Full Transcript of InfoSpace’s 3Q05 Conference Call — Prepared Remarks (INSP)

Here’s the entire text of the prepared remarks from InfoSpace's (ticker: INSP) Q3 2005 conference call. The Q&A is in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

David Rostov, CFO
Nancy Bacchieri, Vice President of Investor Relations

Analysts:

Mark May, Needham and Company
Sasa Zorovic, Oppenheimer & Co.
Stewart Barry, Thinkequity Partners
Gordon Hodge, Thomas Weisel Partners
Scott Sutherland, Webbush Morgan Securities - Analysts
Safa Rashtchy, Piper Jaffary
Jason Wylie, Morgan Cabot
Derek Newman, J.P. Morgan

[Nancy Bacchieri, Vice President of Investor Relations]

Good afternoon and welcome to our third quarter call. With me on the call today is David Rostov, Chief Financial Officer. Before we get started I would like to remind you of two things. First, this is an investor conference call. Accordingly, we will only be taking questions from the investment community.

Standard Disclaimer Omitted. Now, I'll turn the call over to David. Following his comments we will open up the call to your questions.

[David Rostov, CFO]

Thanks, Nancy and welcome to the call today, everyone. I wanted to start by giving you an update on our CEO Jim Voelker. As we announced, Jim underwent coronary bypass surgery earlier this month. His surgery was successful and he is now home recuperating. His recovery is going well and we are looking forward to his return to work in the coming weeks. Overall, we are pleased with our results for the third quarter. Revenues were up 24% year-over-year and in line with the second quarter. This was driven in part by sequential growth in mobile media downloads. In terms of highlights, we are particularly encouraged with the progress we've made in hiring on the mobile side. Over the last couple of months we've added significant media and entertainment expertise to the team. We hired Steve Davis as our new President of mobile media. Steve will be responsible for managing our mobile entertainment business worldwide including content licensing and production, marketing, public relations, promotions, sales, and product development. Previously, Steve was President of Grenada America, the U.S. based development and production division of ITV, one of Europe's largest media companies.

Prior to joining Grenada America, Steve was President and CEO of Carlton America. A leading distribution, video, and book publishing company. Steve's experience in content management and production will be invaluable to the company as we build on our leadership position in mobile. We look forward to his contributions.

As we continue to increase our focus on mobile media, we are also pleased to welcome Jules Haimovitz to our Board of Directors. Jules is a seasoned entertainment executive whose media and content expertise and relationships will be a tremendous asset to our company. Jules is currently the Vice Chairman and managing partner of Dick Clark productions. Prior to Dick Clark Productions, Jules he held the position of President of MGM networks.

Switching to the product side, we continue to leverage our search and directory capabilities into the mobile arena. Most recently, we introduced an innovative new mobile local search product, which allows subscribers to easily and quickly find everything from nearby restaurants and movie times to maps and driving directions. InfoSpace's mobile local search product leverages our knowledge in the online space and ability to design location based mobile products. For example, a user wanting to catch a movie can look up nearby theaters, choose a film, pick a time, and get directions to the theater, all from one application.

Finally, during the quarter we continued to strengthen our metasearch offering. We added Microsoft's MSN search, becoming the only search provider to combine results from the leading search sites including Google, Yahoo!, MSN and Ask Jeeves. As the only provider to have relationships with the most popular engines, we are able to offer a search solution uniquely designed to provide users with the most relevant results.

Now, on to the financial results and outlook. Our revenues for the third quarter were $83.2 million, an increase of $16.1 million or 24% from third quarter '04. We had another strong quarter of profits, generating net income of $11.3 million or $0.32 cents per share. Weighted average fully diluted shares was $34.8 million for the third quarter of 2005. For the third quarter, adjusted EBITDA was $14 million, a decrease of $3.1 million or 18% year-over-year. The adjusted EBITDA margin for the quarter was 17%. And as of September 30 of this year, we had approximately 600 employees.

Now, let me turn to our segments. In the third quarter of '05 search and directory revenues were $44.2 million, up $2.2 million or 5% from the third quarter of '04. As we expected, relative to second quarter, revenues were down mainly due to the loss of the Verizon Yellow Pages subscription business. This is partially offset by a full quarter of revenue from yellowpages.com.

On a positive note, in the quarter we added Yellow Book merchants to our Yellow Page listings. During the quarter total paid searches in North America for both, search and directory, were approximately $182 million. Average revenue per-page search was approximately $0.20, an increase of 18% over the prior year third quarter. Segment income was $16.5 million and the segment margin was 37%. As we discussed on last quarter's call, we expected the margin to be in the 35% to 40% range due to the loss of the Verizon Yellow Pages revenue, as well as greater spending on marketing. As we had planned, we increased our marketing spend over the prior quarter. Although we had good success driving more users to our site, we did not see the impact we had hoped for on the revenue side.

As such, in the fourth quarter we have scaled back our marketing spend to a level similar to earlier periods. In the third quarter, search distribution revenues in North America continued to account for over 60% of the portion of search and directory revenue coming from search.

Now, turning to the mobile business. Revenues for the third quarter were $39 million, an increase of $13.9 million or 55% from the third quarter of '04. Relative to second quarter, revenues were up $1.9 million or 5%. We saw favorable increase in our mobile downloads relative to the second quarter. Mobile segment income totaled $6.8 million for the quarter, down $300,000 or 4% from the same period last year, and the segment margin was 18%.

In line with our guidance our margin was impacted by continued shift to label tones and continued investment in next generation products and services.

Regarding the balance sheet, the company ended the quarter with approximately $362 million in cash and marketable investments. During the quarter we repurchased 2 million shares for approximately $51 million. Since we initiated the $100 million repurchase program in the second quarter, we have repurchased a total of 2.3 million shares at a total cost of $62 million. Excluding the stock repurchases in the quarter, our cash would have increased by over $6 million sequentially. Now, let me turn to our fourth quarter outlook.

On the mobile front we are pleased with the pickup in media downloads and expect additional growth in volumes in the fourth quarter, due to a seasonally stronger period for handset sales, music sales, and greater promotional activity by the carriers. On the search and directory side, revenues will be down sequentially due to continued efforts on our part to improve the quality of our distribution traffic network.

On the margin side, we expect segment margin percentages to be in the same range as we discussed in the prior earnings call, 15% to 20% on the mobile side and 30% to 40% on the search and directory side. As a result of these factors and for the fourth quarter, we expect revenues to be between $84 and $86 million. We expect adjusted EBITDA to be between $13 and $14 million and net income to be between $9 and $10 million.

On a fully diluted basis, earnings per share is expected to be between $0.25 and $0.28 cents. This assumes our effective tax rate in the fourth quarter remains in the low single digits. In the prior outlook, we had assumed a 38% effective tax rate in the fourth quarter. For the full year 2005, we expect revenues to be between $337 and $339 million. We expect adjusted EBITDA to be between $68 and $69 million. And net income to be between $53 million and $54 million. On a fully diluted basis, earnings per share is expected to be between $1.46 and $1.49. This guidance excludes the gain from the first quarter litigation settlement. It also assumes that the company maintains its current effective tax rate in the fourth quarter.

Looking at 2006, and consistent with our comments last quarter, I would encourage you to assume a full tax rate of 38% in your models for 2006. Of course, given our significant NOL, our cash taxes in 2006 will be very modest. In conclusion, it is important to keep focused on the tremendous opportunity before us. Mobile devices and high speed networks are combining to form a new global media network. Today's personalization and entertainment services will continue to evolve and broaden. As the industry continues to develop, it will expand into local information, commerce and advertising services similar to what we have seen on the internet. We intend to capitalize on this growing opportunity by continuing to invest in the next generation of products and services.

Our goal is to improve the mobile experience and help our partners solve critical problems. With our strong cash flow and balance sheet search expertise, critical partner relationships, extensive content catalog, and experienced team we are uniquely positioned to exploit the convergence of mobility, search, information and entertainment. This concludes our prepared remarks. I will now turn the call over to the Operator and I'll be happy to take your questions.

Proceed to the Q&A.