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Atrinsic,
Inc.
Third
Quarter 2009 Earnings Conference Call
November
11, 2009
Operator:
Ladies and gentlemen, welcome to the Atrinsic, Inc.
Third Quarter 2009 Earnings conference call on the 11th of November,
2009. Throughout today’s presentation, all participants will be in a
listen-only mode. After the presentation, there will be an
opportunity to ask questions. If any participants have difficulty
hearing the presentation, please press the star followed by the zero on your
telephone for operator assistance.
I will
now hand the conference over to Sam Recenello. Please go
ahead.
Sam
Recenello: Good
morning and welcome to the Atrinsic conference call to discuss the company’s
third quarter 2009 financial results. All participants have been
placed on a listen-only mode and the floor will be open for questions and
comments following the presentation.
I would like to point out the during
the course of the conference call, there may be statements made relating to
future results of the company that are forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. Actual results,
performance, or achievements could differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including those
set forth in the company’s filings with the Securities and Exchange
Commission.
It should also be noted that the
webcast of today’s conference call may be found on the Internet by visiting the
Atrinsic corporate website at www.atrinsic.com and
then selecting Investor Relations at the top of the webpage, and then clicking
on Events and Presentations. Also on that website, you will find a
link to the news release we issued to announce the company’s third quarter 2009
financial results and webcast. An archived version of the webcast
will shortly be accessible from our Investor Relations site and will be
available for at least the next 12 months pursuant to SEC
guidelines.
Joining me on the call today is
Jeffrey Schwartz, now Interim Chief Executive Officer of Atrinsic, and Andrew
Zaref, the company’s Chief Financial Officer.
Now, I would like to turn the call
over to Mr. Zaref. Mr. Schwartz, I’m sorry.
Jeffrey
Schwartz: Thank
you, Sam, and welcome to our third quarter conference call. My name
is Jeffrey Schwartz and I’m the Interim CEO of Atrinsic.
As you know, there have been a number
of changes at the company over the past six months. Burton Katz, our
former CEO, has exited the business. I’ve been asked to step in as
Interim CEO to move the business forward during this period of
transition. I’ve been on the Atrinsic Board of Directors since
November of 2008 serving in the role as Chairman of the Audit
Committee. I’ve taken on this new assignment with enthusiasm,
respectful of the many assets of the company, including an employee base that is
passionate about our work and committed to the success of the
company. However, I am also well aware that our business faces some
very real challenges. These are represented in the financial results
we are reporting to you today.
Briefly, by way of background, I come
to Atrinsic with a decade of performance marketing experience. I was
educated at the University of Southern California where I received my
Bachelor’s, Master’s, and Doctorate, and went on to begin my career at the Walt
Disney Company. I was CEO of Autoweb and Autobytel, both
NASDAQ-listed companies, and I’ve been active in a number of performance
marketing and web publishing businesses since that time. I currently
sit on the Board of US Auto Parts, a leading automotive e-commerce
company.
The financial and operating results we
are reporting today are not acceptable and we are committed to getting the
company back on track. In terms of orientation, I’m a firm believer
that the starting point is focus, that attention is forceful in proportion to
the narrowness of its focus. For Atrinsic, this means addition by
subtraction; getting the business down to the core set of things that we can do
better than any other company and using that as the firm basis from which to
expand. In the six weeks that I’ve been here, this process has begun
in earnest and we are beginning to see the early signs of progress.
As a company, we are focused on a
limited number of tasks, all of which represent rebuilding and nurturing core
assets of the company. Let me give you the three areas which are the
subject of management focus. We intend to have operational excellence
in these areas and will ask you to measure our progress, in part, by how we
achieve success here.
First, Atrinsic will regain market
leadership in the area of lead generation. Dating back, the assets
inside of Atrinsic were responsible for industry leadership in terms of lead
volumes and lead values. While this is no longer the case today, many
of the underlying assets and competencies remain inside of the
business. We need management focus and innovation to regain market
leadership. We have to rekindle the creativity and entrepreneurialism
inside the organization that is emblematic of a company that delivers the
highest quality performance marketing products to its advertisers. We
are focused on regaining this position of prominence and feel confident that we
can do this in the coming quarters. Last week, the ad:tech conference
was in New York. We had the opportunity to meet with many of our
partners to discuss our plans to ramp our lead-gen and product marketing
capabilities. Our plans have been greeted with enthusiasm and I
believe that we can leverage many of these relationships in the coming
quarters. There are early signs of recovery in Internet marketing and
we are having many productive discussions with advertisers about working with
us.
Second, as you know, our mobile and
LEC tel products serve as an important source of monetization of our own
and third-party media. We should be the largest advertiser inside of
our own network and we should build the market products that delight
consumers. We are committed to developing industry-leading products,
not just in the mobile and LEC tel areas, but in the larger categories
of lead generation and performance marketing. We believe that we own,
can create, and can cost efficiently buy media that delivers significant value
to advertisers. Performance marketing is a growing advertising
category on the Internet and we will regain leadership in this
area.
Lastly, we are focused on and
committed to enhancing our own media properties. Thankfully, we have
some very good assets here that drive considerable traffic, assets that today
serve as a primary driver of our lead-gen efforts. These assets will
be fully exploited and we will work to build new media sources that further
enhance our own media properties. This is critical as the unit
economics of our business, the leverage, is significantly enhanced when those
leads are coming off our own media properties. We have several
initiatives in the works already, including a retooled ShopIt site that we
believe will be an important addition to our own media portfolio.
I firmly believe that focus on these
three areas will create a renaissance at Atrinsic. They will allow us
to reclaim ownership of our core business which should provide a solid footing
for future growth and profitability. A highly focused business is
about opportunity selection, not creation. There are significant
market opportunities inside of our core business and immediately adjacent to it
that could form the basis of the company with significant enterprise
value.
Let me briefly update you on our
current thinking and progress on the agency, mobile, and Kazaa. The
agency side of our business seems to be stabled up, and we are fortunate to have
strong leadership in this area. We are competing aggressively in the
market for new accounts and are cautiously optimistic that the agency will be a
source of revenue growth and profitability in the coming year. We are
also making some internal resource allocation decisions and investments in the
area so as to differentiate our product offering in the
marketplace.
Mobile has been an important theme
inside of our business and that will continue to be the case. We view
mobile as an important source of distribution for our products, promotions, and
our content, and we’ll look to expand it throughout 2010. Mobile will
not have a business strategy that is disconnected from the overall strategy of
the company. It will support and enhance our larger companywide
initiatives.
Kazaa marketing and product
initiatives reached an inflexion point during the quarter. As Andrew
will discuss, we invested substantial capital into the venture during the
quarter and we had a significant allocation of internal resources on the
products. Unfortunately, we did not see the results in terms of
subscribers that we anticipated, and we are working with our partners to
retrench a bit until a new site and other product enhancements are launched in
the first quarter. We will remain a marketing partner on the product
and we remain enthusiastic about the music category broadly, but we have scaled
back our investments until such time as the LTV’s get in line with
the fixed and variable marketing costs of the business.
As we move into Q4 and think about the
business in 2010, these are things we are thinking about. I realize
that we have had a very tough year, but the journey of a thousand miles begins
with the first step. We have taken that step and I am confident in
our ability to create a business characterized by revenue growth and
profitability, in short order. We are focused on the revenue side of
the business, certainly, but also our being appropriately deliberative about our
internal expense structure.
I thank you for your
support. I will now turn the call over to Andrew Zaref, our CFO, to
discuss the financial results. Andrew?
Andrew
Zaref: Thank
you, Jeff, and good morning. I’m going to take a few minutes to
review with you certain financial highlights of the quarter.
Revenues for the third quarter of 2009
and 2008 totaled 14.9 and 30.8 million, a decrease of 15.9 million or
52%. More specifically, the company’s revenues derived from
subscription-based activities declined by 10.5 million, or 68%, as a result of
the decline from an average 800,000 subscribers last year to an average 280,000
subscribers in the third quarter of 2009. The decline is partially
attributable to the fact that the company had acquired the ringtone.com
subscriber base on June 30th, 2008, the very beginning of the third quarter of
2008. However, we also had fewer subscribers in virtually all
subscription-based mobile and landline products, with the exception of Kazaa,
for which marketing formally began during the second quarter of
2009.
Revenues derived from
transactional-based activities decreased from 15.5 million to 10 million, a
decrease of 5.5 million or 35%. Atrinsic Interactive, our agency
business, was negatively impacted by a reduction in discretionary advertising
expenditures by our clients.
Revenues from our lead-gen and content
properties also declined largely as a result of lower transaction volume and
rate reductions. As Jeff mentioned, we’ve taken definitive action to
refocus on our core lead generation business. These activities serve
as the forefront to generate enhanced distribution for our internal proprietary
products and the products of our third-party advertisers.
Operating expenses totaled 19.9
million for the third quarter of 2009 compared to 30.8 million for the third
quarter of 2008, a decrease of 10.8 million or 35%. The decline is
largely attributable to a $10.9 million reduction in third-party media costs
which, to a degree, correlates to the reduction in revenues.
Further during the third quarter of
2009, we expended approximately $2 million towards the development and launch of
Kazaa, our subscription-based music offering. We believe that other
than third-party media costs, sizeable efficiencies are being achieved through
specific actions taken to date. Those initiatives include improved
productivity and headcount reductions, facilities consolidation, and conversion
of several operating expenses to a variable basis from a fixed
basis. In addition, with the deferment of certain provisions of
Sarbanes-Oxley, coupled with significant progress achieved concerning our
pre-acquisition legal matters, we’ve significantly reduced the prospective run
rate of professional fees and other general and administrative type
expenses. Prospectively, we’re continuously monitoring the
marketplace and our operating performance and we will make investments where
necessary to accomplish our goals and objectives, although we’re committed to
returning to profitability and the generation of positive cash
flows.
Adjusted EBITDA for the quarter was a
negative 4.3 million as compared to a positive 1.3 million earned for the third
quarter of 2008. As Jeff mentioned, these results are unacceptable
and we’re taking the necessary actions to address the near-term business
climate, launch new products and reposition ourselves with business partners and
advertisers, realign our fixed operating costs to better align those costs with
our revenues, and make the right investments in the right people, process,
products, and systems to grow.
Now turning to the balance
sheet. The company ended the quarter with $17.6 million in cash and
adequate working capital. The primary use of our cash for investment
purposes during the quarter included approximately $450,000 to complete our
strategic investment in Shopit, and approximately $410,000 in capital
expenditures which are necessarily to complete our investment in the
technologies necessary to improve our products and services.
From an operating perspective, we are
using cash to support our ongoing operating activities. We
continuously monitor our capital structure and limit our cash outlay wherever
possible to conserve resources for selected investments and growth.
Let me turn the call back to Jeff, our
Interim Chief Executive Officer.
Jeffrey
Schwartz: Thank
you, Andrew. As I stated earlier, our strategy at this time is to
focus on a limited number of things in and around our core
business. We believe that we can regain market leadership in this
area and use this as the basis for future expansion. We look forward
to keeping you apprised of our progress and, as always, thank you for your
support during this time of transition.
We will now open the call up to
questions. Operator?
Operator:
Thank you very much. And if any participant would like to ask a
question, please press the star followed by the one on your
telephone. If you wish to cancel a request, please press the star
followed by the two. Your questions will be polled in the order they
are received, and there will be a short pause while you register.
And once again, ladies and gentlemen,
if you do wish to ask a question, please press the star followed by the one on
your telephone.
Thank you. The first
question is from Dave Bench from Trinad. Please go ahead with your
question.
David
Bench: Thanks,
guys. Jeff, if you could just go through a little bit in more detail
in terms of Shopit and, you know, what you see coming forward from that
product. You mentioned there, a little bit retooling
there.
And also, if you could discuss what
the cash position should look like at the end of the year, that would be really
helpful. Thank you.
Jeffrey
Schwartz: Okay,
Dave. This is Jeffrey. I’ll jump in on the Shopit
question. So, you know, we acquired, we completed the acquisition in
the third quarter. Shopit is a social commerce application and,
candidly, we bought a business that was incomplete. And so, you know,
it was an asset purchase. We’re busy today working on a new product,
we think that there’s a substantial market opportunity, we’ve done a good amount
of competitive analysis. And so we’re in the process now of
developing our product plans and are going to begin to do some heavy lifting on
the actual application itself. Probably look towards the first part
of Q1 for a more formal announcement and product launch. We think
that we can create a business model there that is really unique, that’s not
necessarily only driven by our promotional lead-gen but is a product that’s
based on usage, and we’re really very excited about it. So, Dave,
nothing big to report on Shopit today other than to tell you that we’re focused
on it and believe that we can re-launch the product in the first quarter of next
year.
Andrew
Zaref: Dave,
if it’s okay, I’ll handle, sort of, the cash position. So, we ended
the quarter with 17.6 million. To sort of address it in the context
of the statement of cash flows, you should expect to see nothing of a financing
type nature in the fourth quarter.
Equally, from an investment
perspective, as Jeff said, there certainly is very much a refocus on organic
core operating type activities, so I don’t think you’ll see us using any cash to
do any sort of M&A in the next two months, which would get us through the
rest of the year. I wouldn’t look for much there.
Addressing it from an operating
perspective, I’ll sort of divide that into two. As it relates to the
ongoing operations of the company, you will see us use cash to support the
ongoing operating activities of the company. We’re certainly working
on revenue growth and returning to a cash flow positive position but I can’t see
that happening in the fourth quarter. Jeff is six weeks in, and even
if we decide to reduce some expenses to get there, well, that’s not necessarily,
but we’re certainly committed to doing that, you can’t always do that as fast as
what you want. So you will see us use cash from an operating
perspective.
But there’s also a bunch of what’s
called unusual and infrequent type activities that are going on in the
company. Two or three that come to mind, if you look at our balance
sheet, you’ll see some sizeable income tax receivables. As soon as
the Internal Revenue Service completes the processing of some of our returns, we
are expecting some monies coming back out of the IRS which will add to our cash
position. We can redeploy that into the operations. In
addition, there’s a bunch of legal matters out there for the company, some in
which we are the plaintiff and some in which we are the defendant, and a lot of
those type things rely on timing of process. So we are expecting both
some cash inflows and cash outflows. To the extent those two don’t
match in the particular timeframe, you could see some deviation in the cash
balance.
David
Bench: That
should be towards the positive or towards the negative?
Andrew
Zaref: I’m
sorry, could you repeat that?
David
Bench: That
should be towards the positive? In other words, an increase in cash
over the next quarter on that side? Or a decrease?
Andrew
Zaref: That
is very much the case. It could go either way. Over, let’s
call it, the next 12 weeks, I think the inflows will equal the
outflows. But between now and 12/31, if the timing doesn’t work
right, you could see a swing of, you know, a sizeable number. But
there’s always the other side that’s coming in time.
Jeffrey
Schwartz: Dave,
the thing that, I think, I’m focused on is the trend, right? And so,
I think what we’re looking to see is, we’re looking to see a monthly trend that
is getting better, obviously. And I’m particularly focused on the
travel rate out of Q4 into the first quarter. And as we look at some
of the initiatives that we’ve been able to launch over the last six weeks, both
on the expense side and on the revenue side, I’m feeling pretty confident that
our travel rate as of December will be in a place that will give us a good run
and nice profitability for next year.
David
Bench: Great. Thanks
a lot.
Operator:
And as a reminder, if you would like to ask a question, please press the star
followed by the one on your telephone.
And the next question is from Marty
Elbaum from Horizon Networks. Please go ahead.
Marty
Elbaum: Yes. Good
morning, gentlemen. Jeff, I’m a shareholder for a while now and I’m
really, I got to tell you, I’m really disappointed, and I think the Board should
be accountable for what has happened to the company. And I think they
waited a little too long and they let the Katz family destroy this
company. And, you know, I think we’re going in a lot of different
directions now and I really don’t think we’re zeroing in on one specific
direction.
I can’t understand the
investment in Kazaa because I’ve tried to speak to Katz previously, he ignored
my calls, and I understand that he’s no longer there. But where do
you see the revenue? This is a company that has had a lot of
lawsuits, a lot of problems, they’ve lost their following. And how do
you expect to make money with something like this? Can you explain
this to me?
Jeffrey
Schwartz: Thanks
for the question, Marty. Look, we’re, you know, the company’s had a
difficult year, no doubt about it. We’re focused on getting back to
the core. It’s, in my experience, the way we’re going to create a
renaissance here, Marty, is to focus on the things that we used to do
well. These assets used to form the basis of a very profitable and
growing lead generation business, particularly the traffic
assets. So, those assets remain here and they can be deployed in a
very profitable way. We’re focused on rebuilding those assets, both
from our content sites as well as our promotional lead-gen sites.
Marty, what you have to realize is
that it all starts with bringing people in through the door. And when
we lose the flow of consumers through our own content sites and our own
promotional media sites, we ultimately lose the consumers into our subscription
business as well. So by refocusing on the core, which is bringing
consumers through our media properties, I think we can create a renaissance in
our subscription business as well. That being said, we still need to
deploy some new products, Marty. We have not successfully deployed
any new products in some time and we’re focused on doing so.
So, I think, the way we make money
here, Marty, is getting back to the core, getting back to the basics, getting
highly focused on what we used to do well, and using that as the point to build
out from.
Operator:
Thank you. Has that answered your question?
Thank you. And as a
reminder, if you would like to ask a question, please press the star followed by
the one on your telephone.
Thank you. I would now like
to hand the call back to Sam Recenello. Please go ahead.
Sam
Recenello: Good
morning. This concludes our earnings call for Atrinsic’s 2009 third
quarter results. Thank you all and have a very nice day.
Operator: Ladies
and gentlemen, thank you for your participation. You may now
disconnect.