Internet Capital Group, Inc. Q2 2008 Earnings Call Transcript

Internet Capital Group, Inc. (ICGE)

Q2 2008 Earnings Call

July 21, 2008 10:00 am ET

Executives

Karen Greene – Vice President of Investor Relations

Walter W. Buckley, III – Chairman of the Board, President & Chief Executive Officer

R. Kirk Morgan – Chief Financial Officer

Analysts

Jeff Van Rhee – Craig Hallum Capital Group, LLC

Nate Swanson – Thinkpanmure, LLC

Presentation

Operator

Welcome to the Internet Capital Group, Inc. second quarter 2008 financial results conference call. (Operator Instructions) It is now my pleasure to introduce your host Karen Greene, Vice President of Investor Relations.

Karen Greene

I’d like to remind everyone that we’re going to use presentation slides to accompany our prepared remarks today. These slides can be found at our website at www.InternetCapital.com. Just go to the investor information tab and you’ll see an icon for our second quarter conference call. The slides can be access through that icon. For those of you without immediate access to our website, the conference call and presentation slides 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 this press release. All of this information is available on our website which again is www.InternetCapital.com. To access the press release on our website go to the ICG press release tab and select July 31^st 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 those that we make in the conference call as well as the accompanying slide presentations that are not historical facts are forward looking statements that involve certain risks and uncertainties 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 effect of economic conditions generally, capital spending by customers, development of the ecommerce and information technology market and other uncertainties detailed in the company’s filings with the Securities & Exchange Commission. These and other factors may cause actual results to differ materially from those projected.

Now, let me turn the call over to Walter Buckley, ICG’s Chairman and CEO.

Walter W. Buckley, III

I will begin by providing you with an update on ICG and discuss Q2 highlights. Kirk Morgan, our Chief Financial Officer will follow with ICG’s financial results and a review of partner company performance in the second quarter.

In the second quarter of 2008 we continued to make good progress against our goals despite the challenging economic environment and listed on Slide Four are the main takeaways for the quarter. Our eight core partner companies had aggregate revenue growth of 31% in the second quarter of 2008 versus the second quarter of 2007. Channel Intelligence, Freeboarders, ICG Commerce and WhiteFence demonstrated strong revenue growth in the quarter. We announced the pending sale of Creditex, Intercontinental Exchange or ICE which should result in a significant liquidity event for ICG and enhance our balance sheet. And finally, subsequent to quarter end, we adopted a $20 million share repurchase program.

Turning to Slides Five through Nine, let me share some partner company highlights from the quarter starting with Channel Intelligence. Channel Intelligence, an industry leader in web based commerce solutions had a great second quarter. CI ended the second quarter adding a number of new companies to its portfolio including HP Canada, L’Oreal, Kimberly Clarke, [Brookstone], Hickory Farms and US Robotics to name a few. CI also saw an increase in revenues through expansion from existing customers such as Samsung, Matel, HP [eAssets], Best Buy and Microsoft. Based on the May release of the 2008 Internet retailer top 500 rankings, CI customers now represent more than 70% of the top 20 and more than half of the top 100 Internet retailers which is up significantly from this time a year ago.

Freeboarders, a leading provider of technology solutions and IT outsourcing from China continue to win new deals and have a healthy pipeline of prospects as it moves in to the second half of 2008. Two new clients were added in the second quarter including Interval International and Aspect Software. Freeboarders also expanded business with BNP Paribas, HSBC and TicketMaster. Additionally, the company’s financial services business continued strong growth during the second quarter despite challenging times for this sector.

ICG Commerce, a leading procurement services provider expanded its relationship with a number of existing customers including Delta Airlines in the quarter. The company also successfully launched its relationship with Hertz in the US and in Europe and is performing well against its commitments. Earlier in the quarter ICG Commerce announced a key partnership with [JenPak], to provide a total source to pay outsourcing solution to include accounts payable to customers across the globe. The [JenPak] ICG Commerce solution provides best of reach strategic sourcing and transactional expertise to maximize a potential of source to pay outsourcing. With approximately 30 companies targeted the current pipeline appears very promising. Additionally ICG Commerce continues to be highly regarded in the industry and was recently recognized by the Wall Street Journal as one of the top 20 outsourcing providers among all global BPO providers.

StarCite, a provider of on demand global meeting solutions recently announced that technology industry veteran Greg Dukat as its new Chief Executive Officer. We are excited to have Greg on board as he brings a wealth of experiencing in managing fast growing companies. Prior to joining StarCite, Greg was president and CEO of Ventyx, previously known as [Indis]. Under his leadership Ventyx market capitalization increased fivefold while revenues more than doubled to $260 million. We believe Greg’s unique blend of operational, sales and marketing leadership skills will further drive the value inherent in StarCite.

StarCite continued to expand its global footprint during the quarter despite feeling some impact from the challenging economic environment. Specifically, longer sales cycles as well as a slowdown in corporate travel. The company recently signed a major agreement with Accor, a European leader in hotels which operates in nearly 100 countries. StarCite also announced an integration partnership with [Amadeus] a global leader in technology solutions for the travel and tourism industry. Finally, StarCite signed a global multiyear agreement as the preferred technology partner for Carlton Wagonlit Travel which operates in 150 markets worldwide.

Finally, WhiteFence, a leader in online service transactions for home services grew revenue 50% and increased new customers signings over 35% in the second quarter. During the quarter, the company signed 31 new contracts consisting of 16 new service providers and 15 new channel partners. Product and service offerings continue to expand including the addition of new phone, VOIP, cable and home security providers. New channel partner initiatives were launched with Texas Power, DMV.org, Movers.com, and HBN Interactive resulting in a significant new flow of customers and revenue. The company was also able to increase the commission rate it receives from service providers including improved terms with major telephone and cable providers.

Subsequent to quarter end the company announced the launch Movearoo.com, this joint venture was established by a consortium of leading communication companies including AT&T, Quest and Verizon. The site was developed and will be managed by WhiteFence. The platform helps customers or consumers from everything from identifying the right moving company to conveniently setting up home related services such as phone, high speed Internet, TV, electricity, natural gas and more.

While Kirk will address the Creditex transaction in greater detail, we were pleased to announce the pending sale of Creditex to ICE. This is an important liquidity event for ICG and our stockholders and we expect it to significantly improve our balance sheet. We see this event as a good demonstration of ICG’s ability to acquire good companies, build them in to market leaders to capture value. In the case of Creditex, we invested $25 million in 2006 and generated upwards of $75 million two years later.

In terms of deploying capital, we rigorously evaluate three primary uses of our cash which include new acquisitions, follow on funding in to our existing companies and improving our capital structure. Our goal is to put our capital to use where we believe we will get the highest returns and based on that decision we are excited to announce the adoption of a $20 million share repurchase program. This allocation of capital underscores our confidence in ICG’s long term growth potential and our commitment to enhancing stockholder value. While we will continue to actively pursue new acquisitions and are in a number of discussion with companies at this time, we will continue to be patient and disciplined investors.

Despite the challenging economic environment, most of our on demand companies continue to demonstrate healthy revenue growth and strong ROI to their customers. With pipelines building, we are cautiously optimistic about the growth we expect our company to achieve throughout the remainder of 2008 and in to 2009. We do expect the remainder of 2008 to be a challenging time for all of us in the business community but we firmly believe we have a group of companies that provide strong and sustainable benefit for their customers and are becoming increasingly more valuable as the grow. Ultimately, we believe this value will translate in to increased shareholder value.

With that, I’ll turn it over to Kirk.

R. Kirk Morgan

I’ll begin on Slide 11 with our second quarter 2008 consolidated income statement. ICG consolidated results of three partner companies during the quarter, ICG Commerce and Investor Force for the full quarter and Vcommerce from the date our ownership interest went above the 50% level in early May versus two partner companies in the 2007 period ICG Commerce and Investor Force. Consolidated revenue in the second quarter of 2008 totaled $17.6 million compared with $12.5 million for last year’s second quarter. This growth is primarily due to ICG Commerce’s strong performance during the quarter.

Moving to the bottom line, ICG reported a consolidated net loss of $12.3 million or $0.32 per diluted share for the second quarter of 2008 as compared with a net loss of $4 million or $0.11 per diluted share for the second quarter 2007. Results for the 2008 quarter include $600,000 in net charges primarily related to our non-cash mark-to-market accounting expense on our Blackboard hedges. Results for the 2007 quarter include $4 million in net gains which were related primarily to the gain we recorded on the Marketron sale partially offset by some Blackboard hedge expense.

Let me next review our core company results on Slide 12. 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 47% as of June 30, 2008. Aggregate revenue of our eight core companies increased 31% to $64.5 million during the second quarter of 2008, up from $49.4 million in last year’s second quarter. The companies experiencing strong revenue growth during the quarter were ICG Commerce, Freeboarders, Channel Intelligence and WhiteFence. The current economic environment, specifically companies delaying purchasing decisions is negatively impacting the revenue growth of some of our companies, in particular Metastorm and StarCite. If we look at those companies that have more predictable recurring revenue models essentially seven of our eight core companies are growth for the quarter in the first half would be closer to 24% on both a GAAP and apples-to-apples basis which we find very encouraging in this environment.

Our eight core companies reported a $10.2 million EBITDA loss during the quarter versus an aggregate EBITDA loss of $6.5 million in last year’s comparable quarter. ICG Commerce continued to lead the way with solid positive EBITDA for the quarter. Year-over-year we saw significant EBITDA improvement in ICG Commerce, solid EBITDA improvement at Freeboarders, Channel Intelligence and Investor Force and essentially flat EBITDA performance at WhiteFence and Vcommerce. These improvements were more than offset by the performance of StarCite and Metastorm. StarCite accelerated spending in the quarter related to the continued integration of the StarCite [on vantage] platforms and some other non-recurring expenses. Metastorm’s performance was negatively impacted by some delays in signings and increased expenses related to non-recurring legal and some IPO expenses. We continue to believe the investments all of our core companies are making in their businesses will lead to long term stockholder value creation.

Again, as a reminder, the core company information excludes Creditex which is reflected as an other holding given that we own less than 20% of the outstanding equity of Creditex. During the quarter and as previously disclosed Creditex entered in to an agreement to be acquired by Intercontinental Exchange or ICE. Slide 13 summarizes this transaction. ICG’s estimated share of the purchase price, including an estimate of the working capital adjustment is approximately $85 million. This will be paid in shares of ICE stock at closing which is forecasted to be later in the third quarter. The number of shares of ICE stock ICG will receive is based on averages of ICE stock price. The first average was measured leading up to the agreement signing and resulted in an average ICE stock price of $140 per share. The second average will be measured over an eight day period ending on the fifth business day prior to the close of the transaction.

Now, for illustration purposes, if the transaction closed yesterday this would calculate out to about $91 per share. The number of ICE shares ICE will receive is calculated by dividing the merger consideration, currently estimated to be $85 million by the average of those two values. At current estimate ICG’s share of the proceeds will be approximately 735,000 shares of ICE stock which would have a value of approximately $76 million using yesterday’s closing stock price for ICE at $104. 7.5% of those shares will be held back in an escrow. Now again, the ultimate number of shares ICG will receive will fluctuation until closing. We view this sale as an excellent outcome on a carrying value of $125 million deployed less than two years ago.

Now, let’s move to Slide 14. Slide 14 presents the movement of cash at the parent company level during the quarter and total liquidity at June 30^th. We deployed a total of $9.1 million in the quarter primarily related to the previously announced StarCite financing round in April, received $3.1 million in proceeds from escrow releases primarily related to the Marketron and credit trade transactions, and had net cash operating costs of $1.9 million. We ended the quarter with $28.8 million of cash at the parent company. At June 30^th the value of our Blackboard holdings, including our hedgings was $82.2 million and the value of our GoIndustry holdings was $26.7 million. Furthermore, our announcement today of our $20 million share repurchase plan demonstrates our confidence in balance sheet liquidity, our core company growth potential and our commitment to enhancing stockholder value.

In closing, I want to provide an update in to ICG’s path to value creation, how we acquire, build and capture value. This is set forth on Slide 15. In the acquire stage we’ve deployed a total of $36.5 million in the first half of 2008 primarily for GoIndustry’s acquisition of DoveBid to increase our ownership in StarCite and Channel and acquire an ownership interest in Commerce 360. Going in to the year we estimated we would deploy approximately $50 million in follow ons and two new acquisitions. As Buck discussed earlier our acquisitions pipeline has never been stronger but it is always difficult to predict the exact timing of the transactions and obviously we will be very measured in the process.

Turning to the build stage, aggregate revenue of our eight core companies increased 31% for the quarter. Aggregate revenue growth of our core companies on an apples-to-apples basis would be approximately 15% which is lower than we had anticipated. While we will fall short of the full year revenue growth we expected on a apples-to-apples basis when we entered the year and certainly challenges remain in the second half given the macroeconomic headwinds we continue to expect full year 2008 aggregate revenue growth of our core companies will be at least 25% on a GAAP basis. As I discussed earlier on the EBITDA front we have experienced some acceleration of spending at StarCite in the first half which we believe is behind us at this point leading to continue improvement on the EBITDA front for 2008 while supporting our partner companies’ growth and developing their technology platforms.

Wrapping up with the value capture stage, the previously discussed Creditex sale to ICE which we believe will close later in the quarter, obviously is another great proof point on building our track record of acquiring great companies, helping build those businesses and capturing value. We have a strong group of maturing companies which leaves us very encouraged about our ability to capture value.

The first half 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 W. Buckley, III

Now, we’d like to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Van Rhee – Craig Hallum Capital Group, LLC.

Jeff Van Rhee – Craig Hallum Capital Group, LLC

I think most of the things I need are pretty straightforward this quarter but, you commented on the models that you have that are recurring versus those that are not and I just missed the statistics there. I think you gave some semblance of growth in the various models, could you just go back and touch on that again and maybe expand on it if you could.

R. Kirk Morgan

If we’re looking at our businesses Jeff where they’re more predictable recurring revenue models, essentially seven of the core companies, the growth for the quarter would have been about 24% both on an organic and on a GAAP basis. Obviously, I think in this environment, that was very encouraging.

Jeff Van Rhee – Craig Hallum Capital Group, LLC

As you roll it up, you’re at a very unique vantage point as you look around the spectrum of companies that you’re involved in. Any other macro observations if you will in terms of either – you commented on business models but maybe about vertical markets or types of spend that are still happening as opposed to types that are not?

Walter W. Buckley, III

A couple of things, we did really see a slowing in June in terms of new customer signings really across the board. I would say Metastorm and StarCite specifically, they weren’t deals that were lost, they were deals that were pushed in to Q3 or during the second half and actually we’ve seen a slight uptick in July. I would say obviously StarCite has a large presence in financial services and that’s been significantly impacted especially from a meeting standpoint. But, we’re encouraged really across the board by what we’re seeing in terms of buildup of pipeline activity I would say from an ICGC, Metastorm, Channel, Vcommerce perspective, they probably have more pipeline activity at a later stage than we’ve had in a long time. Now, predicting when all that will close, obviously in this time it’s difficult but I think we’re encouraged just by the level of mature activity.

Jeff Van Rhee – Craig Hallum Capital Group, LLC

While you’re on it, the Vcommerce, the ownership stake changed somewhat, what happened there?

Walter W. Buckley, III

That was basically a “warrant” that was part of a previous financing that came due.

Jeff Van Rhee – Craig Hallum Capital Group, LLC

And then I guess just lastly in terms of the hunt for new investments, I mean I’m thrilled to see the buy back, I think that’s just great and a great use of cash particularly down here but as you look at the other uses of cash, particularly finding new investments, on the new investment front can you just talk to the flow of deals? I know you’re always active but continue to be very selective which is great, but what is it about the deals that you’re seeing at this point that just continue to be unattractive? Is it purely pricing? Just give us some color there.

Walter W. Buckley, III

I think the deal flow is very strong right now really across the board and I would say healthier in later stage opportunity than we’ve seen in a while. We are seeing valuations beginning to come down especially in the early to mid stage size companies and we think there’s still room to go there. Our view is we really want to find a market leader, a company that can generate significant value long term at a price we think is reasonable. I think the combination of those two is obviously something we feel pretty strongly about and we’re not going to lower the bar. I think being patient, the market is coming to us from that perspective and we have like three or four really interesting companies that we’re looking at in discussions as we speak.

Operator

Our next question from Nate Swanson – Thinkpanmure, LLC

Nate Swanson – Thinkpanmure, LLC

Just a follow on to that last question, has there been any change in terms of the sectors you’re targeting on new company fundings? I know in the past you’ve looked at online marketing and healthcare as being two sectors that were interesting.

Walter W. Buckley, III

Obviously I think we’ll continue to look at online marketing, healthcare, financial services types of transactions. I would say no, you need to look in the same areas and probably looking I would say for larger later stage opportunities right now. I think that’s where we think there are some interesting opportunities developing.

Nate Swanson – Thinkpanmure, LLC

A couple of things, in terms of the Creditex acquisition, what are your thoughts in terms of monetizing that or I guess your plans post closing of that deal?

R. Kirk Morgan

I think again it’s hard to speculate, we’re still a ways away from closing but I think as we enter the year we really view that as a liquidity event and I think we’ll obviously monitor where the price of ICE stock is but I think all-all certainly the majority we would be looking to sell.

Nate Swanson – Thinkpanmure, LLC

And still on schedule to close late Q3?

R. Kirk Morgan

Yes, that’s correct.

Nate Swanson – Thinkpanmure, LLC

A couple of comments on WhiteFence, obviously they’re moving to really drive a branding initiatives with the launch of WhiteFence index and Movearoo. Can you talk about other initiatives to drive a national brand? And then, on Movearoo specifically, the economics behind that business model? Is it a revenue share or how is that structured?

Walter W. Buckley, III

A couple of things, on the Movearoo side it is very much like a traditional revenue model where they get between 80% and 100% of the commissions they would receive under normal circumstances. The interesting thing is this really is an industry consortium in the telecommunications space and the large R Box and many folks who leave one area and move to another this is sort of the industry’s way making a hand off occur. We think that it could represent a significant growth platform for us going forward. I think [Eric] and the team continue to look at existing opportunities and new opportunities to create a national brand and everything from radio across the board. I think they’ll be experimenting with different initiatives throughout the remainder of this year and 2009.

Nate Swanson – Thinkpanmure, LLC

Then in terms of the Movearoo labeling, I haven’t been to the site but is that branded WhiteFence in any way? And, can you talk who owns the customer after the transactions are processed?

Walter W. Buckley, III

It is branded WhiteFence underneath and just like WhiteFence – it’s a dual ownership of the customer but we have full rights from a further marketing perspective.

Nate Swanson – Thinkpanmure, LLC

Then just in terms of Channel Intelligence it sounds like they’re seeing nice growth there. It seems like it was about a year ago when you sort of flipped their model. Can you talk about maybe where we’re at in terms of getting to a more apples-to-apples growth rate or estimate there?

Walter W. Buckley, III

The company really is, as we flipped the model from a manufacturers [inaudible] product and then the [inaudible] which is more from the retailers to the CSEs. I think you need to go through the full year to see sort of apples-to-apples basis. But, we’re really seeing a real pick up in both products from the manufacturers to the retailers and the retailers to the CSEs and actually other areas of spend in the retailers we’re beginning to manage so I would say really across the board we’re sort of half way through the year and I think we’re encouraged but really the second half of the year is really where we would expect to see a greater level of growth. But again, it’s a new model and we’re going through it for the first time so you might want to put a little bit of caution around that.

Nate Swanson – Thinkpanmure, LLC

Then jus last question around StarCite, obviously there’s a meaningful transition going on there both in terms of the technology platform and the management team. I’m wondering in terms of the slowdown that you saw in Q2, how much of that is macro related and how much is moving pieces in terms of getting customers on to the new platform, getting the management team around it, and things you can influence?

Walter W. Buckley, III

It’s very hard to put a number on it but obviously macro is affecting, especially in financial services and somewhat in technology the number of events. But, not really as much the number of events but the number of attendees. But, I would also say frankly we’re right in the middle of moving the majority of our customers over to the new platform and so when you’re in that type of mode the ability to upsell existing customers is limited and we probably won’t really see that pick up until in to Q4. I mean obviously with Greg on board – there’s absolutely been an effect when you don’t have a CEO in place for six months. So, I think we certainly have felt that as well. I think when you put all three of those together, our sense is we’ll see a better second half of 2008 than we saw in terms of the first half.

Operator

There are no further questions at this time.

Walter W. Buckley, III

We’d like to thank all of you for joining us this morning and we look forward to reporting on Q3 results in November.

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