Ancestry.com Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 1.13 | About: Ancestry.com Inc. (ACOM)

Ancestry.com (NASDAQ:ACOM)

Q1 2013 Earnings Call

May 01, 2013 5:00 pm ET

Executives

Heather Erickson

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

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

Analysts

Jeffrey A. Harlib - Barclays Capital, Research Division

Anisa Hsieh

Rich Gross

Adam Spielman - PPM America, Inc

Operator

Good day, everyone, and welcome to the to Ancestry.com First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I'll turn the conference over to Ms. Heather Erickson, Senior Director of Corporate Communications. Please go ahead.

Heather Erickson

Thank you. Before I have Tim Sullivan begin our discussion, the CEO of Ancestry.com, I'd like to take a few moments to do some housekeeping items.

In our remarks today, we will include statements that are considered forward-looking within the meanings of our 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 our forward-looking statements.

A detailed discussion of such risks and uncertainties is contained 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 analytic 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 a rebroadcast of this call will be available on our website after 6:00 p.m. Mountain Time today.

And now, I'll turn the call over to Tim.

Timothy P. Sullivan

Thank you, Heather, and thank you to everyone for joining us today. Given that we were just with you on our year end earnings call less than 5 weeks ago, I'm going to keep my comments brief, and then we'll let Howard take you through the results in more detail.

We are quite pleased with our Q1 performance, which came in very close to what we had indicated, with our adjusted EBITDA up 55% year-on-year on 24% revenue growth and $51 million of free cash flow in the quarter.

In a quarter where we faced a significant headwind, given the absence of the Who Do You Think You Are? television show on NBC that supported strong subscriber growth in Q1 of last year, we added nearly 80,000 net new subscribers to our Ancestry.com branded sites. That puts us at a total subscriber base of close to 2.1 million and at nearly 2.7 million across all our properties.

In addition to the net subscriber growth, our subscriber engagement remains healthy, as users continue to upload photos and stories to their trees, as well as Ancestry records that we suggest through Ancestry hinting experience. User-generated content was up 17% year-on-year in the quarter, while user-accepted hints remained strong.

The quarter also featured good progress in executing our strategy around content, technology and product. We added another 200 million records to our collection in the first few months of 2013. It now holds over 11.6 billion digital records. Our mobile apps now have over 7.8 million downloads, and we recently added some minor, but visible enhancements that add greatly to the user experience.

We're also seeing a lot of activity with our DNA product, particularly since introducing the new $99 price point in February. I remain encouraged by our continued integration work with Facebook and expansion of the sharing experience on Ancestry.

While we don't have a lot of new news since we last spoke, we certainly do feel great about the quarter. Our results in every respect reflect the best features of the Ancestry.com business model. We have a subscriber base of 2.1 million people that's growing, with a very healthy percentage of those opting to subscribe to one of our higher-priced premium packages and a significant cohort of long-term and loyal subscribers. Ours is a business model that provides a great deal of stability and visibility, with very attractive EBITDA margins. Our strong free cash flows provide us great flexibility to reinvest in new content, advancements to our user experience, key technologies and new product lines like DNA that we think our core to our mission. And obviously, as we have demonstrated, we're able to make these investments while also delevering over time.

So all in all, we think it was a solid quarter of steady progress and a terrific start to the year. With that, I will turn it over to Howard.

Howard Hochhauser

Thanks, Tim. Let me jump right in. We had a great quarter. As Tim just noted, non-GAAP revenue for the quarter rose 24% to $135 million, and adjusted EBITDA increased 55% to $49 million compared to the same period a year ago. Our adjusted EBITDA margin was just over 36%, compared to 29% in Q1 of last year.

The $51 million in the free cash flow we generated helped boost our cash position at year end -- sorry, at quarter's end to $72 million and lowered our leverage ratio to 4.6x. That's nearly a full term lower than we did the financing in December we expect to use our higher-than-expected cash balance to start paying down our debt.

Looking more closely at the P&L. Subscription revenue is up 11% to $114 million and product and other revenue was up 64% to $10 million. Subscription revenue benefited from the net subscriber growth in the core ACOM product, as well as the revenue from Archives.com, which we closed in the third quarter of last year.

The increase in product revenue was driven by growth in our DNA business, which continues to perform well. Net subscriber adds totaled 80,000 for our Ancestry.com branded sites. That translates to growth of about 4% over year end and 12% year-over-year. That growth is despite the cancellation last year of the NBC show, Who Do You Think You Are?, which helped us drive results in the first half of 2012.

Given the assets of the show in the current quarter, we're very pleased with the financial results. This performance was driven from solid execution across the business. In the U.S., we had several successful marketing campaigns, including a New Year's campaign and immigration campaign around passenger list and border crossing records.

Overseas continued to perform well with campaigns in each geo, including a promotion around Australian convict records for Australia Day. I guess Aussies love their convict heritage. We accomplished this by also being disciplined about our marketing spend. You can see in our P&L that our marketing and advertising spend decreased about $2.5 million in the quarter. With a larger reduction outside media spent, partially offset by costs associated with expansion of our marketing team. We also launched some great new content, including more than 2 million U.S. state birth, marriage and death records, and Lord Morpeth's Testimonial Roll, a 420-meter long leaving card from 160,000 people all over Ireland to Viscount Morpeth when he left his post as Chief Secretary for Ireland in 1841.

On the technology front, we continue to do some great things from a launch of auto renewing subscriptions and photo hinting in our iOS mobile app and a test to give new message for our members to share their experience with their family and friends.

To keep up with our product's roadmap, we've continued to expand the technology teams. Another initiative we rolled out this quarter was a price change from our -- for our Archives.com product. As a reminder, we've purchased archives in Q3 of last year. Price testing revealed that site conversion, pre-trial bill-to rates and lower refund rates supported a change from annual to monthly subscription offering. That change increased both conversion and lifetime revenue per visitor.

Moving to CapEx. In the first quarter, we invested approximately $8 million, of which approximately $5 million was dedicated towards content. As we said on last call, we're targeting approximately $40 million to $45 million of total CapEx spend in the year, including approximately $25 million to $26 million in content. And consistent with our last call, we are modeling a 25% effective cash tax rate for the full year.

As mentioned a moment ago, we ended the quarter of cash on the balance sheet of $72 million, double the $36 million we reported at year end. This increase in cash was due in part to the natural growth of the business, which was reflected on our EBITDA. It also benefited from a federal tax refund, partially offset by the payment of certain large expenses at the year end, including certain one-time deal-related expenses. Total debt stood at $968 million as of March 31.

In short, it was a great quarter, and Q2 shaping up to be another good quarter of year-on-year revenue and EBITDA growth. We are very pleased with the performance of the business. We had steady revenue growth and net subscriber additions due to solid content and marketing campaigns, as well as our product development initiatives. We feel we are well positioned for the remainder of the year.

With that, why don't we turn it to you for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go with Jeff Harlib from Barclays.

Jeffrey A. Harlib - Barclays Capital, Research Division

So just on the very strong EBITDA performance and margin, with the marketing spending being lower -- I mean, usually, your Q1 EBITDA margin was much, much lower than it was during this quarter. And I'm just wondering sort of your strategy on marketing and advertising, doing less TV -- and how you think that will impact your growth, if at all?

Howard Hochhauser

Yes, I'll take that and Tim can jump in. So today, we're always looking to optimize our acquisition costs and our media spend. So this year, first half of this year, we're comping against the Who Do You Think You Are? show. That show generated around 100,000 gross subscriber additions in the first half of last year. And we made the conscious decision not to chase after unprofitable growth. So the net result of that is, in this quarter, we decided to have lower year-on-year media spend that our actual external media spend was down by, gosh, $6 million to $8 million year-over-year. As I mentioned in my speech, it was partially offset by more headcount. But long-term, we expect it to have no impact on growth. We measure sort of our media spend relative -- or I should say, our acquisition cost relative to our lifetime revenue per subscriber. That's what we seek to optimize for. So we feel good about our results in the quarter. We feel good that we actually dialed back media spend that continued to grow the business, adding 80,000 net new subs. And as it relates to the rest of the year, you should expect it to be sort of less seasonal than it was last year.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay. I mean, so should we expect continued declines in marketing advertising throughout the year?

Howard Hochhauser

No, you have the anomaly in this period with the TV show, right? So we're comping against the TV show in Q1 and Q2.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay. And just the -- what was the federal tax refund that you commented on? And also if you can just comment on -- you discussed using some of that excess cash for debt reduction, anything more specific on that?

Howard Hochhauser

I'll take the last one first. Yes, business continues to do well. We're in excess cash position. So the best use of that cash right now would be to delever, so we're looking to do that. Our cash rate or -- sorry, our tax refund relates to refund-related payments made in 2012, largely due to expenses that we had as part of the deal. So once the deal was signed, we very quickly went to amend prior year to get a refund.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay. And sorry, when was that exactly?

Howard Hochhauser

When was it received or what year is the tax?

Jeffrey A. Harlib - Barclays Capital, Research Division

Yes.

Howard Hochhauser

It was received in Q1.

Jeffrey A. Harlib - Barclays Capital, Research Division

And how much was it?

Howard Hochhauser

Just under $20 million.

Operator

And we'll now go to Anisa Hsieh from Morgan Stanley.

Anisa Hsieh

Just wondering if you could break out the revenue contribution for Archives in the quarter, and maybe EBITDA as well if that was positive.

Howard Hochhauser

Yes. Archives was about $6-ish million dollars of revenue in the quarter. I'm sorry, what was the second question?

Anisa Hsieh

EBITDA contributions, if that's applicable for Archives?

Howard Hochhauser

It's about a 10% margin business, EBITDA margin business.

Anisa Hsieh

Okay. And then housekeeping, maybe I can wait for the quarterly report, but what was the cash flow from operations in the quarter?

Howard Hochhauser

Yes. Look, I don't have the statement of cash flow in front of me, but we'll file our -- we're actually going to file our reg statement, which will have our full statement of cash flow in there.

Operator

And we'll now go to Rich Gross from Columbia Management.

Rich Gross

Couple of questions for you. First of all, on the cost of goods for the services, did that increase in the quarter for increased headcount, or were -- was there something else going on there?

Howard Hochhauser

Are you talking of cost of goods related to service?

Rich Gross

Subscription, basically, yes. I have it at $21.7 million in the quarter, up from $17.9 million roughly for the fourth quarter and $16.8 million the quarter before that?

Howard Hochhauser

Yes. Sorry, I thought you're talking about the product. The services line, I'll tell you what's in the line and you'll see what's going through the line. But the increase that you see, there's amortization outflows through there, web host net flows through there and member services that flow through there. So you should know that our content is sort of got marked to market as part of this transaction, so whereas our content amortization used to be called in the low double digits, it's now closer to $25 million, $26 million on a full year basis and content amortization flows through that line.

Rich Gross

Okay. I was kind of thinking that might be the case. I just wanted to check. I'm guessing that typically that, is it relatively -- when you guys add subscribers, do you generally get good incremental margins from that? Correct?

Howard Hochhauser

Yes, that...

Timothy P. Sullivan

Higher than the accounting.

Howard Hochhauser

It's truly a noncash purchase price accounting change.

Rich Gross

Okay. And then just in terms of the restricted cash decrease that you pay out some of the outstanding tenders associated with the deals that will happen there?

Timothy P. Sullivan

Yes.

Rich Gross

Balance sheet? Okay. And then the rest of that, is that supposed to happen? Is your expectation for the rest of that would get settled this year? The other [indiscernible]

Howard Hochhauser

Well, to be clear, the restricted, the $68 million, a portion of that is the case you're referring to, but another portion relates to Archives. And frankly, yet even a smaller portion relates to the LBO we did many years ago.

Rich Gross

Okay. So that might kind of stay on there for a while, yes? All right. And then, I missed the first like the first 3 minutes of the call. Did you guys give guidance for subscriber count next quarter?

Howard Hochhauser

We do not.

Rich Gross

And is that something you are -- don't plan to do going forward?

Howard Hochhauser

Yes, so that...

Rich Gross

Continues to...

Howard Hochhauser

Sorry, just going back to the last earnings call, we sort of intentionally take the position that we don't want to give guidance. One of the benefits of going private was the flexibility to run the business. But we didn't want to get into the habit of giving guidance. Last quarter's call happened, I think it was 2 days before quarter end. So we felt, "Gosh, we should get people a little bit of color as to where we expect to finish the quarter." Having said all that again, I did close my speech by saying, "Q2 is off to a good start, and we feel comfortable with our revenue and EBITDA growth in the quarter."

Rich Gross

Okay. And then a final question for you. Just -- you referenced the 25% effective tax rate for the year, what should I be applying that to? Should I be doing...

Howard Hochhauser

Not our GAAP...

Rich Gross

Operating earnings, adding back the amortization?

Howard Hochhauser

Yes.

Rich Gross

Okay. And the 25% effective for the year, should I take into account the $22 million or $20 million roughly for the tax refund that you got in the first quarter?

Howard Hochhauser

No. The best we could do, we'd take EBITDA less content CapEx, which actually, this year is going to be very close to the amortization of content. Take that number times 25% to come up with an effective sort of tax -- cash tax payment.

Operator

[Operator Instructions] We'll now go to Adam Spielman from PPM America.

Adam Spielman - PPM America, Inc

Just trying to get the underlying revenue growth you pointed to the subscription revenue. So is that subscription revenue number, is that kind of a clean comparison Q1 over Q1, excluding acquisitions and also any of the accounting changes?

Howard Hochhauser

Well, I'll tell you 2 things. One, you do have the Archives revenue in subscription, right, whereas you didn't have it last year. Secondly, depending if you're looking at the GAAP or non-GAAP number in our P&L, one is comparable, one is obviously not comparable. And for clarity, the difference there is just the deferred revenue write-down that we took as part of the purchase price adjustment. It's all -- it's in the press release. We isolated the $11.5 million.

Adam Spielman - PPM America, Inc

Right, okay. Make sure I ask in another way. So the core subscribers, up 12%, the 2,096,000 over the, I don't know, about 1.9 million last year. It looks like maybe organic revenue growth is a little under that. Is that fair?

Howard Hochhauser

Using the 130 compared to the 108 roughly, using round numbers.

Adam Spielman - PPM America, Inc

Yes, I mean, basically, you guys used to disclose a lot of nitty-gritty metrics in the business and ARPUs and I understand you're not doing that. I'm just trying to get a sense of -- you grew subscribers 12%, that's an apples-to-apples number, right, there's no acquisitions in there that...

Howard Hochhauser

Yes. And so our -- I just -- well, I said our revenue growth is about 20% if you -- that's a rough number, excluding Archives. So our revenue grew faster than our sub growth. I don't have it handy, but I think our percent in premium went up about 2 points, we're now at 50% of our subscribers in the premium package compared to roughly 48-ish percent same period a year ago. We had a migration to more premium. We also, as you may recall, raised price on the monthly, so you're migrating through that. Now we're $22.95 on a monthly. And well -- and we did not change price on the longer-term durations.

Adam Spielman - PPM America, Inc

Okay. And then when you're out marketing the offering, there's -- you spent time talking about kind of core subscribers versus subscribers that have been with the firm less than 2 years. Is that...

Howard Hochhauser

Yes.

Adam Spielman - PPM America, Inc

The same nomenclature as kind of the premium and non-premium or...

Howard Hochhauser

No, sorry, let me be -- good question. So the premium is -- people have signed up for a World Deluxe or in the U.K., it's the premium offering, so that's has a higher price point. Separately, we talk about core. Core subscribers are those subscribers that had been with us for 2 years. So they have a higher or lower point, but those are people that have just -- it's a tenure description. And not that you're asking, but that, actually moved up now, that's at around 38% of our sub base is in that core duration, that 2-year plus duration.

Adam Spielman - PPM America, Inc

Okay. And then just -- and I'll be on queue [ph] -- a final point on the subscriber adds and the trends. I mean, basically, as we look at -- as you've been very clear, last year was inflated by the TV show. You viewed some of those subs that's coming off. Is that still kind of the right way to think about it, if we look at last year and kind of normalized for the adds and TV shows and think about trying to project out for this year? Is that a decent approach?

Howard Hochhauser

Yes. I think if I understand the question correctly, it's about generally sub growth, and I'll take you back to the first question and I would say, the first question of this call, we're not going to chase after unprofitable subscribers. So we didn't want to try and grow through the TV show comparison. So this year, yes, our GSAs will likely be down year-over-year, but we will grow our net subs in a much more consistent basis, on a less seasonal basis this year. And sorry, one more important point is that we will do that while maintaining sort of LTV per subscriber, and that's the objective.

Adam Spielman - PPM America, Inc

Got it, okay. And just one more quick one on kind of the cash flow and the trajectory. So I understand there was a tax refund coming in and there was an outflow going out, or should we think about any big other working capital swings through the year? Is it pretty simple, kind of your free cash flow should be the actual cash flow generated?

Howard Hochhauser

I would just point out a few smaller items. The high-yield payment happens twice a year, Q2 and Q4, so we didn't have that in Q1, we don't have that in Q3. There's a potential to have some other tax benefits. We haven't publicly talked about them yet, but it wouldn't be that material. So other than that, there's really nothing abnormal about the business. Typically, CapEx, we try to make it sort of even thoughout the year.

Adam Spielman - PPM America, Inc

Okay. And is there any reason you wouldn't just pay down the term loan tomorrow? Is there some calculus for you guys in terms of generally reprice this term loan at some point? And how do you think about prepaying it now versus later?

Howard Hochhauser

So our objective is to get through this earnings call and then look at where cash is by geo [ph] and then look to repay some portion of the term loan.

Operator

And it appears there are no further questions, I'll turn the conference back over to our presenters for any additional or closing remarks.

Howard Hochhauser

Okay. We have no further remarks. Thank you for the questions and the attendance, and we'll see you all in about 90 days. Thank you.

Timothy P. Sullivan

Yes. Thank you, all. We appreciate it.

Operator

And that does conclude our presentation for today. Thank you for your 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!