Internet Brands, Inc. Q1 2009 Earnings Call Transcript

| About: Internet Brands (INET)

Internet Brands, Inc. (INET) Q1 2009 Earnings Call April 29, 2009 4:30 PM ET


Laura Foster - IR

Bob Brisco - CEO

Scott Friedman - CFO


Christa Quarles - Thomas Weisel Partners

Youssef Squali - Jefferies & Co.

Yun Kim - Broadpoint Amtech


Welcome to the Internet Brands First Quarter 2009 Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, April 29th, 2009.

I would now like to turn the conference over to Ms. Laura Foster of ICR, Go ahead, ma'am.

Laura Foster

Thank you. Good afternoon, ladies and gentlemen and welcome to Internet Brands first quarter 2009 conference call. By now everyone should have had access to the first quarter 2009 earnings release, which went out today at approximately 4:00 pm Eastern Time. If you have not received a release, it's available on the Investor Relations portion of Internet Brands website at by clicking on the Investor tab. This call is being webcast and it is available for replay.

Before we begin today, we'd like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions.

These statements do not guarantee future performance therefore undue reliance should not be placed upon them. We refer all of you to the risk factors contained in the Internet Brands recent Form 10-K for the year ended December 31st, 2008 filed with the Securities and Exchange Commission for a more detailed discussion of the factors which could cause actual results to differ materially.

And with that, I would like to turn the call over to Bob Brisco.

Bob Brisco

Good afternoon, Internet Brand is having a good start to the year. Our adjusted EBITDA was up 4% year-over-year, but up 21% on an apples-to-apples basis that excludes the onetime benefit from a year ago. As you may recall, we guided for adjusted EBITDA to increase by 10% to 15% for the full year of 2009. We believe we are firmly on track to achieve that.

Our cash flow dynamics are also very strong. We had operating cash flow in the first quarter of $10 million. We like what we are seeing in many of the fundamentals of our business.

During our last call, I outlined four major factors that make Internet Brand a safe and strong investment in these difficult economic times. These factors are playing out in our favor. The four factors are diversification, organic advertising growth, the performance based nature of our revenue and rapid traffic growth. Each of these factors are already to our advantage and I will quickly explain why for each.

First diversification. While the crisis in the consumer auto sector has meted our topline, its overall impact on our bottom line is diminishing. EBITDA from auto e-commerce business lines, which has been our area of concern, now represents less than 15% of our total.

Mostly, every other area of our consumer internet business has been growing strongly. At some point, we expect the auto sector to rebound from these historic lows that was not budgeted for any of that rebound to happen this year. So to reiterate, we have diversified more than 85% of our consumer Internet EBITDA in about three years time.

Second, organic advertising growth. Excluding auto e-commerce, our ad revenues were up more than 30% year-over-year in the first quarter. Organic growth, meaning excluding acquisition was strong, up 10% year-over-year. This is different from many in the industry. We are growing organically. Even with this growth, we remain significantly under-monetized. We are in the process of increasing the monetization, and there is still a long way to go, and it involves thoughtfully rolling out changes across our network of more than 80 major websites.

Third, the vast majority of our ad revenues are performance based. We deliver measurable positive results for our advertisers. These are essential advancements for advertisers even when the economy is tough.

Fourth and finally, our consumer traffic is surging. Unique visitors were up 44% year-over-year. We are creating more content, growing our communities, and generating more ad inventory. In particular, we have been focusing on ramping up the creation of new content on our websites, which will drive continued traffic and advertising growth into the future.

Turning now to our acquisitions strategy. We have acquired five websites year-to-date for a total of $1.6 million in investments. Our acquisitions are becoming much more cash efficient for a couple of reasons. First, prices, as reflected in acquisition multiples have fallen. Second, our operating platform is scaling revenue from new acquisitions much more quickly than before. As a result our acquisitions are becoming even more accretive.

Earlier today, we announced the formation of a new vertical, Money & Business. We announced two acquisitions in that vertical and This is a giant vertical from the prospective of advertising revenue and our expansion is yet another example of how we are rapidly increasing our total adjustable market.

We are also announcing today the acquisition of, one of the leading women shopping blogs. Our shopping division which focuses on deals, discounts, and coupons continues to post strong results.

Last quarter we guided that our planned acquisition investment would average $10 million to $12 million per quarter inclusive of burnouts. Based on the first four months of the year, we expect this level of investment to be at a lower average for the year. We remain aggressive in adding sites to our platform and we remain at an opportunistic stance given the strength of our free cash flows and the strength of our balance sheet.

Turning now to our licensing division. On an apples-to-apples basis, the division's revenues and EBITDA for the quarter were up slightly. Automated potential new project pipeline is the largest in its history, which indicates the performance will likely improve materially on a sequential basis throughout the year.

The other portion of our licensing business, vBulletin and is also doing well. The big news is that we will be releasing the next major update to the software, vBulletin 4.0 this summer.

In other news, we announced last week that we settled a set of patent litigation lawsuits involving Autobytel. I know that all of the principles are happy to have the distraction out of their way and we are pleased with the outcome for Internet Brands.

Before I turn it over to Scott, I want to summarize that Internet Brands has started the year well and we expect our performance to improve sequentially throughout the year. We believe that we have weathered the worse of the economic headwinds. We expect to remain on course and we are truly excited about how our business is evolving and growing.

With that, Scott?

Scott Friedman

Thanks, Bob. I'll get right through our results. Total revenues for the first quarter were $23.5 million compared to $24.9 million in the prior year period. As expected our revenues continued to shift during the quarter to higher margin advertising revenues and away from our lower margin e-commerce revenues.

This was evident in our adjusted EBITDA margins of 35.1%, a 330 basis point increase from 31.8% in the first quarter of 2008. We expect this trend to continue throughout 2009. Revenues from our Consumer Internet division were $16.2 million in the first quarter of 2009 compared to $16.3 million in the prior year period.

Our higher margin advertising revenues increased more than 30% year-over-year in the first quarter of 2009 driven by acquisitions and organic growth from our auto community, shopping, careers, home and travel & leisure verticals.

I want to emphasize again that unlike industry trends, we are experiencing organic advertising growth across most of our verticals. As expected this growth was offset by a significant decrease in revenues from our lower margin automotive e-commerce business, which is the result of continued weakness in the automotive industry. We expect automotive e-commerce to remain weak throughout the year and have budgeted according.

Revenues from our licensing division were $7.3 million in the first quarter of 2009 compared to $8.6 million in the prior year period. As foreign exchange rates remain constant through the first quarter of 2009, licensing revenues for the first quarter of 2009 would have been $0.5 million higher.

The impact of this exchange rate on our bottom line is immaterial since the company's foreign currency exposure on the revenue and expense lines are relatively comparable. It is also important to note that licensing revenues for the first quarter of 2008 included a 1.1 million benefit from the accelerated completion of a long-term project at Autodata. So, on an apples-to-apples basis, the licensing division revenues were up slightly.

Net income attributable to common shareholders for the first quarter of 2009 was $2.3 million or $0.05 per diluted common share. This is compared to net income of $3 million or $0.07 per diluted common share in the prior year period. Adjusted EBITDA which we define as earnings before interest, taxes, depreciation, and amortization and excluding stock-based compensation increased 4% to $8.3 million in the first quarter of 2009, from $7.9 million in the same period last year. Excluding the Autodata onetime item, we were up 21%.

Now, turning to the balance sheet. We ended the first quarter with $59.7 million in cash and investments with no outstanding debt under our $35 million revolving line of credit. Regarding cash flow, net cash flow from operations in the first quarter of 2009 grew significantly to $10.1 million compared to $5.5 million in the prior year period, highlighting our focus on managing working capital and improving free cash flow.

Turning to guidance, we are reiterating a full year guidance of 2009 adjusted EBITDA growth of 10% to 15% over 2008. We expect revenue growth to be less than EBITDA growth due to our expanding margins. As Bob, mentioned earlier, our business is evolving, growing and we are very excited about the year ahead.

And with that, we'd like to open up the call for your questions. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions). Our first question comes from the line of Christa Quarles with Thomas Weisel. Go ahead.

Christa Quarles - Thomas Weisel Partners

Hi. A couple of questions. First, Bob, as you've kind of entered yet another category, I am wondering if you could give us some data, anecdotal or otherwise on how critical mass in a particular category and what that does to the ad rates that are you are able to charge in the monetization list that you are ultimately able to see? Such that in each incremental acquisition in a category for example monetizes it X percent higher rate.

The second question kind of goes back to the class of acquisitions. So, one of the comments that you made in your remarks centered on the idea that, you know, acquisitions are getting on the platform faster, and are becoming more profitable faster. I was wondering if you could kind of go back to the, you know, the class of '06 and '07 and just talk about, you know, how the performance has been to this point? And then I have a housekeeping question. Thanks.

Bob Brisco

Let me take those questions in turn. Regarding acquisitions into new categories for Internet Brands. The revenues and costs behave differently. So, on the revenue line, as you allude to, the more sites that we add in a category, the higher the yields can go because we are able to sell advertisers multiple sites at the same time. I would say that that is the least of the leveraged points compared to cost side, where we get economies scaled so quickly by adding incremental revenues and websites inside of a category.

So, our fixed costs, which would be general management, technology, some of the content expenses and such were able to spread over more sites as we go. So there is a list on both sides that, say on the way in though we get more of the list on the cost side. Then overtime as we expand sales forces, the revenue list can be significant as well. It is harder to dimensionalize the list is adding incremental sites but probably it is significantly accretive to the ECPM that we are realizing overtime.

On the second question which is essentially the same store sale question of sites that we have owned for more than a year, more than two years and in some cases now actually into the third year. Their performance has been about the same across all. So, in this call we guided that we are seeing 10% organic growth year-over-year. We do internally dissect that the best we can by vintage, when we acquired the asset and the performance is relatively comparable over all of those years.

On the call I mentioned that we are seeing quicker list on some of the newer acquisitions and I can elaborate some on that. We are finding that we have developed so much experience in rolling now 80 sites on the common technology that we are able to realize some of the revenue and expense benefits even faster than we were before. Particularly on the revenue side of getting it in our sales forces hands quickly and getting on to add network revenue optimized much quicker. I say, we have driven that profits all the way back into our due diligence efforts. We have hit the ground running on day one, post closing of the more recent acquisitions to experience the [lift] virtually and immediately.

Christa Quarles - Thomas Weisel Partners

Are you able to do that with the content creation and syndication process that you know are going across business sites, just as quickly? Then my question's for Scott was the tax rate was also a little bit lower and I was just wondering if you could just provide commentary.

Bob Brisco

Regarding the acquisitions and getting them plugged in faster and integrate the Internet Brands, and why we are able to do that. That's correct. We have built the technologies in a way and have the organization set up in a way that we can move much, much quicker. Some times we have seen revenue lift with inside of a week of a closing [evidence] that I won't guide you that they are all that quick. Many of them are. I would say many of them are within the first month. Sometimes they can take up to a quarter to get that done, but its all in that sort of range and the only difference between what takes weeks versus months is the configuration of the technologies that we're acquiring and how much work we are going to have to do with them once we have closed the deal.

Scott, do you want to comment on that.

Scott Friedman

Christa regarding tax, year end the rate was around 41.5% this quarter. We are looking about 40.5%. Some of that, changes is due to the tax related items like timing, differences between book and tax. What I'd guide you is going to be price somewhere right around the 41% area, I think is the best guidance we can give you. We are always constantly looking at finding ways to bring that tax rate down. Depending how far you are going out in your look at the company. There are some tax changes in California that have been approved. They are now law that, don't take effect until 2011, January of 2011. Those are helpful to the company in terms of having a slightly lower structural long-term tax rate.


Our next question comes from the line of Youssef Squali with Jefferies & Company. Go ahead.

Youssef Squali - Jefferies & Co.

If you can maybe help us [parch] out the growth that you reported when you talk about the plus 30% growth rate in advertising, when you axe out the auto e-commerce. How much of that growth is coming from onetime event of things, like for instance renegotiating Google search contracts? What have you on better terms versus really just better or higher traffic growth and yes, higher growth and traffic would be driver there.

And then secondarily, you talked about M&A spending, coming in below your $10 million to $12 million a quarter run rate. It's substantially below that. What are your plans for the rest of the year just in terms of how much should we expect you to be spending on M&A? Then I have a follow-up?

Bob Brisco

We will answer these two and then look forward to your follow-up question. Regarding the first question, breaking down 30% advertising revenue growth year-over-year, I can pull that apart into some factors for you that we mentioned in the call earlier than give you some more color now. The 30% was inclusive of 10% organic growth and 20% of acquired growth. If you pull apart the organic growth, what you'd see are, some offsetting factors. Traffic is up a lot, which helps, of course, how much that traffic helps depends on which site it is and what the mix is, what the underlying yield structures are of that traffic.

We would say that, generally there is a slight bit of softness in advertising rates, so when you look at CPMs or CPCs as measured by conversion rates, slightly down. If you look at monetization per page on our websites, it is up, and that's because we are putting more monetization opportunities on our inventory of pages on the internet or putting better targeted ads to the audience.

So, those are kind of the underlying factors, and when you roll that up, we are seeing 10% organic growth. I think in a better economic climate, you are going to see the organic growth rate increase to where it has been historically or better. It has been running in the mid teens for the last couple of years, and I think the headwind we felt in the economy was that that pushed us back a few points here this quarter versus prior quarters. We are optimistic that will pick back up when some of the headwind [leaves].

On the second question of yours regarding acquisition spending, yes, you are correct that the investment level has declined significantly over the last two quarters. We have been guiding, $10 million to $12 million. We've been at a small fraction of that for the last two quarters. We think that will pickup in the next three. The acquisition pipeline is relatively full at this point in time. We've used the slowness in the economy to our advantage to even more carefully choose the acquisitions that we think will be most accretive to the company. Pricing levels have obviously dropped to make acquisitions more attractive than they were even a year ago. As I mentioned earlier in Christa's question, looking at how quickly we can get them on the platform and immediately realize the benefits from them.

So, looking ahead, I know you are looking for guidance and what we had spend or invest, it's hard to know exactly quarter-by-quarter, I think generally targeting in the $8 million to $10 million range inclusive of earn outs, maybe at the lower end of that range, is probably the best point guidance we could give. I think it's going to vary a lot quarter-by-quarter, if you look back over our pattern over the last couple of years, we have had some larger quarters and smaller quarters and I think you'll continue to see that movement up and down. It's strictly a function of some serendipity of closing dates and what's in the pipeline at any given moment.

But, the overall color I want to give is, the pipeline is full, there is very good acquisitions for us to make in there. We know exactly what to do with them when we close and so you will continue to see us at a steady pace make acquisitions, albeit the average size is likely to be smaller than it was in '07 and '08, though it might be a little bit larger than it was in the first quarter. And I know you have a follow-up.

Youssef Squali - Jefferies & Co.

I guess it's a really follow-up to that. So, what's interesting is that you are spending a lot less on acquisitions or you are just making a lot fewer acquisitions and yet you are reiterating your EBITDA guidance not only on a percentage growth basis, but even in absolute dollars. So, I would have assumed that if you are adding less acquired growth, what gives you confidence that you will still be able to hit the $38.5 million to $40.5 million?

Scott Friedman

That's an even more precise question. You are correct that on reduced acquisition spending, we fully expect to make the earlier EBITDA guidance that we had given. The reason is that business is performing a bit better than we had hoped entering the year and the factors I point to there are organic growth is holding up well, in spite of the economy. The licensing division both parts of it, have what appear to be very positive developments coming in the quarters ahead. I mentioned the Autodata pipeline is a piece of that and also a new vBulletin release based on historic pattern that gives a little bit of lift.

In addition, what we are acquiring? We are acquiring on better EBITDA multiples than we did historically, particularly when you consider them post acquisition and what we can do to improve the EBITDA multiples quickly on the other side. So, it's a combination of all of that. That gives us confidence and even with the lower acquisition spending.


(Operator Instructions). And our next question comes from the line of Yun Kim with Broadpoint Amtech. Go ahead please.

Yun Kim - Broadpoint Amtech

I know your business is doing well, but just wondering if you are seeing some increasing competition out there from just a lot of add inventory with maybe premium inventory at CPM rate. That's probably lowest in the years. And also, whether or not the increasing marketing and usage of behavioral targeting by many advertising networks are affecting you guys at all in terms of pricing and what not?

Bob Brisco

To characterize what we are seeing in the advertising markets, I would say the following. Generally CPM based display advertising as you all well know is soft. Fortunately, we have very, very, very little of that. The smallest slice of our advertising revenue by far is CPM based. When you look at that component itself it's built as CPM, but it's not priced as CPM. What I mean by that is, it's bought and sold as measured by CPM. The advertisers are actually weighing results like quick through rates or products sold, houses rented, cars sold, that sort of thing, underneath that and translating the rate into an effective CPC or an effective CPA.

We have not seen diminishment, the significant in yields from our business. I think it's because of the performance based nature that I spoke of earlier. Generally, now, it's a single digit percentage of the make up of our advertising revenue that you might call pure display, barely a material amount. Have we seen the same market pressure on that that other internet companies have, absolutely. That's [taken] the results that you saw in the first quarter for us. We have seen some of that.

The second part of your question was about the behavioral targeting advertising networks, and some of the pressure on that. I would say, hard to know. Generally, I would agree with your thesis that the rise of behavioral targeting as a tool could put pressure on premium inventory. However, in practice, the truly premium inventory is still very scarce, like, a new car auto industry advertising to get that really premium inventory available.

The rate structure has been quite firm even over the last couple of years, and remains so for us. And I'd also say that I think behavioral targeting is up or down a bit, not only with the economy but with advertisers experimenting with it. I think it is here to stay at some level, but what the level is going to be, I would tell you that jury is out on that so far. I hope that was responsive.

Yun Kim - Broadpoint Amtech

That helped a lot. Kind of turning the focus to the other parts of the business. I think there is a lot of moving parts in the licensing business. Can you just tell us a little bit more, you know, just provide us with a better visibility into that business, like what kind of impact are you expecting from a new release of vBulletin? Do you expect it to impact you right away or do you expect the impact to be more of a three or four quarter impact? Also, how does the completion of that large Autodata project impact your license business next quarter? Thanks.

Bob Brisco

Let me take those questions in turns. Starting with vBulletin. The release of vBulletin 4.0 will be over the course of this summer. We'll be doing shortly some data releasing and you'll see some more trial accounts and then you'll see the full release of the software by the time the summer is over. We expect to see impact beginning over the summer with the new release. I think it will build overtime for a year, a year and half is which we have typically seen. The release cycle on vBulletin releases will be, you know, it's historically been in that timeframe of a couple years. So, usually get a very good first year, year and half and then you wait until the next release and then you get the acceleration of the growth again. That's the general pattern that we have seen.

Regarding Autodata, Autodata is up against a softer comp in Q2 because we had the acceleration of the contract last year in the Q1. I think more importantly if you look sequentially quarter-over-quarter with Autodata, we are quite optimistic and it relates to what I mentioned earlier about the strength of the pipeline of new projects for the company. With the pipeline it's hard to know exactly, when you'll recognize all of the benefits from the new work. That's a combination of when contracts are signed, but then importantly when work is completed and you are able to book the results.

Based on the pipeline, we think we have got pretty good visibility on the rest of 2009 for Autodata and we have made we think reasonable assumptions about what percentage of the pipeline is likely to close that's based on work we have already begun or the work we are about to begin or work that's a little bit more speculative. We weighed all of these things accordingly, but based on what we are seeing, it should be a good sequential progress as the year unfolds in that business. I guess the last point I'd make about Autodata is that as the economy has been difficult and the domestic OEMs in particular has faced trouble.

Autodata has become even more of a supplier of choice because our solutions are able to reduce costs for the manufacturers. I guess the unasked question there is why is the pipeline bigger than its ever been before and you feel so optimistic about it and its really that that request for work are coming now to the higher rate than ever before. I think that's a function of both the quality of what we provide, but also the economic benefit and solutions that we offer to those accounts.

Yun Kim - Broadpoint Amtech

Quick question for Scott, DSO went down quite a bit, can you just give us a little color on that and do you expect DSOs to return to normal levels starting this quarter? If that's the case, should we expect operating cash flows to decline sequentially?

Scott Friedman

First I guess I will pull you back to the guidance that we have outlined to you with EBITDA. As we have been saying, EBITDA, we are going to grow that 10% to 15% throughout the year and expect that to be based on the mix shift in our revenue. Just from a cost perspective, we think that will go up slightly from where we are at in Q1.

Bob Brisco

I think, Yun was also asking about DSOs, day sales outstanding.

Scott Friedman

On day sales outstanding for accounts receivable, that's come down, primarily due to efforts from the team here, in this economic climate, really just pushing on getting collections from our different advertisers and venders across all businesses.

Bob Brisco

Even if you look back the free cash flow of the company and historically quarter-over-quarter has varied some based on fluctuation DSOs. So, I think you are getting at that Yun. Yes, it moved down in Q1, I don't think we are necessarily forecasting some. It's hard for us to characterize whether it's abnormally low as we ended the quarter or if that's normal. It bounces around, five to 10 days maybe based on certain big receivables that come in or out of timing.

So obviously, the movement from the beginning of the quarter to the end of the quarter, where we generated more operating cash flow than EBITDA, is unusual. You can't do that every quarter, quarter-over-quarter. So, it tends to average out overtime. Whether it averages out in Q2 or Q3, hard for us to say it really depends when the moneys come in.

Yun Kim - Broadpoint Amtech

You don't expect it to spike back up. You kind of expected to be normalized tiers maybe up and down a little bit.

Bob Brisco

We don't expect that spike one way or another. You get up to a couple of million dollar swings in the quarter one way or the other based on, just a couple of receivables and whether they come in before the 30th or the 31st of the month or not. Yes, you do and it's hard for us to know, until we get there exactly, when that happens.

No, spikes, but you do get swings on the margin, plus the couple of million, or down a couple of million around the end that can swing you either way. There is no way for us to forecast that pinpoint that quarter cut off.


And there are no further questions at this time. I would like to turn it back to management for any closing remarks.

Bob Brisco

This is Bob. I would just like to thank everyone again for joining us on the call. We are excited about the business in the year, and we look forward to keeping you updated throughout the year on each quarter. Thank you very much.


Ladies and gentlemen, this does conclude our call for today. This call will be available for replay, and those numbers are, 303-590-3030 or 1800-406-7325, and the access code is 4054894 and the pound sign. Thank you for using ACT. You may now disconnect.

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