Internet Brands Q1 2010 Earnings Call Transcript

123jump.com Staff
14 Jun, 2010
New York City

Revenues rose 12% to $26,4 million and net income rose 35% to $3.1 million or 7 cents a share. Same-website revenues increased 15% year-over-year and unique visitors increased 22%. EBITDA and net income grew 27% and 36%. Revenues from our licensing division grew 24%.

Internet Brands, Inc. ((INET))
Q1 2010 Earnings Call Transcript
April 28, 2010 4:30 p.m. ET

Executives

Laura Foster – Senior Vice President, Addo Communications
Robert N. Brisco – President and Chief Executive Officer
Scott A. Friedman – Chief Financial Officer

Analysts

Mark May – Needham & Company
Jeff Rath – Cannacord Adams
Yun Kim – Broadpoint AmTech

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Internet Brands First Quarter 2010 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will opened for questions. If you have questions, please press the star followed by the one on your touchtone phone. Please press star zero for operator assistance at any time. For participants using speaker equipments, it may be necessary to pick up your handset before making your selection. This conference is being recorded today, Wednesday, April 28, 2010. I would now like to turn the conference over to Ms. Laura Foster of Addo Communications. Please go ahead.

Laura Foster

Thank you. Good afternoon, ladies and gentlemen and welcome to Internet Brands first quarter 2010 conference call. By now, everyone should have had access to the first quarter 2010 earnings release, which went out today at approximately 4:00 p.m. Eastern Time. If you''ve not received the release, it''s available on the Investor Relations portion of Internet Brands website at www.internetbrands.com, by clicking on the Investor tab. This call is being webcast and it is available for replay.

Before we begin, we''d like to remind everyone that the prepared remarks contain forward-looking statements. And management may make additional forward-looking statements in response to your questions.

These statements do not guarantee future performance. Therefore, undue reliance should not be placed upon them. We refer all of you to the risk factors contained in Internet Brands'' Form 10-K for the year-ended December 31, 2009 and Form 10-Q for the quarter ended September 30, 2009, filed with the Securities and Exchange Commission for more detailed discussion of the factors which could cause actual results to differ materially. And with that, I would like to turn the call over to Bob Brisco.

Robert N. Brisco

Hi, everyone. The first quarter was a good one and we are very happy with our momentum as the second quarter begins. All of our key metrics are showing double-digit growth rates, traffic, revenues, EBITDA, net income and so on.

The first quarter was strong at 12% revenue growth and as we expected, our second quarter looks even stronger, with revenue growth of 17% to 22%. And we have easier comps year-over-year in the second quarter and as our business momentum accelerates. Our organic growth rate has improved once again.

In the first quarter, our same-website revenues increased 15% year-over-year and our unique visitors increased 22%. Our EBITDA and net income grew 27% and 36%, as our most profitable lines of business are the ones that are growing the fastest.

In a few minutes, Scott will update our full-year guidance, slightly increasing the low-end ranges for the year based on our good start and our visibility. I want to give you a clear picture of why we are on course to deliver consistently high rates of organic growth over the long term. It''s our unique operating platform for growing vertical websites. The platform scales both audience size and revenue, while strictly containing costs.

In prior calls, I have mentioned that we are intensely focusing on the scaling of our platform in areas such as content creation, application development and community expansion. These efforts are paying dividends as evidenced by high rates of organic growth in both audience and revenues. The platform produces consistent, strong operating results. In the simplest terms, it delivers on our strategy of growing vertical websites.

We continue to add to our organic growth rate by making highly accretive acquisitions that fit onto our platform. I''d like to briefly discuss two recent acquisitions that were just terrific. The first is ExpertHub.

ExpertHub is a leading online publisher of legal information and attorney directories, especially in high-value legal niches such as family law, immigration law, bankruptcy law and criminal defense. The business fits perfectly with our vertical focus and platform.

The second acquisition is Tjoos, spelled T-J-O-O-S, which is slang for choosing what you want. The Tjoos site is extremely well positioned in the social shopping space, and is growing traffic and revenues at more than 100% per year. We are excited about adding both of these businesses to our platform.

Looking ahead, our acquisition pipeline continues to appear strong and highly accretive. I want to quickly turn now to our licensing division. Both Autodata and vBulletin continue to perform well with strong organic growth rates. Division had 24% growth year-over-year in the first quarter, helped by relatively easy comps that continue for the next couple of quarters.

In closing, Internet Brands has started the year quite well. Our publishing and licensing platforms are powerful, producing strong and consistent growth. We look forward to keeping you up-to-date on our progress through the year.

Now I''m turning it over to our Chief Financial Officer, Scott Friedman.

Scott A. Friedman

Thanks, Bob. Get right to the numbers, overall revenues increased by 12%. All of my comparisons will be year-over-year unless I call it out otherwise. Consumer internet revenues increased by 7% reflecting a more than 30% increase in ad revenue, 15 points of that increase was from organic same-website revenue growth.

The 15% increase is a sequential improvement from 13% in the fourth quarter and 10% in the third quarter. Auto and commerce revenues were down significantly year-over-year but have shown stabilization and slight sequential improvement in March and April, modest trends that may continue.

Revenues from our licensing division grew 24%. Both Autodata and vBulletin performed very well. Net income, attributable to common shareholders, for the first quarter, was $3.1 million or $0.07 per diluted common share, increases of 36%.

Our platform continues to deliver strong margins. Adjusted EBITDA grew by 27% to $10.5 million and as a percent of revenue expanded 480 basis points to approximately 40%. We expect our margins to slightly expand sequentially through the year.

Now, turning to the balance sheet, we ended the first quarter with $63.1 million in cash and in investments. During the first quarter, we acquired three websites for $7.6 million. All three websites are in our shopping vertical and include Tjoos.com, PursePage.com, and DoDTracker.com, which stands for Deal of the Day. Cash flow from operations grew 7% to $10.8 million.

Now, turning to guidance. We are slightly raising the low end of our guidance range. We now expect revenues of $113 million to $118 million, growth of 13% to 18%. And we expect adjusted EBITDA of 46.5 million to 48 million, growth of 16% to 20%.

For the second quarter, we expect revenues of $27.25 million to $28.25 million and adjusted EBITDA of $11 million to $11.5 million. This implies year-over-year revenue growth of 17% to 22%, and year-over-year adjusted EBITDA growth of 18% to 23%.

Regarding acquisitions, we continue to guide investment of approximately $4 million to $10 million per quarter. And with that, we''d like to open up the call for your questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. If you would like to withdraw your question, please press the star followed by the two. And if you are using a speaker equipment, you will need to raise the handset before making your selection. Our first question comes from the line of Mark May with Needham & Company. Please go ahead.

Mark May – Needham & Company

Thanks for taking my questions. I really am not sure I have many. It''s pretty straightforward. Good quarter. Maybe one question would be if you could give a sense, it looks like both volumes and pricing or RPM were both up in the quarter. Maybe if you could give us a little more flavor as it relates to the consumer internet business and kind of where you were seeing the growth?

And then, guess the other question is, maybe I just don''t recall, but, Scott, you mentioned $4 million to $10 million per quarter in acquisition activity. Is that a little bit higher range on the high-end of that than what you said in the past or am I just -- is my memory gone?

Scott A. Friedman

Hi, Mark. It''s Scott here. I''ll address the last question about the acquisition range. That''s what we provided before, $4 million to $10 million. So, we''ve not changed our stance with respect to acquisition guidance.

Mark May – Needham & Company

Great.

Robert N. Brisco

Hi, Mark. It''s Bob.

Mark May – Needham & Company

Hi, Bob.

Robert N. Brisco

Thanks for your question. And regarding the composition of our organic growth in the first quarter between volume and rate effects, it was some of both, but more on the volume side. And to pull that apart further, you saw our traffic was up very strongly, our unique visitors for the quarter as well as our sell-through rates and number of new advertising accounts that we on-boarded kind of net quarter-over-quarter and year-over-year increases were very strong, as well.

So, we are seeing a firm pricing environment. But, we guide you that the vast majority of the revenue expansion is the combination of more advertising inventory and adding more advertising customers to our platform.

Mark May – Needham & Company

Great. And I think what I was ultimately getting at with the acquisition question is I''m very positive on your acquisition strategy. Are you seeing more…?

Laura Foster

Welcome to the U.S. Auto Parts first quarter…

Robert N. Brisco

Mark, are you there…?

Mark May – Needham & Company

Yes.

Robert N. Brisco

Yes.

Mark May – Needham & Company

Are you seeing more opportunity to potentially do some nice accretive deals at the higher end of that range?

Robert N. Brisco

Yes. Hi, Mark. The acquisition environment''s been very favorable for us for the last three quarters. I would say, the last two quarters of 2009, actually and the first quarter of 2010. And it looks that way as we enter Q2 of this year, and looking ahead, as well. Our pipeline is very strong. And strong both in terms of the quality of the deals and the number of deals and how well they would fit onto our platform. So, we do have an eye towards being forward and leaning in on the aggressive end if everything fits and works out in the right way. Having said that, it''s all about what fits on our platform and being very disciplined in what we do.

So, yes, we have a bias to do a little bit more rather than less at this point but, it''s way too early for us to guide you any different than we have already on this point. And further, it''s just frankly hard to know looking ahead. A lot of this is the serendipity of what exactly fits what we''re looking for at any given moment in time.

Mark May – Needham & Company

Okay. Thanks.

Operator

Our next question comes from the line of Jeff Rath with Canaccord. Please go ahead.

Jeff Rath – Cannacord Adams

Hi, Bob, Scott. I would echo Mark''s comments. Pretty clean quarter and outlook, just two areas I just wanted to get a little more color on. The first was just sort of sequentially, it looks like you''re expecting to see some real nice growth sequentially. Is there anything specific that you''re seeing sort of in the early second quarter that gives you that comfort? Is it the fact that maybe some of that ecommerce business is bottoming and now improving and color on the core sources of strength sequentially would be helpful?

Robert N. Brisco

Yes. Hi, Jeff, thanks for the question. There are a few factors that give us so much confidence as we enter the more mid of the year period here in April. One is that, which I mentioned on the call, we are up against relatively easy comps in some of our lines of business. Auto-related, for instance, was particularly soft starting in some parts of Q2 last year. So, that one piece, that''s the least of it, frankly. The most of it is the business itself is doing very well and what I point to there are two areas. Our underlying audience growth, if anything, was strengthening as the quarter developed. So, March was the strongest month of the three, in terms of audience, for us.

And we''re seeing the same thing on the advertising side of the business that as the year is developing, it looks to us like the general advertising market, in particular some of the segments we''re in, and in particular the performance-based advertising that we bring to market, all of which is enjoying a strong environment. So, none of this loses outside the guidance that we provided already. But, our level of visibility and confidence in things working right now is high. Is that helpful?

Jeff Rath – Cannacord Adams

Yes. That''s very helpful. You''ve given us metrics before on the total number of advertisers. Where does that stand now?

Robert N. Brisco

So, yes. We''ve guided total numbers and over the last two or three years, that number''s risen from 20,000-plus to be 40,000-plus. And it''s there now and it''s been increasing. It''s up quite a bit year-over-year. We would guide up in a strong double-digit increase in advertiser account year-over-year. One item Scott and I are looking at is potentially providing a little bit more color around that in the future. The point I want to make is that there are a lot of small- and medium-sized business advertisers in that count. Thousands of advertisers in all kinds of different categories, professional services, auto aftermarket, travel-related and so forth and some of those are very small advertisers that are of a classified nature, classified advertising type. Many of them are on larger campaigns that go quarters or years in duration and have many facets and larger dollar points.

So, we''re taking a look at, in addition to sort of total big round numbers that are advertising count, if we can be helpful in giving some underlying visibility to the counts. We''ll be taking a look at that. But, know that generally our number of advertisers is increasing in the same type of vector and line in percentage increase year-over-year that revenues are.

Jeff Rath – Cannacord Adams

Great. And now, just the last question before I jump in the queue, Bob and you had spent some time in a very detailed way talking about your disciplined acquisitions, strategy, and sort of the pipeline approach of qualifying and then executing against that. One of the measures, as I recall, was your own stock price valuation, making sure that it was always reflect -- the deal value was, at minimum, reflective of -- accretive to the current valuation of your stock. Given the strong performance recently of your stock, which is great to see, does that, at this point, expand your appetite, looking at bigger deals or maybe revisiting deals that didn''t meet that threshold when your stock was, say, $7.00? Or at this point, it''s not really impactful in that process? Thanks.

Robert N. Brisco

Jeff, thanks. That''s a very astute and complicated question and I''ll try to give, nonetheless, a simple and clear answer. Mostly, we play our own game and make our own market on acquisitions. So, the fact that the market overall is up a bit and we''re up a bit more is a good fact, as we think about life generally and our predisposition to do, perhaps, a bit more rather than a bit less.

Having said that, we don''t really, in any direct way, map how we''re doing in the securities markets to how we think about our acquisition strategy at any exact point in time. But, let me give you just a little bit more color that I think will respond to your question. Our acquisition pipeline''s as bigger, bigger than it''s ever been in the history of the company, the quality of that pipeline is good or better than it''s ever been. So, what it''s really sort of the more buoyant environment and bullish environment is allowing us to do is to be more choosy in what we''re doing. That''s point A.

And point B, perhaps do a bit more. We won''t do more at a higher valuation. So, we would just do more at the same valuation. So, I think the net of all that is to the extent that there''s some additional spread there, it will be for shareholders and that''s the way we think about it.

Jeff Rath – Cannacord Adams

Thanks very much. Good quarter.

Scott A. Friedman

Thanks, Jeff.

Operator

Our next question comes from the line of Yun Kim with Broadpoint AmTech. Please go ahead.

Yun Kim – Broadpoint AmTech

Thank you. Again, congrats on yet another solid quarter. Bob, on the topic of acquisition, are you perhaps open to doing something sizeable if the opportunity presents itself? I think your acquisitions so far have been fairly small ones, especially in recent years. And also, all along the same line of questions or last question, are you at all considering using some form of equity rather than using all cash?

Robert N. Brisco

Hi, Yun. Good to hear from you, as well. So, regarding the topic of potentially larger-scale acquisitions, the short answer is no. We''re not changing our game to go back to that theme. We like the game we''re playing. We like the way it''s working out for us on our platform and from an economic accretion standpoint. I''ll never say never, so I''ll put that caveat in. If just the right thing came along in just the right format at economics that still work for us, we would certainly look at it hard and perhaps do it. There''s nothing immediately in our thoughts about how that might play out.

I will say that the reason -- reiterate, the reason we stayed away from larger deals is the pricings, amongst other things. The pricing tends to be less accretive to our shareholders, and, as importantly, the integration complexity tends to go up. So, we''d be, if we did something larger, looking for a very precise sweet spot of something that still fit perfectly onto our platform and still was very accretive to shareholders. Such a thing may exist. And sometimes you find really tremendous synergy in larger transactions. So, we''re not entirely closed on that. But, I''d say much less likely than more likely over time and things are going real well on exactly what we''re doing. So, we''re by and large just staying the course on what we''re doing.

Regarding the second part of your question about using equity as a part of the re-numeration in acquisitions, yes, we''re open to using a little bit of that in the mix. And I guided you carefully in that sentence. So, generally we''ve been doing all cash or nearly all cash in most of our acquisitions, especially if you look at the totality of what we''ve done. In certain circumstances where the acquisition price was a little higher, we have mixed in just a little bit of equity. But, it''s generally been a distinct minority of the acquisition price, generally speaking and/or we''ve done earn-outs in the past. So, I think we''ll stay with our format, predominantly cash, but perhaps use a bit of earn-out or a bit of equity, if needed, in certain deals. But, by and large, again, I''m going to come back to we''re still fundamentally playing the same game that we''ve been playing all along and we like the game.

Yun Kim – Broadpoint AmTech

Great. Thanks for that detailed question. And just going to the core part of your business, with at least 100-plus web properties that you guys have now, can you just talk about revenue diversity among your websites? I''m not sure if you had something like this handy in terms of metrics. But, how much of your advertising revenue''s driven by your top-10 web properties outside of auto and how that has been tracking over the past three quarters? And then, also, if you can talk about that in terms of the EBITDA contribution, as well.

Robert N. Brisco

Sure, Yun. Another good and detailed question, our revenue diversity is extremely broad. So, let me give you a couple of different dimensions of that breadth. First, number of categories, we''re in seven categories now and it''s a fairly even spread. The largest of those would be in the 20% to 25% revenue range, generally speaking. And the smaller ones might be in the 5% to 10% range. You have to accumulate four of the categories, our largest ones, to reach up to 80% of the revenue. So, it''s not very concentrated. Auto would be the largest. The ecommerce component of that, which has been the one most challenged and, as Scott mentioned, is stabilizing and showing some slight or modest upticks in more recent weeks, represents about 15%...

Scott A. Friedman

About 15%.

Robert N. Brisco

…about 15% of revenue and EBITDA basis, which you mentioned, it''s about 5%.

Scott A. Friedman

Yes, 5% to 10%.

Robert N. Brisco

5% to 10%, less than the 15% on the revenue. Then, the second dimension of breadth is concentration by web property or website itself rather than category. So, you''re right. We''ve got about 100 principal sites. If you took the largest 10 of those, you''d find that they only represent about a third of revenue. So, 10% aside, there''s not a 10/90 or a 20/80 rule going on here. There''s a 10/33 rule and it gets flatter after that. 20 doesn''t get you to 50. So, the diversification is strong, not only amongst category, but within category.

Operator

Ladies and gentlemen, if you have a question, please press the star followed by the one at this time. One moment please. We have an additional follow-up question from the line of Yun Kim with Broadpoint AmTech. Please go ahead.

Yun Kim – Broadpoint AmTech

I''m sorry about, forgot to un-mute the button. So, if I spin that question to the advertiser side, 40,000-plus advertisers, but is there any, like, 5% or 10% advertiser in terms of pops in advertisers representing what percentage of revenue, has that been consistent within the trend?

Robert N. Brisco

Yes. Yun, thanks. I''m sorry that we''ve obviously had some touch-and-go here on telecommunications equipment today. Sorry about that. Sorry you got cut off there. Right, good follow-up question, regarding the concentrations on the advertising side of our business, they''re far less than the revenue concentrations themselves.

So, when you dig down inside of those metrics that we gave, you wouldn''t find any big concentrations. There''s a couple of advertisers at the high-end who might be a point or two of advertising revenue and there''s less than a handful of those. And after that you''re into decimal places of concentration, so virtually none in terms of concentration.

Yun Kim – Broadpoint AmTech

Okay. Okay, great. And then, Scott, just looking at the G&A line, it was up sequentially a bit in the quarter. And it looks like that''s been a trend in the past. What''s driving that sequential uptick in G&A in Q1?

Scott A. Friedman

All right, you said for DNA?

Yun Kim – Broadpoint AmTech

G&A?

Scott A. Friedman

G&A.

Yun Kim – Broadpoint AmTech

General…

Scott A. Friedman

Got it.

Yun Kim – Broadpoint AmTech

Yeah.

Scott A. Friedman

Okay. Sorry, wanted to be clear on that. Yes, most of that pertains to stock-based compensation. Actually, all of that increase is stock-based compensation. So, that was from…

Yun Kim – Broadpoint AmTech

Okay.

Scott A. Friedman

…awards in the first quarter.

Robert N. Brisco

Yun, we give guidance, or we show in the filings how much of the stock-based charges run through the various expense lines. I think if you back that out when you have more time to dig into the data, you''ll find that the expense growth is very, very slight and certainly much less than revenue increases.

Scott A. Friedman

Yes. In fact, G&A''s slightly down.

Robert N. Brisco

Yes, slightly down.

Yun Kim – Broadpoint AmTech

Okay. Great. Thanks.

Operator

Ladies and gentlemen, if there are any additional questions, please press the star followed by the one at this time. And gentlemen, there are no further questions in queue. Please continue with any closing remarks.

Robert N. Brisco

Okay. Thanks, Alysia. Thanks, everyone, for joining us today on the call. You can tell we''re off to a terrific start for the year and we''re feeling really confident and optimistic about how it''ll unfold from here. So, we''ll look forward to updating you again in about 90 days. Thanks again.

Operator

Ladies and gentlemen, this concludes the Internet Brands first quarter 2010 earnings conference call. This conference will be available for replay after 3:30 p.m. Pacific Standard Time through May 12, 2010 at midnight. You may access the replay system at any time by dialing 1-800-406-7325 and entering the access code of 4282775. Thank you for your participation. You may now disconnect.