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Atrinsic Reports Operating Results for the First Quarter 2011

^{Published on 2011-05-16 05:10:31 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Atrinsic, Inc., (NASDAQ: ATRN), a marketer of direct-to-consumer subscription products, built around the Kazaa brand and an Internet search marketing agency, Atrinsic Interactive, announced first quarter 2011 results today.

Results of Operations

For the three months ended March 31, 2011, the Company began segmenting operating results into two segments: Subscription Services and Transactional Services. This shift was predicated on the change by the Company to review operating results based upon the activities of these separate segments, effective January 1, 2011. This change in approach was the result of changes in the structure of the organization due to the restructuring of the Company that took place in the second half of 2010 and was completed by year end. During this restructuring, the Company eliminated certain service lines and changed its media buying activities. The shift in the Company's approach to buying and tracking media and other operating expenses a" formerly analyzed and budgeted on an aggregate and enterprise-wide basis a" is now analyzed, tracked and evaluated on a segment basis.

Revenues for the first quarter of 2011 were $7.1 million compared with $12.2 million for the first quarter of 2010, a decrease of 42%. Subscription revenue, which includes both legacy product subscriptions and the Kazaa digital music service, decreased by $2.5 million, or 42%, to $3.5 million for the first quarter 2011, compared to $6.0 million for the first quarter 2010. The decrease in Subscription revenue was primarily due to a lower number of legacy product subscribers in the first quarter, compared to the year-ago period. Additionally, Transactional Services revenue decreased by $2.6 million, or 42%, to $3.6 million for the first quarter 2011, compared to $6.2 million for the first quarter 2010. The decrease in Transactional revenue was attributable to a lower number of agency accounts in the first quarter, compared to the year ago period, and also reflects the restructuring of Transactional services, which involved the elimination of unprofitable or marginally profitable lead generation and marketing programs during much of 2010.

Operating expenses for the first quarter of 2011 was $10.9 million, compared with $15.4 million for the first quarter of 2010, a decrease of $4.5 million. The decrease is primarily attributable to a 46% decrease in third party media expense, manifested in the Transactional services segment, and is correlated to decreased revenues. A 32% reduction in general, administrative and other operating expense, compared to the year ago period, also contributed to the decrease in operating expenses in the first quarter of 2011.

Adjusted EBITDA for the first quarter of 2011 was a loss of ($3.5) million compared with a loss of ($2.6) million for the first quarter of 2010, an increase in Adjusted EBITDA loss of $0.9 million, which is due to the decline in total revenue, partially offset by decreases in operating expenses. Adjusted EBITDA is a non-GAAP measure a" see Supplemental Disclosure regarding Non-GAAP Measures below.

Net loss for the first quarter of 2011 was ($3.5) million (($0.56) loss per basic and diluted share) compared with net loss of ($3.4) million for the first quarter of 2010 (($0.66) loss per basic and diluted share).

Atrinsic Interactive (Transactional Services)

Atrinsic Interactive is a leading search agency offering advertisers an integrated service offering across paid search, SEO, display, affiliate marketing, business intelligence and brand protection services. Transactional Services gross margin (based on Cost of Media a" 3^rd party) exhibited significant improvement on a year-over-year basis, improving to 74% of Transactional Services revenue for the first quarter of 2011 from 94% of Transactional Services revenue, for the first quarter of 2010. This improvement was the result of the Companya™s efforts to eliminate unprofitable or marginally profitable lead generation and marketing programs. Transactional Services operating loss also improved on a year-over-year basis, for the same reasons, improving the segment operating loss to $0.3 million for the first quarter of 2011, compared to an operating loss of $1.7 million for the first quarter of 2010.

Subscriptions

The Companya™s subscription business is built around a recurring-revenue business model and it is focused on digital music in the rapidly growing mobile space. The Companya™s lead offering is Kazaa, a recognizable brand in this market. The Company also provides alternative billing capabilities, allowing subscribers to utilize payment methods other than just credit cards, to purchase services. The Companya™s core strategic focus for Kazaa and its direct-to-consumer subscription business is to build and sustain a large and profitable subscriber base and a growing and engaged audience and to deliver entertainment content to customers anywhere, anytime and on any device, in a manner the Companya™s customers choose.

As of March 31, 2011, the Company had approximately 192,000 total subscribers (including legacy product subscribers and Kazaa digital music subscribers), compared to 331,000 as of March 31, 2010, representing a reduction of 42% in the total number billable subscribers on a year-over-year basis. Across all of the Companya™s subscription products, average revenue per user (aARPUa) was approximately $6.88 for the first quarter, compared to $6.07 in the year ago period.

Kazaa Update

As of March 31, 2011, the Company has approximately 85,000 Kazaa subscribers, compared to approximately 95,000 as of March 31, 2010 and 77,000 at December 31, 2010. Kazaa ARPU was $11.55 for the three months ended March 31, 2011, compared to $10.69 in the year ago period. We had approximately 8,000 Kazaa Net Adds (new subscriber additions, net of attrition) in the first quarter of 2011.

During the first quarter of 2011, the Company announced an exciting product innovation, allowing subscribers to Kazaa to access the Kazaa music service on the iPad, iPhone and on Android compatible mobile devices by simply navigating to [ www.kazaa.com ], without the requirement of downloading and installing a dedicated application. This allows Kazaa subscribers to stream music via a broad range of wireless devices, and is especially significant in light of Apple®a™s announcement in February, 2011, that it will now keep 30% of revenue generated by new subscriptions and media purchases made in an iPhone or iPad application through its App Store.

As a result of this mobile browser advancement, as well as other improvements and enhancements the Company has made to its digital music service and Kazaa.com, including the Kazaa Radio feature, the Company has seen improvements in customer retention and site utilization, culminating in gradual improvements in subscriber life time values during the first quarter. Although there is no assurance the Company will be able to obtain financing, if the Company is able to obtain suitable financing, it will enable the Company to execute on its product strategy over the next couple quarters. The Companya™s short term product strategy is to release iPhone and Android apps, expand its music library beyond the five million tracks and albums it has already licensed and continue to offer users competitive pricing plans and unique billing alternatives.

Liquidity and Financing

As of March 31, 2011, the Company had $1.6 million of cash and cash equivalents and a $0.8 million working capital deficit. As of May 12, 2011, the Company had approximately $0.9 million in cash and cash equivalents. In order to fund operations, we must raise additional capital. We are currently working with an independent financial advisory firm to assist us in structuring a financing and to raise debt or equity capital to fund our immediate cash needs and to finance our longer term growth to further develop the Kazaa business and grow our subscriber base. There is no guaranty that funding will be available on favorable terms or at all. If we are unable to complete a suitable financing, we will need to cease or significantly curtail our operations.

In connection with the proposed acquisition by Atrinsic of the Kazaa music subscription assets from Brilliant Digital, the Company plans to file with the SEC a Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934. The Proxy Statement will be mailed to stockholders of Atrinsic. Investors and security holders are urged to read the proxy statement and other documents filed with the SEC carefully in their entirety when they become available because they will contain important information about the transaction. Investors and security holders will be able to obtain free copies of the Proxy Statement (when available) and other documents filed with the SEC by the Company through the web site maintained by the SEC at [ http://www.sec.gov/ ]. Free copies of the Proxy Statement (when available) and other documents filed with the SEC can also be obtained by directing a request to Thomas Plotts, Chief Financial Officer, Atrinsic, Inc. at 212-716-1977 ext. 222.

All non-GAAP amounts have been adjusted from comparable GAAP measures. A description of all adjustments and reconciliations to comparable GAAP measures for all periods presented are included within this communication.

About Atrinsic and Kazaa

Our business is focused on two segments: (1) direct-to consumer subscriptions, built around the Kazaa brand, and (2) Search and affiliate marketing, built around the Atrinsic Interactive brand.

Built around a recurring-revenue business model, our subscription service is focused on digital music in the rapidly growing mobile space, and our lead offering, the Kazaa digital music service, is a relevant and recognizable brand in such a space. Our core strategic focus for Kazaa and our direct-to-consumer subscription business is to build and sustain a large and profitable subscriber base and a growing and engaged audience and to deliver entertainment content to our customers anywhere, anytime and on any device, in a manner our customers choose.

Atrinsic Interactive, our affiliate network and search marketing agency, is a top ten search agency according to Advertising Age (2010) and a top-tier affiliate network. We offer advertisers an integrated service offering across paid search, or search engine marketing, search engine optimization, display advertising, affiliate marketing, as well as offering business intelligence and brand protection services to our clients. Our core strategic focus for Atrinsic Interactive is to build a leading independent search marketing agency and a top-five affiliate network.

Kazaa is a subscription-based digital music service that gives users unlimited access to millions of CD-quality tracks. For a monthly fee users can stream or download unlimited music files and play those files on up to five devices and download unlimited ringtones to a mobile phone. Unlike other music services that charge you every time a song is downloaded, Kazaa allows users to listen to and explore as much music as they want for one monthly fee, without having to pay for every track or album. Consumers are billed for this service on a monthly recurring basis through a credit card, landline, or mobile device. Royalties are paid to the rightsa™ holdersa™ for licenses to the music utilized by this digital service. Atrinsic and Brilliant Digital, Inc. jointly offer the Kazaa digital music service pursuant to a Marketing Services Agreement and a Master Services Agreement between the two companies.

Forward-Looking Statements

This press release contains aforward-lookinga statements based on managementa™s current expectations as of the date of this release. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements include the Companya™sdiscussion relating to managementa™s current strategic priorities. Because such statements inherently involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements. Such risks include, among others, the Companya™s ability to maintain customer and strategic business relationships, the impact of competitive products and pricing, growth in targeted markets, the adequacy of the Companya™s liquidity and financial strength to support growth, and other information that may be detailed from time to time in the Companya™s filings with the United States Securities and Exchange Commission. All information in this release is as of the date of this release. The Company does not undertake any obligation to update or revise these forward-looking statements to conform to actual results or changes in the Companya™s expectations.

Supplemental Disclosure regarding Non-GAAP Measures

EBITDA and Adjusted EBITDA

The following tables set forth the Companya™s EBITDA and Adjusted EBITDA for the three month periods ending on March 31, 2011 and 2010, respectively. The Company defines aEBITDAa and aAdjusted EBITDAa as net income adjusted to exclude the following line items presented in its Statement of Operations: Income taxes, interest expense, interest and dividend income, net, depreciation and amortization, and in the case of Adjusted EBITDA, non-cash equity based compensation, equity in (loss) income of investee, and other (income) expense. While this non-Generally Accepted Accounting Principles (aGAAPa) measure has been relabeled to more accurately describe in the title the method of calculation of the measure, the actual method of calculating the measure is presented below.

The Company uses Adjusted EBITDA, among other things, and possibly with additional adjustments, to evaluate the Companya™s operating performance, to value prospective acquisitions, and as one of several components of incentive compensation targets for certain management personnel, and this measure is among the primary measures used by management for planning and forecasting of future periods. This measure is an important indicator of the Companya™s operational strength and performance of its business because it provides one of several links between profitability and operating cash flow. The Company believes the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by the Companya™s management, helps improve their ability to understand the Companya™s operating performance and makes it easier to compare the Companya™s results with other companies that have different financing and capital structures or tax rates. In addition, it is our understanding that this measure is also among the primary measures used externally by the Companya™s investors, analysts and peers in its industry for purposes of valuation and comparing the operating performance of the Company to other companies in its industry. The Company has elected to not adjust EBITDA for the impact of the adoption of ASC 718 (formerly FAS No.123R) and the Company has provided what it believes to be relevant supplemental information in this communication for analysis by others to fit their particular needs.

Since EBITDA and Adjusted EBITDA are not measures of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net income as an indicator of operating performance. EBITDA and Adjusted EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Companya™s ability to fund its cash needs. As EBITDA and Adjusted EBITDA exclude certain financial information compared with net income, the most directly comparable GAAP financial measure, users of this financial information should consider what information is excluded. As required by the SEC, the Company provides below a reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable amount reported under GAAP.