Wednesday, January 04, 2006

InfoSpace (INSP)

InfoSpace (INSP) suffers from bipolar tendencies. On the one hand, the Search and Directory division is probably the best known segment of the business. This segment offers its services through its branded Web sites,,,,, and, as well as through the Web properties of distribution partners. In many ways, old names that seem destined to oblivion in a Google world. However, consumer use of on-line directories such as may still prove to be a growth element in this division.

The other segment enjoys higher growth. InfoSpace is also a leading content aggregator and platform provider in the consumer wireless data market. InfoSpace uses a business model that sells directly to large wireless carriers such as Verizon, Congular, T-Mobile, and Virgin USA both in the States and in Europe. Some analysts envision the growth of mobile content to run at 30-40%! Content provided includes ringtones, games, and graphics. There is increasing competition especially in ringtones where deals are being struck by carriers directly with record labels. Consequently, margins have started to compress. In the games area, INSP continues to earn much higher contribution margins, nearing 45-50%.

Revenues in Search and Directory could well fall this year especially with the loss of the AOL directory business. Most analysts have these expectations baked in their projections. As to the wireless business, most analysts seem to be very conservative in their operating margin assumptions, at least in my opinion. The wireless area will represent over half of revenues in 2006.

Further disturbing analysts has been management’s indication that 2006 will be an investment year…expanding mobile content, increased spending on marketing, investing in local and mobile search, etc. In short, doing what is needed to grow the biz.

Financials have been stellar. The enterprise value, EV is merely $400 million versus the market cap of about $750 million due to a large stash of cash and equivalents of some $350 million. EV/EBITDA is only 5.1 times TTM EBITDA. EV/EBIT is also quite low at 7.23 times. The stock is down about 45% in the last 52 weeks. A number of analysts have downgraded the stock, most recently Needham.

ROIC has been falling from last year’s 10% to a current 7%. Sales growth has creaked to a halt versus a 5 year growth rate of 28%.

But listen up…this company YTD has generated $123 million in FCF, that’s free cash flow. Compare that with an Enterprise Value of $400 million. No debt and roughly $12 per share in cash. In addition, there is a tax-loss carry-forward worth probably about $1.50-$2.50 per share, in my estimation.

The company has not bought back stock historically. However, as of the June quarter, the company has spent over $50 million in share buybacks.

No positive momentum in the near term, that’s for sure. There is the possibility of some bad news if it loses additional search business. Is there a long-term sustainable competitive advantage? Not at all clear what is sustainable in this industry, at least not to me.

But the positive aspects include a debt-free capital structure, almost $12.00 per share in cash, more coming in with its history of free cash flow, and I think some potential as a leveraged buyout candidate if the market continues to ignore it.


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