InfoSpace, Inc. Q3 2008 Earnings Conference Call

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InfoSpace, Inc. (NYSE:INSP) Q3 2008 Earnings Call November 5, 2008 5:00 PM ET


Stacy Ybarra – Director of Investor Relations

James Voelker – Chairman, President, Chief Executive Officer

David Binder – Chief Financial Officer


Kerry Rice – Wedbush Morgan Securities, Inc.

Clark Wong – Needham & Company


Good day, everyone. Welcome to the InfoSpace Incorporated Third Quarter 2008 Earnings Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Stacy Ybarra, Director of Investor Relations. Please go ahead.

Stacy Ybarra

Good afternoon and welcome to InfoSpace’s Third Quarter 2008 Earnings Results Conference Call. I’m Stacy Ybarra, Director of Investor Relations. With me on the call today is Jim Voelker, Chairman and CEO and David Binder, Chief Financial Officer.

Before we get started, let me quickly remind you of two things. First, this is an investor call. Accordingly, we will only take calls from the investment community.

Second, during the course of this call, InfoSpace representatives will make certain forward-looking statements. These forward-looking statements may include statements regarding InfoSpace’s expectations relating to its online products and services, outlooks for the future of our business, business and growth initiatives, anticipated financial performance for the fourth quarter 2008 and transition plans.

Other statements which may be made in response to question which refer to our beliefs, plans, expectations or intentions are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act. Because these statements pertain to future events that are subject to various risks and uncertainties and actual results could differ materially from InfoSpace’s current expectations and beliefs.

Factors that could cause or contribute to such differences include, but are not limited to the risks discussed in InfoSpace’s annual report on form 10K for the year ended December 31, 2007 and quarterly reports on form 10Q, which are on file with the Securities and Exchange Commission. InfoSpace assumes no obligation to update its forward-looking statements.

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

Now, I’ll turn the call over to Jim. Following his comments, David will give the third quarter results and fourth quarter outlook. Then, Jim will wrap up with closing remarks. Then, we’ll open up the call for your questions, Jim.

James Voelker

Thanks, Stacy, and welcome everybody to the call today. So, we have quite a bit to discuss today. Of course, we’ll go over out third quarter results. We also have some exciting marketing and product initiatives we want to discuss in some level of detail and then some thoughts around our overall strategic position.

So, for the third quarter, it was a very strong third quarter for us and the third consecutive quarter in a row that we exceeded expectations. And that’s really great considering that this has been a transitional year for us. If you think back a year from now or a year ago, we had three businesses and we were in the process of divesting two. And our search business, actually, had shrunk from’06 to ’07.

So, we focused this year on revitalizing the business kind of from top to bottom. We’ve done a lot of work on our infrastructure in this last week; we opened the second of two new data centers. Those data centers are outfitted with brand new technology platforms based on the latest and greatest virtual technology, which allows us not only lower operating costs, but more velocity in terms of doing product releases and a better standard of service as well.

We’ve increased our site performance pretty considerably, about 100% over the last six months or so. We’ve also increased our capability around analytics with a new platform there. We’ve introduced several new product features and we’ve been very focused on user engagement and of course, on growth and financial performance.

We made real progress on all fronts this year and the result of that is not only reflected in our financial results here, but also in the confidence that we’re gaining.

So, on the third quarter results, the revenue was 39.5 million, which is up 17% year-over-year. Both are owned and operated and our distribution segments improved sequentially and year-over-year. And owned and operated had an increase of 1.6 million or 12% from ’07. That continues a growth trend from the second quarter, so to have two quarters in a row where O&O has grown is something we haven’t seen in quite a long time.

As usual, if the top line does well, the bottom line does well and our EBITDA was very strong at 6.6 million, which reflects an increase of 114% from ’07. We have a very strong cash position of over $200 million and no debt.

The performance of our business model and our financial position really provide us an opportunity to not only think about in period investing, which we’ve done this year, but also to invest over the longer term.

Now, one of the things we have to consider there is what kind of market we’re investing in and of course, the search market has been consistently strong for at least the last six or seven years. In this last year, we saw it grow in double digits and time will tell regarding the continuation of that, particular over the medium-term, but there are a lot of reasons to be optimistic about search.

It’s still the most targetable and measurable advertising available and actually, that measurability has increased over the course of the last year with new tools that our partners have been able to roll out. And we’ve seen some outside sources such as Jupiter Media, Kavario and Search Ignite all report positive outlooks for search spending in the next 12 months.

Advertising spending overall is going to be under some pressure, but I think most people feel that the last money out of that will be search advertising. Now, all that being said, we have seen some softness in rates that have kind of started this quarter and that’s reflected in our outlook for Q4.

Now, the other thing we think about when we invest is what are we investing in really? And really, we’re investing in our owned and operated traffic. We’ve long held the belief that our owned and operated traffic is of very high quality and really, over the course of the last year, our partners, with their measurement tools, have really validated that via the kind of conversion scores; which means that conversion is roughly – what happens for an advertiser not just getting a click through, but do they get some kind of other activity, either a form filled out or time spent on their site, or of course, hopefully, some kind of transaction.

So, that means that that traffic that we have, which has very high conversion scores is very valuable, not only as a means of generating margins for us, but it’s valuable for advertisers who want people to see their brands, see their products and ultimately buy them, so we think it’s a very, very good place for us to invest. And we’ve been pleased with the initiatives we’ve used so far this year and so, we’re going to increase our investment this quarter in two areas and we’re going to maintain it in a third.

Now the question is how to invest and while our metasearch product has long-delivered a really good user experience, and that’s been validated by us winning the J.D. Power Award a couple of years in a row. Really as a marketing concept, it’s been very difficult for us to message and execute on in a consistent manner.

So, earlier this year, we began to focus on a more personal engagement with the site and particularly with Arfie, our mascot. Bringing Arfie to life and we’ve done that via the website and have him celebrate holidays, moving openings, even the Mars landing and of course, we got some mileage out of that never-ending political season, which hopefully for all of us is behind us now. And the results there have been very good.

We did a recent survey of our users and 885 of respondents were either favorable or very favorable about Arfie’s antics, if you will, and look forward to more. And on a more tangible to revenue kind of statistic, click activity per searcher has improved across the year.

And while that was a good start, we really felt we needed something that was more sustainable and something that was a specific kind of a program and we looked backwards to a short program that we ran at the end of last year that was raising money for animal shelters. And so we decided to expand that concept to a longer-term program that we’re calling Search and Rescue.

We partnered with the ASPCA, which is the nation’s largest animal welfare organization to raise around a million dollars over the next 12 months. This is very simple as we can attract people to use Dogpile, we will donate a portion of the revenue to assist animals. And this is a really easy way for our users, our new users, to connect and to make a difference without reaching into their own pockets and I think our timing’s good here as well.

Across this next year, it looks to be a little tougher economic time and so a way that people can feel good about donating without having to do it directly, we think is a nice message. We also like the fact that animal lovers are a very large and very targetable segment. And what I mean by that is there’s enough animal lovers, it’s large enough to make a real impact on Dogpile, yet it’s one that is very small enough, if you will, and focused enough that we can make an impact with our somewhat limited budget levels.

So, some numbers to think about here. 63% or 71 million U.S. households own pets and within those households, the feelings run from general indifference to the pet to incredible and deep passion for the pet. That end is the end that we’re going to target and we can look and see that 5 million unique visitors come to pet charity websites on a monthly basis. And on an annual basis, people donate over $500 million to these kinds of sites.

So, our online ad programs will focus on those pet-related sites as well as some general sites, but everything with a call to action, either a click to come see our site and land on Dogpile and get the feeling there or download a toolbar or a widget. That way we can really take a look at each kind of campaign and on a very measurable basis, decide on how it’s producing.

We’re also going to be able to leverage close to 1 million ASPCA members through their newsletters and mailing lists and we’ll be launching a national PR effort, featuring a celebrity spokesperson whose been associated with animal causes and I was hopeful we could use the name today, but we’re just not quite there, to do a real media outreach program, television shows, radio spots, newspapers and the like. Again, everything to underscore the fact that there are pets in need and Dogpile’s the place to come if you want to help them.

We’re very, very excited about this. This is something that we can really engage people in emotionally around a great cause and we know we can generate long-term Dogpile users.

So, the second initiative we have is to get ourselves and increase our activity in the lucrative downloadable market. This is the one spot in search where Google is not incredibly dominant. They’re still dominant, but they only have about half the market here and we have seen and studied and watched a lot of smaller players, such as IAC have considerable success here.

And downloadables not only make it easy for users to search, they capture the navigational searches such as DNS errors and default traffic that can be very lucrative for the provider. Now, we wanted to do something a little bit different here and so, we‘ve been working with Microsoft on a downloadable application that really features and utilizes their silver-like technology, which is a flash type of technology, only really a couple of generations ahead.

And the result we will launch is a totally new kind of browser application that delivers, I think, an extremely engaging multi-media experience. I like it as a kind of mini portal almost as a toolbar on your desktop and I won’t do a great job of describing it here, but when you get to see it, I think you’ll be excited by it.

We’ll start with a variety of verticals, news, weather, wallpapers, celebrity gossip and many others under a new brand we’re calling and we’ll be able to measure our performance from each channel and then decide which ways are the most lucrative.

I’m not often given to real technical fascination or hyperbole on things, but I will tell you this new product is very different. It’s the best thing that I’ve seen us build here over the six years I’ve been here and we believe users will find this very attractive and valuable. It’s very exciting.

We’ll be launching later this month with a significant effort behind it and we will plan then to ramp faster after the first of the year.

Now, the third agenda we have to just grow O&O is one that we’ve been running all year and it’s our direct marketing program. In this program, we leverage our high page ranks on WebCrawler and MetaCrawler to use SEM and SEO to drive traffic and users to those sites and it’s been very successful and not only driving revenue, but contribution and we’ll continue to invest here, but more on an in-period return basis.

So, to sum it up there, we have three programs to drive O&O traffic, each with very measurable campaigns. Now, in total this quarter, we plan to spend 2.5 million, which will obviously affect our bottom line, but we’re very confident in our ability to monetize and increase traffic once we get it and we believe this is the best route to build long-term cash flow and value.

Now, on to our distribution business. Distribution continues to be a strong contributor for us and we’ve had a very successful year. In this quarter, actually, we’re up 20% year-over-year. We’ve done that by signing five new portal contracts this, all based on our Web2.O technology. We launched two in the third quarter and the remainder will launch in the coming months.

We’ve also launched DNS assist, with CableVision and TeleNet in the third quarter and we have a very solid pipeline in place there. And overall, we signed another five partners in this quarter, which seems to be the right number for us because it brings the annual number to 15. So, all in all, very good there.

So, a good quarter and really a very good year for us so far. We’ve exceeded the street’s and our own expectations, frankly. We’ve really strengthened our capabilities and operations significantly and we kept our costs in line and the bottom line shows that. I am very proud of the team here. The effort and the performance this year has been astounding. The change out of those data centers alone and our entire technical platform with very ominous problems associated has been a super human kind of effort and I want to definitely congratulate them.

We’ve also recently strengthened our management team by the addition of Stuart West as VP of Corp Dev and Strategy. So, Stuart is joining us from Yahoo!, where he managed business operation and financial aspects of two units and he also has experience at TIVO and with JP Morgan as well. His charge will be to lead our efforts to invest our cash and creating value for share holders.

Right now, I’m going to turn the call over to David for financial details and then I’ll return for a few closing remarks, David.

David Binder

Thanks, Jim and welcome to our call today. I’ll start with a review of our third quarter earnings, including a discussion of our cash position and certain balance sheet items and then provide our guidance for the fourth quarter.

In the third quarter we exceeded expectations on all of our key operating metrics. As Jim mentioned earlier, revenue for the third quarter was 39.5 million, which is up sequentially from the second quarter by 3% and up from the third quarter of 2007 by 17%.

Plus our owned and operated line of business as well as distribution experienced strong growth from prior periods, with owned and operated up by 12% from the third quarter of 2007 and distribution up by 20% versus the same period last year.

Our own websites continue to benefit from product improvements that enhance monetization of queries as well as direct marketing initiatives that drove new traffic to the sites. In addition, our distribution business grew from the continued strength of new partners we added at the end of last year and the beginning of 2008.

Gross profit in the quarter was 21.2 million, equal to 54% of revenue. In total, gross profit dollars were up by 5% from the second quarter this year and by 14% when compared to the same period last year. The sequential increase is primarily driven by strong revenue growth in owned and operated, which was equal to 39% of our total revenue, up from 37% in the second quarter.

Adjusted EBITDA in the third quarter was 6.6 million, equal to 17% of revenue and up by 3.5 million or 114% from the third quarter of 2007. In comparison to the same quarter last year, we grew our gross profit by 2.6 million, while reducing our direct cash operating expenses.

While we achieved our greater-than-expected performance in adjusted EBITDA this quarter, we posted an overall net loss of 9.9 million, included in this total; we recognized 11 million in unrealized losses from investments, primarily from our holdings in auction rate securities.

At the end of the quarter, the book value of our ARS investments was 18.2 million, which is 9 million lower than the booked amount from the prior quarter of 27.2 million. While none of our ARS investments have defaulted and we continue to receive interest payments on their full par value of 40.4 million, the markets to trade these securities continue to be frozen.

The loss we booked this quarter is a reflection of the lack of immediate liquidity, the negative trends in the financial markets and the significant reduction in value.

Regarding the balance sheet, we ended the quarter with 210.4 million in cash, short and long-term investments equal to $6.09 per share. This cash balance includes the current book value of our liquid ARS investment of 18.2 million. The weighted average basic share count in the quarter was 34.5 million and we ended with 34.6 million in total shares outstanding.

Now turning to our outlook, for the fourth quarter, we expect revenue to range between 34 and 36 million, adjusted EBITDA to be between 2 and 3 million and a net loss to be between 1 and 2 million or $0.03 to $0.06 per share.

This top line guidance reflects declining trends in the PPC rates we’re seeing at the beginning of the quarter, which impacts both our owned and operated as well as our distribution products.

Additionally, we are investing this quarter with initiatives that will both increase the amount of quality traffic we drive to our own websites as well as more efficiently align our cost structure into next year.

As Jim detailed earlier, we launched our Search and Rescue initiative and will launch an enhanced toolbar later in the quarter. We expect the total investment for these initiatives to be 2.5 million in the fourth quarter and to yield positive financial results next year.

Additionally, we are shifting and reducing some of our resources that support the European distribution business. As a result, we will incur 700,000 in one-time expenses, which is reflected in our guidance and will position the company to lower operating expenses by more than 2 million annually at the start of 2009. With that, I’ll turn the call back over to Jim.

James Voelker

Thanks, David. So to wrap up here, our business has been strong, but we definitely have some caution about rates, particularly in the fourth quarter. Now we’ve gained real confidence this year that we can grow our owned and operated sector profitably and that’s been important and we’ve also gained capabilities in that way.

We have two new initiatives focused in that direction, with significant investment behind them. From a strategic standpoint, we think we’re in an enviable position, considering today’s economic circumstances. We have cash, we have a currency and we have a very large NOL, which allows us to keep the cash we produce.

We also have a very strong track record here of creating value for share holders by acquiring assets at the right price, managing them effectively for cash production and in some cases, divesting them for significant gains.

We believe that there will be opportunities in the coming year to invest at prices that are below recent values and to start that cycle over again. We have a strong, experienced, leadership team in place who knows how to evaluate, acquire, integrate and grow businesses and this management has over 25 combined years of experience at InfoSpace doing just that.

Now during the last six years, we created over six times return for investors and we’re very proud of that record. For me, it’s time for me to transition from my current dual role as Chairman and CEO to that of Chairman as the next phase of my career and moreover, my life.

To that end, we’ve launched a search for my successor and I’ve hired Spencer Stuart to manage the process and when that culminates in a hire, I will shift to Chairman. I think by continuing in that role, I can help the company achieve a seamless transition and continue to build on the strong foundation we have in place. And with that, we’ll take any questions that you might have.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from Kerry Rice with Wedbush Morgan.

Kerry Rice – Wedbush Morgan Securities, Inc.

Nice quarter. I want to talk a little bit more about the guidance and make sure I understand when you’re talking about the pay per click rates coming down. You get paid by Yahoo! and Google and those contracts are in place until 2011 so, I just want to make sure I understand how the lower rates impact you because I would assume the rates from Yahoo! and Google are staying the same.

James Voelker

Well, I can start with this. I think what you’re referring to is the tack rates and those percentages have not changed. That’s correct. This is really referring to what I guess you’d consider the absolute rates that we see advertisers paying and so that’s where we’ve seen some erosion in rates.

And I’ll say that so far, it doesn’t look a lot different than it did last year, but the economic outlook is a lot different than it was last year and so we’re proceeding with caution.

Kerry Rice – Wedbush Morgan Securities, Inc.

Okay and then regarding the option rate securities, you guys have been kind of slowing writing these down each quarter and you’ve got about a 18 million balance left, so I don’t know what the strategy is and maybe try to better understand that with writing it off a certain amount each quarter or do you think that you go back and re-evaluate how it’s impaired each quarter or ultimately, what I’m getting to, why not go ahead and write the rest of 18 million off?

David Binder

Well, the value we recognize for these investments is based on the market conditions and the inputs we can see or some inputs tend to be less observable than others but we are recognizing what the market is telling us these investments are worth.

Kerry Rice – Wedbush Morgan Securities, Inc.

And you have to go through that evaluation each quarter, correct?

David Binder

That evaluation each quarter.

James Voelker

You do and we don’t do this alone. We do this with the help of our auditors and other consultants.

Kerry Rice – Wedbush Morgan Securities, Inc.

Okay, I’ll step out of line and let some other people ask a question. Thank you.


(Operator Instructions) Our next question will come from Mark May with Needham and Company.

Clark Wong – Needham & Company

Hi, this is Clark Wong in for Mark May. I was wondering if you could give a little more color on why the EBITDA guidance is coming down. The margin at the midpoints is about 7%, that’s down from 17% all year and even if you take out the 2.5 million and the market spend you guys are expecting to do, you’re still going to be below previous margins, so I was wondering if you could give us some color on that.

David Binder

Hey Clark, it’s David. So, you have to keep in mind that we’re investing what in aggregate is 3.2 million in these initiatives, both to grow traffic on our sites as well as reducing costs in 2009. So that the total investment’s 3.2 and that’s really – if you were to adjust our guidance with that investment level, the total EBITDA performance would be in line with what our top line guidance is.

Clark Wong – Needham & Company

Okay and the 3.2 will include the moves you are making in Europe? Is that right?

David Binder

That’s right. You take the 2.5 plus the 700,000.

Clark Wong – Needham & Company

Got it. I was wondering, what do the new data centers mean to expenses? You guys have spent this money on these new data centers. What does it do?

James Voelker

So, going forward it will be a marginal decrease in our on-going operating expenses. What it does more significantly for us is it improves our ability to expand ability to serve our business better, to improve the performance of our sites and allow more stability in our situation.

So, a little background there, when we sold our two businesses last year, in one of those transactions, we sold our existing data centers along with those and we did that, obviously consciously and part of the planning on that was that we could really do a very – call it a clean, free start there – with an entirely new technology base; also helped us clean up some things that – anybody’s who’s lived in a house for ten years knows that you have a lot of trash that’s put in different places in your house and this is a good way to clean it up; and so we got that done and also give us, again, some more room to expand, etcetera.

So, it’s worked out, really, quite well.

Clark Wong – Needham & Company

Okay, excellent. So, I guess CapEx expectations for fourth quarter will come down significantly from what it was the past two quarters?

David Binder

That’s right our CapEx spend has been ramping throughout the first through the third quarters and that’s really driven by the data center build out.

Clark Wong – Needham & Company

Okay, great and in terms of downloadables that you guys were talking about, how will that be monetized?

James Voelker

Well, how it gets monetized is through search traffic, so the downloadable sits inside the browser and, again, as I mentioned it gets searches or generates searches, if you will, from a few different ways. One is it will have a search box on it that people can just type searches into. It also will grab default searches and any kind of errors that get typed into the address box.

In terms of the way the revenue mix on that goes, it’s pretty evenly distributed across those three. So, we’ve done a lot of work. We looked at a number of companies this year in terms of acquisition targets to try and get a concept of this and learn more about it and we really liked the business and felt we could start from scratch here and do a really good job.

Clark Wong – Needham & Company

Okay and is there a launch date on that?

James Voelker

There is a launch date and it’s this quarter.

Clark Wong – Needham & Company

Are we talking front half of the quarter, back half of the quarter?

James Voelker

Well, we’re kind of midway there now, so –

Clark Wong – Needham & Company

Alright. Okay. I was wondering if you could show some it looks like O&O has grown pretty well over the past couple of quarters, I was wondering if you could share some traffic numbers and how those have grown.

David Binder

Yeah, so we haven’t historically and we’re not now preparing specific traffic numbers. I would say that growth has come both through incremental new traffic to owned and operated, primarily driven by our direct marketing initiatives and it has grown also from increased monetization, so the conversion from a query to a paid click has been a big factor in growth as well.

Clark Wong – Needham & Company

Okay, so you guys mentioned that CPC rates were pressured. You started to see some pressure towards the end of this quarter. So, would it be safe to say that traffic was the main driver for the growth in O&O in 3Q?

David Binder

Well, what I said was that at the beginning of the fourth quarter we’re seeing that trend and it’s really more of a reflection in the fourth quarter guidance than in the third quarter.

Clark Wong – Needham & Company

Alright, thank you.


(Operator Instructions)

Stacy Ybarra

Operator, if there’s no more questions, I think we can end the call.


And we have no further questions at this time.

Stacy Ybarra

Thanks for joining the call today.


That does conclude today’s conference. We do thank you for participation. Have a great day.

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