InfoSpace Tumbles On Loss of Key Customer; Openwave Could Also Be Hit By Trend

 |  Includes: BCOR, GEC
by: Eric Savitz

Infospace (INSP) shares are in freefall today after the company announced yesterday that one of its cell-phone carrier customers is terminating its deal with the company to sell ring tones. Here are the details from the release:

The company has been informed by one of its carrier partners that it plans to develop direct licensing relationships with the major record labels beginning in early 2007. Accordingly, the Company expects its revenues, as well as its operating results, to be negatively impacted by these direct relationships. Through the six months ended June 30, 2006, InfoSpace generated $89.6 million in mobile revenue, of which label tone sales represented approximately $55 million. InfoSpace’s total revenue for the same period was $186.1 million.

The Company plans to rationalize its costs to align them with expected future revenues. Specific plans will be announced within 30 days.

The company, in short, is being disintermediated - the carrier (some analysts say it is Cingular) and the labels are skipping the middle man. And for Infospace, that is one huge problem; the Street is backing away; things would be worse if not for the company’s large mountain of cash.

  • Imran Khan, J.P. Morgan: We believe other carriers could potentially follow suit and develop similar relationships with record labels. As such, this announcement makes us question toe longer term viability of INSP’s Mobile business. Trims 2007 revenue estimate to $278 million from $423 million. Maintains Hold rating.
  • Denise Garcia, W.R. Hambrecht: Reiterating our Sell rating…as our investment thesis regarding the trend by carriers to develop direct relationships with content providers plays out. Preliminary 2007 estimate cuts revenue to $300 million, from $425 million.
  • Mary May, Neeedham: Adding to INSP’s challenges, we believe the company’s Search and Directory business remains at risk from competition and from increased scrutiny of traffic quality. We are reducing our estimates significantly. That said, with $13/share in net cash [and] with the likelihood of positive [free cash flow] even in 2007…we are maintaining our Hold rating.
  • William Power, Robert W. Baird: Maintaining our Neutral rating and lowering our target from $24 to $20…the transition to direct licensing agreements…could also negatively impact other music content aggregators, including Openwave’s (OPWV) Musiwave, which accounted for 7.6% of that company’s Q4 revenue.

Infospace shares today have dropped $4.83, to $17.81; Openwave is off 18 cents at $8.71.

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