TheStreet.com, Inc. Q2 2010 Earnings Call Transcript

Executives

Daryl Otte – CEO

Greg Barton – EVP, Business and Legal Affairs, General Counsel and Secretary

Richard Broitman – VP, Finance and Chief Accounting Officer

Analysts

Randy Katz – JMP Securities

Mike Moskoff – MRM Capital

Don Dion – Dion Money Management

Jay Albany – Scully Capital

TheStreet.com, Inc. (TSCM) Q2 2010 Earnings Call August 4, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the Second Quarter 2010 TheStreet.com Earnings Conference Call. My name is Karis and I will be your coordinator for today. (Operator Instructions)

I would now like to turn this call over to your host for the day, Mr. Daryl Otte, Chief Executive Officer. Please proceed, sir.

Daryl Otte

Thanks, Karis. Hello, everyone. I’d like to welcome you to TheStreet.com’s Second Quarter 2010 Earnings Call. I’m Daryl Otte, the company’s Chief Executive Officer.

With me today are Greg Barton, the company’s Executive Vice President of Business and Legal Affairs and General Counsel; and Rich Broitman, the company’s Vice President of Finance and Chief Accounting Officer.

Before we start, I’ll hand the call off to Greg to read our legal statement.

Greg Barton

Thanks Daryl. Welcome, everyone.

All statements made on this call other than statements of historical facts are deemed to be forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to risks and uncertainties including those described in the company’s filings with the Securities and Exchange Commission that could cause actual results to differ materially from those reflected in the forward looking statements.

Although the company believes that the expectations reflected in the forward-looking statements are reasonable, the company cannot guarantee future results or occurrences. And the company disclaims any obligation to update these forward-looking statements, whether as a result of new information, future developments, or otherwise.

You may obtain copies of the company’s filings with the SEC at the Commission’s website, www.sec.gov. And additional information related to matters discussed today also will be set forth in the company’s quarterly report of Form 10Q for the second quarter of 2010, which we expect to file shortly.

And now, I’ll hand the call back to Daryl.

Daryl Otte

Thanks, Greg. Just a quick note on the format of the call. As we noted on last quarter’s call, earlier this year we conducted a survey of some of our investors and analysts to help guide us in making improvements to the usefulness of this call.

The key suggestion was try to make this less scripted. And that instead of spending time at the beginning of the call reading from the earning’s release, we will instead assume everyone has read it. Thus, this call will have a brief overview of the announced results to discuss any further data we feel may add color to the earning’s release, and then of course take questions.

If anyone hasn’t had the chance to read the release, or has specific questions for us that are addressed in the release, please feel free to ask during the Q&A, and of course, we’ll answer.

First off, I’ll hit on an overview of the financial results. Revenue for ongoing businesses for the quarter was at 8% overall , with subscription services revenue up 9% and advertising revenue up 6%.

As a reminder, the revenue which we are excluding from this calculation is our former promotions.com line. And the smaller licensing businesses within our premium services line, particularly licenses, the street rating enjoyed from the government, and dated settlement which expired last July, and our now divested [inaudible] in insurance rating service.

Subscription revenues are up 9% year-on-year to a seven quarter high putting us above the level the company had reached prior to the declines we experienced at the time of Lehman collapse back in the third quarter of 2008.

I want to highlight that this quarter’s revenue performance demonstrates how the bookings momentum we generated in recent quarters converts to revenue growth over time. You can look back over the last four quarters and see how revenue decline rates diminished as we posted improving bookings, then converted to revenue gains in the fourth quarter of last year and are now showing solidly positive improvements.

Ad revenues were up 6% year on year. This is a 37% increase sequentially as Q2 is generally our second largest quarter seasonally, with Q1 generally the weakest.

The year-on-year growth is lower than Q1, which as we noted at the time, benefit from a low bar set by the terrible conditions in Q1, 2009.

Growth this quarter marks our third straight quarter of year-on-year advertising growth, which was all preceded by poor quarters of contraction for the period through September, 2009.

Now done with the overview, let’s move onto some of the details reached in the lines of the business.

For the subscription business, the headline is largely improved revenue growth, but with bookings growing slower, but everything up in a down market.

The 9% year-on-year growth rate was gratifying given that Q2 of this year was a quarter in which the broad financial markets were challenged.

The S&P 500 dropped 12%. The flash crash happened on May 6^th. And the European financial crisis dominated the headlines for weeks.

This is all in contrast to last year when markets were soaring. The S&P gaining for example, 15%. This performance is the power of the ballast provided by subscription revenue streams taking into action.

As to bookings, we believe the challenging quarter for the markets likely contributed to the slowing in our year-on-year bookings, which were up however by 1%. We attribute this deceleration principally to moderated new account acquisition rates, particularly in the period directly following the flash crash on May 6^th.

Renewal business was solid as our churn rate was 3.9%, almost unchanged from last quarter’s 3.8%, which was of course significantly down from a year ago.

As we described previously, we’ve been active both in building multiple channels of distribution for our content and services, and in diversifying our portfolio of service offerings to enhance their usefulness in various market sentiments.

On the first point, the increased power of our distribution clearly was demonstrated this quarter where we improved bookings in a down market compared to the bookings levels from Q2 last year when the equity markets were booming.

While we were up, it was not at the levels to which we aspire. And we feel a full market bias to our portfolio service offerings impacted our new account acquisition rates. We believe new account acquisition for bull-market services tend to moderate when markets are hitch-hoppy, and long-only investors often step to the sidelines.

According, the centerpiece of our portfolio evolution late last quarter was the launch of our new options profit service, which we previewed in our last call.

The timing worked out well, as options are a terrific mechanism for investors to use in these choppy markets. And while the launch was late enough in the quarter to not have materially impacted results, the take-up rate we did see suggested good things to come.

Indeed, since launch, option’s profits has jumped in terms of subscription counts to almost the top 1/3 of our portfolio offering.

As a recap of the service’s merits, option profits provides more than 50 actionable trading ideas each week from a dozen well-known inter-street professionals, bringing professional-grade market insight to retail investors at excellent value with a fresh web Todaro platform and interface.

It takes a team rather than personality-driven approach centered around our brand. And it is priced in a manner intended to raise our ARPU, or average revenue per user.

Keeping in mind this is at early stages, we’re off to a great start with the service, which has received broad industry support , for example, from the Options Industry Council, the CBOE, and our launch sponsor, Options House.

For those looking forward to future quarters wondering about the long-term impact of the recent market declines on our subscription bookings performance, I can say that we’ve seen in the recent weeks a return to levels of bookings, which while not entirely back to previous levels, certainly show that investors are showing more interest.

These better bookings are from a mix of the traditional long equity services we offer, and our new options service.

Finally, for those that want some help reconciling our reported premium services revenue growth of 4% year-on-year to the underlying 9% increase in our ongoing subscription services revenue, please remember that we derived $0.4 million less revenue from our ratings business this quarter due to the expiration of the Global Research Legal Settlement likely last quarter, excuse me, late last July. This variance will be approximately half in the current quarter, and will virtually – that is Q3, and will virtually disappear after that.

I also should mention that in the second quarter, we sold a piece of our ratings business, which focused on bank and insurance ratings. This non-core business did not provide any full contributions to either our top or bottom line. But we are glad we found a better home for that product line while adding to our cash balance.

Now, some commentary on our advertising supported businesses. Investors who follow our business closely will know that we’ve been making considerable effort in building a quality audience of repeat users of our sites , folks who are engaged in the market and look for professionally created action-oriented content to help with their investment decision making.

You may have noted some terrific enhancements to our content offering this quarter; among them, a focus on live video events with interactive elements where users can participate in discussion via social media and other means ; an expansion to our efforts to live blog important economic and financial market events layered again with audience interaction ; an increase in use of our interactive charts, graphs, and modeling tools, and a BETA version of our new investment research center.

All these features serve to enliven our sites, deliver substantial value to our users, and encourage their meaningful engagement. These improvements we believe have caused the underlying demand for our content to increase.

Consistent, however, with trends across the industry, away from driving pay-to-growth at any cost, we have chosen to reinvest the additional demand in our content changes to the site, which generally improve the user experience. We believe these tests will enhance the long-term value of the properties, but they can also tend to moderate pay-through growth in the near term.

Among the actions this quarter were an improvement to the editorial-to-ad ratio on the sites resulting from a reduction in the number of advertising units on each page , and increase in the number of article words per page , and a reduction in the number of subscription marketing units we presented.

Our relative rankings in our peer set as measured by comScore remain steady. Sequentially, we ranked as the 12^th largest site in the very broad business-finance-news research category as measured by average monthly unique visitors during the quarter.

Because the quality of our audience and the engagement from them that we earned, we display higher rankings on key measures of user engagement among the competitive set. For instance, among the top 15 sites as measured by average monthly unique visitors during the quarter, we ranked overweight in key metrics, such as average visits per user and average minutes per visit.

The underlying focus on quality content and audiences are the underpinning for ad growth now and into the future.

As noted at the top of the call, advertising grew at 6% rate year on year in Q2. Demand was good across the board from new advertisers and old, from long-term endemic advertisers and increasing roster of non-endemic advertisers.

We’re pleased with the increased demand we saw from our endemic financial advertisers. And we’re particularly pleased to welcome Charles Schwabb back to our sites as they had been dark for us for some time.

We also continue to attract increasing numbers of non-endemic advertisers seeking to reach our engaged, affluent, educated primarily male market.

A key non-endemic category in which we’re seeing growing traction is automobiles. Mazda began running with us in the second quarter, in which we also saw business from repeat customers, Infinity and Jaguar.

We started running ads for Jeep this quarter, a new domestic advertiser, which is great to see. And for example, they’re all over our sites today.

Other categories in which we’re seeing increased demand include small business and technology.

I point out the new American Express Open Small Business Success Webinar series we produced in Q2, which is now running on our sites. This was done in conjunction with one of our new content partners, SCORE, the small business consulting and training, not-for-profit at www.score.org.

As noted in our call last time, part of our strategy is to continue our focus on brand away from individual personalities.

During Q2, 2010, no single contributor accounted for more than 5% of our site traffic in the quarter. And as was the case last quarter, page view articles by Jim Cramer accounted for less than 1% of our site traffic, ranking 24^th among our contributors and authors.

We probably will not continue to report on this metric going forward, but wanted to give you data from other quarters to demonstrate that last quarter’s results were not an anomaly.

Now onto some commentary concerning EBITDA. The headline here is that we’re making investments in future growth. Our adjusted EBITDA was $900,000 compared to 1.9 million the prior year , and 2.6 million in the prior year, excluding our former promotions.com subsidiary, which we divested in December, 2009.

Our bottom line reflects a substantial investment we’ve been making in the past couple quarters to grow and add long-term value to our business. We see a number of terrific opportunities to put investments into, particularly organically, and we have increased spending in order to capture them.

While we were spending more, we will continue to be disciplined with our cash and investments seeking hard ROI projects. We are also planning on maintaining positive adjusted EBITDA and free cash flow for the year as previously discussed.

The investment program primarily consists of costs for additional staff. Headcount has increased by 25 year over year on a like-for-like basis, 20 of which were added in sales and marketing functions.

We are also making investments in technology, new product development, in training for our staff, and upgrades to our team when positions open up, and finally in marketing expenses.

As noted above, we’re beginning to see some early returns in the form of new product launches in the quarter, and in solid growth in our audience metrics.

We also note that adjusted EBITDA in the prior year reflected an additional $400,000 of revenue received as a result of a now-ended Global Research Legal Settlement, the impact of which will decline at the end of this quarter.

A few comments on our balance sheet. We ended the quarter with cash and cash equivalents, restricting cash, and marketable securities at 82.6 million, an increase of 1 million as compared to March 31^st of 2010.

During the quarter, we generated $400,000 in operating cash flow; received $2.1 million in cash related to the sale of certain non-corp assets; spent $500,000 on capital expenditures; and paid $900,000 in dividends.

We maintained a healthy balance sheet and positive free cash flow allowing us to continue to invest in future growth to take advantage of strategic growth opportunities we see.

Quick update on personnel. I’m excited about the significant strengthening we made to our board and executive team over the last quarter.

As we announced in our last call, early this quarter we added Vivek Shah to our board. Vivek, now the CEO of Ziff Davis, has a wealth of financial media and digital media experience to our board. Before his role in Ziff Davis, having run Time Inc.’s Fortune/Money Group, and served as head of Time Inc.’s Digital Group for News, Business, and Sports.

And as I’m sure you all saw today, we announced the appointment of Tom Etergino as our new CFO. Tom is a proven financial and operating executive with deep experience in digital media, paid digital subscription, and technology businesses both public and private, including DoubleClick, the leader in digital advertising , and most recently, eMusic, a paid digital subscription business where he has served as Chief Financial Officer since 2006, and as Chief Operating Officer since 2008.

Tom will start on September 7th , and we could not be more excited to have him join the team , no one more than me, as starting next quarter he will be taking all your hard questions.

Prior to turning the call over to Q&A, I want to extend thanks to our shareholders who have shown us support this quarter, for our employees who have in my view, managed the market turbulence deftly. And of course, our subscribers, advertisers, and distribution and content partners, the ranks of all which are growing daily.

With that, I’ll open call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Randy Katz with JMP Securities. Please proceed.

Randy Katz – JMP Securities

Hi, guys. This is Randy Katz, pinch hitting for Samit today. A few questions for you. You know, first of all, Daryl, I think if we go back, you know, several quarters to after Eric Ashman had stepped down and Rich took over his responsibilities. It sounded as if, you know, he was going to be the guy and you went and continued the search and I was wondering, you know, what changed internally that lead to the hiring of Thomas? Whether it was, you know, realizing now you needed to step up investments or perhaps that there was something else that you could point to. And then I have some followups.

Daryl Otte

Well, I think part of it was that we met Tom and his fit is so fantastically matched to kind of our business, having a really terrific blend of subscription experience and advertising experience. And as you saw in the press release, having kind of worked in public companies, done M&A, done – actually taken a couple of companies public, and we were just taken by the potential that he could bring to this business.

It doesn’t speak nothing to kind of the brave heroic work that Rich and his team has done. It’s really more about leveraging the team further and making the most of these great assets that we have.

Randy Katz – JMP Securities

Sure. Okay. Jumping around just a little bit, you know, as we look at some of the investings that you referred to in the quarter, you know, step up and headcount, and sales and marketing, actually first of all, I think on just looking at the sales and marketing line, you know, cash expenses looked up 500 or $600,000 there. Can you give us sense of how much of that increase was headcount as opposed to incremental step up in marketing spend?

And looking forward, can you give us a sense of what this hiring could look like over the next 12 to 18 months so we can get a sense of what the margin structure should be in that?

Daryl Otte

Yeah. I think that we’ve, you know, one of the opportunities is to kind of work with you guys better in terms of communicating our business model and whatnot. But I think that we’re keenly looking at staying relatively stable with our cost structure going forward for the foreseeable future, and we’ll be giving a lot more detail in the Q.

Randy Katz – JMP Securities

Okay. I guess in staying relatively stable with the cost structure, can you at least give me a sense of when the hiring took place? Was it completed prior to the end of the first quarter and we saw the step in the second? Or you know, were there still some hiring that took place in the second quarter that might flow through as you see the full amount of the expense kick in in the third quarter?

Daryl Otte

Yeah. I think the majority was front-end loaded, but I wouldn’t say, you know, there has clearly been some step up.

Randy Katz – JMP Securities

Okay. Great. Just a question on booking. So obviously, you know, deceleration from what you’ve seen in the last few quarters, it’s still nice to see it up year over year. Can you give us a sense of perhaps, you know, kind of an acceleration you’ve seen since May? I know you said over the last few weeks that you’ve seen the business start to come back. At what point did you begin to see the pickup again? Can you give us at least a sense to quantify how much it’s come back in the third quarter?

Daryl Otte

I would say it’s been like the last couple weeks that we’ve really seen it. And it is, you know, it’s not back up to the levels that we saw in Q1, which were terrific. Although, you know, if you draw a line between the last couple of week’s results, which I would hate to do, and you know, promise, but we do see that people are coming back. And we’re pushing as hard as we can to get up to those levels. We don’t really see any reason that that’s not the case.

And we are actively working. We’ve learned a lot through this cycle in terms of making our marketing messages more appropriate to what’s happening in the markets real time. And also having portfolio services that speaks to any market condition.

So in future cycles, what we want to be able to do is to come out with the right messages immediately and offer the services to help our users the best to manage through the current market conditions.

Randy Katz – JMP Securities

You know, as it related to the drop off that we saw in May, was there any real impact to traffic or was it primarily the conversion rate of traffic into new business? I guess what I’m really getting at is wondering, you know, if you saw that same impact hit the advertising services as well?

Daryl Otte

I think we’re seeing -- you mean in terms of the traffic to our websites?

Randy Katz – JMP Securities

Right. So in May when we saw the decline in the bookings on the subscription side, I’m wondering if that was the product of lower traffic, which would probably indicate that some of the slowdown in growth on the advertising side hit there as well. Would that be a fair assumption?

Daryl Otte

I think that – let me part that a little bit, if you don’t mind. I think that we did not see the traffic declines that we saw in the bookings declines. And I think that folks remain very actively interested in the financial market but perhaps aren’t. So we didn’t hit them with the right messages that encouraged them to invest and try to make money in the markets. And what we’re going to focus on doing going forward is being better at that.

The advertising was up. I think it probably, I’m happy to be up and that’s great. And I think a lot of folks would be happy with the growth rates that we’re delivering. It’s not the level to which we aspire, and I think that we’re looking to make those growth rates improve as the year goes on, assuming it will get better.

Randy Katz – JMP Securities

Okay. I’ll turn it over there. Thank you, guys.

Operator

And your next question comes from the line of Michael Moskoff with MRM Capital. Please proceed.