Avantax Inc (AVTA) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the InfoSpace Q3 2004 earnings release conference call. Today's call is being recorded. At this time for opening remarks and instructions I would like to turn the call over to Amena Sakopky, [ph] Manager of Investor Relations for InfoSpace. Please go ahead.

Good afternoon and welcome to the InfoSpace 3rd quarter 2004 earning conference call. I'm Amena Sahopky, Investor Relations Manager for InfoSpace. With me on the call today is Jim Voelker, Chairman and CEO, and David Rostov, Chief Financial Officer. Before we get started I want to remind of you of two things. First, this is an investor conference call. Accordingly we will only be taking questions from the investment community. Second, this conference call contains forward-looking statements relating to the development of the company's products and services and anticipated future operating results. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could affect the Company's actual results of operation include, but are not limited to, the progress and costs related to the development of our products and services, the timing of market acceptance of those products and services, our dependence on companies to distributes our products and services, the performance of our systems, the effectiveness of the development and implementation of our strategy, possible changes to that strategy, the ability to retain key contracts and personnel and the ability to successfully integrate acquired businesses. A more detailed description of certain factors that could affect actual results of operations is contained in the company's most recently quarterly report on Form 10(Q) filed with the Securities and Exchange Commission in the section entitled "Factors Affected Our Operating Results, Business Prospects and Market Price Of Stock." Listeners are cautioned not to the rely on these forward-looking statements which speak to the Company's prospects only as of the date of this conference call. The Company undertakes no obligate to update publicly any forward-looking statements due to new information, events or circumstances after the date this conference call or to reflect the occurrence of unanticipated events. Now I turn the call over to Jim. Following his comments, David will review the 3rd quarter financial results and then we will open the call to your questions.

Thank, Amena, and welcome everyone to the call today. InfoSpace is proud to announce a record quarter. Revenue was 67.2 million, up 115% over 3rd quarter 2003. Sequentially, revenue increased by 23%. Net income was 13.4 million for the quarter, up from 1.6 million a year ago and we continue to increase our cash flow. We further strengthened our balance sheet, adding 18 million to total approximately 310 million in cash and no debt. Our search and directory unit posted a strong quarter growing revenue 77% over the same period last year. Sequentially, revenues were up by 22% with a segment income margin of 44% in the 3rd quarter. This growth was propelled by increases in both rate and volume. We are pleased to report growth in each of our search businesses including our owned and operated sites, search distribution and directory. Across our owned and operated properties we introduced product improvements that spurred increases in paid searches. We are cautiously optimistic that these improvements will continue to drive growth. Our distribution business remains strong as we added new partners and grew our existing base. The key draw for our partners is the strength of our overall value proposition. With metasearch, we are able to highly monetize traffic and through our private labeling capability we offer solutions that build brands loyalty for our customers. With search in greater demand than ever, more and more high traffic websites understand the value of their own branded search offering. Equally important, advertisers understand the value proposition of search, particularly where search can be localized. The migration of advertisers and users to online Yellow Pages is accelerating. Out of a universe of 14 billion spent on U.S. yellow page advertising annually, about 7% of those dollars have now moved online.

Continuing to outpace ad spending is user adoption. 37% of looks ups are already occuring online, more than doubling the total from 2003. With growing consumer adoption and the proven return on investment of search and local search, we anticipate merchants will increasingly be attracted to the lead generation opportunities of online Yellow Pages. Info space is focused on exploiting this opportunity. After completing the acquisition of Switchboard late in the 2nd quarter we focused on product and operational integration. Shortly after closing, we introduced several feature improvements to the Switchboard website that leverage our core metasearch capabilities and make finding local businesses faster and easier. The new features reinforce switchboard's leading position in providing web users we enhanced information on millions of businesses nationwide. Now to our Mobile segment. Our Mobile unit posted very strong results in the 3rd quarter reporting a fourfold increase in revenue over the 3rd quarter of 2003 an 25% increase sequentially. This performance is driven by media downloads where revenues grew by close to 40% from the 2nd quarter. Margins were solid at 29%. Growth continues to be fueled by the penetration of download capable handsets and the adoption by consumers of applications such as ringtones, graphics and games. The acceptance of Mobile data services has grown substantially making Mobile content ever more valuable to our wireless carrier partners including Verizon, Cingular, T-Mobile, Virgin, AllTell, U.S. Cellular and many more. We now know wireless subscribers who download use 42% more minutes than non data users and spend 19% more on their monthly wireless bill.

Across the carriers we are seeing that downloading is a highly repetitive behavior. Once users download for the first time 60% return to buy more in the following months. These trends reinforce InfoSpace's strategic position and value proposition in the Mobile market. In the 3rd quarter we partnered with Virgin Mobile UK, providing Mobile content to their subscribers. This marks our first content agreement in Europe. InfoSpace is providing ringtones, graphics, games and real tones as well as promotional marketing programs featuring artists and other specialized content. Our Mobile content products also garnered the attention of Frost and Sullivan in the 3rd quarter receiving the" 2004 Mobile Music Product Suite Of The Year" award. Also in Q3 we expanded the categories of our content portfolio by acquiring Atlas Mobile. Atlas is a game company and gives us a competitive position as a provider of multi-player tournament-styles games such as Tetris, Hold 'Em Poker and Solitaire for Prizes. It also brought established gaming distribution relationships with Verizon, AllTell, Midwest Wireless, U.S. Cellular and Western Wireless. In the 3rd quarter we integrated Atlas Mobile's operations. Looking ahead we plan to port our game titles to the Java platform which will increase our distribution opportunities both here and in Europe. Mobile gaming is in its infancy but we see an important growth opportunity. According to the industry analysts by 2006 Mobile gaming will be a $1 billion industry in the United States and the European market is projected to reach over $5 billion in the same year. We are excited to expand our roll in the Mobile gaming space and look forward to adding new games, products and distribution to our portfolio. Strategically we focused on reaching the largest possible audience through carrier relationships, licensing and publishing of broad and deep content library attractive to consumers and providing the technology to reliably deliver it. Mobile devices and high-speed networks are combining to form a new global media network. We believe that personalization in entertainment services mark the very beginning of an industry that will continue to expand into information, commerce and promotional services as well. InfoSpace is in a leading position to harness the momentum of today's multi-billion dollar mobile data market and to add to the development of the Mobile network of tomorrow.

On a separate note, today we announce the resignation of a member of our management team Kendra Vandermulen, Executive Vice President of InfoSpace Mobile. Kendra has been instrumental in identifying growth opportunities and moving the company into a leadership position in the Mobile space. We thank Kendra for her hard work and dedication and wish her well in her future endeavors. To summarize the quarter, it was a very strong one and we are optimistic about the future. We are well positioned in growing markets. Our financial performance reflects the positive customer consumer embrace of these industries as well as the value we add for our customers. With our strong balance sheet, proven technology and extensive partner relationships we are well positioned to grow in search, directory and media downloads business. We continue to look for the right opportunities domestically and in Europe to expand organically and through acquisition. With that I will hand the call over to David to provide you with more detail on our financial results and our outlook. Thank you.

Thanks, Jim, and good afternoon to everyone on the call today. Third quarter was another great quarter for InfoSpace. Year-over-year we doubled revenue, increased operating income, increased net income and generated considerable cash. Our revenues for the 3rd quarter were $67.2 million, an increase of $35.9 million, or 115% from 3rd quarter 2003. Driven by strong growth in both of our businesses. Operating income was $12.4 million versus a small loss in the prior year 3rd quarter. We had our fifth consecutive quarter of positive net income generating $13.4 million for the quarter versus net income of $1.6 million in the prior year 3rd quarter. Earnings per diluted share for the 3rd quarter of 2004 was positive 37 cents versus 5 cents for diluted share for the prior year 3rd quarter. When comparing 3rd quarter 2004 net income to the 2nd quarter 2004 net income, keep in mind that the 2nd quarter 2004 includes a net gain of $3.7 million, primarily from a litigation settlement or approximately ten cents per share. Excluding this gain, net income would have increased sequentially by over 35%. Weighted-average fully diluted shares was $36.4 million for the 3rd quarter of 2004. And as of September 30 of this year we had approximately 425 employees. Now let me turn to our segment starting with search & directory. In the 3rd quarter of '04, Search & Directory revenues were $42 million, up $18.2 million or 77% from the 3rd quarter of '03. In search, both rate and volume experienced strong growth in the period. Our search & directory business North America generated approximately 193 million paid searches during the quarter, up 38% year-over-year and 8% sequentially. Average revenue per paid search was 17 cents. Up 21% year-over-year and up 6% from the 2nd quarter 2004. Third quarter also reflects the contribution of Switchboard's financial results for a full quarter versus approximately one month in the 2nd quarter of this year. This added more than $3 million of incremental revenues for the quarter.

We don't plan to break out Switchboards results separately going forward since we have integrated the revenues and operations into the rest of our business. Segment income for the group was $18.5 million, up $6.2 million or 50% from the 3rd quarter of 2003. This segment margin increased to 44% from 42.5% in the prior quarter. This was due mainly to growth in our owned and operated search business as well as a favorable impact of the switchboard integration. In the 3rd quarter, once again search distribution revenues in North America accounted for over 60% of the portion of search & directory revenue coming from search. Now turning to the Mobile business. Revenue for the 3rdquarter was $25.1 million, an increase of $19.5 million, or 343% from the 3rd quarter of 2003, and up 25% sequentially. The increase in revenue is a result of strong growth in Mobile media downloads, in particular coming from MP3-type ringtones. As we had expected in the 3rd quarter relative to the 2nd quarter 2004, we saw some revenue and margin reduction in our Mobile services business. Mobile segment income totaled $7.2 million for the quarter, up $6.3 million, or almost eightfold, from the same period last year. And the segment margin was 28.5%. Regarding the balance sheet, the company ended the quarter with approximately $310 million in cash and marketable investments. Our cash balance increased by $17.8 million from the 2nd quarter. From the end of the 2nd quarter. Now let me turn to our 4th quarter outlook. We are once again raising our guidance. For the 4th quarter of 2004 we expect revenue to be between 71 and $73 million.

Excluding any one-time gains or losses for the 4th quarter, we expect to generate income from continuing operation of $14 million and fully diluted earnings per share of 38 cents. This assumes 37 million fully diluted shares in the 4th quarter. For the full year 2004 we expect total revenue to be between 241 and $243 million, up from prior guidance of 227 million to $237 million. In the 4th quarter of 2004 we expect to see an increase in corporate operating expenses of up to $1 million, relative to 3rd quarter 2004, due to higher spending on professional services including Sarbanes-Oxley work. We expect income from continuing operations for the full year 2004 to be $46 million, up from prior guidance of 36 to $40 million. We expect fully diluted earnings per share to be $1.27 for the full year. This concludes our prepared remarks. I will now turn the call over to the operator. Operator, and we would be happy to take your questions.

Thank you. Our question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touchtone telephone. If you are using a speakerphone today, please be sure to turn off the mute function in order for your signal to reach our equipment. We will proceed in the order you signal and take as many questions as time permits. Once again, please press star, one at this time to ask a question. We'll pause for just a moment to assemble our roster. Our first question comes from Safa Rashtchy of Piper Jaffray.

Good afternoon, guys. Congratulations on a great quarter.

Thank you, Safa.

Couple questions, first on the Mobile business which seems to be doing very well, could you talk about the competitive landscape, whether that has had that has had any pressure on the margins? You alluded to the decline in the margins that you saw this quarter. Will that trend be continuing and what kind of -- what factors do you expect to determine the margins going forward? And I have a quick follow up on the search & directory business.

Well, the -- remember, we talked about the compression in margins really having kind of being two issues there, Safa. One is that our, you know, we continue to see price pressures we predicted in our old services business that's now about, I want to say about 20% of the business there doing as downloads grow. That business, you know, we expect to continue to see some pressure there and that's, you know, not that margins were substantially different from last quarter but that's one piece of it. And then as we see a shift to more of the MP3 tones, real tones on truetones, however you want to put that, you know, those are lower gross margin but the volumes continues to be pretty strong, very strong in that. In terms of competition in that space, you know, we continue to hold our market share and in fact perhaps are increasing it but, you know, we would, you know, this is a very, very dynamic industry and it's going to be a very -- you know, this is going to be a very big industry. So wee would certainly anticipate other folks, you know, working very hard to be involved here. David, you have anything else?

No, I think that sums it up.

Okay. What else, Safa?

On the search & directory business, David, could you give us the comparable numbers X Switchboard? I know you mentioned that Switchboard was 3 million but in terms of the growth rates and the increases in number of inquiries or clip charges it would help if you can give those X Switchboard?

Yeah, on a revenue basis, Safa, sequentially we grew about 22% on search & directory. As I mentioned over 3 million of that incremental growth of the 7.7, 7.8 million of growth, over 3 million of that came from the Switchboard acquisition. Keep in mine in the prior quarter as we had said over $1 million in the prior quarter came from Switchboard. If you add those two up you will get a sense of the size of it in the overall absolute numbers. And in terms of specifically on paid searches, that's probably a little too granular and for competitive reasons we haven't broken out that piece. But, you know, needless to say you can look at the revenue side which ultimately is what counts the most.

Okay. Thank you.

Sure. You're welcome.

Imran Khan with JP Morgan.

Hi, guys. How are you?

We're fine, Imran. How about you?

Good, thanks. A couple questions, actually. First on the margin side, could you comment like what percentage of your volume is true tone and, you know, last quarter you said that you expected to see 25 to 30% margins on the Mobile side. Should we rethink about that margin going forward? And secondly on a search & distribution side, I believe you had like 18 months or 24 months relationships? Those are coming up for renewal. Could you comment about the, like what kind of, do you expect the same kind of pricing pressure and market pressure on that side? Thanks.

Well, let me take the second one first. This is Jim, Imran. They are actually, those contracts generally are 24 to 36 month contracts. Okay? And remember we really started in any earnest signing those about mid last year. If you look at -- if you go back you can see the kind of acceleration in our search revenue starting in the last two quarters of '03. So there's not a -- there's not an imminent rolling over of those and just in general I would say as we go out and do new sales and deal in this marketplace, we are seeing the tax stay relatively flat. It's not moving -- not moving dramatically either way. David, you want to talk about ringtones?

Imran, on your questions on margin, you know, we guided last quarter that we thought the Mobile business would be in in the 25 to 30% range. This quarter that we just reported as you know we did almost right in the 29% number. So, you know, it's I think that's still a good view on where we are and where we will be in the next, you know, at least kind of as we look out to the next quarter or so. And then in terms of volume of ringtones, you know, we have in our Mobile media business we have a number of different components. We don't break those out separately, but just to remind you which they, we have kind of what we would call the label tones or truetones which are the MP3 quality one, we have the polyphonic type ringtones, and then we have graphics and other thing like that, and then, you know, and more recently we've added the games business. So all of those are different types of media and they are all part of -- an important part of our business.

Okay. If I ask like quickly a couple of -- two long-term questions. One is timing of Java roll-out in terms of your Mobile gaming side. It seems like that has a lot of higher volume growth. And secondly with regards to the truetone, my understanding talking to like on an Itune side, on Apple side, it seems like their record labels claims like north of 50% of the margins on the retail price? Do you expect to see the pricing for the MP3 quality sound very similar to Itune or do you think you can get a better deal? Thanks.

Let me see, I'm trying to remember the first one, the Java timing. Look at early Q1 is our timing there. The, you know, these are different kinds of products. They are different products. And have different kinds of attributes. We have -- you know, where we have value on truetones it's a little bit different than polyphonics. It's still a lot of value being added in securing the rights and the licensing and clearing of those rights. I don't think you can -- it's not quite the same -- not quite as equivalent to real, what the Itunes folks are doing as what we did there. I don't know, David, you have any more detail on that?

Yeah, great, guys. Have fun at the conference.

Thanks.

Stuart Barry, ThinkEquity.

Good afternoon. Congratulations. Looking at 4th quarter guidance how should we think about it? Fourth quarter is seasonally your strongest quarter and we looked at the bottom line guidance, you had guided for a penny increase sequentially. And then, you know, 3 to 4 million increase in revenue.

I think, Stuart, it's David, I would say a couple things. One, you know, at the end of 2nd quarter we had guidance of 227 to 237 million for the year for revenue. We have obviously bumped that up quite a bit, similarly on the net income side, we bumped it up from 36 to 40 to 46 million based on strength in Q3 and also our outlook for Q4. You know, and even imbedded in the guidance for -- we gave guidance the 2nd quarter had a healthy growth rate assumed in the 2nd half of the year. So we are still, you know, excited about the second half, we are cautious by nature. Also, you know, we continue to say and continue to think that these are just really early businesses. We don't have a long history of predictability. So given those various items, you know, we think this guidance is the right guidance. On the net income side specifically, you know, we continue to think we'll see healthy increases in the business. As I mentioned, we could see up to $1 million in professional service fees primarily, or professional service costs as we work on a number of different initiatives in the 4th quarter that we've decide to use outside help for rather than do it inhouse. You know, a number of initiatives on the business development side. Some on the technology side, some on the Sarbanes-Oxley side, as probably most companies are seeing the same in the 4th quarter. And that, that will contribute as well to our thinking on the guidance.

Okay. And on the search side, could you comment a little bit more on the sort of competitive landscape and the distribution market, number one? And number two, how your efforts to better monetize the Switchboard traffic are going?

Well, on the second one there, Stewart, I would say that, you know, we feel like we are at or ahead of plan in terms of the integration of Switchboard and the work we are doing there and moving forward on the monitization of that traffic. We gave guidance, you know, that we thought was prudent when we made the acquisition between 10 and 12 million in additional revenue in the 2nd half and, I think it was three to five. Four to five on the EBITDA. We still think that's right. The, on the first one in terms of the distribution market, you know, it's, we compete kind of at the, compete mainly against people like Find What? and Look Smart. We think we have a pretty good program in terms of the way we can monetize relative to those folks because of the strength of our partnerships with Google and Overture and the strength of their advertising bases. And we continue to work hard in that area and add distributors and, you know, it's so far so good. Our growth has been, you know, pretty steady.

Okay. Thank you very much.

Thank you.

Scott Sutherland, Wedbush Morgan Securities.

Good afternoon and congratulations on the quarter.

Hi, Scott.

Couple questions. First of all, could you give us what the Atlas contribution was in the quarter?

Scott, this is David. That's not something we are breaking out separately. And furthermore, as we said it's a really small business and not a meaningful contribution to the quarter. It's an early stage business and we are really looking to position that for our strategy and growth into '05.

Okay. Great. And can you give us your 10% customers and would that also talk about, you know, I guess Cingular and AT&T was finally approved today, so you have a presence in both those carriers so maybe what you expect how that will roll-out when they become one carrier.

On the 10% one, no change from prior quarter.

Okay.

On the -- you know, I think the Cingular and AT&T merger, you know, we hope is a positive for us. We have a pretty strong relationship with the folks at Cingular and, you know, they are the acquiring company here. But you know, I think for us and for a lot of other vendors involved in this what it really means is, you know, making certain that we are really focused to help them as they go through, you know, a transition to try to put these two companies together -- networks together. This is a pretty daunting task in terms of getting all the, you know, the products and the systems and the networks and everything to be, you know, look like one, you know, one operator and I think it's going to take quite a bit of time. We are prepared to stand at the ready to help them do whatever they need to do and hope that it benefits us.

Okay. A couple more questions. Your query rates went up and, you know, you had a full quarter of now Switchboard in the quarter. So can you break that out and talk about, you know, core rates? Was that going up without the Switchboard?

Scott, it's David. You're talking the rate per search, I assume?

Yes.

Remember, just by way of background that the -- on average the directory search although on average a directory search is a lower rate than a search on a traditional search per search. But the good news on that is that directory tends to be a much higher commercial rates because almost all if not all yellow page searches are commercial in nature. So the answer to your question is we saw nice growth on the search side and obviously we added more search on the directory side in part coming from the Switchboard acquisition.

Definitely it appears so. And lastly, your other Mobile, I mean had a good -- I think you indicated about 40% growth in the download, was that download or download revenue? And then maybe talk about your legacy Mobile services, are we seeing any growth there?

Yea, on the 40% percent that Jim cited was the media download business and that's download revenue. In terms of the services side, as we've talked about for the last few quarters, you know, we've seen price pressure there and we saw some decline there quarter-over-quarter. Given -- not because of changes in the customer mix but given price pressure.

Any, that concludes your Verizon relationship that you rewon this last quarter.

Well, those prices haven't changed obviously. We just joined into that relationship again and launched the service but, you know, it's kind of reworking one by one all the relationships that we have there to, I guess I would consider market rates.

Okay. Great. Hope we'll catch up at the show here.

Thank you.

Mike Latimore, Raymond James and Associates.

Yes.

Hello, Mike.

Hello there. Congratulations as well.

Thank you.

David, you mentioned that MP3 tones in the quarter, did you say there was a majority or did I not hear you correctly?

I didn't comment on specifically on that, Mike, but what I did say was that an important part of the growth is coming from that area.

From that. Okay, great. And then, just with regard to the Mobile business itself, how do you think about seasonality in that business? You know, typically obviously 4th quarters are pretty strong just generally in wireless. Would you expect a similar kind of seasonality in the download segment as well?

Well, we are going to find out. This is our first really the first quarter where we've, or first year where we've owned this business and seen this kind of growth. I mean, we, you know, anticipate that we will follow the kind of the trends you'll see on phone sales and a lot of those phone sales happen, you know, early in the month of December but the activations may not happen until Christmas Day. So we will, we are going to be very curious to see how this quarter plays out.

Okay. All right. And then on the search & directory side did you give a percent from distribution this quarter?

Yes, it's over 60%.

Over 60%. Okay. Just lastly Kendra's responsibilities, who is going to sort of assume those, I guess?

Well, right now it will be a team of Hank Scorne, Kathy Rae, Kathy is our COO, Hank Scorne, who runs the product side and Steve Eltman who is the CTO there will step up and we've initiated a search there to look for her successor.

Okay, great. Thank you.

Thank you.

Richard Bebco [ph] of Merriman and Company.

Hey, guys, congratulations on the quarter. A question on the Switchboard again, contribution of about 3 million, appears a little bit light. Could you comment on that again, to, you know, what, you know, what's different from your expectations than the actual?.

Yea, Richard. To be clear the 3+ million that I indicated was incremental contribution. That wasn't the whole switchboard. That was incremental relative to the prior quarter where we only owned them for a month. I think the other point to make here about switchboard and the reason I made that comment about not breaking it out separately going forward is we've now successfully integrated the business both on a revenue side as well as on the operating side and so we've added in a number of things. For example, we've added search features and functionality to their directory business. And so when you start to compare that even in the number I just gave you it's very hard to compare that because you are getting a whole other stream of revenue and the benefit of joint operating expenses, joint sales force, et cetera. So that's why be cautious about trying to make kind of a direct comparison there once it's integrated.

Gotcha. That helps. Could you also go over some of your strategy on the local side of the market where you guys appear to have pretty good competitive positioning? What else do you expect, what else are you seeing in the market trends? Are you looking for more acquisitions of traffic? Are you happy with the traffic from Switchboard and so forth? How are you going to compute the growth traffic on interest rate.com or another acquisition for properties you might acquire?

Well, we are very happy with the Switchboard traffic and the growth that it continues to, organic growth it just continues to show. We are -- and Richard, we have a fairly healthy balance on our balance sheet, cash balance that we would like to put to work for the right properties at the right prices. You know, so we are always looking for opportunities to expand our traffic base there. And in terms of strategy the first thing that we want to do is really, and David alluded to it, we've started on this already is to really enhance the products and make sure that we have really the best of all worlds. We will be drawing from the expertise and the -- that Switchboard had on the local side, the kinds of search features we've been able to add from our side and then overall putting the meta concept and metasearch capability into the platform to really start to improve the product and then put that product outcross the board across all our sites and into our distribution sites as well where it's appropriate. So that's the first step is build the best product that we can and that's what our folks are focused on.

One last question on the Mobile side, maybe I had missed it but what is the timing of the roll-out of the Java?

We are just thinking early next year.

Okay. Thank you very much.

Thank you.

Sasha Zormitch, [ph] Oppenheimer.

My question is regarding your guidance giving. This has been sort of the 2nd quarter here where you have posted results that were considerably above your guidance. So when you give out guidance ranges does it sort of expect to be this kind of, sort of really what your philosophy around giving guidance on one hand and on the other hand what kind of visibility do you really have in giving guidance sort of as the business progresses? Clearly it's a wonderful thing if it does what it's just done. Of course one worries about what if it goes in the other direction. I was wondering sort of what your policies are about that and how we are to think about this?

Sasha? David. Our policy is to look at all the various data points we have both historical trends, future trends, industry data and give investors our best feel for what we see the business doing. Obviously as shorter periods of time we have more visibility like any company than longer periods of time, but I think it's important to always remember that these are both the search business and in particular the Mobile business where we've owned this media download piece we started this business in November of last year and last year's results were very, very tiny, so I think it's always important to just remember that this business and particularly on the Mobile side has very little by way of history to base our thinking around. Having said that we spent a lot of time internally developing, you know, predictability models and analyzing the business results and creating metrics to look at. So you're getting our best sense of what we think is the right set of numbers.

Yeah, I'd also add that particularly on the Mobile side we don't to your point there, we don't have a tremendous amount of visibility into the sales or even the promotions if you will, for a particular handsets from our carriers. That's something they keep very close to the vest for competitive reasons. It's quite understandable but it doesn't, you know, it doesn't lend itself to our purposes in terms of trying to, you know, really predict accurately what those roll-outs are going to look like. That's, that's a big part of what's driving the growth there.

Thank you.

Thank you..

Pete Spear with Doublefield Hambrecht.

Hi, guys. Good afternoon.

Hi, Pete.

Could you give some more guidance on operating margins, how we should be thinking about that, just given a trend in Mobile and then also kind of a status and what your thoughts are, plans are for the private label business going forward?

Sure. I'll take your first question, Pete. Regarding guidance on Mobile, as I said in the last earnings call we think 25 to 30% is the right range for our Mobile business and so we are sticking with that at this time and, you know, this quarter we did 29%. So obviously well within that range. I will turn it over to Jim for the second part of your question which related to --

Private label on the search side. Well, I guess, you know, search just continues to be, you know, continues to be a very important event on the Internet and, you know, certainly everybody with a website has determined that they can, you know, monetize their traffic to some degree or another through search. I think the other thing that's actually more important than that, that kind of is a growing market, is that, you know, is that increasingly, people see the value and they can see it I think not only in the monitization but if you will in the long-term equity value of owning their own "their own search franchise." So, in other words, keeping users on your site for a longer period of time and having users view you as a search vehicle and over time having the market view you as partially as such. So, you know, we think that the activity in that business is strong. We will continue to be strong and, you know, we have a pretty good value proposition as been evidenced by our results. You know, we can get a lot better at doing this and we are adding things all the time to improve our reporting capability and some of our management functions. But, you know, we think it's a good, strong market.

So it's safe to say that private label still is the a number one priority as far as search is concerned.

Yeah, it's a very big priority. You know, it seems like we have about 4 or 5 number one priorities at this company, but that's one of them.

Right. Great. Thanks a lot.

Due to time constraints we have time remaining for one final question. We will go to Jason Aurillio with First Albany.

Hi, guys, congratulations on a great quarter. Thanks for taking my call.

Thank, Jason.

I guess a question regarding 2005 outlook. I know you said on the Mobile business you don't have a a lot of visibility in terms of what's going to happen with promotions and even on top line sales. I was wondering if you could give some sense of how you think growth will look like. You are at a $100 million run rate now, how growth will look like on the topline going into 2005. I guess from an industry perspective and is it a fair assumption to assume that you guys can grow in line with the industry? And then secondly on the margin side of the business, wondering if perhaps you could provide a little bit more color on sort of your four key segments? I guess within Mobile media between truetones, polyphonics, screen savers and games, and just talk about the margin structure, maybe of each one of those business so we get better gauge how the revenue will translate into margins into 2005 as perhaps handsets transition over from more polyphonic to truetones centric handsets? Thanks.

Okay. David is going to take the second question first.

Fair enough. David on the margin side, you know, we've talked about at the end of the day we look at and we manage to EBITDA margin, which, you know, our segment income, as we call it, segment income margin, talked about 25 to 30% there. In terms of the specific products within that I will give you a systematically obviously for competitive reasons we don't break them out at that granular level we but schematically, we've talked about the fact that the label tones or the truetones have a much higher revenue per unit, typically a much higher revenue per unit and also we've seen really high usage of of the product or I should save higher usage than some of the other products because of high quality. However, in that situation typically the labels or the owners of that content do some more of the work than they would do on the polyphonic side so the margins, what you would call the gross margin might be a little bit lower on a percent basis. On the polyphonic side, you know, we do the creation typically of the music and the publishing rights, clearing, all that so our margin percent tends to be higher but the price points have been a little bit lower so just to give you a feel. Most folks are charging about $2 for a polyphonic ringtone and about $2.50 for a more truetone type product. Again it will vary dramatically by carrier but that's kind of a rough sense. On the game side I think you will you see depending on what type of game, if you've licensed -- if you've created your own game your gross profit will be incredibly high because you are not sharing that revenue stream with a content owner. If you are licensing content from someone that's a very name branded content owner obviously will you share more of the revenues than a lesser named content owner. And then on the services side as we've talked about you really don't have much by way of, you know, variable costs. It's more of the fixed cost of maintaining and managing those relationships. So hopefully that gives you a feel at a high level for the various product lines and kind of how they are evolving.

So David, are they tight enough to where you would feel comfortable saying that if all of your ringtones transition from polyphonic to truetone that you would still be able to manage the business in the 25 to 30% margin range that you gave into 2005?

I would say at this point, Jason, we are not providing specific guidance in terms of '05. We are actually as we speak working on our plans for '05. I would prefer to comment on your specific question as it relates to the rest of this year and from that perspective, you know, I've said a couple of times on the call that I think 25 to 30% margin for the rest of this year is still in line with what we are expecting. And, you know, one of the issues that determine all that is your relative growth rates of those various products and that's the kinds of thing we are working on right now as we look at next year.

Yea, I think in terms of looking at next year, you know, we are working real hard on that on both sides of the business and, you know, we are pretty curious, I'm pretty curious, too, to see where we come out. But we are working hard on it. We would like to get a little bit more data in terms of, as David said, a product mix on both sides here how we, you know, we manage to move the needle a little bit on owned and operated in search. That's got, I'd like to see that work a little bit longer before we settle in on '05. And, you know, but we feel strong, you know, about the businesses. I mean they, you know, we are in growing markets. We are able to grow right now on the search side a little bit faster in the market. We like that. And can we grow as fast as the Mobile market next year? I'm not sure who is coming out with the numbers of what the Mobile market is going to do next year but I think, you know, internally our goal will be to a find a way to grow more than the growth of the market. I mean that's your goal as an operator. So we feel bullish about the businesses we are in and confident and, you know, as we get more information about what '05 looks like we will be talking to people. Thanks for the question.

Great. Thank you.

Okay. With that, thank you so much for attending the call and we look forward to seeing you out there on the road. Take care.

Once again this will conclude today's conference call. We do appreciate your participation. You may disconnect at this time