Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

InfoSpace Inc. (INSP)

Q3 2010 Earnings Call Transcript

November 4, 2010 5:00 pm ET

Executives

Stacy Ybarra – Senior Director, IR

Will Lansing – President and CEO

David Binder – CFO and Treasurer

Analysts

Eric Martinuzzi – Craig-Hallum

Clay Moran – Benchmark

James Cakmak – Sidoti

Mark May – Needham & Company

Scott Kessler – Standard & Poor’s

Rich Tullo – Albert Fried & Company

Operator

Good day, ladies and gentlemen, and welcome to the third quarter InfoSpace earnings conference call. My name is Crystal and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Stacy Ybarra, Senior Director of Investor Relations. Please proceed

Stacy Ybarra

Good afternoon and welcome to InfoSpace's third quarter 2010 earnings conference call. I'm Stacy Ybarra, Senior Director of Investor Relations. On the call today are Will Lansing, President and Chief Operating Officer – Chief Executive Officer, excuse me 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 product and services, outlook for the future of our business and growth initiatives, acquisition strategy and anticipated financial performance for the fourth 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 the 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 differences 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 statements, which speaks only as of the date hereof. In addition, during this call, our management will discuss GAAP and non-GAAP financial measures. In the press release, which has been posted on our website and filed with the SEC on Form 8-K, we'll present GAAP and non-GAAP results along with reconciliation tables and the reasons for our presentation of non-GAAP information.

Now, I'll turn the call over to Will Lansing. Following his comments, David will refer – will review third quarter results and fourth quarter outlook, then we will open it up to your questions.

Will Lansing

Thank you, Stacy. Good afternoon. Thank you for joining us today. I'll begin with an update on the business and then David will provide details on our financial performance. Revenue was $61.7 million, an increase of $7.4 million or 14% from the third quarter of 2009 but at the low end of our guidance. Adjusted EBITDA was $4.7 million, which is below guidance because of our one-time severance charge of $2.4 million.

Our search business continues to generate positive cash flow. On the distribution side, the business remains stable with high quality traffic. We believe in the value proposition of this business and are cautiously optimistic as the pipeline has begun to open up.

In the third quarter, we signed 60 distribution partners. We look forward to beginning to grow again in 2011. On the owned and operated side of the business, our major initiatives are focused around technology optimization, retaining current users and attracting new users to our site.

We continue to view the search business as an opportunity for us. We’re uniquely positioned to capitalize on our ability to drive quality traffic to highly relevant and monetizable search result pages.

During the quarter, we reduced our investment to non-search initiatives, which allowed us to refocus on our search strategy. Through continued investments and resources focused on developing products that drive traffic and leverage our monetization strength, we are committed to grow in this business.

The negotiations with Google and Yahoo for new search agreements are progressing as expected. And we plan to have new agreements in place by early next year, further solidifying our unique value proposition.

Our e-commerce segment is anchored by our recent acquisition of Mercantila, which drove overall revenue growth for the quarter. While this business continues to be small in scale, we believe there are opportunities to grow top line and invest further to expand the product offering, improve customer experience and augment the platform to facilitate future growth.

Although gross margins are not where we want them to be, we are focused on reducing the loss and driving the profitability in 2011. As we move forward, we'll continue to invest in the growth of our search and e-commerce businesses. In addition, we believe there is significant opportunity to grow through acquisitions and remain committed to our strategy.

As we have said, we look for opportunities to utilize our cash, monetize our 800 million in NOL as rapidly as possible and buy high growth and high profit businesses. If possible, we’d like to leverage our internet, consumer facing and engineering skills. We are looking at opportunities in many different sectors beyond search and e-commerce.

Now, I’d like to turn the call over to David to discuss our financial results in more detail.

David Binder

Thanks, Will, and good afternoon. I'll start today with a review of our financial results in the quarter for the entire business and then give greater details of the performance for each of the segments. I'll end my comments with guidance for the fourth quarter.

As Will mentioned earlier, total revenue in the third quarter was $61.7 million. This represents an increase versus the same quarter last year of 14% and an increase from the prior quarter of 4%. Growth from the prior year and quarter was driven by our acquisition of Mercantila.

Adjusted EBITDA in the quarter was $4.8 million, which includes a severance charge of 2.4 million for departing executive. Excluding this one-time charge, adjusted EBITDA would have been 7.2 million within our guidance range. Normalizing for the severance charge, adjusted EBITDA was up 2% versus the prior year but down 32% from the second quarter of 2010. The drop versus prior quarter was driven by two primary trends.

First, our owned and operated search business continues to decline through the attrition of Make The Web Better. As expected, income from this business was down by $2.1 million versus its performance in the prior quarter. Second, losses in our e-commerce segment increased by 1.1 million. As expected, we continue to invest in future growth and profitability within this segment.

Net loss in the third quarter was $102,000 equal to $0.00 per diluted share. This result includes the $2.4 million severance charge, I mentioned earlier. We ended the quarter with $227.9 million in cash and short-term investments equal to $6.32 per share and we continue to hold no debt. The basic and fully diluted share count in the quarter was $36 million and we ended the quarter with 36.1 million shares outstanding.

Now, turning to the details of our two segments, I'll start with our core segment, which primarily consists of our search business. In the third quarter, our core segment generated $50.5 million in revenue, representing a 7% decrease from the third quarter of 2009 and a decrease of 4% versus the prior quarter. These results are significantly impacted by the performance of Make the Web Better, which generated $5.2 million of revenue in the quarter down by 4.5 million versus the third quarter of 2009 and down by $2.2 million versus the prior quarter.

Excluding the impact of this business, our core revenue was up by 700,000 versus the third quarter of 2009 and up by 300,000 versus the prior quarter. The sequentially growth is driven by the success of our direct marketing efforts for our owned websites.

Now, looking at the performance of our distribution business, we saw a decrease in revenue versus the third quarter of 2009 equaled to $9.2 million and a sequential decrease of 200,000 compared to the prior quarter.

When comparing this performance versus prior year, it's important to note that Make The Web Better was considered a distribution partner in 2009. In the third quarter last year this account generated $9.8 million, which the entire amount moved – entirely out of our owned and operated products in the second quarter this year. Overall, excluding the impact of this account we are seeing performance from our distribution business stabilize after a drop in the second quarter of 2010.

Gross margin from our core segment in the second quarter equaled $24.4 million or 48% of core revenue, versus the third quarter last year, this is an increase of $4.1 million and versus the second quarter this year a decrease of $1.3 million.

The increase in gross margin dollars versus the prior year is driven by the acquisition of Make The Web Better which represented approximately $5.1 million of gross margin in the third quarter up by $4.5 million versus the third quarter of 2009 and down by $2.1 million from the prior quarter.

Income from our core segment equaled $6.6 million or 13% of core revenue. This result includes the separation expense of $2.4 million, I previously mentioned. Excluding this charge we would have reported $9 million in core segment income, up by 27% versus the third quarter of 2009, but down by 20% versus the prior quarter. Again, this trend is significantly impacted by the performance of Make The Web Better, which generated $5 million of segment income in the quarter.

Now turning to the performance of our e-commerce segment. In the third quarter we generated $11.2 million in revenue, up from $7 million in the second quarter. We should note that we close the acquisition of this business on May 10th, so the results from the prior quarter reflect a partial period. Compared to the third quarter last year, growth in order revenue was approximately 40%.

Gross margin for our e-commerce segment equaled $1.3 million or 12% of e-commerce revenue. This compares to $1.1 million in the prior quarter or 15% of revenue. In the third quarter we experienced a relative increase on our cost of shipping, as well as cost relate today product returns. Segment loss in the quarter was $1.8 million, compared to a loss of $700,000 from the second quarter.

Now for our outlook, in the fourth quarter of 2010, we expect revenue to be between $57 and $60 million, adjusted EBITDA to be between $4 million and $6 million and the bottom line to be between a net loss of $1 million and net income of $1 million, or negative $0.03 per share to positive $0.03 per diluted share.

For our topline guidance, we expect our core owned and operated products to decline solely due to the continued attrition of Make The Web Better. Additionally, we are not seeing an uptick from our distribution business like we've seen in prior years and the guidance reflects a slight downward trend.

We also expect our e-commerce segment to see some positive revenue performance from the holiday season but as we continue to invest for future growth, we expect to increase our loss in that segment to a range of $2 million to $2.5 million.

With that, I'll turn the call over to the Operator and take your questions.

Question-and-Answer Session:

Operator

(Operator Instructions) Our first question comes from the line of Eric Martinuzzi with Craig-Hallum. Please proceed.

Eric Martinuzzi – Craig-Hallum

Thanks for taking my question. Just curious on the core business, where it is – and I think you guys went through this before. But could you before Make The Web Better out completely is that gone completely in Q4?

Will Lansing

Hey, Eric. It’s David. No. We’re seeing Make The Web Better decline by about 30% quarter-over-quarter and then generate a little over $5 million of revenue in the third quarter. So we expect it to continue in the fourth and throughout 2011, but at a declining rate.

We should note that when we purchased the asset, we knew that it would be declining. It's declining a little bit better than – it's declining a little bit less than we had expected. The acquisition was very accretive to us even at these rates and we are continuing to look at ways to stabilize and hopefully grow this business, but it's taking time.

Eric Martinuzzi – Craig-Hallum

I guess, maybe if I can peel back the core, just one layer further there, if core this quarter was $54.5 and $5 was Make The Web Better, that leaves $45.5 million. What was that mix between owned and partner?

Will Lansing

I'd have to do the calculation for you, but that, I mean, what you did for the topline adjustment is correct. So, $45million of core revenue less Make The Web Better and we can work offline with you on the calculation of the percentage breakout.

Eric Martinuzzi – Craig-Hallum

Okay. And then the slight downward trend, I'm used to surge businesses that tend to go up between Q3 and Q4. Could you talk about why your distribution partners are slight downward?

David Binder

Sure. So, we did a fairly significant reduction in revenue in the second quarter this year. We cutback some partners that were marketing aggressively and we reduced some accounts whose traffic quality wasn't up to the standards that we are driving the business.

And in the fourth quarter this year we’re not seeing an uptick in the marketing activities behind the largest accounts. Our guidance reflects the trends that we’re currently experiencing and for whatever reasons those partners are not finding positive ROI behind marketing more aggressively.

Eric Martinuzzi – Craig-Hallum

Do you think there, I mean, are they spending the budget elsewhere or do they not have the budget?

David Binder

Hard to say, that’s, I mean, we'd be speculating.

Eric Martinuzzi – Craig-Hallum

Okay. They are just not coming back to you. Okay. And then on the e-commerce, I understand you said, excuse me, the loss there $2 to $2.5 million. Is this – do you feel like this is a key quarter for you kind of we've really got to make our brand, our presence known this quarter, so let's sort of commit to that as opposed to trying to get 2Q going for profit? Is that the idea?

David Binder

You know, Eric. We are in an investment mode and we have a whole bunch of things going on from an infrastructure standpoint, technology standpoint, marketing standpoint and some product work all of which is investment for building the business stronger and in direction to create a profitability next year.

As we said, we are a little above on topline than we had anticipated and we’re little bit below on bottom line and that's because of the investments we are making. So, I think, that's the way to look at it.

Eric Martinuzzi – Craig-Hallum

Okay. And when you say up slightly, are we talking about in the order like 5% to 10% sequential or something bigger than that?

David Binder

It’s closer to the 5% to 10%.

Eric Martinuzzi – Craig-Hallum

Okay. All right. Thank you.

Operator

And our next question comes from the line of Clay Moran with Benchmark. Please proceed.

Clay Moran – Benchmark

Hi. Good afternoon. Talking about Mercantila and the investments, I mean, can you give us a little more idea of what you’re trying to do to enhance that subsidiary and what about the technology product and marketing are you doing that's going to get that grow faster and profitable, and what’s the timeframe for returns on those investments?

Will Lansing

Well, I think we are going to start seeing benefits really next year and it’s a wide range of things, ranging from new presentation layer and new stores to improvements in our day base marketing capabilities to some operational enhancements. I guess I should leave it at that, but infrastructure fulfillment has enhancements.

Clay Moran – Benchmark

Okay. And you mentioned that you are exploring ways to possibly grow “Make the Web Better”, is that what David said and how would you do that?

David Binder

This is David. We are looking at test cases for spending direct marketing online to drive users to applications behind that searched product. It could be download installations or applications online. So, we are currently testing and looking for positive returns that could indicate we could spend more. We just have not seen enough yet to commit to what that business would look like.

Clay Moran – Benchmark

Okay. And then you mentioned, I think Will mentioned reduced investment in non-search, so what's the plan for Haggle? I assume that's the main area outside of search that you were investing in. What's the plan there?

Will Lansing

We are really out of the Haggle business. We came to the conclusion that the path to profitability and return on investment there was longer than we wanted, and that the resources were better focused on search where we have very strong monetization engine and a lot of opportunity. And so we’ve really re-allocated those resources in the direction of our search business.

David Binder

This is David. I would also add that we are focused on the investment in e-commerce through Mercantila, and we think that investment will yield greater long-term shareholder value. So the decision in part to move away from Haggle was recognizing the bigger opportunity with the Mercantila assets.

Clay Moran – Benchmark

Okay. And then one more. That shareholder suit has been settled. I think there were about a million dollars a quarter in legal expenses. Is that boost to cash flow showing up this quarter or still there are some remaining expenses there?

David Binder

In the fourth quarter we expect the expenses to be reduced from the historic amounts, not completely gone away but not at the million dollar level, and then the expectation is starting first quarter next year. We won't be spending anything on that activity.

Clay Moran – Benchmark

Okay. Thank you.

Operator

Our next question comes from the line of James Cakmak with Sidoti. Please go ahead.

James Cakmak – Sidoti

Hi. Thanks for taking my questions. When you look at the distribution business, do you see any other opportunity like “Make the Web Better” to get some yields, put your cash to use that way? And how aggressively are you guys looking at potentially expanding that distribution network which has been about a hundred I think for some time now.

Will Lansing

Sure. David I'll take the question. On the distribution side we continue to look for partners either just to a direct partnership or some investments so that we can acquire or help grow their business. So there are opportunities. I would say Make the Web Better was unique in its size. So we will continue this activity, and I think it's going to be a core piece of how we hope to grow through 2011, but I don't expect anything to be of this size of Make the Web Better, at least nothing in the foreseeable future.

Your second question, we definitely see more opportunities to expand distribution in general, and so – we are aggressively, we mentioned six partners in the third quarter. Then we were out aggressively looking to place our basic search product as well as expand through our portal DNS [ph] and other downloadable application that we provide to certain partners.

James Cakmak – Sidoti

Okay. And then on the M&A front, I apologize if you have already addressed this, I jumped on the call a bit late, has the sense of urgency changed at all? I heard you guys thinking about the need to do something?

Will Lansing

There's been absolutely no change in the sense of urgency. We continue to be committed, quite committed to acquiring businesses that are going to help us monetize those more quickly, and at the same time we remain disciplined as we have always been about making sure it meets the specs that we pay the right price, and it's a good piece for us. And so, I would say no changes; still committed to the same strategy.

James Cakmak – Sidoti

Okay. Thank you.

Operator

The next question comes from the line of Mark May with Needham & Company. Please proceed?

Mark May – Needham & Company

Hi. Just some more questions on Mercantila and E-commerce. Can you remind me how much, if any, right now of the distribution that you guys are actually doing in terms of fulfillment, warehousing of the products, and how that might change over the next year? And then I believe you said that the gross margins for that business are in the low double digit. Is that a reasonable assumption to make going forward given the kind of products that you are selling and the other cost of goods sold that you record in that line? Thanks.

David Binder

Hey Mark, it's David. So the first question, the mix of what we warehouse and distribute versus (inaudible) the vast majority of our sales are through fulfillment partners, so we don't warehouse a significant percentage of our revenue. Over time, that will likely pick up. As we grow in scale and as we really understand the demand profile behind some of our products and the reason for that is it goes to your questions where our gross margins are around 12% in the third quarter, down from the second, that's a big area of focus for us. We expect and we need for those margins to pick back up, and to be in the upper teens for us to get to our profitability targets. So, part of that will be picking up more inventory, so we can earn own more of the product margin, and a lot of it will come through our greater efficiency throughout our fulfillment network and our technology. So that is we mentioned earlier that we are investing in the platform and that's one of the areas of key investment.

Mark May – Needham & Company

Okay. Thanks.

Operator

Our next question comes from the line of Scott Kessler with Standard & Poor's. Please go ahead?

Scott Kessler – Standard & Poor’s

Thanks a lot. Two questions initially. The first question involves your, I guess the status of the renewals with your large distribution partners. Obviously, I don't expect you to provide a lot of detail but any sense of the tenure of those conversations? When we should be able – when we should expect to hear about whether or not they are going to proceed in the way that they have in the past, any potential comments on pricing would be helpful. And the other question involves M&A.

Obviously there was a question about is there a change in the way you guys are viewing the environment and if there is a greater sense of urgency. I guess one of the things that I was thinking about as I heard these questions is, I think in a previous call I had asked about your inclination to repurchase stock in light of waiting for the right e-commerce opportunity or otherwise to manifest itself. And you indicated rightly so that you thought that an M&A transaction would be more appealing in light of your NOL.

And I'm wondering if that has at all changed, especially given that you typically haven't done deals of this size that would use, nearly all of your cash. So I’m just wondering if you can offer some thoughts on that subject. Thank you.

Will Lansing

Sure. To your first question, we are working with our big partners, Google and Yahoo on renegotiating long-term agreement and those discussions are going smoothly. And so we hope to be in a position to announce where we are soon. With respect to the M&A question, I don't think a lot has changed. The challenge for us, I would never say never. We have to keep our options open if it's the right thing to do for shareholders.

Obviously, we contemplate purchasing stock. But the challenge for doing that is, every dollar that we used to buy back in our stock, is a dollar that we can't used to buy profits to monetize the NOLs. And, so it shrinks our ability to go aggressively monetize the NOLs.

Of course, you do the trade off and you think about it and there's a time and a place, right time and a right place to do a stock repurchase, but I don't think that time is right now given where we are and given the opportunity we have to monetize the NOLs.

Scott Kessler – Standard & Poor’s

And if I could just follow up really quickly, I'm guessing that you are looking at a lot of potential deals and obviously the right one or ones haven't manifested themselves. I'm wondering right now if the second point has been more in terms of a strategic fit, or is it more a valuation consideration or you wouldn't be able to get the kind of return as quickly as you are looking for? Is there a kind of occurring...

Will Lansing

For us to do a significant transaction or transactions, the target has to meet a lot of criteria and it has to be the strategic, it has to be profitable and it has to help us monetize the NOLs as well. And it has to be tried on a lot of dimensions including valuation. And so getting all those things to line up is just one process. So I would not say, it's one thing in particular that is the reason it's taking as long as it's taking for to us identify the right target. I would say that it's a combination of our being diligent about it, evaluating all the criteria as we look at targets.

Scott Kessler – Standard & Poor’s

Okay. Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Rich Tullo Albert with Fried & Company. Please go ahead.

Rich Tullo – Albert Fried & Company

Hey, guys. Was the 2.5 million charge or $.05 a share contemplated when you gave guidance last quarter?

David Binder

It's 2.4 million and it was not contemplated.

Rich Tullo – Albert Fried & Company

So why not provide on pro forma basis above the line, the price release so new investors can make a like-to-like comparison.

David Binder

We provided it in the commentary of the press release and we expect people can normalize it in their calculations.

Rich Tullo – Albert Fried & Company

They didn’t do it last quarter and they are not going to do it this quarter. At what time does it make sense to pursue strategic alternatives? INSP can't find a deal with everything lining up, the DOW is up roughly 2,000 points since we last – our earnings conference, what needs to happen?

Will Lansing

I think that to pursue strategic alternatives, we have to have a point of view that we are not likely to be able to deploy the cash, to acquire businesses that will monetize the NOLs in a way that creates value for shareholders and right now we don’t believe that to be the case. We do think that there is opportunities out there for us to buy profitable businesses that will let us monetize more quickly. We are just not at that point right now.

Rich Tullo – Albert Fried & Company

Okay. Have you been getting any inbound interest owing to your large NOL? In my view it's so large that even at a very high loss of it, it would make sense for somebody still to acquire you given the low enterprise value.

Will Lansing

We actually can't comment on inbound interest, but I can tell you that if we were to be acquired, the NOLs would be significantly circumscribed, to the point where lot of value will be destroyed and so I think that a potential acquirer looks at that and recognizes that one of our key assets would be – impaired, would be hurt by an acquisition.

Rich Tullo – Albert Fried & Company

5% of $800 million is still a lot of money.

Will Lansing

It is.

Rich Tullo – Albert Fried & Company

And especially when you are sitting on $230 million in cash. That's it.

Will Lansing

Okay. Thank you.

Operator

We have a follow-up question from the line of Mark May with Needham & Company.

Mark May – Needham & Company

Okay. Thanks. Technical question. Would the NOL be impaired if you were to do a special dividend that was a significant chunk of your cash, sort of 200 million?

Will Lansing

It would not be impaired directly but as a practical matter, we don't have enough profit in our current business today. Our business is between Mercantila and surge. We don't have enough profit today to monetize the 800 million of NOLs in the near future.

David Binder

The strategy is very much about taking the cash and buying more profit, so that we can bring in the monetization of the NOL. If we were to dividends, not a lot of cash and instead of using it to buy profit, it obviously says it will take much longer to monetize the NOLs such that there may be NOL that expire unused at the end of the period.

Mark May – Needham & Company

Right. Right. Okay. Assuming the cash is the only currency that you are using for an acquisition.

Will Lansing

It’s the main currency. We have to think about because issuing stock also has implications for the NOLs. It’s not impossible. I know we can use a mixture of cash and stock but it is the mainly currency.

Mark May – Needham & Company

Okay. Thanks.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session and this concludes today's conference. Thank you for your participation in today's call. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: InfoSpace CEO Discusses Q3 2010 Results – Earnings Call Transcript
This Transcript
All Transcripts