First Union Securities: text of analyst's July '00 report:
KEY POINTS
-- Reported Q2 results ahead of expectations; EPS ($0.51) versus our estimate of ($0.57), revenue of $25.9MM versus our estimate of $23.0MM
-- Business Solutions revenue particularly strong, now accounts for 42% of total revenue with an impressive client roster of over 100
-- Gross margin improvement to 61.5% from 59.8% in Q1, expect expansion throughout the year to mid-60s by Q4 2000
-- DSOs fall 25% qtr/qtr from 81 days to 60 days
-- Upgrading to Strong Buy from Buy to reflect increased growth opportunities and traction of the model
DISCUSSION
Upgrade
We are upgrading our rating on the shares of Ask Jeeves from a Buy to a Strong Buy following the company’s better than expected Q2 2000 results, which were reported last night after the market’s close. Our upgrade is based upon the following:
(1) Revenue upside in Business Solutions. The company reported total revenue of $25.9MM, which exceeded our forecast of $23.0MM. Business Solutions revenue came in at $10.8 million (including a reclassification of $1.2 million in Direct Hit B2B revenue from Web Properties to Business Solutions) topping our forecast of $8.5 million by 28% (including the reclassification) and representing 42% of total revenue.
(2) DSOs fell 25% sequentially from 81 days in Q1 2000 to 60 days in Q2 2000 – this represents the lowest level recorded since late 1998.
Management announced on the conference call that the revenue related to financially strapped companies is currently less than 5%.
(3) Margin performance was higher than anticipated with Q2 2000 Gross Margin coming in at 61.5% (150 bps higher than our estimate of 60% and up 170 bps over Q1 2000 gross margin of 59.8%) driven by a 50% margin in the Business Solutions line (versus our estimate of 30% and up from
28% in Q1 2000.) Management indicated that the current tone of business supports even further margin expansion – and an accelerated break-even point.
(4) Valuation supports more aggressive posture. The shares of ASKJ currently trade at an enterprise value of approximately 1.9x our revised 2001 revenue estimate of $233MM and 7.1x our 2002 EBITDA estimate of $64MM. We have derived a $94 12-month price target based upon our 5-year discounted cash flow analysis. This target price also
represents a 2002 revenue multiple of 9.0x.
New Estimates
We have changed our model slightly to reflect increased future growth opportunities, narrowing EBITDA losses, and accelerated cash flow breakeven. Our changes center on increasing contribution of business Solutions' revenue to total revenue and adjusted gross marginsaccordingly. We have also lowered our traffic estimates for the consumer side (to account for this division's relative de-emphasis by
the company) but have increased the monetization rate. We detail the changes below.
New Former New Former
2000 2000 2001 2001
Revenue $109 MM $104 MM $233 MM $229 MM
% web prop. 56% 66% 50% 62%
% business soln. 44% 33% 50% 38%
EBITDA ($68) MM ($71) MM ($11) MM ($14) MM
EPS ($1.83) ($1.91) ($0.21) ($0.29)
Gross Margin 63% 61% 70% 72%
ADPV 12 MM 15 MM 21 MM 35 MM
RKPV* $13.68 $12.53 $15.39 $11.24
Corporate Contracts 219 244 469 444
The Quarter
ASKJ reported Q2 results that beat our expectations across the board. Business Solutions showed particular strength coming in at $10.9MM compared to $6.1MM for Q1 2000, restated for inclusion of syndication revenues in Business Solutions from Web Properties. Web Properties came in at $15.0MM (would have been $16.3MM if reported including
syndication revenue versus our estimate of $15.6MM).
Average daily
page views (ADPV) of 11.8MM were below our estimate of 13.6MM, but traffic monetization of $13.90 beat our expectation of $12.75. In addition to top line growth, expense and balance sheet management also improved. DSOs dropped from 81 days to 60, and the company ended the Q with cash and equivalents of $141.6MM, down a modest $10MM from Q1 2000. At it current burn rate, we believe that ASKJ has enough cash to last through breakeven. EBITDA loss continues to narrow, and we expect this trend to continue in the future.
Q2 2000E Q2 2000A Variance
Revenue $23.0MM $25.9MM 12.6%
EBITDA ($21.8) ($19.9) 8.7
EPS ($0.57) ($0.51) 10.5
Gross Margin 60.0% 61.5% 2.5
ADPV 13.6MM 11.8MM (13.2)
RKPV* $12.75 $13.90 9.0
*(web properties only)
Business Solutions continues to be the name of the game for the company. Even though the Internet/New Media sector across the board has faced particular challenges this quarter due to exposure to financially unstable dot.com customers, ASKJ was able to outpace concerns largely due to increased contribution of revenue from business Solutions, particularly from new international accounts. Going forward, management anticipates decreasing emphasis on the Web Properties in favor of spending resources on building out the corporate side. While we believe that both corporate and consumer revenue streams are important for the future of the company, we are less bullish on the consumer side of the business due to the competitive marketplace for search engines and portals. We are encouraged by the increased focus management has put on
Business Solutions. Business Solutions’ product offerings were simplified and repackaged to allow for an easier sales process and faster implementation. ASKJ can now guarantee their basic product will answer 90% of customer questions to a website within 30 days of implementation. Additionally, the sales strategy was refocused to
target Fortune 2000 and traditional BAM companies. As a result, less than 5% of revenue is attributable to financially questionable companies which we believe is below the industry average. As a result, ASKJ closed 43 corporate deals during the quarter, with 15% of clients expanding their contracts. On the competitive front, ASKJ remains well positioned. While we believe ASKJ is facing new challenges from several start-ups, the company has secured a demonstrable lead with traditional companies. As a result, we are encouraged by the company’s strong results in what has been perceived as a weak quarter for the sector and upgrade the stock from a Buy to a Strong Buy. |
