Executives
Bruce Smith – CSO
Steve Steinberg – CFO
Bob Rosenschein – President & CEO
Analysts
Wayne Chang – Canaccord Adams
Colin Gillis – Brigantine Advisors
Answers Corporation (ANSW) Q1 2009 Earnings Call May 5, 2009 8:30 AM ET
Operator
Good day and welcome to the Answers Corporations' first quarter 2009 earnings conference call. At this time for opening remarks and introductions I would like to introduce the Chief Strategic Officer Mr. Bruce Smith; please go ahead sir.
Bruce Smith
Good morning and welcome to the Answers Corporation first quarter 2009 conference call. My name is Bruce Smith, Chief Strategic Officer. Joining me are Robert Rosenschein, Chairman and CEO, and Steve Steinberg CFO.
This call is also being broadcast over the web, and can be accessed from our Investor Center page at www.ir.answers.com. A replay of this call will be available at the site shortly after the completion of the call. At the conclusion of our prepared remarks, we will open up the call for your questions.
Before we begin I’d like to remind you during the course of this call we will be making certain forward-looking statements relating to our future performance. These are based on our current expectations, forecasts and assumptions, and risks and uncertainties. For those statements the company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Important factors may cause our actual results to differ materially including among others our ability to maintain or improve monetization, particularly in light of the current challenging economic environment, our ability to maintain or improve traffic, a decision by Google currently the provider of vast majority of our search engine traffic or other search engines to block our pages from user search results or otherwise adjust their algorithms in a manner detrimental to us as experienced in July 2007.
A potential termination of our Google services agreement, or a decision by Google not to renew such agreement or alternatively to renew it on terms less favorable to us, a decision on our part to decrease the number of ad elements displayed on our web properties in the interest of user experience. A failure of WikiAnswers.com to experience continued growth in accordance with our expectations. The effects of facing liability for any content displayed on our Web properties, potential claims that we are infringing the intellectual property rights of any third party, an increasingly competitive environment for our business, and other risk factors. You can find more information about factors that could effect our results in our most recent Annual Report on Form 10-K and our upcoming Quarterly Report on Form 10-Q available at www.ir.answers.com.
All information shared on this call is as of May 5, 2009, and we do not intend and assume no obligation to update such information. Finally we will be discussing non-GAAP financial measures including adjusted EBITDA and adjusted operating expenses. We provide a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures, and the list of the reasons why the company uses non-GAAP financial measures in today's earnings release posted on our corporate website at www.ir.answers.com.
With that said I will turn the call over to Bob Rosenschein.
Bob Rosenschein
Good morning and thank you for joining us. We exceeded expectations and we are very pleased to report solid Q1 results in a tough economy. Here are some highlights.
We hit $4.75 million in revenue, beating our guidance by $25 million, a 3% sequential increase, and 57% year over year. We also beat our adjusted EBITDA by $25 million, with $1.74 million reflecting a robust 37% margin.
According to comp score our combined properties reached 26.5 million unique US visitors in March, putting us at number 28. Worldwide we were number 47, with 50.2 million unique visitors.
WikiAnswers.com keeps on expanding and driving our growth. As previously announced it was the number one fastest growing US domain for two years running in 2007 out of the top 1,500 domains and in 2008 of the top 200.
In Q1 WikiAnswers.com traffic grew a healthy 23% sequentially while WikiAnswers revenues grew 10% even in this tough macro environment. To grasp why WikiAnswers.com keeps on growing, let me paint you this simple picture.
Traffic drives new questions. New questions drive new answers, and new answers drive more traffic. This virtuous cycle translates into a self-reinforcing pattern of expansion. This phenomenon is the driving force behind the remarkable growth of both Wikipedia and our own WikiAnswers.com.
This virtuous cycle is why our traffic is up 10x over the past 20 months and why WikiAnswers.com unique visitor market share in the US in March climbed over 35% against the market leader Yahoo Answers, up from only 4% when we bought Fact Farm in November, 2006.
With that I’ll turn things over to our CFO, Steve Steinberg, for more financial details on Q1.
Steve Steinberg
Thanks Bob and good morning. I’m very pleased to be here today and share with you our Q1 2009 financial highlights. Our Q1 revenues of $4.75 million were two thirds from WikiAnswers.com, one third from ReferenceAnswers.com.
Overall our revenue grew $117,000 or 3% sequentially. WikiAnswers continues to experience impressive growth. Average daily page use were 5,337,000 up 23% sequentially and 183% year over year. Revenue grew 10% sequentially and 167% year over year to $3.16 million.
Q1 RPM for WikiAnswers.com was $6.58, down 8.5% from $7.19 in Q4. We attribute the decline early in the quarter to seasonality with more recent weakness we believe related to the economy.
ReferenceAnswers.com traffic was about flat sequentially with average daily page views in Q1 decreasing 1.5% to 2,982,000 from 3,027,000 in Q4. Its revenue decreased 9% sequentially and 14% year over year to $1.57 million. ReferenceAnswers.com RPM in Q1 dropped 6% sequentially to $5.84.
For those interested in reviewing our historical performance in terms of traffic, monetization of revenues, broken out by web property on a quarterly basis, please refer to Appendix A attached to today’s press release.
Adjusted operating expenses were $3 million in Q1 compared to $2.68 million in Q4, a net increase of $320,000. The net increase was mostly do to compensation related items and recruiting fees. Adjusted EBITDA in Q1 was $1.74 million, a 37% margin. While this is lower then Q4’s 42% margin, it is still a very healthy number.
Our GAAP net income for the quarter was $3.04 million. Let me explain the main reason that our GAAP net income was so much higher then our adjusted EBITDA. In connection with the June, 2008 Redpoint financing, whereby Redpoint purchased $6 million of Series A convertible preferred stock, along with Series A common stock warrants, they also received the right to purchase units of up to $7 million of Series B convertible preferred stock and Series B common stock warrants.
This Series B unit warrant is exercisable until June 16, 2009. Because the Series B unit warrant is deemed a liability for accounting purposes, we must revalue it at each quarter end. Similarly as a result of a change in accounting rules effective January 1, 2009, the Series A common stock warrants are now also considered a liability that must be revalued each quarter end.
This is due to the fact that this security has [down round] protection. The values of the Series B unit warrant liability and the Series A common stock warrants liability, as of March 31, declined as compared to their value on December 31, and therefore resulted in a gain of $2.01 million on our P&L.
If a liability on our balance sheet declines in value, we have a gain. It if increases we have loss. The main reason for the decrease in the liability evaluation was the decline in our stock price from $7.13 at December 31, to $6.37 on March 31.
Going forward to the extent that our stock price goes up or down we will experience GAAP losses and gains from the valuation of Redpoint’s common stock warrants. However since the Series B unit warrant expires on June 16, that warrant will no longer be an issue after that date.
Now let’s review some balance sheet data, cash and cash equivalents as of March 31 were $12.64 million, $900,000 more then year-end. Cash was up mostly due to cash from operations of $1.241 million, less capital expenditures of $212,000 and preferred dividends of $91,000.
Cash from operations was about $0.50 million less then adjusted EBITDA mainly because accounts receivable rose $162,000 while accounts payable decreased $260,000 due to the timing of certain large payments.
Our headcount as of March 31 was 73, compared to 69 on December 31. Let’s talk about Q2, 2009 outlook, we are forecasting that our Q2 revenues will be in the range of $4.45 million to $4.65 million. There are three reasons why we are expecting a moderate to sequential decline in revenue, despite WikiAnswers.com’s continued impressive growth.
First, seasonality, Q2 is historically our weakest period since the school year begins to end in early to mid May. Secondly, its important to understand that revenue and traffic characteristics of each of our web properties. We expect about 70% of our revenue will come from WikiAnswers.com.
We expect its traffic to grow 10% to 15% from Q1. We expect about 30% of our revenue will come from ReferenceAnswers.com. We expect its traffic to decline 5% sequentially. Lastly, in the latter part of Q1 and in April we experienced downward pressure on our RPM’s that we attribute to the economy.
As a result we anticipate a lower RPM in Q2 then in Q1. We expect positive adjusted EBITDA between $1.25 million and $1.45 million. We expect to further invest up to $1.50 million in capital expenditures in 2009 of which approximately $750,000 will occur in Q2 as we launch our second co-location facility.
We look forward to the second half of 2009. We anticipate a return to strong sequential revenue improvement beginning in Q3 and even more so in Q4, our seasonally strongest quarter. We also expect sequential adjusted EBITDA improvement in terms of dollars beginning in Q3 and even more so in Q4. We expect to see strong sequential adjusted EBITDA margin improvement in Q4.
I’ll now turn the call over to Bruce.
Bruce Smith
Thanks Steve, I’d like to talk briefly about two areas this morning, user generated growth curves, and internationalization.
First is the continuing growth we’ve seen with WikiAnswers.com. Bob already explained the virtuous cycle of traffic, questions, and answers. The larger phenomenon is that content drives traffic. While there’s never a guarantee for the future, to date our growth pattern resembles Wikipedia’s and Face Book’s at similar stages in their early growth.
Since a picture is worth a thousand words we’ve already posted on our IR center at www.ir.answers.com the slides for the investor presentation that I will be delivering today at 4:00 PM at the AeA Micro Cap Investors Conference. This presentation includes several graphs highlighting these correlations.
I hope you’ll find it valuable in visualizing the dramatic as well as potential future growth of WikiAnswers.com.
Regarding WikiAnswers.com continued growth a key element in its success is the volunteer community which contributes its valuable content. We have a team to help develop and grow that community and we expect to continue hiring in this area.
On the international front we expect to launch several new language versions of WikiAnswers.com over the next three to six months. It will take a while for these versions to gain traction and of course monetization rates are lower in these markets but the overall size of the market is very, very large.
The growth potential in 2010 and beyond for these new languages is really exciting. Wikipedia, Yahoo Answers, and Facebook are all about four times larger internationally then in the United States. We intend to follow the same playbook that made WikiAnswers.com so successful in English, hopefully duplicating that success around the world.
Now I’ll turn the call back over to Bob.
Bob Rosenschein
Thanks Bruce, as you can see we’re very excited about our growth in 2009 and beyond. A comment on the product development side, we consider content quality a top priority and we are developing mechanisms and technology to help improve the quality of our question-and-answer database.
As one example we’re working on adding new tools to detect and revert vandalism more efficiently. Last but not least, one more thing, I’m often asked about Redpoint’s intentions regarding their option to invest an additional $7 million in Answers in addition to the $6 million they already invested last June.
Based on the conversations I’ve had with them, I fully expect them to invest that second tranche in June, barring the occurrence of any material adverse events or circumstances. With that, thank you, and we will turn it over to your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Wayne Chang – Canaccord Adams
Wayne Chang – Canaccord Adams
Just really quickly, I know you already implicated a Q2 RPM’s are probably going to be a little bit weaker, but I just wanted to find out whether you were seeing any moderation in the CBC decline, I think yours was about down sequentially roughly 8.5%, which is consistent with what the market was expecting for Q1. Are you seeing that sort of moderating over the next several quarters of what you’re seeing in April so far.
Bruce Smith
As you said the decline in Q1 was about 8.5% and as Steve said we’ve seen continued decline into April. I really don’t want to quantify it and we’ve built in an expectation of a decline into our forecast but we have seen a continued decline in April but its not of the magnitude that we saw between Q4 and Q1 because you have the seasonality from Q4 to Q1. But we have seen some weakness additionally in April.
Wayne Chang – Canaccord Adams
Right and is that probably because its probably more heavily weighted on the CPM side, even though its only, what 5% to 10% of your business or—
Bruce Smith
No for us that weakness is more on the ad sense side then the CPM side.
Wayne Chang – Canaccord Adams
Great and can you give me an update in terms of any new ads in terms of your staff or number of volunteers in your community.
Bruce Smith
On the community side we’re closing in on 600 supervisors, I think we’re at about 575. And we are adding staff as you saw in the headcount additions and we would expect our headcount to increase in Q2 versus Q1 as well.
Operator
Your next question comes from the line of Colin Gillis – Brigantine Advisors
Colin Gillis – Brigantine Advisors
Great quarter, so when you look out and you think about the increase in query volume, its predominantly going to be coming from new users, but how much of this is going to be coming from the existing community.
Bob Rosenschein
As you know the overwhelming majority of our traffic is from SCO. To the extent that we can direct and keep that traffic on our site by getting them to ask questions, and we had a tremendous success late in 2008 with our new header in terms of getting more questions asked and answered. That’s the goal to increase our traffic.
But let nobody believe that the majority of our traffic is going to become direct. We’re just trying to keep people as long as we can on the site and in that same vein, we’re constantly running experiments to see how we can direct more traffic from one site to the other and keep them on our properties longer.
But I can’t quantify it for you at this stage.
Colin Gillis – Brigantine Advisors
But if you had to make soft comments, would you feel that you’re engaging the user, constantly engaging the user at a deeper level.
Bob Rosenschein
Yes, we consider and I mentioned it in the quality remarks, the quality of content is one, the quality of user experience is another. Its critical to keeping people happy. So we see our goal as keeping direct users happy but also visitors from Google and other search engine users happy. The goal is to keep them engaged, contributing and if they enjoy the content, great. For that small percentage, they’ll ask a question, even better, and answering a question even better yet.
But yes, the goal is to engage them and inform them.
Colin Gillis – Brigantine Advisors
When you look out at the social media landscape, $6.58 RPM for social media, I believe that’s one of the highest out there, what is it about the WikiAnswers social media that’s allowing you to monetize somewhere between 10 to 100x higher then the properties.
Bruce Smith
We’ve discussed it before, what we’ve found out is that a lot of the traffic is very, very commercial. A lot of the questions that people ask are commercial oriented questions where a product like Google Adsense has a lot of utility and a lot of value. So I think that’s one of the things that drives what we’re seeing is the commercial nature of the questions and answers as well as the fact that unlike other social media sites, we don’t get 100 or 200 pages per visit where all those extra pages have less value.
Currently we’re experiencing about two to three pages per visit so when you factor those two variables into the equation of a small number of pages per visit and very highly commercial questions and answers, you end up with a much higher click through rate, and I think that’s what we’re experiencing.
Bob Rosenschein
I would add one small thought to that, a soft comment, you used the word social media and social networking, in the sense that WikiAnswers.com is a community of people who are cooperating to create information in a question-and-answer database it is that, but unlike Facebook and My Space people are not coming to WikiAnswers just to hang out.
You go to Facebook you find out about your friends and what’s going on, but people come to WikiAnswers and people participate in WikiAnswers mostly because they want to get information or they want to help share their passion or their knowledge about something because everybody knows a lot about something, so that makes it a more information driven service.
And that’s exactly what Google Adsense excels at, given you relevant commercial information about things you’re interested in. So if you’re looking for information, you’re more likely to click on an ad then if you want to catch up on y our friends’ party.
Colin Gillis – Brigantine Advisors
When you look out at the internationalization effort, what time frame and how much effort and expense is there extra bandwidth scale that’s needed as you walk through 2009.
Bob Rosenschein
First of all you should expect it to get off to a slow start for the very simple reason that at the very beginning even the most exponential of curves looks linear. It just takes a while to jump start, we see that with everything, take your pick. Facebook, Wikipedia, they all started out on a relative, it takes a while to get it up to speed.
We expect to get moving in these areas but it will take a while. I would not expect significant material advertising contribution certainly in 2009. However, we’re very excited about getting started because we think there’s a big pick up and future growth and as Bruce mentioned some of these other sites are four times bigger outside.
Bruce Smith
On the expense side just so that people don’t get worried that we’re going to have to spend a lot of money, as I said in the prepared remarks we studied quite a bit, everything we did on WikiAnswers in English and we’re copying that strategy, that playbook and we’ll probably need to hire one person in each of the languages, not expensive people, to help us be able to monitor what happens in those languages to be able to duplicate or recreate the supervisor and the volunteer community in those languages.
So initially we’re looking at about one person in each of the languages to help us built out those languages. We’re also intending to use our current database as an asset in the future because we do have four million answered questions and over 12 million total questions and that’s an asset that we can bring to bear as we enter these other languages.
Colin Gillis – Brigantine Advisors
The slides that you have you AeA are very interesting, the content drives growth and the growth patterns of Wikipedia, and it looks like WikiAnswers’ growth, the [header Facebook at the same stage].
Bruce Smith
Thanks, we hope everyone does take a look at those slides.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Bob Rosenschein
Its very simple, we’re very excited about our progress. As Steve said, look for the second half of 2009 very similar to 2008 without getting into precise numbers, we’re very excited about the seasonally stronger quarters, the content drives traffic, the story is working, its working beautifully, and we’re very proud of the combination and thank you for your support.
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