EDGAR Online Q3 2007 Earnings Call Transcript

EDGAR Online (EDGR)

Q3 2007 Earnings Call

October 30, 2007 5:00 pm ET

Executives

Phil Moyer – President, CEO

Greg Adams - COO, CFO

Analysts

Ross DeMont - Midwood Capital

Bob Renck - R.L. Renck

Presentation

Operator

Welcome to the EDGAR Online third quarter results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Mr. Philip Moyer, CEO and President. Please go ahead, Mr. Moyer.

Phil Moyer

Thank you, Shelly. I want to welcome all of you to this conference call to the discuss EDGAR Online's third quarter 2007 results.

We'd like to remind everyone that the statements made in this call, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. EDGAR Online's actual results may differ substantially from the results anticipated in these forward-looking statements as a result of a variety of factors, including those identified in our quarterly reports on Form 10-Q and annual reports on Form 10-K, which are filed with the Securities and Exchange Commission.

With that, I'm going to turn it over to our CFO, Greg Adams.

Greg Adams

Thanks, Phil. With our announcement this afternoon, we are happy to report third quarter revenues up 15% from last year and 7% sequentially to $4.7 million. We also reported positive EBITDA on an adjusted basis. We were able to achieve this positive EBITDA milestone by growing our revenues, implementing tighter cost controls, and restructuring the organization to better align our costs with our revenue streams and internal forecast. We are focused on building a financial foundation that we can continue to innovate and grow upon. Phil will elaborate more upon the business later.

Now drilling down to the operating results. Our third quarter revenues were led by data licenses and solutions, which increased 29% over last year and 14% sequentially to $2.2 million, or $1.7 million in 2006, and $2 million last quarter. Our data licenses and XBRL solutions are our fastest-growing segment, which now account for 48% of total revenue, compared to only 42% last year.

The increase in revenue was primarily due to the new Fundamental Data customers and services provided to the XBRL U.S. organization to assist them in the entity's efforts to complete taxonomies for the new interactive reporting of data.

Subscription revenues were also 48% of total revenue, but flat with last year at $2.3 million. The leveling off of subscriptions is primarily due to churn in our retail subscriber base, as the access to free SEC filings and other financial information is more readily available on the Internet. As of September 30, we had over 12,300 subscribers.

Our total number of data customers is growing at approximately 10%, but simultaneously, we are experiencing an 18% increase in our average data customer contract over last year, primarily because our growth is coming from selling our higher value XBRL-enabled product and services. Our XBRL data licenses grew over 33% from last year.

Our last revenue segment, advertising and ecommerce, was $191,000 or 4% of third quarter revenue. This increased almost threefold from last year but was flat from the previous quarter due to seasonality. Our page views continue to grow from visitors and the content we are generating on the Internet via sites like Yahoo! and Google and Forbes.

Looking at operating performance, our gross margins remain very strong at 83% as cost of sales increased slightly sequentially; it was up $194,000 from last year due to additional direct resources and data feeds.

The third quarter operating expenses, excluding amortization and depreciation and severance charges, were $4.2 million compared to $4.5 million last year. Savings due to staff reductions were partially offset by increases in stock compensation expense. We expect to continue to see SG&A expenses decline as a percentage of sales as we grow our top line and remain focused on the right cost structure.

Our workforce is currently at 73 employees; down 22 or 25% from December of 2006. As noted in our release, we recorded a third quarter charge of $984,000 relating to severance for our former CEO and additional workforce reductions. Excluding stock compensation, our quarter-over-quarter operating expenses decreased over $450,000 from last year and over $300,000 sequentially.

In summary, the above yielded a third quarter EPS loss, excluding severance charges, of $0.03 per share, which improved from a $0.06 loss per share last year. EDGAR Online has not recognized any income tax benefits related to the loss and has over $30 million in NOL carryforwards.

Onto the balance sheet. We had an invested cash balance at September 30 of $3.8 million, down from $4.1 million last quarter. As discussed during July's call, in the second quarter 2007, we strengthened our balance sheet by negotiating a $2.5 million term loan and secured a $2.5 million revolving credit facility. We have not drawn down on the credit facility, and the term loan is due March 2010 with interest-only payments until July 2008.

With respect to deferred revenue, the balance increased 13% from year end to $4.4 million. The net change in deferred revenue is due to the success that we are having in getting new contracts and selling our I-Metrix Architect product.

So to conclude, we are operationally focused on driving profitable growth while controlling costs. With our continued success in selling data licenses, customized solutions, and the advancement of XBRL as the U.S. and global reporting standard, we expect revenues will increase as we move into 2008 and beyond.

With that, I'll pass it on to Phil.

Phil Moyer

Thanks, Greg. We're encouraged by the results that we're announcing today. In a challenging financial market in Q3, we delivered 15% revenue growth, as Greg mentioned. We're experiencing strong growth in our data business and great momentum around XBRL. We posted our first quarter of positive adjusted EBITDA in recent memory. These are trends that we are focused on continuing.

A few items of note this quarter: we signed a deal to provide SEC filings to MSN. We are now the exclusive provider of that filing to MSN, Yahoo!, Forbes and Google. We are also happy to note that Microsoft has named EDGAR Online as a managed, independent software vendor. We are continuing to experiment with partnerships with software vendors, but we believe that this is a great indication of the competitive advantage of our technology and it gives us an opportunity to expand the channels that we market through.

This quarter we completed our work on the new U.S. XBRL taxonomies for the SEC. On September 27, we were very excited by SEC Chairman Cox's announcement of the December availability of these new U.S. XBRL taxonomies. Chairman Cox also announced a road map to mandatory XBRL reporting for U.S. companies. We were publicly thanked by the SEC Chairman, and Mark Bolgiano, the CEO of XBRL U.S., for our contributions to that project which for a small company like ours, was a very gratifying endorsement of our abilities.

We have further to go as a company. We have many opportunities to capitalize on, but this quarter we are seeing some positive results from our focus, our internal strategy and our improvements in financial management. As we look forward, we are executing on a strategy that sustains and expands the results we are announcing today.

Per my promise back in July, I want to take some time to talk about the strategy. To start, we've traditionally had two major lines of businesses: subscriptions and data solutions. There are a number of trends that we're seeing in these businesses.

First, other financial analysis software vendors, the large, traditional organizations are expanding by building more analysis capabilities into their tools. We are competing with a broader set of companies in capturing their own data to support these proprietary front-end efforts. This dynamic is producing less choice in the data market for customers.

At the same time, there's a worldwide movement towards international data standards. In our industry, as in many industries, XBRL means that the industry, not data providers or traditional data providers or companies set the definition for what is as reported.

At the other end of the spectrum, there are great financial web sites: MSN Finance, Yahoo! Finance, Google Finance, Forbes.com, et cetera. These organizations continue to build more capabilities into their products and provide greater access to consumer-oriented financial information. They use a free model, offsetting their costs with advertising revenues.

So this may be one of the most exciting times in the 100-year-old plus fundamental analysis and data businesses. Vendors are facing consolidation of competitors, vertical integration and commoditization of entrenched positions from data standards. Companies like ourselves must innovate between free and these vertically integrated, high-priced alternatives.

While this could be scary for some companies, we're small and agile, and we've seen this type of competitive environment in many other industries since the advent of the Internet, and we feel like we have a strategy that will serve us well in this new competitive landscape.

One of our most important strategies is to grow our position as a provider of XBRL financial data. We have built the largest commercial database of public XBRL data. We believe that XBRL is this new definition of as reported. We believe the deep detail in XBRL differentiates us, and we will continue to build data and tools around XBRL.

To build our database, we implemented one of the most cutting edge solutions in the world to automate the capture of financial information from filings and turn it into XBRL.

Another strategy of ours is to continue to scale this automated data collection process. We will compete on speed and automation to help us tackle other datasets for our internal use and also for our customers' use.

To deliver our data, we created one of the first fundamental data web services in the world. These web services allow companies to integrate our data into their environments and their applications on-demand. Our strategy is to compete with flexibility, and to use our unique delivery technology to embed ourselves in any environment or any application that uses fundamental data; not just our own.

Our last strategy is to leverage every available Internet business model to deliver our products and services. We have a great legacy as a dot-com and a great user base. We understand the real-time nature of providing our products across the Internet. Based on this legacy, we're going to continue to innovate between these free and high-priced, more monolithic offerings.

In the most recent quarter, we saw a good indication that we may be onto the right strategy. As mentioned, our data business grew at over 27%. However, as Greg mentioned, our XBRL datasets grew at well over 33%. This is our most cutting edge product, leveraging the new data standard, our collection technology, our unique delivery mechanisms. We use this dataset to power many of our other products, like I-Metrix Pro and our corporate filings business. We're going to continue the growth in this business.

From an organizational and financial perspective, our strategy is to continue to bring our costs more in line with the growth in our business. We've made a number of organizational changes over the past two quarters to better prepare our sales, product and marketing organizations for more complex data and solution sales.

This quarter, we announced positive adjusted EBITDA. We're going to continue our tight focus on cost containment. We will do a very good job of calibrating customer demand with product development, which we believe is an important component of staying EBITDA-positive. Our financial strategy will focus on keeping us EBITDA-positive while balancing the need to continue to innovate and to continue to expand our product set.

Simply said, if we are able to continue to grow our top line at this rate, we believe that we'll remain EBITDA-positive.

To summarize, we are encouraged by these results. We believe we are gaining more strategic focus around data and that our strategy is starting to take hold. We are focused on replicating the results we're announcing today, and we expect to continue to innovate, grow the top line, and continue to create value for our customers and shareholders.

Thanks very much. We will now take questions.

Question-and-Answer Session

Operator

Your first question comes from Ross DeMont - Midwood Capital.

Ross DeMont - Midwood Capital

Congratulations on getting EBITDA-positive. That is great news.

Phil Moyer

Thanks, Ross.

Ross DeMont - Midwood Capital

Greg, it looks like subscriptions are roughly flat compared to the third quarter of last year. Do you think you're managing pricing in that you continue to keep revenues flat going forward? Would the data licenses really be where the growth is?

Greg Adams

The short answer is yes. We are seeing a leveling out on EDGAR Pro. EDGAR Access, as we mentioned, is declining. We do have some plans regarding pricing, and we do expect subscriptions at least to remain stable over the next 12 months, and also hopefully the I-Metrix subscriptions will offset any decline in the core EDGAR business.

Ross DeMont - Midwood Capital

In the new deal with Microsoft MSN, did revenue associated with that deal appear in the third quarter income statement?

Greg Adams

Yes.

Ross DeMont - Midwood Capital

It did. Was it a full impact?

Greg Adams

No, it wasn't. It was a very minimal impact to the third quarter.

Ross DeMont - Midwood Capital

So for the most part, that's additive going forward?

Greg Adams

Yes, that’s correct.

Ross DeMont - Midwood Capital

Phil, can you talk a little bit about what it means to be a Microsoft-managed ISV partner? I mean, will Microsoft either sell or distribute your product, or will they embed it in Excel? How does that work?

Phil Moyer

Well, first of all, I think that the future plans around that are anybody's guess. What it primarily means is that there's a small group of software vendors around the world that Microsoft takes a more, I'll just say, hands-on approach in working with to jointly manage pipelines together, to really be able to produce a value proposition that says, when you use this software vendor, this is how Microsoft software gets sold and how we jointly make money together. So it helps us really put a value proposition in the hands of Microsoft salespeople to both sell Microsoft software and also to sell the products and licenses that EDGAR Online sells.

It certainly does give us an endorsement that the type of technologies, things like .NET and some of the things we've done inside of Office 2007 with I-Metrix Pro and some of the other technology work, it is a big endorsement that this is a delivery mechanism that's cutting edge that Microsoft really believes has some tremendous value to itself and also to its customers. So we certainly hope to present a number of ideas back to Microsoft about how they can better leverage what we provide.

Operator

Your next question comes from Bob Renck - R.L. Renck.

Bob Renck - R.L. Renck

Greg, you talked a little bit about deferred revenue growth. Can you tell us about the average life of contracts that go into that deferred revenue?

Greg Adams

Bob, I don't have the details of aging deferred revenue at my fingertips, but I can tell you primarily what is in deferred revenue. The $4.4 million of deferred revenue primarily relates to our subscription business, for the most part. Most of our data licenses, if possible, we try to bill them quarterly in advance. They're larger in contract value, but for the most part, data licenses are billed on a monthly basis or we receive royalties from some of the larger data customers.

But in deferred revenues is primarily the EDGAR Pro annual subscription, or the quarterly EDGAR Access subscription, and typically the annual I-Metrix subscription. So the weighting, for the most part again, without the detailed analysis in front of me, is typically about a quarter's worth of revenue; a quarter to six months, between that space.

Bob Renck - R.L. Renck

As a follow-up, within that mix, the EDGAR Pro list price is about $1,200 per year. The EDGAR Access, what's the current pricing on that?

Greg Adams

Approximately $220 a year.

Bob Renck - R.L. Renck

Right. The I-Metrix is what, $4,800?

Greg Adams

The I-Metrix Professional is $4,800 a year. Correct.

Bob Renck - R.L. Renck

You mentioned in response to Ross' question, you talked about subscriptions basically being flattish, but you had some things you were going to do in pricing. Can you share with us what your conceptual thinking is on pricing?

Greg Adams

Not at this point, Bob. We haven't formalized anything for our customers or we have not agreed 100% on the strategy internally. We do think there's a number of different ways that we can go with that.

Bob Renck - R.L. Renck

I think the prior CEO had put out a press release about the deal you did with the AICPA where you were offering individual licenses to people through, in effect, a group rate? What results have you seen from that? I mean, it's relatively recent. It probably was a month into the quarter.

Greg Adams

We're very, very pleased with the results of that relationship. We've had hundreds of people on some of the webcasts associated with I-Metrix Pro with that offering, and so we're seeing some really strong interest across the accounting community around the product and also in these webinars, if you will, around it. As I think we mentioned before, they get continuing CPA credits for taking these courses and also getting an opportunity to look at our product and how we use XBRL. So very, very good acceptance and excitement and momentum around that relationship.

Bob Renck - R.L. Renck

I hate to mention a competitor, except that I think these are probably the best guys around, and that is the Bear Stearns Accounting Group did a report on October 5 about XBRL that was entitled, "XBRL, The Investor's Path to Better, Clearer, and Cheaper Financial Information." I'm not sure how familiar you are with that, but in a sense, the authors made a case that there was a major productivity improvement available with using XBRL, using databases, and it's caused a number of people to have a reaction. Do you have any reactions to that report and their conclusions?

Phil Moyer

I did see that report, and I will say that I was really encouraged that those benefits are starting to be quantified by that report. There are a number of others that we expect will build off of that.

I actually got a chance to talk to some people over at the SEC that were also really encouraged by that. What I will say to you is that one of the reasons why we bet on this is we believe it is going to make the analysis community and the financial community more productive in how they look at financial statements and all sorts of different asset classes longer term. We also think that it's going to make corporate reporting much easier long term, because there's finally a clear definition that can be used across many, many different types of regulatory agencies about what is a financial report, what is an income statement, what is a balance sheet, what is a cash flow?

There's been a lot of speculation and a lot of interest in the community around what the cost savings are, and we think that report does a great job of taking a first step of starting to quantify some of those savings and some of the benefits.

Bob Renck - R.L. Renck

There's also another report, I don't know if you're familiar with it, that was just published by the Canadian Institute of Chartered Accountants called, "Interactive Data, Building XBRL into Accounting Information Systems." They also do eight case studies and talk about XBRL in a broader context in terms of tagging and integrating. Are you familiar with that and if you are, do you have any reaction to that concept?

Phil Moyer

I have not read that particular report, but we do believe that one of the things that we think will occur with XBRL over the long term is that it will go into the heart of companies, right down into the GL level. We think it gives an opportunity for companies when they consolidate with another company, when they're trying to consolidate results among divisions, it will make it a lot easier for them to move information inside of their supply chain, their financial supply chain going forward.

You start with external reporting and as you move it internally, you're solving many of the same problems that you do when you have to report to multiple entities externally.

Bob Renck - R.L. Renck

Lastly, as a follow up, could you just update us on where you are with Donnelly and the whole drive? I mean, short of a mandate, it doesn't appear that there have been a lot of people heretofore filing in XBRL but there have been a number of seminars, FDI and a number of others. What's the state of play? I don't know whether that's a Greg question or a Phil question.

Greg Adams

You know, we've been very happy with the R.A. Donnelly relationship to date, and we actually think that we really have very, very good relationships with their customers and have a very good pulse on what their customer needs are. We're seeing very, very significant uptick again in interest around this post the September 27 announcement by Chairman Cox.

One of the most important things that could have happened on September 27 was that Chairman Cox really set out a road map towards moving down this path, and what I'll just call the target companies are going to have to shoot towards for reporting, is going to be released on December 5 and the public will have a real view of what that is.

So we're seeing again, significant momentum, significant interest, and significant uptick. As you can imagine, we're not going to see a huge number of increase in filers until people know what that chart of accounts is that they have to file in. So we're seeing a lot of activity, and we expect that to continue.

Bob Renck - R.L. Renck

The December 5 is when there's a finalization of the chart of accounts?

Greg Adams

Yes, that's when they're going to be released to the public for public comment, and I believe that Chairman Cox has even talked about the potential of releasing a rule sometime for people to start commenting on as well, sometime around that timeframe or slightly thereafter.

Phil Moyer

There are no other questions, so I want to thank you all for joining the call, and we'll look forward to talking to you next quarter.

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