Jupitermedia Corporation Q4 2005 Earnings Conference Call Transcript (JUPM)

posted on: March 11, 2006 | about stocks: JUPM

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Jupitermedia Corporation (JUPM)
Q4 2005 Earnings Conference Call
March 10th 2006, 11:00AM EST

Executives
Alan Meckler - Chairman and CEO
Christopher Baudouin - CFO
Chris Cardell - President and COO

Analysts
Kit Spring - Stifel Nicolaus
Safa Rashtchy - Piper Jaffray
Chris Rowen -SunTrust Robinson Humphrey
Joe Maxa - Dougherty & Co.
Adrian Dawes - J.M. Hartwell
Jim Friedland - SG Cowen
Robert Haley - Gabelli & Co.
Matthew Troy - Citigroup

Presentation

Operator

Good day and welcome to Jupitermedia's fourth quarter 2005 financial results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Alan Meckler, Chairman and CEO of Jupitermedia. Please go ahead, sir.

Alan Meckler

Good morning, and welcome to our conference call. We're happy to be able to discuss the results for the fourth quarter of 2005 as well as the whole year, and of course to talk about what the horizon shows for 2006. In the room here with me in Darien I have Christopher Cardell, who is our President and Chief Operating Officer; and Christopher Baudouin, who is our Chief Financial Officer. The way we will run this call, as we usually do, is I'm going to turn it over to Christopher Baudouin to make some comments, and he will come back to me. I will have some comments and then we would be happy to entertain questions. Chris.

Christopher Baudouin

Thanks, Alan. Before we begin our formal comments, I would like to remind you that in our financial earnings announcement released yesterday, and also on this call, Jupitermedia is providing specific forward-looking statements, including guidance related to our expectations of our future financial performance. Any forward-looking statements made as part of our call today are subject to risk and uncertainty that could cause actual or predicted results to differ materially. These are outlined in our earnings announcement, as well as in our SEC filings, including our most recently filed 10-K, which can be obtained from the SEC's website or directly from our investor relations website. With that, I will turn the call back to Alan.

Alan Meckler

Our fourth quarter for 2005 demonstrated success for our three divisions. While most listeners are primarily interested in results dealing with our images division, we're very proud of our quarterly and full year numbers for both our research and online media divisions. Both divisions had solid revenue growth for the fourth quarter of 2005 versus 2004 of 16%, and 4% for research and online media respectively.

The 2004 results -- and this is very important for people looking at our numbers for online media -- include the ClickZ network of websites that we sold in August 2005, along with our Search Engine Strategies trade shows. For the full year, the percentage growth was 16% and 10% for research and online media respectively.

Looking forward to 2006, we expect solid growth again for both divisions. However, we ask stockholders to recognize that our online media division, as has always been, is subject to wide revenue swings with weaker first and third quarters, and stronger second and fourth quarters. It's important to understand that online media can have revenue swings of as much as $1.5 million from one quarter to the next, and that this can significantly affect Jupitermedia's overall margins.

Turning to images, we believe we continue to demonstrate that we're building a image powerhouse, both domestically and around the world. We continue to be affected somewhat by the impact of Getty Images deciding not to sell any of our image properties. However, we also believe that we are now self-sufficient and that by the end of the second quarter this year, the Getty impact will no longer be relevant nor needed to be discussed.

Our philosophy of the importance of wholly-owned images of all types is now sweeping the industry. We're proud of this. This philosophy, which we invented two years ago, is providing us with better and better gross and operating margins as we build out our various distribution channels and develop a powerful sales force. As these sales streams develop, we're selling more and more of our wholly-owned images, which results in better margins.

We are also developing a variety of launched and soon to be launched product lines that could never be successful without the asset of wholly-owned images and ownership. Ownership gives us the ability to be flexible with new offerings that competitors have a difficult time matching; coming quarters will demonstrate further the power of this strategy.

I want to turn quickly to acquisitions, as we are constantly questioned about our acquisition plans. We will continue to make judicious acquisitions of both collections and companies across the image industry. The number of acquisitions will decrease this year in comparison to 2004 and 2005, but there will be several deals during the year that will complement and round out our product offerings. I would like to point out that the full benefits of our many recent acquisitions have yet to be fully realized, but should be apparent by the end of 2006.

Just to talk quickly about some of the things that are coming, without being too specific; in the coming months we'll make a variety of announcements of new services and products that we believe will be embraced by image buyers and appreciated by long-term investors. These announcements will further demonstrate the continuation of the evolution of Jupitermedia as a company in the forefront of offering a wide range of digital content.

Now, I'm going to turn it back over to Chris Baudouin to give you some financial highlights and then we'll have questions.

Christopher Baudouin

Thanks Alan. Looking at our revenues for the fourth quarter of '05, we reported revenues of $36.1 million, which represented a $17.9 million ,or 99% increase over the results for Q4 2004. On a sequential quarterly basis, revenues increased $1.7 million due primarily to the acquisition of BananaStock and PR Direct, which was completed on October 13th and November 10th respectively, as well as increased revenues from our online media and research businesses.

Organic growth for the online images business from Q4 2004 to Q4 2005 was approximately 15%. The sequential increase in online media revenues was expected, as Alan mentioned, due to the traditional fourth quarter seasonal increase in advertising revenues. As a reminder, our online media revenues are traditionally lower during the first and third quarters, while the second and fourth quarters are usually our stronger quarters. On a year-over-year basis, our online media revenues increased by $300,000 from $8.1 million to $8.4 million. I'd like to add, as Alan also mentioned, that the 2004 figures for online media include revenues from our ClickZ property that was sold in August, 2005.

In addition, JupiterResearch had a sequential increase in revenues of approximately $350,000 due to increases in our syndicated research and custom research revenues.

Looking at our gross profit, gross profit during Q4 was $24.8 million, which was a $12.3 million increase from our Q4 2004 gross profit of $12.5 million, a 98% annual increase. On a sequential quarterly basis, our gross profit increased $1.9 million, or 8%. Our overall gross profit percentage for Q4 was 69%, which was consistent with our Q4 2004 gross profit percentage and an increase from our Q3 2005 percentage of 67%. The sequential increase related primarily to the growth and sales of our wholly-owned images, as well as the increase in our online media and research revenues.

With regards to our G&A expenses, during the fourth quarter, we saw an abnormal increase in our G&A expenses, due primarily to increased audit and Sarbanes-Oxley costs, increased tax consulting costs and increased bad debt expense. The increase was in the range of $1 million. We would expect our G&A expenses to be in the range of $5.5 million to $6 million per quarter respectively.

Moving to operating income; operating income for the quarter was $9 million, which represents a $4.2 million or 86% increase over our results of Q4 2004 and a $411,000 or 5% increase, over our Q3 2005 results. The year-over-year increase was due primarily to the acquisition of Dynamic Graphics and PictureArts, and to the growth of our JupiterImages business. Our operating margin percentage during Q4 was 25%, which was a decrease from our Q4 2004 percentage of 27%, but consistent with our Q305 operating margin percentage. The year-over-year quarterly decrease in our operating margin percentage was driven by the addition of Dynamic Graphics, which as a distributor, traditionally has lower operating margins.

Moving to interest expense; interest expense during Q4 2005 was $2.5 million. Included within this amount was approximately $1.6 million related to the required write-off of debt issuance costs. The Company entered into a new debt facility in December 2005 and in connection with the new facility, were required to expense the capitalized cost related to the previous debt facilities.

Moving to income taxes; during 2005, due to the sale of our events business, we utilized the remaining federal NOLs and we began paying federal income taxes in the third quarter of 2005. In addition to the impact of the sales, we reversed the valuation allowance of $23.5 million during the third quarter. During the fourth quarter, we had lower than expected tax provisions, due to income tax benefits related to a revision of our estimated effective state income tax rates, resulting in additional state income tax benefits of $1.2 million. We expect our overall effective tax rate to be in the 41% to 42% range.

Turning to the balance sheet, we had $18.5 million in cash and $62.2 million in debt as of December 31st. Our DSOs were 61 days as of December 31, '05 which is in line with the figure of September 30, '05.

Moving to guidance; for the first quarter of 2006, we expect revenues to be in the range of $35.5 million to $36 million and diluted EPS to be approximately $0.10 per share. For the full year of 2006, We would expect revenues to be in the range of $166 million to $170 million and diluted EPS to be $0.65 to $0.69 per share.

These EPS estimates do not include share-based compensation expenses. The impact of these expenses are expected to reduce EPS by $0.02 for the first quarter and $0.08 for the full year. I'd like to remind everyone that this guidance reflects preliminary estimates for depreciation and amortization related to certain of our acquisitions that are subject to change, pending final appraisal and review by the auditors

As we look at EBITDA, we're expecting $10 million for the first quarter of 2006 and $56 million to $60 million for the full year 2006. The guidance assumes fully diluted shares were approximately 37.2 million for the first quarter and 37.3 million for the full year. With that, I will turn the call back over to Alan.

Alan Meckler

Thank you Chris. As I mentioned I have the two Chris' here, a powerful team. Hopefully, with the three of us here, we can answer your questions. We can now open the floor to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will first go to Kit Spring with Stifel Nicolaus.

Kit Spring - Stifel Nicolaus

Good morning, guys. Can you give some color on how your second half growth is going to ramp up? It looks like you raised guidance for the year, probably due to some of the acquisitions. The second half looks pretty strong relative to 1Q. Can you give us color on that?

Also, talk about what your organic growth rate has been over the past quarter, when you normalize for Getty, or exclude Getty; or talk about the stuff that's been in the portfolio for a year that didn't have Getty in it?

Can you talk about whether you think micropayment sites are a risk for the industry?

Alan Meckler

This is Alan Meckler. We talked about '06 and guidance at the third quarter conference call and we're sticking to our guns, obviously, in terms of what we see happening during the course of the year. The reason why we will accelerate, particularly once we get past the second quarter -- there are numerous reasons. One, several of our new subscription programs are really starting to grow by, I might say, leaps and bounds. We're not going to get too granular about that, but certainly the way they're picking up, we see significant growth month-to-month.

More importantly, we now have a sales team with support of about 150 to 160 people worldwide. About seven or eight months ago it was about 70 people. Part of this, of course, is through acquisitions, but we have hired close to 25 or 30 sales people who were with other organizations that are fairly well known to all of you, without getting too specific. These people who, for the most part, have been with us now a few weeks, we're already seeing an acceleration in their sales and in the sales of the traditional sales team we had, as well as the new sales people. That, combined with our acquisitions and our ability to integrate better and better, is why we see the acceleration of revenues into the second half.

In terms of organic growth from quarter to quarter, it is a complicated process as to what is organic growth and what is not organic growth. We stated last quarter that we were only going to give organic growth year-over-year, and that's what we want to stay with as this point.

In terms of the micropayment sites, of course we think we made a very good investment by buying into HAAP Media in Budapest, Hungary in January. We are starting to see acceleration of the business as we put our muscle behind really, what was a few college kids who have created a really incredible new community, now approaching 600,000 members.

The sales are starting to accelerate. While we don't own this property, we have 49.7%. We do have the right of first refusal on any other sale. We are starting to promote it through our community sites, which is driving more traffic to it than it had previously.

If one checks on various search engines you will see the two HAAP brands are on virtually any photo topic that is mentioned; you will see one or two of their brands in the top 10 on the front page.

We're very excited. We will be expanding this service around the world. Those are some of the things that I was alluding to, about what will be forthcoming in 2006. We're extremely confident that we have an angle on this business that nobody else has seen and we're excited by it.

On the other hand, we don't see it as a threat to our Company at all because what a lot of people haven't realized is that operations that we have, such as Photos.com, is thriving at a pace now greater than it has in over the last 12 months, in the last three or four months its had extraordinary growth.

I think the micropayment business has made the shrewd buyer out there understand that Photos.com is really, in its own way, a micropayment site. If I might digress, this is quite interesting. The difference is that all of the images are professionally shot, but actually if you study the pricing mechanism of all micropayment sites they are all subscription sites, even if a lot of a people don't realize that.

If you look at Photos.com with the allowable downloads on the lower resolutions and if you look at the average sale that we have and the average downloads taken, the average person is probably paying less than $1 an image on Photos.com. So we are sort of protected on the low end if micropayment explodes, but we do believe that there may be yet another appeal of the community aspect of micropayments. That's one of the reasons we have bought into the business in a very, very economical and efficient way and we feel, of course, that this is going to be very valuable for our stockholders. Sorry for being long-winded but that's certainly a favorite topic of mine.

Kit Spring - Stifel Nicolaus

Thank you.

Operator

We'll take our next question from Matthew Troy with Citigroup.

Matthew Troy - Citigroup

Good morning. Just a quick question on the integration-related efforts. Specifically if you could talk about tactically, what we should be looking at down the road -- three, six, nine months in terms of bringing together these properties? Operationally, what are you doing and what should we be watching for?

Optically, in terms of creating more brand awareness and strengthening the Jupiter brand with all of these different legacy acquisitions under one umbrella, you talked about sales force. Could you also talk about some other initiatives, i.e., potentially a new pricing structure or new marketing efforts to support the brand? Thanks.

Alan Meckler

That's a tone in itself also in terms of the integration. Under the guidance of Chris Cardell, who I would suggest is the master at doing integration, you have to understand too -- if I may digress again -- that this company is an offshoot of a company I created and going back to the 1970s, that in the 1990s was known as Meckler Media. Interestingly, we were criticized with that company -- which by the way, we grew from $3 a share and sold out at $29 a share in four years -- we were criticized in the '90s when we bought over 100 websites and everybody said that we were wasting money, we wouldn't know how to integrate, it would crash the value of the business. That business today actually, we still have with our online media division.

This is a team that has been integrating since 1994 or 1995. There are still 50 of us from Meckler Media here with the other 620 people that we now have. Of course, that doesn't totally answer your question.

This is a ongoing process. If we take Dynamic Graphics, which is just about a year old in terms of acquisition, we have taken out about $3 million worth of operating costs; we've simplified the business operations; we have strengthened the properties that were already strong and have integrated the operations in the U.K. and other places where Dynamic Graphics operated, particularly in the United States.

We take an example like France. Over the last few months we have acquired four businesses, two being distributors. This is a good prototype for you. Two were collection companies -- collections of images. We will shortly take the two distribution companies and combine them as JupiterImages France, as our distribution and the brands of PR Direct and Agence Images will disappear.

We will also keep the creativity separate but consolidate a lot of the back office of running the collections of both worldwide and in France. This is what we're doing over and over again. One more point I could go on forever.

We take some of the different subscription programs that we have acquired or that we originally had. If we take our Tucson operation, which was the original Art Today, over the last few months, Hemera and its various subscription properties have been moved to the Tucson platform. Tucson now operates those, but the Hemera operation in Canada and its creativity still thrives with its marketing.

By the same token, Animation Factory, which we're very excited to have acquired in late December of '05 is now in the process of having it's back office and subscription operations moved to the Tucson platform, including marketing, so that team in Sioux Falls, South Dakota can really spend their time doing what they do best, which is creating the biggest collection of 3-D animations in the world. They will be shortly announcing -- this is what I alluded to -- two very new exciting collections or subscription offerings that will be coming out of the collection we had.

I hope that answers how we're doing this. At the same time, under Chris Cardell's guidance, we continue to take out operating costs without taking out the creativity, which I think is the key to this business.

Matthew Troy - Citigroup

Okay.

Chris Cardell

Matthew, this is Chris Cardell. Just to add to it. I think we have made great progress here. There is still a great opportunity, as we combine the businesses together, particularly in functional areas like accounting where we still have opportunities to streamline what we're doing to reduce costs, technology; we've already made great strides. I think a lot of that is evidenced from the customer facing side, if you look at a product like JupiterImages.com but there is still more we can do this in this area.

That's really the approach. To attack function by function I think as Alan has already mentioned, without trying to disturb or alter the creativity or the creative flavor that has made each of the brands important in its own right. Good progress, and more to come.

Alan Meckler

And the last part of the question, JupiterImages.com is absolutely thriving, as many on the phone call know. We launched in the late fall, we're constantly embellishing it. We think, based on what we've heard out there and objective criticism that it's a top of the line site, but it will continue to get better as we throw more and more tech and R&D at it. I think certainly in the next few months you will see a site equal, if not better, than anybody's in the world.

But we had certain other distribution brands in this country through Dynamic Graphics -- Creatas and PictureQuest which are well known, but clearly, what is starting to happen as we round out our sales team and build it up and the publicity that gets out there, picture buyers are starting to spend their time on JupiterImages.com, rather than PictureQuest or Creatas. We will continue to operate those and continue to have significant sales,. What is starting to happen is those sales are declining and the JupiterImages sales are increasing, not only with new business but also taking up the slack for the decline of Creatas and PictureQuest. We see this as a great thrust going forward, and certainly a model that is working now and that will only work better in the coming months and years.

Matthew Troy - Citigroup

Thanks for that detail.

Alan Meckler

Thank you.

Operator

We'll take the next question from Aaron Kessler with Piper Jaffray.

Safa Rashtchy - Piper Jaffray

Hi, actually it's Safa Rashtchy. Hi Alan, Chris and Chris. Most of the questions have been answered. I have a couple of them if you could clarify. Alan, you mentioned that you have been giving organic growth rates on an annual basis. Can you remind us what is your expectation for the organic growth in the images business? I have a follow-up.

Alan Meckler

We feel that 15% is a safe number. We think we can do better than that. There's always a chance that we could have a quarter where we don't. If those who follow us feel 15% is the number that they can use as the bar, I think nobody will be disappointed.

Safa Rashtchy - Piper Jaffray

Okay. Now, Alan, you have been quite innovative in the online images area, introducing many new products. It sounds like you're doing very well in some of those areas, maybe most of them. But, at the same time, your competitors have noticed that and have been more aggressive. Can you give us your view of the landscape, as to which areas do you feel are most competitive? Which areas are your competitors heavily focused on? And, which areas are you far ahead of the others?

Alan Meckler

Safa, I need a little clarification. Are you talking in the area of subscriptions or in general the whole range of the images?

Safa Rashtchy - Piper Jaffray

No, I meant your whole range. Subscriptions you have been doing obviously well, your owned images area, and that is something that hopefully will continue. But, in the broader landscape of the online images, which areas do you feel are becoming more competitive?

Alan Meckler

It's a very competitive business all the way around. The beauty of the Jupitermedia and the JupiterImages model is how broad we are without, I think, in any way having a weakness. Don't forget in royalty-free and rights-managed there are two giants out there, and we know who they are. Our goal is not to -- we're not claiming we're going to be bigger, we just think we're going to get more than our fair share of the business.

Any business we get is going to be incremental and significant. We think with the ingenuity that we have, our skills both in the traditional business and online and the great collections, the great people we have working here, that it's -- it quite frankly, should be a slam dunk that we will be successful in that area.

Our great breadth and depth of offerings, having the largest collection of 3-D animations in the world, the largest collection of flash movies or flash footage in the world, the largest overall ownership of digitized royalty-free images in the world…. It goes on and on, and when we have a position like that, we can be more creative and flexible. Now everyone has to play catch up with us, but quite frankly I think it's impossible.

Safa Rashtchy - Piper Jaffray

Okay, great. Thank you.

Operator

We'll take the next question from Chris Rowen with Robinson Humphrey

Chris Rowen - SunTrust Robinson Humphrey

Thanks Most of my questions have been answered as well. I just wanted to clarify; when you said that you have several, exciting new products coming out, exciting for customers and long-term investors, I'm just wondering if there needs to be an emphasis on that long-term? Is there anything dilutive or that could be a negative upset with these products?

Alan Meckler

That's an excellent question. I didn't emphasize it, but that was put in there with the meaning. And that is, we don't run the Company from quarter to quarter. We do think that most quarters we make our numbers. But we don't run it that way.

For example, we're making a huge investment in all types of footage. I mean a huge investment. I'm not going to break it out. We don't make money in footage, but the fact is we're not backing off from footage. We're one of the leaders in creating HD footage. We're putting out, creating hundreds of new clips every month. We're making a really big investment in flash movies and flash footage.

You will see, which I can't get into, two very exciting new product lines coming out, from Animation Factory, which I might say that the people there had the ideas but weren't able to get them moving with prior management. We have embraced the ideas whole hog. These things are going to come along. I think some of them can go into the black right away and will balance out those other areas where footage might footage might take longer time to be in the black.

So on balance I don't think it will be particularly dilutive. We are never adverse to moving into new areas if we see an opportunity. Now, while a lot of people haven't picked up on it, we did make a move into royalty-free music and you're going to see a lot more in that area as well.

That's why if you read my comments, I talked about being a leader in all types of digital assets and that's really something to emphasize. We are images, we are digital assets and we will think in the right way we're very clever and we have a great workforce and you're going to see some very exciting things.

Chris Cardell

Chris, this is Christopher Cardell. I want to emphasize that the investments that Alan just alluded to footage and flash movies, these are all already reflected in the guidance as we have published here.

Chris Rowen - SunTrust Robinson Humphrey

That helps. Thanks.

Operator

We'll take our next question from Joe Maxa with Dougherty & Co..

Joe Maxa - Dougherty & Co.

I just wanted to follow-up on the organic growth on the images business. If I'm looking at this right -- and next quarter you have when Hemera comes on to consider your organic growth year-over-year. But that business -- I think you have sold a piece of it. So if I look at this right, your organic growth should come down from current levels in Q1 and then probably again in Q2 when Dynamic Graphic comes on, just because of the Getty revenue that it used to see. So I would be looking for organic growth to be in the 10% range or less in Q1, Q2 and then increase in the Q3, Q4. Is that how you net out your 15% for the year?

Alan Meckler

Joe, it does get complicated. Your analysis on Hemera is not correct. When we did acquire Hemera, they had box product operations, we moved those out pretty quickly. We still clip coupons so to speak, but not in the business anymore. Once we moved Hemera to the Tucson platform only a few months ago, it took several months to get it going, we're actually seeing very good growth in the Hemera business right now.

In terms of Dynamic Graphics. Again, we don't want to get too granular about the Getty piece. It's incredibly confusing. On the whole, you have to understand Dynamic Graphics is one of the great distributors in the world. It's now greater than it's ever been. The growth that we're seeing overseas and the distribution network set up by a fellow we have over there named Johnny Gibson has been extraordinary. I would suggest it's better than anyone else's in the world. We have over 220 distributors around the world,

That business is growing very nicely and with all of the things going on at Dynamic Graphics we don't want to get specifically granular. We do feel that it's very hard, quarter to quarter, to pinpoint it . We have more than overcome and will overcome over the period of '06, any perspective or thought people think, that we're going to have a shortfall from the Getty piece.

You should know, I will put this out on the table, that in the fourth quarter, the Getty contribution would be the last great contribution that we had, although it's declined from other quarters. It's around $2 million. In the first quarter, the Getty piece, round figures $500,000 or $600,000 would be the contribution. This is now not a significant factor for us, but it's very difficult to get specifically granular the way you're working, other than to say I wouldn't necessarily agree with your number on organic growth images.

Joe Maxa - Dougherty & Co.

So you're pretty comfortable somewhere in that [15%] neighborhood, quarter to quarter?

Alan Meckler

Yes. Don't forget in the first quarter there is probably a $1.5 million swing on images. That's one of the reasons you see, a little bit of a softness there. But again, I want everyone to know we specifically stated and we're staying with the same story, that we, we said in the third quarter of conference call, we came right out and I alluded to this earlier, and said exactly how we thought '06 would shape up and now three or four months later, we see that even more strongly.

Joe Maxa - Dougherty & Co.

Alan you said $1.5 million swing in images, did you --

Alan Meckler

Sorry, online media.

Joe Maxa - Dougherty & Co.

And also the operating margins that were nice in the quarter. Do you expect to see continued to growth from these levels, or are we starting to see this taper off?

Chris Cardell

Joe, this is Christopher Cardell. There are two factors that are going to continue to help the gross and operating margins for images. First is the fact that we're a large owner of wholly-owned images. Over time, we believe that a greater percentage of our sales will be derived from the images that we own, and therefore, we're not sharing any of the revenues with third-party owners. That's one factor.

The other factor, we answered this on a previous question in terms of the continued integration of the many acquisitions we have made. We've made good progress and good savings, Alan told you some of the numbers, but there is a lot more cost that can be fairly easily taken out of the model. So, with both of those factors going forward, we would expect these margins both gross and operating to continue to improve.

Joe Maxa - Dougherty & Co.

Great. Thanks, guys.

Chris Cardell

You're welcome.

Operator

We'll take the next question from Adrian Dawes with Hartwell.