Thursday, September 21, 2006

Color on Cingular news: InfoSpace (NASDAQ:INSP)

- Several firms are commenting on InfoSpace (NASDAQ:INSP) today after the co announced a loss of a major carrier customer for label tones:

* Piper Jaffray believes the customer was Cingular. Firm notes that year to date, InfoSpace's mobile revenues were $89.6M (48% of total revenue) of which label tone sales accounted for approximately $55M (61% of mobile revenue). Tey believe that Cingular accounted for the vast majority (likely in the 75-80% range) of label tone sales. Firm expects Cingular to continue to use InfoSpace for portal services, games and graphics.

They currently estimate $221M in 2007 wireless revenue. Of the $221M in revenues in 2007, they believe approximately half of that was for Cingular label tones. As such, they expect to significantly reduce their estimates. Also, wireless margins, which have been declining over the last 18 months, should further decline as a result of declining economies of scale in the wireless business.

The loss of a major carrier partner for label tones is a huge setback for InfoSpace. The firm believes shares will likely bottom in the $17-18 range (essentially 0.5x revenues plus $12/share in cash). They note that shares were trading at $18.40 after hours. While they expect shares to bottom near $17-18, they do not see any near term catalysts and thus would continue to remain on the sidelines. Maintains Market Perform rating.

* JP Morgan believes other carriers could potentially follow suit and develop similar relationships with record labels. As such, this announcement makes the firm question the longer term viability of INSP's Mobile business.

However, the company's Search business is driving significantly higher gross profit dollars than its Mobile business (reported 2Q gross profit for Search was 64% vs. 34% for Mobile segment) and the company has ~$13 cash per share. INSP announced it would detail a cost reduction plan within the next month - they believe necessary headcount reduction charges will put downward pressure on INSP's cash balance of $405M as of 2Q-end.

Firm's updated estimates are based on an 80% reduction in INSP's Label Tone business in F'07. They have reduced their estimates as follows: F'06 and F'07 Mobile revenues of $178M (from $186M) and $72.9M (from $218M) respectively. F'06 and F'07 total revenues of $377M (from $385M) and $278M (from $423M).

Notablecalls: Expect to see several downgrades today. I believe the shares may sink even lower than the $17-$18 suggested by Piper.

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