Loop Industries, Inc.
Q4 2008 Earnings Call Transcript

Published: 11 Feb 2009

[Operator:]

Good day, ladies and gentlemen and welcome to LoopNet Earnings Conference Call for the Fourth Quarter and Year-End 2008. The date of this call is February 11. This call is a property of LoopNet and any recording, reproduction or transmission of this conference call without the expressed written consent 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 will now turn the conference call over to Erica Mannion, Investor Relations for LoopNet.

[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 2009 guidance. During the fourth quarter, the company will representing a Credit Suisse’ 11th Annual Global Services Conference on February 24, in Phoenix, Arizona. I would like to bring the following to your attention. On the call today, you may hear forward-looking statements about events and circumstances that have not yet occurred. Actual outcomes and results may differ materially from the expectations contained in these statements, due to a number of risks and uncertainties. Please refer to the company's recent SEC filing at the SEC's website at www.sec.gov for detailed discussions of the relevant risks and uncertainties. The company undertakes no responsibility to update the information in this conference call under any circumstance. The press release distributed today that announced the company's results is available on the company's website at www.loopnet.com in the Investor Relations section under Financial Press Releases. The current report on Form 8-K, furnished with respect to our press release is available on the company's website in the Investor Relations section under SEC Filings and on the SEC's website. You will also hear discussion of non-GAAP financial measures, reconciliation of these non-GAAP measures to the most comparable GAAP financial measures are contained in the press release distributed today, and available on the company’s website. Now, I will turn the call over to Rich Boyle, Chief Executive Officer and Chairman.

[Rich Boyle:]

Thank you, Erica. I would like to welcome all of you to the LoopNet fourth quarter and full-year 2008 earnings call. Along with discussing our recent performance, today we will also share our perspective on the current market conditions in the commercial real estate industry, and how they are impacting our business. I will first give you an overall update on the market and our business. And then Brent Stumme, our Chief Financial Officer will be taking us through the numbers in some detail. Revenue for the quarter was $21.1 million, an increase of 8% over the fourth quarter of 2007. And adjusted EBITDA for the quarter was $9.5 million, which translate to a larger to 45%. For the full-year, revenue came in at $86.1 million, an increase of 22% over 2007. Full-year 2008 adjusted EBITDA was $39.9 million for a margin of 46.4%. We also generated $25 million in cash flow from operations during the year, ending the year with $65 million in cash and no debt. These solid financial results coming at a time of unprecedented turmoil in the broader economy and the commercial real estate sector, we believe, a testimate to the value of the value of the services we provide to our customers and to the strength of our business model. While we fully expect these challenging macro conditions to continue for the remainder of 2009, we also believe that our team and our business is well-positioned to execute through this recession and to take advantage of our strong financial and market position till a long-term benefit of our customers and our shareholders. During 2008 we made progress in many areas in terms of strengthening our business for the long-term. We made many enhancements to the core functionality of LoopNet marketplace and saw increasing activity as a result, especially on the leasing side of the system. We completed the long planned process of migrating customers to a more flexible pricing model. We completed the integration of the City Feed acquisition and expanded the network of online distribution partners that they had, providing even more distribution choices to property listers on LoopNet. We continue to build on our strategic relationship with Xceligent, and completed the acquisition of REApplications in LandAndFarm.com. All of these achievements we believe surge to expand the range of services we offer and increase our value to our customers while enhancing the overall utility of the LoopNet marketplace. We are going to continue to seek to aggressively make progress in a same manner in 2009 and beyond. We continue to make this progress despite market conditions that have been at the least challenging. I would like to spend some time now talking about the conditions in the commercial real estate market. As we have done previously, we are going to highlight some differences between the market for buying and selling buildings and the market for leasing spaces. They behave somewhat differently and it's important to understand how the market is impacting our system in each of the two areas. As we have been reporting for over 15 months now, starting in Q3 of 2007, transaction volume in the building per sales segment has been very low. The original catalyst for this would be on side of the credit crunch. This decrease in transaction volume continued throughout 2008 due to lack of credit and a valuation gap between buyer and seller expectations that developed in the broader economy weakened. During the fourth quarter, these factors continue to create extraordinarily low property sales activity. They are impacting both the demand side of the market as buyers are either unable to obtain financing or waiting for prices to continue to come down, and the supply side, as owners of buildings that do not need to sell are holding their properties off the market. Market research firm Real Capital Analytics reports that during the fourth quarter, deal volume for investment properties valued at $5 million and up was down dramatically compared to the fourth quarter of 2007. Industrial properties faired the best with the decline of 72% on a year-over-year basis. While apartments defined the other end of the spectrum with an 87% decline with retail and office in between. Clearly this is a very light market in terms of transaction volume. The Moody's Real Commercial Property price index our overall composite prices just prices as of December were down 11.5% from the peak of the market at the end of Q3 2007. We believe our business is more strongly correlated to transaction volume rather than to asset values. Of course, expectations around changes in asset value affect deal volume. And so we believe that as prices fall further by side interest will eventually grow and we will see searching and marketing pick-up translating to an increase in our business in the for sale side. The fact that our usage activity is continuing to grow despite the dramatic decline in transaction volume, as a result we believe of the continued shift of marketing and searching from the offline world to the online world. Market trends on the leasing side of the industry, however, have been helping to drive solid growth and lease listings on our marketplace. Whereas on the sales side poor market conditions can simply lead an owner not to put their property on the market. On the leasing side of the business a landlord sitting on Beacon space is highly motivated to have a broker market it. While more cost sensitive due to the environment leasing brokers still work hard to fill those vacancies. However, they will fix this so using efficient cost effective solutions and the LoopNet marketplace is outstanding in those dimensions. Without directly measurable traffic, the listing broker can very clearly see the ROI benefits of marketing on LoopNet versus other channels. The traffic to LoopNet.com is also multiple larger than the closest online competitor and that gap has been widening according to third party traffic measurement reports from comScore. As vacancy rates have continued to increase across asset types on a national basis, we are seeing strong listings growth in the spaces per lease on our market place. Brokerage from CB Richard Ellis reported recently that the nation-wide vacancy rate for office spaces climbed to approximately 14.7% at the end of Q4, an increase of nearly 200 basis points in the last year. Industrial properties increased by nearly the same amount with vacancy rates ending the year at 12.1% nationally again according to CBRE. Overall, we believe that these conditions are likely to continue for some time due to the economic recession and resulting growth in unemployment. We believe the largest supplier of the available space and relatively weak tenant demand will characterize the market conditions on the leasing side, and will highlight the value of our marketing platform to brokers working on marketing the increasing number of spaces available for lease. Those market conditions impacted our results in several important ways. In terms of some of our key operating metrics, our commercial real estate listings active at the end of the quarter grew to over 651,000 which is a 16% increase over the same time last year. The number of spaces being marketed for lease grew strongly with the Q4 total being 25% higher than 2007, while as we said the investment sale market continues to be quite slow with year-over-year growth of 7% in the for sale listings. Members using our service to look at properties on LoopNet generated over 37 million profile views during the quarter. A 5.9% increase over the same time last year. Continuing the aggregation of the supply and demand activity remains the foundation of our business. And we believe we are making solid progress. We ended Q4 with over 3.2 million registered members on the LoopNet marketplace. And comScore reported that we saw an average of about 850,000 unique visitors per month to LoopNet.com during Q4. This does not include traffic to our other sites such as CityFeed.com, BizBuySell.com and LandAndFarm.com nor does it include traffic to our many newspaper distribution partner websites such as the Wall Street Journal, the New York Times, the American City’s Business Journals and over 100 others. On the monetization side of things, Premium Membership revenues accounted for 75% of total company’s revenue for the quarter. Of that 75%, 58% came from paid listers or the marketing side. And 42% came from paid searchers. We had a decrease in total subscribers during the fourth quarter as we expected. Gross sales during the fourth quarter were seasonally weak, perhaps a bit more than normal, and the cancellation rate was above the high end of the range we have seen earlier in the year at approximately 7%. The patterns of where these cancellations come from have been consistent all year. But as I said earlier the seasonality we always experienced over the end of your holiday season was somewhat elevated in the impact this year. We believe the increase in cancellations that we have seen since September of 2007 when the credit crunch hit is very clearly driven primarily by market conditions. Users on the for sale side of our system, especially, those transactional users who have used our paid subscription services typically for the duration of just a single deal are simply not as active in the market right now. The two segments of our subscriber base that have been most heavily impacted in terms of the largest number of cancellations are both transactional and use, and account for a strong majority of all cancellations. The first segment has been searchers looking for buildings to buy, who have been sitting on the sidelines for some time now. We expect this segment to begin to recover as prices per buildings they are interested in fall further. Therefore, full recovery will require some return to normalcy in the debt markets as well. The next largest segment has been the low-volume or transactional listers of for sale properties. Those who had less than four properties listed, many with only a single for sale listing. This population of subscribers decreased throughout 2008. For the single listers, we believe they have not quit listing their properties on LoopNet, they simply have no listings right now. We expect this population to recover as for sale listings volume eventually begins to grow over the current depressed levels. We believe that the most likely catalyst to drive market prices lower, and eventually see transaction volume increase will be properties needing to be refinanced in this market as well as motivated sellers who are seeing cash flow deteriorate and asset prices fall, as well as potentially facing a refinancing requirement. As I mentioned earlier, the listers on the for lease side of the system are in bright spot with good growth driven by an increasing supply of listings and the strength of our marketing platform versus the competition. As we look forward in the immediate near-term, we expect that the poor macroeconomic environment is going to continue. On a relative sequential basis, we are seeing Q1 activity above the levels of Q4 as we would normally expect. We still have abnormally low volume of the for sale transactional users, both listers and searchers, who are simply not active in the market right now. Gross sales for premium membership are running slightly below the levels we saw during Q3 of last year, and they are significantly higher than during Q4. We are expecting the cancellation rates for the first quarter to be at the upper end or slightly above the 4.5% to 6.5% monthly rate we saw during the first three quarters of 2008, as we move past the seasonality we typically see during Q4. The remaining 25% of company revenues is generated from a number of other services, which are also being effected by industry conditions in varying ways. BizBuySell has seen its growth impacted largely for the same reasons that were impacting the for sales side in the real estate area. Buyers are unable to obtain financing for purchases and are concerned about pricing. And business owners are less motivated for some specific reason, foresee this as a poor time to sell. Our recent sales service has still been growing, but we believe that is due in part to the fact that the newer product line picking up share. Demand for that product is tied to activity levels in the for sale segment. Our advertising products used by service providers to the industry to market various product and services also under performed during the fourth quarter with display ads performing particularly poorly. That’s a complicated service [advancements] I know. These market conditions are truly unprecedented in our history. We believe we are doing the right things to manage our business through this period. As a result of our expectations of ongoing market conditions that are challenging. We have also made some changes to this cost structure in the business. We have reduced our year-end expense run-rate by eliminating some positions, reassigning others and reducing certain discretionary spending. Our long-term goals and view of the many opportunities in our business have not fundamentally changed. As so, we believe that is important to continue to invest in the business and to continue to build for the future. Due to these factors, we are adjusting our margin expectations for the near-term and are managing the business to an adjusted EBITDA target margin in the high 30s to low 40s on a percentage basis at the current time. We also believe strongly that in challenging condition such as these, there are opportunities to be found and exploited. With our strong balance sheet, excellent profitability, strong positive cash flow and leading position in the market, we think that we are not only in a position to continue to execute through this downturn, but also to invest in our business and take advantage of the conditions to our shareholders long term benefit. We ended the year with $65 million in cash and expect to continue to generate strong positive cash flow from operations throughout this year. While we have tightened our belts we are still currently making organic investments as well as evaluating a number of additional opportunities organic and external. Let me highlight a couple of areas. First, we have continued to make investments to drive organic growth. Along with same strategic focus we have talked about previously. Driving more marketplace scale and leveraging the marketplace to create additional information services for our customers. We are continuing to invest in these areas, as we think the long-term value to our customers and ROI to our shareholders is very clear. Our recent sale service is a great example of this and we are continuing to expand that product line as well as work to create others. One example would be our initiatives to provide a service to listing brokers, helping them with their property marketing information onto LoopNet by sending us their offline marketing materials. We were very pleased with the additional results from testing we did throughout last year and are going to continue to invest in this initiative during 2009. In addition, we are continuing to look at what we think are some interesting acquisition opportunities. Companies that are not as well capitalized as we are, we may find themselves struggling in this environment and teaming up with LoopNet maybe an attractive outcome for both our shareholders and theirs. We will continue to maintain our focus and discipline and looking for these opportunities, but are optimistic we will find some interesting area to broaden our value to our customers and expand our business. We have also continued working with our partner Xceligent, as they entered new markets with their research-based information services offerings. They continue to enter into and win customers in new markets such as Little Rock and Tulsa at a rapid rate. The next phase in our partnership, the automated ability for a broker with a listing and their research database to publish it on the LoopNet network for public marketing is expected to go live for testing in selected markets in the first half of this year. We also expect them to continue entering new markets throughout 2009 as their combination of fully researched essential market information at a much lower price than their primary competition is being very well received in this market environment. In conclusion, while we can't predict, how long this economic downturn will last, our focus is to continue to execute well in the short-term. These are the opportunities that we see being created in this environment and position ourselves to capitalize on the long-term recovery when it occurs. The short-term market head wins have not changed our long-term view of the large scale opportunities in our business and we are committed to capturing that opportunity. And now Brent Stumme, our Chief Financial Officer will take us through the quarters financial results, before I close with a few remarks before we open the call up for questions.

[Brent Stumme:]

Thank you, Rich. LoopNet's revenue for the fourth quarter of 2008 was $21.1 million an increase of 8% from $19.6 million in the fourth quarter of 2007. The increase was due to higher average monthly prices for premium membership and continued growth of our non-premium membership products. On a year-over-year basis, we experienced a 17% increase in the average monthly price of premium membership resulting at an average monthly price of $65.64. This increase was primarily the result of the shift to volume based pricing structure for listers which the company began to implement in Q3 of 2007 and completed in Q4 of 2008. LoopNet's adjusted EBITDA for the quarter was $9.5 million or 45% of revenues compared to $9.4 million in the fourth quarter of 2007. The company has reported adjusted EBITDA which we define as EBITDA excluding stock-based compensation and litigation related cost, because management use it to monitor and assess the company’s performance and believes it is helpful to investors to understand the company’s business. GAAP net income for the fourth quarter of 2008 was $4.1 million or $0.12 per dilute share compared to $5.7 million or $0.14 per dilute share in the fourth quarter of 2007. Non-GAAP net income which we define as net income before stock-based compensation and litigation related cost, for the fourth quarter of 2008 was $5.3 million or $0.15 per dilute share compared to $6.4 million or $0.16 per dilute share in the fourth quarter of 2007. The effective tax rate for the fourth quarter of 2008 was 40.9% compared to 38.1% in the fourth quarter of 2007. As of December 31, 2008 the company had $64.6 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 which include both basic and premium members grew to 3,251,260 during the fourth quarter of 2008, a 27% increase over the fourth quarter of 2007. The number of premium members as of the end of the fourth quarter of 2008 was 77,283 a 13% decline from the fourth quarter of 2007. The number of profile views of listings on the LoopNet marketplace during the current quarter were $37 million, a 6% increase over the fourth quarter of 2007. Average monthly unique visitors on the LoopNet marketplace were approximately 846,000, a 6% decline over the fourth quarter of 2007. As of December 31, 2008, the LoopNet online marketplace contained approximately 652,000 listing, a 16% increase compared to December 31, 2007. BizBuySell contained approximately 49,000 listings of operating businesses for sale, a 1% decline from December 31, 2007. That brings me to our business outlook. We are providing the first quarter guidance, but due to the economic uncertainty in today's market, we will not be providing guidance for the full-year. The company expects revenue for the quarter ending March 31, 2009 to be in a range of $19.7 million to $20 million, adjusted EBITDA to be in the range of $7.5 million to $7.8 million, and non-GAAP net income to be in the range of $0.11 to $0.12 per diluted share, assuming an effective tax rate of approximately 41% to 42%. The company expects stock-based compensation to be approximately $0.03 per share net of a tax benefit in the quarter ending March 31, 2009. The adjusted EBITDA in non-GAAP net income guidance for the quarter ending March 31, 2009 exclude stock-based compensation and litigation-related costs. I am now going to turn the call back to Rich for few closing remarks before we open up the call for questions.

[Rich Boyle:]

Let me conclude our formal presentation today with just a few thoughts. At the beginning of 2008, we said that we were entering an uncertain year and uncertainly turn out to be one. If you look at the full-year, despite the deteriorating market conditions, transaction volume is down over 70% and asset value is down 11.5% on the for sales side of the business. Our revenue grew 22%, and we delivered EBITDA margins of 45%. We also grew the size of our marketplace organically as well as through acquisitions. All in all, we believe it was a very good performance in such a tough environment. 2009 will be another challenging year, no doubt about that. For the long-term prospects for our business model and our company are strong and we intend to capitalize on them. So with that, I would like to thank all of our employees for their focus and dedication. Thank you all for listening, and let's open up the call for some questions.

[Operator:]

Thank you, sir. (Operator Instructions). Our first question comes from Brett Huff from Stephens, Inc.

[Brett Huff:]

Good afternoon, guys.

[Rich Boyle:]

Hi, Brett.

[Brett Huff:]

A couple of quick questions here and I think some of it were always in your opening commentary, but I didn’t maybe get it down quite fast enough. When we look at the number of profile views that fell off more sharply than I expected, can you just give us a little more color on that, just sort of more of your thoughts is that searchers not doing as much or kind of what is the driver of that?

[Rich Boyle:]

Yes, I mean it's definitely the amount of people coming to look at listings on the system and I think it falls into the general heading of the seasonality that we normally see in Q4 every year. So, on a normal basis Q4 is a relatively light quarter for us, it was worse on for sequential and relative basis than in past year as this year. So, if you look at for example the transition from Q3 to Q4 prior year's this year was little bit steeper. And what we really feel like it was driven by the macro environment and in particular if you recall, it seems like so long go now but the wave of bad news has began hitting the market around late September. We think it had a material impact on people. So, the activity intends to lighten up around Thanksgiving normally was lighting up earlier in the quarter than normal for us this year.

[Brett Huff:]

Okay. And then thoughts on as we lap the pricing changes, the volume based pricing changes, if I recall that lapped about in the middle of Q4, is that right?

[Brent Stumme:]

Yes, this is actually Brent, there was a little bit of pricing that was going on in November- December as well. We are pretty much done putting everybody in the new pricing plans, but there was a little bit that went on in fourth quarter as well probably not quite as much as the third quarter but there was some in the fourth quarter.

[Brett Huff:]

Okay. And so that end given the environment, what is your thoughts for changing in pricing just, I know you are obviously thinking about how to make the pricing a little bit more specific for value. What are your thoughts on that for at least '09 maybe?

[Brent Stumme:]

Yes, I think its consistent with what we talked about last quarter which is that we do think given the environment overall any major changes the pricing level are probably not going to be happening at this time.

[Brett Huff:]

And then just one more little sort of twist on pricing and trying to move that into an idea of organic growth. Some of your growth is coming from the pricing increases, is the increase in usage on the part of the marketers, sort of how close is that to the decline in usage that we are seeing in the units, the unit number of premium subscribers on the searcher side?

[Brent Stumme:]

I am not sure I got it.

[Brett Huff:]

Well, I am trying to get to, it seems like the marketing use is going up as people who want to use your system as a high ROI marketing tool.

[Brent Stumme:]

Yes.

[Brett Huff:]

On that listing side, but on the searching side you have usage going down. And so, how does those two relate, I guess is my question is one larger than the other by a factor or how does that work?

[Brent Stumme:]

Well I think you even need to cut one step further which is on the marketing side. The behaviors we are seeing on the sale side of the system and the leasing system are quite different right now, meaning there is a segment of listers on a for sales side, particularly what we call transactional users. People that come one the system to market one listing at a time, they get occasionally,

[Brett Huff:]

Right.

[Brent Stumme:]

They are just simply not getting listings right now, because they are not building they are not being marketed to be sold at the moment. So, there are declines in that group as well as declines in the searchers that are primary source of declines right now. And those are being partially offset obviously, by growth in other area is there was a net decline of subscribers in Q4.

[Brett Huff:]

I think there is a last question, based on overall usage and mix and how much people use and therefore how much revenue you get per paid user. Axe the pricing that we have seem in the past, do you expect that to be fairly flat or do you think that there is some organic overall increase in usage among those who are using?

[Brent Stumme:]

I think at the moment I would describe it as relatively flat.

[Brett Huff:]

Okay. [That’s what needed]. Thank you for your time.

[Brent Stumme:]

Sure, Thanks Brett.

[Operator:]

(Operator Instructions).Our next question comes from Mitchell Bartlett from Craig-Hallum.

[Mitchell Bartlett:]

Hi, you talked about 58% listers, 42% searchers, but could you characterize that even if you don't want to put a number to it on the spread on the for sale side of that equation?

[Rich Boyle:]

The searcher side the revenue from paid searches skews pretty heavily towards the for sale side of the system, we know relatively few paid searchers on the for lease side of the systems. And within the marketing side the 58% that is marketing, it may be is little bit weighted to the for sale side but there is a reasonable balance between those.

[Mitchell Bartlett:]

So, it won't be wholly different than what its showing here, if you were to split for lease and for sale.

[Brent Stumme:]

Yes, I think that's correct.

[Mitchell Bartlett:]

And then you talked about taking your bill a little bit what is headcount doing overall?

[Rich Boyle:]

So, we ended the year at little over 300 people.

[Mitchell Bartlett:]

Okay. What was it last quarter?

[Rich Boyle:]

It was pretty much flat, at the end of the third quarter it was like 307, we ended the year at 305, so it’s down a couple.

[Mitchell Bartlett:]

Okay.

[Brent Stumme:]

And what we did right after the first of the year was a small and realignment where we do eliminate a few positions. We did reassign some people from where they have been in prior positions to where we felt like we needed the headcount now. In terms of some of the investments we are doing.

[Mitchell Bartlett:]

Perfect, thank you.

[Operator:]

I am showing no further questions at this time. This concludes our Q&A session for today's conference. And ladies and gentlemen, thank you for participating in today's conference call. This concludes our program for today. You may all disconnect and have a wonderful day.