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Analyst Rates InfoSpace 'Neutral'
Thursday September 7, 4:04 pm ET
Analyst Initiates Coverage on InfoSpace, Margin Worries Balance Mobile Content Potential

http://biz.yahoo.com/ap/060907/infospace_analyst_note.html?.v=1

NEW YORK (AP) -- Pacific Growth Equities initiated coverage of InfoSpace Inc. with a "Neutral" rating Thursday, noting the company could be a winner in the still-nascent mobile content market, but concerns about margins in the sector weighed down the rating.
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The Bellevue, Wash.-based company operates in two spaces, online search and directory services, and mobile content.

InfoSpace aggregates search results on some branded Web meta-search sites, such as Dogpile and WebCrawler, and markets private-label search tools to businesses. The company also has online yellow and white pages directories.

InfoSpace also pulls together mobile content such as ringtones, graphics and online games, and provides the content and delivery infrastructure to wireless carriers such as Verizon and T-Mobile.

Pacific Growth Equities analyst J. Derrick Wood noted that InfoSpace has shifted its focus to the mobile content business, with heavy emphasis on ringtones. But in that area, margins are falling, as the market shifts from high-margin polyphonic tones to lower-margin realtones, which use the MP3 format and require royalty payments to artists.

On the one hand, InfoSpace's attention on mobile content puts the company in the running to become a lead player in a sector still up for grabs, Wood wrote. The company holds a 60 percent market share in the wireless portal services arena and 45 percent share in the mobile content aggregation market, and has relationships with 40 wireless carriers worldwide, Wood noted.

"With no clear leader in the emerging mobile search and mobile advertising markets, we believe InfoSpace's long-standing presence in the online search space, coupled with its leading share in mobile media and its strong relationships with the carriers, could create meaningful cross-selling synergies, a strong competitive barrier, and a position to leverage its online assets across a new set of users," Wood wrote.

However, the analyst cautioned, the company is still dependent on its online businesses for cash flow; the company's uneven focus on its mobile business resulting in "any loss of market share could materially impact margins and cash flow," he wrote.

Wood said he believes the company's shares are fairly valued, adding, "until we receive greater visibility into margin stabilization and new product traction, we expect to see limited potential upside in the stock."

Shares of InfoSpace edged down 15 cents to close at $21.77 on the Nasdaq.