Infospace’s revenue and EBITDA well ahead of estimates, but stock still carries a far higher multiple than the peer group. Imran Khan of JP Morgan:
INSP announced 1Q revenue of $42.2M and recurring EBITDA of $7.1M, ahead of our $36.9M revenue and $2.9M EBITDA estimates.
Following are our key points:
* Distribution revenue continues to dominate top-line growth. Total revenue grew 18% Y/Y to $42.2M, with distribution revenue growth outpacing O&O growth. At the end of the quarter, distribution revenue accounted for 69% of revenue, up from 64% in 4Q, supported by the signing of 5 new partners and the extension of the Insight Communications agreement. While we are pleased with the acceleration in revenue growth, we are concerned with the sustainability of distribution growth and are thus modelling F’08 total revenue growth of 4% Y/Y.
* Profitability growth benefited from restructuring efforts initiated in late F’07. Total operating expenses excluding restructuring charges and SBC fell to 86% of revenue from 192% in Q4 as the company began to realise significant operating leverage. Going forward, we think that leverage gains will continue, but not to the extent of Q1 as the company has plans to invest in marketing and product development. Thus, we are modelling F’08 EBITDA of $18.7M vs. our prior estimate of $16.3M.
* Management focuses on traffic acquisition. Management discussed its strategy to grow traffic in the next nine months through strategic PR activities and targeted online spending to build brand awareness, increasing its presence in client side applications such as tool bars and widgets, and leveraging page rank with SEO and SEM campaigns. While we think these efforts could lead to O&O gains in the long term, we think that it will take time to see the benefits. In 1Q’08, comScore data shows average unique visitors in the InfoSpace Network falling 46% Y/Y and 22% Q/Q.
* INSP trades at 28x our F’08E EBITDA vs. the peer group ave. of 17x. Given our concerns with growth in its online search business, we reiterate our Neutral rating.
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