InfoSpace, Inc. (INSP) Q4 2009 Earnings Call February 3, 2010 5:00 PM ET
Welcome to the fourth quarter 2009 InfoSpace earnings results conference call. (Operator instructions) I would now like to turn the presentation over to your host for today, Ms. Stacy Ybarra, Senior Director of Corporate Communications.
Good afternoon and welcome to InfoSpace’s fourth quarter and full year 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 forward-looking statements including but not limited to statements regarding InfoSpace's expectations about its online products and services, outlook for future of our business and growth initiatives, acquisition strategy, and anticipated financial performance for first quarter 2010.
Other statements that refer to our beliefs, plans, expectations or intentions which may be made in response to questions 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 our current expectations and beliefs. Factors that could cause or contribute to such difference include but are not limited to the risks and other factors 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 any forward-looking statement which speaks 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 was posted on our website, and filed with the SEC on Form 8-K, 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 fourth quarter results and our first quarter outlook. Then we will open up the call to your questions.
Welcome to the call today. InfoSpace had an excellent fourth quarter. For the fourth quarter, we delivered 92% year over year revenue growth and posted solid adjusted EBITDA, capping a very strong year for us. We created significant shareholder value in 2009 and executed well against our plan. The bulk of the growth in the fourth quarter and in the year came from tremendous execution by the distribution team. In the fourth quarter, we added eight new distribution partners, bringing our total distribution partners added for the year to 35.
The success we’ve seen on the distribution side is due primarily to our attractive offering for our partners. In particular, we’re uniquely positioned to serve small to medium-sized partners. It’s a good value proposition. We’re able to offer value-added services above and beyond what they might get if they went directly to Google or to Yahoo. In addition, we provide them with superior monetization. While the growth in this business is encouraging, our volume moves up and down as our partners’ volumes move up and down. In the fourth quarter, we benefited from this volatility, but early this year, we began to see a slowdown as some of our partners have pulled back on their marketing campaigns from the fourth quarter. Although we are cautious in the short term, we continue to be optimistic about the long-term growth prospects of our syndication business and are focused on developing additional tools and applications to help our partners grow and acquire new users.
While we recognize that most of the growth this year has come from our distribution business, we continue to invest in our own search products. The beauty of Metasearch is that we can advantage of the innovations of the big search engines and leverage their technology. Our engineering and our operations development is focused on building applications and user interface around search and other consume facing products. We also innovate and search by partnering with smaller start-ups to build functionality while keeping our development costs slow.
This strategy enables us to use our resources to launch new vertical sites to target niche groups. The goal is to complement an otherwise mature owned and operated search business by launching several of these new sites. Over time even a few 100,000 users can become an interesting financial proposition for us.
Beyond search, we’re launching a few initiatives to take advantage of some of our core capabilities to help us diversify our business model. In the fourth quarter, we launched Haggle, a competitive shopping site that offers internet users a chance to bid for great deals on new brand name electronics, gift cards, and other products. When we look at developing new organic sites outside search, we think about how we’re going to be distinctive. So in an auction business, for example, we’re not interested in going toe to toe with eBay. In the haggle business model, users pay for bids, and they typically buy merchandise at extremely attractive prices when the auction closes.
We distinguish ourselves by creating a competitive shopping experience as well as offering a big bargain to our users. Haggle highlights our development strategy of building and launching consumer internet sites that allow us to use our existing traffic and capabilities to organically diversify our revenue beyond search.
What has remained consistent throughout and remains true today is that our number one goal is shareholder value. Our approach to obtaining this goal is diverse. We are not purists. That means in 2010, we’ll focus on accelerating the growth in our distribution business, building out our core search business, and launching our organic new sites beyond search, like Haggle.
A fourth component to our strategy is the use of our cash for acquisitions. At the end of the fourth quarter, we had $226 million in cash on the balance sheet. As I have said on previous calls, we plan to deploy the cash to enter new businesses. We have a wide aperture for the types of deals we consider and are reasonably unconstrained in our thinking about diversifying. Our criteria for investment include businesses that are profitable or will likely be profitable soon and have attractive growth prospects. Among other goals, we’d like to accelerate the monetization of our $800 million in NOLs, which we believe will create significant shareholder value.
2009 was a great year for InfoSpace. Operationally, we performed well, driven by the strength in the distribution business and our ongoing efforts to improve operating efficiencies. I am proud our record this year, the strength our management team, and the execution of our employees.
Our goal for 2010 is to strengthen our position for long-term growth in our business and put the cash to work on some interesting acquisitions. If we succeed in those things, we will wind up creating a lot more shareholder value.
With that I’ll turn the call over to David for more detail on the financials.
I’ll start today with a review of our key income statement items, first with a discussion of our fourth quarter results and then a review of the full year numbers for each metric. I will end my comments with an update of our cash position and then provide guidance for the first quarter of 2010. Total revenue in the fourth quarter was $70.5 million. This represents an increase from the prior quarter of 30% and a year over year increase versus the fourth quarter of 2008 equal to 92%. In both cases, growth came our distribution business and represents performance significantly above the expectations we had when first issued guidance.
In the fourth quarter, the distribution business equaled 81% of our total revenue, which is up from 77% from the third quarter of 2009. As Will mentioned earlier, we signed 8 new partners in the quarter. However, the sequential growth came from a mix of both and older legacy accounts, with 70% of incremental revenue coming from partners we launched in 2008 or earlier and 30% from new partners we launched in 2009.
The relative growth from the distribution business also increased revenue concentration of our current top 5 partners. In the fourth quarter, these partners generated 49% of our total revenue which is up from 47% in the third quarter of 2009. For the full year, we recorded revenue of $207.6 million, representing a sequential growth rate from 2008 of 32%. Again this growth on a full year basis came from the performance of our distribution business.
Gross profit in the quarter measured as our total revenue less payments to our distribution partners and content providers was $22.7 million, equal to 32% of revenue. This compares to gross profit in the third quarter of 2009 of $20.3 million, representing a sequential increase of $2.3 million. As with our revenue increase, the sequential improvement came entirely from our distribution business.
For the full year, gross profit was $81.2 million, equal to 39% of revenue. This represents a sequential increase from 2008 of 400,000. Adjusted EBITDA in the fourth quarter was $11.2 million, up $4.2 million from the third quarter of 2009. However, it’s important to note that this result includes a one-time gain from a net business tax refund equal to $2.4 million. Without this benefit, adjusted EBITDA in the fourth quarter would have been $8.8 million, up $1.8 million from the third quarter of 2009. This sequential increase is driven by the growth in revenue and gross profit from the distribution business.
For the full year, adjusted EBITDA was $27.4 million, equal to 13% of revenue.
Net income in the fourth quarter was $10.1 million, equal to $0.28 per diluted share. This result also benefits from the one-time gain from the net business tax refund of $3.3 million. Additionally, we recorded an income tax benefit primarily driven by the losses realized on the sale of our auction rate securities. In total, these tax benefits in the fourth quarter equaled $5.7 million.
Our average fully diluted share count in fourth quarter was 36.1 million, and we ended the year with 35.4 million shares outstanding. Now, turning to the balance sheet, we ended the quarter with $226 million in cash and short-term investments, equal to $6.40 per share and up by $12.3 million from the third quarter. In the fourth quarter, we sold all of our holdings in auction rate securities. This resulted in a gain to the book value of approximately $300,000 in the fourth quarter. We no longer hold long-term investments or illiquid securities.
Now, for our outlook, our guidance for the first quarter of 2010 reflects a slowdown in the distribution of business that we started to see at the beginning of the year. In large part, some of our partners have cut their marketing campaigns from the fourth quarter as they assess their returns on advertising spend. Additionally, we continue to work with our key partners including Google and Yahoo to maintain high value to their advertisers from our distribution business as well as to provide a positive user experience from our partner sites and applications.
The wide range in our guidance in the first quarter reflects these activities. For the first quarter of 2010, we expect revenues to be between $60 and $65 million, adjusted EBITDA to be between $6-7 million and net income to between $0.5 million and $1.5 million.
With that I will turn the call over to the operator and take your questions.
Question and Answer Session
(Operator Instructions) The first question comes from the line of Eric Martinuzzi with Craig-Hallum Capital.
Eric Martinuzzi – Craig-Hallum Capital
I was just wondering about Q1, the guidance looks pretty impressive; it was certainly ahead of where I was, but the concern, I know you have different kinds of partners, you have regionalized fee-type partners, you have Facebook, MySpace, app-type partners. Which types of partners is it and what do you think is driving their concern?
In terms of our guidance in the first quarters, my comments are really focused on the sequential change from the fourth quarter into the first, and what we were seeing is mostly the partners who advertise to drive traffic to their sites or to their downloadable applications, there was a big pickup in marketing in the fourth, and we are seeing a pause as the first quarter begins while they are assessing the effectiveness and the ROI of those campaigns, so it’s really focused on those ad-driven partners.
Eric Martinuzzi – Craig-Hallum Capital
For your owned and operated, you did see a sequential uptick there from Q3 to Q4. Seasonally, I guess, I would expect that. Is there anything else behind that progress?
No. It’s mostly the seasonally uptick. We tend to see a little bit of improvements in rates as well as our paid click volume picks up in the fourth quarter, and we benefited from that. We’re also running in some of our new initiative revenue into the owned and operated lines, and while it’s relatively small, you’re seeing that in that owned and operated total.
The next question comes from the line of Clay Moran with Benchmark.
Clay Moran – Benchmark
I have a couple of questions on the guidance; also just want to follow up your comments about the weakness in the first quarter. We would typically expect to see that seasonally, so is there really something beyond seasonality here?
No. We would typically see a lot of activity and spending in the fourth quarter that begins to pull back in the first quarter. Our guidance reflects, and we don’t have great visibility through our distribution partners to understand if it is anything other than seasonal.
Clay Moran – Benchmark
On the EBITDA guidance, sometimes you include one-timers. Are there any one-timer’s included in your first quarter EBITDA guidance?
No. Both EBITDA and net income are purely from the operations of the business. No one-time gains or losses.
Clay Moran – Benchmark
On the acquisition strategy, with your stock up a bit here, although still at a pretty low EBITDA multiple, does that change at all your positioning in regards to an acquisition? In other words, are you more careful now that you’ve got some strong momentum in the core business or are you more aggressive now that maybe a deal is a little bit less diluted to EBITDA?
I would say that we are equally careful, so we have been super-disciplined through all of 2009 at the deals we looked at and the deals we passed on, and I would expect that we will remain disciplined in 2010 also. You won’t see us do a deal just to get it done. At the same time, I would say that we think that there is a tremendous opportunity in monetizing those NOLs, and so we really would like to deploy the cash on an acquisition that makes sense. I think with our stock at the levels it is at right now, it’s not going to influence our strategy to be tighter or looser. I think you’ll see us just exercise the same kind of discipline around looking at the deals we have been looking at.
Clay Moran – Benchmark
I think in the past you made comments that was a healthy flow of deals to look at. Is that still the case?
Yes. I would say that is absolutely the case. There is a lot of interesting stuff out there, and I am reasonably confident that we will be able to find something that makes sense for our shareholders.
The next question comes from the line of Ross Sandler with RBC Capital Markets.
Ross Sandler – RBC Capital Markets
Back to the guidance, I know we’re kind of beating a dead horse here, but do you get the sense that any of the stuff you’re seeing early in the quarter is structural in nature with regard to these distribution partners’ ability to advertise? We have seen some of these businesses that might advertise aggressively on search engines, for instance. We view differently from time to time by those particular search engines, not sure how the Facebooks of the world may view them, but is it structural? Do you think it’s temporary, and then any update on pricing across the entire network in terms of PPCs for the first month of the quarter would be great.
The first question about whether or not the changes on advertising are structural. One thing I would offer is that it’s not so much SEM activity that we had seen in the distant past, so we don’t see any kind of structural changes like what had occurred in that segment. I don’t think we’re seeing anything right now that seems to be a long-term or fundamental change. It’s really more campaign-specific and specific to what the activity was in the fourth quarter, reassessing the value of those campaigns. Your second question about the rates in the network, we’re continuing to see remarkable stability across our owned and operated network in terms of PPC rates, and that’s reflective of the fourth quarter results and also the guidance going into the first quarter.
Ross Sandler – RBC Capital Markets
On the first question, could you give us an example of a type of distribution partner? You don’t have to name the actual company but a type of company and the nature of the advertising that they were doing in the fourth quarter and then what might have changed in the first quarter. Is it Publisher’s Clearing House type guys running ads on Facebook and then that’s dropped off? Without giving specific in terms of the name of the company, can you just characterize the nature of the advertising that was going on in fourth quarter, and then what’s changed in first quarter?
I don’t want to go into too much detail in terms of the tactics and the types of partners we are working with. I would offer that it’s mostly on advertising spent both in social networking as well as on search engines to drive people to our partners sites to download applications or to interact with applications on their website. What I would offer is it’s not a lot of search engine marketing activity going from a search results page to a search result page. It’s more of encouraging people to use an application and then measuring lifetime value of those users after they’ve installed or registered. Hopefully that gives you enough flavor. We are not really going into a whole lot detail about the specifics of each of the products or the partners.
The next question comes from the line of Mark May with Needham & Company.
Mark May – Needham & Company
I know in terms of revenue visibility, it’s still quite low, but in terms of your Q1 guidance, do you think that will be your low watermark for the year given what you do know and given the typical seasonality of the business, and then the second question is you are not just standing still, you’re still doing product innovation, etc. Should we expect for headcount additions and other investment-related spending as we head through the year that could have an impact on the opex lines?
On the first quarter guidance, I hate to answer your question without an answer, but we are not giving guidance beyond the first quarter. I will say though that as the mix of our revenue goes more towards the distribution business, it’s more difficult for us to give very precise guidance for the forward-looking quarter as well as for the full year, and that’s really reflective in the wide range. We’re seeing 60 to 65, which is typically a bigger gap than I would typically give, so that visibility becomes an issue as our business becomes more focused with distribution. On the second item, we don’t expect to add much in our operating expenses throughout the year to support the initiatives that we are currently undertaking. That’s both in building out more distribution products and capabilities as well as the owned and operated search and non-search initiatives, so to the extent that we would see increases in operating expenses, we would expect that those increases would come with greater gross profit from those segments.
(Operator Instructions) The next question comes from the line of Douglas Whitman with Whitman Capital.
Douglas Whitman – Whitman Capital
Given your earnings outlook per share, I’m having a little bit of trouble figuring exactly how to figure that. What is the pro forma expectation in your guidance that you are giving for the first quarter on a per share basis?
That’s in the earnings release. It’s between $0.01 and $0.04 per share.
Douglas Whitman – Whitman Capital
Is that a GAAP number or a pro forma number?
That’s GAAP. It’s fully diluted shares so that’s on the net income. It would be coming from the net income of $0.5 million to $1.5 million divided by what we anticipate our fully diluted shares to be.
The final question comes from the line of Eric Martinuzzi with Craig-Hallum.
Eric Martinuzzi – Craig-Hallum
Just to follow on with that prior question regarding the below the line there, it looks like you got a tax expectation for $1.2 million in Q1. That seems to outside the norm. Can you explain what that is, and is that a cash tax?
I certainly can explain it. I’ll try to keep everyone’s attention held on the phone, so it’s going to mostly be a book tax entry. It will not be a cash tax expense, and it has to do with the mechanics around our income tax provision. The number that we are anticipating in the first quarter will be in relative proportion to the income that we would produce, would be consistent with what we expect for the rest of the quarters throughout the year, and it’s a book issue, not a cash tax issue.
There are no more questions in the queue at this time.
Thank you for joining us today.
That’s going to conclude today’s conference. Thank you for your participation. You may now disconnect.
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