Avantax Inc (AVTA) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the InfoSpace Q1 2007 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions I'd like to turn the conference over to Ms. Stacy Ybarra, Director of Investor Relations for InfoSpace. Please go ahead.

Thanks, Lisa. Good afternoon and welcome to InfoSpace's first quarter 2007 earnings conference call. I'm Stacy Ybarra, director of investor relations. With me on the call today is Jim Voelker, Chairman and CEO, and Allen Hsieh, Chief Financial Officer. Before we get started I want to remind 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 related 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 effect the Company's actual results of operations include, but are not limited to: The progress and costs related to the developments 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 required businesses. A more detailed description of certain factors that could effect actual results of operation is contained in the Company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q, as filed from time to time with the Securities and Exchange Commission in the section entitled "Risk Factors." 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, or to reflect the occurrence of unanticipated events.

Now I'll turn the call over to Jim. Following his comments, Allen will review first quarter and -- first quarter results and second quarter and full-year outlook, then we'll open up the call to your questions. Jim?

Thank you, Stacy, and welcome to the call. We have a number of significant items to cover today, including the strong first quarter, several customer wins, a sizable dividend distribution and the withdrawal of an [inaudible]. Our first quarter results demonstrate the progress of our restructuring efforts. As we anticipated, overall revenue was down $2.7 million sequentially due to the wind down in the mobile content business. However, revenue in our core businesses increased by over 15%. Total revenue in the first quarter was $86.6 million, ahead of expectations. In addition, the benefits of the restructuring plan are being realized, as annualized operating expense savings are at $21 million and we are on track to end the year with over $30 million in total cost reductions. This revenue performance in cost savings translated to a 30% sequential improvement in EBITDA, or $9 million.

Further, as part of our plan, we reorganized into two business units, Online and Mobile, and we'll now be reporting segment income in addition to segment revenues and gross profits. This will provide investors greater visibility into our businesses. Over the past four years, the Company has created over $200 million in operating cash flows, and as a result, we've accumulated a significant amount of cash. Through our share repurchase program in 2005, we returned more than $70 million to InfoSpace shareholders and subsequently implemented a $100 million buy back last year. However, for a variety of reasons, including trading and volume limitations and the fallout from the media business, execution has been problematic.

Earlier this year, the Company engaged Credit Suisse as its financial advisor to examine our capital structure and recommend a strategy to return capital. As a result, our board of directors has approved a $200 million special dividend, which will occur in the next 30 days. We selected this form as it protects our valuable NOL from impairment, is very tax efficient and equitable to all shareholders. We'll retain over $200 million on our balance sheet, which we believe maintains the flexible -- the financial flexibility necessary to support our continued growth. The $200 million dividend reflects our commitment to enhancing shareholder value and our confidence in the strength of our cash flows. As always, the board and management are focused on creating shareholder value.

Additionally we announced today that we have reached a settlement with Sandell Asset Management, our largest shareholder. As part of the resolution, Nick Graziano of Sandell will be joining our board. In our discussions with Sandell, it became clear that we were aligned in our view of InfoSpace and our potential. We're pleased to announce this agreement, which allows management to focus our efforts on improving Company's operations and avoids a costly and time consuming proxy contest. Mr. Graziano is a managing director at Sandell and has over ten years of financial managing experience. His perspective as a professional investor will be welcome in the board room. As we have reported in our earnings, our recent financial performance in our core business has been strong and we look forward to working with Nick.

Now, on to our business units, Online revenue was $45 million, up 8% sequentially and segment margin income was strong at 40%. During the quarter we signed six new agreements with high-quality distribution partners. In addition, we extended the contracts of two of our ISP customers. We continue to win new distribution and maintain current partners by providing a unique search experience for their users, market it under their own brand, and with a high degree of profitability, more than any single ad provider. No single search engine covers the entire internet. Different engines use different technologies and thus draw a variety of unique results from the vast pool of information available. Our Metasearch technology covers more than that, as it combines the most relevant results from multiple search engines, such as Google, Yahoo!, Ask and Windows Live Search. We're the only search company to have relationships with all four of these providers.

And to that end, we've extended our distribution agreement with Google into 2011. This long-term agreement with the web's most popular search engine further demonstrates our role as a value-added partner. InfoSpace also applies this approach to the fast-growing local search space, where print, yellow pages and online advertisers pay for placements in online directories. A combination of highly-relevant search results and strong consumer brands, such as yellowpages.com, superpages.com and yellow book reinforce our already strong market position in directory services.

Now turning to the Mobile side, we previously announced that we suspended investment in mobile content initiatives and expect to exit our Mobile Media business by mid year. Therefore our overall Mobile revenue was down 12% sequentially and revenue will continue to taper off through the end of the second quarter. However, our core mobile services demonstrated strong momentum and posted an 18% increase in revenue in the first quarter. This week we announced an extension of our partnership with AT&T, formerly Cingular Wireless, to power the carrier's popular award-winning Media Net service. In addition, InfoSpace will continue to provide AT&T with customized mobile search and messaging solutions, as well as hosting, management and professional services.

We're also extending our partnership with Verizon Wireless, which we power core pieces of Verizon's mobile infrastructure, including its enhanced mobile web 2.0 service, which allows consumers easy access to the latest news and information. The extension of these long-term relationships with both Verizon and AT&T reflect the strength of our partnerships and the increasing momentum surrounding our core mobile services. That momentum is best seen in the dramatic growth and end user adoption of our services. More than 33 million U.S. users accessed our Portal and mobile search services in the first quarter, an increase of 30% over a year ago. Page views are another excellent barometer of usage and we anticipate that we will deliver over four billion page views this year, that's better than a 40% increase year over year.

Looking at mobile search, we launched our first non-English language search service with Vodafone's SFR in France and we entered into strategic partnerships with FAST and InfoGin to deliver the next-generation mobile search service. These two partnerships further boost our successful infrastructure offerings and illustrate our continued commitment to developing best-in-class solutions for mobile operators. In addition, we announced the launch of InfoSpace Find It! for BlackBerry devices, greatly expanding its distribution. Find It! is a premium application that distills millions of listings into six easy categories tailored to the mobile user. It combines eyes-free spoken directions and simple-to-use GPS functionality with the convenience of local search to locate nearby businesses, people and events quickly and easily.

Overall it's been a great and very eventful start to the year. We're growing the revenue in our core businesses, we've reduced our costs and therefore improved EBITDA, attracted new partners and extended several key relationships, and approved a substantial dividend distribution to our shareholders. These achievements demonstrate renewed momentum post last year's restructuring, which is a real testament to the dedication and strength of our employee base. I'm very encouraged by our progress and I'm optimistic for the year ahead

With that, I'll turn the call over to Allen for more details on the financials. Allen?

Thanks, Jim, and welcome to our call today. I will start with the review of our first quarter '07 results and then discuss our outlook for the second quarter and full-year '07. Our revenues for the first quarter were $86.6 million, a decrease of $3.6 million from the first quarter '06. Sequentially revenues were also down $2.7 million from the fourth quarter. As we expected, total revenues decreased as a result of our plans to discontinue our Mobile Media products by mid 2007. Adjusted EBITDA for the first quarter was $9 million, a decrease of $3.7 million from the first quarter '06 and sequentially it was up by $7.2 million. As Jim previously mentioned, we are starting to see the positive results from our third-quarter restructuring. Cash operating expenses, excluding content and distribution costs, were $36.8 million in the first quarter, a decrease of approximately $5.3 million compared to the first quarter of '06. This translates into his an annual savings of approximately $21 million. Once we have completely exited the Media business by mid '07, we expect to realize further cost savings and estimate that our first quarter '07 cash operating expenses will yield an additional annual savings of more than $10 million from the first quarter of '07, resulting in total annualized cost reductions of more than $30 million.

Net loss in the first quarter was approximately $500,000, or $0.02 per share compared to first quarter '06 net income of $3 million and fourth quarter net income of $27.6 million. Included in our first quarter '07 net loss was stock-based compensation of $7.3 million, and an income tax charge of $1.1 million, which was primarily related to our foreign operations. It is important to remember that the majority of our income tax expense is non-cash because of our significant NOLs, and for the first quarter '07, our cash taxes were less than $100,000. For the remainder of the year, we expect our income tax rate to range between 40% and 45%. Weighted average number of shares outstanding were 31.5 million for the first quarter of '07.

Turning to our segments, with the reorganization of the Company's two business units, Online and Mobile, going forward we will continue to provide segment revenues and gross profit. In addition, we will also provide segment income for both business units. As you may recall, prior to 2006, we reported segment income. However, the method of presentation has changed, whereby we are now able to assign certain expenses directly to the business units. For comparison purposes, we have revised the segment information for each of the quarters in 2006 to conform to the current presentation and have included this as an attachment to our earnings release.

Starting with Online, in the first quarter, revenues were $45 million, down $1.1 million from the first quarter of '06. Sequentially, revenues were up $3.2 million from the fourth quarter. Search revenues generated from our distribution partners were up sequentially and revenues from our own sites were in line with the seasonally-stronger fourth quarter. Also for the first quarter of '07, search distribution revenues were approximately 6% of our total search revenues as compared to 54% in the fourth quarter. Segment gross profit margin was 64% or $28.7 million in the first quarter. Our gross profit margin was down 3% sequentially, which was due to a mix shift in our revenues from our own site as compared to revenues from our distribution partners. However, in absolute dollars, our gross profit increased by $1 million sequentially. Segment income was $18 million in the first quarter of '07, a decrease of $2 million in the first quarter of '06, and increase of $1,8 million from the fourth quarter.

Moving on to Mobile, revenues in the first quarter were $41.6 million, down $2.5 million from the first quarter of '06 and down sequentially by $5.9 million. As expected, overall revenues decrease as we continue to wind down the media business. However, revenues from our core mobile business were $11.9 million in the first quarter, an increase of $1.8 million, or up more than -- or up approximately 18% sequentially from the $10.1 million in the fourth quarter. Prior to 2007, revenues from our core services were essentially flat for the past couple of years. However, as usage of these services increased and with the renewal of long-term contracts on more favorable terms, we are seeing the results of user adoption. We had a segment loss of $3.4 million in the first quarter, a decrease of $2.9 million from the first quarter of '06 and in line with the fourth quarter. As we exit the media business and our core business grows, we expect that our Mobile business unit will be profitable by year end. Regarding the balance sheet, we ended the quarter with approximately $413 million in cash and marketable investments, up $11 million from the fourth quarter.

Now, let me turn to our outlook for the second quarter and the rest of the year. For the second quarter of '07, as we exit the media business, we expect revenues to decrease to range between $70 million and $72 million. For Online we expect to experience seasonality in our traffic, as we enter the summer months, which historically is the slowest period for search due to decreased internet usage. We expect adjusted EBITDA to be between $1 million and $2 million and a net loss to range between $4 million and $5 million, or $0.13 to $0.16 per share, assuming 31.7 million shares outstanding. Included in our guidance for the second quarter are estimated expenses of approximately $4 million for advisory and consulting fees related to our return of capital, incremental costs incurred related to our proxy initiatives, and additional restructuring charges related to the media business. For the full year 2007, we expect revenues to range between $270 million and $280 million. We expect full-year Online revenues to range between $172 million and $178 million. This is consistent with our expectation of growth in revenues from our own sites and from organic distribution partners. Additionally, we expect to continue to have volatility in our revenues from traffic from our SEM distribution partners. We expect full-year core Mobile revenues to range between $50 million and $53 million.

Finally, we expect to discontinue our media products by mid 2007 and have included revenues of approximately $48 million from that business. However, discontinuation of the media products may not be linear and could happen faster or slower than anticipated. For the year we expect adjusted EBITDA to range between $28 million and $32 million and our net loss to range between $1 million and $3 million, or $0.03 to $0.09 per share. Our guidance excludes the financial impact of the cash dividend.

Before I open up the call to questions, I would like to add that our restructuring actions and capital allocation decisions, both today and in the past, demonstrate that our board and management are focused on driving shareholder value. We will continue to do that -- we will continue to do what is in the best interest of all InfoSpace shareholders. With that, I will now turn the call over to the operator and we'll be happy to take your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll go first to Jordan Rohan with RBC Capital Markets.

Hey, guys, it's Jordan here. I'm a little puzzled. Can you just go over the line of Mobile assets that you have that are still growing, what those are, what they specifically entail? Also, how much of the fees were paid to the bankers for advising you to give out half your cash and what other alternatives did you consider, because that seems like a pretty simple thing that probably shouldn't have taken that much time or --?

Well, Jordan, I'm sure you know, but the -- talk about that a little bit. Actually with us it's fairly complexion, right? There's a lot of different ways to look at things in terms of what -- what you're trying to do is balance -- what the tax efficiency might be for your shareholders, which is one set of issues. The other set of issues is what -- how you might --how different kinds of tender structures might, might effect your shareholder base, okay? So in other words, you want to try and at least -- there might be some advantages to go do a tender if you thought it would really strongly stabilize your base. And then probably for us, the biggest issue was around our NOLs, and we're a very unusual animal here in the sense that we have a substantive amount of cash. We create cash, and yet we have a very large NOL, a gross number -- and Allen, you correct me if I'm wrong -- but somewhere between $900 million and $1 billion still left.

Right.

And so you have to look at all the variety of kinds of ways and one of the things that a -- one of the risks we were looking at was would we suffer an impairment to our NOLs under certain tender or buy back kinds of structures, and so it really is actually a pretty complex -- complex look at things, to look at. So we're -- we brought Credit Suisse in to give us some good advice on that.

In terms of the Mobile business and what's ongoing there, you kind of think about it as everything other than -- than the aggregation, if you will, and provisioning of content, okay? So for some specific examples, if you think about the Portals that the carriers have on their devices out there, whether it's media net or Verizon Today, or the T-Zones in T-Mobile's case and some for Virgin and others out there, when you open that phone up and you access that service, that's us providing it. And it's us providing that kind of very much end to end, if you will, all elements of it. There may be some elements in terms of content or even some kinds of small technology elements that we don't directly provide, but then we serve as the integrator for that process.

And in that context, we not only do the software and product development and design and delivery and build that -- build that software and deliver it. We also host it and manage it and, again, it's an end to end, kind of view it as an ASP full service, and it's been very successful for us. And then within that -- within that construct, particularly for AT&T and for Virgin, we do the search on that as well, so -- and now for SFR we're doing the search. So it's really the kinds of technical services that we do.

And, Jordan, I think you asked about the -- I just want to frame that. That $4 million number I talked about was the investment advisor fees, but it also included a certain amount of our costs related to our proxy initiatives, as well as the amount of restructuring charge that we'll be taken in the second quarter.

Okay. That makes me feel much better about it. The last thing is can you talk about the monetization trends you're seeing in search and can you contrast that with any affiliate cleanup you may be doing in your search network?

Okay. You saw it on the Online side?

Yes. Thank you.

Monetization trends, I guess we'd say that for us there's several levers. The lever is you're paying click through rates. It's your -- it's the absolute rate, if you will, of the advertising rates in dollars, And then it's -- and then it's, of course, how many you have in terms of just clicks, et cetera. But the trends -- advertising dollars, if you will, what we think of as the rate per click or revenue per click continues to increase. That's all on an upward trend and our click-through rates are very strong and stable, too. They tend to change a little bit seasonally. You know, that'll be a little bit slower in the middle months of the year and as -- kind of as shopping season's approach you'll see those increase, so that's been positive. I think you asked about the -- I'm sorry, was it the -- the traffic cleanup? Is that what you mentioned?

Yes, affiliate cleanup, the quality initiatives you may have done in your network?

It's not so much of a cleanup as it is ongoing volatility and how it -- when we think about these guys, we put our --our distribution partners into two kind of categories. One is our organic -- we think of it as organic traffic. So think of the ISPs, the cable visions, the inside cables and the destination people, the NASDAQs, sites like that. There's very little volatility in that traffic. Actually there's pretty good steady growth in that traffic, as they grow, but there's very little negative volatility and the quality of the traffic in any sense is very high quality and maintains that. Where we see real variations and fluctuations is in the -- is in the SEM kind of partners and those SEM partners can be extremely volatile. And I think it's mainly depending on how their -- on how their secret sauce is working, how their formulas are working and how far they may be trying to stretch the envelope, if you will, and push the edge of the envelope. So we see a lot of volatility in that. In fact I'd say that over the course of time, we've seen it increase slightly, the volatility, and I don't think that'll change. And that's to Allen's point there of we feel very comfortable about our organic and our O&O traffic, but it's pretty hard for us to really pinpoint the forecasts on the SEM stuff.

Fair enough. Thanks for your help today.

Sure. Thank you, Jordan.

We'll take our next question from Gordon Hodge with Thomas Weisel Partners.

Hey, it's Lloyd in for Gordon. I was just wondering if you could -- following up on those last comments on monetization, do you have any color on what you're seeing from project Panama at Yahoo!? is it driving more clicks for you or less clicks and how the pricing might be affected? And then as far as tack in the search environment as you resign with Google and then resign with your own distribution partners, are you seeing tack prices that you pay out rise to your partners, and are you getting a higher tack rate from Google? Thanks.

Okay, Lloyd. Well, let's take the tack one first here. Really, tack tends to be pretty individual to the deal you're looking at, to be quite honest about it. I wouldn't say the market -- there's a -- it's one of those markets where maybe an average doesn't make sense. It's something that is pretty individual depending on the competitive environment and the desire of the player. But we haven't seen tack rates shift dramatically in our organ -- or in our organic traffic that we go after out there. We haven't seen that being a dramatic shift at all even over the last couple of years.

But they always got to remember that they're the ones that's driving traffic, so they deserve a lot of the economics on that.

Yes, I mean they are still taking, as you know, the lion's share of the economics, but we haven't seen it dramatically change for us. What Google and our partners, that's something we really don't comment on, but it's all volume-driven, and the more volume we drive, the better our tack is. You also ask about Panama. And what I'd say there is early indications have been positive. We've seen both positive upticks on rate and positive upticks on number of clicks, if you will, and activity. So, hope for the best here and hope it gets better, but so far, so good.

Yes. As a follow up, was the extension through '11 for Google, was that at your request to make it such a long agreement, or was that at their request?

I would say it was a mutual situation. We -- we have a lot of good quality traffic and, Google recognizes that good quality traffic's a pretty rare commodity out there, especially as concentrated as -- a big concentration like we have. So, that's good and we really appreciated the partnership with Google. I -- frankly they are great partners and they -- and that company knows what it's like to be a partner and they treat people as partners. So it's been a real good relationship and we were both anxious to extend it.

Okay. Thank you.

We'll take our next question from Clay Moran with Stanford Group.

Yes, thanks for taking my question. I have two. First, how does the one-time cash dividend enhance shareholder value? And second, now that you've determined what to do with your cash, can you give us your thoughts on operational strategy, specifically around investing in restarting growth versus generating near-term cash flow?

Sure. Well, I think it's -- I think it's a matter of shareholder value to be able to realize a good dividend,, and I think that's a key issue here. We look at our capital structure, frankly, and we say it again, for a Company our size, we had it up. We've been able to amass due to great operating results over the last few years, a nice big pile of cash, but it's not -- it was not by anybody's definition a very efficient capital structure. There's no data on it, et cetera. So, you know -- and it had proven to us over the last couple years to be more cash than we could see to invest in any kind of acquisitions in the near term, medium term. And because we create more cash every year, we felt like we were in a really strong position here to give some of that cash back to the shareholders. So I think, the people who will sit there and receive a dividend of this size will be very happy for it.

In terms of looking at the difference between growth and -- and near-term cash flows, it is -- it's always a balance and we do believe it's important to have business models that drive cash flows. And so we're working very hard to get our Mobile business by the end of the year to where it's driving positive cash flows, but we still think that we're investing an appropriate amount in the growth opportunities that are there. It doesn't mean there's not acquisitions we wouldn't go out and look for, but I would say that right now in the acquisition market out there, things are reasonably frothy and expensive and particularly on the mobile side, we have not seen a great number of things. In fact, we've seen very few things that we think are proven and sustainable business models yet. And so, we think we'll probably have some time before we would venture out into that market and use our dollars to -- we'd rather use our dollars, I guess, operationally to grow and that's been working fine. As you can see, we had about 18% growth quarter over quarter and we would expect that Mobile business to have a good, strong year on the top line.

Okay. Can you address Sandell's idea of streamlining the Company and selling the Mobile segment? Is there anything you can say on that?

Well, I'll jump to streamlining a bit, a portion of that. Sandell had looked at our fourth quarter results and realized that there is some more cost savings, and this quarter we've demonstrated that we are achieving those levels of cost savings. In fact, we're going ahead of those. So, as you can see, we're on a run rate right now to save $21 million in costs for the year, and as we exit the media business, we expect some more to come in the fourth quarter.

Yes, referencing the mobile business, we obviously wouldn't comment on that, but -- but just to say, take a look at where this business is right now. It's coming out of a period of pretty strong restructuring over the last few months, or actually the six, seven months, starting to really -- the core business going, I just mentioned, is growing at a pretty good clip. Going to reach profitability we think by the end of the year, so there's -- that may not be the time you'd go sell either, right?

Okay. Thank you.

We'll go next to Jeff Shelton with [Lyschroder].

Thanks. Your comments about exiting the mobile content business mid year, does that imply a wind down or sell of the graphics and gaming business, as well?

That's correct.

And based on your comments about expected continued cost savings, the Mobile business had operating expenses of $19.7 million in the first quarter. If by the end of the year there's another $10 million on an annual basis, we should be exiting the year about $17 million in operating expenses?

Well, you have to look at it on a consolidated basis when you talk about that annual savings. So obviously, a lion's share of it's going come out of that Mobile line.

Okay, and then for services, I believe, you said for the full year about $50 million or about a $12 million quarterly basis?

Yes, right now we're at about $12 million and then, yes, I gave a range between $50 million and $53 million.

So how do you reconcile the revenue and the expense line towards profitability in the Mobile segment for the future?

Well, I think in your number there, you're also looking at -- from an operating expense level, you're also including the content and distribution costs, which is going to go away.

All right, I'll take another look at that. And on the Online segment, you guys used to give statistics regarding the number of paid searches. Have you considered revisiting that and providing those numbers again?

That was a few years ago, and when everybody else abandoned them, we did as well.

I mean directionally, have those been going up for both the directory and the search business?

Well, certainly on the directory side and overall on the search side as well, yes.

Okay. That's all. Thank you.

Thank you.

We'll go next to Stewart Barry with ThinkEquity Partners.

Hi, everyone. This is Robert in for Stewart. In the Mobile infrastructure business, can you maybe talk about the longer-term margin or growth prospects? It sounds like you had a good quarter with 18% growth, but what can we think about in terms of operating and gross margins for that business once the media has come out of the system?

I'm sorry. Could you repeat that again?

Yes, do that one again.

Oh sorry. In Mobile infrastructure, what should we think about the longer-term growth in margin prospects? Once media comes out, what do gross and operating margins look like in that business?

So on the gross profit margin, if you will, on the infrastructure business, that's going to be very, very significant, only because there's very, very little content or distribution. That line was really more for the media business, where we were paying out licensing, so it's probably better to look at it from an aggregate EBITDA level and, as Jim mentioned, by the end of the year we expect to be profitable by the end of the year on that.

Yes, I think maybe the other way to think about this, and, again, this is -- this is still -- even though we've been doing this a while, it's still kind of an early stage model is that there's different components hereof how we get paid, right? We get paid on hosting and management kinds of fees, which -- you know, which tend to have -- not have a tremendous amount of leverage in them. I mean they tend to be -- take kind of nonlinear steps depending on volumes, and the kinds of -- you know, amount of equipment you're using, et cetera, et cetera. But where there is -- and then there's professional services, and those have actually stepped up quite a bit. And you can look at other professional service companies and kind of get an idea of what the net margins might be there. We think they'd be similar here.

We've seen a pretty, a pretty dramatic, I'd say, step-up in those kinds of services over the last year or so, and a lot of momentum there. As these services become more important to the carriers because it's more important, there's more users on them, they continue to want enhancement and more integration and different kinds of product enhancements around that. So that portion we see is pretty good growth. Then there's really the lift on -- where the leverage comes in is on the user kinds of -- user-related and traffic-related kinds of things. We mentioned the jumps in -- the jumps in page views and the jumps in numbers of users. That's where the leverage is going come in, but it's still too early for us to start to predict 2008 or 2009 to you.

All right. Also on the expense side, it looked like product development was incrementally higher in the quarter. Can you talk about what kind of investments you're making? Are those more geared towards Mobile infrastructure, and in terms of what you're investing is voice-based search an issue? Is that a hot issue for the carriers?

Yes, on the product development side, just one thing to keep in mind there, one of the drivers in these line items, because you're probably looking at the -- our income statement, it's stock-compensation charges. and that's actually across the board in a lot of these things here, so you have to look back into that. But we are making additional investments in technology things such as we'll continue on in mobile search. We're reinvesting back in our med search technology and those type of items.

I would say on the mobile side in terms of search and that specifically and the R&D there, the issues in the R&D there are continuing to improve the platform. Actually the store-front platform is being redone and there'll be a new version of that out that's enhanced here. Mobile search is a big agenda item for us. No question about that. There's quite a bit of dollars going towards mobile search this year in terms of development. And that's-- and you see some of that reflected even in the partnerships with InfoGin and FAST.

In terms of voice-based search, we do have an initiative on voice-based search and we've been working on that for the last couple years with a partner. And I would just say that carrier interest in that kind of waxes and wanes. It's not something that -- it's not something that I would say is at the very top of their lists, okay, on a daily basis, but people are interested in making it work. I just think that there's been -- personally, I think there's been enough -- so many kind of false starts on voice-based services for the carriers, whether it's voice dialing, et cetera, that there's a certain -- certain wariness to that.

Great. Thank you.

And we'll take our next question from Derrick Wood of Pacific Growth Equities.

Hi, thanks. Couple questions on Mobile and in regards to what you were talking about on the last question. What element of the Mobile infrastructure is based on page views and number of users?

The core service --

Yes, I'm trying to figure out what you're asking. I mean it's -- help me out there.

Well, there's a number of different things under Mobile infrastructure, whether it's store front, Portals, and I'm just wondering which element is priced on page views and number of users?

It's the Portal stuff that we're referring to there, Portal and then -- and then to some degree because it's integrated, right, is search.

Okay.

So it's anything that drives a page view. So when you go to the Portal or media net or you go to Verizon Today and you hit a link, you go out, that's another page view. But it's really that kind of service, the service that the customer interfaces with.

Okay, great. And on mobile search and maybe mobile advertising, can you talk a little bit more about what your monetization capabilities are? You do have the Find It! application out there and it was announced that it's free in terms of download on BlackBerry, so that's a free product. Looking in the long run, what are your ideas around monetizing that?

Well, we already have a pretty healthy advertiser base to monetize with with Find It!. Our problem isn't building that. We've got that built online and we're just really using the same back end of advertisers that we use online. The issue is getting enough clicks to really make it meaningful, right? And that's still pretty nascent.

I think in terms of mobile search, mobile search is a complex product and a complex problem. A lot of this stuff you read in the little blurbs out there and the blogs out there really tend to oversimplify the task here. Search is -- because this is -- it's a combination, if you will, of kind of web search, of Portal search, of off-Portal content kinds of things, combined with much more of a local flavor generally than anything you see online. And then combined with a geographic element or location element that has to be considered. And so getting that experience and that product right is a -- is, I'll tell you, no mean feat, but we've made a tremendous amount of progress and we're happy with that. And we think we know the direction we have to go, both technically and from a UI standpoint to make it a great experience and we think we're getting there, but it's going take some time. In terms of the monetization of that, the carriers are still trying to decide how much -- how much monetization they think they can put there without -- without disturbing their customers, if you will. We'll see some experiments in that later in the year and we'll probably have a much better idea by the end of the year.

Great. That's helpful. One last follow-up, Microsoft announced a mobile search deal with Sprint that's backed by advertising.

Yes.

How does that play -- I mean is there room for multiple vendors within a carrier and has there been any impact on that relationship since they announced -- since Sprint announced the Microsoft deal?

Well, we don't do the Sprint Portal there, so there's been no effect on that from us. We have three of the top four, but that's the one we don't have, so no real impact there. Are there room -- I'm going to give you kind of a waffle answer. It kind of depends on -- kind of depends on the implementation you're talking about. If you're talking about a client-based impli -- client-based thing like something that would search the content portion or something like that, you could see carriers maybe using one or two. When you -- or more. When you get, though, to talking about a Portal like we are, with the three of the four major carriers where we have the Portal, it's really a one -- a one-vendor situation because the integration here into the carrier systems is just -- it's both physically, technically and operationally extremely complex and if we through up a chart here to show all of the different touch points, if you will, we need within the carriers and to make this stuff operate and to -- to make sure that the right people get paid, to make sure that everything just kind of works and it's a great user experience, you'd get the picture pretty easily.

But it's-- so it is something that's pretty much a one -- one-man show, if you will. That's why we're so excited, frankly, in that last -- last quarter here to be able to extend the -- extend the agreements we've had with AT&T and Verizon. I mean, those two together over 130 million users, and we're the Portal, and so we're their partners on that. And obviously, it's something they have a lot of vested interest in seeing grow and we're going to -- that's going to inure to our benefit. It's a great position for us to have. We're proud that we've been able to maintain it and we're really proud of the work our employees have done. So it's been -- it's been a good -- they've been good relationships and I think they're going to get better.

All right. That's helpful. Thank you.

Thank you.

And that concludes our question and answer session. Ladies and gentlemen, I'd like to thank you for participating in today's conference.

This concludes today's conference call. You may now disconnect.