Loop Industries, Inc.
Q4 2007 Earnings Call Transcript

Published: 13 Feb 2008

[Operator:]

Welcome to LoopNet Inc.’s fourth quarter and year-end conference call. This is the property of LoopNet, and any recording, reproduction, or transmission of this conference call without the express written permission of LoopNet is strictly forbidden. This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of LoopNet's website. I would now like to turn the call over to Erica Mannion, Investor Relations for LoopNet. Please go ahead, ma'am.

[Erica Mannion:]

Thank you. Good afternoon. Thank you for joining us to discuss LoopNet's financial and operating results. With me today are Rich Boyle, Chief Executive Officer and Chairman; and Brent Stumme, Chief Financial Officer. Today, Rich will begin with an overview of the business and the overall corporate strategy, continued by a summary of the company's fourth quarter performance and review of the marketplace. Brent will review the fourth quarter financial results and provide first quarter and fiscal year 2008 guidance. Before I turn the call over to Rich Boyle, I would like to mention that the company will participate in the following investment banking conferences during the first quarter, each of which will be available via webcast on LoopNet's website

[Richard Boyle:]

Thank you, Erica. Welcome, everyone to LoopNet's earnings call to report fourth quarter and full year 2007 results. I am pleased to report that the fourth quarter was another strong one for the company. For the full year 2007, we grew revenue to $70.7 million and adjusted EBITDA to $34 million, both of which were 46% increases as compared to 2006. Revenue for the fourth quarter was $19.6 million, which is an increase of 41% from the fourth quarter of 2006. Adjusted EBITDA for the quarter was $9.4 million, up 40% from the fourth quarter of 2006. These strong financial results were driven by the ongoing growth and activity on our marketplaces and our continued monetization of that activity. We have continued making progress in bringing the marketing and searching activities in the commercial real estate industry online and onto our marketplace, despite some challenging industry conditions. At the end of the third quarter, we discussed how the credit crunch and fears of a potential recession were impacting the commercial real estate industry. The trends that we saw developing in Q3 continued during Q4. In the investment sales side of the industry, the turmoil in the credit markets has dramatically impacted the volume of transactions closed. Real Capital Analytics reports that closings of deals valued at $5 million and up were down from 22% to 16% during the fourth quarter of '07, as compared to the same period in '06 depending on asset types. The lack of closed transactions does not directly affect our business, as we are used for marketing and searching for offerings, not as a transaction closing platform. However, the credit crunch has created a situation where buyers are essentially sitting on the sidelines, waiting for conditions to stabilize, and waiting to see if expectations regarding pricing on investment deals will change. We are still seeing very high levels of activity on LoopNet from the buy side, but the rate of growth mitigated during the fourth quarter, even after accounting for our normal seasonal slowness in Q4. Concerns about the potential for a future recession seem to be adding to the market hesitation as well. We have continued to grow our business during this shift in industry conditions, but it has had some impact. These impacts were largely in line with the expectations that we laid out when we discussed our Q4 guidelines on our last earnings call. Specifically, we believe that the primary effects of this change in industry conditions on our business were a slower year-over-year growth rate in our profile view activity, lower subscription sales to searchers, and a higher cancellation rate amongst a segment of users who are paid searchers. This had nothing to do with changes to our pricing model, as the price for searching subscribers has not changed. In short, with buyers taking a pause from actively looking for properties to buy, fewer of them were interested in paying to access enhanced information about investment properties that were available. This resulted in a net decrease in total paying subscribers during the fourth quarter. In contrast to the relative weakness on the buy side, on the sell side or marketing side of our system we saw continued strong growth. The strong secular shift to move marketing online, away from the less effective and more costly traditional marketing methods is continuing. The rollout of many enhancements to the marketing tools we offer, and of the new variable pricing model to the broker's marketing listings on LoopNet is also going very well, and we have seen solid, ongoing growth in the listings coming onto our marketplace. One of the major goals in the marketing side of our system is to put the tools into the hands of the broker's marketing listings to allow them to decide how much to spend to market a listing and to tie that marketing spend very tangibly to the results that we deliver to them. The changes we have been making and will continue to make to the premium membership service to achieve these goals are being very well received by our users. For example, during Q4 we introduced a significant set of enhancements to the tools that we provide our users that allow them to track and report on the marketing exposure LoopNet delivers to their listings. Our showcase listing offering is another example where the listing brokers can choose to distribute their listings to over 100 online partner websites, such as The Wall Street Journal, The New York Times, The Boston Globe, The American City Business Journals, and many others, driving incremental marketing exposure to their listings. We believe that no other marketing channel, online or offline, can deliver the marketing value that LoopNet provides, and these new tools make it very apparent to our customers. This strong value proposition, coupled with the secular shift to the online world, is driving solid growth on the marketing side of our business. We ended Q4 with over 560,000 active commercial real estate listings, which on a year-over-year basis is about 22% growth. The average monthly revenue per listing on the system increased by over 20% on a year-over-year basis as well, as a result of the adoption by our users of the variable pricing model we introduced in Q4, as well as increased usage of the optional per listing upsells that we're offering, like Showcase, for additional marketing exposure. Looking at the impact of these trends on the premium membership revenue by listers versus searchers, we saw the shift appear in the numbers. Historically, the revenue derived from paid searchers and paid listers on our system was roughly in balance. As a result of the current conditions in the industry and the changes to introduce the variable pricing model for marketing listings, we're seeing more of the revenue shift to the marketing side of our system. During the fourth quarter, approximately 55% of premium membership revenue came from brokers' marketing listings and 45% came from paid searchers. Given current conditions in the industry, and given the movement to online marketing and the value proposition our marketing tools offer, we expect this relative shift to continue. Total premium membership revenue is expected to remain in the upper 70s as a percent of total revenue. However, we expect that we will continue to see faster growth of the marketing revenue as compared to the searching revenue. We currently expect that we will see the split shift toward 60% or more of the premium membership revenue coming from the marketing side of our system over the course of this year, and we have factored that expectation into developing our guidance for the year. The combined effect of these marketing and searching trends is that our premium membership revenue grew 37% on a year-over-year basis and accounted for 77% of total company revenue during the fourth quarter. This growth was driven by a 12% year-over-year increase in the total number of subscribers and an increase in the average monthly subscription price of 18% on a year-over-year basis. The overall cancellation rate for the quarter was above the 3% to 5% range that we have historically seen, as it was during Q3 of 2007 as well. This increase was primarily driven by the market conditions in the searching side. We did see a slight elevation in the cancellation rate on the marketing side, but most of the increase in cancellations came from the searching side. Given our belief that this elevated cancel rate is being driven by market conditions, and our view that these market conditions are still prevalent, we do not expect a return to the long-term normal range in the near term, and are expecting cancellations during 2008 to average between 4.5% and 6.5% per month. In addition to this ongoing growth and monetization, we remain focused on our efforts to aggregate activity using our free, basic membership. We passed 2.5 million registered members during the quarter and have continued to see very good growth of both new, first-time listers and searchers coming onto our platform. We have also been making steady progress in expanding the other services that we provide to our customers and have seen some great progress in those areas recently. I wanted to call out a couple of highlights for you today. We released a major upgrade to LoopLink, our service used by brokerage firms to manage their listings and listing search on their own websites, and also to brand their listings on LoopNet and drive traffic to their websites from LoopNet. We've added many features to the service. Some examples include the map search interface introduced on LoopNet.com a year ago, new internationalization features, new reporting tools, and many more. We think the new version has played an instrumental role in a number of recent competitive client wins. We were thrilled to announce recently a renewal and expansion of our relationship with the CCIM organization and also with Colliers International. We have continued out work with the integration of the City Feed platform and their distribution network with LoopNet. The showcase listing options that went live at the end of Q3 is now in full production use by our users and is ramping very nicely, with thousands of listings being seamlessly and automatically distributed to our many online partners. The brokers listing properties on LoopNet are really excited about the option of entering the listing once and having that listing distributed across the entire network. We've also integrated the BizBuySell business for sale listings into the City Feed platform and are still working toward full integration of the commercial real estate listings between the two systems. While it is only six months since we announced the acquisition, we are very pleased with the benefits that we are delivering to our customers from the combination of the largest online listing service of LoopNet, with the largest online distribution network of City Feed. From a profitability point of view, as we have said since the time of our IPO in 2006, we are managing the business to an adjusted EBITDA target margin in the mid to high 40% range. This is still the case looking forward to 2008. However, we are currently expecting our margins to be toward the lower end of this range for the year. The industry conditions we discussed earlier are driving us to expect lower revenue growth than we would ideally like, but we are intending to maintain our areas of planned investment on an absolute dollars basis, thereby taking our margins down a few percentage points. We believe the underlying secular shift driving our business, the movement online, has not changed, and also that during a difficult market dynamic our value proposition to brokers marketing properties is even more apparent when compared to traditional alternatives. We believe we are ideally positioned to capture the shift of marketing and searching into the online world, and we're going to continue to invest in our business to ensure we capture those opportunities. These investments are in various areas such as adding new capabilities to our core products and services for our users, more information content in our systems, more distribution, and marketing exposure for our listers, and various other enhancement and expansion efforts. In addition to making these ongoing investments in organic growth, we announced today that our Board of Directors has authorized a share repurchase program of up to $50 million. One of the most attractive characteristics of our business model is our ability to generate strong cash flow and it is our goal to use that in every way possible to create value of our shareholders. The demonstrated success of our business model provides us with a strong balance sheet as well as financial flexibility, and this repurchase program is in keeping with our goal of increasing value for shareholders. In addition to this buyback program, we will continue to look for interesting acquisition opportunities as another means of putting our cash to work and creating value for shareholders. Next, I wanted to address a change that we are making to the organization here at LoopNet. I'm very pleased to announce that Tom Byrne has promoted to the newly created role of President and Chief Operating Officer of the company. Tom has been a member of the executive team at LoopNet since he joined the company in 2002. He was previously our Chief Marketing Officer and Senior Vice President of Marketing and Sales. In his new role, Tom will assume overall responsibility for leading all operational aspects of the company. I am retaining my role as CEO and Chairman, focused on our overall strategy and external activities with customers, partners, and the investment community. In addition to his strong educational and professional background, Tom is ideally positioned to take on this leadership role by his nearly six years of experience at LoopNet. We are always focused here at the company on how to position ourselves with the right team and the right organization to continue to serve our customers well and optimize our ability to capture the long-term opportunity that we see in this industry. This change to the organization puts us in an excellent position to continue to capture that opportunity going forward. We believe that 2008 will continue to present us with many exciting opportunities to expand our business by serving our customers well, and we are looking forward to reporting our progress to you as the year goes on. Now, I will turn the call over to Brent Stumme, our Chief Financial Officer, who will take us through the results in some more detail and provide you with our thoughts regarding 2008 expectations.

[Brent Stumme:]

Thank you, Rich. LoopNet's revenue for the fourth quarter was $19.6 million, an increase of 41% from $13.8 million in the fourth quarter of 2006. The increase was due to higher average monthly prices for premium membership, an increase in the number of our premium members, and continued growth of our non-premium membership products. On a year-over-year basis, we experienced an 18% increase in the average monthly price of premium membership, resulting in an average monthly price of $56. This increase was the result of the price increases that were implemented in Q2 of 2007 for premium members who use our service to list and search for properties and the shift to a volume-based pricing structure for listers, which we began to implement in Q3 of 2007. LoopNet's adjusted EBITDA for the quarter was $9.4 million or 48% of revenues, an increase of 40% from $6.7 million in the fourth quarter of 2006. The company has reported adjusted EBITDA, which we define as EBITDA excluding stock-based compensation, because management uses it to monitor and assess the company's performance and believes that it's helpful to investors in understanding the company's business. Net income for the fourth quarter of 2007 was $5.7 million or $0.14 per diluted share, compared to $5.3 million or $0.13 per diluted share in the fourth quarter of 2006. The effective tax rate for the fourth quarter of 2007 was 38.1% compared to 25.8% in the fourth quarter of 2006. The lower rate in the fourth quarter of 2006 was due to a favorable tax credit. The fourth quarter of 2007 results include $0.02 per share of stock-based compensation, net of tax benefit, compared to $0.01 per share in the fourth quarter of 2006. As of December 31, 2007, the company had $107.9 million of cash, cash equivalence, and short-term investments, and no debt. Now, I would like to review some of our key operating metrics. The number of registered members grew to 2,567,729 during the fourth quarter of 2007, a 45% increase over the fourth quarter of 2006. The number of premium members as of the end of the fourth quarter was 88,340, a 12% increase over the fourth quarter of 2006. Average monthly new visitors on LoopNet Marketplace were approximately 900,000, a 12% increase over the fourth quarter of 2006. In addition, there were 35 million profile views of listings on LoopNet Marketplace during the current quarter, a 2% increase over the fourth quarter of 2006. As of December 31, 2007, the LoopNet Online Marketplace contained approximately 560,000 listings, a 22% increase compared to December 31, 2006. BizBuySell contained approximately 50,000 listings of operating businesses for sale, a 14% increase compared to December 21, 2006. The company is providing the following guidance for the first quarter and fiscal year 2008, which reflects current business trends. The company expects revenue for the quarter ending March 31, 2008 to be in the range of $20.1 million to $20.3 million, adjusted EBITDA to be in the range of $8.9 million to $9.1 million and net income to be in the range of $0.11 to $0.12 per diluted share, assuming stock-based compensation of approximately $0.02 per share net of tax benefit, and an effective tax rate of approximately 41%. The company expects revenue for the full year of 2008 to be in the range of $84 million to $85 million, adjusted EBITDA to be in the range of $37 million to $39 million, and net income to be in the range of $0.45 to $0.48 per diluted share, assuming stock-based compensation of approximately $0.10 per share net of tax benefit, and an effective tax rate of approximately 41%. The net income guidance assumes a lower rate of return on our cash and short-term investments as a result of our current interest rate environment. Thank you for joining us today. I will now open up the call for questions.

[Operator:]

(Operator Instructions) Our first question will come from Derek Brown of Cantor Fitzgerald.

[Derek Brown:]

Thank you. Question in terms of your approach to marketing. The number of registered users and the growth in that front has obviously slowed quite a bit. How are you looking to counterbalance that? Are you changing marketing tactics? Or are you just simply pulling back on marketing spend at all? Are you pressing the accelerator down on that front to let the market know where you guys are right now? How do you guys think about that in this kind of a market?

[Richard Boyle:]

There's a couple ways. I mean, on the registered user front it perhaps slowed a bit, but not too much. I think the year-over-year growth was probably about 45%. I think the activity level during Q4 from a profile view point of view, there's a seasonal weakness that we see and that we have seen, where we think there's a slow down of the industry on the buy side, investors looking for properties to buy. That said, I mean when we look at where we get registered users, we get such a large component of them organically that it's really not a question of having to take our foot off the accelerator or to otherwise optimize. On the page serve side we do watch it how we drive those on a page serve side, track the spend per and the revenue per on a user-by-user basis. So we feel very comfortable about the incremental value of the registered user coming on versus what we spend to acquire them. There are some discretionary areas where we have the flexibility depending on what time in the quarter it is to ease off a bit. An example would be during the Christmas holiday season we just don't see a lot of activity in our system, so we don't spend a lot on marketing. But those are very tactical. From a strategic point of view, we really haven't changed our view at all that we're in the early stages of aggregating overall activity and we're going to continue to drive that aggregation as a top priority. We're very comfortable about our ability to manage that profitably. As we said earlier, the margin's pulling back a point or two during this year to 45% is a tradeoff that we're willing to make because we're going to continue to make the investments to drive growth.

[Derek Brown:]

With respect to the pricing changes that you guys have implemented over the last several quarters, given where the market conditions currently stand, are you doing any second guessing of having raised prices or considering rolling any of those back right now?

[Richard Boyle:]

No, I mean the pricing model change is really putting more control in the hands of our users to decide where they want to spend their marketing dollars on a per listing basis, and tangibly tying the results they get on a per listing basis per month, and we're very happy with how that transition is going, and the market conditions are not impacting that at all. The market conditions we talked about are really impacting the searching side where we have not changed our pricing model. So we're very comfortable with the pricing model that we're using on the marketing side, and in fact, you know, we've got some good historical examples of in a relatively slow market we think it creates a good environment for us to go to an agent who's marketing properties, show them how online marketing is a more effective and cost efficient tool as compared to their alternative. So we're not inclined at all to change the model we've put in place. We think it's going very well.

[Derek Brown:]

Great, thank you.

[Operator:]

And our next question comes from Steve Weinstein of Pacific Crest.

[Steve Weinstein:]

Thank you very much. Just looking at your '08 guidance and understanding the pricing dynamic that's taking place in the product, it seems to me that just the price increase alone in the product would put you in your revenue targets for the full year. So I'm wondering if you're expecting any growth in the premium numbers in 2008, or if there's any change? Do you think that might actually end up down year-over-year?

[Richard Boyle:]

To understand the dynamic and we talked a little bit about this, or at least I tried to going through my script, we're seeing a very different dynamic on the searching side or the marketing side of the system right now, Steve. The searching side, there's a challenging industry set of conditions out there about investors that are sitting on the sidelines, waiting to see what happens to the financial markets before they decide about buying properties, and that's definitely creating some headwinds for us. In contrast, the marketing side is growing really well. When you net those two out, on the marketing side, as you look at growth in listings and growth in revenue per listing, it's probably true at the end of the day the majority of the growth this year is coming from increased revenue per subscriber as opposed to increased subscriber count. But that's being driven more by the marketing side in the revenue-per-listing type of metrics.

[Steve Weinstein:]

The members that are listing product, given the new pricing schedule, are going to be paying a lot more than the folks who are just viewing or potentially buying product. So I assume you're expecting a fairly material increase in ARPU compared to what we've seen over the last couple of years. Is that fair to say?

[Richard Boyle:]

Well, it's been going up a little bit, yeah, but it's definitely--

[Steve Weinstein:]

Wouldn't the mix shift make it a more dramatic change on a year-over-year basis, because you're adding more at the high end and taking out some from the low end?

[Richard Boyle:]

No, I don't think so. I mean, we have a lot of users who have many listings on the system, and so the average revenue per listing, you know, I mentioned earlier was up about 20% on a year-over-year basis, and we're still in the process of rolling out the variable pricing model. So those types of changes are still propagating through, but when you look at it on a per listing basis, which is how the agents think of marketing their properties, it's not a very dramatic change at the end of the day. When you compare it to what they're spending, for example, the hundreds or even thousands of dollars they might spend in print media advertising, it's a very small marketing fee as compared to their offline alternatives.

[Steve Weinstein:]

Okay, thanks a lot.

[Operator:]

All right, our next question comes from Jim Wilson of JMP Securities.

[James Wilson:]

Richard, as you looked at your outlook for the subscription turnover rate monthly, do you expect a difference? Are you seeing a difference in the marketers versus the searchers that you would build into that overall expectation?

[Richard Boyle:]

Yes, and we have included that in that expectation. So if you actually look at it on a segment-by-segment basis, you know, the cancellation rate in the searcher population has gone up considerably since last September when the credit crunch really hit the market. And as I said earlier, I mean the phenomena there is literally people that just simply said, I'm going to wait and see what happens before I make a decision to look for a property to buy. And so we still see some of them on as free users, but they're just simply not using the paid service, which is typically what they do when they're in the specific act of looking for a property to buy. And as they sit on the sidelines right now, we've seen a higher rate of them canceling out. So the primary growth in that cancellation rate is absolutely coming form the searcher side. There's a very small elevation that's on the marketing side but it's not the driver. The driver is very much the searching side, but when we look at that cancellation rate that I talked about for the full year of 2008, expecting it to be in the 4.5% to 6.5% range as compared to 3% to 5% that it's been historically, that is a blended rate taking all that into account.

[James Wilson:]

Yeah, no, that's what I assumed. I was just wondering if you were willing to differentiate the rate between the two.

[Richard Boyle:]

No, we're probably not going to break it out. We track about eight different segments internally and the blended rate is what we're reporting external for the company.

[James Wilson:]

Is there anything in the way of, from a marketing standpoint, anything on a larger firm basis or anything that might be out there, you're working on negotiating? I know you have obviously contracts in place with the major brokerage firms. But in this environment, is there anything on a more material basis you might look to put together to bring more marketers on board at a more aggressive pace?

[Richard Boyle:]

We're always looking for ways to accelerate the growth on both sides of the business, and definitely in these market conditions it's certainly shifting to a set of circumstances where agents on the marketing side are going to be looking for better ways to market their properties. We certainly have an open dialogue with a lot of the big firms. That said, the reality in the kind of industry segment that we primarily serve is the vast majority of marketing agents on LoopNet are small, independent brokers, and the vast majority of the marketing decisions are made by the independent agents that are marketing a specific property. We love to look for ways to accelerate the growth in our business, but there's no magic bullet. It's a lot of just aggregating independent, small brokers onto the platform over time.

[James Wilson:]

Okay, all right, thanks.

[Richard Boyle:]

Sure.

[Operator:]

That was our last question. Ladies and gentlemen, thank you for your participation on this call. You may disconnect at this time.