recap Qtr results:
Interesting article
InfoSpace Q1 Call Recap
Friday, April 29, 2005
After trading down -20% in after hours yesterday after delivering lower than expected Q2 guidance and a lighter than expected Q1, Infospace (INSP - 9,9,9) shares have declined further in regular trading today. As of this writing, INSP is off -25% to $33.50 per share.
INSP is a holding in the Long Term Growth portfolio as well as one of our four new "Riding The Online Search Boom Stocks." While we readily admitted in our recap of INSP's results yesterday evening that the company's Q1 performance and Q2 outlook (guiding for revenue down -2% to -5% sequentially) was underwhelming, we also said that we thought the market was overreacting to the news. INSP indeed reiterated its full year guidance, which was also not what the bulls wanted (they wanted a guidance hike), but it was hardly the end of the world either.
We spent this morning reviewing INSP's call from yesterday evening and have provided the highlights of the call and our bottom line current thoughts on the stock below.
For a quick refresher, INSP posted Q1 revenue of $87 million, up 81% year-over-year and 9% sequentially, while operating income came in at $16.6 million or 45 cents per share (8 cents better than expected). EBITDA of $21.9 million was up 174% from a year ago, but the EBITDA margin of 25% was down from an all-time high of 27% in Q4. INSP added $62 million in cash to its balance sheet during Q1.
By unit, Search & Directory represented 55% of total revenue at $48 million (up 44%) and Mobile was $39.1 million in revenue (up 163%) or 45% of total revenue. The smaller and faster growing Mobile unit is increasingly becoming a larger part of INSP's total revenue pie. Mobile is expected to account for at least 47% of total revenue for full year 2005 taking INSP's guidance at the mid points.
One interesting datapoint shared on the call was that only 12% of the 180 million wireless subscribers in North America have phones capable of downloading ringtones and graphics at this point. This compares to about 40% penetration in Western Europe, and shows the significant growth upside that is still ahead for industry players.
Focusing specifically on the Search unit, which we said posted weaker sequential results than the top tier paid search names, search prices declined 2% sequentially. This was partly offset by a 1% increase in paid volumes. INSP saw double digit growth in queries, which was offset by a "normal seasonal decline in click through rates".
Later in the call, INSP said that it was looking at better ways to monetize the traffic of its Directory business and that it was putting a number of steps in place that should benefit Directory in the second half of the year. INSP also said that it saw "mid single digit" volume growth in its Search unit, which suggests that it was the Directory side of INSP's Search & Directory unit that pulled down its results.
As for Mobile, most questions on the call didn't focus on the good growth and margin improvement that this unit posted in Q1, but why INSP was cautious about Q2. INSP said that it was "anticipating" seasonality in its wireless business due to a slowdown in new handset sales in Q2 compared to Q4 and Q1 (spillover from the holidays i.e. Q4). The company also noted that there has been an -11% decline in music industry sales year-to-date and that it expects stronger growth in the second half of the year due to new phone sales, new music sales, and more usage.
Analysts weren't able to peg down if INSP was already seeing some "softness" in its Mobile unit or if INSP was simply anticipating this. There were also questions about INSP's important relationship with Cingular on the Mobile side, and INSP claimed that they weren't losing any market share. INSP CEO Jim Voelker said during the call "we (INSP) are a conservative group here". I think the reality of Q2 is that INSP is being cautious and conservative with its guidance, as usual, combined with some potential market share slippage in INSP's Mobile unit and some bumps and higher spending being made on the Directory side of the house.
INSP said that Q2 was traditionally its "slowest" quarter for Search, due to decreasing Internet usage going into the summer and reduced ad spending. INSP did admit that it would like to have greater international search exposure, which was a strong, fast growing contributor to both Yahoo!'s (YHOO) and Google's (GOOG) latest results. INSP could make an international search acquisition of some sort, although the company increasingly seems focused on running Search & Directory as a "cash cow" business and making bolt-on acquisitions for its Mobile biz.
Margin wise, INSP re-iterated that it expects the Search & Directory segment margin to be in the low 40% range and for Mobile margins in the mid 20% range.
Finally, Voelker said that when the company feels that it can no longer deploy its cash to grow the business directly, it would "look at alternatives such as buybacks." INSP is sitting on roughly $10 per share in cash with no debt, and as we've said many times before, management has a good track record of making accretive and strategically sound acquisitions. With $384 million in cash on hand, there are lots of different ways for INSP's management to create additional value and help support the stock.
After reviewing the call this morning, I feel the same about INSP as I did yesterday after digging into its results and seeing how badly the market had thrashed the stock. While the short-term momentum in the stock clearly has been broken and investor confidence in the name won't be repaired over night, I'd certainly rather be a buyer than a seller of INSP down around the $33 to $34 level. INSP will have to work harder in the back half of the year to deliver on its full year guidance, but I don't think this guidance is at risk. Again, taking the low end of INSP's guidance of $1.75, this suggests fully taxed EPS of around $1.15, which means INSP is now trading for just ~20x earnings ex-cash.
While it's certainly an unpopular view right now, I still think our low end fair value target of $45-$50 is achievable this year, while the downside looks like around the $30 level.
With today's thrashing, our weighting in INSP has declined to 3.4% in the Long Term Growth portfolio. We made our most recent purchase of INSP at the $40.49 level in mid January. We've had a very successful multi year run with INSP having first bought the name a few years ago at a split-adjusted sub $5 level and finally selling out of it last fall at $55.
AI
