Executives
Michael Pickett - President & CEO
Analysts
Gene Weber - Weber Capital Management
Onvia, Inc. (ONVI) Q3 2007 Earnings Call October 30, 2007 5:00 PM ET
Operator
Welcome to Onvia's third quarter 2007 earnings conference call. On the call today is Michael Pickett, Onvia's Chairman and CEO. A brief presentation will be made by Mr. Pickett followed by a question-and-answer period. We anticipate this call to last 30 minutes. A recording will be available by calling 1-800-675-9924 and entering replay ID 103007. This recording will be available starting 15 minutes after the conference call.
Before turning the call over to Mr. Pickett, investors are cautioned that other than statements including the company's historical results, statements being made on this call may include forward-looking statements. These forward-looking statements involve risks and uncertainties that can cause actual events and results to differ materially from such forward-looking statements.
In particular, but without limitation, investors, potential investors and other interested parties should note that forward-looking statements may include statements regarding the company's projected cash flow, operating expenses, growth, strategic plans, new products, client counts and client information, optimism about achieving higher results, profitability and any comments about the company's future, in response to your questions.
Additional information about these risks and uncertainties can be found in the MD&A and Risk Factors section in our 2006 annual report on Form 10-K and our most recent quarterly report on Form 10-Q, as applicable.
At this time I would like to turn the call over to Mr. Pickett. You may begin, sir.
Michael Pickett
Thank you, Heather. In 2005 we developed a three-year strategic plan to invest in new content, tools and people with the objective of accelerating revenue growth, generating cash flow and achieving profitability over a three-year period. In August 2005 we launched Onvia Business Builder followed by Onvia Navigator in April of 2006, which have become the foundations of our business. Over the past 24 months, these products have contributed to accelerated revenue growth and in the first quarter of this year, we began generating positive cash flow from operations.
Today I am pleased to announce that we generated net income in the third quarter of 2007, the final objective of our three-year strategic plan. We are proud of the fact that we have achieved all of our plan goals, and we will continue to focus on these key objectives by developing unique products and by providing our clients with critical information they need to grow their businesses.
Onvia's quarterly revenue grew 26% to approximately $5.4 million, up from $4.3 million in the third quarter of 2006. Onvia's growth is being fueled by increases in annual contract value and content licenses. We continue to leverage our content infrastructure, and as a result, our gross margin improved to 83%, up from 81% in the prior year.
Operating expenses in the third quarter of 2007 were lower than planned. Excluding the impact of lease transactions, operating expenses were $4.2 million compared to $4.8 million in the same quarter of last year.
The competitive hiring market in Seattle has made it difficult to fill open positions across the company. For example, our technology and development team was significantly under spent because the team was staffed at 70% of plan during the quarter. We are actively trying to fill our open positions, which will increase operating expenses, but are critical to the longer-term success of the company.
Onvia reported net income of $2.9 million in the third quarter of 2007, which includes the reversal of our idle lease accrual in the amount of $2.7 million. Diluted net income was $0.33 per share. Adjusted net income was $498,000 compared to a net loss of $850,000 in the third quarter of 2006. Adjusted net income is net income excluding the $2.7 million reversal of the idle lease accrual, the accelerated depreciation expense and additional rent expense associated with a series of lease transactions executed in the third quarter.
The idle lease accrual represented our previous estimate of our future loss on unused space under our current lease. In addition, as a result of the lease termination and the execution of a new lease in a different facility, we recorded accelerated depreciation of current leasehold improvements and rent on the unoccupied new facility of $294,000 in the third quarter of 2007, both of which are excluded from the calculation of adjusted net income.
We believe the adjusted net income is relevant because it demonstrates our net income during the quarter exclusive of the impact of a series of lease transactions. Diluted adjusted net income was $0.05 a share compared to a loss of $0.11 a share in the third quarter of 2006.
Onvia's cash flow from operations was a negative $87,000 in the third quarter of 2007 compared to negative cash flow of $1 million last year. Year-to-date, we generated positive operating cash flow of $448,000 compared to $2.9 million in negative cash flow in the same period of 2006.
Due to the seasonal purchasing cycle of the public sector, new client acquisitions and client renewals, are typically strong in the fourth quarter of the year, which impacts client-related metrics and the timing of cash flow generated by the company. Cash, cash equivalents and investments at September 30, 2007 decreased by $40,000 compared to December 31, 2006.
In the third quarter, we issued a security deposit of $538,000 under our new lease. Upon the expected termination of our current lease in January of 2008, our $3.5 million security deposits will be returned.
Year-over-year unearned revenues increased 12% to $9.3 million from $8.3 million as of September 30, 2006. Third quarter unearned revenue declined from $10.2 million in the second quarter of 2007 due to lower national accounts or enterprise sales compared with the second quarter of 2007 and due to a higher than normal percentage of third quarter sales which were booked but uncollected at quarter end. These sales are not recognized in deferred revenue until payment is received from the client. Unearned revenue represents the unrecognized value of paid or billed client subscriptions and content license contracts. Unearned revenue is recognized ratably over the term of each contract.
The annual value of content licenses at September 30, 2007 was $2.6 million compared to $2.2 million as of September 30, 2006 an increase of 18%. Content license revenue is generated from data licenses with resellers of our content. Content licenses are not included in unearned revenue.
This week we plan to launch our new website at www.Onvia.com, which we developed to better communicate Onvia's value to potential prospects. The new website is intended to drive more qualified prospects to our salesforce, which we expect to convert into sales at higher rates than experienced today.
Last quarter we launched a nationwide search for our vacant Vice President of Marketing and our Vice President of Sales positions. These positions are very critical to delivering future revenue growth, developing sales and marketing strategy and contributing to new product development. We have interviewed a number of candidates, and we hope to have the position filled by the end of the year.
Historical adoption of our database products has been very strong. As of September 30, 2007, nearly 45% of our existing clients have purchased access to our Onvia Dominion database, up from 28% as of September 30, 2006. We are pleased with the overall adoption rate of our database products within our client base. However, growth of our client metrics is slowing. Onvia's last major product launch was the release of Onvia Business Builder in August of 2007 followed by the launch of Onvia Navigator in April of 2006. We have leveraged these products to increase contract value of our client base.
However, contract value and contract value per client growth rates have recently slowed due to the delay in launching of the new product. In the first quarter of 2008, Onvia plans to release the new content solution which is intended to expand the market for Onvia services, generate top line revenue growth and improve client and per client metrics.
Now let’s discuss our operating metrics. Annual contract value is the aggregate annual value of the subscription client base. Growth in annual contract value demonstrates our success in increasing the number of high value clients and upgrading existing clients to new and higher value products. At September 30, 2007, annual contract value per client subscription was 17.5%, up from 14.9% at September 30, 2006, an increase of 17%.
At September 30, 2007, Onvia had approximately 8,800 clients, down from 9,000 at June 30, 2007 and down from approximately 9,200 a year ago at September 30, 2006. High value clients, which exclude our entry-level Metropolitan clients, increased to approximately 7,900 clients from approximately 7,800 clients at September 30, 2006, but declined slightly from approximately 8,000 clients in the second quarter of 2007.
Annual contract value per client is the average annual contract value of our existing clients on an individual client basis. As of September 30, 2007 annual contract value per client was $1,984 compared to $1,629 a year ago, an increase of 22%.
Quarterly contract value per client represents the average annual contract value of all new and renewing client transactions during the quarter. Quarterly contract value per client increased to $2,163 in the third quarter of 2007 compared to $1,823 in the third quarter of 2006, an increase of 19%.
We are very proud of our achievements this year. We have achieved cash flow profitability, maintained high revenue growth rates and begun to generate net income. We're very proud of our team, who have made the achievement of these goals possible.
Thank you, Heather. We will be willing to take questions.
Question-and-Answer Session
Operator
Your first question comes from Gene Weber - Weber Capital Management.
Gene Weber - Weber Capital Management
Hi Mike, congratulations on the quarter. Could you tell us where the headcount is now and where you would have liked it to be now?
Michael Pickett
Thanks, Gene. Yes, we are at about 160 people. In technology in the quarter, we were down about ten. In sales, particularly in national accounts, we are down four. The rest of the sales group is okay. We lost quite a few research people. They have been replaced now, and that is not a big deal but it kept expenses a little bit lower. So I would say that probably our plan was somewhere around 180.
Gene Weber - Weber Capital Management
The lack of the people in technology, has that delayed your ability to introduce this new product you are talking about?
Michael Pickett
I think it is probably a little deeper than that. We brought on a new CIO who has done an outstanding job in an effort to rebuild our platform so that we can take advantage of a lot more growth in the future and the possibility that we might want to consolidate some acquisitions. We decided to defer that launch by about six months in order to accomplish this.
So I would not argue that the headcount caused that delay. I think that was an intentional decision. I think the product will be put up on a much more powerful and stable platform. That will enable us to grow a lot faster without any hiccups in the future.
Gene Weber - Weber Capital Management
Are you talking about that with your customers yet, or is this something that you're waiting on until it is ready?
Michael Pickett
We have talked to only a small subset of them and only during our market research. So we have not exposed it to them. We will expose it to them probably very, very early in Q1; very, very early.
Gene Weber - Weber Capital Management
My final question is to just ask you to repeat something. You quickly went through what the cash balance was and you mentioned something about a deposit and then another deposit that is coming back in January. Could you go over that again?
Michael Pickett
Sure. In conjunction with the new lease that we signed at the beginning of the third quarter, we were required to deposit $538,000 for a lease deposit so that is cash out. Since we have both of these spaces between now and 1st of January as we are doing our TI in the new space, we have a $3.5 million deposit on the old space that will be returned to us in January when we vacate these premises. So the net between those two deposits is a reduction of prepaid or other assets and an increase in cash of about $3 million.
Gene Weber - Weber Capital Management
Fair enough. Now I understand. Congratulations again and keep it up.
Michael Pickett
It is just the beginning. Thank you.
Operator
(Operator Instructions) Mr. Pickett, there are no further questions at this time.
Michael Pickett
Thank you, operator and thank you for listening. I will be available as always to answer any other questions that may come up, and again we appreciate you as shareholders and we appreciate the effort of all of the Onvians to help us accomplish our goals.
Thank you very much.
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