ANSWERS CORP ANSW
January 13, 2011 - 11:19am EST by
zach721
2011 2012
Price: 8.17 EPS $0.00 $0.00
Shares Out. (in M): 11 P/E 0.0x 0.0x
Market Cap (in $M): 92 P/FCF 0.0x 0.0x
Net Debt (in $M): 25 EBIT 0 0
TEV ($): 67 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

Q&A sites are getting high valuations due to enormous scalability and profitability driven by low no cost user generated content. In early 2010, Quora in start up mode got a valuation of $90 million (pre site launch), and at the end of January, Demand Media (owners of eHow and other businesses) will have a $1.2 billion market cap post-IPO.  However, Answers.com (ANSW), the industry leader (in terms of Q&A database size) and only pure play public company, has been totally ignored for a couple of understandable but we think temporary reasons. In fact, ANSW stock price is up a mere 10% since 12/31/08, while the company remains one of the 20 most visited sites in the US with 13 million daily unique visitors and has seen its traffic nearly double over the last two years. A number of key changes should be imminent which we believe should lead to a far higher valuation.

 

Answers.com is the 138th most visited site on the web worldwide, and it scored inside the Top 20 in the US in October 2010. Answers.com gets more monthly traffic than ESPN, Linkedin, Disney and Best Buy. This popularity was achieved through the creation of a question and answer database that has just under 6 million registered users with 11 million answers. Despite its size, the company is still growing key metrics at a reasonably good pace, as the number of questions at Wikianswers grew to 11 million in January 2011 from 2 million in September 2008.  Wikianswers makes up 77% of revenue and MRQ grew 31% yr/yr.  The company has made good progress growing their database in the more lucrative segments, such as financial services and automotive.  Every 1.5 seconds a question is asked in the automotive vertical, a highly monetizeable market. This is a very good recent article I suggest interested investors read:

(http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=142605).  

 

The key to realizing significant shareholder value comes down to the monetization of their traffic, as measured through RPMs (revenue per thousand impressions).  Operating margins have fallen from 28% to 9% over the last three quarters, so the trends suggest a potentially ugly scenario.  However, we believe the company has hit a significant inflection point, given the recent changes to their business model that should improve results this quarter and going forward. Over the last 11 quarters ANSW has averaged $6.10 in RPM, however traffic has increased significantly.  Below is a sensitivity of ANSW's revenue in their WikiAnswers segment (about 80% of revenue) to changes in RPM's and average daily page views.

 

 

 

Avg Daily Pageviews

 

 

8,000

9,000

10,000

11,000

12,000

13,000

 

RPM

$4.50

$13.1

$14.8

$16.4

$18.1

$19.7

$21.4

 

(Rev Per

$5.00

$14.6

$16.4

$18.3

$20.1

$21.9

$23.7

 

Thousands)

$5.50

$16.1

$18.1

$20.1

$22.1

$24.1

$26.1

 

 

$6.00

$17.5

$19.7

$21.9

$24.1

$26.3

$28.5

 

 

$6.50

$19.0

$21.4

$23.7

$26.1

$28.5

$30.8

 

 

$7.00

$20.4

$23.0

$25.6

$28.1

$30.7

$33.2

 

 

$7.50

$21.9

$24.6

$27.4

$30.1

$32.9

$35.6

 

 

We believe it is likely that ANSW will begin to generate much better RPM's than where the company is at as of 9/30/10 for the following reasons.

 

A)      Answers.com will tie into the Facebook platform and Twitter, and members will have an option to follow contributors, and make it easier to make recommendations to friends and ask friends.  

B)      Working with Vibrant Media on rich media hyperlinks that are running on 25% of pages and rising  (www.vibrant.com).  These hyperlinks are much more eye-catching and have higher click through rates.

C)      Active discussions with a company that offers interactive monetization toolbars, which will began  testing during Q4

D)      New Ad banner placement strategy coming in 1Q11 with relaunch of the site

E)      Targeted vertical category inventory "... business, shopping, automotive, legal...perform 2 to 5 times greater than general overall RPM's" "We are also reaching audience scale in a number of the most desirable and highest monetizing advertising verticals, and our plan is to exploit this potential in 2011." Nov 10 CC

F)      Direct Sales force to sell advertising: Previously tried this two years ago and stopped. "Over the last two years, from 3Q08 to 3Q10, our traffic has jumped 86%, and this volume changes everything." Nov 10 CC

G)     Relaunch of site with reputation ranking system (higher quality content, better user experience, higher ad click through rates)

 

Regarding these changes the CEO commented, "We are confident that Q4 2010 revenue will be materially better than Q3 2010 revenue, and we expect that our 2011 revenue will also exhibit healthy growth over 2010. In the beginning of 2011, we plan on adding two new direct ad salespeople to help exploit the potential of our large and growing audience and deliver significant new revenues and profits. Furthermore, in the first quarter of 2011, we plan to release a redesigned, streamlined Answers.com site that we believe will enhance both traffic and RPM."  This likely significant short term revenue improvement combined with ANSW's operating leverage should provide a reasonable catalyst.

 

We believe the market is looking backwards and is not appreciating what will continue to be positive catalysts for the company.  We believe few to none of the initiatives have been taken into account from the one analyst that covers the stock.  Currently the analyst is predicting slight improvement (management stated "material improvement") not only for 4Q, but also forecasts that revenue should be down 1% in 2011 over 2010. That would be difficult to believe given growth in key metrics and significant changes to the business model.

 

Simply put, we think Answers.com has a great business model whereby a universe of 6 million people answer questions to common issues which the company can sell advertising around forever without having to pay the writer to create the content, and avoiding distribution/material costs.

 

Below we show a sensitivity of ANSW's 2011 revenue and earnings to the variables of average daily pageviews and revenue per thousand pageviews.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Downside

Base

Upside

 

 

 

WikiAnswers

 

 

 

 

 

 

Average Daily Pageviews

10,000

11,500

13,000

 

 

 

 

Rev/Thousand Pageviews

$4.50

$6.00

$7.50

 

 

 

 

Revenue

$16,425

$25,185

$35,588

 

 

 

 

 

 

 

 

 

 

 

Reference Answers

 

 

 

 

 

 

 

Average Daily Pageviews

2,000

2,500

3,000

 

 

 

 

Rev/Thousand Pageviews

$4.50

$5.50

$6.50

 

 

 

 

Revenue

$3,285

$5,019

$7,118

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

$19,710

$30,204

$42,705

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenues

$5,519

$8,457

$10,676

 

 

 

 

Sales and Marketing

$2,500

$2,500

$2,500

 

 

 

 

General and Administrative

$5,000

$5,000

$5,000

 

 

 

 

Research and Development

$4,500

$4,500

$4,500

 

 

 

EBIT

$2,191

$9,747

$20,029

 

 

 

D&A

$1,200

$1,200

$1,200

 

 

 

EBITDA

$3,391

$10,947

$21,229

 

 

 

 

 

 

 

 

 

 

 

Diluted Shares

11.4

11.4

11.4

 

 

 

EBITDA/Share

$0.30

$0.96

$1.86

 

 

 

EV/EBITDA

20.5x

6.3x

3.3x

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

72%

72%

75%

 

 

 

EBIT Margin

11%

32%

47%

 

 

 

EBITDA Margin

17%

36%

50%

 

 

 

                       

 

Venture Capital firm Redpoint Ventures http://www.redpoint.com/ owns approximately 25% of ANSW with a cost basis of just over $5 and has two board seats (previous investments include Netflix, Myspace, Tivo).

 

Demand Media's S1 provides some useful metrics for comparison purposes, since their eHow business operates in a similar manor to answers.com (albeit with one key difference).  eHow.com is an online community dedicated to providing visitors the ability to research, share, and discuss solutions and tips for completing day-to-day tasks and projects.  The site generates RPMs of $12 vs. $4.50 for ANSW.   Given that eHow pays for their content (which results in higher quality than on answers.com), we do not think that ANSW will get to $12.   However, we do believe that they should be able to do significantly better than $4.50 given that each of their new initiatives is designed to do exactly that.  Currently 26% of revenue comes from display ads and 74% comes from Google Adsense.  RPM's on display ads are up 50% while Google Adsense revenue has fallen by 33% on yr/yr basis.  Google Adsense is based on Cost Per Click and ad Click Through Rates (CTR's are big driver in revenue).  ANSW is working with Google to analyze data to better address their click-through performance by taking Google's advice on ad placements. The younger demographic at Answers 15-30 years old is tech saavy with lower click through rates, and it is much more effective to sell display ads (on a RPM model than depend on ANSW's current model that works on revenue per click). We think advertisers would love to reach this demographic and makes a lot of sense to hire a direct sales force to sell this inventory.

 

Demand Media IPO is scheduled for January 25 led by Goldman and Morgan Stanley.  Below is the implied valuation based on the announced range of $14 - $16.

 

 

 

 

$14.00

$15.00

$16.00

Shares Outstanding

 

83.4

83.4

83.4

Options

 

 

2.9

4.0

5.0

Diluted Shares

 

86.3

87.4

88.3

 

 

 

 

 

 

Market Cap

 

$1,208

$1,311

$1,413

Net Debt

 

 

($83)

($87)

($92)

EV

 

 

$1,125

$1,223

$1,321

 

 

 

 

 

 

2009 Adj OIBDA

 

$36.8

$36.8

$36.8

9M 2010 OIBA Annualized

$55.9

$55.9

$55.9

 

 

 

 

 

 

EV/2009 OIBDA

 

30.6x

33.2x

35.9x

EV/2010 OIBDA

 

20.1x

21.9x

23.7x

 

What is the business worth?

We think the business could significantly grow the top and bottom line in 2011. It is difficult to predict how much, but at current prices if ANSW hits our base case it is trading at about 6x EV/EBITDA for what we think is a unique asset with what should be 30%+ margins.  We think the upside could be $18-20 and downside $5-6, based on the value of their huge traffic alone.

 

 

Catalyst

A number of interesting potential acquirers: Interactive which owns Ask.com (transforming to a Q&A site) plus Dictionary.com (which ANSW tried to buy a couple of years ago), Yahoo, and Demand Media

 

We believe that a number of companies would be interested in acquiring given scale and monetization potential especially relative to recent comps.

 

Very low sell side expectations (the only sell side analyst that covers has revenue falling 1% yr/yr for 2011)

 

Business model improvements (points A through G above)

 

IPO of Demand Media on January 25 with $1bn+ valuation 

    sort by   Expand   New

    Description

    Q&A sites are getting high valuations due to enormous scalability and profitability driven by low no cost user generated content. In early 2010, Quora in start up mode got a valuation of $90 million (pre site launch), and at the end of January, Demand Media (owners of eHow and other businesses) will have a $1.2 billion market cap post-IPO.  However, Answers.com (ANSW), the industry leader (in terms of Q&A database size) and only pure play public company, has been totally ignored for a couple of understandable but we think temporary reasons. In fact, ANSW stock price is up a mere 10% since 12/31/08, while the company remains one of the 20 most visited sites in the US with 13 million daily unique visitors and has seen its traffic nearly double over the last two years. A number of key changes should be imminent which we believe should lead to a far higher valuation.

     

    Answers.com is the 138th most visited site on the web worldwide, and it scored inside the Top 20 in the US in October 2010. Answers.com gets more monthly traffic than ESPN, Linkedin, Disney and Best Buy. This popularity was achieved through the creation of a question and answer database that has just under 6 million registered users with 11 million answers. Despite its size, the company is still growing key metrics at a reasonably good pace, as the number of questions at Wikianswers grew to 11 million in January 2011 from 2 million in September 2008.  Wikianswers makes up 77% of revenue and MRQ grew 31% yr/yr.  The company has made good progress growing their database in the more lucrative segments, such as financial services and automotive.  Every 1.5 seconds a question is asked in the automotive vertical, a highly monetizeable market. This is a very good recent article I suggest interested investors read:

    (http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=142605).  

     

    The key to realizing significant shareholder value comes down to the monetization of their traffic, as measured through RPMs (revenue per thousand impressions).  Operating margins have fallen from 28% to 9% over the last three quarters, so the trends suggest a potentially ugly scenario.  However, we believe the company has hit a significant inflection point, given the recent changes to their business model that should improve results this quarter and going forward. Over the last 11 quarters ANSW has averaged $6.10 in RPM, however traffic has increased significantly.  Below is a sensitivity of ANSW's revenue in their WikiAnswers segment (about 80% of revenue) to changes in RPM's and average daily page views.

     

     

     

    Avg Daily Pageviews

     

     

    8,000

    9,000

    10,000

    11,000

    12,000

    13,000

     

    RPM

    $4.50

    $13.1

    $14.8

    $16.4

    $18.1

    $19.7

    $21.4

     

    (Rev Per

    $5.00

    $14.6

    $16.4

    $18.3

    $20.1

    $21.9

    $23.7

     

    Thousands)

    $5.50

    $16.1

    $18.1

    $20.1

    $22.1

    $24.1

    $26.1

     

     

    $6.00

    $17.5

    $19.7

    $21.9

    $24.1

    $26.3

    $28.5

     

     

    $6.50

    $19.0

    $21.4

    $23.7

    $26.1

    $28.5

    $30.8

     

     

    $7.00

    $20.4

    $23.0

    $25.6

    $28.1

    $30.7

    $33.2

     

     

    $7.50

    $21.9

    $24.6

    $27.4

    $30.1

    $32.9

    $35.6

     

     

    We believe it is likely that ANSW will begin to generate much better RPM's than where the company is at as of 9/30/10 for the following reasons.

     

    A)      Answers.com will tie into the Facebook platform and Twitter, and members will have an option to follow contributors, and make it easier to make recommendations to friends and ask friends.  

    B)      Working with Vibrant Media on rich media hyperlinks that are running on 25% of pages and rising  (www.vibrant.com).  These hyperlinks are much more eye-catching and have higher click through rates.

    C)      Active discussions with a company that offers interactive monetization toolbars, which will began  testing during Q4

    D)      New Ad banner placement strategy coming in 1Q11 with relaunch of the site

    E)      Targeted vertical category inventory "... business, shopping, automotive, legal...perform 2 to 5 times greater than general overall RPM's" "We are also reaching audience scale in a number of the most desirable and highest monetizing advertising verticals, and our plan is to exploit this potential in 2011." Nov 10 CC

    F)      Direct Sales force to sell advertising: Previously tried this two years ago and stopped. "Over the last two years, from 3Q08 to 3Q10, our traffic has jumped 86%, and this volume changes everything." Nov 10 CC

    G)     Relaunch of site with reputation ranking system (higher quality content, better user experience, higher ad click through rates)

     

    Regarding these changes the CEO commented, "We are confident that Q4 2010 revenue will be materially better than Q3 2010 revenue, and we expect that our 2011 revenue will also exhibit healthy growth over 2010. In the beginning of 2011, we plan on adding two new direct ad salespeople to help exploit the potential of our large and growing audience and deliver significant new revenues and profits. Furthermore, in the first quarter of 2011, we plan to release a redesigned, streamlined Answers.com site that we believe will enhance both traffic and RPM."  This likely significant short term revenue improvement combined with ANSW's operating leverage should provide a reasonable catalyst.

     

    We believe the market is looking backwards and is not appreciating what will continue to be positive catalysts for the company.  We believe few to none of the initiatives have been taken into account from the one analyst that covers the stock.  Currently the analyst is predicting slight improvement (management stated "material improvement") not only for 4Q, but also forecasts that revenue should be down 1% in 2011 over 2010. That would be difficult to believe given growth in key metrics and significant changes to the business model.

     

    Simply put, we think Answers.com has a great business model whereby a universe of 6 million people answer questions to common issues which the company can sell advertising around forever without having to pay the writer to create the content, and avoiding distribution/material costs.

     

    Below we show a sensitivity of ANSW's 2011 revenue and earnings to the variables of average daily pageviews and revenue per thousand pageviews.   

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Downside

    Base

    Upside

     

     

     

    WikiAnswers

     

     

     

     

     

     

    Average Daily Pageviews

    10,000

    11,500

    13,000

     

     

     

     

    Rev/Thousand Pageviews

    $4.50

    $6.00

    $7.50

     

     

     

     

    Revenue

    $16,425

    $25,185

    $35,588

     

     

     

     

     

     

     

     

     

     

     

    Reference Answers

     

     

     

     

     

     

     

    Average Daily Pageviews

    2,000

    2,500

    3,000

     

     

     

     

    Rev/Thousand Pageviews

    $4.50

    $5.50

    $6.50

     

     

     

     

    Revenue

    $3,285

    $5,019

    $7,118

     

     

     

     

     

     

     

     

     

     

     

    Total Revenue

    $19,710

    $30,204

    $42,705

     

     

     

     

     

     

     

     

     

     

     

     

    Cost of Revenues

    $5,519

    $8,457

    $10,676

     

     

     

     

    Sales and Marketing

    $2,500

    $2,500

    $2,500

     

     

     

     

    General and Administrative

    $5,000

    $5,000

    $5,000

     

     

     

     

    Research and Development

    $4,500

    $4,500

    $4,500

     

     

     

    EBIT

    $2,191

    $9,747

    $20,029

     

     

     

    D&A

    $1,200

    $1,200

    $1,200

     

     

     

    EBITDA

    $3,391

    $10,947

    $21,229

     

     

     

     

     

     

     

     

     

     

     

    Diluted Shares

    11.4

    11.4

    11.4

     

     

     

    EBITDA/Share

    $0.30

    $0.96

    $1.86

     

     

     

    EV/EBITDA

    20.5x

    6.3x

    3.3x

     

     

     

     

     

     

     

     

     

     

     

    Gross Margin

    72%

    72%

    75%

     

     

     

    EBIT Margin

    11%

    32%

    47%

     

     

     

    EBITDA Margin

    17%

    36%

    50%

     

     

     

                           

     

    Venture Capital firm Redpoint Ventures http://www.redpoint.com/ owns approximately 25% of ANSW with a cost basis of just over $5 and has two board seats (previous investments include Netflix, Myspace, Tivo).

     

    Demand Media's S1 provides some useful metrics for comparison purposes, since their eHow business operates in a similar manor to answers.com (albeit with one key difference).  eHow.com is an online community dedicated to providing visitors the ability to research, share, and discuss solutions and tips for completing day-to-day tasks and projects.  The site generates RPMs of $12 vs. $4.50 for ANSW.   Given that eHow pays for their content (which results in higher quality than on answers.com), we do not think that ANSW will get to $12.   However, we do believe that they should be able to do significantly better than $4.50 given that each of their new initiatives is designed to do exactly that.  Currently 26% of revenue comes from display ads and 74% comes from Google Adsense.  RPM's on display ads are up 50% while Google Adsense revenue has fallen by 33% on yr/yr basis.  Google Adsense is based on Cost Per Click and ad Click Through Rates (CTR's are big driver in revenue).  ANSW is working with Google to analyze data to better address their click-through performance by taking Google's advice on ad placements. The younger demographic at Answers 15-30 years old is tech saavy with lower click through rates, and it is much more effective to sell display ads (on a RPM model than depend on ANSW's current model that works on revenue per click). We think advertisers would love to reach this demographic and makes a lot of sense to hire a direct sales force to sell this inventory.

     

    Demand Media IPO is scheduled for January 25 led by Goldman and Morgan Stanley.  Below is the implied valuation based on the announced range of $14 - $16.

     

     

     

     

    $14.00

    $15.00

    $16.00

    Shares Outstanding

     

    83.4

    83.4

    83.4

    Options

     

     

    2.9

    4.0

    5.0

    Diluted Shares

     

    86.3

    87.4

    88.3

     

     

     

     

     

     

    Market Cap

     

    $1,208

    $1,311

    $1,413

    Net Debt

     

     

    ($83)

    ($87)

    ($92)

    EV

     

     

    $1,125

    $1,223

    $1,321

     

     

     

     

     

     

    2009 Adj OIBDA

     

    $36.8

    $36.8

    $36.8

    9M 2010 OIBA Annualized

    $55.9

    $55.9

    $55.9

     

     

     

     

     

     

    EV/2009 OIBDA

     

    30.6x

    33.2x

    35.9x

    EV/2010 OIBDA

     

    20.1x

    21.9x

    23.7x

     

    What is the business worth?

    We think the business could significantly grow the top and bottom line in 2011. It is difficult to predict how much, but at current prices if ANSW hits our base case it is trading at about 6x EV/EBITDA for what we think is a unique asset with what should be 30%+ margins.  We think the upside could be $18-20 and downside $5-6, based on the value of their huge traffic alone.

     

     

    Catalyst

    A number of interesting potential acquirers: Interactive which owns Ask.com (transforming to a Q&A site) plus Dictionary.com (which ANSW tried to buy a couple of years ago), Yahoo, and Demand Media

     

    We believe that a number of companies would be interested in acquiring given scale and monetization potential especially relative to recent comps.

     

    Very low sell side expectations (the only sell side analyst that covers has revenue falling 1% yr/yr for 2011)

     

    Business model improvements (points A through G above)

     

    IPO of Demand Media on January 25 with $1bn+ valuation 

    Messages


    SubjectWhy haven't they made these changes already?
    Entry01/13/2011 03:32 PM
    Membertyler939
    Interesting story. What has changed that they are undertaking these initiatives now? Integrated ads have been around for years so why are they waiting till now? Also, I've gone to the site and there doesn't seem to be too much targeted advertising. Google Adsense has targeted links but the banners don't change and their is no ad integration in the answers. When do you expect the company to make the changes they mentioned on the conf call? I know they talk about increased traffic, but it has been increasing for a while, so again why now?

    Have you talked to the Canaccord Analyst? What is the bear case that he lays out? thanks

    SubjectQuora
    Entry01/13/2011 06:36 PM
    Memberchuplin1065
    Quora got a 90 mm valaution because the co-founder of Facebook started it. So while I think a great idea I think valaution of that company is rooted in the people not the idea.

    SubjectCongratulations on a very timely call.
    Entry02/03/2011 09:13 AM
    Membertyler939
    eom
      Back to top