Marchex, Inc. (MCHX) Q1 2007 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen and welcome to the first quarter earnings conference call. At this time, all participants have been placed on a listen-only mode and there will be time for your questions and comments following the presentation. It is now my pleasure… It is now my pleasure to turn the floor over to journalist Ethan Caldwell, CEO. Sir, the floor is yours. Ethan Caldwell : Thanks, just a correction on that, I am the Chief Administrative Officer. Thank you very much everyone for joining. Good afternoon everyone and welcome to Marchex’s first quarter 2007 conference call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer. John Keister, President and Chief Operating Officer, Mike Arends, Chief Financial Officer, Peter Christothoulou, Chief Strategy Officer, and Cameron Ferroni, Chief Technology Officer. During the course of this conference call, we will make forward looking statements that have substantial risks and uncertainties. All statements other than statements of historical facts included on this call regarding our strategy, future operations, future financial position, future revenues, acquisition, projected costs, prospects, plans and objectives of management or forward looking statements. We may not have actually achieved the plans intentions or expectations disclosed in our forward looking statements and you should not place reliance on forward looking statements. Actual results or events could differ materially from the plan, intention and expectations disclosed in the forward looking statements we make. There are number of important factors that could cause Marchex’s actual results to differ materially from those indicated by such forward looking statements as are described in the risk factor section of our most recent periodic report and registration statement filed with the security and exchange commission. All of the information provided on this conference call is as of today’s date and we undertake no duty to update the information provided herein. During the course of this conference call, we will also re-concern certain non-GAAP measures of financial performance and liquidities, including OIBA, adjusted OIBA, EBITDA, and adjusted non-GAAP EPS. A reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is contained in today’s earning press release which is available in the investor relation section of our website and definition of these measures as used by us and the reasons why we believe these measures provide useful information to investors will be referenced during the conference call and are also contained in today’s earning press release. At this time, I would like to turn the call over to Russell Horowitz, our Chairman and Chief Executive Officer. Russell Horowitz : Thank you Ethan. On today’s call we will focus on three topics. First I will give a summary of our operational and financial progress during the first quarter. Second, John and I will comment on our ongoing operational initiative, and third, Mike will give a more detailed review of our financial results for the first quarter and comment on our guidance for the remainder of the year. Moving to our first topic, a summary of our operational and financial progress during the first quarter. We started the year with good momentum and there are several catalysts to our business as we highlighted on our last quarterly call that we believe will lead to accelerated growth throughout the year. Specifically, the initiatives we referenced were as follows. One, increased equality of our third party distribution network. For the first quarter of 2007, we added more than a dozen new contextual and pay-per-click distribution partners as well as several third party website owners who are interested in leveraging Marchex content distribution and modernization system. These partners include Computer Shopper, Engineering.com, InvestorVillage.com, Wall Street Reporter, CioIndex.com, WorldGolf.com, and many others. We have added new partners every quarter for more than a year and believe that this trend will continue during the rest of the year. Two, increase the pay-per-click rate from direct advertisers on our propriety network of websites. For the first quarter, we increased the pay-per-click rate from our direct advertisers nearly 50% on a year over year basis. We continue to see favorable trends from advertisers who access our proprietary websites based on the quality of our traffic and we expect this trend to continue. Three, increase our local advertiser market share. For the first quarter, we significantly increase our advertiser base and exited March with a record number of advertisers on our system. Additionally, with tens of thousands of local advertising relationships, we believe Marchex has one of the largest footprints of local advertisers online and just as importantly, we expect to meaningfully increase through the end of the year. Four, increase our propriety traffic. For the month of March, our propriety websites were accessed by more than 31 million unique visitors according to internal logs which represent 11% year-over-year growth. While we are entering a seasonably slow period similar to last year, we believe that our product development initiatives including the uphill launch of 100,000 websites with open list content integrations will lead to meaningful traffic growth in the back half of 2007. Five, increase the revenue attributable to our propriety network of websites. For the first quarter, revenue attributable to our propriety websites increased more than 34% over the prior year period. This growth was accomplished through continued positive trends with OpenList integrated websites, the re-launch of YellowPages.com and related directory sites, increase marketing of certain websites including YellowPages.com and other directory sites and increased miniaturization rates from our own pay-per-click and contextual advertisers. Similar to last year, we expect to see seasonality and revenue from propriety traffic sources in the second quarter followed by strong growth in the back half of the year as we launch several initiatives which we believe will lead to increase traffic and revenue. Our sixth catalyst is to expand upon our OpenList content aggregation and deployment technologies. As most of you know by now, our OpenList content aggregation platform has been designed to organize, localize, refine, and distribute relevant information to any website ours or a third party. But we believe there is a powerful opportunity to take open with the network. We are highly focused on integrating this platform on to our own network of websites as the first step. We believe that the upcoming launch of 100,000 websites by June 30th and the OpenList.com re-launch by the end of Q3 will have a meaningful impact on our growth in the back half of the year and into 2008. We have started the year with a good momentum run, each of these initiatives are first quarter revenue growth with 10% on a year over year basis which was at the height of our guidance range and we continue to expect that this product progress will drive into a growth rate of 20% or more as we exit 2007. Now focusing on the second topic, an update on ongoing operational progress. First, I will focus on those initiatives tied to our network of proprietary traffic. As I recently highlighted, our network was accessed by more than 31 million unique visitors in March 2007. We are particularly pleased with this year-over-year growth given that the vast majority of our websites do not have our enhanced OpenList functionality and is such have not yet been indexed by search engines. Given our ongoing progress with open lists, we believe that June 30th launch can have a meaningful impact on the long term growth in users finding and returning to our network of the more than 200,000 owned and operated websites. In the first quarter, revenue from proprietary traffic was $15.1 million which was up 34% on a year over year basis. The principle factors driving that growth were: 1- Traffic growth from several websites including YellowPages.com, associated directory sites, and OpenList innervated websites. 2- Marketing of selected websites including YellowPages.com and associated directory sites and 3- An increase in the pay-per-click rate from our direct advertisers. Although we expect that we may experience a seasonality in traffic similar to last years trends and that may impact revenue particularly head of our large website roulette at the end of June, we anticipate that we will continue to grow the metrics of our proprietary network over the course of 2007, including the amount of inventory we monetize on a direct basis. Of course the monetization coming from our primary third party advertising partner Yahoo!! has been an important impact on the revenue generated from our proprietary traffic as well. As you all know, Yahoo!!’s new modernization system Panama launched in Q1. The revenue impact of Marchex is relatively new to a post launch, its increased click through rates were offset by lower pay-per-click rates. While it is too early to quantify the impact that Panama will have for the remainder of the year, particularly as new features and functionality continue to be pulled out by Yahoo!, we were pleased to see its launch and will continue to monitor its progress closely. Our strategy for traffic growth in our proprietary network of owned and operated websites is pretty straight forward. Continue building relevant websites with target and relevant content use our marketing tools and knowledge to acquire new users where appropriate. Our OpenList tests have shown that our content strategy will expose more users to our sites through increased indexing and surf results and will help us retain users regardless of how they find our sites. Today a majority of our websites with OpenList integrations show up in our arrhythmic search, whether for an exact match query or a related search query. As a result, the number of pages used per every website that was indexed by surf engines increased substantially over a pre-integartion period as did our repeat visitor and bookmark rates. During the coming months and quarters, we plan to try significant product progress across our network of sites. We believe that the June launch of 100,000 websites will be the beginning of a content rollout and refinement process that will help build Marchex into one the most highly targeted vertical and local networks online. Now, I would like to pass the call onto John Keister to discuss our advertising services business. John Keister : Thanks Russ. Today there are only a few companies that have tens of thousands of search related or pay-per-click advertisers in their system and Marchex is one of them. Continually adding to our advertising base is a critical element to growing our business and as such we continue to focus on growing this relationship on a direct basis and on an indirect basis for example through our local super aggregator partners like AT&T. We believe our leadership and innovation in our local channel has been and will continue to be, a major driver of growing the number of advertisers in our system. There are three elements of the strategy in the advertising services business that I will now highlight. First, we are continuing to focus on growing our network with the addition of new quality partners. We have grown the number of distribution partners in our system every quarter and remain very competitive in our efforts to add new premium publishers. Additionally and very importantly, we continue to test and innovate with new products to attract new partners. For example, over the past number of months we have been testing a beta implementation of our content and modernization platform, the same platform that currently powers our owned and operated websites for third party distribution opportunities. This beta product is meeting with success in the channel as new third party website owners are interested in improving the relevance, utility, and modernization of their website. We also expect that this new distribution will offer opportunities to drive incremental high quality traffic from our own direct advertisers. As we look forward to the coming quarters, we expect this products contribution to grow as our content and modernization platform for our own website continue to improve. The third, is all about quantity and quality for advertisers. Advertisers want a good return on investment from a network that has sufficient volume to be relevant to their overall campaign. Therefore, our goal is to continue to grow both the quality and volume of proprietary and third party inventory within our network in a consistent and methodical way over time. The combination of delivering our direct advertisers to both our growing base of proprietary traffic and third party websites has been a catalyst for advertisers to see more volume and to realize improved return on investment within our system. This has driven increasing pay-per-click rates from our direct advertisers over time. Second, we continue to support our locally focused partners such as AT&T and YellowPages.com as these companies are leveraging their direct sales forces to sell search packages to their yellow pages customers, which are in turn fulfilled by Marchex. AT&T and YellowPages.com have done a tremendous job becoming leaders in local online advertising and we are optimistic that they will continue to grow the number of local advertisers that are buying search packages. Our local network of advertisers continues to be a major focus for Marchex and is a place where we continue to invest and realize growing success. We have tens of thousands of local merchants going through our system and we are rapidly growing our share of local advertising dollars coming online. We believe that this expansion of local merchants combined with our initiative to continue to grow as a leading source of online traffic puts Marchex in the unique position of being an early leader in one of the fastest growing segments of online advertising. We will continue to invest to get this local opportunity since we believe that local search will drive a disproportionate amount of the revenue growth in the search base over the next five years. And third, we will continue to refine the rules under which advertisers and publishers can work with Marchex. We continue to focus on transitioning away from advertisers who utilize wholesale pricing strategies and we will also de-emphasize traffic sources where advertisers have historically received wholesale pricing. While this will be a (inaudible) process, as certain advertising and distribution partners may change their strategy from quarter to quarter, the changes that we started in the fourth quarter of last year are mostly complete. Our focus is to continue to attract premium advertisers, getting premium rates across our proprietary as well as our premium partner network. The goal is ultimately to drive a network with high revenue-per-click rates which can compete effectively for new third party distribution as well feed the overall Marched ecosystem. At this time I’d like to hand the call over to Mike Arends to discuss our financial progress in more detail.

Thank you John. Now moving to the third topic, a more detailed review of our financial results from the first quarter and comment on our guidance for the remainder of the year. In the first quarter we generated revenue of $34.2 million which represented accelerated growth from the preceding quarter. During the quarter, we saw strong growth in our revenue attributable to proprietary traffic. As was highlighted earlier in the call, revenue for proprietary traffic sources was $15.1 million which represented 34% growth from the prior year period. The principal drivers fro that growth were increase in traffic, selected marketing of certain of our sites, and receipts from our direct advertisers. The rates we received from our largest third party modernization partner, post (inaudible) launch, were relatively neutral. As we continue to move through the year we expect our enhanced content integration, selected marketing initiatives, and site re-launches will continue to favorable impact our overall modernization and growth. However, it is important to highlight that certain months can be impacted by seasonal traffic and modernization patterns, which we expect will be the case for the current quarter as it was in 2006. That being said, we are launching several product initiatives in late Q2 and in late Q3 that may offer offset normal seasonal traffic and modernization trends for the summer months. So, predicting the months of actual impact from certain of these initiatives can be difficult. Revenue from our partner network or advertising services group was $19.1 million. The principal factors impacting revenue were one, the continued transitioning away from advertisers and publishers utilizing wholesale pricing strategies and two, the continuation of fourth quarter trends in the finance category. As John mentioned, the majority of our Q4 advertiser and publisher changes were complete by April. It is important to note that that part of our network monitoring systems and rules are fluid as part of our consistent effort to adapt to changing search market prices. Also worth noting, due to the progress of our initiative tied to third party distributions as well as those tied to the redesign of our sales force, we believe that revenue growth from our partner network will accelerate the rest of the year beginning in the second quarter. Total operating costs excluding stock-based compensation, amortization of intangible assets for the first quarter of 2007 were $26.6 million. In the year ago period, total operating costs excluding the previously mentioned items were $22.8 million. In looking at the operating cost for the first quarter, our service cost excluding stock-based compensation decreased as a percentage of revenue on a year over year basis largely due to the increase in revenue coming from our own traffic sources. The increase in sales and marketing cost as a percentage of revenue on a year-over-year basis were largely due to increased personnel costs, marketing of select proprietary websites, and online advertiser acquisition programs. It is important to note that some of the increase in marketing expenses on a year over year basis was influenced by YellowPages.com and several of our directory sites as well as certain other customer acquisition initiatives. In the current quarter, marketing costs as a percentage of revenue may dip down ahead of our broader launch of 100,000 websites before possibly ramping up again to support our post-launch initiative. Other operating costs included additional investment in personnel and product development as well as increased technology infrastructure costs and certain costs related to being a public company compared to last year. Adjusted operating income before amortization for the first quarter wase $7.6 million. Adjusted earnings before interest, income taxes, depreciation, amortization, stock-based compensation expense and gains or losses of sales of intangible assets or adjusted EBITA for the first quarter was $9.5 million. Adjusted operating income before amortization and adjusted EBITDA, are two of the principal metric we use to measure the progress of our business liquidity, and our ability to generate cash. Adjusted operating income before amortization includes a reduction for depreciation charges and excludes amortization costs and costs related to our acquisitions as well as other non-recurring charges. (Inaudible) net income applicable to common stock holders for the quarter was $548,000 or $0.01 per basic share compared to a net loss of $1.2 million or $0.03 per share in the first quarter of 2006. Going forward, our operating results may be impacted by a number of factors including stock-based compensation charges, increased amortization costs associated with our acquisitions, other potential future acquisitions, our preferred stock dividend, and increased public company costs which will also impact our adjusted operating income before amortization and adjusted EBITDA results. Adjusted non-GAAP earnings per share, an estimate some Wall Street investors utilize, as a supplemental measure of our operating progress was $0.11 for the first quarter. Adjusted non-GAAP EPS represents adjusted net income divided by weighted average fully diluted shares outstanding for adjusted non-GAAP EPS purposes. Adjusted net income not only captures those items on a statement of operations that have been or ultimately will be settled in cash exclusive of certain non-recurring items, but represents net income available to common shareholder plus stock based compensation expense, amortization of acquired intangible assets, gain or loss on sales, and disposals of intangible assets, other income or expense, the cumulative effect of changes in accounting principles, and less the discount on preferred stock redemption. Turning to the balance sheet we had approximately $59.1 million cash on hand as of March 31, 2007. During the first quarter we continued to generate significant cash flow from our operations. Going forward we anticipate that we will use our cash principally to continue investing in long term growth initiatives including internal product development and sales initiatives, selected acquisition opportunities, and our stock repurchase plan. I would now like to discuss our financial outlook for 2007. We believe the momentum of the operational initiative communicated over the course of this call will help us drive accelerating growth through the year. Therefore we are reiterating our revenue guidance of $144-150 million. For color on our quarterly revenue expectations we anticipate that our annual revenue growth rate will modestly accelerate from 10% in the first quarter of 2007 to 10-12% for Q2. Based on this guidance we continue to expect that we will exit the fourth quarter with 20% or more revenue growth over the fourth quarter of 2006. Additionally, for adjusted operating income before amortization, we are reiterating our range of $35-39 million for the year. For the second quarter, given the mix in expected revenue contributions and continued products investments that are disproportionally weighted towards the first half of the year, we are anticipating the adjusted operating income before amortization to be similar to the first quarter. We expect we will be efficiencies and margin acceleration at the back half of the year as our revenue growth continues to accelerate at a faster rate than cost. Similarly we are reiterating our adjusted EBIDTA guidance as we expect to add back approximately $6 million in additional depreciation and amortization to the adjusted operating income before amortization range of $35-39 million. As we execute throughout the year we will continue to provide additional details and updates on our progress and financial outlook. I now would like to hand the call back over to Russ.

Thank you Mike. In our last conference call we walked through our outlook for product operational and financial progress in 2007. The main points we wanted to communicate today are that so far this year we are seeing things unfold in the manner we communicated a few months ago. Revenue growth rates quarter to quarter accelerating to (inaudible) operating leverage as we entered the back half of the year which will also set the state for 2008. In a time when quality traffic is harder to come by and few new sources are emerging for advertisers, we believe that Marchex has a unique opportunity to garner increasing market shares in the online advertising market, and specifically the local advertising category. We are increasing our advertiser relationships, our third party distribution relationships, and traffic to our proprietary network of websites. While the timing of the impact of certain of these initiatives can be difficult to predict, we believe that these initiatives will continue to add new opportunities and defensibility to our business. We are very energized by the opportunity with the upcoming website launches as scheduled in Q2 and Q3 that should drive growth in our proprietary traffic base. We know that the growth of our proprietary traffic base is very important and we believe that we are in a position to realize solid growth this year. As always I would like to thank our employees for their hard work. It's due to their efforts that we continue to be excited about our prospects for 2007 and beyond. At this time, operator, we'd like to give the call back to you to take questions from the audience.

Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments please press the numbers One followed by Four on your touch tone phone at this time. Touching One Four a second time will remove you from the queue should your question be answered. Lastly we do ask while posing your question that you please pick up your handset if listening on speakerphone for optimal sound quality. Please hold while I poll for questions. Our first question comes from Christa Quarles. Your line is live.

In planning your second quarter guidance is that assuming marketing services still stays negative in terms of growth? And then the second question is on monetization of direct navigation. We're almost halfway through the second quarter and I'm just wondering if there has been continuous improvement from Panama or if you could just characterize either the stabilization, I think Mike indicated that it was still neutral in Q1, if there has been any improvement in Q2? And then the third question is just on sales and marketing. It was a bit higher in the first quarter than I expected. Sounds like it might take a dip in Q2 until you ramp the new site. I was just wondering if you could highlight any commentary around what we should be expecting and if you should start to see some leverage on that line going forward? Thanks

I'll try and get these in order. First off when you look at advertising services they might make reference to that being an area we expect growth to accelerate and in 2006 in Q2 proprietary traffic had a small dip based on seasonality and so we think there may be some seasonality in Q2 and we do think that we will see advertising services grow and accelerate for the balance of the year. In terms of monetization rates on our proprietary sites we continue to see solid growth from our direct advertisers, and as it relates to Yahoo!! in Panama, the effects post launch were neutral and they've been largely neutral to late. As relates to the balance of the year we're just kind of building our forecast off of what we know and we'll update it as we continue to know more. On the last question, in terms of sales and marketing, your interpretation is correct. We had a number of launches particularly under new parts of our directory services site that we included marketing around. We do think marketing will likely dip this quarter and we (inaudible) ramp that back up a little bit after we get past the launch of those 100,000 OpenList sites as we roll into Q3.

So just to be clear in Q2 marketing services, I think you guys indicated the changes to the partnership have largely been done, but does that still mean that it will be negative like it was in Q1 or did you see an improvement from Q1 growth levels?

No, the advertising services we think will increase. We said most of that was largely done as of April and the majority of it was done as of our last call so while there still may be a little, that's predominantly behind us and we do anticipate our advertising services business to grow this quarter and see that growth accelerate through the balance of the year.

OK, thanks.

Your next question is coming from Clay Moran. Your line is live.

Thank you. Couple questions. First can you talk some more about the direct advertising on your websites? What percent of the inventory or the revenues from those sites is now coming from direct advertisers? And then you give some numbers I didn't quite follow on price-per-click. What was the change year-over-year and/or what was the change sequentially?

In terms of the price-per-click on direct advertisers that rate on a year-over-year basis was up about 50%. We didn't give the specific percentage sequentially but it was also up sequentially. So we did provide 50% year-over-year and it did sequentially increase in terms of those direct advertiser pay per click rates. Your first question was on how much inventory we're monetizing ourselves? It's still in the 20-30% range and our goal will be to increase that percentage over time, but as of now it's about 20-30%

Can you give us any idea of the difference between your direct advertiser price-per-click and what you get from your outsourced ads?

It's really tough to do that in an effective way. There are places our direct advertisers monetize better than our third party sources. There are places where our third party sources monetize better than our direct. Clearly one of the things that drives our ability to take more inventory for our direct advertisers is we continue to increase the depth and breadth of place we monetize better. We're seeing good progress. In every quarter we see those rates go up and we can continue to (inaudible). It sets the stage for us being able to complement that with more inventory. Clearly as we look at growth in local traffic, which is a key driver of our business, and our position in being able to be really kind of the first stopping point for local advertisers coming online, we think will give us the change to accelerate monetizing more of our own inventory. And obviously we're pretty specific today in that we're excited about when we look at the rate of growth of local advertisers coming into our system and our ability to be the primary fulfillment option with our proprietary traffic. That's the big theme as we go into the back after the year.

Second question, you are generating a meaningful amount of cash and you sort of talked about some potential uses of cash. Can you give us your thoughts on stock buy back at this point in time? I assume you didn't do any in the quarter; why was that? And then, you also mentioned potentially acquiring some companies that would be buying up domain names. Russell Horowitz : So, there are a couple of things. We do continue to look at domains that are potentially suitable for us to acquire, and right now what we've been focused on is getting very enriched high-quality content we can deliver to our sites. We continue to look at where we can complement that with selective acquisition. That's an active, on-going focus. On stock buy back, we have done some small buy backs of our preferred shares, on top of the approximately $30 million we had spent previously. And so that is a place we continue to look to be active, as well. So the combination of our free cash, looking at acquisitions that may make sense, specific demand acquisitions that we think are very leverage able in the context of our strategy, and where we can reel-in shares, is continuing to be a focus of how we're utilizing our cash. Clearly one of the focuses for us, as we are at a point where our platform and formula are getting clearer and clearer, is focusing on domestic and international opportunities. And so we think we're well positioned now to make the next steps based on this major launch we have coming up, and looking at how we can start to potentially extend that into other areas as well.

OK, thanks. Russell Horowitz : Thank you. Operator : Our next question comes from Stewart Barry. As there are many persons in queue, please limit your questions to one. Thank you. Stewart, your line is live. Stewart Barry – ThinkEquity Partners : Hi, good afternoon. Russell, could you just provide a little more color on why your direct advertiser up (inaudible)? Is it that local advertisers are willing to pay more per click than maybe general search advertisers are? Or is it that they are using your new conversion tracking product? I mean, what are the advertisers seeing that they're willing to pay that much more? Russell Horowitz : It's all about quality. And when we expose advertisers into direct distribution points on our network, they get more than competitive ROIs, and advertisers are sophisticated and smart enough that, when they see their ROI go up, they're going to up their budget and up their bids. We've been focused on quality throughout. We have one of the highest converting networks, based on our stats and stats that third parties provided to us, and so where we've been able to take advertisers and insert them into our system, we've been able to deliver a very compelling value proposition, both in terms of how we can target geographically, how we can target vertically, in turn delivering more than competitive ROI. That theme of quality plus quantity, as we've gone to 31+ million unique visitors on our own network, has been a catalyst to creating a virtual ecosystem that we think is a key bonus to driving accelerating growth. We've gone through a pretty important product-development cycle, and that, I think, is at least a data point that supports that we are doing things right, and advertisers are voting with their pocketbooks. Stewart Barry – ThinkEquity Partners : And do you plan to add some additional advertising products for advertisers to purchase, for example, banner ads or rich-ad formats? Russell Horowitz : We definitely have a pretty clear view of how we think our advertising services ought to evolve, and that does include greater ability and control for advertisers for what they buy and how they buy it, including over time, being able to deliver a unified user interface for advertisers. And so that is one of the themes we have going forward. And as we have tangible specifics, we'll share those professionally in conference calls, as well. Operator : Our next question comes from Gene Munster. Your line is live. Gene Munster – Piper Jaffray : Hi, I guess to recap on Panama, you mentioned it has kind-of been a neutral impact. Just to confirm, that means your guidance assumes that Panama is going to have a neutral impact going forward. Is that correct? Russell Horowitz : That is correct. You know, we think it through to basically base our guidance at this point on what we know. Yahoo!, with a recent launch, has a variety of elements that they've got planned for the balance of the year. And we think that prudence dictates basing our guidance on what we know, and as it unfolds and we know more, we can update accordingly. But that is a correct assumption. Gene Munster – Piper Jaffray : OK. Is there any chance that the optimization through Panama could go down, or is it only neutral to up going forward? Russell Horowitz : There are a variety of things they can do some of which we have visibility, some of which we don’t, we communicate closely with them. They’ve walked us through a variety of things that we think are positive in the long term but short-term we’re not going to try to over-guess at what those may be, so we believe that Panama has been a and we were very pleased to see it launch. We think its step one in their continuing to create better relevance for advertisers and monetization for partners. Obviously on a quarter-to-quarter basis, you don’t know what assets have been sold in what ways so when we have more data we’ll be sure to share it with you. Gene Munster – Piper Jaffray : In terms of industry, I would say Yahoo!! has been a great partner of yours. When you originally look back at the tax rates that you originally did the Yahoo!! deal with, how have those industry-wide tax rates changed?

High quality traffic we think continues to be a premium and people are willing to pay a lot for it and we like that as a large owner of very high quality traffic. So on the one side we work with partners who also have high quality and that can lead to us at times needing to pay them more, at the same time we believe that we will be a benefactor of that as well.

Our next question comes from William Morrison. You line is live.

Hi Russ, I’ve got a product question for you. Can you tell us, I think your PBC markets are currently ranked as a direct, via kind of a modified Dutch auction top, kind of like the way Yahoo!! used to be and now that Yahoo!! has moved more towards the relevancy model, I’m curious, do you plan to stick with a model where the top bid comes up first regardless or relevancy or are you looking at ways to include relevancy into that product?

We actually have a number of implementations, some of which are based on dead rate and some of which do have a relevant algorithm dictate that placement. So, when we look at where we’re going, we are exploring alternatives on how to implement and most effectively match advertisers with users.

Our next question comes from Jordan Rohan. Your line is live. Jordan Rohan – RBC Capital Markets: Yahoo!! has begun to communicate very specifically with channel partners that it plans to discount payments to others whose traffic clicks below the Yahoo!! average. Have you had these discussions yet and have you that into guidance yet or is this one of those renewable things?

Yahoo! has communicated with us about a variety of initiatives, which are all focused on trying to increase the vibrancy of their system ultimately for the benefit of all. I did answer, I think, in a similar way a prior question. There are a variety of things you can look at and you can know make sense ion the long-term and you can look at other stuff in the short-term by what they call quality-based pricing is one of the elements they’re telling us they’re working through and one of the key components there is quality. Given our focus on high quality, this is an area that we think hopefully in the long term will benefit us. But in totality our guidance is based on what we know today and we think the Yahoo! is making business decisions in their product evolution and we hope to be a benefactor of that both in the second half of this year and potentially beyond that, so its part of what they’ve communicated as a broader role out of a variety of product initiatives post-Panama.

Our next question is coming from Sameet Sinha. Your line is live. Sameet Sinha – Kaufman Brothers: Yes, thank you. Very quickly, do you hear talk about your initiative to go after larger advertisers as you transition away from the wholesale pricing. Can we expect any announcements on that? And also, in that regard, if you can talk about some of what you’ve mentioned regarding the advertising services other than from Tuesday?

The few things that we talked about in terms of the rules is increasing minimum beta rate and increasing the standards for as relevance to be in our system. Those are really some of the key components. Ads are content too and we want to make sure we’re delivering relevant content in whatever form and so folks who have a short list of key words and a lot of identical ad copy that were getting wholesale rates, we didn’t think they helped us deliver relevance to our partners and so the changes were rooted around those two primary things. But in terms of large advertisers, we have had a variety of wins. We haven’t historically talked about or publicly announced advertiser wins, but John, maybe you can just give the caller organizations there both in terms of our sales organization and our areas of focus. So we have, as we've previously communicated, we’ve focused on migrating a large part of our senior sales staff here to Seattle, and we've hired some very experienced folks in that area, and we have some specific initiatives on both the west coast and the east coast, to address some of the (inaudible), or the highest profile advertisers and agencies. This is a place where I would say we've done a bigger job in the past, but going forward, we definitely see this as an area of opportunity, especially as our proprietary traffic continues to grow. Operator : Our next question comes from Maurice Makenzie, your line is live. Maurice Mckenzie – Signal Hill : Yes just a couple of quick questions. The first is on really on Yahoo!, the contribution in the quarter, what it looked like as well as if you can discuss how close you are to renewing your contract and finally if you can discuss, if you have been approached by any other major search engines on developing new partnerships and diversifying that revenue stream thanks.

So I feel like I’ve…we obviously work with a variety of folks in the industry. Yahoo! is our primary partner. That existing relationship goes through late this year but we’ve got a variety of relationships with them that are ongoing. You know this is an area that we are certainly thinking about having a discussion. As it relates to I guess the other parts of your question, do you mind repeating those? Maurice Mckenzie – Signal Hill : (Silence)

Maybe you’ve cut off. We are always in talks with a variety of players given the position in the landscape of having thousands of advertisers that were delivering to all the relevant distributions points. So whether it’s shopping engines, premium websites, or search engines, we are always looking a way to beat the relationships with any distribution source that can be viewed as a value proposition to our advertisers. Thanks. Operator : The final call will come from Clay Moran, your line is live. Clay Moran - Stanford Financial Group : Thank you. I guess in the terms of Yahoo! contract or potentially moving over to another search engine. Can you just give us a timeframe when you think that might be completed?

Yeah, right now I think we’ve talked about our current relationship runs through late this year and as we get closer as appropriate we will provide some details but that’s not on today’s agenda. Thank you. Operator : We have another question coming from William Morrison, your line is live. William Morrison - JMP Securities : Sorry, I just wanted to ask Mike, can you give us the operating cash flow and count backs in the quarter please. Thanks. Michael Arends: The operating cash flow has been north of $10 million and we will be publishing the 10Q shortly so we will have the information in there and then from a count backs perspective consistent with what we have done in past periods of a million dollars or so.

OK, we thank you all for participating in today’s call and we look forward into giving you more updates in the coming months as we look at significant products progress and a variety progress in other initiatives as well. Thank you Operator : Thank you ladies and gentlemen this does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.