The Long Case for Answers Corporation

Mar.26.07 | About: Answers Corporation (ANSW)

Despite recent negative publicity, the weight of the evidence suggests that Answers Corporation (NASDAQ:ANSW) is an attractive opportunity. Answers' website, Answers.com, is a uniquely useful information search tool that aggregates information from Wikipedia with hundreds of official sources and a few of the company's own contributions to produce a comprehensive overview of just about anything you might want to know.

The website has grown remarkably in page views, revenue per 1000 hits, and total revenue since its inception, as more and more internet users become aware of its superiority as a research tool. The result of these impressive gains is best illustrated by the 2006 quarterly income statement. The most important parts of this statement are a 29.6 % average revenue growth rate quarter over quarter and a 45.1 % average gross profit growth rate quarter over quarter.

So far, what has kept Answers in the red are research and development costs and selling and administrative costs. Both of these are less of a negative than they appear at first glance. While a big factor early in the year, R & D costs diminished from 2.6 million in Q1 to 656,000 in Q4. As Answers focuses more on marketing in the future, R & D costs will likely remain low. Selling and Administrative costs are also less of a negative than they appear. The largest part of this cost is the amortization of charges related to the purchase of software companies to improve Answers' website capabilities, and does not represent a cost incurred during the period for which it was reported.

Too further examine Answers' worth as a potential investment I contacted Bruce D. Smith, Answers' Vice President of Strategic Development. Answers has been growing revenue primarily through the sale of direct advertising, and has been doing so at a furious pace. Based on my phone conversation, the sale of direct advertising will likely continue to yield gains in revenue per 1000 hits from quarter to quarter.

However, revenue growth will likely be driven most by increasing awareness and use among internet users of Answers' superior research utility. The potential for such growth is huge. Wikipedia is the 11th most visited website on the internet, and it performs the same function that Answers does except that Wikipedia can be edited by users. However, Answers is by far the superior research tool as it has information on many more topics and has multiple sources of information, including formally published information, for most of those. Therefore, it is reasonable to expect Answers to eventually climb to a similar level as Wikipedia in popularity.

Too address David Gentry's 2006 quarterly income statement. The most important parts of this statement are a 29.6 % average revenue growth rate quarter over quarter and a 45.1 % average gross profit growth rate quarter over quarter.

So far, what has kept Answers in the red are research and development costs and selling and administrative costs. Both of these are less of a negative than they appear at first glance. While a big factor early in the year, R & D costs diminished from 2.6 million in Q1 to 656,000 in Q4. As Answers focuses more on marketing in the future, R & D costs will likely remain low. Selling and Administrative costs are also less of a negative than they appear. The largest part of this cost is the amortization of charges related to the purchase of software companies to improve Answers' website capabilities, and does not represent a cost incurred during the period for which it was reported.

Too further examine Answers' worth as a potential investment I contacted Bruce D. Smith, Answers' Vice President of Strategic Development. Answers has been growing revenue primarily through the sale of direct advertising, and has been doing so at a furious pace. Based on my phone conversation, the sale of direct advertising will likely continue to yield gains in revenue per 1000 hits from quarter to quarter.

However, revenue growth will likely be driven most by increasing awareness and use among internet users of Answers' superior research utility. The potential for such growth is huge. Wikipedia is the 11th most visited website on the internet, and it performs the same function that Answers does except that Wikipedia can be edited by users. However, Answers is by far the superior research tool as it has information on many more topics and has multiple sources of information, including formally published information, for most of those. Therefore, it is reasonable to expect Answers to eventually climb to a similar level as Wikipedia in popularity.

Too address David Gentry's concerns that Answers is overvalued, all one needs to do is look at the forward P/E ratios and the balance sheet. Answers trades at approximately 42 times 2007 earnings estimates, and less than 17 times 2008 estimates. While the first multiple may seem lofty, estimates for next year do much to explain the current valuation. Moreover, an outsized growth rate is more than probable for several years after 2008. Also, Answers has just over 9 million in cash and no debt. In short, Answers' outstanding growth rate combined with its strong balance sheet should calm any fears that Mr. Gentry's assertions of overvaluation hold water.

Finally, Answers has all the earmarks of a startup company poised for success. Insiders own more than 14 % of shares, the company has an outstanding yet consistent growth rate, SEC filings are straightforward and easy to read, management is solid, and they peddle a unique and superior tool to internet users. I personally have been using Answers.com since early 2005 when I happened across it during a Google search and found that it was a superior source of information on any topic imaginable.

Answers Corporation is an attractive long term investment for the investor who doesn't mind a little risk and would enjoy watching a young company grow into a big player online and a boon to his or her portfolio.

Disclosure: Author has a long position in ANSW

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