Answers Corporation, Q2 2009 Earnings Call Transcript

Aug. 4.09 | About: Answers Corporation (ANSW)

Answers Corporation (NASDAQ:ANSW)

Q2 2009 Earnings Call

August 4, 2009 8:30 am ET

Executives

Robert S. Rosenschein - Chairman and Chief Executive Officer

Steven Steinberg - Chief Financial Officer

Bruce D. Smith - Chief Strategic Officer

Analysts

Wayne Chang - Canaccord Adams

Operator

Good day everyone and welcome to the Answers Corporation second quarter 2009 earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to introduce the Chief Strategic Officer, Mr. Bruce Smith.

Bruce D. Smith

Good morning and welcome to Answers Corporation second quarter 2009 conference call. My name is Bruce Smith, Chief Strategic Officer. Joining me are Bob Rosenschein, Chairman and CEO, and Steve Steinberg, CFO.

This call is being webcast and will be available for replay.

Before we begin today, we’d like to remind you that our prepared remarks contain forward-looking statements and that management may make additional forward-looking statements in response to questions. These statements are based on current expectations, forecast assumptions, risks, and uncertainties. They do not guarantee future performance, and therefore undue reliance should not be placed upon them. The company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Important risks among others are our ability to maintain or improve monetization rates, particularly in light of the current challenging economic environment, drops in traffic caused primarily by search engine’s algorithm changes as experienced in July 2007, maintain our relationship with Google, our most important provider of ads and source of revenue, our failure of WikiAnswers to experience continued growth in accordance with our expectations and potential claims that we are infringing the intellectual property rights of any third party.

You can find more information about factors that could affect results in our most recent annual report on Form 10-K and in our upcoming quarterly report expected to be filed shortly on Form 10-Q available at www.ir.answers.com.

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 measure and a 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.

Finally, all information shared on this call is as of August 4, 2009, and we do not intend and assume no obligation to update such information.

With that, I would like to turn the call over to Bob Rosenschein.

Robert S. Rosenschein

Good morning and thank you for joining us today. I am pleased to report that Q2 was another excellent quarter, again exceeding expectations. Here are some highlights.

We saw record revenues hitting $5 million, $350,000 over the top end of guidance, up 6% sequentially, 67% year-over-year. This was the result of continued strong growth of WikiAnswers and the stabilization of ReferenceAnswers. Bottom-line numbers were also very strong with adjusted EBITDA of $1.9 million in Q2, up 9% sequentially and $2.57 million better than the same quarter last year. Our adjusted EBITDA margin was 38%.

This quarter we added 3.6 million new questions to the WikiAnswers database and a million new answers. Both the number of questions and answers we added in Q2 were 12% higher, more than the number we added in Q1. According to comp score, our combined web properties were seen by 26.2 million unique visitors in the US in June, ranking us number 31 in the top US web properties. We had 48.2 million unique visitors worldwide, ranking us number 44. Cash flow from operations was $2.1 million.

I’d like to comment on our upcoming international releases of WikiAnswers. Over half of internet usage today is in languages other than English. Wikipedia, Yahoo Answers, Facebook are all approximately 4 times bigger outside the US and inside the US. We think this represents a huge growth opportunity in 2010 and beyond. We will be launching several European languages over the next few months. Thanks to our large and dynamic English language database and community, we are starting with a great advantage. We will follow essentially the same playbook that has made WikiAnswers so successful in English.

The WikiAnswers English language database contains over 15 million questions and nearly 5 million answers. This is a strategic asset, one which we fully intend to exploit. By selectively translating some of our answered questions, we expect to speed up adoption of the non-English versions, and we will closely track the efficiency of this process with the option of accelerating investment in this area. In addition, many of our existing volunteer supervisors are multi-lingual and are anxious to begin contributing in these languages. These two competitive advantages we believe will help jump-start the launches, which is why we’re so excited about internationalization.

Although European monetization rates are somewhat lower than in the US, they are relatively strong and our efforts may contribute significantly as early as next year. In addition to internationalization, our community development team has been extremely busy in continuous efforts to grow and strengthen the community. A key element in our success is the volunteer supervisor community, which currently stands at about 600.

Two other areas that are also very important to our success, quality and integration. Quality of the question and answer database and quality of user experience are crucial to our longer-term success. One of the big benefits of a Wiki approach like ours is that users can actually edit and improve our content, making it more valuable over time. This is clearly an ongoing project including such recent examples as auto-categorization, optimization of the question asking process, and batch reversion. In addition, we’re working hard on improving our internal text search, creating new video tutorials, and other such features.

Another development is integration of our properties. For almost a year now we’ve been making the sites look more alike with enhanced linking between them. At the beginning of May we advanced the integration a further step making “search all” the default. As a result of this user interface change, users typing in queries into either of our properties are automatically directed to the webpage which our algorithms deem the most appropriate response.

For example, a user typing the query “When did World War II start?” in reference answers will be taken automatically to the user generated page in WikiAnswers. A user who types “Who is Oprah Winfrey” in WikiAnswers will arrive at a multi-faceted Reference Answers page about her. Our goal is to give users the best quality answers to all types of questions and expect tighter integration between the two sites throughout the rest of the year.

These initiatives may actually lower the growth rate of new question and answers, but they should make our properties more useful and more valuable to users and for search engines.

A word about overall trends. In July our traffic was lower than expected. We attribute this to more pronounced seasonality and possibly these other product initiatives.

Let’s look at our outlook. We are forecasting that our Q3 revenues will be in the range of $4.6 million to $5.2 million. We project our adjusted EBITDA to be $1.25 million to $1.75 million. We believe the primary reasons for this sequential decline are greater summer seasonality, the RPM declines we saw in June and July, and product changes intended to prove longer-term traffic and quality. We’re also forecasting full year 2009 revenues will be in the range of $20.5 million to $21.5 million. We project that our full year adjusted EBITDA to be in the range of between $7.2 million and $7.9 million. Steve Steinberg has more financial details on Q2.

Steven Steinberg

Our Q2 revenues were $5 million, 68% from WikiAnswers and 32% from Reference Answers. Overall, our revenue grew $254,000 or 5.5% sequentially. WikiAnswers continued to experience impressive growth in Q2. Average daily page views were 6,082,000, up 14% sequentially and 162% year over year. Revenue grew 8% sequentially and 127% year over year to $3.4 million. Q2 RPMs for WikiAnswers averaged $6.14, down 7% from $6.58 in Q1. However, I want to point out that RPM was higher at the beginning of the quarter than at the end of Q2 and in July.

Answers.com which we have begun referring to Reference Answers reversed its trend and improved this quarter. Average daily page views in Q2 were 2,965,000 compared to 2,982,000 in Q1, about flat sequentially. However, for the first time since 2007 its quarterly traffic was 12% higher year over year. With only one quarter behind us we cannot say with certainty that this is the beginning of a longer-term trend. Although we are hopeful that site integration, adding licensed content, and other initiatives will drive more growth.

Reference Answers Q2 revenue increased 1% sequentially and 7% year over year to $1.59 million and its average RPM was $5.87 compared to $5.84 in Q1.

For those interested in our historical performance in terms of traffic, monetization of revenues broken up by web property on a quarterly basis, please refer to the tables in today’s earnings release.

Adjusted operating expenses were $3.1 million in Q2 compared to $3 million in Q1. Despite adding 11 persons to total headcount in Q2, our expense was only $100,000. The main reason was that the dollar cost of our Israel based salaries dropped to $160,000 due to the very favorable forward exchange contracts we secured for Q2. Adjusted EBITDA in Q2 was $1.9 million reflecting a 38% margin.

GAAP net loss in Q2 was $3.62 million, due primarily to the revaluation of Redpoint’s common stock warrants and their warrant to invest in the series B traunch which were deemed liabilities for accounting purposes.

Going forward to the extent that our stock price goes up or down, we may continue to experience significant GAAP losses and gains from the quarterly evaluation of Redpoint’s common stock warrants.

Finally, let’s review some balance sheet data. Cash and cash equivalents as of June 30th were $20.4 million, approximately $7.8 million higher at the end of the prior quarter. Of course the main reason was Redpoint’s exercise of a second traunch warrant on June 10th, which added $6.5 million after closing calls. The remaining net increase of $1.3 million sensed mostly from cash from operations of $2.1 million was capital expenditures of $870,000.

Robert S. Rosenschein

To close things up, with our upcoming launch on internationalization and the continued strength of our model, our overall confidence in the general health and growth of the business remains very strong. We’re extremely excited about the rest of 2009 and 2010. With that, thank you very much and we’ll turn it over for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question today comes from Wayne Chang - Canaccord Adams.

Wayne Chang - Canaccord Adams

Can you talk again a little bit about more specifically the timing of some of the initial launches of the Wiki International versions and what the impact looks like in the back half? The guidance for the full year seems to suggest that there could be potentially some RPM inflation for WikiAnswers; can you talk a little bit about that, whether that’s something that you are seeing and what the cyclical nature of that is; and in addition to that, what appears to be a potentially robust fourth quarter, are there any lift in additional headcounts, resources, and any other costs that we might need to consider.

Robert S. Rosenschein

First, in regard to the timing of the international versions; expect to see the start already in Q3. We’re fully hopeful that we’re going to start launch these. I would also make a quick comment on the growth. It is almost certain that it will take a while to start up. As excited as we are about the strategic asset of being able to translate some of our already answered questions, it just takes time for a curve like this. As you know, it took a while for the English language of WikiAnswers to grow and we expect it to take time. That being said, we do have expectations that it may make a significant material upside contribution in 2010, but we don’t expect much in revenue contribution for the internationalization certainly in 2009.

Regarding the RPMs, they tend to fluctuate. So we see this again and again. We saw some weakness in the summer. Mostly, this is a decline of CPCs usually, and we expect that we’ll be able to handle and deal with it with our traffic growth, but we do not expect any material increase in the RPMs in Q4.

Steven Steinberg

I just wanted to add that on the higher end of the guidance we did assume some moderate growth in RPM. We didn’t assume a lot, but we have various initiatives and we’re also optimistic that the trends we’ve seen throughout 2009 have finally stabilized, but we factored into our range pretty much more or less a flat RPM or maybe a little bit of growth to a little bit more growth, but in both cases, we’re talking about moderate growth.

Operator

Having no further questions in queue, I would like to turn the conference back over to management for any additional or closing remarks.

Robert S. Rosenschein

We’re very pleased you were able to join us today and we’re very excited about the rest of the year and the continued growth of the business. With that, thank you very kindly everybody. We’ll talk to you soon.

Operator

That does conclude today’s conference ladies and gentlemen. Again, we appreciate everyone’s participation today.

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