Ancestry.com (ACOM) reported disappointing third-quarter results Wednesday that showed management was a bit too optimistic in its subscriber growth forecasts for this year. However, we still like the story – and 30%+ revenue growth is nothing to sneeze at. We maintain the firm is significantly undervalued and expect some short covering in the weeks ahead, as the Street begins to look at 2012 numbers and anticipates the release of the 1940 US Federal Census in April. We’re holding strong with the position in the portfolio of our Best Ideas Newsletter.
Ancestry.com’s revenue advanced 30% thanks to strong subscriber growth, with the firm eclipsing the 1.7 million mark, representing 24% growth from the third-quarter of 2010. Churn edged up a bit on a year-over-year basis, but declined sequentially, as we had expected. Subscriber acquisition costs were a bit higher than we would have liked and came in at $93.64 versus $81-$82 in the third quarter of 2010 and the second quarter of 2011. However, given that average monthly revenue per subscriber continues to edge up and that incremental margins on new subscribers are significantly higher than current operating margins, we’re fine with the relatively manageable increase in acquisition costs. That said, we think the Street continues to punish Ancestry.com, picking either subscriber growth or churn as the concern with each passing quarter. These items are positively correlated, so one or the other will often be viewed negatively.
We were quite encouraged with profitability in the quarter, as operating income and net income surged from the previous period, up 40% and 62%, respectively. Adjusted EBITDA increased 38% on adjusted EBITDA margins that jumped 2.3 percentage points from the same period a year ago. Free cash flow swelled to $30.6 million in the third quarter, which compares to $20.1 million in the third quarter of last year. Earnings per share came in at $0.40, well ahead of consensus expectations.
The company’s guidance for the full-year 2011 was a bit weaker than we expected. The online genealogy research provider narrowed its revenue guidance to the range of $398.5 million to $400.5 million (was $398 million to $402 million), while it cut ending subscriber guidance to 1.685 million to 1.695 million, which, notably, is less than the subscriber number at the end of this quarter, marking the first expected sequential decline in memory. This is particularly bad news, but the fourth quarter is traditionally the weakest in terms of net subscriber additions, so this scenario is certainly within the range of healthy outcomes. Also, management noted weakness in the U.K. and Australia, its subscription plan price testing, and general uncertainty in the economy—neither one is overly concerning, in our opinion. Importantly, however, it raised its adjusted EBITDA guidance to the range of $143 million to $145 million (was $140 million to $144 million), which we take as a distinct positive, as management continues to optimize the business.
The company initiated a share-buyback program to the tune of $50 million, a move we strongly favor. We think the shares are significantly undervalued and view this decision as value-creative. Regarding valuation, it’s worth pointing out that if Ancestry.com achieves no further growth, and we annualize third-quarter adjusted EBITDA (about $40 million), we’re looking at roughly $160 million on a forward basis. With an enterprise value of about $1 billion, the firm is trading at an EV/EBITDA multiple at just over 6 times. Ancestry.com will continue grow (and at a rapid pace), which makes this multiple ridiculously low. We’re holding strong.
Disclosures: Brian Nelson has long exposure to ACOM at the time of this writing.