TheStreet Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: TheStreet, Inc. (TST)

TheStreet (NASDAQ:TST)

Q2 2013 Earnings Call

August 08, 2013 4:30 pm ET

Executives

Erica L. Mannion - President

Elisabeth H. DeMarse - Chairman, Chief Executive Officer and President

John C. Ferrara - Chief Financial Officer

Analysts

Colin Gillis - BGC Partners, Inc., Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the TheStreet's Second Quarter 2013 Conference Call. The date of this call is August 8, 2013. This call is being webcast live on the Investor Relations section of TheStreet's website at www.t.st. The call is a property of TheStreet, and any recording, reproduction or transmission of the call without the expressed written consent of TheStreet is strictly prohibited. As a reminder, today's call is being recorded. You may listen to the webcast replay of this call by going to the Investor Relations section of TheStreet's website.

I would like to turn the call over to Erica Mannion of Saphire Investor Relations, Investor Relations for TheStreet.

Erica L. Mannion

Good afternoon. Thank you for joining us to discuss TheStreet's financial and operating results for the second quarter of 2013. With me today is Elisabeth DeMarse, Chair, President and Chief Executive Officer; and John Ferrara, Chief Financial Officer. Today, Elisabeth and John will review the second quarter results and discuss the industry and market dynamics.

All statements made on this call, other than statements of historical facts, are deemed to be forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, including those described in the company's filings with the SEC, that could cause actual results to differ materially from those reflected in the forward-looking statements. Although the company believes that the expectations reflected in the forward-looking statements are reasonable, the company cannot guarantee future results or occurrences. The company disclaims any obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise. You may obtain copies of the company's filings with the SEC at the commission's website at www.sec.gov. Additional information related to matters discussed today also will be set forth in the company's quarterly report on Form 10-Q for the second quarter of 2013, which the company expects to file shortly.

Now I will turn the call over to Elisabeth DeMarse.

Elisabeth H. DeMarse

Thank you, Erica, and good afternoon. In summary, our second quarter reflects significant progress since my arrival. As we announced in our press release, the company recorded revenue of $13.5 million for Q2, representing an increase of 8% year-over-year and a 7% increase sequentially. This was TheStreet's first year of real revenue growth since Q3 2011. The company also reported a net loss of $1.1 million for the second quarter compared to a net loss of $1.9 million the previous year. Our adjusted EBITDA turned positive at $297,000 for the quarter. The company also generated $1.2 million in operating cash flows for the first half. And we ended the quarter with $59.4 million in cash and investments.

Let me begin with our strategy and outline how this all unfolded. TheStreet is the leading independent digital financial media company providing business and financial news, investing ideas and analysis to retail and institutional investors worldwide. We are fortunate to have a dual monetization model, where 80% of our revenue is derived from subscriptions through The Deal, our institutional business, along with our retail investing newsletters and our Rate-Watch division. Our other revenue is from advertising, primarily through our free site, TheStreet.com. Over the past year, we've built out the management team, rightsized the cost structure and acquired 2 institutional subscription businesses, laying the foundation for lucrative subscription growth.

Now for the business updates. When I arrived at TheStreet over a year ago, my thesis was to grow lucrative high-margin subscription businesses and expand our customer base to include institutions. The Deal, our institutional M&A platform, performed admirably in Q2, with 3% unit growth from Q1. Deal Pipeline customer renewals in the second quarter reflected an average price increase of 4%. Integration of DealFlow Media is going seamlessly. Small-cap data and content products, such as PIPEs, are now available through our Deal Pipeline subscriber base.

During the quarter, we continued to invest in product enhancements for The Deal Pipeline as we strive to increase the amount of must-have data content and analysis that we provide to our valuable user base of law firms, investment banks, hedge funds and professional advisers.

This quarter, we launched our iOS app for Pipeline subscribers. This Deal Pipeline app features our sophisticated insight and analysis of on The Deal economy, with intraday transaction news on auctions, bankruptcies, financing and M&A activity. Further, we expanded our offerings to event-driven hedge funds by launching our active trader service and out-of-court restructuring coverage. Active trader, which is sold as a separate service, provides streaming newsfeed of debt-driven concepts to traders and hedge funds. For out-of-court restructuring coverage, we now have several senior journalists reporting on events, companies and people involved in this very active sector of the M&A landscape.

Looking ahead to Q3, we are excited about the launch of Connections [ph], which is The Deal's version of LinkedIn for dealmakers. Connections [ph] links dealmakers and advisers through a patent-pending search engine of 100,000 deals covered by our newsroom over the past 15 years. We are in the process of rolling out the beta product, and initial customer feedback has been very positive. And so we are very pleased with the extension of our brands in the M&A data and news and has great industrial logic, and these accretive acquisitions are performing as promised.

Moving to subscription newsletters. We continue to gain significant traction with retail investors as we improve our direct marketing operations. During the second quarter, bookings were up 6% year-over-year, and we saw very strong growth in new subscriptions sales. We added more than 2,000 net sub sequentially, and our subscription unit base at June 30 was 4% higher than it was a year ago. Our strong year-to-date performance have grown in both subscriptions and bookings as a result of strong sales growth from existing products, such as Action Alerts PLUS and Stocks Under $10, along with successful new product launches.

Importantly, the summer is the typically slow time for investment newsletter businesses. But in Q2, we beat our internal revenue targets for newsletters by about 6%. As we entered Q3, we continue to see positive momentum in account acquisitions. Free trial pools are growing, led by our free site and recent optimizations and paid search.

Compared to the prior year period, our second quarter churn rate is down, and our renewal rates are up, reflective of a much healthier subscriber base. Churn improved, coming in at 3.3% for the second quarter, which was 22% lower compared with the same period last year. Our first year and second year renewal rates are up slightly as well.

Now on to subscription newsletter revenue. June and July marked the most important inflection point for subscription newsletters because our revenue surpassed last year's revenue levels for June and July. We are now on a positive year-over-year growth path. We are cautiously optimistic that we will see year-over-year revenue growth in this business continuing into the second half of this year.

Our success turning around the subscription newsletter business is the result of building a direct marketing chain with strong experienced leadership and a focus on operational excellence across marketing funnels, user experience and customer service. Our strategy is to put the right customer into the right product while improving overall user experience, which leads to higher renewal rates and longer lifetime value of the customer.

When I arrived at TheStreet, the subscription newsletter business was in free fall, churning large volumes of subscribers and experiencing year-over-year revenue declines of 10% to 20%. Over the past year, our new VP of Subscription Marketing, Doreen Adger, has fixed our leaky subscriber bucket by engineering the free site to generate more leads and subscriptions, optimizing landing page flows and implementing video creative to sell subscriptions. Our improvements are paying off, with the growth in subs and in year-over-year bookings ultimately translating into growing revenue.

Importantly, we entered 2013 with a strong product pipeline. This year, we successfully launched Dividend Stock Advisor and Quant Ratings after an almost 3-year hiatus from launching new relevant products. I strongly believe that rapid deployment of new relevant products, timed with changing market conditions, is imperative in this business. Our success in launching these new products is important not only because we filled major product gaps in dividend income and Quant Ratings, for which there is significant market demand, but we've been able to prove to ourselves and in our investors that we could successfully launch new products and grow revenue organically. Both Dividend Stock Advisor and Quant Ratings are low-cost gateway products that introduce new retail investors to our brand and the quality investing ideas and analysis found on TheStreet. By bringing in large pools of retail investors new to TheStreet, these new products educate new users about our brand promise and provide an audience that we will look to upsell to in the future.

In the second half of this year, we are launching several exciting portfolio products, which will be offered to the market at higher price points. Beta launching in August is Action Alerts Options [ph] portfolio product, offering Options tradings ideas on positions in the Action Alerts PLUS portfolio. Action Alerts Options will be managed by Dan Nathan, who is co-founder of RiskReversal.com and a panelist on CNBC's Fast Money and Options Actions. Dan brings more than 15 years of institutional options and equity trading experience, and we are excited to welcome him aboard.

We also have a couple of new product launches scheduled for the second half of the year, and we'll share more details as these products get closer to launch. Please stay tuned.

As for the subscriber experience, which is critical to renewals and increasing lifetime value, we relaunched the Action Alerts PLUS website in July, providing it with a fresh look and feel similar to that of TheStreet.

Another area of untapped opportunity for the second half is our mobile subscription offering. As consumption shifts towards mobile devices, subscribers expect to connect with our premium products everywhere and anywhere. We are building out our mobile offerings for our subscription content, including tablet and mobile-optimized sites. Improving our mobile subscriptions capabilities will accelerate our growth and reduce our churn. We will give you an update on the progress of this initiative in future calls.

Turning to Media. While many of our competitors have struggled with the shifting sands of online advertising, we have refined our free site as an acquisition funnel for our subscription newsletters. It turns out TheStreet.com is a great way to introduce our lucrative subscription products to more than 10 million people who visit us each month. You've heard me say before we're very fortunate to have an asymmetrical competitive advantage because we have dual monetization opportunities of the audience that comes to TheStreet.com. One of the biggest achievements since I arrived is our ability to generate leads for our subscription business from TheStreet.com. In 2011, 8% of our subscribers were acquired via the free site. In Q1 2013, 20% of subscriptions were sourced from the free site. And during Q2 2013, that percentage increased to 32%.

So while we monetize our free site by converting uniques to subscribers, we also sell advertising. On the topic of advertising, I do not believe our current Media revenue is representative of its potential, despite the secular declines and CPMs the industry as a whole is experiencing.

Pat Dignan, our new Head of Ad Sales, started in April, and his first tasks were to stabilize the declining ad revenue and upgrade the sales team. We've now hired 4 new team members with deep experience in the financial advertising category, joining us from Forbes, Seeking Alpha and NASDAQ. As with any transition, it will take time for the team to pick up speed. However, I do see a newfound energy in our sales group, and I look forward to translating that into revenue.

Happy as we are with the new direct sales team, we continue to refine our programmatic offering. 23% of our ad revenue is now sold programmatically. Again, stay tuned for more developments there.

As to product development for the free site in the second half of this year, we are relaunching MainStreet, our personal finance site that allows us to speak to a wider audience. MainStreet provides personal finance tips and advice, helping consumers save and grow their wealth. By combining lifestyle news, life stage planning and financial resources, MainStreet is an engaging and fun site, where finance gets personal.

Moving to social and mobile. Social is becoming an evermore important channel for us, and we are distributing content across Facebook, Twitter and Google+. With nearly 93,000 Facebook likes, TheStreet is extending our reach towards a younger audience, identifying the next generation of stock enthusiasts. Please like us on Facebook, add us on Google+ or follow us on Twitter.

We've responded to shifting consumption patterns by actively managing social as a new channel and tablets and smartphones as new platforms. Today, nearly 1/4 of our traffic comes from smartphones and tablets. We are also thinking about the ability to distribute content from all our incredibly powerful brands, TheStreet, MainStreet and The Deal, regardless of the platform. To this end, we've relaunched our apps for TheStreet and The Deal and look forward to a subscription app later this year.

Which brings us to traffic. No doubt bullied by record stock market highs, TheStreet.com is avoiding the seasonal summer traffic doldrums. Today, as we queue up programmatic, we will be able to monetize this traffic. It's much more difficult under a pure direct sales model to queue up direct campaigns with unexpected inventory. This is a collateral benefit of programmatic. Furthermore, we have an extremely high-quality audience that advertisers want to reach. For example, among its consideration set for media planners, TheStreet.com ranks #1 for delivering C-level executives, out-indexing its nearest competitor, Yahoo!, by 60%. TheStreet is also #1 for delivering business decision-makers and for HHI, over 100,000, we over-indexed both Bloomberg and Forbes by 20%. These are comScore numbers. We have a wealthy mass affluent audience, attracted by our high-quality editorial and analysis, which is just terrific.

In addition, I'd like to mention that we continue to maintain an active M&A program with a robust pipeline. But we have nothing new to report at this time.

In closing, we are halfway through the year and making significant progress on the 2013 core objectives highlighted during our Q4 call. As promised last year, we're driving lucrative subscription revenue through The Deal and our retail subscription products. We are optimizing our free site by turning our audience into lucrative high-lifetime-value subscribers to our products. Finally, we are modernizing our technology infrastructure by streaming workflows internally and harnessing the power of social, mobile and video.

Now I would like to turn the call over to John Ferrara, our CFO.

John C. Ferrara

Thank you, Elisabeth, and welcome, everyone. Revenue for the second quarter of 2013 was $13.5 million, an increase of 8% compared to the second quarter of 2012 and 7% sequentially. Subscription revenue was $10.8 million, an increase of $2 million or 23% compared to the prior year and $500,000 or 5% sequentially. This increase was primarily due to revenue from The Deal, which we acquired in September 2012 and the DealFlow Media properties, which we acquired in April 2013.

Our subscriber base and bookings performed well during the second quarter. The following metrics exclude The Deal and DealFlow: First, bookings were up 4% compared to the prior year, primarily due to improvements in optimizing our retail subscription marketing funnel and the launch of new products; next, the total number of paid TST subscriptions at June 30, 2013, was 77,700, an increase of 2% compared to the prior year and 2% sequentially. This resulted from getting the right subscriber into the right product and improving our user experience. Finally, ARPU, which is average revenue per user, declined 1.2% in the second quarter compared to the prior year. This decline was expected and reflects the growth in new subscriptions, which are on an introductory level pricing.

During the quarter, The Deal continued to grow its revenue base with price increases and new customers. Revenue from The Deal was negatively impacted by purchase price adjustments of approximately $200,000. These purchase price adjustments will continue to negatively impact the revenue through the third quarter of 2013.

Media revenue for the second quarter of 2013 was $2.7 million, a decrease of $1 million or 28% compared to the prior year and an increase of $400,000 or 17% sequentially. The decrease, as in recent quarters, was primarily due to the persistent market challenges we face, with the rise of programmatic buying and declining CPMs due to excess inventory. During the quarter, we started to report certain miscellaneous other revenue from such things as webinars and conferences as media, rather than subscription services. Our historical financial statements also reflect this change, making reported amounts comparable.

Total operating expenses for the second quarter of 2013 were $14.6 million, a small increase of 1.1% compared to the prior year. As a reminder, we significantly reduced our operating expenses when we rightsized the company in 2012. For the second half of 2013, we expect operating expenses to increase modestly as we selectively invest in our institutional and retail platforms to drive revenue.

The company reported a net loss of $1.1 million for the second quarter of 2013 as compared to a net loss of $1.9 million in the prior year, an improvement of $800,000 or 43%. Adjusted EBITDA was $297,000 in the second quarter of 2013 compared to $843,000 in the prior year.

For the first 6 months of 2013, the company generated cash flow from operations of $1.2 million compared to a negative operating cash flow of $3.5 million in the prior year.

The company ended the quarter with cash, cash equivalents, restricted cash and marketable securities of $59.4 million compared to $60.3 million as of March 31, 2013. Excluding the acquisition of DealFlow, these balances would've increased by $900,000 in the quarter.

And now I'd like to turn the call back over to Elisabeth.

Elisabeth H. DeMarse

Thank you, John. Before concluding my formal remarks and opening the call to Q&A, I would like to comment on the preferred equity in our capital structure. Please note these are the only remarks I will make on the call today regarding this topic, and we won't be taking any questions on the subject during the question-and-answer session.

Recently, one of our shareholders suggested that TheStreet is undervalued and that we can unlock value by purchasing the preferred stock position from Technology Crossover Ventures, or TCB, at a deep discount. First, we are working tirelessly here at the company to increase revenue and shareholder value by implementing and executing on the strategies I described during today's call. Second, this is not the first time that one of our shareholders has suggested to us that we attempt to repurchase the Series B Preferred Stock held by TCV at a significant discount to its current liquidation preference value of $55 million. Not surprisingly, in the course of our regular dialogue with TCV as one of our largest shareholders, we have spoken to them about a repurchase of their preferred equity at a discount. TCV has consistently and recently told us they are not interested in accepting anything less than the value of the liquidation preference. My board and I do not believe that using $55 million of our cash to purchase the preferred equity is in the company's and shareholders' best interest. TCV is under no obligation to sell at a discount and has no interest in doing so at this time. Of course, we would be very willing to listen to and ask our board to consider any proposal which TCV might make to sell its stock to TheStreet on different terms. Investors or potential investors are also certainly free to seek to purchase the preferred equity directly from TCV. Therefore, we'll continue to use our cash for working capital purposes and to fund purchases of strategic subscription businesses, such as The Deal and DealFlow Media, which increased the company's revenue and are accretive. We will continue to evaluate the uses of cash with our board and deploy our cash in what we believe is in the best interest of our stockholders.

In closing, our growth this quarter reflects the continued execution of our strategy. We are driving revenue growth through smart acquisitions, investing in our institutional and retail subscription platforms, focusing on operational excellence and modernizing our infrastructure. We saw positive results in the second quarter and going into the second half of the year brimming with expectations for even more success. We continue to work tirelessly to drive lucrative revenue growth for the remainder of the year. Our free site is sourcing nearly 1/3 of its new subscriptions. The Deal is performing on plan and provides us with a strong platform for bolt-on and organic growth. For the second half, we remain focused on top line improvement, and we'll spend smartly and discriminately on growth initiatives.

With that, operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Colin Gillis from BCG (sic) [BGC] Financial.

Colin Gillis - BGC Partners, Inc., Research Division

I have a couple related to the free site and one regarding subscriptions. On the free site, can you talk to where you see the right mix, is it free and paid traffic, and talk to the free traffic trends?

Elisabeth H. DeMarse

You bet. So in Q1, we were at 20% of the subscriptions coming from the free site. And it did increase to 32% this quarter. So that almost feels about right for me. We've done a lot of the obvious integration, so now it's a function of growing our relevant traffic that's going to convert to subscriptions. And I mean, in terms of the free site funnel, we've really gone full capacity in terms of the placements we can do. We started the project last June. We've been incrementally adding placements since then. And in Q2, we redesigned the article page, and that was the last big phase of the integration. So it feels like that's about the right amount. We'll be tweaking it and tweaking it, and anything can happen. But I would say the easy gains or the obvious gains that we've accomplished in the past year have all been accomplished.

Colin Gillis - BGC Partners, Inc., Research Division

Okay. And that was a big jump in the percent of new subs from the free sites, so congratulations on that. Turning to subs, can you talk to the level of free trials versus the prior year, free trials as a forward indicator? Just give us a sense as to how those are tracking?

Elisabeth H. DeMarse

Yes, we don't really release it on a regular basis. John, do you have -- but free trials are through the roof. So I know that they're up substantially. I don't think there's anything comparative about how it's gone. But part of what is really, really important is opening the top of the funnel and getting people interested and engaged in the brand of TheStreet and thinking, "Oh, maybe I do want to subscribe." So try before you buy. Free trials are incredibly important. And the -- once we get them in -- I do know once we get them in for free trial, that they convert pretty -- they've been converting -- all the conversion gains that we've made are sticking. So the conversion rates through the funnel has been going up. And we just know that free trials are through the roof.

Colin Gillis - BGC Partners, Inc., Research Division

So they're up versus the prior year?

Elisabeth H. DeMarse

Yes.

John C. Ferrara

Yes, they're up.

Elisabeth H. DeMarse

I mean, the other thing is we introduced all these new open houses this year. So we've really been casting the net a lot wider to bring in new people who -- yes, people who are new to TheStreet. And yes, we're just looking at the -- it's up 150% -- 140%, 150% over last year.

Colin Gillis - BGC Partners, Inc., Research Division

So -- and then one last question on the income statement. It looks like revenue grew faster than expense by about 690 basis points. Can you just -- can you talk about -- are you going to be able to keep the trend of expenses growing at a slower rate than revenue?

John C. Ferrara

Well, for this year, we've said that we're kind of focusing on breakeven EBITDA. So for this year, we kind of expect revenues and expenses to grow at the same level. And there will be some lumpiness in these last 2 quarters, so I don't think you'll see that exact increase in the third and fourth quarter, but it'll be similar.

Operator

And I see no additional questions in the phones at this time. [Operator Instructions]

Elisabeth H. DeMarse

Very good. Well, thank you, everyone, for being with us today. We are going into Q3. We're brimming with high expectations. Our Q2 revenue and EBITDA came in at the higher end of our internal projections, led by our subscription businesses. We're showing clear progress, return to revenue growth. And the leading indicators, traffic, free trials, lead volumes, bookings, ad sales pipeline, we are -- all of those are pointing to stronger results ahead. We're charging hard. Our product momentum is excellent. I really believe our M&A Connections [ph] product has tremendous potential to become the LinkedIn for The Deal community. Connection [ph] is the kind of product innovation that we are embracing. We modeled 20,000 dealmakers in the past 2 months to help start that product launch, which you'll hear more about. And it's just a lot of fun because at a time when Mergermarket, which is another firm in our M&A space, is hunting to transact for 3x revenue, and we see tremendous value in The Deal acquisition. So 2013 -- we came into 2013 with a very clean slate, and we've made a lot of progress the first half of the year. We're sharply focused on revenue growth. We're very competitive. We're setting ourselves up for profitable growth. And as I keep saying, profits can't happen soon enough for me. So I thank all of you, and have a great, great evening.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.

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