Here’s the entire text of the prepared remarks from Audible’s (ticker: ADBL) Q3 2005 conference call. The Q&A is here. 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.
Donald Katz, Chairman and Chief Executive Officer
Andrew Kaplan, Chief Financial Officer
Gene Munster, Piper Jaffray
Barbara Coffey, Brean Murray
Mark Mahaney, Citigroup
Barton Crockett, JP Morgan
Steve Frankel, Adams, Harkness
Mark Argento, Craig-Hallum Capital
George Mihalos, Gilford Securities
Sameet Sinha, Kaufman Brothers
Chris Kinkade, Americas Growth Capital
Richard Fetyko, Merriman Curhan Ford
Good day, and welcome to Audible, Incorporated’s Third Quarter 2005 Earnings Conference Call. All of you should’ve received a copy of the earnings release. If you have not received the release, please contact Kathleen Krowicki (ph) at 973-837-2799 and she will ensure that a copy is faxed or emailed to you immediately. With us today from Audible are Donald Katz, Chairman and CEO, and Andrew Kaplan, Chief Financial Officer. Management will first provide a presentation, followed by a question and answer period. We will provide instructions for asking questions at that time. The statements made in the course of this call which are not historical facts may be deemed to contain forward-looking statements. Actual results may differ materially from those anticipated, and any forward-looking statements as a result of certain risks and uncertainties including, without limitation, Audible’s operating history; history of losses; uncertain markets for its services; and its inability to license or produce compelling audio content; and other risks and uncertainties detailed in the company’s Securities and Exchange Commission filing. Any reproduction of this call in whole or in part is not permitted without prior expressed written authorization of Audible, Incorporated. And as a reminder, ladies and gentlemen, this conference is being recorded.
I would now like to turn the call over to Mr. Katz, Chairman and CEO of Audible.
Donald Katz, Chairman and Chief Executive Officer
Thank you, and welcome everyone to today’s conference call. The third quarter was marked by record revenue, record new Audible listener acquisitions, and tremendous progress for our initiatives designed to drive growth well into the future, including the much celebrated launch of Audible Air, the completion of our first quarter of operations for the Audible UK, our exciting education initiatives, and our Podcasting tools and services program, which will become publicly available in the coming days.
During the course of the third quarter, we optimized aspects of our new customer acquisition programs and launched very successful pre-iPod Shuffle programs late in the quarter. This has led to a far greater percentage of committed Audible listeners. And our September and October performance in particular indicates that the up tick and churn we saw in Q3. Churn was about .6% during the quarter has stabilized as we move into what looks to be a very strong holiday sales season.
Before I talk about key metrics for the quarter, I do want to take to share with you two milestones. One is that on this very day ten years ago, Audible was incorporated in Delaware. We came early to the vision of ubiquitous digital delivery of the best of the culture of words that everyone involved early on, including many of our current senior executives looks backward with pride and forward to the markets opening up before us with high excitement.
I also want to mention one of those mini milestones that will certainly resonate for investors and longer term observers of Audible’s progress. For close to 72 hours earlier this week, the number one best-selling album on the iTunes music service was the www.audible.com download of Thomas Friedman’s The World is Flat. The audio book powered above Ashlee Simpson and Kanye West and Nickelback. In fact, on Monday of this week, nine Audible titles were among the top ten bestselling albums at iTunes. These sales were generated by a very successful email promotion coordinated between our publishing partners and Apple. The results are particularly impressive because the email was focused on music listeners who had yet to experience the power and addictive character of listening to the spoken word.
Before I turn to some key metrics, I do want to mention that in the coming weeks we will be introducing some changes in our service and user experience designed to delight our customers. Also, shortly after the first of the year, we will be coming back to you with full visibility on key metrics including net subscriber numbers, as well as specific guidance related to our expectations of solid profitability and robust growth in 2006.
We saw strong new customer growth in Q3. We added 79,800 new customers, and of those customers, 62,000 were Audible listeners, reflecting a year-over-year growth of 102%. As I noted, the total new Audible listener members coming to us through committed programs in which they take a free digital audio player or a discount on a player at retail outlets and make a multi-month commitment to being Audible listeners have been increasing, mostly in recent weeks. The percentage of committed customers rose significantly as a percentage of total new customers in Q3 to 24%, as compared to 17% in Q2.
But to offer you some more color on the recent C change for new member composition. During the month of August, the number of new Audible listeners who came in as committed members was 13% of total new Audible listeners. In October, 42% of new Audible listeners came in as committed listeners. Also, in August, 74% of our new Audible listeners were generated through free trial programs, some of which led to higher churn rates. In October, 33% of new Audible listeners came from trials.
These factors have led to a decline in churn in October. It’s still early to read the trend, but the numbers in recent weeks clearly indicate stabilization has been achieved. The success of the free shuffle with membership program in the last four weeks of the quarter did cause the cost of customers to rise slightly. But this is clearly a cost that comes back as a very strong and profitable revenue stream reaped from highly qualified, committed members.
The strong growth in Audible listeners during the quarter drove net revenue of 16.8 million, reflecting a year-over-year growth of 81%. As expected, we saw a loss from operations for the quarter of $793,000. But before taxes and stock-based compensation expense, we saw a profit of $124,000 which was better than expected.
As many of you know, much of Audible’s success to date has been driven by our ability to invent and deploy new technologies just ahead of market adoption to ensure that we are continually expanding our market opportunity, achieving optimal competitive positioning, and driving rich and diversified media streams of revenue, rich and diversified streams of revenue and profit growth well into the future.
We have called 2005 a year of investment in pursuit of these goals. And there are certainly important initiatives this year that will ensure we remain competitive and in high growth mode for years to come. While we announced specific investments in launching Audible UK, Audible Air, Audible Education, and our new Podcasting applications, we have continuously stepped up execution along many other fronts, all of them designed to come together as major wins for consumers.
Audible Air is our new wireless download service, which we launched in September to rave reviews. Many of you have heard Palm’s CEO, Ed Colligan’s enthusiastic personal review of his experience of Audible Air on his Treo during the last Palm earnings call. Or perhaps you’ve read the in-depth review of Audible Air by David Pogue in the New York Times. For those of you unaware of the product, Audible Air allows for the automatic wireless delivery of our audio content to a SmartPhone, bypassing the PC. I now wake up in the morning and find my Audible audio edition of the Wall Street Journal, and the New York Times or my latest Audible edition of the New Yorker or Charlie Rose or the Bob Edwards Show waiting for me in my Treo 650. The application will also refresh my latest audio book with another personally determined segment of audio automatically, only overriding the portion of the book I’ve heard. It’s an amazing experience.
So far the service is being offered to owners of Palm Treos. I would urge any Treo owner to go to the www.audible.com software page to glimpse and hear a piece of the future. We’re also in private data on both of Microsoft’s wireless platform, the one for pocket PCs and the other for SmartPhones, and we have assigned Symbian (ph) application in private data, the signature element, indicating the App has gained prerequisite qualification from Nokia, manufacturers of the popular Series 6V SmartPhones.
Beyond the tremendous convenience of the Audible Air platform, the innovation is directed at some big numbers coming into the wireless market. Some 850 million phones are expected to be purchased globally next year, and an increasing number will be SmartPhones capable of receiving our audio. Yesterday at a conference in Spain, Nokia’s CEO said that they expect to ship a 100 million SmartPhones in 2006, a significant subset of which will have enough memory or at least memory slots for SD or mini-SD cards so they can handle Audible Air delivery.
Audible UK launched during the final days of the second quarter and completed its first quarter of operations under managing director Chris McKee in Q3. And we are pleased with how things are developing in the UK. We will soon launch our Audible UK audio edition of the London Times, and will continue to ramp our customer acquisition partnership with CD WOW, the big British online retailer. We were also very impressed with the strong sales of our UK source, content at iTunes UK and at www.audible.com US. And we now are partners of the BBC Worldwide are very pleased with our sales trends.
Audible Education is a growth initiative that has implications that are social as well as economic. As the initiative promises to create new auditory learning opportunities for individuals of all ages. We were very impressed with the Pearson Higher Ed study guides being produced in advance of their 2006 Higher Ed channels sales effort. We also have just signed an exclusive original content deal with the very successful publishers of SparkNote to jointly create audio study materials and co-market them at Audible and via their high traffic educational destination site, at sparknotes.com. Additionally, we have struck an agreement with Pollett (ph) Higher Education, the leading college retailer to market audible content both online and in stores. We’re also addressing the K-12 market with a content and marketing agreement with Scholastic. You can expect many more announcements along these lines in the near future.
We continue to see consistent demand for Audible technology among creators of tethered digital audio players. Earlier this week, our first Audible-ready GPS device, the NuV (ph) from Garman (ph) shipped fully audible-ready, and with our marketing materials and sample audio onboard. We expect more of these handhelds to adopt our audio platform in the near future. And we’re very intrigued to see the market response in light of the NuV’s focus on travelers and outdoor enthusiasts.
We were also very pleased with the high adoption rates we’re seeing from our work with Dell and their audio devices, as we are with SanDisk audio devices in the market. We are also on track with XM to bring our technology systems together to allow Audible and XM premium content access from a single device during the first half of 2006. We continue to add consumer electronics accessory marketing partners. Most recently, we added DLO to the Audible marketing partnership family, manufacturers of 30 popular iPod accessories that will all now ship with Audible material that will increase awareness of our service.
On the marketing and distribution front, we launched an important new partnership with BookSpan, the large operator of most of the nation’s book clubs from Book of the Month Club to the History Book Club and many, many others. Co branded boutiques are performing very well in the books and websites as is our new boutique at www.cbsnews.com, the first public result of what we expect to be a strong and multi-faceted relationship with CBS.
At retail, the successful Audible gift card program launched with Target last Father’s Day will be extended for the coming gift buying season to Best Buy and WalMart stores. On the content front, we have now have 270 content partnerships, more than 62% of which are exclusive, multi-year deals. We closed 29 new or renewed content deals in Q3, 16 of which were exclusive. The new deals include access to dozens of Chicken Soup for the Soul titles, nearly 200 new Spanish language titles, and children’s audio books from Scholastic, which I noted earlier.
During the quarter, we also struck several original production deals, one with Rodeo to create audio versions of their popular Abs Diet products, another with marketing guru Seth Goden (ph), and another with writer/performer Eric Bogosian (ph). We also added XM’s franchise spoken word programs the Bob Edwards Show and the Opey & Anthony Shows. And we launched a new twice-weekly program on XM Satellite Radio called This is Audible, that is also available through www.audible.com. This new one hour show features countdowns of Audible’s top seller list, interviews with authors and narrators and features focusing on some of Audible’s most compelling listening.
I also want to note that on September 18, a smaller phase of our network infrastructure upgrade was achieved and is scheduled has resulted in an average 50% decrease in webpage load times. Far more profound improvements are expected during the fourth quarter in concert with the exciting new innovations and improvements that I alluded to at the top of the call.
So let me now turn things over to Andy, who will take you through the financial details from the quarter.
Andrew Kaplan, Chief Financial Officer
Thanks, Don, and hello everyone. As Don mentioned, total revenue for the third quarter grew to 16.8 million, up 81% year-over-year, driven mainly by strong growth in new Audible listeners as well as average Audible listener buying over plan of 19%. Strong sales of Audible content at the Apple iTunes music store accounted for 14% of total revenue. Monthly churn in Q3 of 5.7% was up 6/10 of a percent from Q2, and Q2 churn was up 1.1 percentage point from Q1.
Turning to operating expenses, costs of consumer content revenue in the third quarter was 5.9 million or 35.9% of consumer content revenue versus 36.2% in the immediately prior quarter. This decrease is the result of our efforts to manage down content costs via pricing as well as merchandising mix. In Q3, average customer acquisition costs increased to $43 from $40 in Q2. The primary driver of the increase was an increase in the mix of Audible listeners recruited through 12-month commitment programs, from 17% in Q2 to 24% in Q3, as Don noted.
Our $100 rebate and free Shuffle programs continue to be a source of solidly profitable customers. We expect this strength in our mix of newly committed Audible listeners to continue in Q4.
Expenses incurred in building our UK business, our Audible Air initiatives and the continued strengthening of Audible’s service delivery system are reflected in the operations and technology and development lines.
Moving down to P&L, interest income increased to 554,000 in Q3, reflecting earnings on our 69.7 million cash and cash equivalents balance which is invested in government securities with maturities not exceeding one year. And with that, our net loss for the quarter was 189,000 or a penny per share. And with that, I’ll turn it back over to Don.
Donald Katz, Chairman and Chief Executive Officer
Thanks Andy. So we’re reaffirming our guidance for 2005, an expectation that represents accelerating year-over-year revenue growth for the third year in a row. As I noted, we will be offering guidance for 2006 in early January, along with other key metrics that we will be publishing for the first time. And you can feel assured that the 2005 investment initiatives in the UK, education and Podcasting are all projected to be contributors to both revenue and profit during 2006.
I do want to take a moment before closing to observe that right now is as dynamic and promising a moment for Audible and digital media distribution as I have experienced during our decade of business building. On November 11, I’ll be giving a speech in California at one of the first large Podcasting conferences, where we’d be making some important product announcements. We are expecting Podcasting to be additives on both the revenue and profit lines in 2006. And our discussions with media companies about Podcasting and the commerce revenue streams we can build for the creators of premium programming has ratified the sense one draws from the business pages. Big media companies have indeed reawakened to the web, to digital media in general, and as we’ve observed, to Audible.
Meanwhile, device penetration is steadily rising, led by our amazing partners at Apple, who seem to put out one magical new www.audible.com compatible iPod after another. And it is clear from evidence such as the iTunes bestselling album list I mentioned earlier that our specialty, the world of literate listening and the consumption of the words people need and want to consume as a means of improving their lives, is at its own upward trajectory within the large digital media distribution trend, as confers to the habit of Audible audio come to us by the day.
We envision a day in the not too distant future when newspapers carry listings describing the rich flow of new titles at www.audible.com as they do with television. The technology innovations we have helped create are positive disruptions of the status quo, and we are well positioned to serve the millions of listeners who will want to program their own listening time during those times of the day when they can’t read or look at a screen. Q3 represents yet another step forward. And thanks. So we’ll take some questions now.
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