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Executives

Stacy Ybarra – Senior Director Investor Relations

William Lansing – President, Chief Executive Officer

David Binder – Chief Financial Officer

Analysts

Eric Martinuzzi – Craig-Hallum

Ross Sandler – RBC Capital Markets

InfoSpace Inc. (INSP) Q1 2009 Earnings Call May 6, 2009 5:00 PM ET

Operator

Welcome to the InfoSpace Inc. first quarter 2009 earnings results conference call. Today's being recorded. At this time I'd like to turn the conference over to Stacy Ybarra, Senior Director of Investor Relations.

Stacy Ybarra

Good afternoon and welcome to the conference call. I'm Stacy Ybarra, Senior Director of Investor Relations. On the call today are Will Lansing, President and CEO and David Binder, Chief Financial Officer.

During the course of this call InfoSpace representatives will make certain forward-looking statements which may include statements regarding InfoSpace's expectations relating to its online products and services, outlook for future of our business and growth initiatives, potential for strategic acquisitions and anticipated financial performance for second quarter 2009.

Other statements which may be made in response to questions which refer to our beliefs, plans, expectations or intentions are also forward-looking statements for purposes of the Safe Harbor provided by Private Securities Litigation Reform Act. Because these statements pertain to future events, they are subject to various risks and uncertainties and actual results could differ materially from InfoSpace's current expectations and beliefs.

Factors that could cause or contribute to such difference include but are not limited to the risks discussed in InfoSpace's annual report on Form 10-K for the year ended December 31, 2008 and quarterly reports on Form 10-Q which are on file with the Securities and Exchange Commission. InfoSpace assumes no obligation to update its forward-looking statements.

In addition during the call management will discuss GAAP and non-GAAP financial measures. In the press release which has been posted on our website we present GAAP and non-GAAP results along with reconciliation tables and the reasons for our presentation of non-GAAP information.

Now, I'll turn the call over to Will Lansing. Following his comments, David will review first quarter results and second quarter outlook. Then we will open up the call to your questions.

William Lansing

Good afternoon and thank you for joining us today. What I'm going to do is quickly run through some high level first quarter results and

Operator

Thank you for standing by. It is silence until we do resume. We are getting the speakers back for the InfoSpace quarterly conference call. There has been a technical problem that dropped lines and we are restoring the speakers' line. We are awaiting and we should be underway shortly. We do apologize for this inconvenience. Please continue to hold in silence for just another minute or so. [break in audio]

William Lansing

I'm sorry about the difficulties we had, the technical difficulties. I hope that you're all with us still. What I'd like to do is run through the high level first quarter results and then share my thoughts on where we're taking InfoSpace and then we'll take questions afterwards.

First, the results. We had a great first quarter with strong revenue growth and adjusted EBITDA coming in above expectations, mostly because of strength in our distribution business. We are very happy with this result given the tough economic environment.

Revenue was $39.1 million, up $2.4 million or 6% over the fourth quarter. In the first quarter we continued our focus on improving efficiency and managing costs and as a result, adjusted EBITDA was strong at $3.8 million.

Regarding the balance sheet, we ended the quarter with about $205 million in cash and no debt. I'll talk more in a minute about our plans for the cash.

Today is my 94th day at InfoSpace and I'm happy with what I found at our company. We have good assets and we have good people which is about as much as any incoming CEO could ask for. Our search business is attractive both on the owned and operated side as well as on the distribution side and our strong balance sheet will let us invest in and beyond that business to deliver value.

What is it that we like about the search business? First, it's a big and growing market. It's where the majority of monetization on the internet takes place. Second, it's a high margin business. Though we are a smaller player, we have sufficient scale to be profitable. Third, the business has somewhat high barriers to entry, enabling us to carve out a franchise that's defensible from smaller players. And fourth, there are good returns to scale because of our contracts and the IP in our business.

We believe that dollars being allocated to online advertising and promotional activity will continue to grow and that the percentage of that money that's being allocated to search will continue to rise, mostly because it works for advertisers. It's measurable and the ROI is clear.

Now our search business has two parts. Our owned and operated business represents our direct to consumer efforts including our flagship search Dogpile as well as brands like MetaCrawler, WebCrawler and WebFetch.

On the B to B side, we have a growing distribution business where we provide private label search, portal products and DNS error assist to our distribution partners.

Our owned and operated properties add up to less than 1% market share. I consider that an opportunity. We have the scale to be profitable at this volume level and we can improve existing and introduce search properties, leveraging the already attractive economics of our owned and operated business.

I mentioned barriers to entry. The fact is that it's not easy to get to our level of search traffic and the economics associated with that level of scale are not enjoyed by many. Our comparative advantage, MediSearch was originally developed to provide high utility to the consumer, but more importantly it allows us to capture superior monetization from our Google and Yahoo relationships.

So we have an attractive owned and operated business, at least from the standpoint of having a superior monetization engine. But it's not secret we have to change how we invest and market our search engine properties.

Recent efforts in investments in our search business, many of which commenced late last year were a step in the right direction, but it will take more work to make these initiatives successful in the marketplace.

We're looking at two efforts to reverse the decline in market share in our owned and operated properties. First, we much enhance the products so that groups of consumer desire to use them. Second, we must improve our SEO and SEM customer acquisition efforts to communicate this value and capture consumers.

We're not talking about massive investment. A very modest allocation of resources in product improvement promises to reinvigorate our owned and operated properties. We have smart engineers and product people working on these products. Our intention is to tailor each of these properties to a specific customer base and to craft the personality of each so as to be distinctive and desirable.

The second part of the equation revolves around communicating the value of these owned and operated brands to consumers in a cost effective way. By this I mean that we must become expert in optimization and marketing efforts to capture customers at a cost below their lifetime value.

We're getting better at this and I believe that these marketing efforts coupled with our improvements will slow and ultimately reverse the decline in our owned and operated business.

The distribution business is not a poor cousin. It has lower margins but it also delivers traffic without high customer acquisition costs. We provide value add to our distribution partners. We pass traffic to Google and Yahoo. They all appreciate it and we get paid for it. We intend to grow this business as it's nicely complimentary to our owned and operated business.

Like all good businesses, we're only as good as our people. We're fortunate to have some talented people at InfoSpace and we are recruiting others. Now is the time for us to build the A team of consumer internet talent.

As I've said in the past, I'm interested in growing InfoSpace through both organic efforts and through acquisitions. So far I've spoken about our plans for organic growth but the acquisition opportunities are at least as interesting. We have a strong balance sheet and cash with which to make acquisitions and the market for buyers like ourselves continues to improve.

Initially, we're targeting small tuck in acquisitions of businesses that can build our brand trust at the company and bring in consumer internet marketing expertise. These targets are in and around but not limited to search businesses.

Ideally, they will enable us to strengthen our search business or our search monetization engine will strengthen them. The common denominator is that we are looking for tuck ins with great consumer internet talent that are or will quickly be profitable.

We continue to actively seek bigger opportunities that have attractive characteristics; good growth potential, good margins, a fair price and preferably in but not limited to the consumer internet space. I cannot yet give you specifics on targets but you can be assured that we care about making money and unlocking the value of our NOL's.

You can count on the same careful stewardship of your assets that you have enjoyed with our Board of Directors to date. Our efforts in M&A will be no less careful of the acquisitions and asset dispositions of the past that resulted in unlocking shareholder value.

So to wrap up, we're pleased the first quarter's results, but we recognize that we have a lot of hard work ahead of us. We have the assets and the strategy in place to position us well for long term growth and profitability. We remain focused on improving operating efficiencies, strengthening the team and re-engineering the owned and operated business for growth and of course we will be opportunistic on the acquisition front.

With that, I'll turn the call over to David for more detail on the financials and then I'll be happy to take your questions.

David Binder

Good afternoon to folks on the call. I'll start today with a review of our first quarter earnings including a discussion of our ending cash position and balance sheet and then provide our guidance for the second quarter.

As Will mentioned earlier, revenue for the first quarter was $39.1 million. This represents sequential growth from the fourth quarter of 6% and a decrease from the first quarter of 2008 of 7%. Trending from what is typically our seasonally strong fourth quarter, we saw solid sequential growth from our distribution business, partially offset by a decrease in revenue from our owned and operated properties.

Our distribution business benefited from the growth in traffic and revenue from existing partners, plus contribution from newly launched accounts. Regarding the owned and operated business, we drew traffic to the sites, however the revenue per click continued to decline in the first quarter and overall revenue was down sequentially.

In the first quarter 69% of our total revenue came from the distribution business, up from 64% in the fourth quarter of 2008. Overall gross profit in the first quarter measured as a revenue less payments to distribution partners and content providers was $18.7 million, a decrease of $200,000 from the fourth quarter. Our gross profit margin was 48% down three percentage points sequentially.

Adjusted EBITDA in the first quarter was $3.8 million up by $100,000 from the fourth quarter of 2008 and ahead of our guidance. We reduced our overall cash operating expenses in the quarter with lower spending in advertising and marketing associated with some of our owned and operated growth initiatives.

Additionally, we began to see some of the cost benefits from the build out of our hosting facilities, the lower expenses associated with third party services related to our data centers and network operations.

In the quarter we recognized a net loss of $5 million. Within this amount we recorded $5.4 million in losses associated with our holdings in offshore securities. At the end of the quarter the book value of these assets was $8.2 million.

Net loss per share for the quarter was $0.14 and both our average and ending basic share count was 34.9 million.

Now turning to key items in the balance sheet, we ended the quarter with $205.4 million in cash, short and long term investments equal to $5.88 per share and roughly in line with the balance at the end of the fourth quarter. Included in this total is the current book value of our investments and option rate securities which as I previously mentioned is equal to $8.2 million.

Now for our outlook, as we enter the second quarter we continue to see strength in our distribution business both in existing partners as well as in our pipeline. Additionally we are seeing fairly stable revenue rates from our advertising partners on our owned and operated websites.

As a result, for the second quarter we expect revenue to range between $37 million and $39 million, adjusted EBITDA to be between $3.5 million and $4.5 million and our total operating results to post between a net loss of $300,000 to net income of $700,000 equal to a range of $0.01 loss per share to a positive $0.02.

Now with that, I'll turn the call back over to the operator to take your calls.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Eric Martinuzzi – Craig-Hallum.

Eric Martinuzzi – Craig-Hallum

The seasonality of search throughout the year seems it suffers in the summer months. That's why you've got the potential for sequential decline here in Q2. I was wondering, do you feel like you're going to get normal seasonality? Do you have any visibility that would give you a sense of things rebounding with back to school in the September time frame?

William Lansing

It's a little bit hard to say. Your guess is as good as ours on this. We're happy that our first quarter looks as good as it does sequentially and I think that tells you that we have something coming back our way. There's cause for a little bit of optimism, but really no one knows. We don't know.

David Binder

I would add that the guidance for the second quarter anticipates the typical volume softness that you get in the early summer months so we are expecting on our owned and operated side volumes to trend typically the way they do seasonally.

Eric Martinuzzi – Craig-Hallum

The partner side on the distribution side, what sort of traction did you get with bringing on new distribution and holding on to your existing?

William Lansing

In the quarter we signed four new partners as well as a number of renewals and I would say that the distribution team is doing a very good job of tracking and closing their pipeline. We seem to typically close a good number of new accounts on a quarterly basis and they're continuing to hit those numbers. On the renewal side, we've been very successful.

Eric Martinuzzi – Craig-Hallum

On the other income, you've got an expense, and that expense here I assume that if I back out the $5.4 million charge that we would be at roughly $700,000 positive on the other income line. Given the $205 million, what sort of interest rate should we use for the Q2 projection there?

David Binder

For the general cash balance outside of the auction rate securities, we're seeing a very low yield, below 1%. For the auction rate securities, about 70% of par value which is about $40 million we receive pretty favorable yields around 2%.

Operator

Your next question comes from Ross Sandler – RBC Capital Markets.

Ross Sandler – RBC Capital Markets

On the G&A line, it was a little higher than we were expecting. Were there some one time costs in G&A in 1Q? And second, can you talk about pricing, so far what you're seeing in April and May as compared to the first quarter?

William Lansing

The G&A had a little bit of one time costs associated with some head count changes both welcoming in some new folks as well as some folks departing. So it was a little bit high and it was more of a one time effect.

Regarding rates, entering into the second quarter, we're seeing them relatively flat from how the exited the first which for us somewhat positive news. Starting early fourth quarter we saw the declines that were impacting our business and right now I would call it stable and somewhat reassuring.

Operator

There are not further questions at this time. I would like to thank all of you for attending today's conference. That's concludes today's conference.

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