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Executives

Stacy Ybarra - Senior Director, Investor Relations

William Lansing - President, Chief Executive Officer

David Binder - Chief Financial Officer

Analysts

Kerry Rice - Wedbush

Eric Martinuzzi - Craig-Hallum

Mark May - Needham

Clay Moran - Benchmark

Ross Sandler - RBC Capital Markets

InfoSpace, Inc. (INSP) Q2 2009 Earnings Call August 5, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2009 InfoSpace earnings results conference call. My name is Damalee and I will be your operator for today. (Operator instructions) I would now like to turn the presentation over to your host for today’s conference, Miss Stacy Ybarra with Investor Relations. Please proceed.

Stacy Ybarra

Good afternoon and welcome to the InfoSpace’s second quarter 2009 earnings conference call. I'm Stacy Ybarra, Senior Director of Investor Relations. On the call today are Will Lansing, President and Chief Executive Officer, and David Binder, Chief Financial Officer.

During the course of this call, InfoSpace representatives will make certain forward-looking statements which may include statements regarding InfoSpace's expectations relating to its online products and services, outlook for future of our business and growth initiatives, acquisition strategy, and anticipated financial performance for third quarter 2009.

Other statements which may be made in response to questions which refer to our beliefs, plans, expectations or intentions are also forward-looking statements for purposes of the Safe Harbor provided by Private Securities Litigation Reform Act. Because these statements pertain to future events, they are subject to various risks and uncertainties and actual results could differ materially from InfoSpace's current expectations and beliefs. Factors that could cause or contribute to such difference include but are not limited to the risks discussed in InfoSpace's annual report on Form 10-K for the year ended December 31, 2008 and quarterly reports on Form 10-Q which are on file with the Securities and Exchange Commission. InfoSpace assumes no obligation to update its forward-looking statements.

In addition, during this call, our management will discuss GAAP and non-GAAP financial measures. In the press release, which has been posted on our website, we present GAAP and non-GAAP results along with reconcile tables and the reasons for our presentation of non-GAAP information.

Now, I'll turn the call over to Will Lansing. Following his comments, David will review second quarter results and third quarter outlook. Then we will open up the call to your questions.

Will?

William Lansing

Good afternoon and thank you for joining us today.

Overall InfoSpace had a great second quarter with all metrics coming in above expectations. Much of the success is due to strength in our distribution business and our efforts to rationalize costs.

Before we look at the details of the financials, I’d like to spend a few minutes to give you an update on our product and market initiatives.

Our owned and operated strategy revolves around targeting multiple verticals and finding narrow audiences who will use sites and products for their distinct unique feel and appeal.

Turning to second quarter, we launched new sites that further this strategy. We launched dogreatgood.com, a charitable giving site. When you search on Dogreatgood, a percentage of our revenues goes to charity. The program is an evolution of the search and rescue program that we began last year on Dogpile and with Dogreatgood, we’re expanding beyond the pet community to include charities focused on kids, health services, education, and the environment. These are charitable categories where we know there’s lots of news activity and we can do a lot of good. So far, we’ve been pleased with the results. We expect this program to go gradually over time and our marketing efforts are designed to drive awareness and targeted in cost effective ways.

We also continue to develop downloadable products. At the end of last year, we announced the release of nation.com, a toolbar initiative that included content and features across multiple content verticals. Since that launch, we’ve had some early success with the pet vertical and our intent is to build out more of these verticals using the low cost main platform. This is an evolution of the toolbar initiative that we have discussed in the past.

The goal here is to attract specific audiences who will use these applications to search and help us to incrementally grow our owned and operated business.

Additionally, we relaunched InfoSpace.com in the quarter. Over the past few years, this site featured local directory search results. In May, we took this site over from Media and began to shift the focus to Web Search.

True to our namesake, infospace.com emphasizes features rich in the metasearch experience. Along with all the top search engines, we’ve added a peek from Twitter, so users can see current tweaks along with the blended web results from their query.

We’re delivering top search results in a feed based on real time conversations. As you all know, Google is based on calling the web and indexing the results based on ranking and recent. Twitter has real time focus built on the flood of constantly updated messages posted by people using the social networking site. Our team combined the technology of both search methods on infospace.com offering truly comprehensive results.

We’ve also added filtering functionality that allows users to choose which search engines to include in their query results. This feature lets our users configure their search experience based on their individual preference.

More importantly, it emphasizes the greater relevance we achieve by providing the results from multiple search engines on one page, really highlighting the value of Meta.

While we’re focused at InfoSpace on Metasearch, we do have some insight into the overall search market. When we look at the macro trends over the past few quarters, we’ve seen that rates have really stabilized and we expect this trend to continue. We also believe that the search market continues to be a strong one. More people are spending more time online and we’re seeing the volume of usage increase.

More importantly, advertisers’ budgets are continuing to shift online. It’s still the highest yielding, most measurable area of advertising spend, and even with recent softness in the market that was caused by the recession, we’re seeing advertisers continue to pour money into this segment. We think the long-term prospects will continue to show solid growth.

We’re in a really good position to leverage growth in search. Our business is founded on our partnerships with Google, Yahoo, Microsoft, and Ask. It gives us a very leveragable, solid model to offer great products in the search area. Our business model, the metasearch model, is that we generate the highest monetization of any single search engine.

I’d like to quickly address last week’s announcement that Yahoo and Bing are teaming up. Metasearch technology works best when there’s a strong network of advertising in search. We’ve always felt that healthy competition for advertisers makes our meta products and value proposition better. We have solid relationships with all the major search engines, including Google, Yahoo, Microsoft, and Ask, and we’re pleased to see the partnership finally happen.

As you know, our search business is not just our owned and operated properties. We continue to be proud of our ability to grow through our distribution partners. During the second quarter, we signed nine new distribution partners and growth from both new and existing accounts is driving top line growth and profit.

Now turning to our acquisition strategy, I’m interested in growing InfoSpace organically as well as through acquisitions. We have a strong balance sheet and cash with which to make acquisitions. We remain focused on businesses with a good growth profile and positive cash flow. We believe we have a smart acquisition strategy that makes sense and reasonably confident that we’ll have some traction with our M&A strategy within the year.

With that, I'll turn the call over to David for details on the financials.

David Binder

Thanks, Will, and good afternoon.

I’ll talk today with a review of our income statement, including some of our new product trends and give you an update on our balance sheet and finally, discuss our guidance for the third quarter of 2009.

Starting off with the income statement, revenue in the second quarter was $43.8 million. This represents a growth rate from the first quarter equal to 12% and a 14% increase from the second quarter of last year.

Both our owned and operated and distribution products showed growth from the first quarter with a majority of incremental revenue coming from our distribution business.

From our own websites, we benefited from higher volume driven by our product initiatives and PPC revenue rates that stabilized from the declines we experienced the end of 2008.

From our distribution business, we continue to see strong revenue performance from our existing partners, as well as incremental revenue from newly launched accounts.

In the second quarter, 71% of our total revenue came from the distribution business, up from 69% in the first quarter and up from 63% from the second quarter of 2008.

Overall, gross profit in the second quarter measured as our total revenue less payments to distribution partners and content providers was $19.5 million, up $760,000 from the first quarter of 2009 and equal to 44% of revenue.

Adjusted EBITDA in the second quarter was $5.48 million up by $1.6 million,000 from the first quarter of 2009 and equal to 12% of revenue.

We surpassed our guidance and expectations due to both stronger than expected gross margins and greater efficiencies in our cost structure, which yielded an overall reduction in our non-tax related cash operating expenses.

Yet income was $2.9 million in the second quarter compared with a net loss of $5 million in the first quarter of 2009, and equal to $0.08 per share.

Our average fully diluted share count for the second quarter was $35.1 million and we ended with $35.2 million in shares outstanding.

Now turning to the balance sheet, we ended the quarter with $208.3 million in cash, short and long term investments equal to $5.91 per share and up by $2.9 million from the first quarter. Included in this total is the current book value of our investments and option rate securities of $8.2 million.

Now for our outlook, as we enter the third quarter, we continue to see strength in our distribution business, both through our existing partners and in our pipeline. Additionally we anticipate a continued stabilization of our PPC revenue rates. As a result of these trends, we expect revenue to range between $47 million and $49 million, adjusted EBITDA to be between $4.5 million and $5.5 million, and our total operating results to post between a net loss of $500,000 and net income of $500,000 equal to a range of $0.01 loss per share and net income of $0.01 per share.

Now with that, I'll turn the call over to the operator take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first call comes from Kerry Rice - Wedbush

Kerry Rice - Wedbush

You’re obviously doing really well in the distribution channel, should we think of this as the new kind of level of revenue you should be maintaining? I guess initially or historically Q2 has been down and you guys actually did a really good growth here sequentially and year-over-year. The guidance being $48 million, should we assume that that’s the new level of revenue growth or is there some seasonality or can you maintain adding nine plus distribution partners a quarter?

David Binder

Well first of all, the underlying seasonality in our business is still there. We typically see summer as being a relatively weak period for us. We anticipate that the holiday seasons we’ll see more activity on our site than our partner sites.

The strength that we’re seeing going into the third quarter and what we’ve seen in the second quarter is really driven by first of all the new distribution accounts as well as the marketing campaigns on some of our existing accounts performing in a very strong way to offset that underlying seasonal weakness.

On our owned and operated sites, the initiatives we have in particular with the direct marketing initiatives are driving volume that has helped to offset that underlying trend, seasonality trend.

Kerry Rice - Wedbush

Can you maybe expand? Is there one of your marketing initiatives doing better than the other? Are we seeing any traffic growth on Dogpile.com or is it primarily these new initiatives and is there any particular one?

David Binder\

We don’t break out the revenue or traffic by site. I would say that our core trends on Dogpile have not changed a whole lot. We’ve seen a lot of good traffic growth coming to Webcrawler and the initiatives are still relatively small. The other initiative, including Dogreatgood and infospace.com are still relatively small and we’re more looking forward to those initiatives creating future growth and they’re less of a factor in the second quarter performance.

Kerry Rice - Wedbush

I know that distribution revenue generally has a little bit lower margin structure than your owned and operated revenue. Are we seeing a big uptick in operating expenses?

David Binder

I would say that the margin profile going into the third quarter is mostly impacted by the product mix shift, less so about an expansion in cash operating expenses, and more of a shift toward the distribution business.

Operator

Eric Martinuzzi - Craig-Hallum.

Your next question comes from the line of Eric Martinuzzi - Craig-Hallum.

Eric Martinuzzi - Craig-Hallum

We did have good success on the distribution side, but I know it’s not all wins or typically is no wins. Did you lose any distribution partners in Q2?

David Binder

We did not. We have not lost a major account this year.

Eric Martinuzzi - Craig-Hallum

What do you attribute that to?

David Binder

We believe very strongly in our value proposition. We provide a greater revenue and margin per query than most of the alternative sources of search for distribution partners and we provide a very high level of service and support. So it becomes a very rare occasion when we actually lose an account to a competitor.

Eric Martinuzzi - Craig-Hallum

Just going through the cash flow statement, I noticed a small acquisition. It looked like around $400,000. What can you tell us about that?

David Binder

In the quarter, we purchased a company, Web Position Gold, an SEO optimization service that is offered to third parties to help improve the performance of SEO ranking. The technology that we are integrating into our products, it’s a management team that we’re very excited to bring over to us.

It’s a small acquisition and we think that the technology and the talent will become a very significant asset for us.

Eric Martinuzzi - Craig-Hallum

So there’s going to be greater services, because historically, maybe I’m not grasping the model here, but you’re basically dependent on your partners for those advertising dollars to flow to you. I’m not sure what SEO does for you.

William Lansing

I think you shouldn’t read too much into the acquisition. It was really a talent acquisition. It happens to have a product that we like and that is profitable and will be more profitable with some of the things we intend to do to it. But I would be careful about trying to extrapolate from that to a much broader M&A strategy.

Eric Martinuzzi - Craig-Hallum

Lastly, what was your headcount for finishing off the quarter in June and then where do you expect it to be as you come out of Q3?

David Binder

We ended around 150 employees. We expect, if anything, a modest increase.

Eric Martinuzzi - Craig-Hallum

Modest, in the neighborhood of five to ten?

David Binder

Yeah, nothing significant.

Operator

Your next question comes from Mark May - Needham

Mark May - Needham

Just ask a question on the distribution business in a different way. Just wondering what segments of your distribution partners were driving a lot of the growth in the quarter and what was that a function of? Is this from partners that are in the ISP space? Is it partners that are taking advantage of maybe depressed ad prices across the market and the availability of inexpensive ad inventory?

William Lansing

So we’ve some growth across all the different types of partners we have, ISPs. We’ve done pretty well with the D&S business. I would say the majority if the growth is coming from people who are marketing applications and content to drive people to sides that also offer a search experience.

To be clear, in the past we’ve talked about SEM and organic and that’s not really how we look at the business anymore, because what we’re seeing is a lot of people who are either using social networking presence or other types of gorilla war organic as a way to drive traffic to applications and then those applications bring the search experience.

I would say that a lot of the distribution growth came in that area, but across the board we’ve seen a decent uptick.

Mark May - Needham

What about the broadly across the lines of business? Can you give us any sense of the actual metrics that are driving the revenue growth in terms of ECPC?

David Binder

What we pointed to is that the revenue PPC rates have been fairly stable. We had an issue coming out of 2008 in turning to the fourth quarter coming out that really became a dampening factor on our revenue. That one factor has helped us going into 2009, but other than that, the performance of our products, both in owned in operated and distribution, have not significantly changed.

Mark May - Needham

In terms of how you’re monetizing your surfs, do you have any plans to change the layout format or whatnot of the surf itself that could impact per page yields one way or another?

William Lansing

Mark, we’re constantly experimenting with that. I know we have a bright marketing team that is constantly exploring at it and we’re testing some of the kind of wisdom and testing it with data to see if it holds true and I say it all points to we’re willing to try some other formats if we think they’ll monetize better, but we don’t have anything conclusive there yet.

Mark May - Needham

What about Yahoo and some of the other search folks are increasingly using search data for retargeting? What’s your thinking in this regard?

William Lansing

We’ve looked into this as well. For us, it hasn’t presented a big opportunity and so we’re not currently active. It’s always something that we’ll continue to look at, but right now we’re not actively doing that.

Operator

Your next question comes from Clay Moran - Benchmark

Clay Moran - Benchmark

Will, can you talk a little bit more about the acquisition strategy, just would be helpful to hear you remind us of the characteristics that you’re looking for for a potential acquisition. If your view on valuation has changed at all given the rally in the public markets and just want to make sure when you say within the year, is that this fiscal year or does that mean within twelve months?

Lastly, are there significant costs related to the acquisition review and procedure at this point in time?

William Lansing

So taking each of those in turn. On the valuation, yes, we have seen just like everyone has seen, a run up in values in the last few months. So I think where we had really hoped to target things in the five to six times EBITDA range, we’re probably pushed up into the six to seven times EBITDA range now. That’s probably a bit more realistic to buy a profitable business with attractive prospects and the kind of future that we can get excited about.

We continue to believe that eight or nine or ten times for a major acquisition is on the speculative side. We are actively looking at a lot of things right now. It’s a very high priority for us. So from a timing standpoint, I wouldn’t want to be pinned down to it today, but I can tell you that we are putting in an enormous amount of energy into it. I’m really confident we’re going to have some very interesting things to talk about and not that distant future.

We haven’t really changed our spec very much. I mean with the exception of the valuation moving up a little bit to reflect market conditions, we remain focused on businesses that are profitable, that let us leverage our NOL shield, businesses that have sufficiently attractive growth prospects that we can get excited about getting behind them and then building a whole strategy around them, including additional tuck-in acquisitions afterwards.

In terms of kind of an area, we like consumer. We like direct to consumer. We like direct marketing businesses. We like internet businesses. So it’s concentric circles around our search business, but it’s not related necessarily to our search business. We certainly have relaxed the constraint of having it to be tied directly to our search business, but I think it’s fairly safe that we’re in that consumer, direct marketing, e-commerce, internet space.

Last question around the cost associated with acquisitions. We are for the most part, although we talk to lots of financial advisors and get feel full from a lot of different sources, for the most part we are doing the work ourselves. We are very focused on kind of a self-sufficient shop in terms of executing the deals.

Stacy Ybarra

Operator, I think we have time for one more question.

Operator

Your last question comes from Ross Sandler - RBC Capital Markets

Ross Sandler - RBC Capital Markets

First, it looks like your quarter-over-quarter L&L revenue was up like 5%. That outpaces Google’s U.S….they don’t break out L&L, but I’m guessing probably outpaced their L&L. So what do you think is driving that?

Second, has there been any communication from Yahoo, Microsoft, as to how potentially your agreement will change going forward and how that might impact your monetization as a distant second to Google.

Third, just how have things looked in the month of July and into the first couple days of August?

William Lansing

First with respect to our performance relative to Google, we’re proud of our performance and I wish I could tell you all the reasons why we’re stronger and better and doing better than Google. I really can’t go there, but I can tell you we’re proud of the performance and I think that we are getting some amount of benefit from the marketing initiatives that we put in place.

On the Microsoft front, we don’t believe that our economic arrangements with either one are going to change in the short-term and we have long-term contracts that define our relationship. So in the short-term, we’re not looking for a lot of differences. In the longer term, we think it’s a very good thing that they are together. If they by virtue of being tied together wind up with higher advertiser rates, we will be beneficiaries to that and so we look forward to that and having stronger competitor there in the space is a good thing for everybody, well at least for most of us.

So I would say that we’re pleased about that partnership and we expect it to affect us neutrally in the short-term and positively in the long-term.

In terms of business this quarter so far, steady, feeling pretty good, and looking like the last quarter.

Operator

You have no further questions.

William Lansing

Thank you, operator. Thanks for joining us. We appreciate it.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: InfoSpace, Inc. Q2 2009 Earnings Call Transcript
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