Homestore, Inc. at Needham & Co. 8th Annual Growth Conference Call Transcript (HOMS)

| About: Move, Inc. (MOVE)
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Executives

Michael Long, Chief Executive Officer

Analysts

Mark May, Needham & Company

Mark May, Needham & Company - Analyst

Go ahead and get started here. For those of you that don’t know me, my name is Mark May I’m a senior Internet analyst at Needham & Company. And we appreciate everyone attending the conference today. Next stop, or the first stop can click it off here is the team from Homestore, we are delighted to have them at the conference. We appreciate you guys coming. After the presentation, which will last about 30 minutes there is a breakout session in the library, which is right around the corner. We have a full team from the company here today. I think giving the presentation is Mike Long, who is the company’s Chief Executive Officer, we also have available for the Q&A session, Lewis Belote he is the company CFO also joining us I think its Alan Merrill who is the company’s EVP of Corporate Strategic Advisory and also Mollie who is the Director of Investor Relations. So I appreciate the team coming and participate here. Now, Let Mike take over the floor.

Michael Long, Chief Executive Officer

Thank you, Mark and I do appreciate the opportunity that we have seeing today. Good morning, and I like to apologize I’m allergy-sufferer; this is allergy season for me. For those who don’t have allergies, you don’t understand and those who do appreciate your empathy.

Homestore, as is our custom at the beginning of our presentation, we can ask you to read the Safe-Harbor clause. And I’ll give you just a moment to look at that. Okay, that being done. We have spent a lot of time and effort over the last four years, simplifying the business model and the focus of Homestore, as you know, we are a 10 year old company and we had a rapid growth and development period in the late 1990 and the early 2000. And of course, a result of that was a quite bit of revenue but no profit and no cash flow, so we’ve spent the last four years simplifying and retooling the Homestore business model.

We have very fortunately started to compete, the in area of tremendous economic activity and maybe as move-related, economic events. So it’s about $1.5 trillion of home sales annually in the space, there was about $90 billion of annual leases for apartments available each year up for grabs and there’s about a $120 billion of new consumer spending that is the rightly related to the mood. Those are things such as home improvements purchases, insurance services, electronic purchases for example, signing up for entertainment services such as cable or satellite, that’s about 15%, of the GDP.

In this large market opportunity, the customers that we focus on that are serving in this market in two categories. They are real estate professionals in which there are three sub categories, REALTORS, home builders and apartment owners and managers. Collectively they spend about $9 billion trying to reach this audience of about 18 million Americans or household that will move each year. Additionally, there is group of about well, hundreds if not thousands of national and local advertisers who spend about $11 billion, trying to reach this, this group of 18 million moving households each year. And they’re after the $120 billion of new consumer spending associated with the move.

And the opportunity prevent us to build a recurring relationship with these individuals and families as they move into a new community. In other words, to be their long-term home improvement store, their insurance company, their dentist or their florist. But one of obviously exciting area is serving the needs of REALTORS, home builders and apartments who get the immediate benefit of the buy decisions of these new households.

REALTORS, spend about $5 billion each year. Trying to get their message and their brand information out to potential home movers, home builders about $2.5 billion and apartment owners and managers another $2.5 billion.

So, the overall move related ad spend is about $20 billion, which is roughly 8% of the total advertising spend in the US economy. The internet spend relative to the total advertising spend, our number suggest is about 6% that is of the $16 billion total but it is, with this changing and growing rapidly, and I’m sure the other companies you’ll be spending time with at this conference today will clarify that number and it’s probably more aggressive than the 6% we’re illustrating here, which is normalizing the move related spend, you would expect the ratios to be same in the move related space and they are not. Actually, the total move related advertising spend online is now approximately a little more than 4%. And you would expect it to be about 6% or $1.2 billion it’s about 800 million. The good news is that it’s changing, it’s growing and adapting faster than the other advertising segments based on the information that we have.

And the reason for that is the recognition by advertisers that in dealing with move related messaging to consumers, timing frequency and the urgency of getting that message out to movers, because there is a narrow window of opportunity. But even more importantly is that these move-related consumers is moving consumers are already online. About 74% consumers have moved, where live time narrowly on the incident now to gather information to support their decision to move where they’re going to move and which homes they’re going to purchase or rent. So it’s an incredibly efficient opportunity for those advertisers that are spending about $20 billion today trying to get their message out, to this group of consumers.

Never have so many people preparing to spend so much nothing has been so accessible online. Here are some facts really about the changing real estate market. First of all, the housing market is slowing that’s not news. It’s been in the, it’s been in the media everyday about the economic activity around real estate. As a matter of fact, it’s the real estate market has powered the economy forward over the last 3 or 4 years which is very difficult economic challenges faced by the country, but it is slowing down. The effect on Homestores that our listing inventory. These are the properties available to advertise, by REALTORS, home builders and apartment managers, is increasing actually quite rapidly. And as David Lereah, Chief Economist of National Association REALTORS will say this is a market transition that is firmly in place.

Just looking historic, so what’s the effect, obvious question, what’s going to be the effect on the real estate ad spending as a result of they slowing transition in housing market place. If you look at historically over the last 30 years, they’ve only been three years; bringing total real estate move-related ad spending declined, three years out of 29 years and keep in mind that this information is historical generally out of contacts would be availability of online media. So, just the offline less sufficient ad spend only declined three years out of 29 years. And that’s an ad spend that is almost impossible to measure the benefit, so as we know the online ad spend is incrementally measurable. Observations is modest, they’re just very modest shifts in online, I mean offline to online ad spending 1% shares was about $200 million of revenue opportunities for company’s competing in the online real estate advertising category.

And another observation is that market leaders which happen to be the largest, our largest constituents and customers tend to be the most productive REALTORS, the largest home builders and the largest apartment owners and managers, they, during economic slowdowns in the housing category and historically always being market share. So matter of fact, some of leaders of those companies privately will share, review about of slowdown of real estate activity, is can be in as they have planned, as the larger companies consolidate their market positions and gain market share, and we’re fortunate to be serving that segment of the market extremely well.

After the, and of course now you’ve got home sellers, who would have starting to feel some exciting, therefore not getting multiple offers for their homes and the homes are not selling in three days, actually that was a challenge for us. Because many of our potential advertising customers, REALTORS for example, explain why did I, why do I need to advertise the home online if the home is selling at above market price or the asking price within three days. That’s no longer the case, so REALTORS are now stepping up to much more robust advertising campaigns, so we are seeing same phenomena in the home builders and apartment owners. So the pressure is now being applied on these marketers to buy the property owners to advertise their properties more effectively particularly online is increasing and we believe that that is a good thing for Homestore. So the opportunity is the slowing housing market should increase online, home and apartment advertising. Now, what I said was online advertising, we actually do anticipate a fairly significant decline in offline advertising, but again we believe that is supporting for our business model since we are primarily in online media company.

As the Homestore’s competitive position, we are very fortunate to be the leader as far as unique measured by the unique visitors that come to the Homestore network every month to look at the inventory of our customers. And the advertising associated with that inventory, we have about 10 million unique users each month. What is more important is, we measure very carefully the amount of time that these unique users and visitors spend on our site looking at our customer’s inventory. And based on minutes which suggest that, I think the quality of the site; our leadership were 8 times the number of minutes of the second largest player in the space. So we believe that that the content that we are providing that consumers love the content in the Homestore network and they enjoy going there and spending a lot of time in many cases the average unique user for example on REALTOR.com who visit more than 3 time a month and they spend 40 minutes or more in our network looking at inventory. And of course, that’s a critical value proposition that we offer to advertisers.

There are about 3 million listing, home listings in our, in the Homestore network today, it’s about 99% of the entire inventory of the REALTOR represented products for example, homes in the country. There is about 2 billion listing views each month just in REALTOR.com alone. Again a key part of the value proposition that we offer REALTOR’s. We have the best in breed customer Relationship Management Solution called Top Producer with about 15,000 customers if you would recall which was a software offering that had a very large installed software base on the client side. And we have converted that we believe quite successfully to an ASP recurring revenues subscription service. And so far, we have converted about 50,000 customers and that number is moving up quite nicely.

And then Welcome Wagon, which is brand we are very excited about owning. And 75 year old brand, and we’re retooling that brand, and we are excited about its potential contribution to Homestore’s growth beginning in the second half of 2006, with the retool business model we, but already we had increased the number of movers receiving Welcome Wagon gifts from about 2 to 4 million movers. No intent is that Welcome Wagon gifts would be available to all 18 million movers each year at a point in the future. So we very pleased with the expanding reach of Welcome Wagon.

Again as an example of our simplified business model we have 3 categories of revenues now and 4 years ago there would probably have been 8 or 9 or 10 categories of revenues inside of Homestore. Its, the major category is online media made up of revenues from REALTOR.com, RENTNET and HomeBuilder are 3 consumer facing website and retail advertising. Retail advertising is inventory in and around our listing sites that we felt to non-real state advertisers. That represents now about 70% of the total revenue of Homestore those in this category called online media. And REALTOR.com for those that are interested is, is now more than half of that 70%. 20% of our revenues come from offline media and Welcome Wagon deals, the largest component and then Top Producer which is our ASP CRN solution is about 10% of revenues.

The vast majority of our revenues are now annual recurring subscription-based. For those of you who have been following the company for the last few years, we have talked at great links about our investment program. We felt that when we began the turnaround at Homestore other than dealing with some legacy issues, funds on the store of the locating problems, which required about a $100 million of capital who is off. Other than that minor item, we chose to aggressively reinvest across the board and all of our strategic business units. And we stared with 3 REALTOR.com, top producer in retail advertising, which represented about half the business. And, it took about 2 years for us to completely reengineer those solutions and we are very pleased that those businesses 80% of the revenues from those 3 business lines come now from products that we have introduce as a result of our first phase of investments. So they have been completely refresh of course, we will continue to maintain our R&D program there, but it is not necessary at the level that we experience in 2002 and 2004.

We didn’t shared with you that if that was program was successful that we would launch a second phase of investment. And, we appreciate the confidence that our investors placed in us during that period. That if we got positive results from the first phase then we would, essentially reinvest in and refresh the other half of the business. Our HomeBuilder, RENTNET and Welcome Wagon as well as update our corporate infrastructure such as our data’s and their operations which were quite depending on. And that program is underway, we shared with you, we expect to complete our second stage of investment in the first half of 2006. The results, we believe that before our next conference call with you to discuss our yearend results and our fourth quarter results that we would produce, will about March 2, I think, notably (ph) confirms the base specifically it will be about March 2. But we feel so strongly about the impact of this second phase of investment, not just on those 3 business but on the entire corporations strategy that we planned to host a conference call for investors prior to March 2, where we would like to go over in great detail, review the strategy of Homestore has changed by an improved by, we hope the results of these second phase of investments. So, we will be in touch with you in the next few weeks to schedule that investor conference call which will be extensive review of Homestore’s strategy and the implications of the, this phase of the investment on the company.

We are very pleased with our results today even though only about, only half of our business has been fully reinvested in that the results today that we are experiencing increasing revenue which is a positive thing. But more and more importantly, I would suggest improving profitability and increasing cash flow. This is our year-over-year quarterly growth rates of combined revenues and you can see when our first phase of our investment plan kicked in very nicely between quarter one ’05 and quarter two ’05. And we appreciate some of the investor’s support that came under results of those demonstrating the evidence of their success of their first phase of the investments. But we’re now enjoying obviously quarter-over-quarter growth rates, and of course year-over-year revenue growth trends are very positive. And, I would like to remind you, this is before our Phase II investment kicks in the first and second quarter of 2006, where the benefits of that program won’t be fully as visible until the second half of 2006.

And we’re here to make profits, we are here to grow revenues and serve more customers everyday and generate more eyeballs to our website, I mean clearly we are. But our goal as a public company is to generate profits for our share holders. So, we’re very pleased that the second quarter, and third quarter of 2005, where we produced for the first time in the company’s history GAAP profitability. And keep in mind, we’re a company that’s firmly existing since 14 years. So, it was about time and we appreciate your patience. And we are optimistic about the future trends.

Our cash position, for a company like ours that is in a very dynamic space, and it’s so dynamic, it’s attracting a lot of new interest, some extremely well-capitalized and believe that they just discovered this new exciting market called New Related Advertising. And we’re diluted in the space and we not only plan to defend our position, but we expect to expand our leadership position and unique capital available to do that. And we are very fortunate that internal operations are generating positive cash flows, but we did add $100 million of new capital to balance sheet in November with the strategic partnership formed with Elevation Partners. Elevation Partners are wonderful strategic assets for this company and are only, I think, we get $100 million of capital. We acquired 2 new very high quality Directors like Fred Anderson and Roger McNamee who have exemplar careers in technology and media. So, we are very excited about our partnership and we are also glad to have capital in the cash in the banks so that we can be opportunistic as we plan to defend and expand on market share going forward.

So in summary, looking at Homestore I’ll ask you to remember just a few things. First of all, it is a very large market opportunity, there is no doubt its easy to measure the market now that we serve it is very large and it is growing this online real estate advertising category. We are the leader in this space, so we have a strong position to capitalize on the opportunity, but it is, and we’re not market constraint. Our issues in this market will be Homestore execution issues it will not be market limitations. So, and that will not be given as a reason why, if we experience any difficulty in the future, it will not be that the market opportunity as we fairly expect, we stumbled on the execution side which we are going to try to the best of our ability to limit, the kind of mistakes along those lines.

The first phase of our investment program, I believe it’s been marvelously successful. Based on the, and persistently successful when you have had half the business invested in and its generating overall interesting and we believe exciting growth rates for the entire company, its not difficult to extend that reasoning into, or do at least as well, or almost as well with the second phase of investment, but that should also have a material effect on the company’s overall growth rate and profitability. But those benefits I would caution you really won’t be obvious to you as investors in sort of second half of 2006. And we do look forward to meeting with you in this conference call, before March 2, to go over the rate to tell you the impact we believe that we’ll have on our corporate strategy.

And then finally we have a, we don’t provide a lot of forecast as a company, we’re been in the company and the company that’s been in dramatic transition for the last few years and we thought it was irresponsible to provide detailed forecast of our future performance. In many cases, because we didn’t know and so we flush your information that is not based, that was not fact-based. But we are encouraged, we are becoming more encouraged daily and we have reached to say that, we believe this market opportunity and the assets that we have should produce the company that has at least 20% that generates at least 20% top line growth and 20% profitability. And albeit that a modest future forecast it is a, we’re pleased to make it and we believe that we would say that with some confidence.

That concludes the overview of Homestore and I think we’ll have a few moments Mark for some Q&A and I’ve got my associates here from Homestore with me who can help if can’t answer the question. So, I would like to open it up for Q&A.

Questions and Answers

A - Michael Long

Yes, please.

Q - Unknown Speaker

With your phase 2 after negative (ph) short-term income statement in exchange of longer-term gain?

A - Michael Long

Phase 2, yeah let me restate the question for friends that are listening on the web, the question is, as I said it correctly is the phase 2 have short-term negative income statement impact in exchange for long-term gain. The answer is yes, and we are more than 2/3 and ¾ of the way through that pain already. We have been expensing phase 2 as incurred, and phase 2 began at the beginning of 2005 and we have been expensing it on a quarterly basis buying large, we capitalized very little.

Q - Unknown Speaker

Has phase 2 as discussed can slow that environment down, can you give – do you see a difference in how REALTORS versus Home Builders, Apartment Managers react to the kind of environment individually?

A - Michael Long

Well, its, the question is are we experiencing, as the market slows down, we are experiencing what kind of reactions are we getting from REALTORS, Home Builders and apartment managers, to this market slowdown, is that individually, individually there is 1.3 million REALTORS, so its kind of tough to measure them individually. But of those 3 categories, okay the reaction is first of all, its market-by-market. Its every market in the US has been experience the hyper, almost hyper inflation on home prices for example, South Florida, Phoenix, Southern California, The Manhattan market, all had been maybe a little over inflated based on what the economists say, so the adjustment is and even there that the market is slowing as suppose to retrieving that the rate of increase is declining. The rest of the country, really it was, it was a media event as far as home prices, if you go to demo in Iowa, which actually is a good market for us, a good REALTORS and Home Builders in that market, they never identified what this bubble, this housing bubble that the journalists talking about everyday. So, but so the reaction it depends on the market the REALTORS who were selling, were customer selling a 100 houses a year and then we’re selling a 150 houses a year. They are, they’re working harder now. They’re just working a lot harder. The good news is listen, despites the Home Builders a lot as well is that our biggest challenge was convincing them to advertise, because the houses were selling before they ever got online and one of our challenge is consumer who were looking at REALTOR.com for example and they find a house and they call a REALTOR and it was already sold. So, it was a very frustrating to assume the experience, that’s not the case now. So, we think the small rational market is a very positive thing. Across the board, apartment owners, REALTORS and Home Builders now appreciate that the online advertising opportunity and we believe is about 15 times more efficient in offline advertising, and so it’s efficacy. And they’re getting that message now and they’re slowing down actually, purge this into a reallocate from offline to online. Yes.

Q - Unknown Speaker

What is the impact on housing slowdown since you have an off-line media component and where do you see Welcome Wagon gift book penetrations in this market space?

A - Michael Long

Okay, I think the question is what, so what if this is we have in off-line media component what the impact of this housing slowdown on that component and the second part of that question is what the heck is Welcome Wagon out from what you remember is maybe when you were a young girl or maybe your aunt wants the Welcome Wagon represented it on the block. Okay, the first part of that question is that, the largest component of the Welcome Wagon is of our offline front is a Welcome Wagon gift book and since it was so poorly penetrated and when we started the turnaround as far it was only addressing about 2 million movers and it had no national advertising and then it was all local advertising, we’ve retooled that model, the initial phases which we’ve already shared with you, we’ve got more to share in our next conference call with you was to get national advertisers in the book and to expand the number of recipients for the book. So, that is, that actually is growing our offline media the regardless so what’s happening in the slowing housing market. So the answer right now, is no impact on Welcome Wagon, and now as far as Welcome Wagon what it is today, I mean what it used to be was a welcoming, welcoming vehicle whereas someone local in the community would visit any mover with the gift basket from Welcome Wagon and offers from local advertisers and they would sit down and have tea at 12 O’clock in the afternoon, for noon. Nobody is home at noon and anymore and Welcome Wagon lady, she went to work too. She got another job. That’s what really happened. So, now what we deliver is that gift through the mail and what we’re excited about in the future of Welcome Wagon is that on the opportunity for online delivery of gifts, more integrated in with our real estate operations and because it’s a wonderful brand, this brand awareness is actually quite high and it’s viewed as very friendly brand, it means Welcome. And we think that’s a positive asset, they’re shifting from offline to online, while cheating the balance of offline and online, guess we’ll be, that’s an indication of what the future Welcome Wagon will look like. For example, we would be launching WelcomeWagon.com as we speak.

Mark May, Needham & Company - Analyst

We will now move out for a breakout session in the library right around the corner.

Michael Long, Chief Executive Officer

Okay, thank you very much for your attendance this morning. Thank you, Mark.

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