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Executives

Stacy Ybarra – Director of Investor Relations

James F. Voelker – Chairman of the Board, President & Chief Executive Officer

David Bradley Binder – Chief Financial Officer & Treasurer

Analysts

Kerry Rice – Wedbush Morgan Securities, Inc.

Ali Mogharabi - B. Riley & Company, Inc.

Lloyd Walmsley - Thomas Weisel Partners

[Khar Wong] – Needham & Company

Analyst for Clay Moran – Stamford Group Company

Ross Sandler – RBC Capital Markets

InfoSpace, Inc. (INSP) Q1 2008 Earnings Call April 29, 2008 5:00 PM ET

Operator

Good day and welcome to the first quarter 2008 earnings results conference call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Stacy Ybarra, Director of Investor Relations. Please go ahead ma’am.

Stacy Ybarra

Good afternoon and welcome to InfoSpace’s first quarter 2008 earnings conference call. I’m Stacy Ybarra, Director of Investor Relations. With me on the call today is Jim Voelker, President and CEO and David Binder, Chief Financial Officer.

Before we get started I want to remind you that during the course of this call InfoSpace representatives will make certain forward-looking statements.

These forward-looking statements include statements regarding InfoSpace’s expectations that over the next few quarters we will introduce product enhancements to the marketing initiatives designed to expand our business, expectations that we will be introducing two portals for customers in the future, expectation that we will continue to grow, expectation that we will complete certain restructuring activities by the third quarter 2008 and expectations for our financial performance for the second quarter 2008.

Other statements which may be in response to questions which refer to our beliefs, plans, expectations or intentions are also forward looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act.

Since these statements pertain to future events, they are subject to various risks and uncertainties and actual results could differ materially from InfoSpace’s current expectations or beliefs. Factors that could cause or contribute to such differences include but are not limited to the risks discussed in InfoSpace’s annual report on Form 10-K for the year ended December 31, 2007 and quarterly reports on Form 10-Q which are on file with the Securities & Exchange Commission. InfoSpace assumes no obligation to update its forward-looking statements.

In addition, during this call our management will discuss GAAP and non-GAAP financial measures. In our press release which has been posted on our website we present GAAP and non-GAAP results along with the reconciliation tables which highlight this data as well as the reasons for our presentation of non-GAAP information.

Now, I’ll turn the call over to Jim. Following his comments David will review the first quarter financials and second quarter outlook. Then we’ll open up to your questions.

James F. Voelker

I’m pleased to report a strong quarter and a great start to the year. Revenue was $42.2 million up $6.3 million or 18% over the first quarter of 2007 and up $3.1 million or 8% over the seasonally strong fourth quarter. In addition, we began to release the benefit of cost reductions announced late last year and as a result adjusted EBITDA came in well above our expectations of $7.1 demonstrating the operating leverage in our business.

Regarding the balance sheet we ended the quarter with over $220 million in cash and no debt. Our overall goal is simple, increase the number of quality users and searches, enrollment operated properties as well as distribution partner sites. To that end, we’re investing more resources in the product and marketing than any time in the company’s history and that’s yielding results.

Last week we announced key upgrades to improve the user experience and modernization on our flagship site www.DogPile.com. Our research indicates that DogPile users indicated above average in their tendencies to shop online and the product improvements are designed to leverage and capitalize on this knowledge.

Specific changes include a visually enhanced and more intuitive home page, easy to read search results page that’s been simplified based on eye tracking research, improvements to the meta algorithm to ensure the most relevant results, deep links within search results that direct users to specific sections of websites, enhanced content integrated in to traditional search results, and the launch of search spy social networking widget which allows users to catch a real time glimpse of current DogPile searches from their personal start pages at NetVibes or iGoogle.

Over the next nine months we will continue to add vertical content and improve functionality and relevancy yet traffic acquisition is the key initiative. Over the next few quarters we’ll implement a three-pronged attack building brand awareness with strategic PR activities and a targeted online spending, increasing our presence in client side applications such as toolbars and widgets and levering our high page rank with SEO and SEM campaigns.

The first agenda relies heavily on bring Arfie the DogPile mascot that lives on the site to life. While DogPile delivers great search results we’re positioning the site as the fun place to discover the web with Arfie at center stage.

We experienced great customer involvement with Arfie whenever he dresses like Elvis, celebrates a holiday or make a statement. By expanding his activity we can further engage our users and attract new ones. We’re expanding Arfie’s range, letting him of his leash so to speak and are deploying viral marketing initiatives to bring Arfie to other places on the web where users congregate. The goal is to make an emotional connection with people either on DogPile or elsewhere and increase search activity as a result.

Next, client side applications such as toolbars and widgets provide fertile ground for traffic acquisition and retention. Leveraging the [inaudible] of content aggregators and social networking sites such as NetVibes, iGoogle, MySpace and FaceBook as well as more aggressive direct marketing efforts will enable us to regular target and acquire a steady stream of new users. Widgets such as SearchSpy, FavoriteFetches and even a roaming Arfie bring our search capability and our brand experience to users in a variety of online environments.

Finally, our high page rank provides an opportunity to use SEO and SEM effectively to drive traffic with good contribution margin and user retention. This initiative has been successful in its early stages this year and we will ramp it up during the remainder of 2008. For these programs we’ve increased our marketing budget 50% from $8 million last year to $12 million this year although the spending will be heavily weighted towards the later part of the year. We’ve had success with online campaigns and believe we can attract users and a positive ROI.

Our distribution network is an important part of the traffic acquisition strategy and we continue to have success in this arena. In the first quarter we signed five new partners and extended our agreement with Insight Communications, a broadband ISP that provides service to more than 650,000 users. We’re providing Insight a new web portal featuring user defined tabs and drag and drop functionality making it easy for consumers to organize an engaging personal [iStone] page. Of course, the portal will include our search results.

Our new portal and search offering has enjoyed a successful start in the market and we have two additional launches in the near future. The DMS market continues to develop. DMS is a server side set of applications that capture error traffic and provide end users a helpful set of suggestions for navigation. This is an early stage market and we have several trials in the US and Europe and are very encouraged by the results.

As with our owned and operated initiatives client side applications are important in distribution as well. We’ve had good results with MyPoints, a united online site where users earn points for online purchases. The customized MyPoints toolbar tracks point totals for users and has a persistent desktop presences that makes search convenient. The penetration, retention and usage have been above our expectations and we believe similar programs can be effective for many of our customers.

To close, we had a productive and financially strong quarter. We have a proven scalable business model and have reduced costs to position ourselves for profitable growth. We significantly improved our product and are focusing our attention on growing traffic. In addition to organic efforts we have a strong balance sheet that allows us to be opportunistic regarding acquisition of quality sources of traffic. I’m encouraged with the progress we’ve made this quarter but we have a lot of hard work ahead of us.

With that I’ll turn the call over to David Binder for more details on the financials.

David Bradley Binder

I’ll start today with a review of our first quarter earnings including a discussion of our cash position and balance sheet and then provide our guidance for the second quarter.

As Jim mentioned earlier revenue for the first quarter was $42.4 million which exceeded our expectation by approximately $6 million. This represents a sequential growth from the fourth quarter of 8% and an 18% growth rate from the first quarter of 2007.

Gross profit margin was 48%, down 3% sequentially from the fourth quarter. In the first quarter we experienced growth from our distribution line of business which represented 69% of our total revenue up from 64% of our revenue in the fourth quarter.

Adjusted EBITDA in the first quarter was $7.1 million, equal to 17% of revenue and exceeding our guidance by approximately $4 million.

In the quarter we began to see some results from the restructuring initiated at the end of last year. As a result we reduced our cash operating expenses while growing top line revenue. On a normalized basis excluding deal, dividend and legal fees in the fourth quarter we reduced our cash operating expenses by $1.6 million.

In the quarter we recognized a loss from continuing operations of $2 million. Within this amount we recorded a $6.7 million loss related to an unrealized reduction in the fair value of our auction rate securities. In addition to this charge we also recorded stock-based compensation expense of $3 million.

Including the results from our discontinued operations, total net losses for the quarter was $2.8 million. We recorded a $700,000 loss associated with the wind down of certain assets that were not assigned in the sale of our directory and mobile businesses. We expect to complete these types of activity by the end of the third quarter 2008. Net loss per share for the quarter was $0.08. Our average basis shares for the quarter were 34.3 million and the ending basic share count was 34.4 million.

Now, turning to the balance sheet, we ended the quarter with $220.7 million in cash, short and long term investments, a decrease of $354 million. During the quarter we paid approximately $360 million in shareholder dividends, severance and other deal costs related to the sale of our mobile and directory businesses.

At the beginning of the year we expected a cash balance including the effects of these costs to be between $210 and $215 million and we ended the quarter $5 to $10 million above that mark. Within our long-term investments we’re holding $29.7 million in auction rate securities versus a par value of $40.4 million.

In total we’ve reduced the fair value of these holdings by $10.7 million of which we booked $7.7 million in the first quarter of 2008. While we continue to receive interest income on the full par value, these investments have failed to provide us with an opportunity to liquidate through their designed auction process.

Now, turning to our outlook. As we enter the second quarter we are beginning to see some positive results from our product and marketing initiatives. However, the period has been historically seasonally weak for our properties.

On the distribution side while we continue to win new deals we also expect that some existing partners will adjust their marketing spend through the period. For the second quarter we expect revenues to range between $34 and $36 million, adjusted EBIDTA to be between $2.5 and $4 million and net loss to be between $1.9 and $0.4 million for a loss of $0.06 to $0.01 per share.

Now I’ll turn the call back over to the Operator for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Kerry Rice – Wedbush Morgan Securities, Inc.

Kerry Rice – Wedbush Morgan Securities, Inc.

On the auction rate securities, you’ve written off I think you mentioned a little over $7 million. Did you mean there’s another $3 million that you’ll write off sooner or later or just maybe re-explain that better so I can better understand?

The second question is excluding the write off like you mentioned EBITDA bumped up to 17% and you had a goal of exiting ‘08 with 15% EBITDA margins so do you see this coming back down a little bit next quarter and then do you see it then bumping back up gradually or how do you see that as we get to the second half of the year?

David Bradley Binder

I’ll start with the auction rate securities. Over the past two quarters we’ve recognized impairments on the holdings. So including the write down that we did in the fourth quarter the total reduction in value is $10.7 million. In the first quarter the reduced value was $7.7 of that $10.7.

Kerry Rice – Wedbush Morgan Securities, Inc.

Do you foresee having to write off more of this? Can you give us any insight into that?

James F. Voelker

This is something that we’ll assess every quarter looking at market conditions. Regarding the EBITDA margin in the first quarter, it was a great quarter for us and obviously exceeded our guidance and expectations significantly. We are seeing second quarter or anticipating that it will come down off of that 17% mark. We’re still targeting exiting 2008 at the 15% EBITDA or greater.

Kerry Rice – Wedbush Morgan Securities, Inc.

Jim, I think you’ve mentioned not as guidance but you’ve previously talked about you would like to see revenue growth around the overall search industry growth rate of 15%. Is that what you’re looking for the year? Can you give us any indication year-over-year growth for ‘08?

James F. Voelker

I think that would be called guidance, Kerry. I think at some point here we definitely believe that’s the first goal out there to achieve that growth rate. I can’t put a time stamp on that for you when that’s going to happen. But that’s definitely the first goal that we ought to be able to achieve is to grow along with the market. We’re not there yet obviously.

Operator

Your next question comes from Ali Mogharabi – B. Riley & Company, Inc.

Ali Mogharabi - B. Riley & Company, Inc.

Could you give us a little bit more info on the portal appliance? I’m trying to figure out if you have signed any, or you think you will sign any, as big as actually the one that you lost last year?

James F. Voelker

We have three customers now that we’ll be launching this year and we have several out there in the pipeline but at this point I wouldn’t want to speculate on who will be signed and who will not be signed. There are some that are at that same size of the folks that went away at the end of the year.

David Bradley Binder

Ali, I would add that we did see some terminations at the end of last year. The new customers that we’ve signed have more than made up for the revenue that has terminated. I would characterize it as not necessarily all associated with the portal product but it’s the distribution business in total.

Ali Mogharabi - B. Riley & Company, Inc.

Could you just give us your thoughts on this Microsoft-Yahoo battle that’s going on and actually both parties have remained pretty much silent for a while.

James F. Voelker

We’ve said before we think that just from an industry standpoint and then definitely from a selfish standpoint we would welcome a much healthier second network out there, if you will. Google being the first ad network. And we think that the only way that that’s really going to be accomplished, because if you see the two traffic bases of Yahoo and Microsoft coming together either strategically or commercially in some manner, to form a large enough audience that drives a good competition.

I don’t have any particular insight. I hear all the same rumors. You hear rumors I don’t and I hear rumors you don’t. On the surface of it I don’t quite see how it benefits Yahoo or its shareholders to walk away from this deal. I think somewhere along the line it gets done.

Ali Mogharabi - B. Riley & Company, Inc.

Let’s say if it doesn’t go through, how can that impact you and have you thought about that? What would be your strategy going forward if that does not take place?

James F. Voelker

It’s kind of called what’s it been like for the last three years? It’s not anything new. The new thing would be the changes would be if it does go through. We’d be in the same position we are in doing business with all three of them instead of with two of them. Again I think we get a benefit if it goes, it’s not necessarily a detriment if it doesn’t.

Operator

Your next question comes from Lloyd Walmsley – Thomas Weisel Partners.

Lloyd Walmsley - Thomas Weisel Partners

Could you comment on any plans you have or might have to do with your cash balance and then if you have any interest in acquisitions, where you might be looking?

James F. Voelker

We’re always looking for opportunities to build the business. Right now I’d say our focus is the kinds of things we’re most interested in are things that have either quality search traffic or the ability to drive quality search traffic and add to that. At this point in time we’re not interested in diversifying, if you will.

It’s just other kinds of businesses we see that our business model works really well. I think this quarter is very demonstrative of it. We raised the top line a little. We raised the bottom line pretty well, too. It’s really things around that nature where we can find quality search traffic that we would be interested in.

Lloyd Walmsley - Thomas Weisel Partners

Would you think about buy backs with the cash balance?

James F. Voelker

That’s possible. If we go some period of time and I can’t define it, it’s probably less than two years and more than next month where we’re not able to find something more productive to do with the cash, and then we would look at that.

The only thing I’d say about a buy back is if you recall before from our discussions around dividends is with the NOLs that we have buy backs are a little bit tricky because you don’t want to impair the value of that asset. If we got to that point it would likely come in the form of a dividend as opposed to a buy back so we could preserve the NOLs.

Lloyd Walmsley - Thomas Weisel Partners

Looking at the DNS redirect business and some of the portal deals, how are incremental tack rates that you all pay out on your affiliate deals? Is there much change there or is it pretty stable?

James F. Voelker

First of all I get balanced depending on how you structure the deals particularly with portal. So we may take a much higher tack rate, on other words we would take a greater percentage depending on what fees we would charge for the portal. So those can slide actually a number of points back and forth that way. But tack rates follow what the big guy in the industry does and they’ve stabilized tack rates pretty well over the last year so they’re staying pretty stable.

Operator

Your next question comes from Khar Wong – Needham & Company.

Khar Wong – Needham & Company

I’m just wondering why the owned and operated business was down year-over-year after, I guess 4Q showed some good trends there? And also on the flip side what drove the distribution business to accelerate in growth?

David Bradley Binder

In terms of owned and operated in the first quarter we did see good volume growth versus the prior quarter. However overall we were slightly down versus fourth quarter and as we come out of the holiday shopping season we tend to see rates get a little bit weak in the first quarter and that’s really the driver of the trends for owned and operated. Your second question on distribution, could you restate that again?

Khar Wong – Needham & Company

There’s a bit of acceleration in terms of year-over-year growth and even if you look at the revenue base between distribution and owned and operated. What drove that acceleration in distribution?

David Bradley Binder

In distribution we really had two effects. One our new partners that we signed through the fourth quarter and even in first and they contributed to a good portion of that growth. We’ve also seen a lot of growth in the partners that are using marketing to drive volume and that is a source of year-over-year growth as well as the reason why we were so far ahead of our guidance and expectation.

Khar Wong – Needham & Company

You’ve mentioned in the past that you want to focus more on the O&O side. What revenue mix do you expect to see exiting the year?

David Bradley Binder

It’s hard to gauge that and mostly because of the volatility we see within some of our distribution partners. We’ve been in the mid-50’s to now upper 60’s percent of distribution as a percentage of our total. It would be great if we continue the growth and bring that mix more to 50/50 but it really depends on how much growth we get out of the distribution business.

James F. Voelker

And I think for us it’s not so much the mix that’s important, it’s the fact that both lines are moving in the right direction and growing. We’re focused on driving absolute dollars to the bottom line not so concerned about the percentages above it.

Operator

Your next question comes from Clay Moran – Stamford Group.

Analyst for Clay Moran – Stamford Group Company

You mentioned your comment that dog pile users tend to shop more. Have you seen any sets on their search traffics based on the economic conditions that’s been taking place?

James F. Voelker

I can’t say that we have. I think within the range of error we can’t really see anything that looks any different.

Operator

Your last question comes from Ross Sandler – RBC Capital Markets.

Ross Sandler – RBC Capital Markets

On the distribution side, first is it looks like it grew about 35% year-over-year and apologies if someone already asked this but can you tell us how much of that growth was on a same store sales basis versus new client wins?

David Bradley Binder

We don’t really break out the distribution business that way. I would say though that you’re getting good contributions from both types of revenue, existing accounts grew pretty well as well as the addition of new ones.

Ross Sandler – RBC Capital Markets

If we think about that piece of your business longer term, I know Google has looked at some of the intermediaries out there that use marketing both on Google and Yahoo to drive traffic to their landing pages and they allow some of it, they frown upon some of it. Do you view this as a risk longer term with the more marketing oriented distribution partners that you are facilitating on the back end?

James F. Voelker

We’ve been along that same curve with Google and Yahoo now for the last couple of years and I think it’s stabilized quite a bit. We are feeling as we’ve stabilized quite a bit in learning exactly what Google and Yahoo both feel is, just in the simplest terms, good traffic versus bad traffic.

Ours has been pretty stable and if we look across the last three years we’ve had really good growth in it. We’ve had some partners who are very, very, most of our partners actually, that the older partners are very stable. They go up and down depending on the season and how they feel like they’re marketing spend can work, but they’ve been pretty stable.

That being said and this didn’t really affect us as you can see in the first quarter; we had a very strong quarter. We saw just from market activity a lot of folks in the domain name space where we weren’t really handling any traffic, we saw a lot of people in that space get shut down or severely curtailed. I guess just to say that the sand is always shifting there.

You never know where it might come next but at least at this point with the folks we’ve had we think that we have come to terms on the right formulas to make sure that our traffic is good and accepted and works for our partners and it works for us.

Operator

That does conclude today’s question-and-answer session.

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Source: InfoSpace, Inc. Q1 2008 Earnings Call Transcript
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