Ancestry.com Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar.28.13 | About: Ancestry.com Inc. (ACOM)

Ancestry.com (NASDAQ:ACOM)

Q4 2012 Earnings Call

March 28, 2013 5:00 pm ET

Executives

Howard Hochhauser - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer and Member of Equity Committee

Timothy P. Sullivan - Chief Executive Officer, President, Director and Member of Equity Committee

Analysts

Jeffrey A. Harlib - Barclays Capital, Research Division

Anisa Hsieh

Rich Gross

Operator

Good day, everyone, and welcome to the Ancestry.com Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I'd like to turn things over to Mr. Howard Hochhauser. Please go ahead, sir.

Howard Hochhauser

Thank you, operator, and thanks, everyone, for joining us. This our first call since our take-private transaction, and I want to thank those of you who are listening today for your support in our December financing.

In our remarks today, we will include statements that are considered forward-looking within the meaning of securities laws. Forward-looking statements are based on current knowledge and expectations, and are subject to certain risks and uncertainties that may cause actual results to differ from the forward-looking statements.

A detailed discussion of such risks and uncertainties is contained in our annual -- in our company's annual report for the year ended December 31, 2012. The company undertakes no obligation to update any forward-looking statements.

We will also refer to certain non-GAAP measures which, in combination with GAAP results, provide additional analytical tools to understand our operations. You can find a reconciliation of these non-GAAP measures to the GAAP results included in our press release. A reconciliation is also posted on the company's IR website found at ir.ancestry.com. And finally, a rebroadcast of this call will be available on our website after 6 p.m. Mountain Time today.

Okay. So now I'm going to walk through the financial results, and then Tim will provide some additional perspective around 2012 and the strategy we're pursuing as we move forward onto our new ownership structure, which, in short, is largely consistent with the path we have been pursuing for the past several years.

To help you in reviewing and analyzing the results, in addition to our press release, we have published an annual report that you can access through intralinks.

Please note that the merger transaction was completed on December 28, 2012. Accordingly, our results are presented for the predecessor company from January 1 through December 28 and for the successor company from December 29 through the 31st. For simplicity, we have also presented combined results for the full year and fourth quarter. I'll be referring only to these combined results in my comments today.

With that, let's jump in. We delivered solid performance for the fourth quarter and full year 2012. Revenue and adjusted EBITDA growth were strong, and we ended the year with 2 million subscribers for Ancestry-branded websites and approximately 2.5 million overall when you include our other brands such as Archives and Fold3. Total non-GAAP revenue came in at $132 million for the quarter and adjusted EBITDA was $50 million.

For the full year, non-GAAP revenue totaled $488 million and adjusted EBITDA was $179 million. Adjusted EBITDA for the 2012 period does not include transaction-related expenses which totaled $109 million for the year, $106 million of which was recognized in the fourth quarter. These include a noncash charge related to stock comp along with certain other cash expenses such as investment banking, legal, accounting, consulting and other merger-related costs. The company delivered approximately $106 million in free cash flow in 2012.

Looking more closely at the Ancestry-branded website results, starting with subscriber growth, we added approximately 313,000 net subs in 2012. As has been the case in recent years, most of our net sub additions came in the first half year. We ended the year in a solid position with 2,016,000 subscribers, up 18% year-on-year.

Overall subscription revenue grew 24% for the quarter to $120 million and for the year, was up 21% to $455 million. Our subscription revenue is approximately 75% U.S. Of our international sub revenue, U.K. was up 14% with 10% subscriber growth.

Subscription revenue increased at a higher rate than our total subscriber base for 2 primary reasons: the impact of Archives.com acquisition, whereby we closed the acquisition over the summer of 2012; and continued increases in the percentage of customers taking premium packages, which we attribute to the ongoing addition of quality content married with sophisticated marketing. At the end of the year, approximately 50% of our base was in such a premium package.

I want to note that moving forward, the primary subscriber metric we will provide is total subscribers. From that, you can derive net subscriber additions. We will no longer be reporting ARPU, SAC or churn. We have made this reporting change to focus the audience on our core financial performance such as revenue, EBITDA, free cash flow and in our total subscriber count. We are doing this on the heels of a very healthy quarter and a positive outlook for the first quarter.

Moving to CapEx. In 2012, we invested approximately $24 million in content, $13 million in technology and -- excuse me, $8 million in facilities for a total CapEx investment of $44 million. That's consistent with our prior stated expectations for the full year. Likewise, in 2013, we are targeting a CapEx spend of approximately $40 million to $45 million, including a content spend of about $25 million to $26 million.

Looking at the balance sheet. We ended the year with $36 million in cash and cash equivalents. In December, we completed a $970 million financing related to the take-private transaction, consisting of $300 million in 8-year senior notes bearing interest at a fixed rate of 11% and a $720 million loan package, including $50 million undrawn revolving credit facility and a $670 million term loan, which expires in December of 2018.

As of December 31, 2012, the interest rate on the term loan was equal to a LIBOR floor of 125 plus an applicable margin of 575. Again, the revolver remains undrawn.

We finished the year with a leverage ratio of 5 spot 22. Given the take-private transaction, we do not plan on issuing earnings guidance going forward. But since our call is taking place on March 28, I want to provide some color around our performance in Q1 and our current leverage.

In short, things are going well. We're now cycling through the impact of the Who Do You Think You Are? television show which aired on NBC from February through the middle of May 2012, and we are pleased with our current net subscriber growth. We expect to finish the quarter with approximately 2,080,000 Ancestry subscribers. That's 3% growth relative to the end of the year and 11% on a year-over-year basis.

We had previously estimated the television show had an impact on our gross subscriber additions of about 100,000 or about 8% of our total, and that continues to look like the right estimate. In fact, due to our expected performance in Q1, we expect to have a cash balance at March 31 of approximately $70 million. And with strong year-over-year growth and adjusted EBITDA, we expect to have a leverage ratio of approximately 4.8x at March 31 or nearly a full term lower than when we did the financing. That assumes total debt outstanding of $970 million or $900 million on a net basis.

In short, we are pleased with our business performance in Q1, including our revenue, subscriber and adjusted EBITDA growth. With that, I'll now turn the call over to Tim.

Timothy P. Sullivan

Thank you, Howard. Since this is our first earnings call as a newly private company, and I know that some of you are still relatively new to the Ancestry story, I really wanted to briefly start with just a simple restatement of our core growth thesis.

We continue to believe that family history is a sizable potential market, and that remain in the early innings of this market's growth and development. What we know is the desire to understand who we are and where we've come from is a fundamental and relatively universal human interest. Research that we have commissioned from Harris Interactive indicates that 80% of American adults are interested in their family history. So that's 250 million people just in the U.S. that say they care about the core thing that we do.

We further believe the key to growing this market is the creation of online experiences that make family history easier, more accessible, more social and more collaborative. It's this belief that drives our focus on investments in technology and product experience. In a simple sense, as much as the Ancestry has revolutionized family history over the past decade plus, we believe these investments in product and technology can continue to revolutionize and to democratize family history in ways that will make our services even more relevant and more interesting to millions more families around the world.

We also believe that we are still a long way from achieving our goal of aggregating the world's family history knowledge. In archives all around the world and in shoeboxes and annex everywhere, there remain so much content yet to be digitized, indexed and put online in a way that is easily accessible to our users. Digitized historical content has always been the foundation of our value proposition, so we remain highly focused on content acquisition and aggregation, both by expanding our network of strategic relationships with archives, governments and private institutions all over the world, but also by creating the tools and the platform that allow our users to upload their own archival photographs, documents and stories.

We also think we have a great subscription business model with attractive economics that allows to make significant investments in building our category defining brand. Our marketing efforts, combined awareness-driving media like TV, radio and PR; efficient customer acquisition from paid search, display advertising, affiliate marketing and SEO; an increasingly sophisticated and personalized marketing to our large registrant base have already demonstrated some level of interest in our products.

And lastly, we think family history over the long term is a global idea. And while our business today is largely focused on our well established but still growing businesses in the U.S., the U.K., Canada, Australia and Sweden, we are making important content investments in markets like Germany where we believe that -- that we believe can emerge as relevant businesses for us someday, while at the same time, fueling new discoveries for subscribers in our existing core markets.

So with that basic overview of our growth thesis, which has again remained very consistent over time, let me highlight a handful of the important accomplishments, milestones and market developments that defined our success in 2012.

As always, I'd also like to thank our very talented employees, who continue to think about the best ways to serve our loyal subscribers and work hard to innovate in countless ways that help drive this business forward.

First, let me say that this was clearly a big year for content. In 2012, we added our 10 billionth record to Ancestry, led by the important release of the 1940 U.S. Census, but also including the release of many other content collections around the world. We made investments in our core technology and product experiences, including improvements to our image viewer, our record hinting technology, social collaboration and mobile.

Let me take a moment to speak a little about mobile as we are especially pleased with the recognition that we've recently received for our mobile efforts. Our Ancestry mobile app was a winner of the 2013 Appy Awards, which honors the best apps in the diverse range of categories, and our Ancestry Android app was named by Google as 1 of the top 12 apps of 2012. We will probably surprise no one that we've seen a dramatic growth in the number of people interacting with our service on a mobile device. Today, over 1/3 of our new registrants are coming from mobile and our apps have been downloaded nearly 7 million times since their initial launch in 2010.

Also in 2012, we completed the acquisition of Archives.com, which has given us a complementary and growing second brand in the U.S. focused on an affordable entry level price point and a simple streamlined user experience. In addition, we launched our new AncestryDNA product this year, a service that benefits our existing subscribers by helping them break through research brick walls, but is also a great introductory experience for users that are new to family history. We now have a customer database of more than 120,000 DNA samples. And just last week, we announced a new lower $99 price point for AncestryDNA, a price point that we believe will allow us to grow our DNA database even faster in 2013.

And lastly, we obviously completed our take-private transaction in late December. And Howard stated, and I will reiterate, our essential strategy as a private company will remain much the same as it has -- as it was when we were public.

And as Howard also communicated, we're excited about 2013 and beyond, and we're off to a very solid start so far this year. So I'd like to highlight a few of the key areas for content and product investment that we plan for in 2014. First, on the content front, our focus for this year is on continuing to add to the largest and most comprehensive collection of online family history content available anywhere. To achieve this, we will continue to develop our unique network of partnerships with archives and record offices at the national, state and provincial levels in all of our core territories and to invest in bringing the most useful and viable content to our customers.

One important project that I'd highlight is a collaboration that we announced just last week with FamilySearch International, a nonprofit organization sponsored by The Church of Jesus Christ of Latter-day Saints. Over the next few years, FamilySearch and Ancestry will work together to try to digitize and index over 140 million pages of U.S. probate records with a goal to create a national database of wills, letters of administration and other probate documents spanning 1800 to 1930. We think that we also have been a neglected source of online family history research and yet some of the most useful and fascinating documents available. So we're therefore excited and pleased to be working with FamilySearch on this project, and we look forward to finding other ways that we can collaborate with FamilySearch to advance our respective goals.

Also important are our investment -- content investments in Germany. By the end of 2012, we secured deals which cover more than 20 million vital records, including Mainz, Dresden and the state archives in Berlin. And we expect 2013 to see an acceleration of our content efforts in Germany as we seek to get critical mass of key vital records for that important market.

On the product front, look for further improvements in how we make our products easier to use. For our mobile apps, we'll be about making it simple to get started on the Ancestry and to share family history with others on the go. In our DNA experience, it will be about improving both our ethnicity and matching experience.

In 2013, we'll continue our R&D investments in semantic extraction technologies that we believe can continue to expand the amount and quality of content we expose to our members. We've been successful over the last 18 months applying this technology to content collections like historical city directories, with the results of making more of our ancestors in these city directories more discoverable and more hintable inside the Ancestry member tree experience. We'll also continue to make intuitive improvements to our search engine experience, designed to help our members better find the things they're looking for.

And finally, we'll continue to improve sharing. We think there is a lot of upside in helping our members better share their family history experience with the rest of their family, and we see better sharing of discoveries and family history stories as key to keeping our existing members engaged but also important to attracting new people to our service.

As I hope that provides a good summary of 2012 and our focus for this year, we continue to be quite excited about the business, and it's clear that we have a lot to work on and a lot of opportunity in 2013 and beyond. So with that, we will now turn it over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Jeff Harlib with Barclays.

Jeffrey A. Harlib - Barclays Capital, Research Division

Just -- can you just talk a little bit about marketing spend in 2013, areas of emphasis and also how you expect that to trend as a percentage of revenues?

Timothy P. Sullivan

This is Tim. I'll start -- I mean, I think in terms of areas of emphasis, it's really largely the same game plan that we've employed in past years. I would say we've made some improvements to the way we execute on digital marketing. In all of our markets, we're rolling new creative for television in the U.S. next month, and we will have new creative in other markets throughout the course of the year, but it really is largely the same approach to marketing and generally the same kind of marketing mix we've seen in past years.

Howard Hochhauser

With respect to percentage of revenue, we're looking to, to piggyback what Tim said, sort of further optimize our media spend as we had done every quarter as a public company, but be as efficient as possible.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay. And are there any changes planned in your subscriber rates or the type of subscriptions you offer?

Timothy P. Sullivan

Yes, again, this is Tim. We're really constantly and regularly tasked different price and packaging combinations in really all of our websites. So I wouldn't say we have specific plans to make changes today, but I would say we're constantly looking at that and won't hesitate to test new ways of both packaging and pricing our service throughout this year and beyond.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay. And just with Germany, you're building up content there. You have a rough timing on when you expect people launch your site or get further down the road?

Howard Hochhauser

That's further down the road. We've made a lot of progress on the acquisition of the content, which is going to continue now and actually start the digitization indexing phase, but that's a down-the-road step.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay, okay. 2014 potentially or?

Howard Hochhauser

Potentially in 2014, you may start to see some marketing initiatives.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay, okay. And lastly for me, just taxes for 2013, should we be modeling a normal tax rate or lower? Just some help on that.

Howard Hochhauser

Yes. Our effective sort of cash tax rate will be approximately 25%. Again, that's a cash rate, not a GAAP rate. From a GAAP perspective, we'll be in a loss position.

Operator

We'll go next to Anisa Hsieh with Morgan Stanley.

Anisa Hsieh

So there had been some press -- reports in the press that Who Do You Think You Are? show may be coming back on TLC. If Ancestry were to participate in such a show again, would you be looking at the same level of cost or investment as in the past? I believe it was in the single digit million.

Timothy P. Sullivan

Well, first, let me say it has been reported on and off that there may be some discussions. Others say that those discussions continue. We think we're a lot closer certainly to the end of that process than we are at the beginning. We love to see the show back on the network, but there's really nothing more specific to say about our plans there.

Howard Hochhauser

Yes, I would just add with respect to cost, to the extent we do participate, and there was a show, likely be it's been reported via on a cable network. Cable has sort of different economics than NBC or ABC and therefore, the costs are likely to be far lower than it was in the past. I would just add, the impact to the company would therefore also be far lower.

Operator

[Operator Instructions] We'll go next to Rich Gross with Columbia Management.

Rich Gross

A couple of questions for you. First of all, in terms of the lack of data around gross adds churn, SAC or ARPU, can you give us any data on that or the gross adds even, so I can calculate further data points? I don't quite understand the reasoning behind not reporting that anymore.

Howard Hochhauser

Yes. So as a recovering sell side analyst, as my first Wall Street job, I could sympathize with you. Having said that, I'd say a few things. Now more than ever, we're a multi-brand company, right? You have Ancestry, you have Archives, you have Fold3. So just focusing on a set of metrics without focusing on the GSAs for all of the brands would be probably misleading, and so we get people caught in the weeds. The other aspect is we really want to focus people on revenue, EBITDA and free cash flow and not get mired in this discussion around churn in the quarter, which is impacted by a variety of things including the amount of new subs versus old subs, monthlies versus annuals. So we're doing this on the heels of we think was a really solid Q4, really pleased with our performance in Q1. And again, now we're topping Who Do You Think You Are? period, which, again just to reaffirm what I said in my speech, we had estimated around 100,000 GSAs contribution from that TV show, that looks to be the right number. We're showing net sub growth in Q1 that we're comfortable with based upon the guidance in my quote in the release, EBITDA growth that we're comfortable with. So we're doing it on the heels of strength, and again, it's really getting people focused on the right metrics, which we believe are revenue, EBITDA and free cash flow.

Rich Gross

So when I'm looking at it, I'm thinking about your -- the value per subscriber with your additional subscriber growth. Are there any thoughts from your perspective on how that's changing in terms of your revenue per subscriber, acquisition cost per subscriber? Have you seen anything since your go private transaction, have you seen anything with the switch that you made to the promotion of the annual versus the semi-annual or quarterly subscriptions?

Howard Hochhauser

Yes, I would say to your point, I think, you're getting at lifetime revenue and lifetime value, both measures, which we feel really comfortable with. I'll also caution you that those metrics tend not to move quarter-to-quarter. Our subscriber base is remarkably consistent in their behavior and renewal rates are remarkably consistent by package and by duration. So we feel very good with where our lifetime value is for the Ancestry base and the Archives base.

Rich Gross

Can you comment on the trend that you saw with the subscriber durations in terms of annual, semiannual? You guys kind of are getting into that anniversary of changing that pricing or changing that promotion that you're pushing in terms of the subscribers. Any commentary around that would be useful.

Howard Hochhauser

Sure. Other than now that we're into the SAC renewal sequence of the semiannual renewals, they're renewing just as we had expected them to. So we reaffirmed our decision that we made over a year ago now to implement that package. But I would amplify what Tim had said, we are price testing all the time, testing different packages, different offer pages. And one measure that we look at is conversion and LTV. To the extent we make further changes, it would be accretive to one or both of those measures.

Rich Gross

And have you seen any opportunities there or -- thus far?

Howard Hochhauser

Again, we test all the time, and our customers are going to be the first to know should we make a change.

Rich Gross

All right. And then, in terms of cash guidance that you gave and the restricted cash that was on the balance sheet, can you comment quickly kind of what the restricted cash was and if the guidance includes restricted cash?

Howard Hochhauser

The guidance excludes restricted cash. Restricted cash is set aside for -- to the appraisal or the shareholders that didn't tender on the offering.

Rich Gross

Okay. And then in terms of product revenue for 2013, can you give any comments around that in terms of what you guys are thinking on new software or any thoughts on the DNA product?

Timothy P. Sullivan

Yes. The only sort of exciting initiative is the lowering of the price of DNA to $99. So that's going to drive the product revenue number.

Rich Gross

Any changes in terms of how you're thinking about gross margins or cost savings that you've had there or how you think that's going to change through the year with the DNA?

Howard Hochhauser

We're not going to talk about that today.

Rich Gross

Okay. Are you going to talk about that next quarter, or is that something that won't be discussed?

Howard Hochhauser

We'll update you next quarter.

Operator

[Operator Instructions].

Howard Hochhauser

It looks like there are no further questions. I want to thank everyone for their participation. And our first quarter earnings call should be around the corner in 4 to 5 weeks. Thank you.

Operator

And ladies and gentlemen, once again, that does conclude today's call. We do appreciate everyone's participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!