Internet Brands Q4 Earnings Call Transcript

123jump.com Staff
21 Feb, 2010
New York City

The Internet Media Company fourth quarter earnings grew by 21% to $11.8 million due to mix shift and so net income grew 38.7% to $4.3 million. Earnings per share were $0.09 as against $0.07 a year ago. Revenues for 2010 are expected to range from $26 million to $26.6 million.

Internet Brands, Inc. ((INET))
Q4 2009 Earnings Call Transcript
February 18, 2010 at 1:30 pm PT

Executives

Robert N. Brisco - Chief Executive Officer
Scott A. Friedman - Chief Financial Officer
Laura Foster - Investor Relations

Analysts

Youssef Squali - Jefferies & Company
Mark May – Needham & Co
Jeff Rath – Canaccord Adams.

Presentation

Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Internet Brands fourth quarter and 2009 financial results conference call. During today''s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) If you have a question, please press * followed by the 1 on your touchtone phone. Please press “*0” for operator assistance at any time. For participants using speaker equipment it maybe necessary to pick up your handset before making your selection. This conference is being recorded today, Thursday, February 18th, 2010. I would now like to turn the conference over to our host Ms Laura Foster, Head of Communications. Please go ahead, ma''am.

Laura Foster – Head of Communications

Thank you. Good afternoon, ladies and gentlemen and welcome to Internet Brands fourth quarter and full year 2009 conference call. By now everyone should have had access to the fourth quarter 2009 earnings release, which went out today at approximately 4:00 pm Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Internet Brand’s website at www.internetbrands.com by clicking on the Investor tab. This call is being webcast and is available for replay.

Before we begin today, we would 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 31st, 2008 and Form 10-Q for zthe quarter ended September 30th, 2009 filed with the Securities and Exchange Commission for a 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 Brisco – Chief Executive Officer

Good afternoon and welcome. We are very pleased with our fourth quarter results and our early momentum in2010. In the fourth quarter our same store revenues were 13% higher than a year ago and our EBITDA was 20% higher with customarily strong performance in 2010. While it is early in the year we are guiding 2010 revenue growth of 12% to 18% and EBITDA growth of 15% to 20%. We consider our visibility very good at this point since a large majority of our revenues are recurrent. Our strong performance continues to be driven primarily by a combination of audience growth and monetization of that audience. There remain our hallmarks. First, we build large audiences. We build them organically and through acquisitions and high value verticals. Second, we monetize those audiences extremely well. I’m going to give you some important metrics about those audiences and our monetization. In Q4 our unique visitors increased 20% year-over-year to a monthly average of 50 million and the year has started well as we have served more than 56 million unique visitors in January.

Our organic growth initiatives are producing great results. In prior calls I had mentioned that we are accelerating our rate of contact creation, community webbing and website redesign. These efforts continue to accelerate. For sites where we have focused our organic acceleration programs we are seeing traffic and revenue growth in the range of 20% to 40% or more. As always more than 97% of our audience is from organic non-paid sources.

On the advertising side, we now serve more than 40,000 direct advertisers. This is another hallmark of our business. We are extremely diversified in our revenue mix across vertical markets, across types of revenue and across all sizes of advertising customers. Our 40,000 direct advertisers reflect the true diversity of the Internet landscape, with particular strength in small and medium sized business advertisers across all seven of our verticals. As you know our advertising booking business is almost entirely built on performance-based advertising and we continue to produce great results for advertisers in all categories and all sizes.

Turning now to licensing, vBulletin was a big contributor in the fourth quarter. Sales were very strong following the release of vBulletin 4.0 during the quarter and sales remained strong this year. Autodata also continues to perform strongly. We expect revenue growth from our licensing division to grow this year in total by 15% or more. We announced seven acquisitions in the fourth quarter, all in our Home and Health vertical. In home we acquired the leading gardening communities and two of the leading craft communities. In health we acquired a strong position in cosmetic dentistry and added to our positions in dermatology and in fertility. Looking ahead, we expect that acquisition activity will range between $4 million and $10 million per quarter depending on opportunities. We are very careful and disciplined as we acquire only properties that are immediately accretive and significantly so. And importantly, with our acquired properties we typically experience strong revenue and margin growth rates and we add them to our shared operating and technology platform.

Now I want to step back. It has been two years since our IPO. As everyone knows, those two years have been exceptionally difficult for both the advertising and the Auto markets. But we have grown EBITDA over those two years by more than 40%. This speaks to the power of our business model. We know how to build audiences and we know how to monetize those audiences. We will continue to do both of those things in 2010 to make that a very good year.

Now I’m going to turn it over to our CFO, Scott Friedman.

Scott A. Friedman - Chief Financial Officer

Thanks Bob and good afternoon everyone. I’ll start today with a detailed review of our fourth quarter and full year 2009 financial results as well as discuss our first quarter and full year 2010 guidance.

We are very happy with our performance in the fourth quarter and our ability to grow top line revenues on a year-over-year basis and sequentially by 9% from the third quarter of 2009. We achieved record adjusted EBITDA of $11.8 million and record adjusted EBITDA margin of 42.7%. This is the result of a continuing mix shift, a higher margin advertising revenues from lower margin auto e-commerce revenues as well as from the continued leverage derived from our operating platform. Total revenues for the fourth quarter were $27.7 million, a record for us as compared to $27 million in the prior year period. Consumer Internet advertising revenues increased $2 million or 19% in the fourth quarter of 2009 compared to the prior year period driven primarily by organic growth from our websites, in the home improvement, auto enthusiast and careers verticals. Offsetting this increase was a $3.3 million year-over-year decrease in automotive e-commerce revenues which was due to continued weakness in consumer demand for automobiles. Excluding automotive e-commerce revenues from websites owned more than a year organically grew by approximately 13% compared to the prior year period.

Revenues from our licensing division were $10.1 million in the fourth quarter of 2009 compared to $8.2 million in the prior year period. The increase in licensing revenues was primarily the result of a successful launch of the company’s vBulletin 4.0 publishing suite during the quarter. Net income attributable to common shareholders for the fourth quarter of 2009 was $4.3 million or $0.09 per diluted common share. This is compared to net income of $3.1 million or $0.07 per diluted common share in the prior year period. As previously mentioned we experienced record adjusted EBITDA during the fourth quarter of 2009. Adjusted EBITDA which we define as earnings before interest, taxes, depreciation, amortization and excluding stock-based compensation grew by 21% to $11.8 million in the fourth quarter of 2009 from $9.8 million in the same period last year. As a percent of total revenues our adjusted EBITDA margin expanded 640 basis points to 42.7% from 36.3% in the prior year period.

Turning now to our full year results, revenues for the full year were $99.8 million compared to prior year revenues of $104 million. Consumer Internet advertising revenues increase $7.9 million or 21% in 2009 compared to the prior year driven by website acquisitions and more importantly organic growth from our websites in the home improvement, auto enthusiast and careers verticals. Offsetting this increase in advertising revenues was $13.3 million year-over-year decrease in automotive e-commerce revenues which was due to continued weakness in consumer demand for automobiles resulting from the adverse economic and credit climate in 2009. Despite the economic environment last year, excluding automotive e-commerce revenues we experienced a 12% increase in revenues on a same store sales basis. We expect these trends to continue in 2010 and I’ll in a few minutes provide 2010 guidance that support this trend.

Licensing revenues in 2009 was $33.6 million compared to $32.5 million in the prior year. Net income for the year ended 2009 was $12.4 million or $0.27 per diluted common share compared to net income of $11.6 million or $0.26 per diluted common share in the prior year. Our expected tax rate for the year ended December 31, 2009 was 37.8% as compared to 41.4% in the prior year. The reduction in the effective tax rate in 2009 was primarily attributable to one time restructuring development credits that were recognized in the fourth quarter of 2009.

For the year ended December 31, 2009 adjusted EBITDA grew 14% to $40.1 million, a record for us, from $35.3 million in the prior year. Adjusted EBITDA margins for the year ended December 31, 2009 expanded 630 basis points year-over-year to 40.2%.

Now turning to the balance sheet, we ended the fourth quarter with $60.1 million in cash and investments with no outstanding debt. During the fourth quarter we acquired seven websites for an aggregate purchase price of $8.1 million. Three of the websites are included in our health vertical and the other four are included in our home vertical. For the year ended December 31, 2009, we acquired 18 websites for an aggregate purchase price of $19.9 million. Regarding cash flow from operations for the year ended December 31, 2009, cash flow grew to $36 3 million compared to $33.8 million in the prior year.

Now turning to guidance, we have a high level visibility into our business for 2010. This is based on our organic growth rates, current sales trends, the strength of advertising upfront and the pipeline of work at Autodata. As a result we are providing guidance for the first quarter and full year 2010, as follows.

For the first quarter of 2010, we expect revenues to range from approximately $26 million to $26.6 million and adjusted EBITDA to range from approximately $10 million to $10.5 million. For the full year 2010, we expect revenues to range from approximately $112 million to $118 million representing year-over-year revenue growth of 12% to 18% and adjusted EBITDA to range from approximately $46 million to $48 million representing year-over-year EBITDA growth of 15% to 20%.

And with that we would like to open up the call for your questions.

Question-and-answer session

Operator

Thank you, sir. We’ll now begin the question-and-answer session. As a reminder if you have a question please press * followed by the 1 on your touchtone phone. And if you’d like to withdraw your question please press * followed by the 2. If you are using speaker equipment you will need to lift your handset before making your selection. And our first question comes from the line of Youssef Squali with Jefferies & Co. Please go ahead.

Youssef Squali - Jefferies & Company

Thank you very much. A couple of questions, first starting with something you talked about a couple of times in the call about visibility. Can you just talk a little bit about how much of the quarterly revenues that you bake in for your revenues have already been booked are from the contracts that you have on hand and I guess really the question there, can you qualify a little bit what you are seeing out there? Arguably the environment has improved a little bit in I think Autos as much and maybe if you can give us a sense of what you are hearing from advertisers in the upfront markets? Thanks.

Robert Brisco

Hi Youssef thanks for the question. Regarding visibility our visibility is very high as you noted because of the high percentage of recurring revenue. If you look at the quarter we are in it is obviously way up and above 90%. If you look out a couple of quarters it is still up around 90%. Even if you go out towards the end of the year it is going to be in the mid to high 80s, something like that. So, our visibility on the recurring revenue line is quite high. Regarding your question about the advertising environment more generally, the tonality is very strong compared to where it was six months ago. We saw continuous improvement in the upfront markets, as they unfolded late in Q4 and early this year. We also experienced a much higher arrival rate of request for proposal RFPs from advertisers. Giving a little bit of color by category most of our categories are tracking up significantly now year-over-year. That was true in Q4 and remains in Q1. For example, travel, home, health, auto after markets are all showing very strong expansion but the only areas that are lagging still I’d characterize as having in common being severely impacted by credit markets still. So, that would be new car auto, mortgage and lending related and large ticket consumer electronics. So, those are the three areas that would be impacted by the credit but other than that the environment is certainly stronger than it has been in the last year and a half. That is what we see right now.

Youssef Squali - Jefferies & Company

Okay and then in your 2010 guidance, what are you baking in, in terms of just the health of the auto-e-commerce business which continues to be somewhat challenged?

Robert Brisco

We approach auto e-commerce positively in 2010 still given the credit market difficulties and so forth. We built in slight declines which were consistent with what we saw in Q3 and we are comfortable we have accounted for that properly. We will see if it could be better than that in the back half of the year but we’ve approached the full year positively on that line.

Youssef Squali - Jefferies & Company

Okay great. Thanks a lot.

Robert Brisco

You’re welcome.

Operator

Thank you and our next question comes from the line of Mark May with Needham & Co. Please go ahead.

Mark May – Needham & Co

Thank you. I just had one question for now just on the monetization efforts. I was wondering what additional you can do to continue to improve the monetization of the owned websites?

Robert Brisco

Sure. Hi Mark there. There are a few things we can do to continue to improve the yield. The first is that we continue to roll our best practices on acquired sites. And that typically takes a number of quarters to do between say two and six quarters depending on the amount of new technology we need to deploy and the additions that we need to make to our sales forces. That’s the first and perhaps the most obvious things is that we apply our standards there. Then the second thing is we are constantly innovating. So, we are writing new codes, deploying new systems that earn us where the yield opportunities are on the site. And we just get increasingly better in that all the time. To give you a sense of that, on any given day we would be running yield management experiments across our network that runs in the hundreds. That’s on any given day. So, the level of optimization tuning continues over time. We see that coders if not years on that extension. So, there is always more there to optimize and the third level we poll is we develop new revenue sources. So, on new sites of monetization become available, new ad networks, new partners that we haven’t utilized before and we also innovate new products for our clients, new types of services. We roll out services from one area to the next. And a quick example of that is pay per call has been one of the highest growing areas on a percentage basis in our advertising bucket business and that still isn’t rolled out very deeply across our networks. So, in 2010 you’ll see considerable expansion in our pay per call revenue.

So, there is a lot that goes on that yield management equation in the mix. We feel like we have got a long way to go, that’s years but still tuning that significantly improves our pageant.

Mark May – Needham & Co

Thank you.

Operator

Thank you. And ladies and gentlemen if there are any questions please press * followed by the 1 at this time. As a reminder if you are using speaker equipment you will need to lift the handset before making your selection. And our next question comes from the line of Jeff Rath with Canaccord Adams. Please go ahead.

Jeff Rath – Canaccord Adams

Hi guys just a couple of follow up questions. I wonder if you can talk about the visibility and the recurring revenue nature of your vBulletin revenue line. Does that have similar characteristics or how would you describe that?

Scott A. Friedman

Yes hi, regarding vBulletin that is one aspect of our business that is less recurring and more one time sales. However it is very forecastable. So, as an example we launched the vBulletin 4.0 suite product in Q4. As we expected we had a large increase in sales immediately before, during and after the launch of the software. Since then, we were able to track and we do on a daily basis the run rate of both renewals and new customers coming in and we have been very pleased with that as showing significant growth over prior year and is very forecastable on a day in day out basis. So, we feel that our visibility on that even though a significant component of that is non recurring before the visibility nonetheless is very high.

Jeff Rath – Canaccord Adams

So, are you able to give us any outlook for that segment of your business in 2010?

Robert Brisco

Yes I can give you some. Regarding vBulletin in quarters 1, 2 and 3, which would be before we launched vBulletin 4.0 we were running significantly ahead of prior year. And Q4 will obviously have a difficult same store comp number against the release of the product. So, I can’t say with confidence where we will be relative to the prior year in that quarter and then further out you go including Q4 next year the harder it is to forecast and one of the reasons is we are still finalizing our product release schedule. Primarily at this point it does not necessarily include an entire new release of the product but additional modules. We have several new products on our pipeline right now and we expect to have at least one of them rolled out sometime before year end but it is hard to forecast with precision on the magnitude of those revenues, or in which quarters they will fall at this point.

Jeff Rath – Canaccord Adams

Okay and then just following on a question asked earlier with regards to your auto e-commerce revenue, you are still fighting that negative trend, albeit it seems to be lessening. How should we think about that trend as it relates to overall auto sales? Do we in a very simple way, should we think about that as somewhat linear if we get a unit volume recovery here? We should see naturally a pick up or is there something else that’s going on in that business which leads you to have more of a negative outlook?

Scott A. Friedman

Hi Jeff, it is Scott here. First part I’ll address. It is just about the auto e-commerce to us in total, as a percentage of our total revenue. So for 2009 we have discussed before, auto e-commerce has been approximately 20% of our total revenue and for EBITDA it has been roughly around 10%. We see that auto e-commerce becoming less of an effect on our business. So, for this year we are estimating approximately about 15% of our total revenue from auto e-commerce and on the EBITDA line maybe less impactful, somewhere probably between 5% to 10% of revenue.

Robert Brisco

And hi Jeff, this is Bob. I’ll take the part of the question there about trends. There are several dynamics going on and let me speak to that a little more broadly at first. On the OEM side of our business which is more traditional though performance-based advertising, that looks relatively strong as the year opens for the full year. The upfronts were good and the spot market activity looks pretty good as well. Generally I think OEM advertising business will perform well in 2010 as auto makers look to take up efficiencies and get healthy themselves. They are shifting their budgets on line. So, if anything we think as the year unfolds we will pick up some momentum on the OEM advertising side.

The dealers on the other hand are a bit of a different story. The dealer business has remained more challenged for us and generally and the dynamic I point you to there is basically dealer financial situation. The shrinkage in the overall car market from 17 million units a year down to 10 to 11 to 12 depending which forecast you believe has taken a serious toll on the profitability of dealership. So, there has been a shakeup. Some of the smaller ones are closing.

However what we are seeing is and if I guide you to this is some stabilization and we are optimistic as the year unfolds that we might be a little better than we thought with some improvement in areas. But what I characterize as right now that the dealers who were the beneficiaries of federal assistance actually last year in the auto crisis or a period probably much like this, the commercial banks have shoring up right now and they will be relatively conservative. I don’t think we know what this looks like at the other end yet and the dull weather marker for offset we are looking for really are the credit markets. And I think unit volumes have been stable but well if I characterize them in the auto sector I think it is unclear right now. There is with credit lending practices as tight as they are, there are a lot of consumers unable to arrange new car financing. For the dull weather when that turns around, I’d expect that as in prior recoveries the dealers would get better and get better fast as that turns and we will be beneficiary of some of that. This is too early to call that in our view based on what we are seeing out there.

Jeff Rath – Canaccord Adams

Great just two more if I can and I’ll pass it along. Just a quick housekeeping, how should we think about tax rate? Should we still be modeling 41% for 2010?

Scott A. Friedman

Yeah Jeff, I’d model between 40% to 41%.

Jeff Rath – Canaccord Adams

Okay.

Scott A. Friedman

….is a good number. This is one time item in the fourth quarter.

Jeff Rath – Canaccord Adams

Yeah and then thinking just about the acquisition you announced sort of the bundle on this today. When you talk about the acquisition landscape for your sweet spot is it getting more competitive or do you still see the value and opportunities out there? Any sort of commentary around the pipeline and pricing there would be helpful. Thanks.

Robert Brisco

Sure Jeff thanks. Regarding acquisitions the pipeline and the market dynamics I’d characterize as about the same as they have been on average over the last year and a half to two. Just to give a little bit more color on that in the wake of the economic recession, and the tightening of the credit markets, assets just generally, assets were very difficult to price. So, we sort of slowed down back about a year ago. That changed mid last year and then as you see in our numbers in Q3 and Q4, we are more acquisitive, more like our normal pace than we were in the first half of 2009. We believe 2010 is going to look more like the second half of 2009 than the first half. So, we guided between $4 million and $10 million a quarter in new acquisitions. Last year we had a couple that were below 4. I don’t really anticipate that but I think we will still be in that range that we guided. In terms of pricing, prices did finally adjust to the new market reality, mid last year. That’s still what we see as sort of the whole world ultimately does move together but sometimes it takes a while. So, that’s the habit and then the final leg of your question Jeff was about competition. And we generally don’t see that much competition if any in the specific deals that we are looking at. I think it has to do with the size of the businesses that we are looking to acquire, the specificity and frankly we are very proactive in unearthing opportunity. So, when you put all of that together we are able to be highly selective and highly disciplined and pick up exactly what we want in terms of meeting our category needs and our growth opportunities when they become available.

Jeff Rath – Canaccord Adams

Thanks very much.

Operator

Thank you. And Mr. Brisco there are no further questions at this time. Please continue with any closing remarks you may have.

Robert Brisco

Just like to conclude by thanking everyone for their participation today. As Scott and I have mentioned we feel very good about having a strong 2010 and we look forward to updating you as the quarters unfold. Thank you very much.

Operator

Ladies and Gentlemen, this concludes the Internet Brands fourth quarter and 2009 earnings conference call. If you like to listen to a replay of today’s call please dial 1-303-590-3030 for International participants or 1-800-406-7325 and enter the access code 4206148 followed by the # key. The replay will be available until March 4, 2010. Thank you for your participation. You may now disconnect.