Internet Brands

Internet Brands

The Company

Internet Brands is an Internet media company that builds, acquires and enhances branded websites in categories marked by high consumer involvement, strong advertising spending, and significant fragmentation in offline sources of consumer information. We operate a rapidly growing network of more than 40 principal websites, currently grouped into three vertical categories: automotive, travel and leisure, and home and home improvement. Utilizing a cost-efficient, proprietary operating platform, Internet Brands operates and enhance websites that attract consumers through rich content, opportunities for participation in strong online communities, and user-friendly functionality. Our websites collectively attract large audiences researching high-value or specialty products, enabling us to sell targeted advertising. We also offer certain services directly to consumers, such as new car brokering.

We operate a rapidly growing network of more than 40 principal websites, currently grouped into three vertical categories: automotive, travel and leisure, and home and home improvement. We also license our content and Internet technology products and services to major companies and individual website owners around the world.

We commenced operations in 1998 as CarsDirect.com, an online automotive brokerage service that enables consumers to research, price, configure and order vehicles online in the United States. In 1999, we expanded by acquiring our Autodata Solutions business, which develops and licenses technology to the automotive industry. In January of 2001, we acquired Greenlight.com, our primary competitor in the online auto brokerage business. In 2002 and 2003, we broadened our automotive business by launching several new and used-car advertising services to automotive manufacturers and dealers.

In December of 2004, we began to accelerate our expansion into new lines of business and into new categories. We changed our name from CarsDirect.com, Inc. to Internet Brands, Inc. in May 2005, reflecting this expansion. We now operate our business in two segments: consumer Internet and licensing. During the three years ended December 31, 2006, we acquired 16 websites in our consumer Internet segment for a total of $40.3 million. During the same period, we internally developed additional websites, such as Autos.com and Wikicars.com.

During the period from January 1, 2007 through June 30, 2007, we acquired an additional 29 websites in our consumer Internet segment and one business in our licensing segment, for an aggregate purchase price of $66.1 million. The largest of these acquisitions is Jelsoft Enterprises Limited, the developer of vBulletin, and the leading global provider of Internet community bulletin board software. We expect to continue to grow our business by acquiring additional websites and improving our existing websites through the application of our operating platform. We have historically been able to deploy capital for acquisitions efficiently, and then integrate acquired websites onto our platform quickly and effectively. Although we believe we will continue to identify, negotiate and purchase websites that meet our operating platform criteria, we cannot predict whether we can continue to purchase websites at the same rate and on similarly favorable terms as the market for user-generated content assets becomes more attractive.

We are dependent on our three vertical website categories for most of our revenues. Downturns in general economic or market conditions adversely affecting any of these categories, such as is currently adversely affecting the automotive and home mortgage verticals, would negatively impact our business and financial condition.

Internet Brands believes that as individuals increasingly use the Internet to pursue areas of passion, research purchases and conduct commerce, both individuals and the advertisers who seek to market to them will demand access to online media in the form of vertical websites like ours. Our websites attracted 24.5 million unique visitors in June 2007 (measured by adding the number of unique visitors to each of our websites in that month), an increase of 161% from an estimated 9.4 million unique visitors in June 2006. Our network includes a leading automotive e-commerce website (CarsDirect.com), a leading network of online automotive enthusiast communities, leading websites in the travel and leisure category (Wikitravel.org and FlyerTalk.com), and leading home and home improvement websites (ApartmentRatings.com and DoItYourself.com). Our international audiences are rapidly expanding and accounted for approximately 24% of the monthly visitors to our websites in June 2007.

In addition to our consumer Internet business, we license our content and Internet technology products and services to companies and individual website owners around the world. Our Autodata Solutions business is a leading supplier of licensed content and technology services to the automotive industry, serving most of the major U.S., Japanese and European automotive manufacturers. In June 2007, we purchased Jelsoft Enterprises Limited (Jelsoft), the developer of vBulletin, making us the largest licensor of proprietary community bulletin board software.

We monetize visits to our e-commerce and enthusiast community websites through various advertising revenue formats, such as cost per lead, cost per thousand impressions, cost per click, cost per action, and flat fees, while our Autodata Solutions business and Jelsoft subsidiary generate revenues in the form of licensing and service fees. In 2006, we generated revenues of $84.8 million.

We believe that the preferred medium by which consumers seek information and engage in commerce is shifting from traditional to Internet media and, within Internet media, from untargeted horizontal portals and search websites to vertical websites focused on specific categories of products and services. Vertical websites typically provide highly targeted, in-depth information and allow users to access online communities that provide fresh, differentiated niche content in their categories of interest. We believe that over time advertisers will heighten their focus on online media because they are increasingly demanding a measurable return on their investments across all forms of media, and the Internet enables them to track individual user responses to their advertising programs. Growth in the use of the Internet as a principal medium for consumer research and for connecting users with shared interests has created a demand for website content and community tools from businesses in highly competitive markets and those seeking to develop new Internet website communities.

Our Revenues

We derive our revenues from two segments: consumer Internet and licensing. In our consumer Internet segment, our revenues are primarily derived from advertisers. In our licensing segment, our revenues are derived from the licensing of data and technology tools and services to automotive manufacturers and proprietary software for website communities.

Our revenues grew from $61.1 million in 2004 to $78.1 million in 2005, an increase of 27.7%. The key factors influencing our growth were:

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the addition of websites that we built, acquired and enhanced, which offered new advertising opportunities to our existing advertisers and facilitated new advertising relationships;

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increased advertising sales on our websites as our consumer Internet audiences grew; and

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increased licensing revenues from our automotive licensing customer base.
Our revenues grew from $78.1 million in 2005 to $84.8 million in 2006. Despite this growth, our revenues decreased from $21.9 million in the first quarter of 2006 to $19.1 million in the first quarter of 2007, primarily as a result of a sequential decline in the consumer Internet segment. This decline was the result of reduced advertising spending by our automotive and home mortgage clients, consistent with the industry-wide downturn in these sectors. Partially offsetting this decline was steady growth in online travel- and home-related advertising revenues and licensing revenues.

Historically, our revenues have come from clients located in the United States. International sales accounted for 7.6% of our revenues in 2006 and 9.3% of our revenues during the three months ended March 31, 2007. We expect that revenues from customers outside the United States will increase as a percentage of total revenues as we acquire additional international websites. In June 2007, approximately 24% of our website visitors were located outside of the United States.

Expenses

The largest component of our expenses is personnel. Personnel costs include salaries and benefits for our employees, commissions for our sales staff and stock-based compensation, which are categorized in our statements of operations based on each employee’s principal function. Cost of revenues primarily consists of development costs, including personnel cost, related to the licensing business and marketing costs directly related to the fulfillment of specific customer advertising orders and our costs of hosting our websites. Sales and marketing expenses include both personnel and online marketing costs. Costs associated with online marketing have generally been increasing.

Our Value Proposition

We have become a leading provider of Internet media by building, acquiring and enhancing a network of websites that provide vertical content to consumers and help advertisers reach targeted audiences. Users of our websites enjoy research and shopping experiences supported by unique content, comprehensive databases, powerful vertical search tools, and user-friendly functionality, which enable us to attract loyal and engaged audiences. We facilitate online communities associated with our websites by providing innovative user tools, highly functional, safe, secure and moderated websites, and community governance “best practices.” Our media platform enables advertisers to selectively target customers within our websites. In addition, we repackage our automotive content and technology to provide our licensee customers differentiated, reliable, and scalable Internet solutions. Our Autodata Solutions business and Jelsoft subsidiary provide information and technology solutions for major automotive manufacturers and individual website owners establishing and nurturing online communities, respectively.

Our Operating Platform

We achieve attractive operating margins in our consumer Internet business by utilizing the Internet Brands operating platform: an integrated set of operating processes, personnel expertise, and proprietary technologies that achieve strong revenue yields and operating efficiencies. We gain strong cost efficiencies by leveraging the components of our operating platform—common technology, personnel, and support services—across all of our websites. Our technologies are modular in design, enabling us to combine selected functions to bring new websites to market rapidly and selectively apply functionalities developed for one of our websites across our network of websites. We also attempt to maximize revenue yields by deploying technology and business intelligence tools that identify and serve the revenue source projected to result, at a particular point in time, in the highest revenue to us. As a result, our platform facilitates rapid audience growth by delivering better user interfaces, faster website operating speeds, more appealing tools, and stronger online advertising capabilities. In addition, our platform is specifically designed to support this rapid audience growth within and across our categories of business, with minimal incremental costs.

Acquisition Risks

Our acquisition-based growth strategy entails significant execution, integration and operational risks.

We are pursuing a growth strategy based in part on acquisitions, with the objective of creating a combined company that will serve as an increasingly effective marketing channel for advertisers and that will achieve increasing cost savings and operating efficiencies. Since late 2004, we have acquired a significant number of websites. We intend to continue making additional acquisitions in the future to increase the scope of our operations domestically and internationally.

Our acquisition-based growth strategy involves significant risks. For example, while we frequently engage in discussions with third parties regarding, and enter into agreements relating to, possible acquisitions, there is significant competition for acquisition targets in our markets. Consequently, we may not be able to identify suitable acquisitions or may have difficulty finding attractive businesses for acquisition at reasonable prices. If we are unable to identify future acquisition opportunities, reach agreement with such third parties or obtain the financing necessary to make such acquisitions, we could lose market share to competitors who are able to make such acquisitions. This loss of market share could negatively impact our business, revenues and future growth.

Even if we are able to complete acquisitions that we believe will be successful, we may be unable to achieve the anticipated benefits of a particular acquisition, the anticipated benefits may take longer to realize than expected, or we may incur greater costs than expected in attempting to achieve anticipated benefits. Significant risks to these transactions, which could have an adverse effect on our business, prospects, financial condition, operating results or cash flow, include:

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use of substantial portions of our available cash, including a portion of the net proceeds from this offering, to pay all or a portion of the purchase prices of future acquisitions;

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diversion of management’s attention from normal daily operations of our business to acquiring and assimilating a new company;

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entry into new markets in which we have limited or no prior experience and in which competitors may have stronger market positions, which may result in errors or failures by us in the conception, structure or implementation of our strategies to take advantage of available opportunities in these new markets;

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failure to understand the needs and behaviors of the audience for a newly acquired website or other product;

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unwillingness by consumers and advertisers to accept our current or future pricing models or our inability to implement pricing models that maximize our revenues;
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redundancy or overlap between existing products and services, on the one hand, and acquired products and services, on the other hand;

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failure of the market to accept the products and services of an acquired business;

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inability to maintain or enhance the key business relationships and the reputations of acquired businesses;

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dependence on unfamiliar affiliates and partners;

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difficulty assimilating operations, technologies, products and policies of acquired businesses;

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failure to improve our operation, infrastructure, financial and management controls, procedures and policies in step with our growth;

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potential loss of key employees from an acquired company, including in such areas as technology development, marketing, sales and content;

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failure to integrate, train, supervise and manage our expanding work force effectively;

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assuming liabilities, including unknown and contingent liabilities, of acquired businesses; and

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potential impairment of acquired assets.
In addition, the issuance of equity or convertible debt securities to finance or otherwise complete acquisitions may dilute the ownership of our then-existing stockholders. Failure of our acquisition-based growth strategy to yield anticipated benefits would likely harm our operating results.

Our acquisitions may make it difficult to evaluate our financial performance.

Our strategy includes the continued addition of new websites to our platform. In the first six months of 2007, we have acquired 29 websites. Upon launch or acquisition of a new website, we generally attempt to integrate it into our platform as quickly as possible and begin to generate associated revenues. As a result of this strategy, it may be difficult to evaluate our financial performance from period to period.

The company relies on travel service providers to upload their listings onto our websites, such as Vamoose.com, VacationHomes.com and BBOnline.com.