Ancestry.com LLC (NASDAQ:ACOM)
Q1 2014 Results Earnings Conference Call
April 30, 2014 05:00 PM ET
Heather Erickson - Head of Global Communications
Tim Sullivan - Chief Executive Officer
Howard Hochhauser - CFO and Chief Operating Officer
Jeff Harlib - Barclays Capital
Good day, everyone. And welcome to the Ancestry.com First Quarter Earnings Call. All participants are in a listen-only mode. Later, there will be a question-and-answer session. As a reminder, this conference is being recorded.
At this time, I'd like to turn the conference over to Heather Erickson. Please go ahead.
Thank you. Before our CEO Tim Sullivan begins the discussion, I'd like to take care of a few housekeeping items. In our remarks today, we will include statements that are considered forward-looking within the meanings of our securities laws. Forward-looking statements are based on current knowledge and expectations and are subject to certain risks and uncertainties that may cause actual results to differ from the forward-looking statements.
A detailed discussion of such risks and uncertainties is contained in our annual report on Form 10-K for the year ended December 31, 2013 and the discussions in our other security and exchange commission filings. The company undertakes no obligation to update any forward-looking statements. We also refer to certain non-GAAP measures, which, in combination with GAAP results, provide additional analytic tools understand our operations.
You will find a reconciliation of these non-GAAP measures to the GAAP results included in our press release. A reconciliation is also posted on the company's IR website found at ir.ancestry.com, a rebroadcast of this call will be available on our website after 6:00 p.m. Mountain Time today.
And now, I'll turn the call over to Tim.
Thank you, Heather, and thanks to everyone for joining us today. Overall the first quarter of 2014 was inline with our expectations. Revenue during the quarter grew 14% and we generated $32 million in free cash flow. We ended March with $2.16 million Ancestry.com subscribers about 3% from the prior year, this growth reflected somewhat wider growth subscriber additions, while overall retention metrics remains solid as the existing subscriber base continues behave as expected.
Howard is going to provide the details in a moment, but first I would like to give an update on where we are and where we are focused in 2014. Most importantly we remained focused on broadening the core products appeal by making Ancestry easier and more accessible for more people.
We are investing in several promising opportunities including features and improvements to the core product, designed to engage new generation of users also international growth including some really interesting new content investments from Germany and Mexico and continuing to attract and retain great talent particularly in the areas of technology, product development and our AncestryDNA business.
Our AncestryDNA is quickly becoming a really interesting success story. We launched this service just under two years ago in May of 2012, because we knew that genetic genealogy was really right in the bulls eye of our mission to help everyone discover preserve and share their family history. And it does so in a way that we think expands our addressable market and makes the Ancestry.com experience better by helping people learn more about who they are and where they come from.
Today we are focused on investing in the underline science and technology that drive the product experience, growing consumer awareness and achieving real critical mass. Today our database of genomic samples is just over 400,000 and its continuing to grow. As this database grows and the result to network effect intensifies, the value proposition for our users will continue to improve. And we are also excited by the fact that in a very real sense, we begun to construct a genetic graph of the U.S. population.
So far we have identified more than 15 million cousin relationships including 3 million relationships that connect the 400,000 members through distant shared ancestors. We think this genetic graph is unique and valuable resources that will become the cornerstone of future product developments, eventual non-U.S. expansion and further differentiation for AncestryDNA in the market.
But I also want to emphasize again that our AncestryDNA service really compliments our core family history offering. Today roughly 25% of non-subscribers are taking AncestryDNA tests, then go on to subscribe to Ancestry. AncestryDNA further validates our basic thesis about the near universal interest people have in discovering our family history and it’s proven to be richer compliment to a core product.
We’re excited about the success we’re having and we have a lot more to do as we continue to build this business. In short, we’ve identified a path to building the leading offering in the emerging personal genomic space and we’re executing on that objective.
To wrap up, we feel good about where the business is positioned today, the investments we’re making and where we’re heading. We also enjoy a strong market leadership position; have an attractive business model that enables us to make the right investments in our future, while continuing to drive profitable growth in the near-term.
Now over to Howard.
Hey, thank you Tim. Let me quickly summarize the quarter. Financial results were inline with our expectations with the revenue and EBITDA right on plan. That was offset by some softness in gross subscriber additions which lead to the lower than expected net sub adds.
Revenues up 14% year-over-year to $154 million on a non-GAAP basis, subscription revenue grew at 9.5% and product revenue ramped 69% to about $16.5 million. Adjusting for FX, subscription revenue growth would have been just north of 10%.
Higher product revenue is primarily a reflection of the growth of our AncestryDNA business. To provide some perspective around the numbers, AncestryDNA generated about $20 million in total revenue in 2013.
EBITDA totaled $49 million in Q1, about flat with the prior year. EBITDA is flat year-on-year due largely to an increase in market expand of approximately $8 million or 22% year-on-year. This increase was partly a very [deliberate] investment to increase awareness for AncestryDNA, which accounted for about $5 million of the spent. I’d point out, that the early results of the spent are starting to pay off. We ended the quarter with 2.161 million Ancestry.com subscribers. This reflects about 20,000 nets sub adds in the quarter.
Let me quickly turn to cash flow and the balance sheet. Our free cash flow for the quarter totaled $32 million. We ended the quarter with a healthy cash balance of $122 million, which does not include another $52 million in restricted cash.
Looking ahead, please keep in mind that we’ll be funding our biannual interest payment on the senior notes of about $16.5 million and on the pick notes interest is about $22 million in the second quarter. The pick note interest is higher than the typical interest payment, because it’s about seven months of interest as opposed to typical six months of interest.
Turning to CapEx, this year we’re budgeting to spend about $60 million to $65 million of which a little shy of two-thirds will be in content.
As you think about our objectives for 2014, as Tim discussed, we’re very focused on executing on the long-term vision for the business and there are number of initiatives we’re making in people, technology and product.
Product investments include not only AncestryDNA as we’ve discussed, but also accelerated content investments, particularly around international as part of the collaboration of FamilySearch -- excuse me, particularly international which is part of the collaboration with FamilySearch which includes Mexico and Germany. As a reminder, these two markets are still in investment mode, so we don’t expect any significant revenue contributions from them this year.
Let me sum it all up by saying we’re excited about the opportunities we see for the business and we will continue to execute against them. That concludes our prepared remarks. And with that operator open it up to Q&A.
Thank you. (Operator Instructions). And we’ll take our first question from (inaudible) with Vector Capital.
Can you provide update on litigation and how much you're spending on shareholder litigation as well as any other in progress?
Yes fiduciary litigation was dismissed last year, so ongoing litigation is the appraisal case. The expenses associated with that are included in the footnote in our press release.
And [whether] it's going to trial in June so how much do you expect to fall in?
We're not going to comment any further on it.
We'll take our next question from Jeff Harlib from Barclays Capital.
Jeff Harlib - Barclays Capital
Hi, good afternoon. Can you just talk a little bit more about the gross ads being somewhat softer than you expected or do you think driving that and any plans to address that?
Sure, Jeff, it's Tim. Look, I think we're looking at really all assets, all aspects of the media marketing activities and media spends. One thing, we certainly are cognizant of is a year ago we were really advertising a single service Ancestry. And today where we are in market with now kind of two related, but distinct value propositions. So to some degree we’d acknowledge that some of the brand new, newbie interest is potentially being satisfied by our AncestryDNA service whereas in the past, some of that might have been going into sort of new subscription trial. That is really just a hypothesis but it’s one that we’re investigating. Typically in any quarter, there is a lot of things going on, media clearances and we really been digging into a bunch of things. I think we are comfortable that everything is pretty well on course and we are not seeing any long-term trends or any trends that we consider to be long-term drags on the business.
Jeff Harlib - Barclays Capital
Okay. And just on the marketing spend, can you just talk about how we should look at that going forward, should that be maintained at this high level to support AncestryDNA and just also any roadmap to potential profitability or of the DNA service?
Look, I guess on both of those I would say, we are really evaluating our options as we proceed. I think we do see that as -- we consider to be very important to continue to drive awareness for our brand in this very new and nascent category. So we really are investing in DNA marketing and kind of on a quarter-by-quarter, we like what it’s doing for the business both in terms of net data base growth as well as awareness.
And in terms of the path to profitability, look I would honesty tell you we are staying very much on a mode of investments, in fact plan to sort of continue hiring scientists and the folks that are going to help us further develop this value proposition. So, I don't think we could give you a forward look on and when we'd expect this business to be profitable. I will say though that to the extent that 25% of non-subscribing purchasers are then going on to subscribe to Ancestry, we're very positive about the metrics that the business is providing at the stage.
Jeff, this is Howard, I would just add on to that this business part of why we're in private writers to make these investments that have long-term dividends. So we're making the investments in DNA as an example and in other product initiatives that the return is not this year, but the year after that and the year after that. So, the headline is we’re really happy and really pleased with the investments we make to-date and the early returns, but this is definitely about the long game, it's not about Q2 or Q3.
Jeff Harlib - Barclays Capital
Great, thank you.
We’ll take our next question from Gene (inaudible) with HSBC Bank.
Yes, this is Gene (inaudible) and my question was actually around subscribers and you just answered it. So, thank you so much.
Call one more time for questions.
(Operator Instructions). And we’ll take our next question from [Shelley Sheer] with Prudential.
Hi, could you talk a little bit about the television shows you sponsor, where you are in the season, plans for subsequent season that sort of thing?
Yes, we're excited back half of this year we will be sponsoring two proven successful programs, Who You Think You Are on TLC. The air date has not been confirmed, but I think you expect to see that sometime in Q3, but TLC still I think nailing down the air data. As we said we're quite pleased with the performance of, well quite please with the quality of show last year, very pleased with its rating on TLC and happy with the way it impacted our business. So we are cautiously optimistic that we’ll see some nice lift from that show.
And the second show that we’re sponsoring this year is Skip Gates, Finding Your Roots on PBS and this show has been a fantastic program for a number of years, the line-up is super strong, we’ve not been a sponsor of this program in the past, but we will be this year and we're excited about that. That air date is I think sometime again last half of the year, even late Q3 or potentially Q4.
And how many episodes of each or do you know yet?
Yes, we don’t we are still sort of nailing that and don’t have a specific number to report to you.
Okay. Thank you.
(Operator Instructions). And at this time there are no more questions over the phone.
Thanks everybody for their participation and look forward to talking next quarter.
Thank you for your participation. This does conclude today’s call.
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