Answers.com (ANSW) reported earnings yesterday before the market opened. They are one of the three companies I previously highlighted as Israeli Microcaps built on the Google (GOOG) search business model. I had a chance to chat with CEO Bob Rosenschein after his earnings call (transcript here) and gained some insights.
Answers.com's original business, what they now call ReferenceAnswers, has stopped growing but management has also stemmed the fall-off in traffic to the site. On the flip side, ANSW’s new site, Wiki Answers is experiencing very rapid growth and is a top 50 site in the US. That growth in WikiAnswers is delivering 50% annual growth for the entire business on almost every metric. Management has done a remarkable job of putting this business on healthy footing, setting its growth path and getting in profitable to the point it is generating cash. ANSW is pretty fully valued right now but I think there is potentially upside in the stock. Let's start with why it is fully valued.
First, let’s analyze the cap table. The fully diluted cap table at ANSW has 15.5MM shares comprised of :
- 7.9MM of common shares
- 2.6M preferred shares owned by Redpoint, a VC in Silicon Valley who did a PIPE in ANSW. I should point out that Redpoint did a similar transaction in Myspace and then sold it to Newscorp (NWS).
- 667,000 Redpoint Warrants at an exercise price of $4.95 and 636,000 Warrants at an exercise price of $6.05 (both in the money now)
- 2.1MM in the ESOP
- 1.1 MM warrants at $17 per share (way out of the money now so you may want to reduce them from your fully diluted calculation).
The company delivered $5M in revenues in Q2 and laid out full year projections that project slightly north of $20MM in revenues for the year. ANSW has $20.1MM on the balance sheet and is debt free. Based on the cap table outlined above, ANSW has about $1.25 per share of cash. That means $6.75 enterprise value, reflecting a market cap of just north of $100MM sans the cash. Quarterly EBITDA was $1.9MM and the company is projecting $4.3MM to $5MM in operating income for 2009. That computes to a (EV) P/E of approximately 20 on this year's earnings. That is a healthy multiple for a business that earns approximately 90% of its revenues from Google. By comparison, IncrediMail (MAIL) trades at an (EV) P/E of approximately 4X earnings.
Another reason the company is valued here is that it is almost entirely dependent on SEO traffic and I would guess that therefore the Page Views Per Visit are pretty low right now.
There are 4 big plusses and/or upside options for ANSW that I would watch for:
- International expansion. The company is going to tackle 4 new languages. Given that international usage on a site like Facebook is 4X domestic usage, that is a growth driver for ANSW.
- ANSW is a leading site. A Top 50 site is nothing to sneeze at and deserves a premium valuation. As they climb the ladder, that will help them find other revenue models. This will require them to build stickier content and technologies that improve the quality of answers and increase PPVs. Based on my call with the CEO, management is all over this issue and looking for ways to channel users through more pages on the site and build or find technologies and content that increase stickiness.
- The company is building a tacit expert network through WIKIAnswers. One would imagine that there are better ways to monetize that than through Google Ads. They could potentially plug in something like LivePerson (LPSN) for click to call revenue or other monetization opportunities for their contributors. See LPSN's Q2 earnings conference call transcript here.
- I suggested to the CEO yesterday that he should verticalize and widgetize the content. There is a lot more ad upside in verticals such as autos, health and legal and other places to insert wikianswers content. I think this has upside as well.
- ANSW has not yet started leveraging social media which is an obvious way to drive traffic to a site like this. Based on my conversation with the CEO, this is on the roadmap and I think very important to traffic growth. They could implement Facebook connect or Gigya Socialize (full disclosure: Benchmark company) to drive more traffic back to the site and keep people on the site longer.
One other risk to note is the dollar/shekel exchange rate. As the shekel strengthens against the dollar, ANSW's cost base could increase in dollar terms since much of its expenses are in Shekels. (A lot here on this topic)
All in all, ANSW is a great turnaround story. I would watch for entry points into the stock either on dips in the price down to the marker of the Redpoint $6 warrants or on early signs of growth from international or new revenue streams. This could have legs.
Full Disclosure: Long MAIL