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Answers Corporation (NASDAQ:ANSW)

Q3 2009 Earnings Call Transcript

November 4, 2009 8:30 am ET

Executives

Bruce Smith – Chief Strategic Officer

Bob Rosenschein – President, CEO and Chairman

Analysts

Wayne Chang – Canaccord Adams

Operator

Good day everyone and welcome to the Answers Corporation third quarter 2009 earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to introduce the Chief Strategic Officer, Mr. Bruce Smith. Please go ahead, sir.

Bruce Smith

Thanks, Cecelia. Good morning and welcome to the Answers.com third quarter 2009 conference call. My name is Bruce Smith, Chief Strategic Officer. Joining me today are Bob Rosenschein, Chairman and CEO who will present the prepared remarks and Steve Steinberg, CFO. This call is being webcast and will be available for replay.

Before we begin today, we’d like to remind you that our prepared remarks contain forward-looking statements and that management may make additional forward-looking statements in response to questions. These statements are based on current expectations, forecast, assumptions, risks, and uncertainties. They do not guarantee future performance, and therefore undue reliance should not be placed upon them. The company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Important risks among others are our ability to maintain or improve monetization rates, particularly in light of the current challenging economic environment, drops in traffic caused primarily by search engine’s algorithm changes as experienced in July 2007, maintaining our relationship with Google, Answers.com’s most important provider of ads and source of revenue, our failure of Answers.com to experience continued growth in accordance with our expectations and potential claims that we are infringing the intellectual property rights of any third party.

You can find more information about factors that could affect results in our most recent quarterly report on Form 10-Q available at ir.answers.com.

We will also be discussing non-GAAP financial measures including adjusted EBITDA and adjusted operating expenses. We provide a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure and a list of the reasons why the company uses non-GAAP financial measures in today's earnings release posted on our corporate Web site at ir.answers.com.

Finally, all information shared on this call is as of November 4, 2009, and we do not intend and assume no obligation to update such information.

And with that, I would like to turn the call over to Bob.

Bob Rosenschein

Thank you, Bruce. Good morning and thank you for joining us. I'm very pleased to report that we had another good quarter. Today, I will break the call into two parts followed by your questions. Q3 highlights and trends, and looking forward quality, quantity and how management views our business drivers. Here are the Q3 highlights. Revenue is just shy of $5 million, up 40% year over year. Adjusted EBITDA was $1.7 million, up 228% year

over year. Our cash balance rose $940,000 to $21.3 million.

Q3 contains the weak seasonal months of July and August, which were more pronounced this year. The traffic bounced back to our highest levels ever in September. WikiAnswers traffic, that is page views, jumped 38% in September over August. You probably saw our big comScore news last month. In September, our audience size ranked number 13 in the US with 56 million unique users, that is more than Craigslist for The New York Times. Worldwide, for September, comScore ranked Answers.com at number 25 with 83 million unique users, ahead of CNN and Twitter.

We see audience size as a huge opportunity. In Q3, we released international versions of Answers.com in four languages, Spanish, French, Italian, and German. However, we are very early in that process.

This quarter, we also unified our branding. Answers.com is now the overall umbrella brand with WikiAnswers and ReferenceAnswers comprising its current components. With unified branding, we also renewed our marketing efforts. We participated in three industry events in last two months, TechCrunch50, Demo, and Web Summit 2.0. You may have seen some of the press, especially the very positive TechCrunch article.

Let's get into more detail on Q3 financial results. Overall, Answers.com revenues were approximately $5 million, 69% from WikiAnswers, 31% from ReferenceAnswers. Q2 revenue was about flat sequentially, including 40% year over year. Overall, average daily page views were 9.19 million page views, up 2% sequentially and 60% year over year.

For WikiAnswers specifically, average daily page views were 6.34 million, up 4% sequentially and 105% year over year. WikiAnswers revenue grew 1% sequentially and 75% year over year to $3.42 million. Our revenue growth was lower than our traffic growth because of continued softness in RPMs. Q3 RPM for WikiAnswers averaged $5.87, down 4% from $6.14 in Q2 and down 15% year over year. We believe the primary reason for such weakness is the economy and its impact on ad rates.

WikiAnswers traffic growth was only 4% in the quarter due to the traffic declines we’ve experienced in July and August, probably because of the greater summer seasonality and product changes intended to improve longer-term traffic and quality. On a very positive note, traffic seems to have jumped back impressively in September as noted before.

ReferenceAnswers average daily page views in Q3 were 2.86 million compared 2.97 million in Q2, down 4% sequentially but 7% higher year over year. ReferenceAnswers Q3 revenue decreased 2% sequentially and year-over-year to $1.55 million, and its average RPM was $5.89 compared to $5.87 in Q2, and compared to $6.44 in Q3 2008. Adjusted operating expenses were $3.28 million in Q3 compared to $3.11 million in Q2, an increase of $170,000. The increase resulted from various items, including five new employees, co-location facility costs, new marketing initiatives, and the initial cost of translating English language content into other languages.

Adjusted EBITDA in Q3 was $1.7 million, reflecting a 34% margin. We added GAAP operating income of $980,000 and GAAP net loss in Q3 of $70,000, due primarily to the $1 million non-cash accounting charge from the revaluation of Redpoint’s common stock warrants, which are deemed liabilities for accounting purposes. We may continue to experience significant non-cash GAAP losses from the quarterly revaluation of Redpoint’s common stock warrants to the extent that our stock price increases.

Let's review some balance sheet data; cash and cash equivalents as of September 30 were approximately $21.3 million, $940,000 higher than the end of Q2. The net increase stems almost entirely from cash from operations of $1.35 million less CapEx of $200,000 and preferred dividends of $200,000.

Let's turn now to the business drivers; as you know, the core of our business continues to be the virtuous cycle of traffic creating content, which drives more traffic. Critical to maintaining this cycle is our strong ranking on search engine results, which is driven by the quality of Answers.com content. We take the view that traffic and financial growth benefit from content quality, product functionality and usability.

Several examples of improvements we've made to content quality include, one-click, (inaudible) appropriate words out of flag, optimized spelling check, more Q&A featured on the homepage. One of the exciting things about our business, and we've seen this several times now, is the seemingly minor user interface changes can yield surprising results. Here are few examples. Last year we relaxed the constraint that using of categorizing new question before posting it. The new questions jumped. Just a few weeks ago we redesigned the question submission page and new questions again jumped. The point is that ours is a business of continuous iteration, experimentation and improvement. We try new things all the time, if they work great, if they don't we will go back and try something else. They expect to see us continue to invest in our product line, user experience and size, and quality of our databases.

Let me also update you with some negative news. We’ve been informed by Google that we will no longer be receiving their definition link traffic starting sometime in Q4. While we have appreciated this link for almost 5 years, we do see it as a one-time ReferenceAnswers event, that currently amounted to about 5% of our overall revenue.

On the monetization front, RPM seems to have stabilized but we have not yet seen the jump in ad rates that one reads about in the press. Going into 2010, international Answers.com remains a significant opportunity, we've launched four international Q&A versions. Now, we are actively beginning to translate parts of our substantial English-language Q&A database to propel these sites forward. We expect to begin seeing the fruits of that labor in the second half of next year.

There are several other initiatives you should know about. The first is the social media. We believe that users should be able to log into our site without creating a new Answers.com account. By lowering the friction that Facebook and Twitter uses, for example, we will boast new contributions plus spread the word, look for this functionality in the first quarter of 2010.

Guidance, we project Q4 revenue in the range of $5.45 million to $5.95 million, and Q4 adjusted EBITDA in the range of $1.90 million to $2.35 million. That brings our full-year 2009 revenue guidance for $20.2 million to $20.7 million, the midpoint of which is 44% over 2008. Our full year adjusted EBITDA is projected to be from $7.25 million to $7.70 million. The midpoint of our annual revenue guidance is 2.6% less than we projected in August due primarily to lower monetization rates than expected.

In summary, Answers.com continues to grow and generate cash. We are in a strong position in unique users, which presents further market upside, particularly internationally. We are very excited about the opportunities for further expansion in 2010.

With that, thank you very much. And we will turn it over to any questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Wayne Chang of Canaccord Adams.

Wayne Chang – Canaccord Adams

Hi good morning guys. Thanks for taking the question.

Bob Rosenschein

Hi, Wayne. Good morning.

Wayne Chang – Canaccord Adams

Hi good morning. A quick question just around Wiki RPM; seems like it fell about 15% year-over-year. Can you give me a little bit of insight as to whether you're seeing that trend kind of finding out at least into the fourth quarter, what we seeing so far in October? Can you talk a little bit more about the potential impact, I don't know if that's something that you have internally quantified around the notification that Google provided around sending over QA traffic. What percentage of that represents – any percentage, any figures that we could walk away with just to get a better understanding. Thanks.

Bruce Smith

Sure, Wayne. This is Bruce. On the RPM front, what we've seen is stabilization, as Bob said. RPMs are down approximately 15% on WikiAnswers. If you’ve noticed, last year we actually had an uptick to over $7 in the fourth quarter on WikiAnswers. We are not seeing this improvement on WikiAnswers and ReferenceAnswers that we are reading about in the press. So we are being very conservative in our forecasting and actually assuming that we are not going to see that. That's what's driving a lot of our forecasts. As we are not seeing it, we want to be prudent and not expect that we are going to get it. So, if it does improve it would be a positive for us, but we are just not seeing it.

Bob Rosenschein

I will answer the part, Wayne, about the Google definition link. The very simple fact is that we had this windfall in links, by the way that is only when exactly monetizes the same way as a normal page, but we show a slightly different experience to those features. But in general, I would say, if you ask me a couple years ago, that will be a massive proposition of our business. Fortunately, I would say, over the years it became less and less of an issue, as I mentioned before, totals about 5%. So it’s not even that material anymore. So we enjoy doing it and we thank our partners at Google for the faith they put in us. It’s more a prestigious thing, but it is not a massive part of the business. The way we model it is we take the revenue and do a rough estimate if it happens, when we think it might happen then it will be this much in follow on traffic and revenue.

Wayne Chang – Canaccord Adams

Okay. Great.

Bruce Smith

And one final thing on that is that 5% – the expected loss of the definition link is also in our guidance for Q4. So that is also impacting our guidance for Q4. It’s our expectation that the definition link will go away.

Wayne Chang – Canaccord Adams

Okay. Great. Thanks. Are you guys seeing anything so far on the new language sites that are launched? It is still basically sort of developmental?

Bob Rosenschein

I would say, Wayne, that it is in its infancy. We are excited about the potential. But I will have to remind you that WikiAnswers invested [ph] quite a while to get up to speed. Those things we can do to accelerate it, but let no one expect that it is going to turn to material revenue in the immediate term.

Wayne Chang – Canaccord Adams

Great. All right. Thanks a lot guys.

Operator

(Operator instructions) And at this time, we have no further questions in queue.

Bob Rosenschein

Thank you very much everyone for joining us on today’s call. Bye.

Operator

And that does conclude today’s conference. Ladies and gentlemen, we appreciate everyone’s participation today.

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