Epoch's report follows. I am not sure why anyone is buying now given the reduced outlook. I sold this morning at the open.
InfoSpace Lowers the Boom on 2001 Expectations
By Matthew Adams
Vice President, Analyst
Key Points
After announcing the departure of three key senior executives last week,
InfoSpace dropped the proverbial other shoe Monday with a loud thud. The
company revised 2001 guidance downwards and now forecasts flat annual
revenue growth for 2001 (we had estimated 66% growth) and a net loss of
$0.14 (we had projected income of $0.12 per share).
The main reason for the revised expectations is management's plan to
de-emphasize parts of its consumer business in favor of more stable
businesses such as the wireless and merchant segments.
December quarterly revenues matched our top line expectations of $66 million
while quarterly pro forma net income of $0.04 beat our estimate and First Call
consensus of a penny per share. Year-end wireless subscribers of 1.5 million
exceeded management's goal of 1 million and our estimate of 1.3 million.
The company has promised to deliver a revised operating plan within 30 days
that will detail the changes in strategy and guidance for 2002.
We are lowering our 2001 revenue estimate to $211.8 million (from $346
million) and forecast a net loss of $0.18 per share (from a gain of $0.12 per
share.) Because of the drastic change in 2001 expectations and the uncertainty
of future guidance, we are advising investors to avoid this stock in the near
term.
Investment Summary
During Monday's conference call to discuss December earnings, InfoSpace's
management delivered the second jab of a one-two knockout punch for the stock.
The company reported decent numbers for the December quarter but lowered the
boom by forecasting flat revenue growth for 2001 it ascribed to a shift in business
strategy. The company will de-emphasize the parts of its consumer business it
deems unstable and unscaleable. Management promised a revised business plan
within 30 days detailing its plan to regenerate revenue growth and providing
clearer 2001 guidance. We think that this restructuring, coupled with reduced
visibility into near-term catalysts, make it unlikely the stock will enjoy upward
momentum in the near term. We are therefore changing our outlook from positive
to negative, and recommend that investors avoid this stock until there is better
visibility into future revenue growth and a return to profitability.
Change to Negative Bias
We are making a dramatic about-face -- from positive to negative -- in our
outlook based on the company's restructuring of its business plan, lack of near
term positive catalysts and management changes announced during the past
week. Below, we outline the investment positives that led to our initial outlook and
discuss what has changed to sour us on the stock.
Profitable Core Business: The company's core business of providing
infrastructure services has delivered profits in five out of the past six
quarters. Yesterday, the company announced that it has decided to
de-emphasize the consumer segment of the business that, while unstable,
accounted for 58% of December revenues. The company does not expect
annual revenues from this business to grow at all in 2001. This reduction in
revenues will contribute to overall net losses for the next four quarters,
returning the company to cash-flow-negative territory.
Expanded Management Team with Wireless Experience: During the past
year, InfoSpace added to its team managers with strong wireless experience
in order to increase its overall depth. The company's day-to-day operations
will suffer from the recent departure of CEO Arun Sarin's and CFO Rand
Rosenberg's strong wireless experience.
Growing Wireless Business: InfoSpace had a nascent wireless business
that was delivering 100% quarterly revenue growth and was well on its way
to meeting year-end goal of 1 million customers. This investment positive
remains intact. The company's 1.5 million wireless subscribers beat its
year-end goal of 1 million and exceeded our estimate of 1.3 million. We
estimate the company will still meet its 2001 year-end goal of 5.0 million.
Attractive Valuation: The stock was trading near its 52-week low and below
comparable revenue multiples of its peers at the time of our initiation. Using
our revised estimates, InfoSpace now trades at 9.6x our revised 2001
revenue estimate, still below our wireless data group average of 13.8x.
However since the company now expects to lose money on the bottom line
and have flat revenue growth, this multiple seems high. This is especially
true compared to Inktomi's 6.7x multiple. Inktomi is another Internet
infrastructure company, albeit one that is expected to see revenue growth of
37% in 2001 and report a net profit for calendar year of $0.03 per share.
The Results
For the December quarter, InfoSpace reported revenues of $66.1 million and EPS of
$0.04, meeting our revenue estimate but exceeding our EPS estimate of $0.01 per
share. The company hit its revenue target due to strong growth in wireless
subscribers, which offset weakness in the consumer segment. Gross margins of
83% came in slightly higher than our estimate of 81%. Better than expected
performance on the bottom line came mainly from lower than expected SG&A
spending. December operating expenses accounted for $60.1 million, or 91% of
sales. We had forecast $64.5 million, or 98% of estimated sales. Excluding one-time
charges and amortization costs, InfoSpace reported net income of $0.04 per share,
exceeding both our estimate and First Call consensus of $0.01 per share.
Operating Metrics
InfoSpace reported good metrics for the business segments that were discussed
on the conference call. Wireless numbers were strong and merchant revenues
were slightly above our expectations. However the company did not provide
metrics for the consumer business (number of consumer websites or average
monthly fee). The broadband business is still too early stage for detailed discussion
and management is not expecting significant revenue contribution until 2002-2003.
Wireless: InfoSpace reported more than 1.5 million wireless subscribers
using its services through the company's wireless carrier partners. This figure
exceeded both the company's year-end expectations of one million
subscribers and our bullish forecast of 1.3 million. Wireless revenue in the
December quarter accounted for 12% of the total, or $8.0 million, slightly
above our estimate of $7.7 million.
Merchant: The number of merchants using InfoSpace technology increased
marginally from 1.95 million to 2 million. For the December quarter,
InfoSpace's merchant commerce platform facilitated $449 million in
transaction revenue versus $340 million for the September quarter. Merchant
revenues accounted for 30% of all revenues, implying quarterly sales of
$19.8 million, an estimated sequential increase of 30%, and slightly above
our forecast for $19.3 million.
Consumer: Consumer affiliate websites accounted for 58% of revenues or
roughly $38.2 million during the quarter, slightly below our estimate of $38.7
million. Management did not deliver specific metrics for the consumer
business, either the number of consumer affiliates or the range of average
monthly fees.
Cash: Ending cash and short-term investments balance for the quarter was
$370 million, up slightly from $362 million from the previous quarter.
DSOs: Days sales outstanding (DSOs) decreased to 48 days, down from 50
days in September. For 2001, management's guidance remains at 50-60
days.
Changes to the Model
While the December results came in close to expectations, InfoSpace made news
by lowering its 2001 guidance significantly. We had wondered aloud last week
whether this would happen (see Comments on Management Shake-up), with the
hope that the company would have unloaded all its bad news in one fell swoop.
However our hopes were dashed by yesterday's new revenue and net income
guidance. InfoSpace now expects 2001 revenues to reach $215 million,
representing no annual growth and a 60% cut from previous management
guidance of $360 million. The company expects merchant revenues to grow
10%-15% year over year, consumer revenues to remain flat, and wireless
revenues to double over this year's $18 million total.
We have factored this information into our new estimates but believe the company
has pushed revenue guidance and average monthly revenue fees down so far in
order to avoid any further adjustments going forward. For example, the
company's wireless revenues for December of $8 million combined with the average
subscriber count of 1.2 million results in an average monthly fee $2.28 per
subscriber. In order to reach the $36 million in 2001E wireless revenues, as
suggested by management's expectations of 100% year-over-year revenue
growth, InfoSpace needs to generate only $1.43 per month per subscriber.
The flaw in this calculation is that it assumes the subscribers were added evenly
over the quarter whereas the majority might have signed on earlier in the quarter
thereby increasing the time-weighted average above the arithmetic average.
However we also looked at the merchant segment numbers which stayed relatively
flat compared to the prior quarter. Combining the average merchant count of 1.95
million with the $19.8 million in December merchant revenues (implied by
management's statement that 30% of total revenue came from merchants), the
resulting average monthly fee is $3.34 per merchant. To generate 10% growth for
its merchant business (the bottom end of the stated 10%-15% annual revenue
guidance), we calculate that the company will only need $2.30 per merchant per
month, assuming no growth in the total number of merchants.
We think this drastic reduction is wise and have kept our estimates roughly in
line with management's new expectations. Our new 2001 revenue estimate is
$211.8 million with reduced gross margins expectations between 72%-73%
throughout the year. We expect that net losses will be between five and four cents
per quarter resulting in full year net loss of $0.18 per share. We are more bullish
than management on the wireless side and forecast revenue growth of 141%
with sales reaching $43 million for the full year. We still predict that the company
will reach its 2001 goal of 5 million wireless subscribers by year-end. The table
below lists management's new expectations as well as our new estimates
compared to our previous estimates. |
