Internet Capital Group Inc. Q1 2009 Earnings Call Transcript

Internet Capital Group Inc. (ICGE)

Q1 2009 Earnings Call

May 7, 2009; 10:00 am ET

Executives

Walter Buckley - Chairman & Chief Executive Officer

Kirk Morgan - Chief Financial Officer

Karen Greene - Vice President, Investor Relations

Analysts

Jeff Van Rhee - Craig-Hallum

Frank Gemino - Henley & Company

Presentation

Operator

Welcome to the conference Internet Capital Group first quarter earnings conference call. My name is Jen and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions).

I would now like to turn the presentation over to Ms. Karen Greene, Vice President of Investor Relations. Please proceed ma’am.

Karen Greene

This is Karen Greene the Investor Relations and I want to welcome you to Internet Capital Group’s first quarter conference call.

I would like to remind everyone that we are going to use presentation slides to accompany our prepared remarks today. These slides can be found on our website at internetcapital.com. Go to the Investor Information tab and you will see an icon for our first quarter conference call. The slides can be accessed through that icon. For those of you without immediate access to our website, the conference call and presentation slides will remain on our website and be available for future reference.

On the call this morning, we will be discussing certain non-GAAP financial measures. For additional information on these non-GAAP financial measures, including a reconciliation of these measures to the most comparable GAAP measures, please refer to the press release we put out this morning including the attachment to this press release. The press release is also available on our website, which again is internetcapital.com. To access the press release on our website, go to the ICG Press Release tab and select the May 7th press release. The attachments to the release can be accessed by clicking on the PDF file contained within the release itself.

Before we begin, I would like to briefly review our Safe Harbor language. The statements contained in our press release and those that we make in the conference call as well as the accompanying slide presentation that are not historical facts are forward-looking statements that involve certain risks and uncertainties including, but not limited to risks associated with the uncertainty of future performance of our partner companies, acquisitions or dispositions of interests in partner companies, the effect of economic conditions generally, capital spending by customers, development of the e-commerce and information technology markets and other uncertainties detailed in the company’s filings with the Securities and Exchange Commission. These and other factors may cause actual results to differ materially from those projected.

With that I’ll turn the call over to Walter Buckley.

Walter Buckley

Thanks, Karen and welcome and thank you for joining us this morning. I will begin by providing you with an overview of ICG and its partner companies for the first quarter of 2009. Kirk Morgan, Chief Financial Officer, will follow with ICG’s financial results and review partner company performance for the quarter. ICG and its partner company demonstrated solid progress on both the top and bottom lines for the first quarter, in an environment that continues to be quite challenging.

Turning to slide four, here are some of the highlights of the quarter. For the second consecutive quarter, our core partner companies demonstrated strong EBITDA improvement with a $3.4 million loss in the first quarter of 2009 versus $11.4 million loss in the first quarter of 2008.

Exclusive of stock-based comp and unusual items, this group was in aggregate, essentially EBITDA breakeven in the first quarter of 2009 versus in aggregate EBITDA loss of $8 million in the first quarter of 2009. Kirk will elaborate on these results, but this EBITDA improvement is a direct result of the cost management measures that we implemented at the partner companies beginning the third quarter of 2008.

In the first quarter of 2009, our core companies achieved year-over-year aggregate revenue growth of 12%. We entered the second quarter of 2009 with a strong balance sheet, which provides us the financial flexibility that we believe is important, in this environment.

Finally, subsequent to quarter end, we hired Jack Reinelt, as the new CEO of GoIndustry-Dovebid. Jack is a very talented and experienced business executive, who mostly recently served as Chief Operating Officer at TeleAtlas a global leader in digital mapping and navigation solutions.

Under Jack’s leadership, the business grew revenues from 78 million pounds to over 217 million pounds and EBITDA from 6 million pounds to roughly 110 million pounds over a four-year period. We are excited to have Jack at the helm of this company and we believe to continue to hold significant potential going forward.

Now, slide five to eight, reflect partner company highlights from several of our core companies, starting with Channel Intelligence. Challenge Intelligence is provider of enterprise e-commerce solution for manufactures and online retailers closed the first quarter with year-over-year revenue growth of 24%. The revenue increased was achieved, while reducing our operating expenses by 13%.

CI continued strategy of moving new and existing customers, performance-based pricing, which were the significant contributor to the overall results. Despite poor retail sales and a weak environment for manufacturers, CI saw bookings increased 32% in Q1, demonstrating the value, the CI products and services provide their customers.

Freeborders, a global provider of offshore IT services deliver from China, had a very good first quarter, achieving impressive revenue growth, while increasing profitability. The company has done a good job of maintaining its existing customer relationships and has added several new large customers during the quarter including the Royal Bank of Canada.

ICG Commerce, a leading procurement service provider saw good level of commercial activity in the first quarter of 2009. Just after the close of the quarter, ICG Commerce signed multiyear multimillion dollar relationship with a larger publishing company. Additionally the company expanded relationship with three of its existing customers including Cameron and Vought.

To address the market focus on quick ROI solutions ICG Commerce also launched a new platform, the Capital and Project Sourcing Desk. This offering is oriented around helping companies rapidly manage large ad-hoc expenditures, which can represent up to 30% of a company’s annual indirect spend.

Now moving to Metastorm, Metastorm software for business process management needs continues to be well received in the market, as reflected by continued purchases by existing customers as well as new license deals and organizations around the world. New customers acquired in Q1 2009 include ADP Iberia, Health First, London School of Economics, Nixon Peabody and TW Telecom, just to name a few.

StarCite, a provider of on-demand global meeting solutions secured a number of new global 500 clients in the first quarter including a leading chemical product manufacturer, a large discount retailer and one of the world’s largest pharmaceutical corporations.

Among this client list is a European-based industrial leader, which is rolling out meeting 360, StarCite’s co-branded solution with American Express. StarCite also expanded its relationship with many of its existing clients as companies continue to seek ways to manage costs for their meetings programs.

The company also experienced healthy growth in its supplier or hotels division, exceeding its sales expectations and signing on 10 major hotel brands. Ongoing corporate and supplier option continue to drive growth in overall RFPs.

StarCite powered more than 72,000 unique electronic requests for proposals for meetings, an increase of 14% for the quarter. Finally the company experienced over an 80% improvement in EBITDA in Q1 ‘09 versus Q1 ‘08, a reflection of the cost action taken in the second half of 2008

Finally WhiteFence, a leader in online service transaction for home services renewed or amended contract with 15 existing service providers, including several of their top providers, expanding the scope of the relationships and increasing in some case significantly the commission rates.

The company also saw increased customer growth versus the first quarter of 2008 along with reduced marketing costs to obtain those customers. WhiteFence experienced an 87% improvement in EBITDA in Q1 ‘09 versus Q1 ‘08, reflection of lower operating and marketing expenses.

In summary, the most prevalent themes among our partner companies are; number one, getting to or in a number of cases maintaining profitability and this is evident in the 70% aggregate EBITDA improvement we saw this quarter at our core companies and number two, saving their customers’ money, across the board, the solutions our company deliver often deliver prudent ROI and provide significant efficiency to their customers. Because of this, we are now seeing new and existing customers adopt and proliferate our partner company’s platforms to improve their bottom lines.

The ICG management team remains actively focused on our top priority of work diligently with the partner company management teams. We have been actively involved on strategic, financial and operating fronts, leading the charge in new initiatives including financings, recaps, M&A, recruiting, sales and marketing activities and expense management. Supporting these efforts, ICG continue to provide legal, financial and marketing expertise from its corporate team to these companies.

We are pleased that the actions we have taken at our partner companies have resulted in improved operating results, particularly on EBITDA front in Q1. Our number one priority is to continue to drive our partner company’s EBITDA to sustained EBITDA profitability and solid revenue growth. We look forward to continuing to share the progress of our companies with you and with that I’ll turn it over to Kirk.

Kirk Morgan

Thanks, Buck and good morning. Let me begin on Slide 10, with our first quarter 2009 consolidated income statement.

During the quarter ICG consolidated results of three partner companies; ICG Commerce, Investor Force and Vcommerce. We consolidated two partner companies in the comparable 2008 period, ICG Commerce and Investor Force. Consolidated revenue in the first quarter of 2009 totaled $21.7 million, compared with $16 million for last year’s first quarter. This growth is due to revenue growth at ICG Commerce and Investor Force as well as the consolidation of Vcommerce.

Moving to the bottom line, ICG reported consolidated net loss of $11 million or $0.30 per diluted share for the first quarter of 2009 as compared with the net loss of $6.6 million or $0.17 per diluted share for the first quarter of 2008.

Importantly, results for the 2009 quarter include $3.4 million net charges, while the 2008 quarter includes $5.7 million in net gains. These charges and gains primarily relates to the variability and the fair value of our Blackboard hedges.

Excluding the impact of these charges and gains, our net loss would have improved from $12.3 million in the 2008 quarter to $7.6 million loss in the 2009 quarter, an improvement of over 38%. This improvement is a good demonstration of the progress our partner companies are making, toward profitable growth and cost reduction we have made in corporate.

Let me next review our core company results on Slide 11. Aggregate revenue over eight core companies increased 12% to $67.8 million during the first quarter of 2009, from $60.7 million in last year’s first quarter.

The companies experiencing strong revenue growth during the quarter are ICG Commerce, Freeborders and Challenge Intelligence. Regarding the first quarter, in light of the significant headwinds our companies were facing on the overall economic front, we believe the 12% year-over-year aggregate revenue growth is solid. It’s also important to note that historically the first quarter has generally been our company’s weakest.

I will now move on to EBITDA. Our eight core companies reported aggregate loss of $3.4 million during the quarter, a significant improvement of over 70% from an aggregate EBITDA loss of $11.4 million in last year’s comparable quarter.

ICG Commerce and Freeborders led the way with positive EBITDA for the quarter, a great accomplishment in this market. These aggregate EBITDA results highlight the value proposition our companies offer to our customers and the pact of cost cutting initiatives.

Again I believe it’s important to provide a little more color on our EBITDA performance. On the next slide, Slide 12, I will highlight the trend in our aggregate EBITDA results, excluding some elements such as stock-based compensation, severance and other unusual costs. I exclude these to provide you with a picture of how we measure progress at our partner companies both from an operational and evaluation perspective.

Aggregate EBITDA would have improved from a loss of $8 million in 2008 quarter to a loss of about $100,000 in the 2009 quarter. This demonstrates a significant improvement I discussed earlier and it leaves me encourage for continued profitable growth as we look out for the rest of 2009.

Now let’s move to Slide 13. Slide 13 presents the movement of cash at the parent company level during the quarter and total liquidity at March 31st. We deployed a total of $4 million in the quarter, primarily to Investor Force and Vcommerce, we see $1.6 million in proceeds primarily from escrow releases, repurchased $400,000 of our common stock, and had net cash operating costs of $4.8 million, which is not indicative of our $12 million annual run rate.

At quarter end, we had $65.6 million of cash at the parent company, the value of our Blackboard holdings including our hedges was $72.5 million in the value of our GoIndustry Holdings was $3.8 million.

Let me close with some overall views on the quarter and rest of 2009. Our focus in 2009 is on delivering significant and even improvement with revenue growth. We believe our Q1 2009 performance was solid progress towards these goals, as most of our company hit our internal expectations on both the revenue and EBITDA fronts.

With five of our eight companies experiencing 2009 operating costs to be lower than 2008, this highlights the cost reductions completely in late 2008 and early 2009 and leverage in the models. We will continue to look for ways to operate ICG and our companies as efficiently as possible, which will continue to improve our EBITDA results. Coupled with our strong balance sheet, almost a $140 million of liquidity and debt free, continued improvement on the EBITDA front at our partner company, presents us with flexibilities on many fronts.

We look forward to reporting to you on our Q2 results in late July or early August. Now I’ll turn it back over to Buck.

Walter Buckley

Thanks, Kirk and we would like to open it up to questions.

Question-and -Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Van Rhee - Craig-Hallum.

Jeff Van Rhee - Craig-Hallum

A couple questions, guys. First maybe you can just touch on, either Buck or Kirk. If you just talk about ICG Commerce, in particular you mentioned a multimillion dollar win with large publishing company, just specifically multimillion in what respect? Is that an annual revenue type contribution just to help me understand that?

Maybe some color on the backlog you have quite often given some commentary around the backlog thereabout dollar amount and potentially contract length and any other material developments is related to ICG. Then I have a few other questions.

Walter Buckley

On ICG, yes, it’s a multimillion dollar annual contract and it will kick off some time late in the second quarter. From a pipeline standpoint, as we have said, previously, entered 2009 with very strong. Didn’t see a lot of movement in the pipeline until really March and is true really across the board and the things began to loosen up a little bit in March, continue into Map and April.

We are feeling cautiously optimistic about ICG specifically, but across all the companies and it’s a trend, but certainly we are not ready to plant the flag in the ground at the markets turned.

Jeff Van Rhee - Craig-Hallum

Your broader feeling there though would be that you would, I mean understanding that it can be somewhat lumpy in terms of stair steps higher that you don’t see any meaningful degradation in the pipeline or in the backlog in terms of existing contracts and that you tend to layer over the course of the year. So, all of the same you probably see that stair step function growth?

Walter Buckley

Yes, what’s interesting is, we had a huge fourth quarter in terms of new signings by ICG Commerce and usually after that our pipeline has taken a significant dip and we didn’t see that actually this time.

Actually the pipeline increased, the question is, forecasting ICG, when deals will close because they are large and they can be lumpy, but yes, I actually think that we will see a stair step growth.

Jeff Van Rhee - Craig-Hallum

As it relates to the broader picture, I guess and your expectations on the coming year, any color? You obviously got an interesting view in the economy through the portfolio with companies, any color on your thoughts around whether we bottomed, whether things is stabilized, improved, continue to get worse, anything along those lines would be helpful and then also sectors and model types that are doing well?

Lastly in that batch of questions, for 2009, any broad thoughts on EBITDA profitability for the core companies? How many you think will probably be EBITDA positive for the year right now at least just you’re modeling them now?

Walter Buckley

I’ll hit the first couple then turn it over to Kirk. I think it’s fairly murky out there and I don’t think, we are ready to say we have hit the bottom and I just think there are too many variables, too many moving parts. That said, I’d say, the trends we saw in March and April certainly are positive compared to the previous quarter or two, but again it’s one month at a time. I think that’s our view.

I think that the companies that are doing well are the ones that provide, immediate ROI and tangible ROI to their customers, something we have talked about before. I think in this environment, companies are looking for tactical, real-time savings and the company delivered that.

I think we are experiencing growth and I think we will experience significant market share increase this year and beyond. It’s hard to say that certain sectors are doing better than others. I’d say certain companies seem to be more aggressive than others, from a customer standpoint. So, actually we break it out more into which companies are doing this as a way to drive savings and maybe increase share on the e-commerce side.

So, I’ll turn it over to Kirk on the EBITDA.

Kirk Morgan

On EBITDA Jeff, clearly, I was very happy with where we end up for the quarter and EBITDA. Almost all the companies significantly improve from where they were in last year’s first quarter, which obviously, as I said earlier, leaves me, encouraged with how we look out to the rest of the year.

I’m just a bit concerned with the lack of visibility in the last half of the year right now. I think the cost cuts that are companies have taken are paying off and we will continue to pay off. It’s just difficult to really pin down on the top line.

On the EBITDA side, we are going to continue to make significant improvement. I’m not ready to say, which companies other than, clearly with progress of ICG Commerce continues to make. They will be positive. I think a number of the others are heading that way, Jeff. Hopefully the progress continues the way they did in the first quarter, they will end up there, but I’m just not ready to really put that line in the sand yet.

Jeff Van Rhee - Craig-Hallum

Do you have to come at that differently, any quantification of the reduction in costs at the partner companies, namely the steps they have taken as a group, how many heads out of how many heads or other, if there is another more representative metric that may help us have a sense of the scope of their reaction to the conditions out there?

Kirk Morgan

EBITDA improved, if you exclude everything. EBITDA improved from a loss of $8 million last year to potentially breakeven. So, on $7 million of revenue growth or so, we achieved $8 million of EBITDA improvements. So, I think clearly having more EBITDA improvement even after stripping everything out, then a revenue growth, said that the number of reductions was very significant.

I don’t have that specific number. I mean, StarCite, there was probably $4 million, $5 million of integration costs that were in last year, that’s not in this year. Metastorm had some a bunch of unusual things relates to their IPO and some legal litigation, but it’s a $10 million to $15 million easily, Jeff.

Jeff Van Rhee - Craig-Hallum

I guess lastly, the sources uses of cash, I think you said you used $4 million to invest in partner companies, but if I saw the ownership stakes they didn’t look like they were any changes in ownership stakes. Can you just clarify that?

Walter Buckley

Again the money that primarily going in to Investor Force and Vcommerce, Jeff, is in the form of debt.

Kirk Morgan

We wouldn’t yet translate into ownership until we convert that debt.

Operator

Your next question comes from Frank Gemino - Henley & Company.

Frank Gemino - Henley & Company

One quick one, I know the quarter started off its scary as the last two, but what was your thought process on the share buyback? It didn’t seem like we had an opportunity to pickup some relatively cheap prices, was there any thought process, why we didn’t pickup more?

Walter Buckley

Well, entered the year with a lot of uncertainty and put a program in place as part of the blackout, which lasted well into through most of February, all of February and obviously we were conservative on that program. In hindsight maybe we should have been more aggressive, but that’s where we were. We felt that being prudent and cautious at this time was the right thing to do.

We were able to buyback some shares, but not as much as we would have liked to have, bought back and you put those programs in, you can’t change them until the blackout period expires. I think it’s something we continue to look at and evaluate and we take it’s a great use of capital. The majority of our capital has gone over the last six months, in terms of spending roughly $10 million.

Operator

(Operator Instructions). As there are no further questions in the queue, I’ll hand the call back to management for closing remarks.

Walter Buckley

We would like to thank all of you for joining us in the call this morning and look forward to reporting our second quarter results in August. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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