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TheStreet (NASDAQ:TST)

Q1 2012 Earnings Call

May 03, 2012 4:30 pm ET

Executives

Erica L. Mannion - President

Elisabeth H. Demarse - Chief Executive Officer, President and Director

Thomas J. Etergino - Chief Financial Officer and Executive Vice President

Analysts

Michael Mauskopf

Kyle Krueger

Operator

Welcome to TheStreet's First Quarter 2012 Earnings Conference Call. This call is being webcast live on the Investor Relations section of TheStreet's website at www.t.st. This call is property of TheStreet, and any recording, reproduction or transmission of this call without the expressed written consent of TheStreet is strictly prohibited.

As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of TheStreet's website.

I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations, Investor Relation for TheStreet.

Erica L. Mannion

Good afternoon. Thank you for joining us to discuss TheStreet's financial and operating results for first quarter of 2012. With me today are Elisabeth Demarse, Chief Executive Office and President; and Tom Etergino, Executive Vice President and Chief Financial Officer. Today, Elizabeth will review the first quarter results and provide color on industry dynamics. Tom will then review in more detail the first quarter financial results.

All statements made on this call, other than statements of historical facts, are deemed to be forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, including those described in the company's filings with the Securities and Exchange Commission, that could cause actual results to differ materially from those reflected in the forward-looking statements. Although the company believes that the expectations reflected in the forward-looking statements are reasonable, the company cannot guarantee future results or occurrences. The company disclaims any obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise. You may obtain copies of the company's filings with the SEC at the Commission's website, www.sec.gov and additional information related to matters discussed today also will be set forth in the company's quarterly report on Form 10-Q for the first quarter of 2012, which the company expects to file shortly.

Now I will turn the call over to Elisabeth Demarse. Elisabeth?

Elisabeth H. Demarse

Thank you, Erica. Thank you, everyone, for your interest in TheStreet, and welcome to our First Quarter 2012 Conference Call. Given that I joined the company approximately 7 weeks ago, I'd like to provide solicitors a bit of color on my background and why I'm so excited to be here.

My deep domain expertise in financial information and analysis serves very well for leading TheStreet. I've served my entire career in media, financial information and technology; I've held senior positions at Citibank, Bloomberg, Hoover's, Bankrate, CreditCards.com, and Newser. In these roles, I've built countless financial information products, including news, subscription, database and analytic products. My expertise includes a rare combination of experience with more than 15 years working in premium subscription models and 15 years of Internet advertising models.

At Bloomberg, I was Head of Marketing, working directly for Mike Bloomberg. Then as a Senior Member of Management Team at Hoover's, I helped take that company public. As CEO and President of Bankrate, I turned that company around from substantial operating losses to a business that generated impressive net income margins. At CreditCards.com, I successfully acquired the assets to build the company from a small-growth stage company into leading online destination for credit card acquisition, driving very strong margins during one of the worst economic downturns ever in the financial industry. And in 2010, I successfully sold the CreditCards.com to Bankrate. I spent the last 2 years as CEO of Newser, where we invested heavily in direct ad sales, mobile and social. So I'm extremely excited about bringing my learnings from that experience to TheStreet.

On a personal note, I'd been following TheStreet for years. I've even known all the former CEOs, except for one, so I have a very strong advantage of knowing the company extremely well prior to accepting this position. And I always believe that the company has extraordinary, untapped potential.

What influenced my decision the most are the 2 established and strong business models that we have here at TheStreet. The subscription-based Premium Services business model and advertising, in which we now refer to as advertising-supported media. These models are highly scalable, and as we grow revenue, our cost structure will allow for high operating leverage and margin expansion. And I have secured complete commitment from my board to this dual business model strategy.

Another reason I joined TheStreet is the quality of our audience. TheStreet has strong market position and brand equity within the high interest finance vertical. We're top 10 comScore site in the coveted business and finance vertical. TheStreet's audience is comprised of highly engaged users, affluent educated professionals who seek our content for a purpose. Our audience is a premier audience, 65% male with an HHI over $100,000. These are highly valuable demographic characteristics, which can drive substantial growth in both of our businesses.

On subscription side, TheStreet has developed a well-known leading consumer brand in the investment category. We have leading subject matter experts and a platform on which to grow new newsletter talent.

With that said, let's move to the quarter's results. As you read in our press release sent out today, revenue for the first quarter was $12.8 million, a decrease of 9.2% compared to the first quarter of 2011. We continue to be challenged by the macro environment as retail investors remain on the sidelines and advertisers are standing by until they return. Market uncertainty remains, trading volumes are down and saving [ph] rates are up, all of which are causing retail investors to focus on fixed income instead of equity. Retail investors have largely been absent for rally that we are seeing. While we face macroeconomic headwinds, the company continued to also experience execution issues. The challenging market environment is out of our control, but we can improve execution.

In the short-term I've been on board, I have observed, started to evaluate the company's assets and made some early changes to the organization that will position us for growth and allow us to capture the large market opportunity available to us. The first stop was reorganizing the editorial side of our business. TheStreet's advertising-supported media business previously had a primarily full-time editorial staff. We pivoted towards more of a contributor freelance model without sacrificing high-quality content. And we have retained a select few full-time editorial staff. This is a strategy I have successfully implemented at Bankrate, CreditCards.com and Newser. I believe it is the first step to achieving maximum growth and return in the media business.

On the premium side, subsequent to quarter end, we discontinued ETF profits. The product was not performing as well as expected and with the target audience that was not as clearly defined [ph] as it should have been, combined with a very limited market opportunity. This is due to the abundance of free ETF content available, and thus, we decided to discontinue this product.

There's also been some personnel changes, as I believe you need the right team in place to execute effectively. Two notable additions to TheStreet are Bill Inman, who joined our team as our new Editor-in-Chief in mid-March. An award-winning editor, nominated for the Pulitzer 3 times, Bill spent 17 years at Bloomberg News, where he and I worked closely together for over a decade. Bill has decades of experience covering financial markets and business news, and most recently served as Editor-in-Chief of Institutional Investor. Bill has immediately reorganized our newsroom around the contributor model, and I'm so pleased to have them on board.

Another addition is Eric Shakun. Eric managed my M&A program at CreditCards.com and spent the last 2 years at Jordan, Edmiston Group, focusing on the marketing and media space. Eric has been hugely productive, putting processes and operations in place, getting us off to a running start.

Lastly and regrettably, there have been cuts of staff. While it is never pleasant to make these cuts, it is necessary to rightsize and have the most effective team in place in order for TheStreet to progress. I believe the organization was too siloed, with subscription and ad-supported media sites not having enough communication and coordination with one another.

Since we've made this change to the freelance contributor model and since we've made the 2 sides of the business communicate more frequently, we are already seeing the barriers between the 2 sides of the organization breaking down. People are working closer together and the communication now flows much better.

The changes I mentioned today were the first steps, and we can continue to further assess our assets to determine how each can be improved to ensure all of our products, are the most informative and effective for our customers.

While that effort is ongoing, looking towards the future, I see many opportunities for TheStreet. First, in relation to our audience, we've had sustained growth in our targeted demographic. We believe that as the market rebounds and becomes more interesting and returns increase, retail investors will seek higher returns and return to the market. When inevitably retail investors return to the market, discounted brokerage advertising spend will increase, and will be a must-buy for these brokerages, due to our attractive demographic.

Secondly, TheStreet Business Desk has nearly 400 newspapers under contract for services, as was mentioned last quarter. Of those, we have successfully implemented about 270 newspapers as of April 30, including the San Jose Mercury News, Denver Post and St. Paul Pioneer Press. Both we and our partners are excited about the prospects for growth and the ability to leverage our cost structure through this new distribution channel.

Another area I'm looking forward to seeing progress on is mobile. Our mobile traffic doubled from last year, and we believe mobile will be a growth driver on our products in the long run. This market offers a lot of opportunity and will be a primary focus for us.

The above opportunities make me excited for the future. I've been in this business long enough to know that creating sustainable growth doesn't happen overnight. The remainder of the first half of 2012 will be used to continue to evaluate assets, implement change and solidify our strategy to build a stronger company with sustainable revenue and margin growth, ultimately returning great value to our patient shareholders.

With that, I'll turn the call over to Tom, who will review our financial results, and then we'll take any questions you have.

Thomas J. Etergino

Thank you, Elisabeth, and welcome, everyone. The company recorded revenue of $12.8 million for the first quarter, which, when compared to the first quarter of 2011, declined 9.2%. Revenue contribution from the advertising-supported media business, referred to previously as Marketing Services, was $3.6 million and revenue contribution from Premium Services business was $9.2 million.

Despite our continued progress in the rollout of certain of our key strategic initiatives, namely TheStreet Business Desk and mobile initiatives, the company's revenue related to its Media business declined 19.6% for the first quarter of 2011. We attribute the decline to both macroeconomic challenges and our poor execution on monetization that Elisabeth just mentioned.

To give you more color on the macroeconomic challenges we face, which impacted both our advertising sales and Premium Services bookings, the challenges stemmed from what we believe was weak demand for investment-relating content from retail investors. Indicators of this include the following: First, the Google Investing Index, which reflects the volume of search queries related to investing, showed a double-digit percentage decline year-over-year during the quarter and second, the number of daily average revenue trades, or the DART volumes, as recorded by a major online brokerage firm, declined by double-digit percentages as well, when compared to Q1 2011.

Additionally, our modernization efforts remain challenged. You may recall that on our previous call, we had strong upfront commitments from our endemic advertisers, year-over-year, but bear in mind, these upfront commitments are long-term commitments that typically allow customers the flexibility in the flight-ing of their campaigns, which is often contingent on the market environment. As a result of its timing of when we realize this revenue, it varies based on the advertisers' decision regarding when to utilize their commitments.

On a positive side, in Q1, the revenue from nonfinancial advertisers increased from the double-digit percentages year-over-year.

As you can imagine, we've been disappointed that we have not yet delivered on the modernization front. We are in the initial stages of adjusting these issues, but we do remain extremely positive on our ability to realize our full potential, especially with the addition of Elisabeth's monetization expertise and proven capabilities.

Additionally, in Q1, we continue to show strong audience growth. Our internal measurements show the average number of monthly unique visitors to our sites grew by approximately 8% compared to the first quarter of 2011. This internally measured growth was once again collaborated by the industry-recognized external rating services which showed double-digit growth.

Moving on to our Premium Services business, subscription bookings were $9.6 million for the first quarter, a decrease of 21.6% compared to the prior year. As I just mentioned, we believe that many of the macroeconomic factors that contributed to the advertising decline year-over-year, also contributed to the bookings decline from for Premium Services business.

Revenue from our Premium Services business decreased 4.4% compared to the same period last year. The decrease is primarily attributable to a 10% decline in the average number of subscriptions as compared to the prior year period, partially offset by a 7% increase in the average revenue per subscription.

The increase in average revenue per subscriber, or ARPU, was driven by both favorable product mix as a result of our upselling efforts and higher product pricing, as well as an increase in the percentage of total subscriptions that are in the non-introductory cycle. As a reminder, we typically discount the introductory first-cycle subscription significantly, so the mix of introductory cycle versus older cycle subscribers can impact our overall ARPU.

The decrease in the average number of subscriptions in Q1 2012 versus Q1 2011 was primarily driven by the number of first-cycle subscriptions up for their first renewal cycle during the quarter, which was the result of the strong new subscription bookings we achieved in Q1 2011. This fact also is the primary reason why our average monthly churn for the quarter increased to 5.1% compared to 3.4% in the first quarter of 2011. As with most subscription-based businesses, our first-cycle subscribers have the higher churn rate than subscribers who previously have renewed.

Looking to the expense side of the business. We continue to show that when faced with a challenging quarter, we are also able to effectively manage costs in response. Operating expenses were $15.6 million for the quarter, excluding the $1.7 million restructuring charge, which is a decrease of 7.8% compared to the same period last year. Overall, the cost reduction stemmed from lower headcount-related costs, lower consulting and professional fees and lower depreciation and amortization.

As you will see, in Q1, we incurred a restructuring and other charge of $1.7 million. The restructuring charge is primarily due to the efforts we made at the end of the quarter to rightsize the organization for the long-term and rationalization of certain technology initiatives.

The company reported a net loss of $4.4 million for the first quarter of 2012 as compared to a net loss of $2.6 million for the same period last year. Excluding the restructuring charge, net loss was essentially flat from last year as expense management measures effectively offset the lower revenue base.

Adjusted EBITDA was negative $1 million for the first quarter of 2012 as compared to a negative $0.5 million for the prior year period. The company ended the quarter with cash, cash equivalents, restricted cash and marketable securities of $71 million, a decrease of $4.3 million compared to December 31, 2011. The company used $2.4 million in cash flow from operations in the first quarter.

As a reminder, the first quarter is historically a use of cash flow quarter, primarily the result of payment of annual cash incentives for the prior year. The decrease in advertising revenue bookings for the quarter also negatively impacted cash flow when compared to year-over-year.

Last, the company continued its dividend payment policy during the quarter, providing return on investment to our shareholders as we manage through the difficult macroeconomic environment and continue to progress through this period.

Now, I would like to ask the operator to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from the line of Michael Mauskopf from MRM Capital.

Michael Mauskopf

Did you just say that the average revenue sub went up 7.7% year-over-year?

Thomas J. Etergino

Average revenue sub? I said average -- it's ARPU, went up 7%.

Michael Mauskopf

Yes.

Thomas J. Etergino

Average revenue per, yes, average revenue per subscriber, correct, while the subscribers went down.

Operator

[Operator Instructions] And we now have a question from the line of from Kyle Krueger from Apollo Capitol.

Kyle Krueger

Yes, brand-new shareholder, Elisabeth, I just wanted to ask you to give us a general look into the next several quarters. What approach you'll take for the business, know that you reduced some headcount and hear the things you're saying on the call. Generally, what will the expenses look like going forward? Will it be more variable under this plan? When would you anticipate that revenues could be up on a year-over-year basis? Just give us your outlook on some of the more important financial metrics, if you could, in a very general way.

Elisabeth H. Demarse

Well, thanks for the free pass on being general because it's early days. It's really early days in. Even though I've known the company well for a long time, in fact, it's extremely different than coming in and looking at the operations up close. And having said that, to some degree, yes, there was low-hanging fruit, we come in at the very rare time you come in, there are no sacred cows. It's a very clear and rare opportunity to reorganize things. And I'm not going to say that it's easy, but it's a very rare moment of clarity that you really never get again. So taking advantage of that quickly to get to the cost structure, what I will say is at this scale, I believe that this company and both of its business has sufficient scale to be certainly cash positive, and I have to work very hard to get there without breaking anything. And that's what I'm really doing now. And in some stages that would mean bringing in people who could help me, in some cases it means realign the operations so that we can take advantage of the very talented people who work here, and that was a very nice surprise. I knew a lot of the people here, but just coming back in, seeing the caliber of the people who are here, it's been fantastic. And I want to get through this and I want to get to what I call a machine operation so we can concentrate on the growth. And sadly, I can't give you an ETA on when will we able to get to the fun stuff of growing our wonderful businesses. So I don't know if that helps. I can probably get a little more granular if you want, but why don't you ask me something specific and I'll try and see if I can answer.

Kyle Krueger

Well, when do you see a return to revenue growth, and how dependent is that upon the individual investor coming back? Are there some other changes that you can make to the revenue model in order to facilitate that in advance of a market comeback on the part of the individual investors? I mean, how do you see that?

Elisabeth H. Demarse

So there are couple of things. One is, I have a saying, which is, “not the reins, but the horse,” and that certainly was the case at Bankrate when we -- when I took over Bankrate. It was in the early ops [ph] , and was the terrible -- worst advertising decline ever in that business, same thing at CreditCards. We muscled through a very unfavorable circumstance where the credit card issuers pull back mightily from the marketplace. So I do believe that when you have these small companies that you can outmaneuver and out-execute in favor of the business condition. So it's not -- that’s one of the reasons I've put my own money here is, yes, it's a great to have wind in our sails, but we can also just be faster, quicker and nimbler and re-optimize, though there have been some pleasant surprise, I'm not going to walk you through it. But you might scratch your head and say, "Well, how do you feel about the newsletter business? Are those good products?" Without walking you through granularly, I'm getting very nice confirmation that we have very, very good products in that business, and we just had some missteps in our strategies in terms of targeting people. We're getting people into the right products. That's operations. I hope I can fix that very quickly. In terms of the CPM business, again, I'm enthusiastic about that business. I think that they were a little more sensitive to retail traffic. And so my goal is to hang on to what we've got, and I don't think we're missing a beat, by the way, in this transition when it comes to the CPM business.

So -- and frankly, it's all going to be about the upfront in the fall and building a really strong business with our high endemics, which have a great stake in working with a multiplied channel like us. So that was a very long-winded saying. We think that we're -- it's not going to be revolutionary. It's going to be evolutionary, but I certainly, hope to get growth as soon as possible. We have to, like I said before, become a machine in terms of operations or it's just not going to be sustainable.

Kyle Krueger

And you've got the benefit of coming in and having a strong balance sheet. Do you see yourself being acquisitive in the near term before you really get the operations squared away and molded into the image that you see for the company? How do you see that?

Elisabeth H. Demarse

Yes, so we do have a very strong balance sheet, and I'm very excited about that. Jim Cramer makes the joke that we're fat [ph] . I think what -- the reality is that might work and properly so, will not let me do one thing until I get our ship in order. So that's one of the reasons I'm working so fast and so hard, and the team's working fast and hard to get us into very strong, excellent operational -- excellent operating condition, because there's no point in doing any kind of M&A program unless we can absorb it and make it accretive and do all the things we need to do to integrate these things.

Kyle Krueger

Okay. And just a final question. I realize it's a board decision, but the dividend, do you -- would you see keeping the dividend in place, or do you see yourself more as a growth company and eliminate the dividend and put that capital back into the growth of the business? How do you see that issue?

Elisabeth H. Demarse

Yes. So I'm a little bit funny in that I have this -- and this is my attitude at Bankrate, which is I like to be a value-growth place, if there's such a thing. So I'm actually enthusiastic about the dividends. We'll, of course -- and evaluate the dividend, but I think it's a great promise. It costs us about $3 million a year. And there is no reason, in my opinion, that we can't continue to commit to the dividend. Having said that, I also like it because that sort of differentiates us in the marketplace, and as a marketer, I like to be different. We're a growth company, but we pay a dividend. I'm a fan of dividends.

Kyle Krueger

Yes, okay, okay. And just one thing I'd add at the end is I'm a longtime InsWeb shareholder and I certainly, appreciate your efforts and work there at a board level, culminating a great outcome. You forgot that -- you forgot to add that one to your list of accomplishments, so thank you.

Elisabeth H. Demarse

Yes, that was fun. Thanks.

Operator

And I see no additional questions in the queue at this time. I would like to turn the conference back to TheStreet for any final remarks.

Elisabeth H. Demarse

Well, I'm very excited to be here. Thanks, everybody, for tuning in. I just want to reiterate, it's a rare moment, there's great clarity, it's not easy, but it's obvious what has to be done here. And we're working as hard as we can to get there. So thank you again, and we'll talk to you in a couple of months.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.

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