Ancestry.Com's (ACOM) CEO Timothy Sullivan on Q1 2016 Results - Earnings Call Transcript

| About: Ancestry.com Inc. (ACOM)

Ancestry.com Inc. (NASDAQ:ACOM)

Q1 2016 Earnings Conference Call

April 20, 2016, 5:00 PM ET

Executives

Jon Laudie - Investor Relations

Timothy P. Sullivan - President and Chief Executive Officer

Howard Hochhauser - Chief Financial Officer and Chief Operating Officer

Analysts

Rich Gross - Columbia Threadneedle Investments

Akbar Causer - DDJ Capital Management LLC.

Operator

Good day ladies and gentlemen and welcome to the Ancestry.com First Quarter 2016 Earnings Conference Call. At this time, all participant are in a listen-only mode. Later, we will conduct a questions-and-answer session and instructions will follow at that time [Operator instructions] As a reminder, this conference call is being recorded.

I would now like turn the conference over to Jon Laudie, Investor Relations you may begin.

Jon Laudie

Thank you and welcome everyone to Ancestry’s first quarter 2016 earnings conference call. On the call today, we have Tim Sullivan, Chief Executive Officer and Howard Hochhauser, Chief Financial Officer and Chief Operating Officer. After Tim and Howard makes some brief prepared remarks, we will get to your questions.

On this call today, we will include statements that are considered forward-looking within the meaning of the securities laws. Forward-looking statements are based on current knowledge and expectations and are subjects to certain risks and uncertainties that may cause actual results to differ from the forward-looking statement.

A detailed discussion of such risks and uncertainties is contained in our annual report on Form 10-K for the period ended December 31, 2015, which was filed with the SEC on February 19 of this year, and the discussion in our other SEC filings. The company undertakes no obligations to update any forward-looking statement. We will also refer to certain non-GAAP measures, which in combination with GAAP results provide additional, analytic tools to understand our operation. We've combined a reconciliation of these non-GAAP measures to the GAAP results included in our press release. Our reconciliation is also posted on the Company's IR website found at ir.ancestry.com.

A re-broadcast of this call will be available on our website after 6 PM Mountain Time today. And now, I'll turn the call over to Tim.

Timothy P. Sullivan

Thank you Jon, and hello to everyone today and welcome to the call. It has been a busy and really a terrific start to the year.

Before I comment on our very strong Q1 results, I would like to first address the transaction that we announced at the beginning of the month. We think this is a very positive event for Ancestry that validates what we built here as well the terrific opportunities we see ahead. The transaction features the entry of Silver Lake Partners, the premier private investor and technology companies to our investor group along with an increased investment from GIC.

Following the transaction, GIC, Permira and Spectrum as well as management all remain significantly invested in Ancestry. This really is a win for us on every level, over the last three plus years under private equity ownership, we've accomplished a lot for the company, our people and our debt holders.

The group behind that success is remaining intact while we add the technology acumen of Silver Lake, who believes in our strategy and the opportunity here. All of this puts us in a great position to execute on our plans and lean in even more into the growth opportunities like AncestryDNA.

Now on to the results. Simply stated we had an outstanding first quarter that continued the momentum we've been seeing across the business. Revenue grew 19% compared to the first quarter of last year, or 21% on a constant currency basis. We've strengthened both the subscription business and DNA.

Adjusted EBITDA excluding one-time item was up 13% remaining in the double-digits despite difficult comparisons with the prior year. We added more than 108,000 net new subscribers during the quarter and DNA growth remains tremendous. We are fast approaching the 2 million milestone of customer samples in our database affirming our leadership in consumer genomics. Overall, we are executing across the Board at a high level and I’m very happy with our performance.

Our core subscriber business is healthy and growing. Total subscriber base is up 7% year-over-year and subscription revenues grew 9% as we benefit from consumer interest in our premium packages and bundled offerings. These bundles provide access to our ancillary subscription sites like Newspapers.com and Fold3, in addition to a core Ancestry subscription driving incremental growth for these businesses while also enriching the Ancestry subscriber experience.

We’re also continuing to invest in exciting new indexed content in improvements to our customer experience. We added key content collections from North America, the UK and Germany. At Newspapers.com, we launched the publisher extra subscription, which gives subscribers access to all content from our news paper publisher partners. In many cases, this includes content from the first date of the newspapers’ publication hundreds of year ago up through recent editions.

In the consumer genomic space, AncestryDNA’s momentum has been exceptional and we remain very excited about the further development of this new, fun and very accessible value proposition. Sales of AncestryDNA kits remain very strong and as I mentioned a moment ago, our customer database will soon hit 2 million samples.

This kind of database scale is really important, not only because it is a great indication of a very significant consumer interest in our product, but because the network of that to this large and growing database is driving ongoing improvement and the user experience. The larger our data base grows, the more genetic cousins we are finding for people and with this unmatched collection of genomic data and family trees, we are hard at work researching new aspects of relatedness that we think will power even more interesting and assessable user experiences.

My last thought before I turn it over to Howard, actually has nothing to do with our financial performance, but it’s something that everyone at the Ancestry is tremendous proud of. Five-years ago we partnered with the United State Holocaust Memorial Museum to create the world memory project, an effort to let anyone help make important records from the museum searchable online for free.

Five-years later, some 35,00 volunteers around the world have together indexed over 1 million names, giving families, victims and survivors a better understanding what happened to their loved ones during the holocaust. We are proud of our participation in this important effort. To wrap things up, I'll say again that we’re off to a great start in 2016, a year in which we’re focused on execution, targeted growth investments and capitalizing on the real momentum we see across the business.

Both our family history business and the AncestryDNA are firing on all cylinders, the transaction we announced a few weeks ago lends further strength to our position by expanding our investor base, solidifying our go forward ownership structure and providing Ancestry with the support and strategic insight that will further enable us to execute on our plans.

We look forward to keeping you all posted on our progress and here is Howard to cover the results.

Howard Hochhauser

Thank you. As Tim mentioned, we're off to a great start to the year, as we carry through on momentum that’s been building over the past few quarters. Revenues grew 19% compared to the first quarter of last year, including a strong at 9% in the subscription business. Our services and other revenues grew more than 80% lead by AncestryDNA. Revenues continue to be impacted modestly by FX. On a constant currency basis, revenue would have been up over 21%. Our Adjusted EBITDA excluding one-time items also grew strongly in the double-digits or 13% year-over-year on the quarter.

We believe the acceleration we are seeing in revenue growth validates the investments we've made in the business over the past couple of years, which have improved our products and our overall customer experience. They have also helped to diversify the revenue base both into the high growth DNA business, as well as emerging business like Newspapers.com as Tim had talked about.

Breaking down the subscription business the 9% revenue growth was driven by solid new customer acquisition growth, healthy retention rates and increasing update of the bundled offering. We ended the quarter with over 2.3 million subscribers, 5% higher than where we ended in 2015. We remain super pleased with our subscriber growth, which continues to benefit from the DNA cross sale into the core business.

Adjusted EBITDA growth excluding one-time items of 13% was also strong, especially coming off the strong growth rate we saw on the prior year. Performance is consistent with the outlook we provided on our last earnings call, we had noted that revenue growth would accelerate at a faster pace than the Adjusted EBITDA growth. Overall, we’re happy with performance and believe the top and bottom line momentum across the business makes it a good time for us to investment in longer term opportunities.

Free cash flow grew 6% year-over-year to $46 million and we ended the quarter with the $177 million in cash and cash equivalents of 4.6 times net leverage. Upon closing of the transaction that Tim had highlighted for you, we expect incur various transaction related charges in cash payment. The majority of these charges relates to payments to our advisors. We expect to record these charges in the second quarter.

We believe this transaction is really a great outcome for Ancestry and a validation of the genomics and family history category. Now we move forward with an experienced and balanced group of long-term investors who have been great strategic thoughts and support to the company as we build for the future.

Thanks for listening. Why don’t we open it up to Q&A.

Question-and-Answer Session

Operator

Thank you [Operator Instructions] And our first question comes from Rich Gross from Columbia, your line is open.

Rich Gross

Hey guys, great quarter, just a couple of questions I wanted to ask. First on the new sponsor, I mean obviously you didn’t disclose it on the press release, but are you willing to talk about just who the lead sponsor is, just so that we're clear from bond holder perspective if Silver Lake going to be taking the lead here, is it still Permira?

Timothy P. Sullivan

As we said in the initial release, they have equal minority positions, equal means equal and that's GIC and Silver Lake.

Rich Gross

And so is that smaller or larger than Permira?

Timothy P. Sullivan

It's what it says its equal minority positions. Once we close the transaction, we may provide further details.

Rich Gross

Okay, and I saw that Silver Lake and GIC were at equal minority ownership, I wasn’t sure if equal minority meant that together they were the majority or it didn't say anything in reference to Permira. I was just trying to understand that. The other question I had was on marketing expense, I don't think it’s unusual for you guys there was a seasonal uptick in the first quarter and you kind of guided a little bit to the fact that you are going to be promoting the DNA product a little heavier. Should we expect the normal seasonal tick down in the back half of the year or should we expect the spend to kind of stay closer to current levels to kind of push out the DNA product internationally?

Timothy P. Sullivan

Yes, it's a good question Rich. While marketing spend is up on an absolute basis, it's actually constant as a percentage of revenue. So we're seeing real efficiency again in the cross sale from the people that are buying the DNA test and then going over and purchasing an Ancestry subscription. So the attach rate continues long at the same pace that we've seen in past quarters.

Rich Gross

Okay, so the guidance is basically I should think about it as a percent of sales.

Timothy P. Sullivan

Yes.

Rich Gross

Would that be accurate, instead of thinking this just stays at the current notional level?

Timothy P. Sullivan

Yes, we are modeling it as a percentage of revenue. So that's a fair way to think about it.

Rich Gross

Okay. Alright and then the last thing I just had is, if you can provide a update on kind of how you are thinking about international and the subscription product, Germany and Mexico that would be great.

Timothy P. Sullivan

Yes, so your question relates to international generally. So we launched in Germany we're on air on TV there marketing the product and have actually had great success in driving traffic to the website. This is an important year, we've a lot of content coming to the site this year, everyone try lots of new marketing initiatives as we expand our brand into the markets.

So very early, but feel good with the initial launch. I would also add that we launched DNA into 29 additional markets in the quarters, now DNA is in over 30 markets with the similar product that you see in the U.S. and Mexico is also on pace to launch that's likely going to be a mix of a mobile product and mobile tree product and a DNA offering.

Rich Gross

Okay, and then is there anything that you guys wanted to share in terms of how you are thinking about potential refinancing.

Timothy P. Sullivan

Yes, I'll just say we're focused on the business and closing the transaction and that's where it heads up.

Rich Gross

Okay. Thanks for sharing.

Operator

Thank you, and our next question comes from Akbar Causer from DDJ Capital. Your line is open.

Akbar Causer

Hi guys, firstly congrats on another strong quarter and also on the transaction, great outcome. Just one question from me, just kind of getting more color on the subscriber growth, you know when you slice through the data, I know you have talked about how the DNA has been a very strong driver for growth. Anything else you are seeing in the trends as you look at the different sources of subscriber growth?

Timothy P. Sullivan

Yes, it was a great quarter, we're very pleased with the results, so it’s a combination of things, its DNA as you mentioned. We also have four shows on now, we have Finding Your Roots on long lost family, Who Do You Think You Are, and then Genealogy road shows may kick in here. So you have in some sense, you know perfect storm of some great marketing, great creative DNA as well as the TV shows in the market.

And that talks about the gross subscriber additions, which I mentioned in my speech, but also retention rates are generally you know really consistent over time. So as DNA has expanded the [Tam] (Ph) and expanded more people into the family history service, the retention rates have really held pretty steady.

Akbar Causer

Alright, thanks. That's all from me.

Timothy P. Sullivan

Great.

Operator

Thank you [Operator Instructions] And I'm showing no further questions, I would now like to...

Timothy P. Sullivan

It looks like there are no further questions. We really appreciate everyone's time and look forward to connecting next quarter, thank you.

Operator

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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