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The Active Network (NYSE:ACTV)

Q1 2013 Earnings Call

May 02, 2013 4:30 pm ET

Executives

Brinlea Johnson - Director

Jon Belmonte - Interim Chief Executive Officer

Darko Dejanovic - President

Scott Mendel - Chief Financial Officer and Principal Accounting Officer

Analysts

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

William Sutherland - Northland Capital Markets, Research Division

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 ACTIVE Network Earnings Conference Call. My name is Sean, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I'd like to turn the call over to Brinlea Johnson of The Blueshirt Group. Please proceed.

Brinlea Johnson

Good afternoon. Welcome to the ACTIVE Network First Quarter 2013 Earnings Call. With me today is Jon Belmonte, interim CEO, Darko Dejanovic, President; and Scott Mendel, CFO.

Before we get started, we'd like to remind you that our statements today that are not purely historical are forward-looking statements. Our actual results may differ materially from those projected in any forward-looking statements due to various risks and uncertainties, including the company's ability to generate revenue and control expenses in order to achieve and maintain profitability; the company's ability to maintain an adequate rate of growth and improve its operation; the company's ability to successfully manage its acquisition, investment in businesses, applications and technologies; effects of the company's recent management changes and the final terms of the separation agreement, if any, with the company's former officers and the associated impact on our financial results; and those other risks and uncertainties set forth in the Risk Factors section of our periodic filings with the SEC.

All forward-looking statements are qualified in their entirety by this cautionary statement, and we undertake no obligation to revise or update these statements to reflect events or circumstances after the date hereof.

I would also like to point out that during the call, we do mention certain non-GAAP financial measures, which will be explained during the call. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings press release, which is made available prior to today's call. This conference call is also being recorded and will be available for replay and Internet broadcast on The Active Network Investor Relations site at www.activenetwork.com under Webcasts and Presentations.

I would now like to turn the call over to Jon Belmonte, interim CEO.

Jon Belmonte

Thanks, Brinlea. Good afternoon, everyone, and thanks for joining us. I'm very excited to be back at ACTIVE working with this leadership team. I appreciate the confidence the Board of Directors has shown in selecting me for this interim role and want to thank Dave and Matt for all of their hard work.

With over 10 years of previous experience with the company as Chief Operating Officer and Chief Media Officer, I have a deep familiarity and understanding of ACTIVE's business. I'm prepared to engage quickly and identify areas to improve ACTIVE's operational efficiency, as well as our financial performance. I look forward to keeping you updated on our progress and meeting many of you in person in the future.

Now, I'm going to turn it over to Darko to cover the first quarter operational highlights, and then Scott will discuss the financial results.

Darko Dejanovic

Thank you, Jon. We had a good start to the year. Our customers are telling us that our solutions delivered impressive results. Here are a few measurable proof points from the quarter.

One of our largest YMCA customers, the YMCA of San Antonio announced their conversion from our legacy product to ACTIVE Net which leverages ACTIVE Net services. This solution gives our customer a much more efficient way to serve their 50,000 members by reducing business cost and increasing the reach of their programs. Dairy Queen is now leveraging RegOnline across its franchise system and 80% of franchise event attendees are using the system to register online, significantly reducing the administrative burden. California State Parks opened in July chemical reservation and processed a record 17,000 reservations in the first hour. And according to Maxwell, who is a first-time user of ACTIVE chemical technology, check in was 5 times faster at this year's event. We also have some notable wins in this quarter, including global deals with UBS, Heaven [ph] data and the IRONMAN Series. We won back the Two Cities Marathon and the Woodlands Marathon based upon the depth of our technology versus our competitors. And finally, YMCA Los Angeles have also selected ACTIVE to replace their legacy system.

As previously discussed, we are focusing on driving our industry-leading solutions into new markets. For example, on March 1, we went live with registration for the 2014 U.S. Bowling Championship. Our league management software which also follows soccer and baseball is now following bowling. This is a great example of how we can utilize our current technology platform to expand into new markets. We also launched a new activegames.com website as well as the modules that allows organizers to manage both registration and marketing efforts within a single system. These launches coincide with the big season for family spanning up for all types of games.

We released Marina Manager and especially our ActiveWorks Outdoors platform to follow seasonal rentals and recent docking fees and full mooring operations. To drive online adoption, we are offering a new mobile web service that displays a hunting or fishing license on the form as a proof of purchase. Our first destination is in Tennessee and we look to expand this offering to other states. For our enterprise customers, we launched the Active league management application. For example, Maxwell uses tools to allow exhibitors to scan badges, collect information on attendees and immediately connect it back to registration data and attendees profile. In combination with all the features, including Scan and Go and mobile application, Maxwell will be able to manage its 2013 event with 1 unified ACTIVE solutions instead of 4 separate systems as they did the year before.

We also continued to aggressively consolidate products, data centers and build out our ActiveWorks platform. Some examples of product consolidation includes migrating existing games customers to ActiveWorks games, register the customers to ActiveWorks Endurance and [indiscernible] Customers to ActiveWorks Outdoors. We also physically closed data centers. After shutting down 10 last year, we're on a path to close an additional 7 data centers this year. We expect this to contribute to margin expansion as well as improved performance. Finally, we're expanding the functionalities within our ActiveWorks platform as payment processing, order management, password user service, email and e-commerce offerings are fully available to products in all markets. By bringing these shared services together, we continue to decrease the development implementation time to bring new offerings to the market. So let's turn the call over to Scott to provide a more detailed review of our Q1 financial results.

Scott Mendel

Thanks, Darko. I'm sure many of you saw we preannounced positive results yesterday in our press release. And today, I want to go into more details on our Q1 2013 financial results. We had a solid uncomplicated quarter from a financial perspective. I'll begin by walking you through our results and address key metrics, which unless otherwise noted, are compared to the same period of the prior year, then I'll move on to Q2 guidance.

In the first quarter, revenue increased to $106 million in line with our guidance range and up 12%. Registrations were flat at approximately 18.1 million and revenue per registration grew 11%. Registrations were slightly lower than anticipated due to weather impacting Hunting and Fishing licenses in our outdoors vertical which we don't expect to continue. Our technology segment revenue constituted 90% of total net revenue, or $95 million, up 13% from $84.1 million. Within technology revenue, net registration revenue for the quarter was $70.5 million. The remaining technology revenue increased 19% to $24.5 million as a result of higher subscription and implementation revenue.

Marketing services, our other reporting segment was $11 million for the quarter.

Gross margin improved 230 basis points this quarter to 52.6%. Excluding noncash items, our gross margin increased 320 basis points to 61.7%. These strong gross margins are the result of 2 factors: Operational improvement and the fact that there's no deferred revenue haircut in 2013.

Moving on to operating expenses. We continue to balance investing in the long term with scaling our business. Total operating expenses were $69 million, up from $68.5 million. Sales and marketing expense was $26.8 million, up 7% as we invested in our sales and marketing staff in order to capitalize on our market opportunity. The number of employees in sales and marketing at quarter end was 667, up 29 from the fourth quarter of 2012, with the majority of the increase related to quota-carrying reps.

In the first quarter, R&D expense was $21.2 million flat from the prior year, and we capitalized $5.4 million of software development related to new functionality.

G&A expense was also flat at $16.5 million.

Loss from operations were $13.2 million, an improvement from the loss of $21 million. And this reflects the solid revenue growth, the gross margin accretion and virtually flat operating expenses.

First quarter net loss was $15.2 million or a loss of $0.25 per share. On a non-GAAP basis, excluding the impact of certain noncash items, first quarter loss per share was $0.15.

The weighted average common share this quarter was $60.8 million.

Adjusted EBITDA for the quarter was $6.1 million, up from a loss of $3 million driven by our continued focus on operational execution, while also making prudent investments in the business.

For the quarter, depreciation and amortization expense was $15.4 million and stock-based comp was $3.9 million.

CapEx, which includes our software capitalization was $11.5 million.

Cash flow from operations was $60.2 million as a result of solid revenue growth and typical seasonal patterns.

From a balance sheet perspective, we ended the quarter with no debt and a cash balance of $107 million.

Net operating cash available was $28 million, which as you remember, is defined as cash plus registration receivable less the registration payable.

We closed the quarter with $74.8 million in deferred revenue, up $8 million from last year.

Turning to Q2 2013 outlook. We're targeting revenue to be in the range of $128 million to $133 million and adjusted EBITDA to be in the range of $18 million to $21 million. We expect registration growth of approximately 3% to 8% and revenue per registration growth of approximately 3% to 5% over the prior-year period. Net loss is expected to be in the range of $10 million to $3 million and our basic share count to be approximately 62 million shares. This guidance includes an estimate for the one-time charges associated with the recent management changes.

With these changes, we believe the most important task at hand is to prioritize and accelerate the company's strategic and financial goals, and as a result, we will not be providing full year 2013 guidance at this time. We expect to do so once we have had an opportunity to align our future financial projections with our go-forward strategy.

We'll now move on to Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Fitzgerald of Jefferies.

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

Scott, you mentioned it's kind of colder weather and been upstanding a bit longer year-over-year. Other than the Hunting and Fishing license impact, are you seeing any other unique trends or impacts to seasonality? That's question one. And then, you highlighted launching the ACTIVE On-Site app and the branded credit card readers. We know it's early days, any early read on the demand or traction with those mobile products? I guess the third one would be, didn't hear if you highlighted what mobile traffic was to your sites in Q1?

Scott Mendel

Sure. I'll start it off. When we looked at the registration growth, excluding outdoors, registration growth in the first quarter was very strong at 15%. So the weather impact was the main driver of the registration growth being flat in the current quarter. The second question -- I'll actually answer the third question first. So the third question was on mobile traffic. Mobile traffic for the quarter was 31% of active.com page views. So a good clip of our active.com traffic coming via mobile. And then lastly, from an on-site and registration adoption, so we launched a branded on-site registration tool. It's in the early stage, but I'll let Darko comment on what he's seeing from an adoption perspective.

Darko Dejanovic

Yes. Exactly as Scott said, we just launched it on the last quarter or so. The organizers seem to be excited about the ability to process on-site credit card and register on-site. But it's too early to talk about any significant adoption numbers at this time.

Operator

Your next question comes from the line of Jeff Houston of Barrington Research.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

I guess my first one is for Jon. I was curious about how much has changed with ACTIVE since you left in 2011? I know there's been a few acquisitions and you've only been interim CEO for a day or 2. But just curious to see what your initial thoughts are? And with guidance being pulled through the full year, mentioning that you're trying to align projections with go-forward strategies, what the different type of strategies you are considering.

Jon Belmonte

Great. Thanks for the question. Obviously, I have a deep familiarity and understanding of the ACTIVE business, given the 12 years that I was here. That said, as you mentioned, I've been away from the day-to-day operations for about 16 months and it will take some time for me to refamiliarize myself with the progress we've made. I can say that, in addition to supporting the Board's executive search for a permanent CEO, there are a number of areas that I've already started to dig into. For example, with respect to product development, Darko and I will look at our progress to date, as well as our planned investment to determine our best path forward there. Also, I think there has been lots of focus on internally as well as externally and I'm picking up the work there on return on investment for our sales and marketing expenditures. It's clearly a core driver of ACTIVE's future revenue growth and an area I plan to spend a lot of time on. Also, increasing online transaction rates for our SaaS customers is a core part of our strategy, and in my opinion, deserve additional attention. And -- so I would say that's a start for some of the areas that I have already started to dig into.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Okay, great. Then separately, regarding the marketing line revenue of your business, could you talk a bit about the headwinds that you've been facing there, if they've turned a bit and just some of the trends you're experiencing with that part of your business?

Scott Mendel

Yes. I'll start it off, Joe. On the marketing services line, as you can see from the results, marketing services in the first quarter grew at 7%, which was a fairly healthy growth. We do expect, and how we talked about on prior calls, what we talked about is the growth in that business has slowed a little bit as we refined our strategy. That headwind continues for the next couple of quarters. And as we talked about prior, we did expect this to come back strong towards the end of the year as we kind of got through those tough comps.

Operator

The next question we have comes from the line of Bill Sutherland of Northland Capital Markets.

[Technical Difficulty]

William Sutherland - Northland Capital Markets, Research Division

Can you hear me now, Scott?

Scott Mendel

Yes.

William Sutherland - Northland Capital Markets, Research Division

Okay. Sorry about that, maybe a dead spot. I was curious about how things are going with the sales force. The expansion and where you stand with the productivity that you are hoping to get on that.

Scott Mendel

Sure. So as I mentioned in my prepared remarks, headcount in sales and marketing grew by 29 people for the quarter. So we're on a good pace. And the growth was in quota-carrying reps. The main areas of growth that we have been able to drive from a headcount perspective and mainly focused in our community cost [ph] verticals, so park and wreck [ph] apartments, [indiscernible customers, et cetera. And so that was, as you remember, the top priority from a sales headcount growth perspective. So we're moving along there pretty well. I know in speaking with Jon since he's been on [indiscernible], one of his main areas of focus is both the level of investment we're making in sales and marketing and the return on that investment, and we look forward to working with Jon and the rest of the leadership team on how we maximize return on that investment and look at the level of method we're making.

William Sutherland - Northland Capital Markets, Research Division

Okay. And then on the -- with the business that you are now doing combined with StarCite, can you update us on how this cross-selling has moved ahead? If there's been a number of deals that have finally gotten signed?

Scott Mendel

Yes. We continue to focus on building the funnel from a StarCite perspective, and business events overall. That team is diligently working on building the funnel to increase the level of cross-selling.

Jon Belmonte

Bill, this is Jon. That's a great question. One that I've asked about already. This is one of the top priorities I'll work through with the business team. We had

[Audio Gap]

I said, we had no cross-sell opportunities this quarter, so we're currently reevaluating the pipeline.

William Sutherland - Northland Capital Markets, Research Division

Okay. Nothing got signed in the quarter. Okay.

Operator

Next question comes from the line of George Askew of Stifel.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

On the number of organizations that you're working with, number of registrations, just in aggregate. On the website, you've got 55,000 plus organizations, 90 million transactions plus 200,000 activities, but it's a little different in the press release. What are the best numbers to use?

Scott Mendel

So the number of registrations last year was 89 million registrations. I believe, last year's number of organizations was 59,000. So that was a total -- 55,000, excuse me. That was the total for last year. And so I think that's what you quoted from the website. That's last year's full year numbers. The number of registrations for the quarter we just released was 18 million registrations in the quarter.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Good. Secondly, the -- you provided one quarter forward guidance. Is that going to be the pattern here for the rest of the year, recognizing that you're not providing full year?

Jon Belmonte

So the reason we didn't provide full year guidance right now is due to the recent management changes and the fact that we're going to sit down as a team with Jon, bring him back up to speed and evaluate where we're at and align our future financial projections with our go-forward strategy. Our vision is to continue to offer full year guidance, just not at this call.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

And what about one quarter guidance, forward quarter guidance?

Scott Mendel

Yes. So just like on this call, we gave one quarter out guidance and we anticipate providing that going forward.

George I. Askew - Stifel, Nicolaus & Co., Inc., Research Division

Okay, good. And then as far as the internal expectations with your executive recruiting firm, the process for the new CEO. What is the timing planned for that? And to Jon, is he going to be pursuing that permanent CEO role?

Scott Mendel

So the process is just kicking off. And so we're focused on ensuring that we find the best candidate, evaluating both internal and external candidates, of course. But again, it's just kicked off, so I can't comment on how long it will take. And yet, a specific question for Jon. I'll turn it back to Jon.

Jon Belmonte

Yes, George. I can tell you that at this point, my entire effort is focused against driving operational efficiencies and financial performance internally. And in supporting the Board in their search for the permanent CEO.

Operator

[Operator Instructions] Your next question comes from the line of Nat Schindler of Bank of America Merrill Lynch.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Just wanted to go a little bit into your guidance for registrations, kind of this mid-single-digits guidance. Even though your year-over-year comparisons are getting much, much easier this coming quarter, as well as you mentioned that you shouldn't have the impact of the bad weather effect which hurt your Hunting and Fishing this quarter affect you next quarter. So if core non-Hunting and Fishing's growth is 15% in a quarter when you really had a tough comparison, why wouldn't it be higher next quarter?

Scott Mendel

A couple of things to answer the question. So just to remind everyone, registration growth that we gave in our guidance was 3% to 8%. A couple things. When we derived our forecast, we looked at the fact that, typically, outdoors would've expected to be flat year-over-year now. And what we did factor in was some of the delay from the first quarter Hunting and Fishing licenses being bought in second quarter. So that is factored in. However, I'll also say that we are looking at the timing of when some of the events happened this year relative to last year. So when you talked about I've got easier comps in 2012 going forward, we are starting to take into consideration timing of events. So there could be some events that opened in first quarter of this year versus last year in second quarter. So we've taken that all into consideration when we rolled off our guidance. We think the guidance we gave is an appropriate level and the registration growth we are expecting to see is 3% to 8%.

Operator

We have no further questions in the queue. I would now like to turn the call over to management for closing remarks.

Jon Belmonte

Thank you. I just wanted to thank everybody for joining us today and reiterate that I am very excited about the opportunity ahead of us. We appreciate your continued interest in the company and look forward to keeping you updated on our progress.

Operator

Okay. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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