Answers
Corporation
2nd
Quarter 2006 Conference Call
Participants:
Bob
Rosenschein, Chairman and CEO
Steve
Steinberg, CFO
Bruce
Smith, VP of Strategic Development
Bruce
Smith
Good
afternoon, and welcome to the Answers Corporation 2nd
Quarter
2006 conference call. My name is Bruce Smith, VP of Strategic
Development. Joining
me are Bob Rosenschein, Chairman and CEO, and Steve Steinberg, our CFO.
This
call is also being broadcast over the web and can be accessed from our
Investor
Center page at ir.answers.com.
A
replay of this call will be available at the site shortly after the completion
of the call. At the conclusion of our prepared remarks, we’ll open the call for
your questions.
Before
we
begin, I will caution that comments made during this call by management
contain
forward-looking statements, including predictions and estimates that involve
a
number of risks and uncertainties. For those statements, the company claims
the
protection of the safe harbor for forward-looking statements contained
in the
Private Securities Litigation Reform Act of 1995. Important factors may
cause
our actual results to differ materially, including, among others, our ability
to
increase the number of Answers.com users, our ability to improve monetization,
a
decision by Google, currently the provider of almost all of our search
engine
traffic, or other search engines, to block our AnswerPages from users’ search
results or otherwise adjust their algorithms in a manner detrimental to
us, a
decision by Google to stop directing user traffic to Answers.com through
its
definition link and other risk factors. We encourage you to review our
filings
with the Securities and Exchange Commission, including, without limitation,
our
registration statement on Form S-3/A declared effective in June 2006, which
identify specific factors that may actually cause results or events to
differ
materially from those described in any forward looking statements.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
The
content of this call contains time sensitive information that is accurate
only
as of the date of this call, July 31st,
2006.
We undertake no obligation to revise or update any forward-looking statements
to
reflect events or circumstances that occur after the date of this conference
call.
I
would
also like to point out that throughout this call we will be referring to
our
GAAP financial results as
well as non-GAAP measures.
These
non-GAAP measures are not in accordance with, or an alternative to, GAAP
financial measures and may be different from pro-forma measures used by
other
companies. You can find a reconciliation of the differences between the
non-GAAP
financial measures presented and the most directly comparable financial
measure
or measures calculated and presented in accordance with GAAP, attached
to our
press release issued earlier today and posted on our corporate Website
at:
ir.answers.com.
With
that
said, I’d like to turn the call over to Bob Rosenschein. Bob…
Bob
Rosenschein
Good
afternoon and welcome! It’s a pleasure updating you today on another quarter of
strong progress. The quick summary:
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Answers Corporation 2nd
Quarter 2006 Conference Call -
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Q2
revenue jumped 31% sequentially to $1.511 million, 34% if you
consider
just the ad revenue. In fact, this was the 6th
straight quarter to exceed 30% sequential revenue growth. This
exceeded
the top-end of our guidance of $1.450
million.
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Our
non-GAAP net loss improved by 12%, dropping to $664,000, also
surpassing
our guidance. Non-GAAP net loss per share dropped from $0.10
to $0.09.
Steve Steinberg will explain “Non-GAAP net loss” in a few
moments.
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Our
average daily traffic increased modestly, to roughly 2.7 million
queries
per day. Even considering the end of the school year and the
summer lull —
frankly — we’re not satisfied with this traffic growth, and I’ll be
telling you later what we’re going to be doing about it in Q3 and
beyond.
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Next,
we keep improving our rich reference content. We now provide
our users
over 3
million topics
from over 100 trusted dictionaries and encyclopedias, with much
more
coming.
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Finally,
we recently integrated our Brainboost natural language answering
technology, Phase I.
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The
primary driver of our 31% sequential revenue growth was a very healthy
jump in
our monetization rates. Our average RPMs actually increased in Q2 from
$4.67 to
$5.95, 27% over the previous quarter. In fact, through various efforts
in July,
they have been comfortably north of $6.00, and we expect more upside
ahead.
So,
for
the first time, I’m pleased to inform you that we expect to be Non-GAAP
profitable—that is net income on a Non-GAAP basis—by Q4 2006 or Q1
2007.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
I’ll
turn
the call over to Steve Steinberg, our CFO, for a more detailed recap of
our
fundamentals.
Steve
Steinberg
Thank
you
Bob, and good afternoon. I'd like to begin with an overview of our Q-2
2006
financial performance. For a more detailed review of this quarter’s results,
please refer to our quarterly report on Form 10-QSB, which we expect to
file no
later than August 15, 2006.
Q2
revenues increased to $1,511,000, compared to $1,154,000 in the previous
quarter, representing 31% sequential growth. The GAAP net loss in Q2 was
$2,958,000, compared to the Q1 GAAP net loss of $3,480,000. The Non-GAAP
net
loss in Q2 was $664,000, an improvement of 12% compared to $757,000 in
the first
quarter. When we refer to our Non-GAAP net loss in Q2, we mean the net
loss
prior to stock-based compensation, amortization of acquired technology
resulting
from the Brainboost acquisition and a penalty payment of $227,000 to the
Brainboost sellers because our registration statement on Form S-3/A covering
the
Brainboost stock consideration was not declared effective by the SEC before
April 1, 2006. This filing was declared effective on June 9th.
Non-GAAP
net loss
per
share for the second quarter of 2006 decreased to $0.09, compared to $0.10
in
the previous quarter.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
As
I
said, our Q2 revenues rose to $1,511,000. Answers.com Q2 advertising revenues,
of $1,457,000, which accounted for 96% of our total Q2 revenue, was 34%
higher
than in Q1. The remainder of our revenue was earned mostly from partners
who
license our Answers service.
To
refresh the memories of our regular call-participants and for those listening
for the first time, Answers.com advertising revenue is a function of growing
query traffic and monetizing such traffic. We consider revenue per one
thousand
queries, or RPMs as our primary measurement of monetization. Our key objective
is to constantly maximize both traffic and RPMs in a manner that values
the
critical impact that each has on the outcome of our advertising revenue.
Getting
into the numbers, our average daily queries this quarter increased to
approximately 2.7 million from approximately 2.6 million in Q1. Our average
RPM
increased to $5.95, from $4.67 in Q1. Of course, we plan to continue growing
queries and RPMs significantly in 2006 and beyond. Later in this call,
you will
hear from Bruce and Bob on the methods and initiatives aimed at further
improving these metrics in the second half of 2006 and beyond.
Operating
expenses, before
$2,067,000 of expenses that resulted from stock-based compensation and
charges
stemming from amortization of acquired technology relating to the Brainboost
acquisition - what we refer to as Non-GAAP
operating expenses,
were
$2,335,000 in Q2, compared to $2,040,000 in Q1, a net increase of $295,000.
The
net increase was driven by many factors including additional headcount,
legal
and accounting and other costs relating to our registration statement and
annual
shareholder proxy and meeting and content and web hosting costs. Our headcount
increased by eight employees during the quarter and we had 58 employees
as of
June 30, 2006.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
Now,
let’s review some balance sheet data….
Cash
and
cash equivalents and investment securities as of June 30, 2006 were $11,963,000
and we have no significant debt. Our cash and investment securities dropped
approximately $1,100,000 this quarter. The drop resulted from the net cash
used
in operations of approximately $915,000, which includes $200,000 of the
Brainboost penalty paid in Q2, and capital expenditures, including intangibles,
of $260,000; less the $75,000 we received through the exercise of stock
options.
Now
I
would like to talk about our Q3 outlook.
We
forecast that our revenues for Q3 will be in a range of $1,750,000 to
$1,800,000, or 16% - 19% sequential
growth.
We want
to remind everyone that Q3 includes the summer months of July and August.
Our
industry traditionally experiences a seasonal drop off in the summer months.
We
forecast that our GAAP operating loss will fall within the range of $1,610,000
to $1,660,000. Our Non-GAAP operating loss is expected to be in a range
of
$925,000 to $975,000, an increase over the current quarter despite our
forecasted increase in revenue. Our Non-GAAP Operating expenses are expected
to
increase in various areas - mostly advertising and promotion, Web hosting
and
content licensing, and salaries, as we are planning to add up to 9 employees
during Q3. Due to timing, some new hires in Q2 only impacted part of the
quarter
and some of the new hires we originally planned to bring aboard in Q2 will
actually be added in Q3.
Thank
you
for your time. And now I’d like to turn the call over to Bruce….
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Answers Corporation 2nd
Quarter 2006 Conference Call -
Bruce
Smith
Thanks,
Steve…
We
are
very pleased with our strong performance in boosting our RPMs this quarter.
We
were very successful in continuing to optimize our CPC advertising with
Adsense
and Shopping.com. As a matter of fact, as one of our tests this quarter,
a
change in ad position yielded dramatic positive effects, and we’re continuing
these ongoing refinements.
We
completed our implementation of the DART AdServer from Doubleclick, which
resulted in better yield and more flexibility working with our ad
networks.
We
continue to focus on selling our own advertising which will contribute
to
continued RPM growth in the future and are looking to recruit the right
individual to lead this effort.
On
the
content front, during the quarter, we enhanced Answers.com with material
from
AMG’s Music, Games and Movies; Gale’s Encyclopedias of Surgery and of American
Industry, and just yesterday, we added content from several Barron’s sources,
including their: Accounting, Banking, Business, Financial, Insurance, Marketing,
Real Estate, Law, Food Lovers’ and Wine Lovers’ Dictionaries and the concise
edition of the Encyclopedia Britannica, another highly regarded reference
work.
We
also
have already licensed some great new titles, such as Sports Network and
McGraw-Hill’s Dictionary of Science & Technology and their Concise
Encyclopedia of Science & Technology, two highly respected sources, which
are currently being integrated.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
For
those
of you listening over the Internet, you will notice that today we launched
our
new enhanced investor relations website at ir.answers.com.
This is
a great place for investors to visit to stay informed about everything
going on
at the company.
For
your
information, several of our executives have set up one year 10B5-1 plans,
for
reasons of personal liquidity and market predictability. Bob will be selling
up
to 4,000 shares per month, representing only 7.5% of his total shares and
options; Steve Steinberg, 2,500 shares per month; and Jeff Schneiderman,
our
CTO, 1,500 shares per month.
In
our
last quarter’s conference call, we also explained that there was a penalty paid
to the Brainboost sellers, relating to the longer-than-expected SEC review
of
our registration statement and related filings. That one-time process is
complete, reflected in today’s numbers, and thankfully
behind
us.
In
Q2, we
also won our first CODiE award, as the Best Education Reference or Search
Service, beating Microsoft Encarta, Britannica, and Pearson.
Lastly,
some of you may have noticed an exciting new standalone product we released
on
July 2, called blufr.com (that’s B-L-U-F-R.com).
It is
an addictive game which dares visitors to try to answer a stream of true
or
false trivia questions. Our purposes in setting up Blufr.com were twofold:
(1)
experiment with viral and interactive marketing techniques, such as embedding
messages in blogs and Websites, what is popularly termed Web 2.0, and (2)
drive
incremental new traffic to Answers.com. So far, we’ve been thrilled with this
rapid development project. With minimal resources, our team built a property
that’s climbing quickly in various Web metrics. And all this with little real
marketing push yet… By the way, blufr was featured on CNN’s TV program “In the
Money”, as an About.com site-of-the-day, and in this Sunday’s Washington Times,
plus numerous blog postings. We look forward to applying some of these
techniques to the larger Answers.com property.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
Now
I
would like to turn the call back to Bob.
Bob
Rosenschein:
Thanks,
Bruce…
To
understand how we reach the next level, you must realize that, in the long
run,
it’s all about building the best service. That means constantly delighting
people with easier ways to access useful information. It means improving
the
content and improving the technology.
We
differentiate ourselves from other online reference sites with the sheer
breadth
of our 100 rich best-of-all-worlds dictionaries and encyclopedias—putting it all
together in one unified, easily accessible, attractively formatted whole.
In
other words, some people will value our site for Britannica, some for Wikipedia,
or both.
We
differentiate ourselves by not
giving
you a long list of links to navigate one at a time, but rather an
everything-you-wanted-to-know about a unified topic page.
We’re
proud that Google refers its definition link to Answers.com, but that’s not
enough. We will continue to make our technology easier, faster, and smarter.
It’s all about improving the product.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
What
improvements should you expect in the coming months?
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Ongoing
content enhancements—both licensed and original resource centers— which
help drive Answers.com user satisfaction and SEO traffic
growth.
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New
faster, smarter Phase II of Brainboost natural language question
answering.
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Distribution
of our innovative 1-Click AnswerTips to Webmasters and bloggers
without
requiring any user download.
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While
we’ve made steady progress on monetization and traffic, the third key element
to
increased revenue is user retention. In other words, we want users to have
longer visits and perform more queries once they discover our site.
To
that
end, as a continuation of the new work on our home page, we are redesigning
our
Answers.com topic result pages in Q3, for streamlined navigation, clearer
feature promotion, and a generally more engaging user experience. We believe
the
product in general and the new topic result pages in particular will be
key
factors in further building retention, loyalty and traffic. I could not
be more
excited about the improved topic result pages and navigation.
In
summary, this is a great time for the company. We’re growing a great Internet
property, with a clear trajectory towards profitability and beyond.
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Answers Corporation 2nd
Quarter 2006 Conference Call -
With
that, we conclude our prepared remarks and invite our listeners to present
any
questions. Bruce…
Q&A
(moderated by Bruce Smith)
…
Closing
the Call (Shareholder.com Operator)
Thank
you, all. This concludes today’s teleconference. Please disconnect your lines at
this time, and have a good day.
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