INSP: Still Waiting for the Future PART 1
Bear Stearns
Jeffrey Fieler, CFA 212 272-9629 jfieler@bear.com 10/23/01
Christopher Tessin 212 272-6637 ctessin@bear.com
Subject: Analysis of Sales/Earnings
Industry: Consumer Internet
BEAR, STEARNS & CO. INC.
EQUITY RESEARCH
InfoSpace (INSP $2) - Buy
Still Waiting for the Future
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Key Points
*** Q3 Results came in line with our expectations and slightly ahead of the
street with revenues of $34mm and a pro forma loss of $0.03 per share.
*** By the end of the year the company will forgo all non-recurring revenue
streams and be at a run rate of $27 million per quarter.
*** 2002 Revenue guidance of $105-$110 million forecasts little growth for
businesses with established growth characteristics. The company obviously
does not want to disappoint investors again.
*** At current levels shares remain a good speculation on the growth of mobile
data and merchant services, however, given gestation periods, we view it
as much as an option as a stock.
*** We maintain our Buy rating as the shares have limited down side at 2x cash
and attractive long term potential, but expect the shares to be mired in
the near term.
InfoSpace Summary Data
Current Price $2.15 12 mo. Target NA52 Week High $26Shs. Out 341,417
Upside to Target NA52 Week Low $1.06 Mkt Cap$734,047
Financial Model
Estimates(1) Year Q1-Mar Q2-Jun Q3-Sep Q4-DecFull YearRevenues
2000 $0.02 $0.02 $0.03 $0.04 $0.11 210,114
2001 ($0.02) $0.01 ($0.03) ($0.04) ($0.08) 160,735
2002 ($0.04) ($0.04) ($0.04) ($0.04) ($0.17) 109,050
First Call 2001 ($0.02) $0.01 ($0.04) ($0.03) ($0.09) 165,150
First Call 2002 ($0.03) ($0.02) ($0.01) $0.00 ($0.05) 178,690
(1)EPS from Operations does not include stock based compensation, goodwill
amortization and one time gains and losses.
Summary
InfoSpace beat street Pro Forma EPS estimates, but continued to disappoint by
significantly revising 2002 guidance and announcing that they would reduce
their work force by 22%. The company reduced revenue estimates for FY 2002 to
$105-$110 million down from previous guidance of $167-$172 million. By
reducing overhead, the company maintains the expectation that even with
significantly reduced revenues it will return to Pro Forma profitability in the
second half of 2002. Currently, recurring revenues as defined by the company,
make up 81% of revenues or $26 million of a total of $33 million for Q3 01. A
worrisome point is that the company's guidance establishes little revenue
growth for recurring revenues and the essential elimination of non-recurring
revenues through the end of 2002. Given the growth profiles of both the
merchant services and wireless businesses, we can only assume that this growth
going forward is a result of continued pricing pressures in the information
syndication business and/or that the company is working to build in an upside
surprise in the future after delivering so many disappointments. Given limited
growth over the next 5 quarters without a return to profitability, we view the
shares of InfoSpace more as an option than a stock. It is an option on the
continued growth of merchant services and on a ramp in wireless adoption usage
in North America as the companies carrier partners complete and market 2.5G
networks and services in the US in the second half of 2002. Given that the
company has approximately $1 per share in cash, no debt and a small quarterly
burn of under $10 million, we think that it will pay to be patient in this
name. However, while we believe in the long term story for the shares, we
would point out that we do not expect them to appreciate significantly any time
soon and should an investor need a tax loss sale candidate, this name would
apply.
InfoSpace announced a Q3 2001 pro forma EPS loss of ($0.03) beating consensus
estimates of a loss of ($0.04) by a penny and matching our estimate of a loss
of ($0.03). Revenue for the quarter fell 35% sequentially to $33.1 million
which was in line with consensus estimates of $32.7 million and our estimate of
$33.4 million. However, InfoSpace revised guidance down for the fourth quarter
of 2001 by noting that the company expects recurring revenue of $27 million and
non-recurring revenue of $2-3 million for a fourth quarter revenue total of $29
to $30 million. This would represent a sequential drop from Q3 of 10-14%.
Previous guidance indicated that the company expected revenue of $33 million
for the fourth quarter. The $0.01 rise in EPS estimates for the fourth quarter
are attainable as a result of a reduction in headcount that InfoSpace plans to
undertake resulting in the elimination of 200 employees or 22% of the
company's work force. As a result of this guidance, a full year pro forma EPS
loss ($0.08) is expected for FY 2001 versus our previous estimate of a loss of
($0.06).
InfoSpace continues to add wireless subscribers in a difficult environment.
Wireless subscribers grew from 3.0 million in Q2 2001 to more than 3.75 million
in Q3 01. In total, revenue from wireless made up approximately 20% of
revenues for Q3 01, up from 16% in Q2 01 resulting in approximately $6.6
million, down from approximately $8.4 million in Q2. This decline is
attributed to the dissolution of the company's Brazilian relationship with TIM
and the sale of Locus Dialogue's speech business. Without these one time
effects, revenues in the segment grew 6% sequentially. Total registered
wireless users increased 25% sequentially, while active users grew 15% from 2
million to 2.3 million for the quarter. While we look positively at the
addition of 300,000 wireless users, active users as a percentage of wireless
users fell again from 67% in Q2 01 to 61% in Q3 01 suggesting that subscriber
count continues to outpace usage. Catalysts for this segment continue to be the
rollout of two-way SMS and the proliferation of next generation services such
as GPRS and 1XRTT from InfoSpace's carrier partners in the US.
Infospace's commerce platform processed more than 9 million transactions in Q3
01 up from 8 million in the first quarter. Merchant revenues made up
approximately 30%, up slightly from the second quarter. Merchant revenue can be
calculated as between .7% and 1.1% of the total dollars processed through the
commerce platform in addition to fixed recurring licensing fees of between $3-
$5 million per quarter. The total dollars processed through the platform rose
from $600 million in Q2 to $700 million in Q3 2001. Transaction growth has
been partially due to signing new customers. During the third quarter the
company announced that it would power payment solutions for Wells Fargo bank
and Dydacomp in addition to a solution for Union Bank of California.
Currently, wireless and merchant revenue combine to make up approximately 50%
of the revenue for the firm. The company announced that it expects to maintain
this level through year end.
Looking ahead to Q4, we expect the company to take an as yet unspecified
restructuring charge to reduce the workforce and we expect total revenues to be
$30 million with a loss of $0.04 per share. Current guidance for 2002
indicates a range of revenues of $105-$110 million, down from previous
guidance of $167-172 million and down from the previous quarters guidance of
$310 million for 2002. This is indeed a worrying trend as the company shows no
signs as yet of credibly stabilizing the business and given the $27 million in
recurring revenue the company estimates for Q4 2001, this figure implies little
growth for 2002. We are dropping our 2002 revenue estimates to $109 million and
believe that the company should be able to reach these based upon current
merchant processing, wireless subscriber and affiliate business levels. In
addition we are looking for a $0.17 loss in 2002. We believe that this should
mark the low water mark in the company's guidance. Given the growth prospects
for both the wireless and merchant services businesses, we expect that this
builds in the potential for an upside surprise in 2002.
We currently view the stock at its currently depressed price as an option on
the future of wireless data services. We maintain that at a price of $2.00 the
stock is trading at two times cash, a level where many technology companies
have a found a bottom. Because we view the company more as an option than a
stock, we have no price target on the shares. We continue to believe that
InfoSpace has some of the best technology in the wireless, m-commerce and
broadband services space. The company is well positioned from exposure to high
growth markets and expect the share price to reflect that in time.
Particularly as the company delivers additional new contracts and demonstrates
that it is deep enough to play in all the areas where the company is developing
business. We look toward announcements of carrier adoption of the SMS solution
as corroboration of not only these trends, but also of this competitive
positioning of the company.
Companies Mentioned
AT&T Wireless (AWE)
InfoSpace (INSP)
Verizon (VZ)
Vodafone (VOD)
Wells Fargo (WFC)
Dydacomp
Union Bank of California (UB)
AWE, VZ - Within the past three years, Bear, Stearns & Co. Inc., or one of its
affiliates was the manager (co-manager) of a public offering of securities of
this company and/or has performed, or is performing, other banking services,
including acting as financial advisor, for which it has received a fee.
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makes a market in the common stock or options of the issuer(s) in this report,
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be on the opposite side of public orders in such common stock or options.
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for all investors. Moreover, although the information contained herein
has been obtained from sources believed to be reliable, its accuracy
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