CoActive Marketing Group, Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

| About: Mktg, Inc. (CMKG)

CoActive Marketing Group, Inc. (OTCPK:CMKG) F1Q09 Earnings Call August 13, 2008 4:30 PM ET


Fred Kaseff – Chief Financial Officer

Charles F. Tarzian – President, Chief Executive Officer


Adam Mizel - Aquifer Capital Group, LLC


Welcome to CoActive Marketing Group’s fiscal 2009 first quarter earnings conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Fred Kaseff, Chief Financial Officer.

Fred Kaseff

Welcome to CoActive Marketing Group’s conference call for the quarter ended June 30, 2008 which is the first quarter of our fiscal year 2009.

There will be a replay of the conference call available starting approximately two hours after the end of this call until midnight on Wednesday, August 20. To access this replay, dial 800-642-1687 for domestic calls or 706-645-9291 for international calls and any time during that period, use conference ID number, 59829705.

A replay will also be available through our website, redesigned in connection with our recent rebranding under the name ‘mktg’ at immediately following the conclusion of this call.

All of you should have access to a copy of our press release that was distributed earlier today. If you do not, please either refer to our website or contact Cynthia Hilliard of CoActive at 212-366-3438.

Following remarks from our President and Chief Executive Officer Charlie Tarzian, I will cover the financial and operating results. At that point, Charlie and I along with Marc Particelli, CoActive’s Chairman of the Board will take your questions.

We believe that it is in the best interests of our stockholders and the investing community for us to make forward-looking statements in our press releases and in today’s call. These statements include management’s expectations and projections with respect to future operating results, clients, and customer projects. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual results or events may differ from those expressed or implied in any such forward-looking statements as a result of various factors including the risk factors and other risks that are described from time to time in the company’s filings with the Securities and Exchange Commission. Please refer to our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional information concerning risk factors that may affect our future results.

Now I would like to turn the call over to Charlie Tarzian.

Charles F. Tarzian

We continue to make progress during Q1 in solidifying and growing our client relationships, in moving to a higher-value, more measurable and recurring marketing service mix and improving our capabilities in continuing our investment and new service capabilities and in upgrading our internal operations. Our results of strong year-over-year growth of nearly 19% in operating revenue and solid profitability show that we are on the right track.

We did see a tightening in marketing spend by our clients through the quarter as they reacted to the deteriorating economic climate but the direct measurable link between our services and customer and revenue acquisitions by our clients allowed us to increase our share of our clients’ marketing spend in many cases.

We also saw a stronger demand of our services from some of our larger clients towards the end of their fiscal years where there was a conscious effort to spend more in the midst of the economic downturn to take market share away from competitors.

In past calls, we reported that we’ve changed the direction of our business to stress integrated marketing programs while moving away from one-off events and promotions. We continue to focus on opportunities that create recurring revenue streams with larger Fortune 1000 clients. The mix which entices the new business pipeline reflects this change showing CRM and integrated marketing programs, social media and digital consumer network fills and large enterprise sales enablement assignments.

We also mentioned that we are investing in developing new capabilities and initiatives to fuel future growth. Specifically, our field network automation dashboard, sales enablement tool kit and data analytics applications are all reaching market-ready status and we expect to make them available to our clients by the end of fiscal Q2.

By the end of the quarter or shortly into the current quarter, three notable changes occurred in our business. First, as reported on the last day of the first quarter, we completed the acquisition of Marketing Partners, a rapidly growing experiential and events marketing firm with strong leadership, a great team and world-class clients. Marketing Partners has recorded $14.1 million in sales and $4.3 million in operating revenue in calendar year 2007, has offices in New York, Chicago, Toronto and San Francisco, and adds a seasoned team of 28 full-time people to our combined firms, and brings major clients and growth opportunities with them including Nike, CVS and YouTube. We have been working to integrate the organizations over the past six weeks and take advantage of the best of both organizations. The combined team is working well together and the process of integration is going well.

Second, we have rebranded or are in the process of repositioning the firm as ‘mktg’ to reflect and emphasize the changes we have made in the business and the direction we are taking in the company. ‘mktg’ is an integrated marketing services company that is moving towards offering alternative media services. These services include face-to-face marketing, word-of-mouth marketing, shopper marketing, mobile marketing meaning marketing delivered to consumers’ phones, viral marketing and digital signage at the point of sale. While we have previously performed all of these services in one way or another for our clients, we believe putting all of these together as an integrated whole allows us to offer a more comprehensive set of services delivered together and at a premium. This is the first step toward doing that and we are committed to making this the basis of our core offering to our clients going forward.

Thirdly, we saw full impact in Q1 from the broader economic difficulties as we gained share of client marketing expenditures. However, at the end of Q1 and more recently during Q2, we are seeing the effects of [inaudible]. Some clients are pulling back specific types of spend like retail promotions for example while others who were planning on spending increases have signaled they will stay flat or reduce their spend in our services as well as the other less targeted markets. We are in the process of evaluating the implications of this change and intentions.

As we look to the future, we see continued expansion of our capabilities according to continued growth and while the difficult economic times and cutbacks by a number of our clients are likely to aversely affect us in the short-term, we see the quality and value of our work for clients increasing and our opportunities expanding over the long-term. With the integration of Marketing Partners, we will pursue continued organic growth in fiscal 2009 through cross-selling and integration of services in our Q3 and Q4. We also expect to add to our business as we reach out to acquired talent, capabilities, services and clients.

Now, I would like to turn the call back over to Fred. He’ll take us through the numbers for the quarter and then we’ll take your questions.

Fred Kaseff

We have just completed a very positive first quarter of our 2009 fiscal year showing operating revenue and bottom-line growth on both a year-over-year and sequential basis.

I will review both top-line sales and operating revenue but as noted in previous quarters, we consider operating revenue which is sales, less reimbursable and other program costs and expenses as the more relevant measure of the success of our business.

Sales for the quarter ended June 30, 2008 were $22.3 million, up 9% or $1.9 million from last year’s first quarter, while operating revenue showed even greater percentage improvement, increasing 19% or $1.5 million to $9.3 million versus last year’s $7.8 million on the continued strength of our relationship with Diageo but also revenue gain from new high-margin and relationship-based business.

Comparing the quarter ended June 30, 2008 versus the quarter ended March 31, 2008, sales were down slightly, 3.5% or $800,000 and $23.1 million to $22.3 million. Operating revenue was up 3% or $300,000 from $9 million to $9.3 million, again, due to our ability to generate higher-margin recurring business.

On the expense side, compensation which relates to costs for overhead and other personnel not otherwise chargeable to client programs was $6.9 million for the quarter ended June 30, 2008 compared to $6.7 million for each of the year-over-year quarter ended June 30, 2007 and the sequential quarter ended March 31, 2008. Notably, compensation as a percentage of operating revenue was 74%, an improvement over the 85% seen in the first quarter of fiscal 2008 and comparable to the 74% shown in last year’s fiscal fourth quarter.

General and administrative expenses were $1.6 million for the quarter ended June 30, 2008 compared to $1.5 million for the quarter ended June 30, 2007 and $1.8 million for the quarter ended March 31, 2008. As a percentage of operating revenue, G&A was 17% for this year’s first quarter, an improvement over 19% from last year’s first quarter and 20% from last year’s fourth quarter.

Year-over-year, operating income jumped to $801,000 for the quarter ended June 30, 2008 from an operating loss of $381,000 for the quarter ended June 30, 2007 meaning that $1.2 million as a corresponding $1.5 million increased in operating revenue translated to the operating income line. Sequentially, operating income improved from $594,000 to $801,000 from Q4 fiscal 2008 to Q1 of fiscal 2009, meaning the $207,000 of the corresponding $267,000 increased in operating revenue flowed to operating income, both reflecting our ability to generate greater operating revenue while controlling our expenses.

For the quarter ended June 30, 2008, net income was $477,000 or $0.07 per share fully diluted versus a net loss of $246,000 or $0.04 loss per share fully diluted for the quarter ended June 30, 2007 and versus net income of $71,000 or $0.01 per share fully diluted for the quarter ended March 31, 2008. We calculated net income and EPS for this quarter using an effective tax rate of just over 41% which we believe will fairly approximate our effective tax rate for the fiscal year.

Looking at liquidity, we entered our first quarter with $2.8 million in cash and cash equivalents. As we reported earlier, on June 26, 2008, we closed on a bank credit facility providing for a $2.5 million term loan which was funded in connection with the Marketing Partners acquisition and a $2.5 million revolving credit facility to be used for working capital purposes. As of June 30, there were no borrowings outstanding on the revolving credit facility.

As Charlie stated, we are all very excited for our June 30 acquisition of Marketing Partners which diversifies our client base, lessens client concentrations and which we expect to be accretive in our current fiscal year.

Finally, as Charlie also noted earlier, we are starting to see some client spending delays impacting us in light of the current economic environment. We expect that these changes will begin to adversely impact us in Q2 as clients dimension their spending for the remainder of this calendar year, although we do believe that the measurability of our services will enable us to at least maintain our share of clients’ marketing spend. As a result, we will likely fall short of the strong profits and earnings per share reported in last year’s second quarter.

With that, we are now ready for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Adam Mizel - Aquifer Capital.

Adam Mizel - Aquifer Capital Group, LLC

Can you give a better sense of both the issues that you are hearing from your clients around their marketing spend and their plans going forward and what are the likely drivers that either improve or make worse the decision-making that is going on at the client level as we look at the next 6-12 months?

Charles F. Tarzian

I think in conversations we are having across the board, I think it’s a mixed bag. As we said, we are anticipating that we would have some growth incent. Some of our clients have told us, look, right now, particularly in this quarter, we are going to stay flat. We have projects in the pipeline with other clients that have pushed some of those projects, and when I say projects I mean with our existing client base out a quarter or two. There’s a lot of surveying and reflection going on in the client base. That’s the best that I can give you in terms of what they’re saying and what they’re doing. It’s as much a condition of postponement as it is a reflection of what’s going on the economy.

Adam Mizel - Aquifer Capital Group, LLC

What about as you compete for new business with new clients? Is that easier or harder in light of the environment we’re in and how does that impact the business?

Charles F. Tarzian

I would say that the pipeline that we currently have and the net new clients that we are currently talking to are very, very interested in the story that we’ve produced and in the kinds of things that we can do for them. I had told you before, I think on the last call, Adam, that we have probably as well as everyone else, missed out on opportunities because of the economic conditions, because clients that we don’t have or we’re not talking to have also postponed new spend or are looking for new partners to help drive their business. I will say, the ones that we are talking to are looking very specifically at the measurability of the programs that we’re delivering. So they are basically saying to us what will this do from an ROI perspective? How is this going to help us because they are shutting their spend down in terms of things like advertising and other less measurable kinds of activities. I will say that the pipeline and the conversation that we’re having reflects that in terms of clients’ move to more measurability, the clients’ move to social media and communities, things of that nature that we’ve spoken about in previous calls.

Adam Mizel - Aquifer Capital Group, LLC

Does that lead you to make any changes in your expense base or your investment in your business while your clients are somewhat on hold or do you not see a difference?

Fred Kaseff

Yes, Adam, I would say to that, the situation is still fluid. The clients are still evaluating their spending. So to be sure, we are assessing as we should be but I say it is with an eye toward what is best for the company both in the short-term and the long-term.

Adam Mizel - Aquifer Capital Group, LLC

Last question and then I will get back in the queue. You’re 90 days into the Marketing Partners acquisition. You talked about the integration going well. How is that business both holding up to developing and potential cross-synergies that you had expected when you did the acquisition?

Charles F. Tarzian

Sure, just to correct, this is the sixth week of integration, it’s only half of the 90 days. It’s going very, very well. We have met with senior clients, some of their largest clients and are preparing to do presentations to some of their clients about the capabilities that ‘mktg’ combined can offer them. We also have a group traveling to Beijing during the Olympics because of the strong Nike business that we have and are preparing for the 2010 Olympics in Vancouver with the Canadian tourist group that we’re doing some work with. First of all, it has been a great group of people. They will be moving in with us probably the middle of September. I have personally as well as the senior team met with their senior clients and we feel very bullish about our opportunities which are why we had made the acquisition in the first place.

Adam Mizel - Aquifer Capital Group, LLC

I noticed it seems on the balance sheet that working capital as a use of cash has sort of declined. Is that seasonally normal or is there something particular going on there?

Fred Kaseff

No, it is seasonably normal. Some of it is tied to what goes on traditionally around Diageo’s year end because they are such a large client and with the June 30 year end that also impacts us. It did last year as well.


There are no further questions at this time.

Charles F. Tarzian

We thank everyone for being on the call and we look forward to the next call which will be our Q2 call. Thanks very much for participating.

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