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Executives

Stacy Ybarra - Senior Director, Investor Relations

William Lansing - President, Chief Executive Officer

David Binder - Chief Financial Officer

Analysts

Clay Moran - Benchmark

Brian [Berkin] – Craig Hallum Capital

Analyst for Ross Sandler - RBC Capital Markets

InfoSpace, Inc. (INSP) Q3 2009 Earnings Call October 28, 2009 5:00 PM ET

Operator

Welcome to the third quarter 2009 InfoSpace earnings results conference call. (Operator instructions) I would now like to turn the presentation over to your host for today, Miss Stacy Ybarra with Investor Relations. Please proceed.

Stacy Ybarra

Good afternoon and welcome to the InfoSpace’s third 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 fourth 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 most recent quarterly report on Form 10-Q on file with the Securities and Exchange Commission. InfoSpace assumes no obligation to update its forward-looking statements which speak only as of the date the statements are made.

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

William Lansing

Good afternoon and welcome to the call today. I will start out with an update on the business and then David will provide an analysis of the financials.

We posted another strong quarter with good performance across all of our key metrics and top line growth coming from our distribution business. We continue to see stable rates in our advertiser network. Digital advertising is one of the most efficient channels to reach consumers so we are not surprised that search advertising is strengthening as the economy recovers. We continue to believe that the search market is a strong one and that the long-term prospect is continued solid growth.

On the owned and operated side of the business the team is focused on launching new sites and optimizing traffic on our legacy sites. We have a direct relationship with over 4 million unique visitors per month. We continue to believe there are opportunities to grow focusing on targeted consumer groups and through leveraging the traffic to our sites.

We are beginning to see progress on some of the growth initiatives put in place earlier this year. While the numbers are not particularly meaningful to the bottom line yet we have seen signs of success with organic growth. These early results validate our micro-segment strategy. We will continue to invest to leverage our meta search platform for growth.

Additionally, throughout the year we have been able to reduce costs and operate more efficiently as an organization while continuing our development efforts on new products. Specifically, we are exploring ways to leverage our traffic and skill set to launch other products. Our distribution business continues to confirm our view that we have a unique and attractive value proposition. During the quarter we closed 9 deals. Our distribution network remains stable with high quality traffic for advertisers remaining an emphasis. We offer good monetization and we provide value-add by proactively working with customers to grow search revenue and frequency.

We work closely with our distribution partners which has helped us successfully launch new products into market such as Portal and DNS. Many of our large partners look for ways to manage costs and our products allow them to increase monetization while lowering the cost of maintaining and building search related products. This partnership velocity is evidenced by our extremely low churn rate. We are proud that our team has not lost a significant renewal in 18 months.

In addition we have a strong pipeline for future growth. We intend to continue to invest in and grow this side of the business. Turning to our acquisition strategy, the use of our cash for an acquisition continues to be an important part of our long-term strategy. As we have said in previous calls our focus is to acquire profitable businesses that can help us monetize our NOLs. We will likely diversify our business model. While we have applied significant resources in this area during the past quarter we are not prepared to make any further announcements at this time.

With that I will turn the call over to David to discuss the financials.

David Binder

Thanks Will. Good afternoon. I will start today with a review of our third quarter earnings including a discussion of our ending cash position and then provide our guidance for the fourth quarter. Total revenue in the third quarter was [audio break]. This represents an increase from the prior quarter of 24% and a year-over-year increase versus the third quarter of 2008 equal to 38%.

While revenue from our owned and operated business remained relatively flat versus the prior quarter we saw significant top line growth and performance that exceeded our expectations from the continued strength in our distribution business. In the third quarter 77% of our total revenue came from distribution, up from 71% in the second quarter and up from 69% in the first quarter of 2009. Growth came from increased volumes through new partners we have launched over the past 12 months as well as from our established legacy partners.

Gross profit in the third quarter, measured as our total revenue less payments to our distribution partners and content providers, was $20.3 million, up $0.9 million from the second quarter and equal to 37% of revenue. Adjusted EBITDA in the third quarter was $7.1 million up $1.7 million from the second quarter of 2009 and equal to 13% of revenue. This sequential increase is driven partly by the growth in gross profit and partly by reductions in our overall cash operating expense.

We continue to see benefits from the steps we have taken throughout this year to rationalize our cost structure. While we have increased our profitability we have also maintained the appropriate level of investment in initiatives to grow our business.

Net income in the third quarter was $1.8 million compared with net income of $2.9 million in the second quarter of 2009 and equal to $0.05 per share. The sequential drop in net income is primarily attributable to an increase in stock based compensation of $2.5 million. Our average fully diluted share count for the third quarter was 35.8 million and we ended with 35.3 million shares outstanding.

Turning to the balance sheet, we ended the quarter with $214.1 million in cash, short and long-term investments equal to $6.07 per share and up by $5.9 million from the second quarter. Included in this total is the current book value of our investments in auction rate securities of $8.2 million.

For our outlook, first of all we expect a one-time gain from a tax refund in the fourth quarter. This will benefit our adjusted EBITDA by $2.4 million and our net income by $3.3 million and will only effect our results in the fourth quarter. More importantly, our guidance considers the continued strength in our distribution business and fairly stable rates in volume in our owned and operated properties. As a result of these trends and including the one-time net tax benefit we expect fourth quarter revenue to be between $57 million and $60 million, adjusted EBITDA to be between $7.4-8.4 million and net income to between $3.3 million and $4.3 million equal to $0.09 and $0.12 per share.

Excluding the onetime net tax benefit we would have expected adjusted EBITDA to be between $5-6 million and net income to be between breakeven and $1 million.

With that I will turn the call over to the operator to take your questions.

Question and Answer Session

Operator

(Operator instructions) The first question comes from the line of Clay Moran – Benchmark.

Clay Moran - Benchmark

Clearly the most obvious one is the guidance. You are guiding towards a pretty significant boost in revenues sequentially but a down tick in EBITDA. Can you explain where that profitability goes?

David Binder

The guidance considers a pretty strong growth coming from distribution which obviously comes at a lower gross margin percentage. We also believe the cost structure we achieved in the third quarter is the one we will have going forward and maybe a slight uptick in our cash operating expenses. So you are effectively seeing the percentage of revenue coming at a lower rate because of that shift towards the distribution business.

Clay Moran - Benchmark

But in the current quarter the shift was to distribution as well. The profitability in the current quarter drove $7.1 million. You didn’t really see a sequential change in the O&O business. What is changing Q3 to Q4 besides the slight uptick in costs? Am I missing something?

David Binder

It is that uptick in our cost structure.

Clay Moran - Benchmark

If you could maybe give a little more color on how things have progressed on the acquisition front. Specifically if you could go into what type of candidates you are looking at. I just want to see if that has changed. You did mention for the first time specifically saying you will likely buy something that would diversify the model. Can you give any color as to why you are being definitive in that today?

Also as we have seen for awhile now, public market prices have gone up. Do you think your thought process on that has changed again as well?

William Lansing

Sure. Obviously on this subject there is very limited amount of stuff we can share at this point since we don’t have a deal coming out. It is no secret and it is consistent with everything we have seen in the past that we are extremely focused on trying to find an acquisition or a series of acquisitions that will let us monetize the NOLs. We have talked in the past and it remains true today that it is likely that an acquisition would be adjacent to or outside of the search space and there is a preference for doing something in the Internet space but it is not necessarily limited to the internet space. So that is a pretty broad range of things that we have been looking at and are looking at.

There is a preference to applying our skills and management skill to what we buy and that takes us in the direction of consumer and Internet. I think that is about as much color as I can give you on it at this time. With respect to the prices, it is absolutely the case that in the public market at least, and probably the private markets too, prices have come up. We continue to see opportunities and we are working on opportunities and we continue to believe we will be able to buy profitable businesses at a reasonable price.

Reasonable is a relative term and I think when the whole market moves then our notion of reasonableness will probably move up with it but I don’t think we are talking about any kind of dramatic changes. I think we are still focused on buying something that has the kind of characteristics that are going to let us get to monetization of those NOLs. So I hope that is helpful.

Clay Moran - Benchmark

Can you talk a little bit about the deal flow you have seen? Does it roughly match the desired characteristics that you are looking for? At least maybe can you comment are there opportunities around internet properties that would use your marketing background?

William Lansing

The answer is yes. I think we are seeing a lot of interesting opportunities and we are in the middle of looking at some right now. I don’t think we are looking for the [empty set].

Clay Moran - Benchmark

Since distribution is a big driver these days can you disclose the total number of distribution partners and can you disclose any concentration with any one or few partners?

David Binder

We don’t go into a whole lot of detail behind the makeup of those partners. We have not lost a significant partner for well over a year. We continue to sign up new partners. We announced nine new deals signed this quarter so we don’t go into a whole lot of detail on that concentration.

Clay Moran - Benchmark

So we can assume there is no one that is 10% or more?

David Binder

We are seeing a couple of partners that are over that threshold. If one gets over a 20% threshold we will likely disclose that.

Operator

The next question comes from the line of Brian [Berkin] – Craig Hallum Capital.

Brian [Berkin] – Craig Hallum Capital

Related to Google and Yahoo! are these still monetizing at historical levels or are you seeing any foreseeable changes to the Yahoo! contracts since it began its Microsoft relationship?

William Lansing

No. We do see periodic shifts in the monetization of each of the different networks. A lot of it is based on what they are doing to measure the quality of traffic and how they monetize their payouts for that quality of traffic. We haven’t seen a significant shift. There has been a little bit of movement in the quarter but nothing that has materially impacted our overall results from each of the two partners. Nothing very dramatic.

Brian [Berkin] – Craig Hallum Capital

I think you mentioned that the nine new partners came from portal and DNS. When you are seeking out new distribution partners is one portal or is DNS, is one more preferred than the other when you are trying to seek out new distribution partners?

William Lansing

We really like the portal and DNS products because they add a lot of quality traffic and they are very sticky, good partners because we are providing a lot of value add service. To the extent of bringing in good, high quality, organic traffic we definitely value those two products very highly. That being said, we still are launching new partners who provide content and applications and those have shown to be very high quality traffic as well.

Brian [Berkin] – Craig Hallum Capital

I hate to beat a dead horse and I know you aren’t going to speak much more to it but do you think you can find an acquisition target at 5-6 times as you mentioned in the past? Are you willing to wait out to the point you find something at that price?

David Binder

I think it remains to be seen. I don’t want to commit to a specific multiple. I think that we are committed to a reasonable range. Could it be higher than 5-6 times? It could be. I think you can be confident we aren’t out making wildly speculative bets on companies that have potentially tremendous opportunity ahead of…you have to pay a very high multiple to take advantage of that. I don’t think that is the game we are in but I couldn’t say specifically that 5-6 times is the magic number. It could certainly be a multiple a little bit higher than that.

Brian [Berkin] – Craig Hallum Capital

What was your headcount exiting Q3?

William Lansing

We are around 150.

Operator

The next question comes from the line of Ross Sandler - RBC Capital Markets.

Analyst for Ross Sandler - RBC Capital Markets

How was CPC trends in 4Q so far relative to 3Q? Are they improving or are they just the same if there is any way to quantify that?

William Lansing

We have seen the rates be relatively flat, maybe slightly down but down typically with the seasonal trends we had seen in the past few years prior to 2008. Remember, 2008 ended roughly with a lot of advertiser pull back and CPC rates dropping. We have not seen anything like that this year and we are continuing to see stability with a little bit of seasonality in it. That is a sort of steady participation from the advertisers.

Operator

Ladies and gentlemen this concludes the question and answer session for today’s call. I would now like to hand the call over to Ms. Stacy Ybarra for any closing remarks.

Stacy Ybarra

Thanks for joining us.

Operator

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

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