Executives
Walter Buckley - ICG’s Chairman and CEO
Kirk Morgan - Chief Financial Officer
Karen Green - VP of Investor Relations
Analysts
[Justin Reid] - Craig Hallum
Swanson Nate – Think Equity
Frank Gemino - Henley & Co.
Internet Capital Group, Inc. (ICGE) Q1 2008 Earnings Call May 8, 2008 10:00 AM ET
Operator
Welcome to the Internet Capital Group first quarter 2008 results. (Operator Instructions) It is my pleasure to introduce your host Karen Green; VP of Investor Relations.
Karen Green
This is Karen Green with Investor Relations and I want to welcome you to Internet Capital Group’s first quarter conference call. I’d like to remind everyone that we are going to use presentation sides to accompany our prepared remarks toady. These slides can be found on our website at internetcapital.com. Go to the Investor Information tab and you will see an icon for our first quarter conference call. The slides can we accessed through that icon. For those of you without immediate access to our website, the conference call and presentation sides will remain on our website and be available for future reference.
On the call this morning we will be discussing certain non-GAAP financial measures. For additional information on these non-GAAP financial measures, including a reconciliation of these measures to the most comparable GAAP measures please refer to the press release we put out this morning including the attachments to the press release. The press release is also available on our website which again is internetcapital.com. To access the press release on our website go to the ICGE press release tab and select the May 8 press release. The attachments to the release can be accessed by clicking on the PDF file contained within the release itself.
Before we begin I’d like to briefly review our safe harbor language. The statements contained in our press release and the rest that we make in the conference call as well as the accompanying slide presentation that are not historical facts are forward-looking statements that involve certain risks and certainties, including but not limited to risks associated with the uncertainty of future performance of our partner companies, acquisitions or dispositions of interests in partner companies, the affect of economic conditions generally, capital spending by customers, development of the e-commerce and information technology market and other uncertainties detailed in the company filings with the Securities and Exchange Commission. These and other factors may cause actual results to different materially from those projected.
With that let me turn the call over to Walter Buckley; ICG’s Chairman and CEO.
Walter Buckley
I’ll begin by providing you with an update on ICG and discuss Q1 highlights. Kirk Morgan our Chief Financial Officer will follow with ICG’s finance results and our view of part of the company’s performance for the first quarter.
2008 got off to a solid start as both ICG and our partner companies continue to execute well against our goals during the first quarter. Listed on slide four, the main take away from the quarter; our eight co-partner companies had aggregate revenue growth of 29% in the first quarter of 2008 versus the first quarter of 2007.
We deployed approximately $27 million of capital primarily to increase ownership stake in some of our best companies and facilitate important M&A activity. Specifically, we increased our ownership stake in StarCite from 26% to 32%. We increased ownership stake in Channel Intelligence from 40% to 46% and we help facilitate Go Industry’s transformational acquisition of DoveBid.
Now turning to slides five through nine let me share some part of the company highlights from the quarter. Starting with Channel Intelligence, it was an industry leader and web based commerce solutions. CI had a great first quarter; the company added many new retailers and manufactures towards CII network which currently includes over 2000 retailers and over a 100 manufacturers across 20 countries. This program provides product level pricing and inventory availability to customers.
Channel Intelligence also added several new retailers to it’s list of customers with SellCast Retailer Solution, including Coldwater Creek, Omaha Steaks, West Marine and Partselect to name a few. Through CI Solutions the company is continuing to raise the bar for what retailers can achieve online in growing their online presence to add product sales to cost effective average hiking hedge with shopping engines and other programs and platforms.
Freeboarders, our leading provider of IT outsourcing from China had a strong first quarter signing a number of new customers including entertainment publications, lending trade, US Bank and Ticket Master. The company also expanded this relationship with SACADA, ALIAL and HSBC. Also during the quarter Freeboarders closed the sale of its product lifecycle management division or PRM to loss in software. Currently the deal we have not announced, but the sale enables Freeboarders to concentrate on its core competency of providing IT outsourcing solutions to its clients.
Finally, the company was recognized by a number of industry associations as a leading provider off shore outsourcing solutions, including Frost & Sullivan which named Freeboarders as a 2008 Chinese Outsourcing Company of the Year. ICG commerce, a leading provider; become a services provider had another good quarter and signed a significant determined BPO agreement with the Hertz Corporation in the fist quarter. Multi year, multi million dollar contract which is one of ICGE’s largest contract to date engages ICGE to manage a majority of Hertz’s indirect spend, cost of company’s North American and European locations.
ICG commerce was selected in the highly competitive process based upon the depth of expertise and their strong customer references. In addition the company expanded the relationships with several existing clients including a professional service to the company and a large software provider. ICG commerce enters the second quarter with a strong pipeline of customer prospects.
StartCite a provider of on demand and global meeting solutions continue to expand its corporate client base signing First Data Corporation, Lincoln Financial Group and Great West Life as well as one of the world’s largest consumer electronic manufacturers and a global sporting goods maker. StartCite also experienced growth in the supplier side of its business signing new contracts with Hilton, Hyatt and Kempton Hotels that will allow StartCite to provide real time rates and inventory for booking small meetings.
StartCite partnership with American Express, are in recognition in Business Week’s 50 most innovative companies list and it’s solutions for enterprise meetings management are featured in several national and procurement oriented publications.
Finally, sessile to the quarter StarCite announced that it secured $15 million in funding from current investors including ICG, TPG Ventures and Norwest Venture Partners and finally WhiteFence a leader in online service transactions for home services grew a revenue of 70% and increased new customer signings over 30% for the first quarter.
During the quarter the company signed 43 new contracts consisting of 31 new service providers and 12 new channel partners. Rights and service offerings continue to expand including the addition of Stars Premium Movie Service, new credit card offerings and several new energy companies including a higher natural gas, NStar, Accent, Comers and MX Energy. The channel partner initiatives were launched with echo start advantage resulting in a significant new flow of customers and revenue and finally the company was able to increase the commission rate received from a number of providers including several in the top five.
Now in terms of deploying capital we felt that focusing our resources in the quarter on acquiring additional stakes in our existing companies was the best use of our capital. Valuations remain high in a private side, especially when compared against public comparables and we believe the opportunity to put our capital in the businesses we know well like Go Industry, StarCite and Channel Intelligence at attractive valuations was a compelling and opportunistic use of our capital.
As a brief update on Go Industry have closed the transaction during the quarter the newly combined company is the clear international leader in the sale and valuation of used industrial machinery and equipment. Integration has gone well and the company is on track to deliver cross sales of approximately $8 million in 2008. They always have the strong sales pipeline including deals of Eli Lilly, Atlas Aluminum as well as two valuation contracts with GE commercial finance, an advisory from Alex Partners.
Economic trends are in Go Industry’s favor given that many options are conducted as a result of insolvency and the fact that business is our hungry to realize value from our used and surplus assets. As a result we believe the combined company is well position for growth in 2008 and beyond.
In addition to this activity we acquired an interesting Commerce 360, a software based search marketing company that approves paid and organic search campaigns for clients including internet retailer and fortune 1000 companies. Their technology click equation uses advanced mathematics and statistical analysis to optimize campaigns across the entire search chain that delivers campaign efficiency and performance.
We are excited about the potential of this company as well as the unique prospective that provides us into the online marketing world, but to be clear Commerce 360 is an emerging company that falls into our non core other category for now as it is earlier in the lifecycle than many of our other partner companies. However, we believe that will become increasingly valuable to ICG and has important potential synergies with a number of other partner companies; in fact we have already facilitated a strategic partnership between Commerce 360 and Channel Intelligence.
During the quarter we embarked on an endeavor we titled “Of You and ICG.” It’s a series of video interviews with ICG and Partner Company Management that provides you with important insights into the progress, strategy and value proposition at ICG and its partner companies. These videos underscore our continued effort to clarify our story and provide enhanced visibility for our stockholders. We believe that this new initiative will help to convey the value being created at our partner companies and -- while we are optimistic about our and their future.
In addition to this effort we accepted a number of invitations in the second quarter to present our views on the on-demand space; from industry players such as the Software Information Industry Association, Montgomery Partners, Think Equity and JMT Security just to name a few. These requests are tests to our expertise in the on-demand space and reinforce our branded thought leaders in building on-demand companies.
Our observation to the market as well as our take away from these conferences that while the macro environment is challenging, call for solution to deliver meaningful and measurable return on investments are out there. A number of our companies have reserved an increase customer rigor around validating ROI return before decisions were made. The positive aspect is that once they achieve this comfort level, corporations are investing in these types of software solutions using these solutions as critical tools to the life savings and or increased revenues.
In general the first quarter performance of our companies met expectations; we are enthusiastic about the growth we expect from our companies or we expect our companies to achieve throughout the remainder of 2008. The on-demand sector continues to grow and the pipeline of opportunities for our companies remains strong. As a result we believe we are well positioned to build value and deliver long-term shareholder value and look forward to reporting to you on our continued progress and with that I’ll turn it over to Kirk.
Kirk Morgan
I will begin on slide 13 with our first quarter 2008 consolidated income statement. ICG’s financial statements for both periods reflect the results of our two consolidated core companies; ICG Commerce and Investor Force. Consolidated revenue in the first quarter of 2008 totaled $16 million compared with $11.8 million for last year’s first quarter. This excellent revenue growth is due to ICG Commerce’s performance during the quarter which I will discuss in more detail later in my remarks.
Moving to the bottom line, ICG reported a consolidated net loss of $6.6 million or $0.17 per diluted share for the first quarter of 2008 as compared with the net loss of $19.6 million or $0.52 per diluted share for the first quarter of 2007. Results for the 2008 quarter included $5.8 million in net gains, primarily related to non-cash mark-from-market accounting gains on our blackboard hedges compared with $11.9 in net charges in the prior year primarily from the debt re-purchase. Additionally, results for the 2008 quarter include $1.8 million of stock based compensation compared to $1.9 million in the prior year.
Let me next review our core company results on slide 14. The information I’m about to share with you relates to ICG’s eight core companies, in which we had an average ownership interest of 46% as of March 31, 2008. Starting with the first quarter of 2008 we will now report the aggregate results of our core companies based purely on such company’s GAAP results, as this manner is consistent with how our core company’s management teams lead their businesses.
In the past we presented the revenue and EBITDA related to the acquisitions completed by our core-companies on a pro forma or as we called it an apples-to-apples basis. Where we would add the effect of all the acquisitions for all the periods presented, based on the underlying GAAP results of both the core company and its acquisition. Under a purely GAAP method you would only present the revenue associated with an acquisition from the confirmation date of the acquisition but no adjustment to the comparable prior period. We believe this is a preferable method of reporting as this links us up with how our management teams view their businesses.
Using our core companies GAAP revenue resulted in an increase to ICG’s aggregate revenue growth rate. Aggregate revenue of our core companies increased 29% to $60.4 million during the first quarter of 2008 from $47 million in last year’s first quarter. Significant contributors to the quarter were ICG Commerce, Freeboarders, Channel Intelligence and WhiteFence. ICG had an excellent quarter with the recent signing of a significant multi year; multi million dollar contract refers further demonstrating progress in this growing market. Now based on these results and our view of the remainder of the year we continue to expect our full year 2008 aggregate revenue growth of our core companies would be at least 25%.
Our eight core companies reported an aggregate $10.6 million EBITDA loss during that 2008 first quarter versus an aggregate EBITDA loss of $6.5 million in last year’s comparable quarter. IC Commerce continued to lead the way with solid positive EBITDA for the quarter.
Certain other core companies like StarCite, Channel Intelligence and WhiteFence continue expanding their sales and marketing efforts developing, their technology platform, in the instance of StarCite integrating platforms. This spending was in the plan and we believe will lead to long term stockholder value creation.
Going to the bottom line the aggregate net loss for our core companies for the quarter was $15 million up from $8.9 million of last year’s quarter primarily due to increased expenses I noted in EBITDA discussion and intangible asset amortization expense associated with Metastorms M&A activity. Again as a remind the core company information excludes Credit Ex which is reflected as another holding given that we own less than 20% of the outstanding equity of Credit Ex.
I need to again provide some color around our holdings in Credit Ex. Credit Ex continues to benefit from the market volatility related to sub-prime issues generally increasing credit derivative activity in the market. Additionally, according to the International Swaps and Derivatives Association with no shown amount outstanding, our credit default swaps grew at an annual rate of 81% to over $62 trillion at the end of 2007. The effect on Credit Ex continues to be quite positive; growing volume, increased transaction size, our broadening market base and record revenue for the quarter.
We believe this Credit Ex continuous to execute in the market for credit derivatives continuous to grow, Credit Ex is creating significant value to ICG. Again our current GAAP historical cost carrying value of our 50% ownership interest in Credit Ex is approximately $25 million which has been our carrying value since the deal closed in the fourth quarter of 2006.
Now let’s move to slide 15. Slide 15 presents the movement of cash at the parent company level during the first quarter and total equinity at March 31. We deployed a total of $27.4 million in the quarter received $100,000 in proceeds from monetization from our other holdings category and had net cash operating cost of $5.1 million. We ended the quarter with $36.7 million of cash at the parent company.
On March 31, the value of our blackboard holdings was $74.9 million which includes the value of our blackboard hedges of a positive $2 million. Additionally the value of our Go Industry holdings was $23.4 million at quarter end reflecting the additional go shares we purchased in conjunction with the DoveBid acquisition. Now everyone’s model should reflect that we now on a 133.8 million shares of go industry. Overall we believe our liquidity at March 31, 2008 positions us well to execute on our 2008 plan.
In closing I want to provide an update to ICG’s path to value creation, how we acquire, build and captured value. As summarized on slide 16, both the look back and we look forward in 2008 with an update on our first quarter progress. In the acquired stage we continue to expect to complete two new acquisitions in 2008 and some follow-on as well deploying an estimated $50 million in total in 2008 of which we expect the majority of the funded from monetization. We deployed a total of $27.4 million in the quarter, again primarily for Go Industry’s acquisition of DoveBid to increase our ownership interest in StarCite and Channel Intelligence and acquire in an ownership interest in Commerce 360.
Turning to the bill stage our first quarter aggregate revenue growth and EBITDA at our core companies and our view of the rest of the year has a sound track to meet our 2008 objectives, core company revenue growth of at least 25% and continuing improvement on the EBITDA front. All are supporting our partner company’s growth and developing their technology platforms.
Wrapping up with the value capture stage we continue to believe that over 2008 we will have two events where we will capture value in this stage. The first quarter was a good start to the year and we look forward to reporting to you on our 2008 progress.
Now I’ll turn it back over to Buck.
Walter Buckley
Thanks Kirk and now we would like it opened up to Q-and-A.
Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from the line of [Justin Reid] with Craig Hallum.
[Justin Reid] - Craig Hallum
Kirk just clarify for me in terms of the historical numbers, the GAAP versus pro forma, is the difference in ‘07 between GAAP and pro forma for core companies $16 million?
Kirk Morgan
Yes.
[Justin Reid] - Craig Hallum
This quarter’s ’07 was on a pro forma 53, 2 if I look at the historical numbers.
Kirk Morgan
That’s correct.
[Justin Reid] - Craig Hallum
ICG Commerce, certainly showing some really nice growth, got some pretty good visibility on the back log, margins took a big dip, looks like there maybe a volume that’s starting to come back; can you give us just a little color to the extent your willing -- what that model ultimately looks like and where can those gross margins go? What does that business look like in the next year or two reasonably?
Kirk Morgan
ICGC I think had a very good quarter across the board and the pipeline looks good going into Q2. Actually we talked about before when they bring on a new customer usually significant up front cost associated with that and they actually haven’t begun to see all the revenue flows from Hertz and so it’s a timing and you’ll see some more of that in Q2, but as we went to the second half, I think that begins to level out and the leverage in the model begins can you kick in. I think overtime we’ve reached a 20% EBITDA margin business and we should see good improvement this year on that.
Justin Reid - Craig Hallum
The corporate G&A for the quarter?
Kirk Morgan
Corporate G&A was right inline with overall we expect to have about $14 million of corporate G&A for the year.
Justin Reid - Craig Hallum
So just take that, divide it by 4 and that’s were we were in Q1.
Kirk Morgan
Yes that’s right. The difference is the 38 that you see and is really just some depreciation.
Justin Reid - Craig Hallum
What is the ownership stake in Commerce 360, with how much of it do you own and then second maybe Buck, could you talk you certainly got an interesting vintage point with a great flow of companies coming through as well as the portfolio that you own. Can you talk to about sort of the macro environment, where are the pockets of weakness, where have you seen pockets of strength; give us some color on sort of the general environment? You touched on it, but maybe a little more color would be great.
Walter Buckley
On the ownership interest in Commerce 360 Jus we own 30% on the primary basis.
Kirk Morgan
Jus from a macro environment I would say as I mentioned in the script, companies are really demanding and really putting companies through paces and really analyzing up front the ROI and the time it take for payback on their investment and they want obviously a shorter payback and we have proved in that and so I think the companies that can do that and validate that ROI up front, not benefiting but obviously I think not being significantly hurt by it at all and so I really think its all about visibility into return on investment today and making decisions, I means that’s a good news and viewing these types of platforms as strategic helps manage their costs, gives them visibility on how to manage their costs as well as provide I would say to potentially reduce overhead.
So, it’s sort of a double edged sword from our prospective. I mean obviously there is some weakness in the financial services sector; that said Freeboarders for instance signed two major financial service customers in the quarter and I think as companies can wither look for ways to save money those companies that can demonstrate that are benefiting. But it’s still in a very uncertain time and really no one knows which way it’s going to go, but as we see things through the remainder of the year I think we see actually revenue accelerating. Companies like Channel, V-Commerce, picks up the second half of the year. I think StartCite will benefit once they get that platform completely rolled out early in Q3 from a pan up demand and existing customer add on.
Justin Reid - Craig Hallum
The Freeboarder side, to just clarify on the divestiture, the PLM side when did that take place? When did that cash show up and then excluding the PLM side can you give us a sense of what kind of growth they’ve seen. I know apples-to-apples and just in terms of what to go forward business is?
Walter Buckley
They received cash in Q1 and the business is at a very healthy growth rate, above our average.
Operator
Your next question comes from Swanson Nate - Think Equity.
Swanson Nate – Think Equity
Buck just to expand on your last comments around ROI and the value proposition that customers are looking for specifically as it relates to ICG Commerce. I mean if you look at some of the renewals that you’ve had over last 12 months, the new Hertz deal and then the pipeline of deals going out, it would seem like you’ve kind of cracked the code on how to show that ROI; is that consistent with what you are seeing and if so do you think that you actually see revenue growth accelerate from ICG Commerce at some point?
Walter Buckley
I don’t want to say we’ve cracked the code, not in this environment. With that said they have a very strong value proposition. On a average they are stating anywhere from 8% to 12% of the spend that they are managing for their customers and that’s fairly -- and that doesn’t really account for headcount savings and process savings; that’s just raw savings on goods purchased. Our view is as the market -- I don’t -- its hard to say that the market reached it’s shipping point but we do see increased activity and I think that companies like Hertz, Kimberly Clark, Good Year are now beginning -- actually all increased their overall spend with our e-commerce are really good proved points, but I don’t think we are quite yet ready to say we are ready to go; we have hit the tipping point.
Swanson Nate – Think Equity
ICG for a second, the Hertz deal does look it has a nice international component. Is that helping you competitively and are you seeing more deals like that in your pipeline?
Walter Buckley
The first question is yes, it is helping us competitively. The first big international deal we had was Kimberly Clark last year and that really allowed us to being to build out our European operations. I think that was -- having that European footprint helped us significantly in the Hertz deal. Just to give you an idea, IBM is Hertz’s biggest customer and we are competing with IBM and Accenture in this deal and won and so, I think absolutely having a global -- European and global footprint is important. We have now a fairly significant footprint in China, both from a sourcing and an analysis and a lease perspective and obviously we are building presence in India which I think is important to compete globally.
Swanson Nate – Think Equity
StarCite, you increased your ownership stake there; one, can you talk about general uses of capital and then Mike Bolks been gone for I guess 45 or 60 days now. Can you talk about where we are at in the search for his successor and how the company has performed kind of in the interim?
Walter Buckley
Yes, I mean I think StarCite use of capital really is on a sales and marketing front. I mean we really want to build out capabilities not as much in the US, but globally. You are seeing us really expand our European presence. We hired a new head of European operations and also beginning to moving into Asia. There’s huge cost savings in managing a global travel and we want to really take benefit from that. In terms of the CEO search at StarCite, we have several very good candidates in the queue right now and we would like to see this search complete by the end of the quarter though nothing is for sure in this business, but I think we’ve got several very good candidates that have really built big businesses in their past and hopefully we can close someone in the next month or two.
Swanson Nate – Think Equity
Whitefence was up 70% year-over-year; you would think it’ll see some slow down due to the housing market. Can you talk about what sort of leverage your pointing to keep that growth going and how long you think that’s achievable?
Walter Buckley
Yes, one thing we need to remember about Whitefence is its just not new home sales or existing home sales. If anybody that moves, which includes renters, college student, transient workers and so there is 24 million to 25 million folks that move every year and we really haven’t seen that number come down or we haven’t seen enough information that number is coming down, people are still having to relocate or move. That said it is becoming a terrific job offering new services to their customers and you are seeing an increase in -- I think the increase orders per customer is up, the size of the order is up, the commission obviously we are getting from the customer, so I think big areas of expansion are in energy and financial services, credit offerings, banking account offerings. Believe it or not, 60% of the people who move establish a new relationship with the bank for instance and so I think Eric and the team are really doing a good job expending the sort of overall footprint of the offering to their customers.
Swanson Nate – Think Equity
In terms of monetization, no change to your guidance. Continue to expect to monetization this year?
Walter Buckley
Yes that’s correct.
Operator
Your next question comes from Frank Gemino - Henley & Co.
Frank Gemino - Henley & Co.
Buck, in the area of monetization we are on target for the two hopefully this year, but how much is the market conditions affecting that, you see any problems?
Walter Buckley
You never know, but I think that the businesses we have and the companies that are sort of in the mature category they are all experiencing very good revenue growth. I think they are really emerging as leaders in their markets and creating value, so from our prospective we think as we said it, we will have two monetization events unless the world really deteriorates from here and at valuations that we feel are fair or favorable and remember a couple of businesses actually benefit from this Credit Ex and Go specifically. So that said if we don’t get companies of these kind of -- valuated at levels that we are comfortable with, we are not going to -- we don’t feel we need to do anything, but to think to do a monetization. With that said I think today where we see things that we still believe we will see to monetization this year at attractive valuations.
Operator
There are no further questions in the queue at this time.
Walter Buckley
Just like to thank all of you for joining us this morning and I look forward to reporting second quarter results in early August. Thank you.
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