Avantax Inc (AVTA) 2004 Q4 法說會逐字稿

Good day, everyone and welcome to the InfoSpace Q4 2004 earnings release conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Amena Sahopky. Please go ahead.

Good afternoon and thanks for your patience, everyone. Welcome to InfoSpace's 4th quarter 2004 earnings conference call. I'm Amena Sahopky, Communications and 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 you of three 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 operations 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 distribute 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 recent quarterly reports on form 10-Q filed with the Securities and Exchange Commission in the section entitled "factors affecting our operating results, business prospects, and market price of stock." Listeners are cautioned not to 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 obligation to update publicly any forward-looking statements, due to new information, events or circumstances after the date of this conference call, or to reflect the occurrence of unanticipated events. Third, in this conference call, we will discuss adjusted EBITDA which is a non-GAAP financial measure. A table reconciling the company's adjusted EBITDA to income from continuing operations in accordance with GAAP is included in the table accompanying the condensed consolidated financial statements in our earnings press release which can be found in the Investor Relations section of our corporate website. Now, I will turn the call over to Jim. Following his comments, David will review the Q4 financial result, and then we will open up the call to your questions.

Thank you, Amena. And welcome to the call today. 2004 was a year of tremendous growth and profitability for InfoSpace and we're very proud of our 4th quarter and full year '04 financial results. Revenues, profits, and cash flow rose substantially year-over-year and we experienced growth in every aspect of our business. Looking forward, we've improved our strategic position via acquisitions in the directory and mobile gaming arenas. Our strong financial performance reflects the execution prowess of our employees as well as the fundamental strength of the markets we compete in and our position within those major markets. Fourth quarter revenue was $79.7 million. Up 104 percent over 4th quarter 2003. Sequentially, revenue increased by 19 percent. Net income was 18.9 million for the quarter or $0.50 per share, up from 9.9 million, or $0.29 a share a year ago. And we continue to demonstrate increasing operating leverage in our cash flow. Adjusted earnings before interest, taxes, depreciation, and amortization or adjusted EBITDA, was 21.7 million, an increase of 4.6 million, or 27 percent sequentially from the 3rd quarter of '04. The adjusted EBITDA margin for the quarter was 27 percent as well. For '04, revenue was 249 million, reflecting an 89 percent increase over the full-year '03. Net income for '04 which includes the gain from the sale of Payment Solutions business was 82 million, versus a net loss in '03. Excluding that gain and related items from that transaction, income from continuing operations for '04 was 51 million, or $1.40 per share, versus a net loss in '03.

In addition, we further strengthened our balance sheet, adding $27 million of cash since the 4th quarter '03, to finish the year with approximately $322 million in cash and no debt. Now, a look at each segment. The search and directory unit posted another strong quarter, growing revenues 66 percent over the same period last year. Sequentially, revenues were up by 12 percent, with a segment income margin of 46 percent in the 4th quarter, propelled by increases in both number of searches and the rate per search. Again, we're pleased to report growth in each component of our business. The owned and operated search site, search distribution and directory. Product enhancement drove increases in paid searches on our owned and operated properties. Intelefine, our query intelligence technology, is having a measurable impact on the relevancy of results, frequency of searches, and paid click through rates. This is the second consecutive quarter of revenue increase for our owned and operated sites, and this growth accrues directly to the bottom line. Our distribution business in which we private label our search and directory capabilities was the unit's strongest area of growth across the year. The combination of modernization rates, customization rates and unique metasearch technology allows us to create a compelling product for our distribution partners, one which enhances their own brands. As the major companies in the search markets strive to differentiate themselves through their search technologies and as a variety of web properties desire integration of proprietary data into search, metasearch is becoming a more compelling and valuable technology.

Independent research demonstrates that result sets from various search engines are diverging and further studies have demonstrated that our metasearch technology is delivering a significantly higher success rate than any single search product. Our distribution partners are the beneficiaries of these trends. Leveraging metasearch, the distribution business generated most of the unit's 66 percent year-over-year growth. We expect this portion of our business to continue to grow in importance in '05, as more companies understand the value of offering their customers a search function which reinforces their brand and keeps their customers on their websites. Moving forward, we believe our commitment to enhancing and supporting our customers' brands will continue to be a major point of differentiation. As searches become the second most popular activity on the Internet, and online advertisers have discovered the value and efficiency of the medium, the prospects of local search have improved. In the past year, online yellow page lookups have increased to 37 percent of all yellow page lookups driven by the adoption of broadband services and the continuing online shift in consumer behavior. As a leader in online yellow pages, InfoSpace is focused on creating a unique user experience by combining our metasearch capability with the industry leading Switchboard platform to deliver the most comprehensive results sets available. Since acquiring Switchboard in the 2nd quarter of '04, we've introduced several feature improvements to the site and significantly expanded our directory listings, which now include advertisers from Verizon, BellSouth, Dex Media, MartinDale Hubble, LM Barry, Knight Ridder, Overture and Google. Our goal for 2005 is to build the best directory user experience in the market by combining our strengths and structured data and web search along with editorial and other value-added content. We will also launch a next generation mobile directory product in '05.

With a double digit growth rate that is significantly above market, InfoSpace is positioned for a strong 2005 in our search and directory segment. Now, to the mobile unit. The mobile unit completed a transformational year by posting very strong results in the 4th quarter, reporting a 250 percent increase in revenue over the 4th quarter of '03, and a 29 percent increase sequentially, and the largest absolute dollar growth of the year. Mobile margins were 25 percent. This exceptional performance continues to be driven by media downloads. Hand sets is the key metric driving download adoption and at the end of 2004, just 30 percent of handsets in the North American market were download capable. We're still at an early stage market with fewer than 10 percent of North American subscribers downloading content. Consumer adoption of ringtones, graphics and games continues to rise and with it carrier interest in driving ARPU and decreasing churn by merchandising variety of content. As investor interest in the mobile content market has grown over the year, questions have arisen about the potential impact that increased competition and direct deals between carriers and content owners might have on our business. While the exciting opportunities in this space will draw much interest, we are the leader in mobile downloads in North America, and to achieve this leadership position, we've developed a number of key competencies across the supply chain. We've built a broad catalog of polyphonic ring tones, true tones, graphics and games and are continuously expanding it. We specialize in licensing and digital rights management, in order to protect our carrier and content partners' interests.

Licensing is a complex world. Where artist, publishers, labels and other entities own rights to content that must be guarded and accurately compensated. InfoSpace has become a trusted partner of these various constituencies, clearing content for millions of transactions monthly. To further enhance our value, we support our partners with promotional marketing programs featuring top artists and other specialized content. In the 4th quarter, we scored an industry first by creating and publishing the first live music for mobile ring tones. Working with Island Def Jam music group we recorded exclusive content with the multiplatinum artist Ludacris that was released last week on Cingular. Music artists and celebrities are embracing the mobile medium as a means to extend their brands, interact with their fans on a personal level and create new revenue streams. Given Infospace's track record of providing exciting mobile products from popular artists like Nelly, Usher and the performers at last week's Sundance Film Festival, artists are increasingly looking to InfoSpace to create compelling mobile content promotions for new releases and tours. Additionally InfoSpace's long standing partnerships with such major mobile operators such as Cingular, Verizon, T-Mobile, All Tell, Rogers and many others, have allowed us to integrate at several levels in order to provide store front applications, user interfaces, billing and portal services and a variety of content. Through our relationships with the major handset manufacturers, we also specialize in rendering and delivering content to more than 500 unique mobile devices. Our expertise across the complex multi-stage process of content acquisition and delivery makes us a valuable partner for mobile operators and content producers. Neither the carriers nor the content owners possess the core competency or the scale necessary to cost effectively execute the numerous tasks across the supply chain.

Although some of our mobile partners have entered into direct content licensing arrangements, we continue to perform management and delivery functions under favorable economic arrangements. As the mobile market grows, and the content pool expands, the complexity of content acquisition, rendering, and delivery will increase and become more challenging to manage. We believe the leadership, expertise, and outstanding performance of our mobile unit throughout '04 have demonstrated InfoSpace's important position in the mobile content value chain. Beyond ring tones and graphics, mobile gaming is emerging as a major category. Mobile gaming in the U.S. is expected to reach approximately $300 million in '04, growing to nearly a billion in '06. The European market is even larger with industry estimates for '06 up to 7 billion. The market is clearly growing rapidly and InfoSpace is poised to take advantage of the rising demand with new and exciting mobile gaming products. Over the 2nd half of '04, we acquired three mobile gaming companies. Atlas, I-Elmo and Elkware. The three companies provide a large portfolio of more than 100 J2ME and brute gaming titles, core development, publishing and porting capabilities and critical distribution relationships with major mobile operators in North America and Europe, including Vodaphone, Verizon, O 2, Orange, T-Mobile, Telefonica, 3, and Tim. Our mobile gaming strategy has been to invest in the core competencies required for a sustainable leadership position in this space. These skills include licensing, development, and technology assets.

Our Hamburg-based acquisition Elkware designed award winning games including immersive role playing games and popular branded title games that are distributed through the major mobile operators in Europe. Elkware also has a proprietary porting technology for converting J2ME games to brew and vice versa, ensuring distribution across multiple handsets and operators. I-Elmo based in the U.K. is a high quality developer with a portfolio of popular casual games particularly suitable to leverage the tournament for prizes technology developed by our California-based studio atlas. Our ability to leverage a large portfolio of titles, technologies, and applications across an international distribution network gives InfoSpace a major stake in the emerging mobile games market. We're excited to expand our role in the mobile gaming space, and look forward to adding new games, products, and distribution to our portfolio. Strategically, InfoSpace is focused on reaching the largest possible audience through supporting our carrier relationships, licensing, developing, and publishing, a broad and deep contract -- 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. Today's personalization and entertainment services will soon extend to include broader music and video offerings. As the industry develops it will expand into information, commerce and promotional services similar to what we see on the Internet, by virtue of our position in two businesses, InfoSpace is uniquely positioned to capitalize on this convergence and be a leader in the development of the future mobile network. Since the board hired us two years ago, we've worked to generate growth and profitability and to improve our strategic position.

As to the former, our employees have delivered stellar financial results, particularly in this last year of 2004. In terms of strategy, we pared down the two high growth segments and have made five key acquisitions that have significantly enhanced our long term prospects for sustainable profitable growth. Today we're confident of the potential of our markets, the strength of our business models, and our ability to execute. In '05, we will make investments to ensure that we capitalize on the extraordinary opportunities before us, be it in technology, content, product, customer support, or acquisitions. In search and directory, we're teamed on acquisition opportunities that add traffic to our substantial network. On the mobile side we continue to look for opportunities to expand our carrier relationships, grow our content portfolio, and our geographic reach. We are pleased but not satisfied with our progress. And look forward to continued growth and profitability in 2005 and beyond. With that, I will hand the call over to David to provide you with more detail on our financial results and outlook. David?

Thank you, Jim. And welcome to the call today. Fourth quarter capped a great year for InfoSpace. Jim discussed the financial highlights for 2004. So I will focus on a review of our 4th quarter results, and our outlook for 2005. In the 4th quarter, we saw very strong revenue growth across both of our business segments. This translated into exceptional profit and cash flow growth. Our revenues for 4th quarter were $79.7 million, an increase of 40.6 million or 104 percent from 4th quarter '03. Operating income was $16.9 million, versus 6.9 million in the prior year 4th quarter. We had our sixth consecutive quarter of positive net income, generating $18.9 million for the quarter, an increase of 9 million, or 91 percent from the 4th quarter of '03. Earnings per diluted share for the 4th quarter of '04 was positive $0.50 versus $0.29 per diluted share for the prior year 4th quarter. Weighted average fully diluted shares was 37.9 million for the 4th quarter of '04. And as of December 31 of this year, we had approximately 445 employees. For the 4th quarter, adjusted EBITDA was $21.7 million. An increase of 4.6 million, or 27 percent sequentially from the 3rd quarter of '04. The adjusted EBITDA margin for the quarter was 27 percent. Now, I will review our segments, starting with search and directory. In the 4th quarter of '04, search and directory revenues were $47.2 million, up 18.8 million, or 66 percent from the 4th quarter of '03. In search, both rate and volume experienced strong growth in the period.

During the quarter, total paid searches in North America for both search and directory were approximately $205 million, an increase of 32 percent from the prior year 4th quarter. Average revenue per paid search was approximately $0.19. An increase of 27 percent over the prior year 4th quarter. Segment income was $21.7 million, up 9.3 million or 74 percent from the 4th quarter of '03. The segment margin increased to 46 percent from 44 percent in the prior quarter. This was the 2nd consecutive quarter that we saw growth in our owned and operated search business. We also experienced strong growth in our distribution business. In the 4th quarter, search distribution revenues in North America continued to account for over 60 percent of the portion of search and directory revenue coming from search. Now, turning to the mobile business, revenues for the 4th quarter were $32.5 million, an increase of 23.2 million, or 250 percent from the 4th quarter of '03, and up 29 percent sequentially. The increase in revenue is the result of strong growth in mobile, media downloads. Mobile segment income totaled $8.1 million for the quarter, up 4.8 million or 143 percent from the same period last year. And the segment margin was 25 percent. Our segment profits increased by approximately $1 million from the 3rd quarter. As a market leader in the new and emerging mobile market, we are continuing to invest some of our profits back into this business, thus reducing margin percent on a sequential basis.

The decrease in margin percent was due primarily to an increase of approximately $1 million in our spending in the areas of sales, marketing, public relations, and product development, in order to better serve our two key constituencies, content owners and carriers. And in order to expand our product offerings such as adding games. Our label tone products, as well as our other products, experienced strong sequential growth. And label tones maintained a very similar share of total revenues and margin relative to 3rd quarter. Regarding the balance sheet, the company ended the quarter with approximately $322 million in cash and marketable investments. Due to the strength in our business, our cash balance was up over $11 million sequentially from the end of 3rd quarter, and increased by 26.5 million from the end of '03. The cash balance includes the $50 million we invested in the 4th quarter to purchase I- Elmo. As a reminder, this month we closed the purchase of Elkware mobile for approximately $26 million in cash. We have had a tremendous 2004. And we have exceeded our own expectations. This points to the strength in both of our markets, the quality of our assets, as well as the great job done by our team. Now, let me turn to our 2005 outlook. When we provide guidance, we try to give you insight into how we see the business evolving. Both the opportunities as well as the risks. As you know, we are in very early stage and rapidly evolving businesses.

Also, a significant portion of our revenue comes from providing services for branded companies. As such, we don't always have full visibility into their plans. Equally important, acquisitions have been and will continue to be a part of our growth strategy. We recognize that this makes your jobs more challenging, in terms of predicting future results. In order to help you better evaluate us, we have introduced adjusted EBITDA. We are expecting continued strong growth in '05. For the full year '05, we expect total revenue to be between 375 and $395 million. Up from $249 million in '04. At the midpoint of our guidance range, this reflects annual revenue growth of over 50 percent. Of this amount, we expect our search and directory segment to contribute between 200 and $210 million in revenue. Up from 157 million in '04. We expect our mobile segment to contribute between 175 and $185 million. Up from $93 million in '04. Over the last few months, we have purchased three mobile games companies. In 2005, we plan to focus on integrating these acquisitions, and leveraging our mobile assets to build the leading role in the mobile game business. As we build on this foundation, in 2005, we expect the games business to account for 5 to 10 percent of our overall mobile revenues. We expect adjusted EBITDA for the full year 2005 to be between 92 and $100 million. Up from 59 million in '04.

At the midpoint of our guidance range, this reflects annual EBITDA growth of over 60 percent. We expect income from continuing operations for the full year '05 to be between 67 and $75 million, up from 51 million in '04 and we expect fully diluted earnings per share to be between $1.75 and $1.95. This assumes 38.5 million fully diluted shares outstanding in '05. Let me take a few minutes to give you some additional detail underlying our guidance. Starting with margins, on the search and directory side, we continue to expect that the segment margin will be in the low 40 percent range. In particular, we will continue to focus on enhancing our online and mobile directory products. On the mobile side, we expect that segment margins will be in the mid 20 percent range. This is a very rapidly growing market and we are building our presence in Europe. Accordingly, we plan to continue investing and expanding our content catalog, product suite and marketing to key customers. A few key items on the operating expense side, our guidance includes an estimate of $14 million of increased expense, or $0.35 per share, consisting of a $10 million increase in noncash depreciation and amortization expense, primarily from the recent mobile acquisitions, and a $4 million increase in tax expense. We are still finalizing our goodwill analysis related to our recent acquisition. On the tax side, we will have alternative minimum tax, as well as foreign income tax. At this time, our adjusted EBITDA guidance and our net income guidance excludes the impact of any one time gains or losses. Any litigation settlements, including any gain from the recently announced litigation settlement, and the cost of expensing stock options.

We are in the process of evaluating the rules that came out in late December regarding expensing of stock options. Like many technology companies, expensing of stock options, although a noncash expense, will have a significant impact on our future GAAP results. Turning to 1st quarter 2005 guidance, for the 1st quarter of '05, we expect revenue to be between 84 and $86 million. We expect adjusted EBITDA to be between 19 and $20 million. And we expect income from continuing operations to be between 13 and $13.5 million. Guidance for the 1st quarter includes an estimated increase in expenses of $5 million relative to 4th quarter or $0.13 per share. 3.5 million of this, or $0.09 per share, is comprised of $2.5 million coming primarily from increased noncash depreciation and amortization expense, and $1 million from increased tax expense. It also includes what will look like an increase in G&A expense of a million dollars relative to 4th quarter. In the 4th quarter, we had a credit of approximately $1 million from a higher-than-expected collection of litigation insurance proceeds. The actual G&A spending will be relatively flat. Also, in the 4th quarter, we had the benefit of a foreign currency gain of almost $500,000. Our guidance reflects normal seasonality patterns relative to 4th quarter. And we expect fully diluted earnings per share to be between $0.34 and $0.35. This assumes 38.5 million fully diluted shares in the 1st quarter. This concludes our prepared remarks. I will now turn the call over to the operator, and we would be happy to take your questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, you can do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star, one if you do have a question. And we will take our first question from Imran Kahn with J.P. Morgan.

Yes, hi, guys. Congratulations. Great 2004. Jim, and Dave, a couple of questions, actually, first, you know, if I look at your search revenue, it seems like the volume was up 6 percent sequentially, primarily upside came from the pricing growth of $0.19 so I was trying to better understand like where you are seeing the pricing trend from in the -- in that $0.19 that went up from $0.17. And then I have a follow-up question.

Well, first, I would say, Imran, is I think we -- it was both from growth and volume and David, unless you -- I would say that, what we -- remember, with us, as all of us in this market are price takers, not price makers, right? It is whatever people are paying for the advertising, and in general, and then of course, it has something to do with sort of the, the type of searches people are doing from time to time. But we would expect to see prices be high in the 4th quarter, due to the seasonality and just, you know, if you will, the competition for advertising and for key words around all the retail business. And so, the similar trend that we saw last year and one I would expect we will see next year. David?

That's right. Imran about 6 percent of the growth sequentially came from price -- I'm sorry, from --

Volume.

-- volume and close to 12 percent came from price, so again, remember it is a mix of our business as well as search and directory and search tends to be stronger in the tail end of the year and directory tends to be stronger in other parts of the year, so it kind of balances them out nicely.

Okay. And going back to the mobile question, actually there are two question, first, and I think you kind of addressed that, if I look at mobile incremental margins, from sequential basis, Q2 to Q4, it seems like 13 percent that every additional dollar you're bringing in, and I think you talked to some of the investment you are making. I'm just trying to get a better sense, like what is the normalized incremental margins for the mobile segments of the business? And then, your G&A expenses went down, historically you had a lot of litigation expenses, I was wondering like, going forward how much litigation expenses you expect to see in your G&A expenses. Thanks.

All right, Imran, on the first question on mobile, as I mentioned on the call we had about a $1 million increase in spending primarily driven by our focus around content, PR, and really, better positioning InfoSpace in the mobile media and entertainment sector. In terms of normalized margins, obviously we're really, really early in this business and as you know the margins fluctuated some over the last few quarters. We think, as our guidance for '05 -- I shouldn't say we think. Our guidance for '05 reflects a range in, around the mid 20 percent range. So similar to where we are today.

And some of the things you have to think about in that regard, Imran, as David said, this is a market that is very early stage and yet our business, year-over-year, nearly tripled. So, I think rationally, we're very rational -- rationally very excited and exuberant about the business and the opportunities in it, so we're certainly going to invest in it. It we're also broadening our product portfolio and by, and in particular, with games and doing investing in that, where right now, the revenues are, have not -- haven't developed anywhere near our other personalization products have so we will see some issues there. But one think I would point out and I know in business school they teach to you look at the percents of margins and I know were you a good student, Imran but at the end of the day here from the Q4 -- from Q1 to Q4, we doubled our revenue and doubled the cash we made out of this business, cash flow and at the end of the day you can keep all the percentage margins and I will take all the cash, Imran and I will live in a nicer house than you with.

And the G&A expenses?

David?

Litigation, it is hard to speculate on litigation, Imran, as you know, as a company, we don't. Obviously, we have some litigation we announced a potential settlement of litigation, and we will have to wait to see how that gets resolved.

Great. Thank you. Congratulations. It was a good year for you guys.

Take care. Thank you, Imran.

And we will move next to Safa Rashtchy with Piper Jaffray.

Hi, guys. Congratulations, great quarter.

Thanks.

A couple of questions. Let's start with the mobile business. David, you mentioned that the mix and the margin of the label tones, ring tones, did not change from Q4 to Q3, and that's a bit surprising to me. The assumption was in the industry that the label tones are on the rise and they would become the majority of the ring tone, specifically with some increase in their share, and also, I'm curious as to why margins have stayed, because they did not deteriorate and then I have a couple of follow-ups, please.

Sure. Safa, on the label tone side, as I indicated, we saw strong growth in label tones as we had expected, we also saw strong growth coming from other parts of our product mix. A number of our products that wouldn't be label tones, it would be things like graphics and things like what are cover tones. A number of carriers did a number of unique promotional and interesting promotional activity in the 4th quarter, around, holiday specific phones, or graphics, and so we saw strong growth across the board, and what that translated into was that the growth in the label tones was equal to growth in other parts of our business. So that margin mix -- the margin and mix stayed relatively the same.

Okay. And then maybe if you -- both you and Jim could update us on the competitive landscape, Q4 was in particular a busy quarter with lots of new competitors entering the field, maybe not lots, but some major ones entering the field, especially with Jamba and some of the carrier, as you mentioned, doing some of their own inhouse ring tones. Can you give us an update of how difficult was it? Are you seeing an entirely different environment? Or to you, it hasn't changed a whole lot?

Well, I would say at this point the only -- it is a business that is always changing, right, Safa? And when you're in a business that is growing as fast as this is, and I think even more than the current growth, just has the -- people are starting to recognize that this mobile media network is going to be a very important media network in the future and it is going to draw a lot of attention, there's no question about that. We have seen everybody's remarks this quarter, and the different spaces and just about everybody's got some kind of mobile thought around it so, we recognized that early on and we would expect to continue to see people enter the business. We haven't seen a lot of effect yet from any of the Jamba, the Jamba activity. And remember, again, that their business model is largely going to direct to consumer and so we've seen the ads and that, and in our -- in our opinion we hope that is good. We would like to see that stimulate more demand in the marketplace. We haven't seen them yet or encountered them doing the kind of thing we do, which is, working and leveraging the carriers' brand and letting the carrier leverage our capabilities, so we really haven't seen much of that at all.

Okay. And one last question. I will stick with wireless in this case. Just a clarification. David, I thought you said 6 to 7 percent of the revenues is expected to come from games, is that right?

I said Safa, to be clear I said 5 to 10 percent of mobile revenues would come from games in '05.

Okay. Given the number of acquisitions you have had in the games area, and what you already had, that seems to be pretty small.

Well, I mean I think Safa, a couple of points, one, that two out of the the acquisitions we closed, one we closed literally two or three weeks ago, and the other, a little bit over a month ago, so really early stage, but all three of the companies that we purchased, like most of the industry, is very young, and still in the very early stage. So we think that that's, that's sort of our best view at this point in terms of the opportunity out there. And obviously, the main thing we got do here in the short term, is try to integrate the companies and integrate the sales forces an get focused on growing the business.

Okay. Thanks. I will come back if there is time after others are done.

Thank you.

And we will take our next question from Jason Avillo with First Albany Capital.

Hey, guys. Congratulations on a great quarter.

Thanks Jason.

Couple questions. First getting back to the CPC question on the search side, I'm just trying to reconcile what Yahoo said which I know is a big partner of yours. I think they said RPS was flat sequentially so I'm wondering what drove the price increases, was it better yield, was it better pricing on the directory side, perhaps Google was a little bit stronger than what you had anticipated, or what that really was and then secondly on the mobile gaming side, I'm just trying to pull apart the two business, if you sort of think about the mobile business on a legacy basis in 2004 and I know you got it as high as about $20 million for the gaming business, and in 2005, wondering if you could talk about the different margin structures between those two businesses. Thanks.

You want to --

Sure, Jason I will take a stab at those. On the first question on search and directory CPC, really our business is comprised of a mix of our own sites and our partner sites and I think what you can derive from that and we have relationships with multiple search -- search providers, so in that sense our data could look a little different than others but really it is hard for me to compare and contrast that with someone else other than to say that we saw favorable growth across all of our major channels there. And then on the volume side, I think you understood that. So I will jump over to the -- your question about the mobile business. And I think your question was what should the margin characteristics of the games business be. I think it is still really early and one of the things we're working on kind of what I indicated earlier in the call was focusing around integrating the acquisition, leveraging the sales forces, and so what you should expect is that our guidance that reflects the whole company reflects the contribution as well of the games business and our best thinking on the games business.

Okay. And one final question for you. It looks like content and distribution as a percentage of revenue was up 450 basis points. I'm wondering if that was sort of a function, you sort of implied that revenue share hadn't moved on the mobile side. I'm wondering if it is becoming a little bit more competitive on the third party search distribution business.

I wouldn't say, that Jason. What I would say is just when you look at our business and the growth in our business on the search and directory side, much of the growth has a bigger percent of the growth has come from distribution, as you know. And so that's what's driving the increase in content cost, as a percent of the total business. Not a difference in pricing, but a difference in just mix of distribution versus the rest of our company.

Great. Thank you.

You're welcome.

And we will take our next question from Sasha Zorobite with Oppenheimer Funds.

When were you giving the guidance here, did any of that for the following year, did any of that come from acquisitions that haven't been made yet? Or is it this just fully to be understood as organic growth?

The 2005 guidance, Sasha, would be all from businesses that we own today.

Great. And my second question would be regarding your deferred revenue that decreased significantly in the 4th quarter. Could you explain that?

Sure. I would be happy to. Deferred revenue is -- we have a number of customers, one in particular, that prepays a lot of their -- a lot of the business to us, and so as you get towards the end of the year, that deferred revenue line goes down, because you're -- you're amortizing the revenues over the period you're providing the service, but the cash was paid much earlier so you see the deferred revenue go down while the revenues are part of the normal year, and that's the main change there.

Thank you.

You're welcome.

And we will take our next question from Scott Sutherland with Wedbush Morgan Securities.

Hi, guys. Good quarter.

Thanks, Scott.

First, on the search and directory, just kind of drill down a little bit more on the price per query going up, you can characterize the price per query on the directory side versus the search side? Did that increase faster as you have seen some of the dynamics in the directory business improve?

I would not say that, Scott. I would say that the bulk of the growth, really all of the growth, came in the search side. And really, you know, that -- the search in the 4th quarter is a strong -- you know, it is a seasonally strong quarter, and I think we benefited from that as well.

Okay. Great. On the mobile side, it sounds like you now believe that the margins are going to be pretty stable here at the 25 percent range through '05, it sounds like it is going to stay stable here, are you assuming that the label tones or the true tones pretty much stay as a stable mix through the year and you're going to kind of offer these new things like games and other content or is there something else going on there?

Well, I mean label tones is an important part of our business and we think an important part of our future growth but we are also focused around a number of other areas. You mentioned games. That is clearly a significant focus for the company. We have had some really good success with things like graphics, with what I call cover tones and even with more what I would call seasonal type songs and pictures, for example a jingle bells was one of the better-selling and one of the better performing items in the holiday season. And so again, it is really about managing a mix of business and managing relative growth and relative margins across your various products.

Right, exactly, so as you indicated you manage that mix, do you think the percentage contribution from these label tones stays relatively stable or do you think that increases a little bit this year?

I think that --

The overall contribution certainly increase. Label tones is a good business for us, Scott. Despite rumors to the contrary. It is a very good business. And the volumes per user tend to be much higher, right? Because I think frankly it is a better product, it is a more attractive product, so we expect to see strong growth in that and versus polyphonic or something, yeah, we would expect to see that mixed shift more to label. It certainly has already. But, it is not -- it is a misconception that there is not a good economic opportunity for us in the label tone business.

Okay. Guys. Great, thanks.

Thank you.

Next we have Mike Latmore with Raymond James and Associates.

Hi, great finish to the year there.

Thank you, Mike.

I think last quarter, you mentioned the sequential increase in the media downloads, either transactions or revenues, can you give that number again?

I don't think we did.

Okay.

I'm pretty sure we didn't.

Okay. All right. Fair enough. As you look to '05, the -- in terms of the mobile guidance, maybe if you could give a few more assumptions there, primarily being what do you see just general market growth being in the media download, kind of all-in, and then any assumptions for some major new customer adds in the guidance for '05?

Sure, Mike. Well, as you know, the -- that kind of the media download market is -- and there is a lot of different industry experts and the numbers I would characterize as vary considerably but I think all of them have a general view that there is going to be significant growth in that market. Really coming from both increased adoption rates, and equally important one of the trends that we've talked about and that we've seen is a strong contributor or major contributor is around just the number of handsets that can do the things that our products allow the handsets to do. So we continue to see that trajectory has been very strong and dramatic and we think that will contribute to us there. We're also continuing to find that the carriers are making money doing this stuff and are trying to promote it and to do more with their various offerings that relate to games and ring tones and graphics and other products like that. So all of that contributed to our thoughts on guidance.

Just in terms of -- as you look at the market, for a lot of this content, Europe made a little over half, comes from direct channels, Asia is a different percent, where do you think the percent comes, sort of off the handset versus through direct channels in the U.S. over time?

Well, that's a good -- that's a really good question. You know, right now, -- and these markets developed in different ways, right, Mike? In particular, Europe developed with a -- a direct distribution, largely because the capability for downloads and downloading particularly the blue type of downloading capability and later the java stuff just wasn't there when this all got launched and so it was all done by SMS messaging, and some other factors, too, the way the carriers approached it there, so here it has been the other way around and the carriers I think, you can certainly see that the carriers in some carriers are going to jealously guard their customer base in terms of allowing others to sell into it. Other carriers clearly are going to be more open. And want to generate from both sides. But I think that's the key, is the carriers have a very strong interest in generating demand on, demand through the handset and where they have, they are seen as the brand and kind of get the benefit and the customer loyalty around that and I think that is just going to become increasingly important. And also as the capability of the store front better increases, both on the handset and through the system there, and that's going to -- that's going to evolve slowly over the next couple of years, but there will be more and more opportunity for carriers to bundle on the handset, bundle graphics, bundle video, bundle music, games, et cetera. I think it is always going to be a very, very -- if not the primary way, it is going to be a very, very important part of the downloading will be done directly through the handset and by the carrier.

Okay. Thanks a lot.

Thanks.

And next we will move on to Pete Stair with Dellafield Hambrecht.

Hi, guys. How are you doing?

We're doing well, Pete. How about you?

Great. Thanks. Great quarter. Can you just talk a bit more about mobile directory services and how those might play out beyond, and this year and beyond and then product development costs over the course of this year, whether those costs will be organic or actually rather whether product development will be organic or whether you will potentially acquire further technologies like you did with Elkware and their porting capability.

We're doing a lot of work in that area right now. And you know, I wouldn't -- we would never comment at all on acquisitions until they happen. But, we -- we think, actually, because of the unique position we're in, the experience we have in operating within the -- remember, it is not just the mobile download business we're in, it is our portal services really has given us a deep understanding of how the -- how the handset works and how the networks interface, and the latencies and things like that, and then, I think we have a -- getting a much better handle all the time on the directory side, and in terms of what kinds of -- what are the characteristics of the data that we might want to provide to the handset because it will be different than what you see on the web. But you know, if we think that there are critical pieces of technology or critical skill sets that we don't have, we would not be shy about making an acquisition.

Okay. Great. Thanks.

Thank you.

And we will take Chad Bartley with Pacific Crest.

Hi. Thank you. A few questions. On the atlas mobile and I-Elmo acquisitions, what did they contribute respectively in Q4? Because I know when you guys acquired Moby, it had a pretty big December. And also, you can help us on the legacy mobile side of your business? You know, revenue, outside of the download business, or growth sequentially, anything there? And then looking forward, any additional color on the level of incremental investments you expect to make in the mobile business, maybe you can compare that with the 1 million you did in Q4. And then finally in '05, you think the mobile game portion of your business will contribute at all to the bottom line?

Okay, Chad, let me see if I can answer all of those. Starting with contribution of atlas and I-Elmo, I-Elmo we closed really in the last month of the year, so that is very negligible impact on the business. And atlas, although we purchased the company earlier in the year, and kind of tail end or midsummer time frame, remember, atlas is a very small company, had just gotten started a few -- a bunch of months before we purchased them, so the best way to answer your question is that neither contributed in a -- in a material way to our business results.

Okay.

In terms of the legacy side of the business, we don't break those two out separately. Some of the initiatives are run by the same -- some are similar customers and similar teams working on them. I would characterize that in the 4th quarter as having performed reasonably well relative to -- from prior periods. And then I think your third question related to incremental investment in mobile. I think the best way I could point you or the best way for to you think about it is that we think our margin in that business in '05, so if you take the revenue guidance and you take our margin guidance, it is going to be in the mid 20 percent range. And that will give you a feel for kind of our spending, or our cost side, relative to the revenues. And you know, as kind of Jim indicated in his comments, this is just a really young and fragmented industry. And so we think it is really important to stay out ahead of that. And, and in order to better position ourselves to continue to grow in the long term, we're going to continue to invest people and infrastructure resources to chase new categories of opportunities to drive long term mobile growth.

Is one way to think about it then if you look at your 2004 margins were around 28 percent, so essentially investing a few points to get to you the mid 20 range?

Yeah, I would just take where we ended 4th quarter and say, -- and furthermore, I mean, 2004 was the year of -- the margin fluctuated a bunch, it started at 25 and ended at 25, so I think -- you still have to say that this is a young business, and the margins will be i the mid 20 percent range, is the best way to say it.

Okay. And then anything on EPS from the mobile game segment?

Yeah, it is -- obviously, we provided a range of guidance of 5 to 10 percent of revenue, and that range, depending on how that business does, will have an impact on EPS. Within that range. But, you know, these are early stage companies. So early stage companies have, you got to build them.

Great. Thank you.

You're welcome.

We will take our last question from Richard Fettico with Merriman and Company.

Thanks. Good quarter, guys. Just real quick on the search and directory side, you mentioned integrated into Dex, SBC and Verizon wireless. Have you integrated all of the InfoSpace.com as well as Switchboard.com where you can have listings from these three sources on each site?

Couple of things. First of all I don't think we mentioned SBC.

I'm sorry, BellSouth.

We have BellSouth and -- yup, BellSouth. Right now, we're doing mostly Verizon on the InfoSpace network, and BellSouth and Dex on the other, but that's -- those are some of the things we're working on. And in addition to that, of course adding many more listings in terms of folks like Google, Overture, MartinDale Hubble and many that we talked about. But the goal here is, Richard, as time goes on of course to have kind of have a unified platform and unified product, but due to contractual issues and what have you and frankly the amount of work it takes to do some things, it is -- this is not a one-month process.

Okay. And on the wireless side, could you give us an update on your Cingular relationship and what you do for Cingular with your private label platform essentially there? Minus any -- you said that Cingular was thinking about moving this platform inhouse and opening up to multiple vendors. Could you give us your perspective there, and similar thing for T-Mobile? Are you still representing the majority of the ring tone dial tones for Cingular and T-Mobile?

Well, we are, and as we've said all long, we wouldn't expect to remain necessarily the exclusive provider at either of those, although it is today that way. The issue around -- when you say platform, that is a broad word, and there is a lot of different, a lot of different kinds of services that get bundled into that. The store fronting part of that, Cingular has taken inhouse. And that transition happened in the -- late in the 4th quarter and actually overall, it went very smooth. So we -- we -- and in fact, we continue to see volumes as you can see by the results we had in the 4th quarter, volumes have gone up pretty dramatically over the course of the quarter. So no real changes there. We're doing more and more work for Cingular on other sides of the business as well and we can -- we believe our relationship there is very strong. The one -- you can see that the promotional -- the promotional event that we mentioned, the -- doing the live music and live ring tone music with Ludacris, that was something we did no pun intended in concert with Cingular and launched with them exclusively last week and have a good relationship. Obviously they are a very good customer and important partner for us and we work real hard to do the right thing by them. On the other part of it -- what was the other part of the question?

T-Mobile.

It was about T-Mobile. You know, I would say the same thing there. Without the addition of the Ludacris event, we continue to work hard and do the same kind of work we've been doing for T-Mobile over the last -- the course of the last year or so. The other thing that has happened to us with Cingular of course is that after AT&T was acquired, they unified their product platform on to the old -- on to the Cingular platform as opposed to AT&T platform, so we were the -- we've been the beneficiary of quite a nice little lift in terms of the number of new phones that are being sold, because now all the AT&T stores, if you will, are selling Cingular products. So that's been something that we've done a lot of work on and we've been fortunate to be the beneficiary of that.

Great. Could you just elaborate a little more on the store front transition inhouse, what does that mean, has the content now been distributed by Cingular as opposed to you guys, or what does that mean I guess in more detail, if at all possible?

It is really -- it is really technical detail. And it is -- we still do the downloading et cetera. But in terms of the actual store front, the store front in some of the manipulation of the user data around that, that's what Cingular is going to do and will continue to do. And handle some of the billing integration and things like that. It doesn't really -- the only impact it has on -- well, it doesn't have any real impact on our content. I mean we still bring and source all the content. We do all the handset stuff. And again, you just should look at the volumes and that can tell you the story.

Okay. And so the assumption for '05 is that you will continue to do just that for Cingular? Continue to be the major source of mobile content? Or at least on the ring tone side?

I would never sit here on a conference call and tell that you we have our customers locked up 100 percent, okay? We have to work very hard every day to keep all of our customers happy. But we think that we're -- we think we're doing a good job for Cingular. It is growing their revenues. I think they think we're doing a good job for them. And we are always going to be diligent and vigilant about doing whatever it takes to keep them happy. But, there is no -- no more mystery to it than that, Richard.

Great. And then finally, on the games, have you been able to port some of these games on to the GSM standard? And also, have you been able to get some of these games into Cingular and T-Mobile from the GSM carriers hands, I suppose, where do you stand in that process?

Well, the answer is yes, we ported some over. We've had some recent successes in sales. And we will see the results of those as it goes forward. But, so far, so good. We're very happy about the assets that we've purchased. We love the people there and the energy that they've got and the passion and the knowledge they have about the game business. We think that the -- we did a lot of work on this over a long period of time and the folks here, John Foster, John Heffron and that team, Steve Alpmin and Hank Scorning, these guys worked really hard to make sure we were buying the right puzzle pieces and fitting them together, not just geographically but also from a skill set, technology set, licensing set, and we think we entered the market right now with a really, really strong portfolio, that we can supply frankly capital that these small companies didn't have to improve that set, and a set of skills that is second to none in terms of creating games and publishing them and delivering them. So we are really happy and excited about it but we're going to wait for the proof to be there before we start bragging about it.

Thank you very much.

Okay.

Thank you.

Operator, I think we're out of time.

Thank you. That does conclude today's question-and-answer session and that concludes our conference call. We do thank you for your participation.