Thesis

Shares of InfoSpace could offer upside in excess of 40% based on a SOP and break-up analysis as the company pursues an aggressive cost-cutting program and returns the bulk of its cash hoard to shareholders.   Following the loss of Cingular, one of the company’s key Mobile customers, the company will be reducing its firm-wide cost structure in excess of $15 million, which will drop entirely to the bottom line and significantly grow EBITDA and EPS from depressed levels.  Meanwhile, the company is sitting on $400 million of cash without significant capex or acquisitions on the horizon. In light of the company’s strong free cash flow and lack of significant investment opportunities management is currently analyzing the impact of returning the bulk of its cash hoard to its shareholders.  By reducing its corporate structure by $15 million the company would be rewarded with an incremental $5 per share in value and also focus investors on the company’s largest asset, its $1 billion NOL carry-forward.  Given the company’s outsized cash balance it could return $300 million to shareholders immediately via a combination of special dividend and share repurchase.  Assuming the above cost-cutting and capital restructuring measures a SOP analysis yields a value of $34.22 per share and a break-up value of $38.68

InfoSpace has two business lines, Online and Mobile.  Online generates revenues from Web search and directory services when an end user of the services generates a paid search at an InfoSpace Web site.  Online also generates revenues from paid searches through a distribution partner’s Web property.  Mobile earns revenue typically through agreements with mobile operators for various services, which include subscriber usage, hosting and maintenance services, and professional services, as well as for the delivery of mobile media content products, such as ringtones, graphics and games. 

Why and how is the company cheap?

The company is significantly cheaper than its internet search peers, Google and Yahoo!, due to its significantly slower growth rate and the restructuring of the Mobile business, which was anticipated to be a major growth opportunity.  I am NOT arguing that the company’s search business should trade at parity with a Google or Yahoo!, but at the current share price the mobile business is only valued at 5.0x EBITDA in my SOP analysis. 

The company should be valued on a SOP basis or on break-up value due to its significant cash position and opportunity to recapitalize the company.  EV/EBITDA is also a suitable way to value the company, although it doesn’t give the company credit for its recapitalization opportunity and must incorporate value for the sizable NOL.    

The company will cease to trade at a discount to its intrinsic value once it formally announces its cost-cutting measures and a significant cash distribution. 

Exhibits

Catalyst