Traffix 1Q05 conference call transcript

| About: Traffix Inc. (TRFX)

Here are the entire prepared remarks (not available at the time of writing on StreetEvents) of the Traffix (ticker: TRFX) 1Q2005 earnings conference call:

1Q 2005 Conference Call, April 14, 2005

Good morning.  With me today is Andrew Stollman, our President and Dan Harvey, our CFO. As announced on March 16, 2005, Josh Gillon, our former EVP and General Counsel resigned from his executive positions at TRFX in order to pursue other business interests. All of us at TRFX thank Mr. Gillon for his five years of service, and wish him the best of luck in all his future endeavors.

We will open the call with a comparable and sequential basis overview of the financial results for our first fiscal quarter delivered by Dan. Following the overview I will then discuss several trend based factors recognized in the first quarter and their potential interplay with the Company’s prospects for the balance of Fiscal 2005.   

CFO Dan Harvey:

Good morning ladies and gentlemen:

Quarterly Financial Results:

  • Consolidated Revenue for the first fiscal quarter of 2005 was $13.3 million, an increase of 85% when compared to $7.2 million in consolidated revenues for 2004’s first fiscal quarter.   
  • Organic growth in core revenues accounted for approximately $3.8 million, or 62% of the total consolidated revenue increase of $6.1 million. The organic growth was driven by the expansion of our customer base, and partially through the improved utilization of our marketing database
  • Revenue attributable to recent acquisitions accounted for the balance of the consolidated revenue increase of $2.3 million, or 38% of the total consolidated revenue increase of $6.1 million. Note that the recent acquisitions where completed subsequent to the first fiscal quarter on 2004. The acquisition revenues were from search engine marketing activities and from the sale of performance based on-line advertising media.
  • Gross margins on a percentage basis were off approximately 22% relatively, on a year-to-year comparative basis, more succinctly we reported a 46.9% gross margin in 2004’s first quarter compared to a 36.6% gross margin reported in the current quarter; pursuant to the changes undertaken in our business model over the last 15 months this comparative benchmark losses its intuitive value. More importantly, margins remained stable on a sequential basis when comparing the first quarter’s 36.6% gross margin with the 37.1% gross margin reported during the fourth quarter of 2004. Based on the 23% sequential increase in revenues, we are very pleased to have recognized a negligible margin compression. We are generally confident that the stable gross margin environment is the by-product of our promotion-based, content-centric, web-property strategy and the economies of scale recognized as a result of the longer-term customer relationships that arise from this strategy.
  • Income from operations increased 92% comparatively, and on a sequential basis we went from a $247,000 fiscal 2004 fourth quarter operating loss to operating income of $198,000 in 2005’s first fiscal quarter. Our core overhead remained relatively constant, and the net increase in consolidated overhead was primarily attributable to   the two acquisitions completed in the past ten months.
  • Pre tax income improved $595,000 comparatively, and $874,000 sequentially. Both the comparative and sequential improvement results from the capital gains recognized this quarter from the liquidation of our equity security portfolio. The capital gains were recognized in order to take advantage of an expiring capital loss carryover.
  • Net income for the first quarter was $623,000, representing a comparative increase of $270,000, and a sequential increase of $502,000. Diluted earnings per share was $0.04 in the first quarter on diluted average shares outstanding of 14.3 million vs. the comparative Diluted earnings per share of $0.03 in the first quarter of fiscal 2004, on diluted average shares outstanding of 13.6 million. For the sequential comparison, the fourth quarter of fiscal 2004 reported Diluted earnings per share of $0.01 on diluted average shares outstanding of 14.1 million.
  • Our balance sheet continues its strong liquidity position, maintains it freedom from non-trade debt and carries approximately $2.42 of cash and marketable securities per share. This financial position will allow us to capitalize on attractive strategic options that might present themselves in the future.

I now turn the chair back to Mr. Schwartz.

CEO Jeffrey Schwartz:

Good morning ladies and gentlemen

Successful businesses all go through a maturation process, and I am excited to report that Traffix is approaching an inflection point, where our operating  expenses are beginning to flatten out and our revenues are showing growth, increasing our core business operating margin and growing share holder value.   The many business units operated by Traffix are beginning to work together in a way that will continue to benefit operating margins in future periods.

During prior period conference calls we discussed our developing web content strategy, and I am proud to announce that this strategy is maturing into a successful content business for Traffix.  Within the past 6 months, Traffix has launched 4 content rich websites: a site offering downloadable music, a site filled with brand name recipes, and 2 interactive game sites and  These new entities already generate over 7 million unique visitors per month and are on target to deliver over $15 million in revenue and $3 million in income from operations in fiscal 2005. 

Our web content strategy continues to mature and we are repackaging some of our content to appeal to specific niche markets and build more focused communities.  Music of Faith is our new downloadable music site that offers more conservative fare like gospel, choir and holiday songs.  Eat Right Recipes is a place for dieters to find low calorie and Atkins friendly recipes.   With a scalable model in place, we are aggressively pursuing new content channels, and we are continuing to expand our existing content categories. 

The development of these new niche content sites will also create some exciting synergies with our existing online dating business, continues its steady revenue growth, and is pursuing an aggressive strategy of expanding into niche lifestyle groups.  Traffix has continued to invest in the interactive community technology that powers iMatchup.  This technology will augment our content sites with interactive community content, and allow iMatchup to leverage an existing self identified community to build its niche dating business.

With the emergence of our web content strategy, Traffix’s media footprint and market penetration has swelled.  According to ComScore, the Traffix Network had approximately 17 million unique visitors and almost 600 million page views in March 2005.  Historically, we have not sold traditional advertising in this media, but it is an untapped resource of banner inventory.  Currently our banner inventory exceeds 1 billion impressions per month. Our team is exploring all of our options in developing this revenue stream, in the attainment of maximum value. 

I am optimistic that as we continue to develop this business strategy, our operating margins will continue to improve and build shareholder value.

Revisiting the acquisitions of the past 10 months.

Send Traffic was acquired at the end of June 2004.  Our stated fiscal 2005 projection for Send Traffic continues to be $10 million in revenue and $1 million in income from operations, including inter company sales.  We are currently on track to meet or beat those projections.   Since acquisition the company has had a relatively modest growth rate from third party clients.  However, the business has proven to be a tremendous asset in helping us achieve our over all strategic goal of building Traffix into a leading online media and marketing company.  It would have been virtually impossible for us to have conceived of and executed on our web site content strategy without Send Traffic.  Since we acquired Send Traffic our core business expenditures in Search Engine Marketing have profitably grown by over $800, 000 a month.  This was made possible by their state of the art management tools and team of Search engine marketing professionals.  Management is pleased with all the trends and prospects that we are currently seeing at Send Traffic.

Hot Rocket Inc. was acquired on January 21, 2005.  At that time we announced a projection for the company that they would achieve $6 million in revenue and contribute $1 million in income from operations.  I am pleased to report that they are currently ahead of budget.  Hot Rocket is run by Mark Colociappo, who is a new breed of Internet arbitrageur.  Essentially, Hot Rocket purchases media on a cpm basis and uses a performance based model to deliver sales, leads, and data to third party clients. The company’s skill lies in it’s ability to rapidly deploy and optimize the media it acquires.  Each and every day is a new auction for Hot Rocket.  The most profitable offers receive the most volume.  This is virtually an agnostic approach to business, where return is the key driver.

Management believes that we are not even close to seeing the results that economies of scale can bring the company.  If we are fortunate enough to maintain our revenue trajectory, our margin should increase even faster in the future.  The demand for our media is there, we are committed to continue to deliver the media to the market place and grow our business.