Alloy, Inc. F2Q09 (Qtr End 07/31/09) Earnings Call Transcript

Sep. 8.09 | About: Alloy Inc. (ALOY)

Alloy, Inc. (ALOY) F2Q09 Earnings Call September 8, 2008 5:00 PM ET

Executives

Jodie Smith – Investor Relations

Joseph D. Frehe - Chief Financial Officer

Matthew C. Diamond - Chief Executive Officer

James K. Johnson, Jr. – President and Chief Operating Officer

Analysts

Julian Allen – Spitfire Capital

P. J. Solit - Potomac Capital

Operator

At this time I would like to welcome everyone to Alloy, Inc. second quarter earnings conference call. (Operator Instructions) Ms. Jodie Smith, you may begin your conference.

Jodie Smith

Good afternoon. Thank you for taking the time to join us for our conference call on Alloy’s second quarter earnings. Participating in today’s discussion are: Matt Diamond, Chief Executive Officer; Jim Johnson, Chief Operating Officer; and Joe Frehe, Chief Financial Officer.

Alloy reported second quarter earnings after the close of the market today. If you have not previously received a copy of the press release, it is available on Alloy’s Web site at www.alloymarketing.com. Joe will begin by providing a discussion of our financial results and position followed by Matt who will provide a discussion of operational highlights and an update on recent events. We will then open the session up for questions and answers.

Our press release and this presentation reference several non-GAAP financial measures, specifically adjusted EBITDA and free cash flow. We’ve included these non-GAAP measures because we believe that they are important in evaluating the company’s operating performance. Because they are not calculated in accordance with GAAP they should not be considered in isolation of, or as a substitute for, net income as an indicator of operating performance or net cash flow provided by operating activities as a measure of liquidity. At the end of our press release we’ve provided supplemental disclosures to reconcile the non-GAAP financial measures to their GAAP counterparts in accordance with the SEC’s Regulation G.

Certain remarks that we may make during this call about future expectations, plans and prospects for Alloy constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those that are discussed in our annual report on Form 10-K for the fiscal year ended January 31, 2009, and in our other periodic SEC filings which are on file with the SEC and available on the SEC’s Web site at www.sec.gov. We refer you to these filings for a full description of such factors.

I’ll now turn this program over to Joe Frehe.

Joseph D. Frehe

Good afternoon and thank you joining Alloy's second quarter fiscal 2009 conference call. I would like to begin by highlighting some of the key financial information for the second quarter of fiscal 2009.

Revenue for our second quarter of 2009 increased $122,000 to $54.2 million from $54.1 million in the second quarter of fiscal 2008. Revenue increased from the Media segment and decreased in the Promotion and Placement segments. Media segment revenue increased 17%, or $2.9 million, to $20.2 million. This increase was primarily driven by our Interactive, Channel One, and in-store marketing business, Front Line, and was partially offset by lower royalties in our Alloy Entertainment business.

Promotion segment revenue decreased 2%, or $578,000, to $27.1 million. This decrease was primarily due to lower sales on our on-campus marketing business, partially offset by an increase in our AMP agency business.

Placement segment revenue decreased by 24%, or $2.2 million, to $6.9 million. This decrease was primarily due to a decline in multi-cultural newspaper advertising, partially offset by an increase in targeted military newspaper revenue.

Adjusted EBITDA, which we define as operating income or loss, plus depreciation and amortization, and non-cash-stock-based compensation for the second quarter of fiscal 2009 increased approximately $3.4 million to $4.9 million from $1.5 million in the second quarter of fiscal 2008. The increase in adjusted EBITDA was primarily driven by the impact of higher revenue and lower expenses in the media segment.

Operating income increased $3.1 million to $2.0 million for the second quarter of fiscal 2009, from a loss of $1.1 million in the second quarter of fiscal 2008. The increase in operating income was primarily driven by higher adjusted EBITDA, partially offset by a higher depreciation in amortization.

Net income increased $3.4 million to $2.0 million for the second quarter of fiscal 2009 from a net loss of $1.4 million in the second quarter of fiscal 2008. This increase is primarily driven by higher adjusted EBITDA.

Net earnings per basic share in the second quarter of fiscal 2009 was $0.15 compared to a net loss of $0.10 per basic share in the second quarter of fiscal 2009.

We believe free cash flow is an important measure of our company's operating performance as it represents the amount of cash available for debt service, acquisitions and stock repurchases. Our free cash flow, which we define as the sum of net cash provided by, or used in operating activities, changes in operating assets and liabilities, minus capital expenditures for the second quarter of fiscal 2009, increased approximately $3.6 million to $3.9 million from $300,000 in the second quarter of fiscal 2009. This improvement was primarily due to higher adjusted EBITDA and improved cash collections.

Free cash flow per share in the second quarter of fiscal 2009 was $0.32 per diluted share compared with $0.02 per diluted share in the second quarter of fiscal 2008. Turning to our balance sheet, we believe our balance sheet is very strong at July 31, 2009. Cash was $31.9 million, we did not have any outstanding debt, and our working capital was $26.4 million.

We also have a revolving credit facility with Bank of America with $25.0 million currently available for borrowing. We are currently in the second year of a three-year agreement. Our accounts receivable at the end of the quarter were $3.2 million lower than our first quarter balance.

DSOs, or days sales outstanding at the end of the quarter were approximately 47 days compared with 65 days in Q1 and 58 days in the prior-year quarter. The lower DSO number reflected strong cash collections and the impact of the seasonal on-campus marketing business.

Also during the quarter we repurchased 571,000 shares of our common stock on the open market for approximately $3.4 million. To date, in the current fiscal year, we have repurchased approximately 705,000 shares for approximately $3.9 million.

Our capital expenditures for the quarter were $1.3 million, $200,000 higher than the prior-year second quarter, primarily due to purchases for our in-store marketing business. We expect our full year capital expenditures to be in the range of $4.0 million to $5.0 million, related to the general information technology purchases and our in-store marketing business.

With that, let me turn the discussion over to Matt.

Matthew C. Diamond

As you have seen, our second quarter performance was strong as we more than made up for a slow first quarter. Our revenues increased slightly versus last year, but importantly they increased the profitable Media business segment, which significantly increased our year-over-year EBITDA.

After six months, we have [inaudible] out of last year's EBITDA results, however, as we mentioned in the press release, we foresee this year's third quarter EBITDA falling short of last year's third quarter EBITDA by approximately $3.0 million. It is likely that after three quarters our EBITDA will be roughly flat versus last year.

As we have previously stated, our goal for the full fiscal year is to equal last year's EBITDA performance on slightly lower revenue. Cash flow should be roughly equivalent to last year.

I would like to now give you some additional color on our individual businesses.

In our Promotions business segment the AMP agency business has improved dramatically versus the prior year, by successfully increasing margin and reducing costs. Our on-campus marketing business has performed below expectations as consumer demand for our products has decreased and associated marketing costs have continued to rise. Much of this is due to the economy as incoming students are simply spending less on non-essential products.

We are focusing on making up as much ground as possible for the remainder of the year, and revamping our interactive marketing products and pricing strategies for the next year. In 2010 our goal will be to exceed our excellent 2008 results.

Our college business continues to struggle, especially in the Placement segment. Newspapers continued to decline at double-digit rates.

While our Media focus has been cost containment, we are also developing new growth strategies to offset the decline. This is a difficult task that we are in the middle of and we will update you as our plans fully materialize, however, we do expect revenue declines for the foreseeable future.

Offsetting these declines with the college business, our Media segment as a whole has been doing well. Alloy Digital, Channel One, and our in-store marketing business, Front Line, all posted nice gains year-over-year. Alloy Digital has successfully launched two sponsored Web series, IntegratedTackle.com, our sports-oriented site and continues to upgrade our Team.com TV platform.

We foresee near-term growth in this business segment as sponsored Web videos increase in popularity and competes with television but we caution that we're still in the early stages of executing this strategy.

Channel One had an excellent first half of the year, with revenues increasing 19% versus the prior year. However, we are projecting some weakness in the last half of this year as we expect decreased military advertising spend since recruiting goals have been met.

We are pushing to make this up by bringing on new advertisers but we are unlikely to make up what we will lose from the military.

Front Line revenues and EBITDA increased 21% and 119% respectively, year-over-year, and they are almost totally sold out through the end of the year. The in-store market and the business continues to expand as this becomes a more regular advertising budget item for advertisers.

We also continue to seek adding retailers to our in-store network and look to have revenue and profit growth in 2010.

We also strive to keep our corporate costs low, however, this year they have increased 29% versus last year's first six months. Almost all of this is due to increases in benefit-related costs. In our history we have been lucky to have low benefit costs compared with most other companies, however, as our workforce ages, we are starting to see these costs increase.

As a way to combat these rising costs we plan on a vigorous benefits negotiation later this year and we will continue to be conservative in hiring additional employees. However, it is unlikely that we will be able to achieve the same low benefit costs as in past years.

As Joe mentioned, our cash position remains strong and we have been aggressive in pursuing stock repurchases. As we have reached the cash generative quarters of our business, we will evaluate market conditions to make purchases both in the open market and in blocks as they become available, as well as in privately negotiated transactions.

With our cash we may continue to repurchase stock and bolster our Media business segment through internal investments or acquisitions.

I would like to now open up the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Julian Allen – Spitfire Capital.

Julian Allen – Spitfire Capital

I have a question related to your second half outlook, which is you are obviously signaling that the current quarter will be weaker than last year by about $3.0 million, yet your hope for the full year is that you can make up for that in the fourth quarter. Can you give us a sense of into which businesses you have that kind of visibility going into the fourth quarter and what are the variables that could drive either strength above that number or, conversely, weakness below that?

Joseph D. Frehe

Let me clarify. We're ahead by approximately $3.0 million or so in the first six months and we're saying that we will lose that ground in the third quarter. So to clarify, after three quarters, we will be very close to flat for the year. So it's not as if there's any ground that needs to be made up in fourth quarter to continue to hopefully strive to be flat year-over-year, which as we said from the beginning, would be a very solid year, obviously in an extremely tough media environment.

Obviously we don't need the color, so I won't go into too much detail, but we are obviously doing well in our Media segment in some pretty significant headwinds when even the interactive numbers that came out for the first half of the year for the industry were actually down.

So we're really happy with our core business, the fact that it's overcoming these declines across the board. However, some of the declines that we've experienced in newspaper, as an example, in the third quarter that's a very big quarter for newspaper, so since it's such a big quarter, we can't offset those declines with the gains that we're going to get, for example, in Interactive or Front Line.

So that's the reason why Q3 will give back some of the gains that we had in the first two quarters.

As far as visibility for the fourth quarter, unfortunately, with our business you don't have great visibility relative to, say, an up-front television type of business. However, we can look at the activity that we do have in things like Channel One, what's been booked, what hasn't been booked, versus a year ago. Same with Interactive, which is obviously very close to markets and not a lot of it's booked in fourth quarter at this stage.

Our Promotions business, a certain percentage is booked at this point, so when we look at all that, I think it's fair to say that we will enter the fourth quarter, we anticipate having basically our work cut out for us, but an opportunity to stay flat for the year, or close to that, and that continues to be our objective.

Operator

Your next question comes from P. J. Solit - Potomac Capital.

P. J. Solit - Potomac Capital

Could you give a little bit of color on the Interactive, the Teen.com. I was on the site the other day and it looks good. You've got a lot of great brands advertising and a lot of webisodes going on. Any color on how are the webisodes doing in terms of audience and are the advertisers happy.

Matthew C. Diamond

Yes, Teen.com is in our Interactive segment or digital segment, certainly a stand-out right now as far as all of the activity that we have going on. We have great numbers. The first webisode that we aired was Haute and Bothered, which did very well for us and the sponsor, with good viewership. The second one is Private. Private continues to well. We're about half way through the viewing of it and the numbers and the views continue to impressive. Each episode is getting stronger. We are in the 5.0+ million views now and growing rapidly. So we are very happy and so are the sponsors as it relates to those.

I think more importantly what we've proven is that with all the great content that we have that we use for books, TV, movies, now has a legitimate and strong outlet with a prop set of distribution that we own, in our digital network, with Teen.com as the anchor for that.

The media metrics numbers are fantastic on Teen.com and they continue to grow. So as we said in the script, it's early on and we still have a lot of execution to do but we feel like we're in a fantastic position to really capitalize on broadband professional content, really like no one else is doing in our space. Others are doing it in the non-use space and others are doing it in the non-professional content space, but no one has marketing, sales, content, and distribution online. And so the early webisodes are web series we're very proud of and anyone hasn't seen it, they should go to Teen.com and check out some of the great content we have on there.

P. J. Solit - Potomac Capital

What is the status on the TV deal negotiations?

Matthew C. Diamond

Our relationship will continue with Warner Brothers. We'll have a continuing ongoing relationship with them so we're happy with where all that settled, it gives us an opportunity though to have a lot of breadth in the distribution with all the things that I just talked about and the accessibility we have with those things are carved out so it gives us the potential for online opportunities and other distribution, which is really the key for us.

So we feel like the next phase of this for us is really to capitalize on the digital distribution while continuing to have a strong relationship with them on the TV front. And we think we'll be able to work that out. We will continue to do both as we move forward.

Operator

There are no further questions in the queue.

Matthew C. Diamond

Thank you very much, we appreciate it. We look forward to updating you on Q3 and continuing to work toward a solid 2009.

Operator

This concludes today’s conference call.

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