quarter included Microsoft Office, 3M, Lexmark, denim (ph), Paper Mate, Sears Home Depot. And CI expanded its relationships with numerous customers including Best Buy, Hewlett-Packard, Xerox, Proctor & Gamble, just to name a few. The CI Managed Services teams directed advertising spend for approximately 50 leading retailers and successfully driving over $150 million in 2008 in customer sales while achieving an excellent return on ad spend.

Freeborders, a global provider of offshore IT services delivered from China, reported 51% revenue growth in 2008 and significant improvement in EBITDA. Growth was fairly evenly spread throughout the year with a slight uptick in Q4. The company signed seven new clients and expanded relationships with several existing customers. And Freeborders is widely recognized as one of the leading IT outsourcers in China, receiving the 2008 Frost & Sullivan Company of the Year Award, recognition by FIRESTAR Research and was featured by the International Association of Outsourcing Professionals for outsourcing excellence.

ICG Commerce, a leading procurement services provider, had a particularly strong Q4, ending the year with annual revenue growth of 23%, exceeding EBITDA targets and establishing contracts with new and existing customers worth approximately $200 million in total contract value. In the fourth quarter, ICG Commerce established multi-year, multi-million dollar relationships with three new clients including, Whirpool and Teva Pharmaceuticals.

The company also expanded relationships with six existing customers, including a significant expansion with oil services leader Cameron industries. These extensions were worth over $38 million in total contract value. Through new client acquisitions and expanding existing relationships, ICG Commerce added close to $5 billion in spend under management in 2008, bringing total spend under management to well over $10 billion. Total contract value at year end was $275 million.

During the year, the company continued to expand its global delivery platform, opening new centers of excellence in London, England and Quendou (ph), China. The company was also named the leading End-to-End Procurement Outsourcing Provider by the Black Book of Outsourcing based exclusively on customer feedback. This acknowledgment reflects the company's commitment to building strong partnerships with customers and a track record of delivering measurable savings.

Turning to MetaStorm, a leading provider of business process management software. The company started 2008 on a strong note with a filing of an S-1 to go public in early Q2. However, economic headwinds hit MetaStorm in Q2. These economic conditions and weaker 2008 demand led MetaStorm to cancel its proposed initial public offering.

With that said, MetaStorm's management team lead by Bob Farrell is well positioned to capitalize on the opportunities in this emerging market and ended the year on a strong note. With 25% annual revenue growth on a GAAP basis, the company added 181 new customers for the year, including 51 new customers in Q4. Customers signed in Q4 include Advance Auto Parts, Defense Technical Information Center, Ericsson AB, Millennium Pharmaceuticals and the Washington State Liquor Control Board.

Existing customers expanding their use of the MetaStorm software included Allergan, MetLife, Network Rail, Sprint Nextel, Standard Chartered Bank, Talisman Energy and Thomson Elite, to name a few.

StarCite, a provider of on-demand global meeting solutions, faced a number of challenges in 2008, including the distractions and additional expenses caused by delays in their technology integration project as well as the impact of reduced travel activity, resulting from the economic recession.

Balancing these setbacks was the hiring of a new CEO, Greg Dukat who was recruited in midyear. This was an important milestone and in six months, Greg has brought new rigor and a fresh vision to the company, focusing the company on important initiatives to respond to the current environment.

The company reported 22% revenue growth in the fourth quarter, adding new customers, Cephalon, Genentech, Target and Lincoln National Corporation. Additionally, StarCite experienced a considerable uptick in bookings in December. In fact, supplier bookings, i.e. hotels, consisting of marketing fees and technology sales were at an all-time high in Q4.

Most importantly, the company completed the migration of its customers to its new technology platform, which has made way for significant cost reductions and upsell opportunities within existing customers. The company signed 20 new customers in total for the year and enters 2009 with a healthy pipeline.

StarCite also expanded its relationship with Carlson Wagonlit Travel, one of the world's largest travel management companies, signing a multi-year agreement. On the supplier side, StarCite also completed the direct integration of its new Small Meeting Solution with Hilton Hotels and renewed a substantial relationship with Starwood Hotels & Resorts.

And finally, WhiteFence, a leader in online service transactions for home services, reported revenue growth of 34% for 2008 over 2007 and a 28% increase in revenues in Q4 '08 versus Q4 '07. The company also reported full year EBITDA improvement of 52% and was near EBITDA breakeven in Q4 this year.

Customers placing orders for home services with WhiteFence increased to 1.4 million in 2008, an increase of 31% compared to 2007. And finally, WhiteFence was recognized by Inc. magazine as one of the fastest growing private companies in America.

In general, we were pleased with the performance of our partner companies, given the challenges of the macro environment. The progress our companies made in 2008 shines a light on the value they provide their customers. Our partner companies offer their customers an opportunity to reduce costs, gain efficiencies and benefit from visibility into their business processes.

Just to provide a few examples. ICG Commerce signed four very large contracts over the past 100 days with companies who needed to achieve critical and rapid cost reductions. These companies appreciated that outsourcing indirect procurement to ICG Commerce would yield about five times more savings than other outsourcing endeavors. And through an approach of applying category expertise to analyze and manage our indirect spend would deliver hard dollar savings that could be in the hundreds of millions of dollars over the life of the contract.

StarCite has recently signed a number of new customers who are looking for the most cost effective approach to hosting meetings. Suppliers or hotels are placing increased marketing dollars on a StarCite platform because of the high customer acquisition ROI.

Similarly, Channel Intelligence experienced good growth through a tough retail season, because their customers relied on the CI platform to drive sales and direct their online ad dollars to yield the highest possible returns.

I could cite similar examples of customer ROI in each of our partner companies. Their solutions are an important element in helping their customers drive efficiencies by reducing costs and increasing -- or increasing revenues.

From a corporate perspective the ICG management team remained actively focused on our top priority of working diligently with our partner company management teams to navigate through these challenging times. Acting as Executive Chairman, the managing directors who sit on the boards of our partner companies are actively involved on strategic, financial and operational fronts and in some cases led the charge on new initiatives including financings, recap, M&A, recruiting, sales and marketing and expense management. Supporting these efforts, ICG corporate provided legal, financial and marketing expertise to our companies as well.

Turning now to acquisition activity during the year. While we did not complete a new acquisition in 2008, we evaluated over 400 deals with a deeper look into approximately two dozen companies. We submitted six term sheets. But after negotiations, we concluded the valuations at which we could acquire interests in new private companies would not result in sufficiently attractive returns to ICG stockholders.

Recently, we have seen indications that private company valuations are beginning to close the gap with their public company counterparts, which supports our view that these assets were richly valued. We view this trend very positively and we believe over the next six to 18 months, you will see some very exciting investment opportunities at prices we find attractive. As a result, we are increasing our focus on finding and evaluating companies in markets that we think are best equipped to weather this economic downturn.

On the monetization front, we were extremely pleased with the outcome of the Creditex sale to ICE. And we are pleased that we acted opportunistically in selling our ICE shares. I think the ICG team did a great job in generating over $60 million in proceeds from this sale in a very volatile and challenging environment. Clearly, we were disappointed that MetaStorm had to pull the S-1 in response to deteriorating markets, but we believe it was the right decision for the company.

As a result of our capital deployment decisions as well as Creditex monetization, ICG enters 2009 in a strong financial position. We also believe that while our companies will face challenges as a result of the economic environment and conditions, they are well positioned to weather this storm as a result of the improvements they have made and will continue to make on the EBITDA front.

Our number one priority is to continue to drive our partner companies to EBITDA profitability while achieving solid revenue growth. Secondly, we want to proactively build deal flow in several targeted markets. We look forward to continuing to share our progress over the next several months and hope you will attend our March 4th investor conference that will feature ICG Commerce, MetaStorm and Channel Intelligence. Please go to our website or contact Karen Greene for further details.

With that, I'll turn it over to Kirk.

Kirk Morgan

Thanks Buck and good morning. Over the next several minutes, I will summarize ICG's fourth quarter and full year 2008 consolidated GAAP results, provide some color around our aggregate 2008 core company revenue and EBITDA performance, discuss ICG's liquidity position and review our expectations for 2009 at a high level.

I'll begin on slide 16 with our fourth quarter 2008 consolidated income statement. During the quarter, ICG consolidated results of three partner companies: ICG Commerce, Investor Force and Vcommerce. We consolidated two partner companies in the comparable 2007 period: ICG Commerce and Investor Force.

Consolidated revenue in the fourth quarter of 2008 totaled $20.5 million compared with $14.1 million for last year's fourth quarter. This growth is due to revenue growth at ICG Commerce and, to a lesser extent, the 2008 consolidation of Vcommerce.

Moving to the bottom line, ICG reported consolidated net loss of $26.6 million or $0.71 per diluted share for the fourth quarter of 2008 as compared with a net loss of $3 million or $0.08 per diluted share for the fourth quarter of 2007.

For the year, ICG reported consolidated net loss of $22.9 million or $0.60 per diluted share as compared with a net loss of $30.6 million or $0.81 per diluted share for 2007. The quarterly and annul net loss was driven principally by approximately $23.2 million of impairment charges recorded in the fourth quarter of 2008. In conjunction with our normal annual impairment testing, we recorded other than temporary impairments of equity and cost method investments, primarily GoIndustry where the quoted market value of ICG's stake in GoIndustry was well below ICG's carrying value and certain impairments of our consolidated goodwill.

Additionally, results for the 2008 and 2007 quarters include gains primarily related to non-cash, mark-to-market accounting gains on our Blackboard hedges. Results for the full year of 2008 also included the gain from our Creditex sale.

Let me next review our core company results on slide 17. The information I am about to share with you relates to ICG's eight core companies in which we had an average ownership interest of 47% as of December 31, 2008.

Aggregate revenue of our eight core companies increased 16% to $70.4 million during the fourth quarter 2008, up from $60.5 million in last year's fourth quarter. The companies experiencing strong revenue growth during the quarter were ICG Commerce, Freeboarders and Channel Intelligence. This brings our 2008 annual aggregate revenue growth to approximately 23%.

Regarding the fourth quarter, in light of the significant headwinds our companies are facing in the current economic environment, we believe that 16% year-over-year revenue growth is solid. It's also important to note that all of this quarterly growth is organic, increasing from approximately 14% organic growth in the first half of 2008.

I'll now move on to EBITDA. Our eight core companies reported an aggregate $1.5 million EBITDA loss during the quarter, a significant improvement on an aggregate EBITDA loss of $11.6 million in last year's comparable quarter. Four of the eight companies reported positive EBITDA in the 2008 quarter, a great accomplishment in this market, highlighting the value proposition our companies offer their customers and the impact of cost cutting initiatives. It's also important to note that the fourth quarter is typically our core companies' strongest.

For the year, EBITDA loss was essentially flat from the 2007 period. Now, again, I believe it's important to provide a little more color on our EBITDA performance. On the bottom of this slide, I highlight some elements included in our EBITDA results such as stock-based compensation, restructuring, severance, write-off of some S-1 related expenses at MetaStorm and other unusual costs. EBITDA would have improved from a loss of $8.1 million in the 2007 quarter to positive EBITDA of $3.8 million in the 2008 quarter if these items had been excluded.

For the year, aggregate EBITDA would have improved from a loss of $26.1 million in 2007 to a loss of $14 million in 2008. Again, this highlights the solid EBITDA performance I discussed earlier. And as you can see, the Q4 improvements are even more encouraging when you look at it relative to our annual performance. I believe this is positioning these companies for more profitable growth in 2009.

The next slide, slide 18, should prove very useful in your valuation of our core company aggregate revenue performance for 2008. In an effort to provide more transparency into our core companies, we've categorized our core companies based on their 2008 reported revenues in increments of $10 million.

Now let's move to slide 19. Slide 19 presents the movement of cash at the parent company level during the quarter and year and total liquidity at December 31st. We deployed a total of $2 million in the quarter primarily to Investor Force and Freeborders, received $3 million in proceeds from the sale of the remaining freely tradable ICE shares we received in the Creditex transaction. We purchased 9.1 million of our common stock, received an income tax refund of $4.9 million and had net cash operating costs of $2.3 million.

During the year, we deployed a total of $42.3 million to partner companies, received $63.5 million in cash proceeds primarily from the sale of ICE shares received in the Creditex transaction, repurchased 1.9 million shares of our common stock for $9.3 million, received the tax refund and had net cash operating costs of $12.7 million.

We ended the year with $73 million of cash at the parent company. The value of our Blackboard holdings, including our hedges at year end was $64 million and the value of our GoIndustry holdings was $5.3 million.

Let me provide an update on the 25 million share repurchase plan we announced last year. For the year, we deployed 9.3 million, repurchasing 1.9 million shares at an average price of approximately $4.75 a share. We believe this was a very good use of our capital and we want to continue be very prudent and measured in all of our capital allocation decisions. Our stock repurchases will be no different.

Let me next close with some views on 2009. Now in light of the macroeconomic backdrop, we believe our 2008 performance was solid. We expect revenue growth in 2009, but the lack of visibility in the 2009 corporate spending and other macroeconomic uncertainties has made top line planning for 2009 very challenging. As the year unfolds and some clarity is reached, we will provide updates on our revenue growth expectations.

Our focus in 2009 will be on the bottom line. At the core company level, we expect to make significant improvement on the EBITDA front. Five of our eight companies expect 2009 operating costs to be lower than 2008, highlighting the cost reductions completed in 2008 and leverage in the models.

However (ph) profitable in 2008 and expecting to be in 2009, ICG commerce will increase 2009 expenses over 2008 in support of its growing backlog of businesses -- of business.

Additionally, on the corporate side, we have reduced our ICG operating expenses from a 2008 run rate of over $15 million to a 2009 run rate of just under $12 million, a reduction of over 20%. We achieved this through lower compensation levels, head count reductions and reduced other outside services. We will continue to look for ways to operate ICG and our companies as efficiently as possible.

We look forward to reporting to you on our 2009 results. I'll turn it back over to Buck.

Walter W. Buckley, III

Thanks Kirk and we would now like to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jeff Van Rhee of Craig-Hallum. Please proceed.

Jeff Van Rhee - Craig-Hallum

Good morning everyone, great results. Certainly, you guys ought to be pretty satisfied; this looks really good. A number of questions for you, if you would. Just to follow up on how Kirk just wrapped things up in terms of the '09 view. Understanding everything he said, there is limited visibility and a lot of people have opted for one quarter as opposed to a full year's guidance. Can you talk maybe qualitatively in terms of what the risks and opportunities are in the revenue picture and try to narrow those expectations somewhat? You said you think you'd grow. Could you possibly narrow that down to 0 to 10%? I mean give us a sense of a range and what the biggest variables are in that picture given a lot of these companies are on demand and have pretty reasonable backlogs for fairly good visibility?

Walter Buckley, III

Yes, Jeff, I think most of our companies we do have good visibility into and I think we'll see solid growth from a majority of our companies from what we can see today. And we have got one or two -- one specifically that's really a license software business where you just don't have the visibility you would like to have to forecast out four quarters. And so that's really the biggest -- the issue we are facing as we think about 2009. That said, I think we'll see solid growth and, as importantly, increasing EBITDA.

Jeff Van Rhee - Craig-Hallum

If you exclude the one license company, do you think it's reasonable as a starting base on the others as a group might be able to put up double-digit growth?

Walter Buckley, III

Yes.

Jeff Van Rhee - Craig-Hallum

Okay. And then on the EBITDA, you did comment that a number the companies intend to lower expenses in the forward year. Do you have any semblance of what you think is a number of the eight that will be EBITDA positive for '09, what your expectation is there?

Kirk Morgan

Jeff, we are not putting that line in the sand at this point in time. I mean we are certainly focused in driving all of the companies to get there eventually. I think a number of those will be positive in 2009 if the current macroeconomic environment stands to where we think it will be. But in terms of a specific number at this point in time, we are not ready to do that.

Jeff Van Rhee - Craig-Hallum

Okay. And then I guess ICG Commerce is just... you've had some fantastic signings lately and a lot of renewals business just seems to be going exceptionally well there. Would you comment on two things there? One, the $275 million in backlog, what's the average contract length there? And then also, the gross margin improvement in the consolidated numbers as a result of ICGC and a few others, but probably primarily ICGC, can you talk about what changed there?

Walter Buckley, III

Yes, I'll hit the first and let Kirk do the second. ICGC had a great year, and really... it really back ended into the fourth quarter where they signed three major new accounts and a significant upgrade with Cameron industries. The average length of a contract is three to five years, so I would say four is a good number to think about. And I think that what's compelling about ICGC in this environment is that they are driving measurable savings fairly quickly once the service is up and running. And so with well over $10 billion of savings, our average... I mean spend under management, our average savings is roughly 10%. So these are measurable savings the company is facing in the pressures of the economic environment they are in. And so what's good for... what we are excited about there is that the pipeline going into this year is fairly solid even after those types of signings. And that's something we hadn't seen before. Usually, when we had a number of signings, we would go, the pipeline would sort of empty out for a period of time. With that, I'll turn it over to Kirk on the margin side.

Kirk Morgan

Yes, as Buck said earlier, the majority of ICG Commerce's signings where somewhat late in the fourth quarter. So there is a bit of a revenue pick up there, Jeff without some corresponding expenses that are hitting right away. So I think you were seeing the benefit of that a lot in the fourth quarter as well as just reduced expenses I think and focus at Vcommerce and Investor Force as well.

Jeff Van Rhee - Craig-Hallum

So should we expect on a consolidated basis at least gross margins to come down?

Kirk Morgan

Yes.

Jeff Van Rhee - Craig-Hallum

Okay. Okay, I'll let... oh, one last one before I jump off. You gave a lot of the numbers about the buyback. It's great to see and I think it is a great use of cash. Can you talk to just in the quarter what the number of shares acquired was and what the average price was?

Kirk Morgan

In the fourth quarter?

Jeff Van Rhee - Craig-Hallum

Yes.

Kirk Morgan

Yes, so in the fourth quarter, I think for the year, it was 9.3 million at 4.75 average price. The vast majority of the shares, 9.1 million of dollars was deployed in the fourth quarter. So as I think of it, it was during the quarter at 4.75.

Jeff Van Rhee - Craig-Hallum

Okay. Great, thanks.

Operator

(Operator Instructions) And it appears we have no further questions.

Walter Buckley, III

Well I would like to thank everyone for joining us this morning and we look forward to our investor conference next week and reporting future results in May. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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