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Intersections Inc. (NASDAQ:INTX)

Q4 2013 Results Earnings Conference Call

March 17, 2014, 05:00 PM ET

Executives

Mike R. Stanfield - Chairman and CEO

John G. Scanlon - Executive Vice President and Chief Financial Officer

Analysts

Patrick Fitzgerald - Robert W. Baird & Co.

Benjamin Clifford - Nomura Securities

Operator

Good afternoon, ladies and gentlemen, and welcome to Intersections Inc.'s Fourth Quarter Full Year 2013 Earnings Call and 2014 Business Update Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

During this call, Intersections will make certain projections and forward-looking statements, including, without limitation, statements relating to the company's future revenues and earnings, plans, strategies, objectives, expectations and intentions.

These projections and forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy, and that actual results could differ materially from results projected in these forward-looking statements.

For some of the factors that could cause actual results to differ materially, you should review the SEC filings at our corporate website at www.intersections.com. We do not intend to and do not undertake any obligation to update any forward-looking statements or projections we may make.

The financial highlights and certain non-GAAP financial measures discussed during this call are also available in the press release Intersections distributed this afternoon, which is available currently on our website at www.intersections.com.

I will now introduce Michael Stanfield, Chairman and Chief Executive Officer of Intersections Inc. Mr. Stanfield, you may begin the call.

Mike R. Stanfield

Thank you. Good afternoon, and welcome to Intersections' 2014 business update call.

Our agenda today is that John Scanlon, our Chief Financial Officer, will review our fourth quarter and calendar 2013 financial performance, I’ll then provide a strategic update to our business and set some high-level expectations for 2014 and the next few years, we'll then open the call to questions. John?

John G. Scanlon

Thank you, Michael, and Happy St. Patrick’s Day to everyone.

Today, we reported revenue of $310.3 million and adjusted EBITDA of $29.2 million for 2013. Throughout this presentation, adjusted EBITDA refers to EBITDA before share-related compensation and non-cash impairment charges.

The revenue and adjusted EBITDA results reported today were both in line with the guidance we previously provided. For 2013, our diluted earnings per share from continuing operations was $0.13 per share.

The decrease in our revenue in 2013 versus the prior year is primarily due to the cessation of marketing of our products by financial institution clients and to a lesser extent by select subscriber portfolio cancellations by certain large financial institution clients.

We believe these actions by our clients are in response to greater regulatory scrutiny in the United States surrounding the sales, marketing and administration by financial institutions of add-on products, including identity theft production products.

Revenue declines from our large U.S. bank clients were partially offset by increased revenue from our consumer-direct and our Canadian business lines. On an aggregate basis, these two business lines grew revenue approximately 6% in 2013 to more than $74 million.

The decrease in our adjusted EBITDA in 2013 versus 2012 was driven primarily by the decrease in revenue and select subscriber portfolio cancellations by our financial institution clients in the U.S., just discussed; an increase of approximately $5 million in marketing expenses for our Identity Guard branded business which led to a 16% increase in the total number of Identity Guard subscribers at year end compared to the prior year; an increase of approximately $7 million in G&A expenses related to the development of our recently announced VOYCE platform; and an increase of $3.3 million in the loss from operations in our Market Intelligence segment.

We have subsequently announced that we’re discontinuing this Market Intelligence segment and expect to wind down operations in the second quarter of the current year.

Consolidated net income for fiscal year 2013 was $2.4 million or $0.13 per diluted share compared to $19.7 million or $1.04 per diluted share for fiscal year 2012.

Our consolidated G&A expenses were $83.5 million in 2013 compared to $80.3 million in 2012, an increase of 4%. Without the increased G&A expenses for VOYCE and the increased Market Intelligence segment loss, G&A excluding severance expenses would have been about 9% lower in 2013 versus 2012.

For the full year 2013, we added approximately 552,000 new subscribers including 123,000 new subscribers in the fourth quarter, compared to 1.1 million new subscriber additions for the full year 2012.

In 2013 approximately 41% of our new subscribers were related to Identity Guard or other consumer-direct brands compared to approximately 16% of new subscribers in 2012. Approximately 27% of our new subscribers were from our Canadian business in 2013 compared to 19% in 2012.

Despite these new subscriber additions, our year end subscriber count declined to 2.9 million at the end of 2013 compared to 4.5 million at the end of 2012. Our overall subscriber retention rate was negatively affected by the cancellation of approximately 1.1 million subscribers by multiple clients, including the cancellation of a 650,000 subscriber portfolio by one client representing our entire book-of-business with this client in the fourth quarter of 2013.

We believe these cancellations are primarily the result of strategic decisions by certain financial institutions to exit certain business lines including ours in light of the current regulatory environment and/or to selectively cancel certain [cyber] [ph] populations for specific regulatory related reasons without exiting the entire business line.

We calculate overall retention as the subscribers at the end of a 12-month period divided by the sum of the subscribers at the beginning of that 12-month period plus additions in the 12-month period.

On that basis, retention at the end of 2013 was 56.9% compared to 74.7% reported at the end of 2012. However, without the impact of the portfolio cancellations mentioned earlier, underlying retention would have increased to 78.8% in 2013.

Consolidated revenue for the fourth quarter of 2013 was $72.1 million, a decrease of 14% from the same quarter last year and a 5% decrease from the third quarter of 2013. We generated adjusted EBITDA of $5.2 million in the fourth quarter of 2013, a 54% decrease when compared to the same quarter in 2012 and a 1% decrease from the third quarter of 2013.

In 2013, we generated $23 million in cash flow provided by operating activities and returned approximately $16.8 million in cash to shareholders via $14.4 million in cash dividends and $2.4 million in share repurchases. We ended 2013 with $20.9 million of cash [into a term] [ph] equivalents and no outstanding debt.

Finally, as I mentioned earlier, in March of this year, we made the determination to cease ongoing operations at our subsidiary Intersection Business Intelligence Services which was business as Zumetrics.

These operations are expected to wind down and cease during the second quarter of 2014. We plan to classify this business as discontinued operation at the time that meets the requirements under U.S. GAAP. At that time, we will no longer have a Market Intelligence segment.

For fiscal year 2013, the loss from operations for the Market Intelligence segment was approximately $3.7 million.

Now, I’ll turn the call back over Michael.

Mike R. Stanfield

Thank you, John. While our traditional with large U.S. financial institutions has been shrinking, we’ve been working hard to reposition Intersections for future growth and success. Our transition strategy is going to be the topic of rest of today’s call and then we’ll open to questions.

Our Board, Management and I, believe we have a promising future if we can achieve the following three objectives. First, devote substantial efforts and resources to growing our Identity Guard brand in the U.S. and Canada through expanded product offerings, increased direct-to-consumer marketing, and increasing our non-financial institutions partnerships.

Second, successfully launch VOYCE to become a unique and leading pet health technology platform on a worldwide basis, for both consumers and medical practitioners.

And third, to manage our U.S. large bank business to exceed the expectations of the millions of subscribers who continue to use and value our products and services, grow that business where possible and maximize cash generation to fund higher growth initiatives.

Let me address these three objectives. We’ve been selling products under the Identity Guard brand since 1997. Up until a few years ago, the primary focus of our Identity Guard brand was to fine-tune new identity theft product features, prior to introducing them to our endorsed clients.

As a result, Identity Guard has always offered some of the most advanced and feature-rich identity theft production products in the market and has commanded a premium price as a result.

For example, our average paid subscription price in 2013 was $15.50 per month compared to $10.72 per month most recently quoted by a large consumer-direct brand. Over the years, we’ve gained considerable skill and expertise in marketing identity theft product features to consumers, and have kept our marketing budget modest in order to preserve capacity for investments in our traditional marketing channels.

We typically acquire new subscribers in our direct-to-consumer business for less than $100 across multiple marketing channels which we believe is lower than other large competing brands. Even with modest marketing support, we have grown our Identity Guard revenues by compound rate of 21.5% over the past four years and finished 2013 with approximately $42 million in revenue.

Our vision for Identity Guard brand goes beyond selling our existing products to new subscribers. We recently launched a new premium product, SafeConnex, which helps prevent identity theft by providing secure log-in, credit card auto fill, and secure web browsing services. SafeConnex also includes flexible capabilities with one-on-one marketing and consumer upsell into paid Identity Guard subscriptions or other products.

We intend to use the SafeConnex product primarily as a mean to developing a large base of consumers at low cost and converting the modest percentage of these into a hard paying subscriber.

We are also in the later stages of creating an expanded product suite under the Identity Guard brand for launch in 2014. These due offerings are targeted at protecting today's mobile-centric social media active customer in the app-oriented economy.

We expect these products will enable us to reach a much broader consumer population with free and low cost solutions with the developing threats to identity and privacy. Our objective is for Identity Guard to be the go-to brand for security, privacy and identity protection in the mobile, pad and desktop world.

With the significant contraction of our traditional bank marketing channels, at least in U.S., we have been expanding our Identity Guard marketing budget. We remained highly focused on generating strong returns on our marketing investments over a five-year time horizon, and therefore, have a natural bias towards marketing channels that offer a high degree precision and tracking results.

We believe the steady increase -- with steady increases in our marketing budgets we can build Identity Guard into a $100 million or greater revenue business over the next four years with higher per subscriber profitability than our traditional indoor subscribers. We believe we've been conservative in our goals; we have the potential for considerable upside on these projections.

Let me now turn to our new health monitoring platform, VOYCE. We told you last year in this call that we were investing a new product development outside of our traditional identify theft protection industry, a product that utilized our skills and expertise in data management, subscription management and customer service. That investment, which shows up in our G&A expense line in CP&S segment totaled approximately $11 million as of the end of last year, included approximately $9 million spent in 2013.

We unveiled VOYCE at the 2014 Consumer Electronic Show in Las Vegas, and the VOYCE pet health monitoring platform was named best of CES by multiple media outlets including Yahoo Tech and PCWorld.

Two weeks after CES we sent our team to the North American Veterinarian Conference in Orlando. Thousands of professionals came to talk to us, doctors, medical device manufacturers, pet food companies, veterinarian students and potential distributor partners from 34 countries, all wanted to know more about VOYCE. We could not have asked for a better launch of our platform.

VOYCE is a platform that connects pets, their owners and veterinarians with individualized pet health monitoring data and customized pet health related content. VOYCE operates using non-invasive radio frequency technology, accelerometers and onboard microcontrollers, and specialized algorithms to monitor vital pet health indicators such as rest, activity, patterns, calories burned, heart rate and respiratory rate.

This data is seamlessly uploaded to the VOYCE platform via Wi-Fi or it can be shared, trended and used to drive personalized content from pet health experts such as Dr. Alexandra Horowitz, the author of best-selling Inside of a Dog; Dr. Mark Stephenson, Chief Corporate Development Officer at LifeLearn Inc.; and Dr. Andy Roark renowned expert from the Cleveland Park Animal hospital among others.

The initial form factor from VOYCE will be a collar for larger dogs, meaning more than 20 pounds, expected to be launched in mid-2014 at a price point of $2.99 for the collar and $15 per month for ongoing monitoring and platform access.

According to the 2013-'14 American Pet Products Association National Pet Owner Survey, there are approximately 83 million dogs in the U.S. alone with just 5% penetration of domestic dogs. This nascent market can reach $1 billion in revenues.

The response to VOYCE has been tremendous and suggests a scope far beyond initial form factor and expectations. Following the initial launch, we expect to follow on with the smaller caller for cats and small dogs, professional version for veterinarians and larger versions for the equine, bovine and other large animal markets. We also expect to move into the international market sooner rather than later. We look forward to updating you as VOYCE's strategy unfolds and takes hold.

I encourage you to visit www.mydogsvoyce.com to learn more about VOYCE and understand your dog like never before. Keep up-to-date with our launch plans and review some of the publicity and television broadcast that have highlighted VOYCE.

Finally, let me address our traditional endorsed business with financial institutions. Our consumer products and services are highly valued by millions of subscribers who we've served over the years. They deserve our best level in service as long as they choose to remain our customers, and we're committed to providing that to them.

We have no way of knowing if our major bank partners will one day resume marketing our products. Today with the exception of cancellations by our partners, subscriber retention has exceeded our expectations and for portfolios for our client is no longer actively marketing but is still a client.

We believe this demonstrates the strong appeal of our products to subscribers even in the current climate. These long lived subscriber relationships provide us with reliable cash flow with which to fund Identity Guard, VOYCE and other new business initiatives, and help us maintain a state of readiness to resume marketing with our major clients and others whenever they chose to do so.

As it's well documented, the sensation of marketing and selective portfolio cancellations by major financial institution clients has been a significant headwind for our company. We expect 2014 to be no different and anticipate declining volumes again this year.

Given the prospects for growth with Identity Guard and VOYCE and absent any surprise in our endorsed business, we currently anticipate 2014 will be the turning point in our business. We're currently forecasting anticipated revenue as follows.

2014 is projected to be in the range of $260 million to $275 million on a consolidated basis. 2015 is projected to exceed $300 million; and 2016 is projected to approach $400 million, based largely on the growth in revenues from Identity Guard and VOYCE brands.

We're no longer providing EBITDA guidance as small changes in level of expense or timing could have a material impact on whether or not we remained with any published guideline we provide.

For the past several years our Board has declared a quarterly cash dividend; and doing so, our Board evaluates our cash position, access to capital and projected investment needs to determine whether or not a dividend declaration is in the best interest to shareholders.

In the first quarter of 2014 our Board declared a regular quarterly cash dividend of $0.20 payable to -- payable on April 3. Our Board will continue to evaluate the attractiveness of continuing dividend payment each quarter.

These forecasts constitute forward-looking statements within the meaning of the Federal Securities laws and are subject to substantial uncertainties, including changes in our financial institution business or the regulatory environment; adjustments in investments in our Identity Guard and VOYCE brands and our other growth opportunities, and the risk factors disclosed in our SEC filings.

Over the past 18 years, like many successful companies, Intersections has experienced several severe obstacles, and we have overcome them through creativity and commitment. We expect 2014 to be a turning point in our history as we build new businesses, while we continue to manage a great deal of change and uncertainty in our traditional financial institution business.

Although we certainly have a long way to go, I'm pleased with the progress we made in this transition. We're driving this transition in the same successful ways that served us in the past by being intelligent, efficient and thoughtful.

We're building new businesses of the highest quality, while balancing the goal to create meaningful cash flow and shareholder value with the need to be fast and cost effective at the same time. All of us here at Intersections are committed to the success of this transition, and we want to thank you for your continued support, confidence and interest.

We'll now open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And your first question comes from the line of Patrick Fitzgerald from Baird, please proceed.

Patrick Fitzgerald - Robert W. Baird & Co.

Hi. I know you kind of broke it down in terms of the $76 million I think it was that you've got from Canada and new direct-to-consumer year-over-year. And you said that you grew that -- those two things 6% year-over-year. How does that break out between Canada and direct-to-consumer?

Mike R. Stanfield

Well, we said that we have grown direct-to-consumer about 21% per -- over the last several years. And I think the last year was pretty much consistent with that. And so, Canada growth was much lower.

Patrick Fitzgerald - Robert W. Baird & Co.

Okay. Is there -- I don't know if you've ever -- how much -- how big is direct-to-consumer right now for you guys?

Mike R. Stanfield

$42 million last year.

Patrick Fitzgerald - Robert W. Baird & Co.

Okay.

Mike R. Stanfield

Incidentally Canada was -- just the difference there is - actually a business it's twice that size, it’s a joint venture and we only recognized half the revenue in Canada.

Patrick Fitzgerald - Robert W. Baird & Co.

Okay. And that's with financial institutions for the most part in Canada?

Mike R. Stanfield

Today that is primarily financial institution business.

Patrick Fitzgerald - Robert W. Baird & Co.

Okay. So with the -- I know a lot of the large financial institutions are on the sidelines. With the existing customer, with your existing partner base, the ones that are continuing to market, have the campaigns changed much? Are they more or less effective? And are the retention rates of clients about the same or better or worse than they were previously?

Mike R. Stanfield

Are you asking about financial institutions?

Patrick Fitzgerald - Robert W. Baird & Co.

Well, I'd like to know both with the credit unions and the smaller regional banks that are continuing to market as well as non-financial institutions, new partners that you've signed up, just the difference in the marketing campaigns and their effectiveness.

Mike R. Stanfield

I’m not sure that I can answer that without either being - so generally it would be a meaningless answer or it’d be so specific that I wouldn’t find it appropriate to answer.

Patrick Fitzgerald - Robert W. Baird & Co.

Okay. Fair enough. And then just in terms of your projections, how much of the growth if you could breakout, how much of that you expect more from Identity Guard versus VOYCE in 2015 and 2016?

Mike R. Stanfield

Well, we’ve and I have told you that we expect Identity Guard to exceed a $100 million by 2017 and we’ve told you we expect the combined to be over $400 million by 2017. And we don't expect much growth -- or let me put this way, we expect limited growth from Canada, so from there, you can -- and we don't expect a lot of growth from the large banks. So, from there, you can create your own estimates. We’re not going to break out a specific estimate for VOYCE right now.

Patrick Fitzgerald - Robert W. Baird & Co.

All right. Thanks a lot.

Operator

And your next question comes from the line of Ben Clifford from Nomura. Please proceed.

Benjamin Clifford - Nomura Securities

Hey guys, thanks for the call. Just a few questions. I was wondering is there a contingency plan in place to fund these new products if let's say Bank of America terminates their marketing revenue with you or if financial institution revenue is worse than you expect?

Mike R. Stanfield

I’m sorry, is there a contingency plan to fund these products if Bank of America terminates, is that basically the question?

Benjamin Clifford - Nomura Securities

Right.

Mike R. Stanfield

I mean to say there is a contingency plan to deal with catastrophic events and I would consider that a catastrophic event if it happens soon. They aren’t pretty, but we would expect that they would not result in such cessation of doing business on the growth fronts. Let's say they would be painful.

Benjamin Clifford - Nomura Securities

Okay, thanks. And just a follow-up one of the previous questions. I know you can't give specifics, but your projected revenue goal down $270 million this year and then growth projects to slightly I don’t know $300 million to $400 million in the following two years. Any sort of proportion in terms of how of much of that is VOYCE and how much of that is direct-to-consumer with Identity Guard?

Mike R. Stanfield

VOYCE is just coming to the market in the next 90 days or so. And for many reasons including competitive reasons, we’re not in position to give you a precise estimate of where we think we can take VOYCE at. But we are extremely bullish on it.

Benjamin Clifford - Nomura Securities

So, are you saying VOYCE is not in that projection?

Mike R. Stanfield

No, VOYCE is in that projection, I’m just not going to give you a specific number of what we think VOYCE will do.

Benjamin Clifford - Nomura Securities

Okay, great. Thank you.

Operator

(Operator instructions)

There are no remaining questions at this time.

Mike R. Stanfield

Okay. Thank you very much. We --

Operator

Sorry, this concludes today’s conference. And thank you for your participation. You may now disconnect. You all have a great evening.

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