Inuvo Inc (INUV) 2003 Q1 法說會逐字稿

Good afternoon Ladies and Gentlemen and welcome to the FindWhat.com first quarter fiscal year 2003 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star, zero, on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Karen Yagnesak, Director of Marketing and Communications of FindWhat.com. Thank you. You may begin.

Good afternoon and welcome to FindWhat.com’s first quarter 2003 financial results conference call. Prior to the announcement of the call I would like to ask you for your patience to state the Company’s policy with respect to forward-looking information pursuant to the Private Securities Litigation Reform Act of 1995.

Statements made in the course of this conference that are not truly historical, such as statements regarding the Company’s or management’s intentions, hopes, beliefs, expectations, or predictions in the future are forward-looking statements. All forward-looking statements made during this conference are based upon information presently available to the Company and the Company assumes no obligation to update any such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the factors and risks discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and any other reports filed from time to time by the Company with the Securities and Exchange Commission. Copies of such filings can be obtained from the Company or the Securities and Exchange Commission. All information discussed on this call is as of March 31, 2003.

I will now introduce members of FindWhat.com’s executive management team participating in the conference call today: Craig Pisaris-Henderson, Chairman and Chief Executive Officer; Brenda Agius, Vice President Finance; and, Phillip Thune, Chief Operating Officer and Chief Financial Officer. We will begin the call with Craig outlining our Market Division and highlighting some of the recent developments. Brenda will then provide more specific financial results and our financial outlook, followed by Phillip with a discussion of our current and projected operating environment. The prepared remarks will take approximately 30 minutes, after which we will open up the call for a question-and-answer period. Any analysts on the call feel free to direct your questions to Craig, Brenda and/or Phillip at that time.

Now I will turn the call over to our Chairman and Chief Executive Officer, Craig Pisaris-Henderson.

Thank you Karen and welcome to FindWhat.com’s Q1 conference call. Q1 was yet another record-setting quarter that was coupled with the launch of several industry-leading initiatives that we feel not only set new standards for our industry sector but also helped to further differentiate ourselves as one of the leading performance-based marketing companies in the world. Here are a few highlights to consider.

Q1 marked the 14th consecutive quarter of increased revenues with top line revenue increasing to $15.8 million, an 18-percent increase quarter-over-quarter and $2.2 million above the previous guidance. Q1 also marked the eighth consecutive quarter of increased pre-tax diluted EPS with Q1 coming in at 20 cents per share, or five cents above expectations.

In Q1 we increased cash and short-term investments by over $4 million from operations while maintaining our record of no long-term debt. In Q1 FindWhat.com became the industry’s first and only company to successfully develop, implement and launch an post-click analytic tool call ‘AdAnalyzer™’, designed to help our clients obtain their true ROI for our distribution network.

We became the industry’s first and only company to successfully develop, implement, and launch an ad campaign scheduler, allowing our advertisers to automatically set their campaign schedules, concentrating on the days, weeks, or months that provide the highest yield for their online advertising budget.

We launched an industry-leading suite of tools under the name ‘CruiseControl™; containing the tools previously mentioned as well as several others, such as AutoBidding service and an Auto[indiscernible] service, that when combined not only make FindWhat.com an easier buy for advertisers of all sizes, but also set new standards within the industry for client-related services.

We further solidified and expanded our core partner distribution network and we have plans in place to enhance our multiyear private label relationship with Lycos and HotBot, which Phillip will elaborate on later in this call.

We completed our move into our new corporate headquarters in Fort Meyers, Florida, as well as final migration steps into our new state-of-the-art network operation center. We also further enhanced our technical capabilities within our Atlanta network operations facility, increasing our technical capabilities many times while further solidifying our technical architecture.

And last on this point, we completed our move into our new facility in midtown New York, giving us the enhanced space mentioned on previous occasions for our planned buildout of an Agency Sales Division as well as additional buildup of our Business Development Division and Corporate Development Division.

It is also my pleasure to report that due to our continued success, we are increasing our previous full-year 2003 revenue guidance of $60 million to $66.5 million, representing a 55-percent increase year-over-year from 2002. We are also increasing our full-year 2003 pre-tax EPS guidance to 74 cents, and our post-tax EPS guidance to 45 cents, up from 66 and 40 cents, respectively.

And last, as of this month, FindWhat.com was approved for and began trading on the NASDAQ national market, taking a step up from the NASDAQ Small Cap marketplace.

I think you can see from this summarized list of highlights we’ve been extremely busy thus far in 2003 and are delighted in the development of all the points mentioned above, as well as many not mentioned. With this said, I’d like to thank all of the FindWhat.com team members. It’s through your hard work and dedication that we have continued to grow and take a leadership position within the industry.

Before turning the call over to Brenda and Phillip for an overview of our financial and operational details, I’d like to take a moment to update the investment community on FindWhat.com’s 2003 and 2004 strategy and how it differs from others in our sector.

On our last conference call I touched on a few things that we believe would happen over the course of 2003 that would show clear differences in strategy between companies within our sector. One of those points is our belief that the largest search and portal sites would continue to dedicate more resources towards performance-based opportunities, recognizing that they already possess one-half of the business equation to successfully develop their own performance-based product. Because of this belief, we are the only company to have developed and launched a private label service providing a complete, turnkey solution to large traffic-providing companies, allowing them to launch their own pay-per-click initiative with little to no market concerns or capital expenditure costs.

Another point is our belief that the average price per client paid by advertisers in our sector will ultimately be dictated by the true ROI received by the advertisers for the actual sales conversion rate rather than by perception of the value of the click from a name-brand traffic provider versus a not-so-well-known name.

Because of this belief, we are the first and only company within our sector to develop and launch a post-click analytics tool for advertisers of all sizes, giving them post-click tracking reports based on parameters that they determine to be relevant to their specific initiatives.

I also noted that 2003 would be a year of expansion for FindWhat.com as we invest in and develop new initiatives in corporate departments to facilitate diversification of FindWhat.com into new markets with an ROI on synergistic partners that will further serve to expand our core mission of continuing to be a leading global performance-based marketing company. This is an area where I believe is the greatest difference between FindWhat.com and other top-tier performance-based companies.

Among the differences is our decision not to focus all of our resources on competing for the top tier search and portal sites, which has gone from a relatively uncompetitive strategy to becoming an extremely competitive strategy, as well as speculative from our perspective due to the top-tier companies’ abilities to perform such services themselves.

Instead, over the past few years we have focused on building relationships in the middle market while testing multiple distribution outlets, truly differentiating our distribution network from others offered in the sector and helping us to obtain a solid position in the marketplace.

Another difference is our approach to building ‘best of breed’ and in some cases the only services of their kind that assist advertisers of all sizes with their buying decisions and the management of those decisions.

And last, as 2003 continues to unfold and with the burgeoning strength of the U.S. paid listings marketplace, as well as those abroad, we feel it’s become evident how our diversification strategy greatly differs from others in our sector as we intend on continuing to focus on opportunities that provide clarity to the marketplace of our intent and will help to further solidify our position as a leading performance-based marketing company.

On this point, while recently reading an institutional marketing piece, the idea of diversifying one product offering was referenced as ‘deworsification’ and that most new initiatives that companies take on typically serve to challenge the company and prove hurtful in the long run as new initiatives often take the management’s eye off the ball while trying to substantiate their decisions. With this concept keenly in mind and as I’ve mentioned in the past, FindWhat.com will continue to expand in all areas — internal and external — only when the initiative presents an opportunity to management to leverage or enhance existing assets without the need to build new supporting departments, to understand or to manage the new initiatives.

At this point I’ll turn the call over to Brenda for a detailed overview of our financial statement and I’ll come back after Phillip speaks for a wrap-up. Brenda?

Thank you Craig. I am pleased to report that in Q1 we continued to meet and exceed our financial goals. We highly value the track record we’ve established of consistent revenue growth and strategically managed operating expense decisions.

With that said, I will discuss the Company’s first quarter financial results in detail and then I will turn it over to Phillip who will provide further insight on our overall financial performance, key metrics, and the state of our operations. Let’s begin with revenue.

Q1 2003 revenue was approximately $15.8 million. This exceeded our original revenue projection by more than $2.2 million, or 16… [technical difficulty]

Ladies and Gentlemen, we are experiencing technical difficulties. Please remain on the line as the conference will begin shortly.

Operator?

I’m here, sir.

OK.

Are we okay to go?

Yes, you are.

OK. Brenda?

Let me start with Q1 2003 revenue. Q1 2003 revenue was approximately $15.8 million. This exceeded our original revenue projection by more than $2.2 million, or 16 percent. When compared to the prior quarter, Q1 2003 revenue exceeds Q4 2002 by approximately $2.5 million or 18 percent. We believe that the upward revenue momentum, which we now have achieved for 14 consecutive quarters, is a testament of our commitment to our ability to build and sustain quality advertiser and distribution partner relationships.

Moving down to the P&L, our Q1 2003 operating margins, our operating margins declined slightly from 27.2 percent in Q4 to 26.6 percent in Q1, representing the first sequential decline in over two years. To further elaborate, I would like to touch briefly on the rate of growth of our expenses.

Four of the largest elements of our operating expenses are: 1) the revenue sharing payments we make to distribution partners; 2) payroll; 3) depreciation and infrastructure expense; and, 4) professional fees. As a percentage of revenue, three of the four slightly increased in Q1 versus Q4 2002. Our revenue sharing payments as a percentage of revenue remained roughly flat for the six straight consecutive quarters, coming in at roughly 50 percent. We expect the same pattern in Q2.

Our historical high operating margins support our philosophy of operating efficiently. However, the time has come where we must sustain our infrastructure and our teams so we have the ability to pursue multiple opportunities simultaneously, including new initiatives identified by our Corporate Development Team.

As Phillip will discuss in more detail, we do not anticipate large sequential increases in revenue over the next two quarters, but we do intend on continuing to build our technical capabilities as well as our corporate development sales, advertiser solutions, strategic development, and technical team.

As Craig mentioned, we believe the long-term impact of this spending will enable us to be a more diversified company with multiple revenue streams. The short-term impact, along with the resumption of activity in our patent litigation with Overture, will be lower margins in Q2 and Q3. We also anticipate that our revenue sharing payments as a percentage of revenue will begin to creep up starting in Q3. As such, we anticipate a percentage point per quarter increase on a sequential basis in Q3 and Q4 of 2003.

Turning back to the litigation with Overture, since March 2002 we had been waiting for a Judge in New York to rule on whether our case should be heard in the Federal Courts in New York or if it should be heard in Los Angeles. The Judge recently ruled that Los Angles was a more appropriate venue, primarily due to the location of many of the key witnesses in the case. With the venue question now away, we anticipate that beginning in Q2 of 2003 we will be back on a run rate, spending approximately $150,000 per quarter on this litigation. We continue to believe that we do not infringe on any valid or enforceable claim of Overture’s patent.

In summary, while we do have the ability to match expenditures with anticipated levels of revenue growth and we believe that we have the ability to expand margins in future years, we continue to think margins will decline from Q1 levels for the rest of the year as we increase our capabilities to pursue the many opportunities we see before us.

With revenue and operating margins out of the way, let’s discuss pre-taxing and net income. Our first quarter pre-tax income, which we believe is the best measurement of our Company’s overall performance relative to prior quarters, was at an all-time high at $4.4 million, or 20 cents per diluted share. This compares to a pre-tax net income of $3.7 million, or 19 cents per diluted share in the fourth quarter of 2002, and pre-tax net income of $2 million, or 10 cents per diluted share, for the first quarter of 2002.

In Q1 2003 the Company recognized a tax expense of $1.6 million, or 38 percent of its Q1 2003 pre-tax income. This compares to a Q4 2002 tax expense of $1 million, or 28 percent of Q4 2002 pre-tax income. In addition to the increase in our expected tax rate, the Company’s diluted shares outstanding increased from 19.3 million shares in Q4 2002 to 21.3 million shares in Q1 2003.

As a result of these increases, we’ve experienced a slight decline in our Q1 2003 diluted earnings per share. Q1 2003 diluted earnings per share of 13 cents is down slightly from Q4 2002 14 cents diluted earnings per share. We would like to note that we anticipate an expected tax rate of 38–40 percent.

Turning to our balance sheet, our financial position has never been stronger. At March 31, 2003 we had $27.7 million in cash, no long-term debt, and we achieved a positive retained earnings position.

Finally, I would like to highlight the remainder of what we anticipate for 2003, and then Phillip can provide greater detail on the overall 2003 financial outlook.

Our 2003 revenue is estimated at $66.5 million, which represents a 55-percent increase over 2002’s revenues of $42.8 million. Pre-tax income is estimated at $16.5 million, or 74 cents per diluted share, which represents a 49-percent increase over full-year 2002 pre-tax income of $11.1 million. And lastly, net income for 2003 is estimated at $10 million, or 45 cents per diluted share.

This concludes the Q1 2003 financial highlights. I will now turn the call over to Phillip. Thank you.

Thanks Brenda, and we apologize for the technical difficulties. Brenda’s opening statement was just talking about obviously our financial results and the fact that we highly value the track record that we’ve established of consistent revenue growth and strategically manage operating expense decisions.

I’d actually like to spend a fair amount of my time on our revenue, why we increased revenue as much as we did in Q1 and what is driving our revenue growth assumptions for the rest of the year.

Before I turn to Q1’s performance, let me provide a little bit of background. In recent months the concept of contextual paid lifting has received a lot of attention. Contextual lifting, as opposed to search lifting, are shown to an Internet user without that user having typed a query into a search box or having clicked on a keyword among the directory of keywords. FindWhat.com has been experimenting with contextual lifting for over two years. I think this is a good example of FindWhat.com being well ahead of our peers in terms of innovating with different types of traffic and different implementations with our distribution partners, although doing it without fanfare.

This culture of quiet innovation has led us to build a distribution network that is very different from the networks of Overture and Google in many ways, including searches of our traffic, the interdependency inherent in our relationships with our distribution partners, and the diversification of our revenue sources.

The fact that both Overture and Google have realized that paid listings can be highly targeted and effective for advertisers without the occurrence of a traditional search box query has several ramifications for our business. It can lead to the loss of a key partner as I will discuss in more detail momentarily, but it also leads to greater acceptance by advertisers and it should get more entities, which have the ability to offer contextual lifting interested in our space. That, of course, grows the pie that we can attack.

As always, we watch the efforts of larger players in this sector with keen interest, and given our broader experience, we offer a word of caution. The decision to show listings without a search box or a directory query must be tested on a case-by-case basis. And many implementations do not work, either for the advertiser or the distribution partner. We would hate to see paid listings head down the path of banner ads, ubiquitous, untargeted, and largely ignored.

Implementation without expensive testing can result in lower conversions for advertisers, which should not be acceptable for anyone in our industry. We’ve put our money where our mouth is, offering our advertisers the ability to track conversions on a keyword-by-keyword basis through our AdAnalyser™ post-click analytic tool. We challenge others in our space to follow suit.

To summarize, innovation is often born out of necessity and ours has been the result of a reluctance to compete in what we have long viewed as a difficult game, going after the largest portals in the country for straight distribution relationships. As we have done in the past with our private label service for large portals, we believe that we will continue to attack revenue opportunities in a unique, intelligent, fair and a sensible way, staying several steps ahead of others in our sector to continue to find high-quality traffic for our managed advertisers on terms that are equitable for the level of service that we provide to our distribution partners.

Our performance in Q1 is representative of this ability, by following through on several tests we have done over the last several months and quarters. We generated far more [indiscernible] in Q1 than we expected, leading to 18 percent sequential revenue growth. These additional [indiscernible] came from expanding our relationships with both contextual listing partners and more traditional partners, as well as growth from our private label partnership with Terra Lycos.

As we projected, our average revenue per click-through, or RPC, was flat in Q1. We continue to believe that bid prices have significant room to grow, but we are much less focused on our average RPC and on increasing revenue in a profitable way. Of note, RPC can be impacted by the mix of where our traffic comes from. For example, the RPC on clicks via our private label service are below our overall average because we only recognize as revenue our net share of the revenue from those clicks, whereas we recognize 100 percent of the revenue from clicks on the FindWhat.com network.

So, as we expand our relationship with Terra Lycos, it could have a negative impact on the RPC we report, but we stress to investors that: 1) do not confuse a decrease in reported RPC with lower bid prices or lower interest from advertisers due to changes in the mix at which partners generate [indiscernible] click-throughs, our bid prices can actually go up even if the reported RPC goes down; and, 2) You should realize that we manage our business to maximize revenue and profits, not RPC.

Continuing on the theme of RPC and what to expect going forward, we originally generated news about a number of new advertiser tools, as Craig mentioned, branded under the name of ‘CruiseControl™’. As with the Cruise Control feature in a car, our tool allows our advertisers to drive traffic to their site with minimal ongoing effort, from automating the scheduling of their campaigns to the replenishing of funds in their account to the bid amount charged for a click-through. We have launched these tools, along with AdAnalyzer™, not to wring more revenue out of existing advertisers, but to offer them a better, easier, more quantifiable service. We believe our tools will reap a greater advertiser retention and spend over the long run based on providing better service and value.

We do not foresee any of these tools or the increase in our minimum bid from a penny to five cents, which will not impact current advertisers due to a grandfather clause, offsetting the other factors impacting RPC in 2003.

One of the main factors that will impact RPC is the expansion of our partnership with Terra Lycos. Lycos renewed their straight distribution relationship with Overture last week, but that does not impact our private label relationship with Lycos. In fact, Terra Lycos has notified us that they intend on improving the placement of their inside ad-buyer listings, which are managed via our private label service and which currently appear in boxes on the right side of the search pages of Lycos.com and HotBot.

We expect this new implementation to occur during May or June, leading to additional revenue and a healthy increase in click-throughs from that partnership.

The final specific point on revenue concerns Google’s recent acquisition of Applied Semantics, which has been one of our five largest distribution partners over the last year. The Applied Semantics team is excellent and Google is lucky to have it. While we will seek to continue to work with them, we believe it is prudent to anticipate that revenue from that relationship will decline significantly. We never like to lose large partners, but it is something that has happened in the past and we expect that it will happen in the future. We remind investors that ours is not a contract-driven business, meaning we do not try to lock up distribution partners for long terms as with our advertisers. Most of our partners can reduce the revenue we generate with them very quickly if we don’t continue to be a great partner, or if they get a better offer or an acquisition proposal from someone else.

Hopefully, our track record of consistent revenue growth speaks to our ability to serve as a great partner and to expand our relationships significantly. We continue to believe that the revenue opportunities in the market segments we attack are significant and over time we can more than overcome the loss of any one partner.

For example, Excite.com was a top-flight partner for us in Q4 of 2001 before its assets were sold to [indiscernible]. Despite generating no revenue from Excite in Q1 2002, we managed to keep alive our string of sequential quarterly revenue growth, which is now up to 14 straight quarters as of Q1 2003, and which we currently expect will continue through at least Q4 of this year.

I would like to make one final point before I turn it back to Craig regarding the way we develop our projection. Our approach has been consistent. We review everything that we know as of the day of our projections, including current deals that we have, probably pending deals, and any new opportunities that are far enough along to allow us to estimate when and by how much they will impact our operations.

For example, we have never projected an improvement in the position of our Lycos [Indiscernible] until today, now that it is probable that such a change will take place in the near future. We’ve been fortunate enough once the quarter had begun to consistently find new sources of revenue and to be more efficient in achieving our goal we projected. Actually to take some credit, I think our team consistently has executed at a very high level, leading to better-than-expected performance.

That’s what occurred in Q1, and as we’ve relayed in this call, the results were very, very good. In the spirit of trying to be as open as we can be, we want to note that we feel there is a higher degree of variability to our projections today than we felt in the past few quarters, meaning that our estimates should be considered to be in the middle of a range of possibility, given uncertainties as to when exactly the events we’ve been discussing take place and what the impact of those events turns out to be. I think our estimates should always be viewed as our best guess at the middle of the potential range of outcome. We are saying that we feel the range is somewhat wider today than it has been.

With all that said, let me congratulate our team on another outstanding quarter. We remain very confident in our ability to maintain a high level of momentum and that is very much because of the long-timers we have who have stepped up flawlessly to take on increased responsibility, as well as our excitement over our newest team members and what we believe they will contribute.

Let me now turn it back to Craig for a final comment before the question-and-answer period.

Thank you Phillip. Again I would like to thank all of you for attending our Q1 2003 conference call. And again, thank all of the FindWhat.com team members for their diligence and dedication and for your continuing efforts to make FindWhat.com the world leading performance-based marketing company.

At this point we’ll turn the call over to the operator for the Q&A session.

Thank you, Gentlemen. Ladies and Gentlemen, at this time we will be conducting a question-and-answer session. If you would like to ask a question please press star, one, on your telephone keypad. A confirmation tone will indicate your line is in the question queue. To remove your question from the queue, please press star, two. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from Youssef Squali with First Albany. Please state your question.

Yes, thank you. Good afternoon. Very impressive numbers, guys! A few questions. Maybe Phillip, maybe you can address this. Can you — I understand the cost side of guidance, but again, on the revenue side, what initiatives did you take in the first quarter that you just won’t be doing for the remainder of the year? That’s kind of number one.

Number two, can you dig a little deeper in the Lycos contribution this quarter, either from a click perspective, from a revenue perspective, what kind of traction are you guys getting with other potential partners?

And lastly, with ad agencies, I know one of the thrusts of the sales force here in New York is to go after ad agencies. How are you doing there? And maybe, if you can actually quantify that, that will be great. Thank you.

OK, thank you. I’m actually going to take the second question, which is about Lycos, first. As you know, we don’t break out the contribution from Lycos exactly, but, in general terms, I can say that the Lycos initiative I think continues to build momentum. I think reflective of that is their decision to expand the placement of those listings from the boxes on the right-hand side over more to the left-hand side of the page, which we believe will increase the numbers of click-throughs. Unfortunately I can’t go into too much specifics, but I can tell you that they’ve been very pleased with the acceptance of advertisers. I think their sales force has been sort of pleased to sell that product and have that product as part of their arsenal. And we’ve been pleased with the growth of the partnership.

In terms of the revenue side and initiatives, a lot of our growth, as I think we’ve said over the last few quarters, comes from expanding our relationships with existing partners. And we do that in a number of ways and I think as I mentioned in my prepared remarks that we do a lot of testing. I’m not going to go into exact initiatives primarily for competitive reasons, but I guess you can sort of keep turning the dial up and maybe in some quarters that this is a good analogy, you turn the dial a little bit faster than in other quarters, so I think that’s what happened in Q1. We had been testing some things. They looked like very good traffic for our advertisers. We implemented them and they did very well. And we’re sort of now at a higher bar or higher level, so to speak, and again, we think we can continue to grow from that level despite the anticipation that Applied Semantics will not be a very big partner of ours.

So, hopefully that answers that part of the question. Let me turn it over to Craig for the question about agencies.

Actually, following up a little bit on that point as well, I mean, as was said previously in today’s discussion as well as other conference calls, we’re constantly exploring new initiatives. We do feel that we are a performance-based marketing company, not necessarily a performance-based search company. And to that point, there are many initiatives and many opportunities yet to be explored by anyone, quite frankly, within the online sector where we know and feel very confident that we can help our advertisers get very beneficial and good conversion clicks.

So, at any rate, the point to it is, we continue to look at some of those opportunities. In fact, we have a number of them identified at this point that we really haven’t attacked yet because again, the opportunities for the current marketplace are so large. I mean, we still see the existing U.S.-based marketplace as growing at a very, very rapid rate, and to that point, we want to stay focused on the things that we know and feel very confident are going to help us continue with our momentum.

So, at any rate, it’s just a final wrap-up on that point. On to the last point, the ad agencies, I mean, one of the things that we’ve been speaking about is growing our distribution network to the point where we are a ‘must buy’, meaning we’re large enough or we represent a large enough source of traffic for any one agency or one large advertiser that they really need to factor FindWhat.com into their marketing campaign. To that point we focused really hard in Q4 and specifically in Q1 to get our new facility open, which we finally had opened in Q1. A little behind schedule in terms of actually getting our new facility open, but we did get that done in Q1, as well as hiring Dan Ballister, VP of Sales. Actually we hired him at the end of Q4. And at any rate, Dan has been consistently throughout this quarter — or excuse me — throughout Q1, building up his agency sales division and we finally have some feet on the ground. We’re really excited about it. And their primary focus is going after advertisers that can take advantage of our distribution network and actually come in and bid higher. Our intent isn’t necessarily, as Phillip pointed out, is not to try to manage RPC, but with that said, we’re constantly looking at ways that we can further monetize our existing traffic, either by bringing in advertisers with larger budgets, which again, we need the large distribution network first before we can attract those partners. Now that we have that, there’s already companies that are coming in, as well as focusing on some of the larger companies that have a wide array of products so that we can actually work on our width, meaning not just concentrating on the highly-targeted keywords, but also working on a lot of the lower-targeted or less-targeted keywords, which increase our revenue opportunities.

In fact, on that point, the more that we develop that initiative, the average RPC could actually be negatively affected even though we’re bringing very good and high margin revenue into the company. So it’s a very, very big focus for FindWhat.com over the course of 2003, and like I referenced earlier, we’re very happy to report it’s finally on its way.

OK, thanks.

Our next question comes from Jordan [Rawhon] with [Salvia]. Please state your question.

Hi guys. I was hoping you could give me some more detail about the Company, got it’s higher partner rev share in the second half of the year.

First, would it be reasonable to expect that to continue into the first few quarters of 2004?

Second, is this due to a mix issue of Lycos versus other, assuming that Lycos rev comes with a slightly higher rev share, or for that matter, is it due to renegotiation of contracts with other partners outside of your top tier?

Hi, Jordan. Actually, I’ll take the first part and then turn it over to Phillip. Working backwards, there is additional competition in the middle market. I think we’ve all seen that. We spoke about it today with Google’s acquisition of Applied Semantics. They were a meaningful partner for FindWhat.com, and as reported in SEC filings, they were a meaningful partner for Overture as well. We do think that our success in the middle marketplace, and quite frankly, our leading the charge, so to speak, in other areas, such as contextual marketing, is attracting other players. It’s a logical approach for those companies to start looking at some of the areas that we’ve been successfully exploring for quite some time now.

So with that said, we do anticipate some challenges there in terms of competitors that we really haven’t seen in the past. But nevertheless, as Phillip alluded to, we’ve been doing this for several years now, so when we start looking at the offers or the product offers that we have to a small mid-market player, it far surpasses those currently available from other players or other participants within our sector, meaning we can actually help them understand their traffic at a higher level. Why? Because again, we’ve been working with the smaller players. We can add some port of services that can help them better monetize a larger portion of their traffic rather than just having a plug-and-play type of a solution.

So, we are going to see some additional competitiveness within the middle market, so that is part of it. I’ll turn it over to Phillip in terms of impact of other initiatives, such as Lycos.

With Lycos we only recognize as revenue our portion. Maybe a way to think about it is our portion of the rev share. So unlike with the FindWhat network we don’t recognize 100 percent of the revenue and then show an expense in Sales and Marketing. We just show our portion as revenue.

So, yes, certainly Lycos as it expands helps a little bit with the overall rev share percentage that we report. But we’re now in our sixth straight quarter where our rev share has sort of hovered right around 50 percent, maybe a little higher, a little lower. We just I think want to be prudent. This is a competitive space. Obviously, some of the other public companies in our sector have seen increasing rev share amounts. We don’t think they were totally immune to that, so I think part of our guidance with respect to Q3 and Q4 is, being prudent, giving ourselves the ability to go back either to existing partners or new partners to try and generate the revenue in a bigger way and having leverage there.

In terms of what happens in 2004, to be totally honest, I think your guess would be as good as ours. Our trends are — the trends in this business can change pretty quickly. We feel pretty good about the remainder of 2003. I think it is certainly possible that if it continues to creep up in 2004, it’s also possible that it flattens out again we would probably not have projected four quarters ago. That would still be roughly in the 50-percent range.

So, I don’t want to make a thing about 2004 to be totally honest. I think at this point it would still be somewhat of a guess.

OK. So, the reason then that the second quarter rev share appears to be under control is in part because the Lycos is booked on a net basis. Later this year because at that point it would give you a little bit more room to bump it up for some other partners.

I wouldn’t totally ascribe what happens in Q2, our projection for Q2 just to Lycos. Like I said, that helps, but again, we’ve got the [indiscernible] ability on Q2 being 30 days into the quarter and it’s just, again, what we’re seeing now is that we think it will remain flat in Q2.

Thank you very much.

Our next question comes from Richard Fetyko with Kaufman Brothers. Please state your question.

Thank you. Good quarter, guys! I’m just wondering, Applied Semantics, what have you — did you see already a lower activity from Applied Semantics in the first quarter or in the second quarter so far already? What’s in the guidance from Applied Semantics, I guess?

Yes, thanks Richard. Applied Semantics was fully in Q1. It has been fully in Q2 to date. That acquisition has now closed and we’ve had conversations with the folks, both from Applied Semantics and with Google, and I think, as I mentioned, we will continue to work with them, but I think we’ve been given guidance from them that we should expect in the very near term that that revenue will either completely or mostly go away.

So, apparently, obviously it is in your guidance then. So you’re making up for that business from your other partners and new partnerships that you forge.

Right.

Can you tell us how many new [indiscernible] you’ve added during the quarter?

Sure. I don’t want to get into a habit of reporting distribution partners because I think in absolute numbers it’s not all that helpful. But I think we remain in sort of the low 200 range or low to mid 200 range, again, as we’ve done for I think every quarter since we’ve been in this business. We’ve continued to add a number of new partners.

I will say that whether those partners make a meaningful impact to overall revenue going forward still remains to be seen. As usual, we’ve signed up some very promising partners.

Just one other point on that as well, one of the things, going back to our forward-looking into other areas or other marketplaces, quite frankly, that we can help get our advertisers additional quality traffic, we constantly go out and bring a number of new affiliates online that we use as tests, quite frankly, in conjunction with a group of advertisers that we communicate with actually on a weekly basis minimum that work closely with us to develop other opportunities far before they ever go out to the entire network.

So, to that point we are constantly bringing on new partners. The number does not necessarily signify growth rate because at the end of any given month we may actually cut half of the new distribution partners we bring on because we find that the traffic source or the new initiative just wasn’t something that we’d like to bring in because we didn’t feel it was beneficial enough to our advertisers.

So, it really isn’t that meaningful, the number, other than knowing that FindWhat.com’s distribution network is made up of hundreds of small and middle sized, and quite frankly, a couple of large sized as well. We get a portion of their traffic. But literally this distribution network has been built year over year to the point where it’s this size.

So in terms of our position in the marketplace, it is a good point because again, for FindWhat to really lose momentum, so to speak, we’d have to lose a significant portion of our distribution network. And again, the numbers are so high we feel that we’ve positioned ourselves in a very solid fashion in terms of continuing to grow our business with multiple distribution sources.

I was wondering if you could sort of give us an update on your partners or a number of 10-percent affiliates, or top five as a percentage of total revenues, any other further color on that?

Sure, this is Phillip. Obviously, it will look a little bit differently going forward because of Applied Semantics. I believe that in Q1 we had just one distribution partner that was over 10 percent, and then the rest of the sort of top five, top ten, I think point out in sort of a similar fashion to how they have in recent quarters.

And then on the revenue per click, I know you can’t really break it down between your own or [indiscernible], but was the revenue per click, did it increase on your own network? Just directionally, if you could give us an idea if it was up quarter-over-quarter or flat.

I guess I’d rather answer that question just in terms of bid prices. I think we’ve seen bid prices on the FindWhat.com network still enjoying growth and I think, as I mentioned, we believe that they will continue to enjoy a fair amount of growth. So again, we can’t really break out FindWhat network RPC versus overall RPC, but certainly we grew the number of advertisers, both with Lycos active advertiser accounts, both for Lycos and for the FindWhat.com network. I think we’ve had a great reception for the launch of CruiseControl™. All of the feedback we’ve received, maybe with a very odd exception, has been extremely positive. So again, we think bid prices have good momentum across the FindWhat.com network.

OK. And then lastly, maybe sort of a higher level question. I think the quality of traffic, you sort of alluded to that that’s going to become more and more important to the advertisers as they get a little more sophisticated and sort of buying or purchasing their sales leads across different networks. What kind of feedback are you getting on your ROI tools or any other tools that you launch? Some of them may be sort of fresh, maybe too early to tell. But I was wondering if you had any feedback on the advertisers already?

Sure. As you know, the launch of this price was relatively recent, so it is early in the initiative, but I can very proudly say it’s been very positive. Keep in mind, our philosophy is that at the end of the day online marketing or online ad buying is going to be based on a somewhat predictable conversion rate and every step that we take in launching new initiatives helps the advertisers get to the predictability that they’re looking for through automated services.

So in other words, someone can actually tell us what they’re willing to pay for an advertiser that should have a high probability of converting into a sale. And based on the tools that we put in place, they can plug that in and the system will manage itself. So we are moving strongly and again, very proudly will state that we’re by far leading the industry with those types of initiatives at this point.

And again, to date all the advertisers that we have spoken with directly that have given us feedback have been incredibly happy with the first steps. And quite frankly, they’re going to be much happier as we move forward through 2003 with other things that we plan on deploying.

OK. Also, just one more. Phillip, I was wondering, the Lycos sort of initiative, you’re counting on May/June implementation. How much of that is in the guidance? Did you sort of bake in a significant improvement from Lycos or just a marginal improvement in terms of clicker rates?

I’d just rather not go into exact detail, but it does play into the guidance. It assumes — that was a tough one and we’ve probably been somewhat conservative there because it hasn’t happened yet. We’ve got some guesses as to what will happen, but we’re still working through the exact details of the implementation, the new implementation, and so it’s sort of difficult to say. We’ve taken a guess. It will help us — it certainly will help us with click-throughs, but we’re being somewhat conservative there because it’s a known factor that it’s coming but it’s not quite known exactly what it’s going to look like or how much new traffic that we’ve got.

Great! Thanks.

Our next question comes from [Lanning] Baker with Smith Barney. Please state your question.

Thanks a lot. I had a couple of questions. First, if I’m doing the numbers right between the first quarter and the fourth quarter, your pre-tax margin goes down by 200 or 300 basis points to about a 24-percent pre-tax margin. Maybe you could just sort of give us the things that would cause the pre-tax margin to go up or down and sort of rank them in terms of order of magnitude as you think about it, over say the ’03 — sorry, ’04 and ’05. What are the big margin deltas because in the near term it looks like that you’re guiding toward lower margins. What are the things that either accelerate that or change that further out?

Secondly, as I look at the P&L it looks like your — I mean, in the first quarter you’ll spend $1 or $2 million or product development. In an industry that’s got growth rates 50 percent-plus, or something like that — I mean it’s not quite that strong — and is it seems like it’s maybe a $2-billion industry, is $1 or $2 million of product development enough to be spending when you’re — I guess on feature sets and performance and measurement and tracking and all those sort of iterations are coming out of a pretty dynamic market, I would guess that there’s probably close to $200 million being spent collectively by everybody in the marketplace. Are you — do you feel like you’re spending enough on product development to maintain the market share that you have because — I guess, do you perceive that you’re spending a greater percentage of product development dollars than you have revenue dollars? And if not, do you think that’s a sustainable condition in the long term?

Let me answer the first question and I think it will sort of lead into an answer of the second question, which I’ll leave to Craig.

There are really, and I think Brenda highlighted them, there are really sort of four main factors that are going to impact margins. Far and away the biggest one is going to be the percentage of revenue that the revenue sharing payments represent. So again, even a one-percent or 100 basis point move in that can have a pretty large impact on pre-tax income. So that’s sort of number one.

I think number two would be headcount, as Brenda said. Number three probably could be characterized as the increase in fixed costs as we expand our infrastructure, whether that be higher rent payments or higher depreciation because we’ve built out a second data facility, and again in the future I’m sure there will be a third or fourth or fifth.

And finally, just because of the Overture litigation, we always sort of talk about professional fees or litigation expenses.

I think what you’re seeing from Q — you mentioned Q1 to Q4, if I can maybe just go from Q1 to Q2, as I think we said to Jordan, I don’t think revenue sharing payments is much of a factor from Q1 to Q2. But the other three — but the other three are. The litigation expense kicks back in. We continue to sort of invest more, not only in product development, but again, just in the facility and the personnel that we have, which as a result means that we have a higher payroll.

And I think because we’ve — revenue growth on a sequential basis for Q1 and Q2, I think we’ve estimated sort of one or two percent, we believe that those three categories of expenses that I just mentioned are going to grow faster than revenue from Q1 to Q2, and then I think the sort of margins will level off from there, from Q2 to Q3 to Q4.

But again, we thought it was very, very important to continue to sort of build out what we’ve been trying to do, which is to grow a company that can handle a lot more opportunities because we’re seeing a lot more opportunities. And like I said, I think that leads into Craig’s answer on your second question.

It’s very hard to do an apples-to-apples comparison with FindWhat and others in the marketplace. If you do want to take that approach, then you have to take a step back. You have to first realize that you’re talking to a company that in its history to actually to get to a point where it can sustain itself, only raised $8.5 million versus companies that went out and did IPOs in the $50, $60 to $100 million range. That was after they had seed investments. At a minimum — and I’ve got one in mind — had a minimum of $20 million.

So, to that point it’s very hard to put FindWhat.com next to any company and say, OK, apples to apples these guys have done x-amount or have been able to produce x-amount based on the same amount of let’s just say R&D or in a production-type of environment. It’s been very different.

So, with that said, do I believe that we’re spending enough? Yes, I do. In fact, we’ve been pretty happy with the quality of folks that we’ve attracted to the company and I will give credit where it’s due. We have got some fantastic people that have recently come onboard over the last few quarters that have helped us not only identify new initiatives, but actually in very, very short order put the initiative back out to the marketplace.

As an example, private label, I mean that was basically duplicating our entire system, which, keep in mind, is more sophisticated in terms of back-end filtering systems to make sure we’re delivering quality products than anyone else in the sector because of dealing with the middle markets and more questionable traffic, let’s say. We were able to duplicate that system and redeploy that under the Lycos brand in six weeks, from signing the contract to actually putting out to the marketplace. Supposedly that shouldn’t have been doable in that timeframe according to what other people were telling us. But not only that, that was with very minimal overhead cost.

So, going back to how much we plan on spending, which is roughly $3.5 million over the course of the year, based on the initiatives that we see today and we’ve carefully mapped out what we want to go after, and I think one of the differences may be, and I do not again want to get into a comparison type scenario, but possibly one of the differences could be we are very clear on what we want to accomplish.

So we’ve sat down, we’ve looked at the initiatives that we feel is going to take FindWhat.com to the next step, and we’ve identified the costs involved with doing that, from tech to internal resources, and we’ve mapped that out. Now, there’s no doubt that historically we’ve been, as Phillip was just alluding to, somewhat conservative. Why? Because we think it’s prudent.

So to that point, we’re not being conservative in that we’re going to come back and increase guidance there unless, quite frankly, an initiative comes along that we do not see right now, an opportunity comes along that would cause us to do that. And if that’s the case, of course, we’d come to the marketplace and inform everyone. But at this point we’re very confident that we’re going to be able to succeed on the initiatives that we see as beneficial to the company, to continue to put us in a leadership position with the type of investment that we’ve put into our guidance.

OK, thanks a lot guys.

Our next question comes from Stewart Barry with Delafield Hambrecht. Please state your question.

Hey guys. I guess my question has to do with the percentage of distribution partners you now share with Google and Overture and is this percentage increases your partner total, distribution partner mix. And also an instance where you guys do share your distribution partner with Google and Overture can you guys give us some examples where you’re taking share from them, you know, we’re in the battle for traffic?

Sure Stewart. Well first, there aren’t that many. I mean that’s the simplest to answer that question. There are very few partners out there that we are openly sharing with either Overture or Google. I will say that there are some meaningful partners, such as [Indiscernible]. [Indiscernible] was a great partner for Overture and they were a great partner for us. Google was very fortunate to have those guys and we think an awful lot of them. But at the same time, that’s one of very, very few.

In terms of winning the battle, that’s not the battle we fight. We chose a long time ago not to make this about money. If this were about money, head-on about just who can pay the largest check, we would have lost a long time ago. We were not in the position to do the $50 million, $20 million, $10 million up-front types of deal that other companies in the sector have done in the past, and quite frankly, still do today.

So what we’ve done, we’ve had to be more innovative. It was just interesting to get that question from [Lanning] regarding our R&D. The reason why FindWhat is here today is because we have been more innovative. We have provided more ancillary products and services to the distribution partners, helping them produce more revenue.

So, to that point, we don’t really go after the head-to-head battle. I really don’t think there is any partner that we’re taking share from Overture or Google, quite frankly. And if there is, I’m not aware of it and I have to go down and pat our guys on the back because at the end of the day it’s not going to be because we’re going to pay them more money. That’s just not — we don’t think that’s a long-term strategy that’s a winning strategy. And even if we did it’s not a game that we could play.

So, at any rate, I think our distribution really relies on our innovation, our technical innovations that our technical teams have put together, as well as our Customer Service and every other division, quite frankly, and the additional benefits that we offer where others in the sector just can’t.

OK, thanks a lot.

Our final question comes from Mr. Squali. Please state your question.

Actually, my question has been answered. Thank you.

Mr. Henderson, there are no further questions at this time.

Great! Well, thank you. We’d like to thank everyone again for attending our Q1 2003 conference call. There will be replay available on our Web site. And, of course, if you have any additional questions after the call feel free to give us a call here at FindWhat.com. Thank you very much.

Thank you again. This concludes today’s teleconference.