Novice Investing - Digital World with Infospace

Date: Sunday 20th 2008f July 2008 12:49:36 PM

Digital World with Infospace - 10/22/2006

By: Hari Wibowo

I must admit. The one reason I was exploring InfoSpace Inc. (INSP) 2005 annual report is because of its fallen price. Picture this; As of Friday 20th October 2006, InfoSpace is trading at $ 20.14 per share with $ 630.8 Million market capitalization. As of December 31st 2005, InfoSpace has a positive net cash of $ 370 Million, or $ 11.82 per share. Thus, your potential investment loss is limited to $ 11.82 per share currently. Sure, InfoSpace might report a loss and its cash pile may dwindle but you will not find a lot of companies trading with 60% cash value. We have written in the past that InfoSpace might be a good investment candidate without any new product offerings in the next few years. Now, let's look deeply into InfoSpace business by analyzing its 2005 annual report. A lot of things have changed since December 2005 but InfoSpace annual report is still a better way point of entry to start your investment analysis.

First of all, business line. InfoSpace divides its business into two segments; mobile business and search & directory. Mobile business generally helps customers to deliver content onto a mobile or other devices from conventional browser content. With InfoSpace, mobile operators can customize their mobile content offerings and share revenue that way. Mobile operators benefit because they can monetize their own subscribers base. InfoSpace benefits because it shares some of the revenue from the subscriber base without having to do much spending in marketing. InfoSpace generated mobile revenue when users download ringtones, graphics, games as well as hosting, maintenance, subscriber usage and others.

For search & directory segment, InfoSpace helps users to locate relevant information on the web. In short, InfoSpace is a search engine!! Not as big as Google, mind you. But, that's how the company described it on its annual report. Its web properties include: Dogpile.com, Switchboard.com, Webcrawler.com and MetaCrawler.com. While these lists of web properties is impressive, for a $ 600 Million company, this does not appear to be

valuable enough. For search & directory segment, InfoSpace made money when users search its database and it displays paid search on the side. This is exactly how Google monetize its growing popularity of its search engine. Unfortunately, InfoSpace search engines had been losing shares for the past several years.

While InfoSpace maintains an international presence, 90+% of its revenue is still derived from the United States over the past several fiscal years. For example, its customer for its mobile business segment is mobile operator such as Cingular Wireless, T-mobile, Verizon wireless, virgin mobile and others such as Google, Yahoo and Record labels Sony BMG, Warner Music and the like.

In its 2005 annual report, InfoSpace warned of competition which may erode the company's revenue stream. One of that is when InfoSpace's customers can go directly to our distribution partners for content. This, in fact, has happened on September 2006 when Cingular Wireless decided to opt out of InfoSpace's services. InfoSpace also warned that their top five customers account for more than 81% of revenue for 2005. Agreement with Cingular Wireless, Yahoo! and Google expires on 2006, 2008 and 2009 respectively. If these customers feel that they do not need InfoSpace as the middlemen, that is a disaster for the company going forward.

At this point, it seems like InfoSpace is a company with dwindling market share for both its mobile division and its search& directory division. InfoSpace merely plays the role of a middleman for its mobile division. Unless they can create meaningful content for mobile providers, I believe that there will be pressure on how InfoSpace's business model should work. The Cingular wireless defection is only a start. For search & directory division, InfoSpace has unmeaningful market share. It won't rise to the plateu of Google, but given the right funding for research, it can increase its market share significantly in the coming years. I am not sure which way management is going but InfoSpace has increased its development expenses to $ 31.2 Million in 2005 from $ 17.8 Million in 2003. Also, to sustain its mobile revenue division, InfoSpace should partner with smaller content providers which offers content that is unique from larger content providers. This will give mobile operators with a wider breath of choice and ultimately, they will cling to InfoSpace instead of going after thousands of small content providers.

The rest of InfoSpace's 2005 annual report talks about its financial statement, which you can view at Yahoo! Finance. Therefore, we should not discuss that a lot further.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding InfoSpace Inc. (INSP) or any other securities.

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