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TheStreet.com (NASDAQ:TST)

Q1 2011 Earnings Call

May 05, 2011 4:30 pm ET

Executives

Daryl Otte - Chief Executive Officer and Director

Thomas Etergino - Chief Financial Officer

Unknown Executive -

Analysts

Michael Moskoff - MRM Capital

Unknown Analyst -

Operator

Good day, ladies and gentlemen, and welcome to the TheStreet Quarter 1 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Paul Cox, Investor Relations of TheStreet. Please proceed.

Unknown Executive

Good afternoon. Thank you for joining us to discuss TheStreet's financial and operating results for the first quarter of 2011. This call is being webcast live on the Investor Relations section of TheStreet's website at www.t.st. This call is property of TheStreet and any recording, reproduction or transmission of this call without the express written consent of TheStreet is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of TheStreet's website.

With me today are Daryl Otte, Chief Executive Officer; and Tom Etergino, Executive Vice President and Chief Financial Officer. Today, Daryl will begin with an overview of the first quarter and Tom will review Q1 financial results.

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. 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. Any additional information related to matters discussed today also will be set forth in the company's quarterly report on Form 10-Q for the first quarter of 2011, which we expect to file shortly.

During the second quarter of 2011, the company will participate in the 10th Annual JMP Securities Research Conference on Monday, May 9, in San Francisco, and the 12th Annual B. Riley & Co. Investor Conference in Santa Monica on Tuesday, May 24.

Now I will turn the call over to Daryl Otte.

Daryl Otte

Thanks, Paul. Welcome to our first quarter of 2011 earnings call. I'm pleased to report that our first quarter results were strong with $14.1 million in revenue, a 7% year-over-year increase from continuing businesses. In the first quarter, we executed on our strategic plan and began to deliver returns on the many investments we made last year.

Before I go into details for the first quarter, I would like to reiterate some of the primary elements of our strategic plan for the business and describe how the new team we put in place over the last 18 months is executing on that plan.

Our strategic plan is designed to build long-term profitable growth and value on the proven and profitable business model inherent in critical media. We are applying this model against our key assets, which are TheStreet's strong market position and brands in the finance circle, our robust editorial content and our strong advertising and subscription monetization skills.

We are focused on generating original, top quality, timely content and monetizing the consumption of that content with diverse and robust revenue stream. We create a large volume of content, over 3,000 original articles and 500 videos a month, produced at high journalistic standards with deep domain experience and overlaid with strong publishing skills.

We also offer an increasingly growing suite of data tool abilities and, notably, just this week on our new iPad app. All of this content is produced by our professional in-house editorial team and through a select group of hand-chosen practicing professionals. This content, because of its quality and relevance, attract highly engaged users, affluent, educated professionals who come to our content for a purpose. These users attract both endemic advertisers in the financial category and non-endemic advertisers that are attracted to the demographic characteristics of our audience and the high level of engagement they have with our sites.

We have been an industry leader in building a large-scale consumer subscription business in digital media, having both subscription revenue and advertising revenue allows us to monetize our high-quality content in a superior manner.

A key part of our strategy has been to build the size of the audience to business our network, all maintaining the targeted and highly valuable demographic characteristics of that audience. All the audience growth is a precursor to revenue growth for both of our premium services and advertising businesses, which in turn allows us to earn a higher return on investment on a relatively fixed cost of our business.

I have described 2010 as a reset year for the company, during which we made significant investments beginning in Q2 with the objective of strengthening our platform and building our team to support our strategy. We get this but the commitments remain operating cash flow-positive and adjusted EBITDA-positive for the year, which we achieved.

These investments include key steps to replace legacy technologies, such as our web technology and commerce infrastructure, building out our subscription telesales capability, investing in our display advertising sales and content-creation teams and expanding distribution channels for both our advertising-supported and our premium content. We implemented a new approach to our chief count agreements, focused on lowering our fixed cost or aligning our closely individual interest for those of the company through revenue-derived royalty. We updated our brand and corporate identity, refreshing our name and ticker symbol, and introducing a more modern and graphic identity system and logo.

We also developed a state-of-the-art video production studio at our headquarters, where professional video programming can be produced to support the increasingly important multimedia component of TheStreet content.

We also made important infrastructure improvements to support an increase in volume of our business to our network derived from natural search, which is a vital part of our traffic growth strategy. This has positioned us to take advantage of Google's recent changes to its search algorithm to elevate the prominence of original high-quality content by gap, which TheStreet produces.

For 2011, we are focused on seeing returns on these investments. We feel that such returns already are evident in our results for the first quarter. Our strategy is coming to fruition and we now believe the company is in a significantly better position to realize the potential return of asset and constantly growing business.

Premium, subscription bookings grew by 15% year-over-year and we had an average of 92,228 paid subscriptions in the first quarter of 2011 versus at a 3-year high and up 7% from Q1 2010.

This is encouraging for 2011. As I mentioned before, our audience growth rate and the operating metrics of our Premium Services businesses, principally Bookings, typically are precursors to revenue growth.

Our churn rate improved again to 3.4% in the first quarter, delivering an almost continuous series of sequential improvements since our first quarter of 2009 when churn was 5.1%. Our advertising pipeline for 2011 is much stronger than it was this time last year, and our marketing services revenue increased 19% year-over-year. As previously announced, we've secured 100% of the top online brokerages, our core advertising constituency and the upfront for 2011 for the first time since 2007.

We now have apps on all major mobile and tablet platforms featuring basic content and video in all formats between monetized sponsorship and select premium services content. In the quarter, we also gave you the version of our real money premium service 4 days ago.

In January, we extended our suite of premium service products with the launch of ETF Profits, a dynamic new service designed to provide investors with insightful commentary and optional ideas for trading ETF. ETF Profits is the second largest in the series of new premium product releases, which began last year with our Options Profits.

We announced in March, a strategic content distribution agreement with the Journal Register Company, where we will integrate and cross-promote certain content and services. Which views editorial will power the coverage of national business, financial market and personal finance in the Journal Register's print and online properties, which collectively reached 16 million users each month. TheStreet will also integrates like Journal Register local business coverage into our network of sites.

In April, we introduced TheStreet annual awards program for the Best Mutual Funds and Best ETFs, which leverages our TheStreet ratings data and which we are able to monetize the display advertising and the licensing of award in ETF for use in the promotion of these winning funds in ETF by their sponsors.

This week, we launched the ready for market version of our new iPad application. I hope you will all download and experiment with it and give us your feedback. The app leverages our strong written and video content offerings in a way that is native to the iPad, while also operating unique app-only functionality such as sophisticated portfolio management tools, which sync to portfolios held in other TheStreet properties, and some cool charting tools which I have not seen anywhere else. We've just begun promoting applications, and the download rate is looking good. The application will be supported through its launch period by a number of our key endemic advertisers and sponsors. These developments demonstrate our commitment to seeking new ways to distribute and monetize our high-value content.

In the first quarter, the size of our audience to our network of sites grew significantly. According to our internal measurements, the average number of monthly unique visitors to our network in the quarter grew by more than 30% over last year. Growth in our audience is a result of the investment made in our business as I described beforehand. We continue to see increased traffic coming to us from natural search, demonstrating the strong demand by users for our content.

I note also that comps were recently included TheStreet in its ranking of the top 10 fastest growing sites in terms of U.S. audience across the world in any category for March. We are pleased to be listed among such industry solid one's as the BBC and also such exciting new businesses, including social and Zynga.

Let me conclude by thanking our employees and contributors for their renewed energy and creating top-quality contents and products. Everyone at TheStreet is working hard each day to deliver on our strategy. It's a very exciting time for us at TheStreet. Also, I would like to thank our shareholders, subscribers, advertisers and distribution and content partners for their continued support.

With that, I'll hand the call over to Tom, who can provide some additional financial details.

Thomas Etergino

Thanks, Daryl, and welcome, everyone. I will review the financial results for the first fiscal quarter ending March 31, 2011.

As mentioned in the fourth quarter earnings call, our pro forma adjustments in 2011 will be far fewer and less dramatic than they were in 2010 versus 2009. Based on where we stand today, the pro forma adjustments that we see making in our 2010 and 2011 financials will revolve primarily around the divestiture in May 2010 of our banking and insurance ratings product line, which was within our Premium Services business. And as such, our expectations for 2011 or that on our ongoing business results will closely resemble our GAAP financials.

With that, the company's ongoing businesses recorded revenue of $14.1 million in the first quarter of 2011, an increase of 7% compared to the prior year period, with $9.6 million of revenue from our ongoing Premium Services business and $4.5 million from marketing services. The increase in the company's Premium Services revenue for ongoing businesses is primarily the result of a 7% increase in the average number of subscribers during the quarter as compared to the prior year period with all marketing channels contributing robustly to this increase, partially offset by a 4% decrease in the average revenue per subscriber during the quarter as compared to the prior year period.

Our lower ARPU was primarily driven by the success we have enjoyed in bringing in new subscribers over the last couple of quarters. As a result of this success, a higher percentage of our current subscriber base, as compared to Q1 2010, is in its first subscription cycle.

As I mentioned on the last call, these new subscribers tend to have lower introductory pricing. As the subscribers renew or are up sold to our telesales stores, we expect to see ARPU for those users increase. Overall, ARPUs affected by a number of variables including product mix, percentage of subscribers in their introductory cycle and pricing. So it may fluctuate somewhat period-to-period.

Subscription bookings were $12.3 million for the first quarter of 2011, an increase of 15% as compared to the first quarter of 2010. Our churn rate declined to 3.4% in the first quarter of 2011, compared to 3.6% in the fourth quarter of 2010 and 3.8% in the first quarter of 2010, which should be less of this improvement to the key investments undertaken last year that Daryl mentioned earlier, including the improved product quality, technological improvements and the efforts of our telesales organization.

The steadily improving trend in churn is terrific, but we caution everyone not to focus too much on modern quarterly fluctuations, especially now as we've taken such big steps in our core businesses performance. We feel we'll come more slowly and the relative figures going forward will be disproportionately affected by the trials we will continue to undertake to find new sources of subscriber growth. At some point, steadily improving churn will mean that we're not pushing the envelope hard enough.

For the company's Marketing Services business, we recorded revenue of $4.5 million for the quarter, an increase of 19% as compared to the prior year period. As mentioned on our last call, we began the year with a significantly higher level of commitment from our core advertisers for 2011 as part of the annual upfront sale cycle, which drove our Q1 results as the first quarter is traditionally weighted towards endemic advertisers. These larger upfronts have freed up our sales staff to focus on new opportunities with our solid traffic growth, giving them more quality inventory to sell into.

Operating expenses for the company's ongoing businesses were $17 million in the first quarter of 2011, an increase of 15% as compared to the prior year period. The increase in operating expenses for the company's ongoing businesses is primarily a result of a $1.2 million increase in sales and marketing, an $800,000 increase in costs of services and a $600,000 increase in depreciation and amortization, partially offset by a $400,000 increase in general and administrative expenses as compared to Q1 2010.

The increase in sales and marketing and cost of services are primarily related to our implementation of several 2010 strategic initiatives as mentioned earlier. The increase in depreciation and amortization is primarily due to acceleration of the depreciation of certain capitalized assets that will become obsolete as a result of our expected continued upgrade to the company's technical infrastructure and its content management systems through 2011.

On a sequential basis, operating expenses increased 2%, of which half of this increase was due to the acceleration of depreciation just mentioned, indicating that the company's previously discussed 2010 investment program has already reached maturity.

The company recorded a net loss of $2.6 million in the first quarter of 2011 from its ongoing businesses, as compared to a net loss of $1.4 million from ongoing businesses in the prior year period. Adjusted EBITDA for the company's ongoing businesses was a loss of $500,000 in the first quarter of 2011, as compared to a positive $600,000 in the prior year period. We expect to be adjusted EBITDA-positive for the full year of 2011.

The company ended the quarter with cash, cash equivalents, restricted cash and marketable securities of $75.5 million, a decrease of $3 million as compared to December 31, 2011 (sic) . The decrease is primarily a result of a $4.3 million reduction of aggregate accrued expenses and AT, including the payment of annual cash incentives for 2010 and a decline in days payables outstanding, partially offset by an increase in deferred revenue as a result of our strong bookings this quarter.

As I've mentioned on prior calls in any given quarter, we may have an overall use of cash in operations due to timing of payments, with Q1, a typically weak cash flow quarter. That being said, we expect to be free cash flow-positive for the full year of 2011.

With that, I'd like to ask the operator to open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Mike Moskoff from MRM Capital.

Michael Moskoff - MRM Capital

Regarding your press release from the other day, with the March sequential growth of 32% on the visitor, is the sequential growth from -- is it the March quarter or is it March from February?

Daryl Otte

The comps for results are sequential on the month, right? So it's February to March.

Michael Moskoff - MRM Capital

Okay. Regarding the non-endemic advertisers, can you just quantify that or qualify that?

Daryl Otte

Yes. I don't think -- we don't really kind of do a split but as Tom said in his prepared remarks, Q1 is generally much stronger for endemic than non-endemic advertisers.

Michael Moskoff - MRM Capital

Okay. So the non-endemic would be like non-financial kind of advertisers?

Daryl Otte

Correct.

Michael Moskoff - MRM Capital

Okay. And last but not least, you made a comment, as far as profitability going forward, you expect just as the EBITDA to be positive for the year and free cash flow positive for the year, can you quantify it all? Or what your hopes are for this year as far as numbers are, or what-have-you?

Thomas Etergino

We're not giving guidance -- like number guidance on the bottom line. What I can say is that to the degree revenue is higher than it was in prior year, we have said that just a proportionate amount of that would hit the bottom line. That's really all I've said.

Michael Moskoff - MRM Capital

And last but not least, as far as Tom, one of your main goals at the analytical coverage, is that looking better from the last conference call we had?

Thomas Etergino

I can't really speak for what analysts are going to do. I know that we've had some inbound calls. We have some kind of interest. Like we said in the prepared remarks, we will be at a couple of conferences. So we'll be -- there's an outreach program to both the investor community as well as the analyst. So there's definitely renewed interest, but I can't really speak for when I would expect any kind of coverage because I can't speak for them.

Operator

And your next question is from the line of Jeff Osher with the Harvest Capital.

Unknown Analyst -

Let me -- just basic math, is your bookings the last 2 quarters have shown an acceleration, 20% to 40%, presumably if the average duration of bookings is consistent at some point your revenue on the premium services side will start reflect that bookings growth? So that's -- and I have a follow-up after that. Is that correct?

Daryl Otte

Definitely.

Thomas Etergino

Yes, that's correct.

Unknown Analyst -

Okay. So on that simple math, looking at the change in OpEx, can you guys just walk through how you're defining -- you mentioned several times the return on investments and even with the bookings growth up in the mid-teens, your OpEx year-over-year was up in the mid-teens, as well. So if your 2010 investment plans are largely played out, I assume it's fair for us to assume that's $17-ish million is okay to run through Q2, through Q4 and then maybe some seasonality in Q4?

Thomas Etergino

I'm not giving guidance on total OpEx. I have said that, again we'll see, we are largely fixed in our cost structure. So you mentioned the OpEx going up. It was only up 2%, I believe, sequentially of which half of that was depreciation-related. So again, what I'll just say on OpEx is that you should see a lot of leverage on our OpEx side. You're comparing, I believe, year-over-year, so Q1 2010 versus 2011. The issue there is that the investments that we made last year really started in kind of Q2, Q3 and Q4 of last year.

Unknown Analyst -

Okay, so I understand that. The step up will cliff as we get in the back half. But the leverage points you were referring to, those should start to materialize -- in other words, if your bookings -- there's no leverage this quarter from a GAAP perspective or even a bookings perspective because your OpEx change roughly equated to the bookings change. What I'm driving at is if bookings continue at the pace that they have been over the last couple of quarters in OpEx, the change year-over-year given the step up in Q2 through Q4 of last year marginalizes, that's where we should see the leverage? Kind of?

Daryl Otte

That -- yes. I agree with that.

Unknown Analyst -

It was really previous callers' question. Okay. I just want to make sure that you guys agree.

Thomas Etergino

And the other stat that we found very positive was the uptick in traffic. So again, that's the other side of the business that's also very positive from the return on investment.

Unknown Analyst -

Will you -- last question, are there any conferences you'll be attending in Q2?

Thomas Etergino

Yes. We're going to JMP conference on Monday, and we have the B. Riley conference later in the month.

Operator

And your next question is from the line of Sanjay Puri from Unterberg Capital.

Unknown Analyst -

Just a couple of quick questions. Can you guys talk a little bit about some of the new products that you might be introducing this year or you might have rolled out this quarter? I don't know -- I got on the call a little bit late. I don't know if you talked anything about that. And then just wanted to get a better sense on churn, because you've shown some nice improvements on churn and just wanted to get a better a handle on, kind of where that goes from the seasonality standpoint as the model is starting to normalize now?

Daryl Otte

Sanjay. It's Daryl speaking. Yes, in terms of the new products, the one that we discussed in the call before you got here were we were highlighting the launch of ETF profit. And also last week, our new iPad application, which we pleaded everyone to download and give it a try. It's great because it highlights both kind of our strong video and written word content in an application that's very native to the iPad. But in addition, it has some really terrific charting tools, which you'd all see on our site which we think are rather unique to our apps and downloads have been looking pretty good on that over the last couple of weeks. There were pretty...

Unknown Analyst -

Have you seen kind of the existing customer base begin to take more of that product because I don't -- I can't imagine that's accretive to gross margin right off the bat?

Daryl Otte

Yes. We don't break out profitability by product line for the outside world, but we do think that our users are logically users of the app and because the apps kind of have an incremental functionality to our whole suite of services, we think it's kind of additive rather than cannibalistic, so we're pretty excited about that. We are looking forward now to the next state launch that we're preparing for that we've discussed publicly, then the relaunch of RealMoney and RealMoney Silver, which we're rebranding as RealMoney Pro. And that's also our new technology platform, and those are important subscription products for us and are in need of a refresh and they're going to keep all the great characteristics that they have now but add some new fun and useful utilities. Do you come at prep?

Unknown Analyst -

And then how about churn? Any comments on churn, just how we should think about churn going forward?

Thomas Etergino

This is Tom. So like you said, we really have experienced some significant decrease in churn over the past 8 quarters. And those incremental improvements will become a little more difficult over time, again, it's kind of a lot of small numbers. That said, we are focused on it and we're going to continue to focus on testing new subscriber acquisition sources. And that may or may not pan out and those different tests and those could impact churn in any given quarter. So we're not giving guidance on churn, but I would say I wouldn't expect the kinds of churn improvements we've had over the last 8 quarters since we went from 5.1 down to 3.4. I think that we've largely -- we've gotten to a pretty good place. And we hope to continue, but those small numbers will come into play.

Unknown Analyst -

Sure. But do you feel good about where things have settled out right now?

Daryl Otte

I do.

Operator

[Operator Instructions] Our next question is from the line of Muhammad Ahmed from BMA Capital Management.[ph]

Unknown Analyst -

It is impressive some of the metrics you've cited in the press release, as far as increases in traffic and the impressive increase in marketing services. However, unfortunately, there was a loss this quarter. Following up on a previous callers' question, I mean, what's the strategic plan? Is it through -- do you anticipate that the initiatives are going to lead to higher revenue and that is going to be more than an increase in OpEx that will lead us to profitability?

Daryl Otte

I think you've characterized our strategy quite well.

Thomas Etergino

Yes.

Unknown Analyst -

And do you think that would happen this year in 2011?

Daryl Otte

We're not giving -- we don't give all of our guidance on our results. No.

Unknown Analyst -

No. I hear you. But when do you think the strategic plan would bear fruit?

Daryl Otte

Well, we think that there is some solid evidence of it bearing fruit in the Q1 results.

Unknown Analyst -

Okay. A technical question, in your cost of services line item, is it possible to tell us what goes in that line? Is that where contributor fees are in?

Thomas Etergino

Contributor fees are in there, yes. Editorial is in there, yes.

Unknown Analyst -

As an order of magnitude, can you tell us what percentage is that?

Thomas Etergino

We don't break out our percentages. No.

Unknown Analyst -

Beside counter intuitive fees?

Thomas Etergino

It is -- one of the places where we spent last year, again that's where we think we will have leverage. But we think that investing in quality editorial is one place where we think there's going to be a high return on investment.

Unknown Analyst -

Got you. And one last question, you kept mentioning that you do have primarily, mostly a fixed cost basis. Your sales in the marketing line, do you expect that to be fixed going forward in 2011?

Thomas Etergino

No, that's actually one line where you might see it fluctuate because we do spend marketing dollars and that is one area where there's a variable component for sure.

Unknown Analyst -

Any anticipation the variability is going to be for that line item to increase?

Thomas Etergino

I'm not giving guidance on any line items. But that one could move up and down in any given quarter, based on what we're doing, both on testing, as well as just other marketing plans that we have.

Unknown Analyst -

Got you. One last question, I promise. The G&A, there was a rather material decrease of about 10%. Could you tell us why did that go down?

Daryl Otte

Yes. Our basic strategy to re-invest, to re-allocate where we spend our money away from kind of central administrative costs and put them into their if the businesses will get a higher return, and that would be in the kind of cost of sales and line item sales in marketing.

Unknown Analyst -

Got you. So there was -- rather than a reduction there's just a reallocation?

Daryl Otte

Not in accounting reallocation, we've spent on different things.

Operator

And at this time, there are no other questions. I'd like to turn the call over to Mr. Daryl Otte for closing remarks.

Daryl Otte

Well, thanks, everyone, for listening to our call. We appreciate your interest in the company and we look forward to reporting our Q2 results shortly after the end of next quarter. Thanks.

Operator

And ladies and gentlemen, thank you all for your participation in today's conference call. This concludes the presentation and you may now disconnect.

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