Banks.com, Inc. Q2 2008 Earnings Call Transcript

Banks.com, Inc. (BNX)

Q2 2008 Earnings Call

August 14, 2008 5:00 pm ET

Executives

Daniel M. O’Donnell – Chairman, President, Chief Executive Officer

Nate – Investor Relations

Gary W. Bogatay, Jr. – Chief Financial Officer

Analysts

Bob Davidson

Andrew Wayne - EverFiesta

Presentation

Operator

Welcome to the Banks.com second quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Dan O’Donnell, CEO of Banks.com.

Daniel M. O’Donnell

Thank you for joining us for the Banks.com second quarter 2008 earnings call. I’m Dan O’Donnell, Chairman and CEO of Banks.com and I am pleased to host today’s call along with our CFO, Gary Bogatay.

I’ll begin the call with some key financial and business highlights for the second quarter and I will then turn the call over to Gary who will discuss our financial results and operating metrics in greater detail. We will then open up the lines for your questions.

Before we begin, we would like to cover the safe harbor statement.

Nate

Hello, this is Nate, Investor Relations for Banks.com. During this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involves substantial risks and uncertainties including statements regarding our expected financial results for the fiscal year 2008.

Forward-looking statements which are based on management’s current expectations are generally identifiable by the use of terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “possible,” “potential,” “predicts,” “projects,” “should,” “would,” and similar expressions.

The forward-looking statements that we will make on this call include statements regarding management’s expectations regarding our strategy, our focus on higher quality content and traffic in the financial services vertical, and our commitment to becoming the premier source of targeted financial traffic. The potential risks and uncertainties that could cause actual results to differ materially from those expressed and implied here include among others unanticipated slowdown in the financial services vertical, market acceptance of the enhanced version of Banks.com, introduction of additional competitors in the Internet search services space, unexpected diversion of advertising dollars away from the Internet, slower than anticipated growth rate of our advertising base, dependence on our search providers, market development of Internet advertising and paid search services, and the stability of our infrastructure.

Other information on the factors that could affect our financial results is included in our filings with the Securities and Exchange Commission including our annual report on Form 10-K for the fiscal year ended December 31, 2007, our quarterly reports on Form 10-Q and our current reports on Form 8-K. Except as required by law, we assume no responsibility to update these forward-looking statements publically even if new information becomes available in the future.

With that, I will turn the call back over to Dan O’Donnell, CEO for Banks.com.

Daniel M. O’Donnell

For the second quarter, we reported revenue of $3.2 million compared to revenue of $7.2 million reported in the prior year quarter. Adjusted EBITDA came in at approximately break even versus $1.5 million reported in Q2 of 2007. Our GAAP net loss was $0.03 compared to GAAP net income of $0.01 reported in Q2 of ’07.

Our results reflect many of the challenges that we talked about on our last call including our continuing transition as a company as we refocus our strategy around the Banks.com domain and building more diverse recurring stable revenue strings, a loss of our larger historical advertising network partners, the effects of passage of HR 1677 otherwise known as the Taxpayer Protection Act on our direct advertising business and the sun-setting of our domain parking and desktop businesses.

In addition, this quarter we were also negatively impacted by the broader slowdown in online financial services businesses. As we did last quarter, I will address these challenges in turn and then address our strategy and progress.

First, I’ll talk about our ongoing business transition. As we have been talking about for the past few quarters, we are undergoing a major transition in our business. We continue to build our business around the Banks.com domain and high-quality content and services for the financial services vertical.

As part of this strategy, our ongoing focus has been on customer acquisition, retention and engagement. We have continued to build out our CPM and develop our pay-per-lead advertising sectors as well as our newer services such as our online tax preparation service and MyStockFund.com. This strategy will result in lower revenue in the near-term as a much smaller portion of our revenue is realized in the pay-per-click advertising. However, we feel that this strategy is the right one for the long-term. We hope to retain customers beyond their initial visit to our site by cross-pollinating the traffic to our site enabling cross-selling opportunities.

Contributing to the reduced emphasis on direct advertising is the termination of the agreements with our historical advertising network partners that we discussed previously. Two of our larger advertising agreements ended in the first half of the year. They will negatively impact our year-over-year growth rates in the second half of the year and create difficult comparisons. Importantly, we have been actively exploring and signing advertising partnership opportunities and I will discuss those in a moment.

The passage of HR 1677 has also continued to negatively impact our results. The bill is currently in the U.S. Senate where it will need to be acted upon by the end of this congressional session in January and then signed into law by the President or the bill will terminate.

We made several changes to the site to help alleviate any potential for user confusion. Among others, this mainly includes consolidating all traffic including through our flagship domain Banks.com, and clearly displaying at the top of the page the site is a service of Banks.com. We believe these changes coupled with our direct communication with members of Congress, the Internal Revenue Service and potential advertisers will give us the opportunity to look forward to growth in next year’s tax season.

Next, we have now completely exited our legacy domain parking and desktop businesses. This is a function of changing industry dynamics as well as our strategy to focus on the financial services vertical with an increased emphasis on customer acquisition. However, the loss of the revenue from these businesses will continue to negatively impact year-over-year growth rate comparisons in the near-term.

Finally, I would like to address the current online advertising environment and specifically the environment for online financial services advertising. The overall online advertising market has weakened somewhat from the last time we spoke with you. Macroeconomic weaknesses have let some of our advertisers to reduce spending on financial services advertising. While we do not see the situation improving significantly in the long-term, we do still believe that our strong base of financial refocused users remains very valuable to advertisers in this difficult economic environment.

As a result of the challenges I have just discussed, we have previously announced that we now believe that our 2008 results will be significantly below our guidance. Due to the environment for online advertising, and the fact that we are in the early stages with some of our new products and partnerships, we will not be giving updated full-year guidance at this time. However, it is important to remember that there is inherent seasonality in our business as we see greater traffic through our site during the tax season.

Our strategy remains consistent with what we have laid out to you on previous calls. Our goal is to create a cohesive plan around our flagship Banks.com domain and high-quality content and services for the financial services vertical. We feel that this will result in the best experience for both our users and advertisers.

In Q2, we continue to see strong growth in organic traffic to our site. Organic traffic to the site again doubled in the second quarter, demonstrating the continued demand for high-quality financial services content in services. We continue to believe that our highly targeted traffic remains attractive to financial services-focused advertisers.

During the second quarter, we signed two strategic advertising partnerships. We signed on with Marchex’s IndustryBrains and another with Business.com. Both agreements cover contextual and search advertising across the Banks.com ecosystem of sites. Importantly, both advertising partners are focused on the financial services vertical making them a perfect fit for our highly targeted user base. We will continue to explore newer partnership opportunities that will allow us to best modify traffic to our site.

In addition to these two partnerships, we have also been working to improve the Banks.com advertising network. In Q2, we fully integrated the platform into Banks.com and made it more visible for potential advertisers. This will make it easier for advertisers to sign up and advertise across our network opening the door to more direct PPC relationships.

To improve the experience for our users and advertisers, we are constantly making improvements to the look and feel of the site aimed at increasing user usage and engagement. Last quarter, we fully integrated the Informer Rate table data on our site. In Q2, we made several enhancements to this offering by adding a group of deposit products including CD rates, IRAs, etc. Other enhancements include the completion of the integration of IRS.com into Banks.com and the initial testing of monetizing for lead generation.

The second quarter concluded the busy tax season, an important period for Banks.com. We shared some of the success we saw during the tax season on the last call but I think it’s important to highlight them again in our discussion about Q2 results. During the past tax season, we have over 130,000 users registered for our online tax preparation service. We continue to view the strong usage of our tax preparation service as important as users who file their taxes with us this year will return to Banks.com to file their taxes next year at no additional traffic acquisition cost to us. While the tax preparation service was only a small percentage of our overall revenue this season, we are pleased with the number of registrations and optimistic on this offering longer-term.

Moving to MyStockFund, our focus continues to be on filling out the product offering and we began offering IRAs to our client base at the tail end of the tax season. We feel this offering is an excellent ag jump to our online tax preparation product.

To summarize, we continue to face many challenges in the transition of our business and are experiencing headwinds from the weaker market for online financial services advertising. At the same time, we are executing on our strategy to build a premier site on the web for financial services content and services. We are making progress in diversifying our revenue streams and we are exploring all opportunities to best modify the traffic to the site both in new advertising partnerships and through the Banks.com advertising network.

With that, I’ll now turn the call over to Gary.

Gary W. Bogatay, Jr.

As Dan mentioned, revenue for the second quarter was $3.2 million. This is down from revenue of $7.2 million reported in Q2 ’07. The decline in revenue can be contributed to the factors that we highlighted earlier including our shift in strategy, the effects of House Resolution 1677, the termination of our agreements with our legacy advertising network partners, the sun-setting of our domain parking and desktop businesses, and general weakness in online financial services advertising.

Total revenue from our proprietary traffic and MyStockFund.com came in at $3.1 million or 98% of total revenue. We continue to expect the revenue from our proprietary businesses will increase as a percentage of our total revenue as we exit our lower-margin legacy businesses.

Gross margins for the second quarter were 56.3%, up from 54.8% in Q2 ’07. The increase in gross margins was primarily due to the changing mix in our proprietary and non-proprietary revenue and the exiting of certain business lines as we already discussed.

Operating expenses for the second quarter totaled $2.4 million, down approximately 20% from the $3 million we reported in Q2 of 2007. The lower SG&A levels reflect cost-cutting actions we have taken to rationalize our expenses and retool the business in light of the business transition we are currently working through. As part of our evaluation of our SG&A spending, we have made reductions in headcount, implemented across the board salary reductions, and reduced technology infrastructure-related expenses.

We remain on track to exceed our previously stated goal of SG&A expenses by approximately 20% and cash-related SG&A expenses by approximately 30% in fiscal year 2008. We expect by the end of Q3 that our monthly cash SG&A expense excluding debt service to be 50% of what they were in December 2007. Additionally, we continue to look for other ways to rationalize our spending in light of the near-term outlook.

Adjusted EBITDA or earnings before interest, taxes, depreciation, amortization, and stock-based compensation was approximately break even. This compares to adjusted EBITDA of $1.5 million reported in Q2 of 2007.

GAAP net loss for the first quarter was $0.03 per diluted share versus net income of $0.01 per diluted share reported in Q2 of ’07.

In the second quarter, we recognized $248,000 of income tax benefit due to losses incurred. Our historical tax rate has been in the range of 35%-45%.

For the second quarter, our operating cash flow was $600,000. We ended the quarter with $1.7 million in cash and $3.6 million in total current assets. Our total debt of $6.5 million is comprised of our note payable related to our acquisition of IRS.com. As of the end of Q2 2008, we are current in all of our payments to our lender and are in fact, ahead of our principal payment amortization schedule but have fallen out of compliance of our financial covenants. We continue to work with our lender and are currently exploring various options that will allow us to satisfy those covenants.

Related to this, we have retained Merriman Curhan Ford to explore a variety of strategic alternatives for the company including the potential sale of our Look.com and Camps.com domains. We continue to believe that the Look.com and Camps.com domains are highly valuable and could be very attractive for the right buyer. Beyond the potential sale of these domains, there is little else we can say regarding the strategic initiatives at this time.

With that, I would like to turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bob Davidson.

Bob Davidson

I was wondering when you guys are going to start making money. I’m looking at $10,000 red numbers on my portfolio. I don’t care about verticals, I don’t care about matrices. I care about black numbers and profits. When are you guys going to start making money?

Daniel M. O’Donnell

I think the best answer that I can give you on that is Q1 of next year for a number of reasons. As we mentioned, we cut SG&A pretty deeply as the year progressed but our revenue is pretty front-ended into Q1. Unfortunately, we have yet to figure out a way for those SG&A expenses to be spread out in the same seasonal fashion so those are spread out a lot more evenly. The direct answer to your question would be Q1 of next year.

Operator

Our next question comes from Andrew Wayne - EverFiesta.

Andrew Wayne - EverFiesta

I was wondering if you can address the liquidity of your company. What are your cash on-hand and do you have enough to continue operation for the rest of the year?

Daniel M. O’Donnell

Let me let Gary take that one. He can talk to you about what cash we have on-hand and where we’re at as far as the question regarding paydown of the debt and that type of thing.

Gary W. Bogatay Jr.

As I stated on the call and our financials are out there now as well as our 10-Q, you can see we have $1.7 million in cash plus pretty significant current assets which is primarily accounts receivable that will be received over the course of the next few months. As we look at all of the significant cuts we’ve taken in SG&A, we’re looking to maintain being cash positive from operations and at the same time, paying down our debt as well as the strategic initiatives that I spoke about, primarily the sale of the assets of Look.com and Camps.com which are not core to our business. We believe they will be cash positive.

Andrew Wayne - EverFiesta

I guess the notes payable you have and your current liabilities, don’t you owe payment pretty soon or is that going to be re-categorized as a long-term liability?

Gary W. Bogatay Jr.

Right, in actuality, it is going to be a long-term liability but for GAAP purposes, we’re required to reclass it to short-term liabilities. It obviously makes our working capital look upside down but we’re in direct communications with our lender. We’re working with our lender and as I said on the call, we are actually a few months ahead in our principal payments. So we’ll continue to do that, we’ll continue to pay that down but that is simply a GAAP requirement to classify that as short-term.

Andrew Wayne - EverFiesta

So maybe I didn’t hear this earlier, so the lender has agreed to hold this as a long-term liability despite your current assets falling below the terminating ratio?

Gary W. Bogatay Jr.

Right. As I said earlier in the script, we are out of compliance with the stipulated financial covenants, but we haven’t defaulted on payments at all. So it’s a long-term agreement, it’s a five-year term. We’re only two years into it.

Andrew Wayne - EverFiesta

So even though you’re not in compliance, you’re saying the debtholders can’t come after you and they can’t call you to make the payment. Does that make sense?

Daniel M. O’Donnell

Andrew, I think the short answer to the question is yes but I think that the reality is that we are in close communication and working with the lenders and as Gary pointed out, we are ahead of our payment schedule. So while I’m certain we would like to be back in covenant compliance as soon as possible, we’re in close communication with them as far as working through this.

Andrew Wayne - EverFiesta

My concern is that you guys just don’t take the money and declare bankruptcy. By just looking at your balance statement, how far you can turn it around and start making money soon because it seems like every quarter I have been listening to your conference calls, it seems to be promising new initiatives for the future but it seems like is still sometime in the future when the company will turn around.

Daniel M. O’Donnell

I’m not sure if there is a question in there that you want me to field. We were pretty profitable for quite a long time. As we transitioned the business late last year, we obviously hit some bumps in the road. I’m not sure how much you’ve looked back on our history but we have been quite profitable in the past and expect to get there again in the future. That’s why we know you invested your money and that’s our plan going forward.

Operator

There are no further questions at this time.

Nate

We actually did have a couple of questions that were e-mailed into us prior to the call. I’ll ask them here. First is, are you considering selling your non-core domains, what price would you expect to get for those domains, and would you ever consider selling IRS.com or Banks.com?

Daniel M. O’Donnell

As we mentioned in the script, we retained Merriman to attempt to sell Look.com and Camps.com for us. We are in the middle of that process right now so I really couldn’t comment on pricing and what we would expect to get. We have not considered selling IRS.com or Banks.com and we don’t anticipate needing to consider it. That would be a whole transition to yet another business model so no, that’s not in the cards for us at this point.

Nate

Another question we had e-mailed in, how many accounts currently on MyStockFund.com? Have you been successful at adding new accounts to the site?

Daniel M. O’Donnell

When we acquired MyStockFund, it had approximately 3,500 accounts. I think we are up about 10% in the first six months that we’ve had it. So we will have been able to stay ahead of any accounts attrition and are getting slow, steady growth out of it.

Operator

There are no questions in queue.

Daniel M. O’Donnell

I would like to thank everyone for joining us on the Q2 2008 Banks.com conference call and we will speak with you next quarter. Thank you.

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