Inuvo Inc (INUV) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the FindWhat.com second quarter 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 Ms. Karen Yagnesak, Director of Marketing and Communications at FindWhat.com. Thank you. You may begin.

Good afternoon and welcome to FindWhat.com's second quarter 2003 financial call. Prior to the commencement of the call, I would like to ask 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 purely historical such as statements regarding the company's or management's intentions, hopes, beliefs, expectations, and predictions of 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 cause differences include but are not limited to the factors and risks discussed in the company's annual report on Form 10K ending 2002, or any other reports filed from time to time with the Securities & Exchange Commission. Copies can be obtained from the company or the Securities & Exchange Commission. All information discussed on this call is as of June 30, 2003. I will now introduce those participating in the conference call. Craig Pisaris-Henderson, Chairman and Chief Executive Officer, Brenda Agius, Vice President of Finance and Phillip Thune, Chief Financial Officer. We will begin the call outlining our market position 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. Prepared remarks will take approximately 30 minutes, after which we will open up the call to 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'll turn the call over to your Chairman and Chief Executive Officer, Craig Pisaris-Henderson.

Thank you, and welcome to FindWhat.com's Q2 conference call. Q2 was another record setting quarter for FindWhat.com that was coupled with our pending merger with our European counterpart [INAUDIBLE]. We also continue to establish new standards for our sector with the propagation of our industry-leading tools and services and point out we continue to build our internal infrastructure as we prepare to further differentiate ourselves in this rapidly changing and consolidating sector. Starting with the highlights from operations, Q2 marked the 15th consecutive quarter of increased revenues, the top line revenue increasing to 17.5 million, or roughly $2 million over our Q1 revenue and $500,000 over our most recent guidance. Q2 also marked the ninth consecutive quarter of increased pretax income at approximately $4.4 million.

Q2 marked FindWhat.com's first full quarter of trading on the NASDAQ national market, as well as its inclusion into the Russell 2000 index representing increased awareness of the Wall Street community as a whole. In short-term we [INAUDIBLE] cash and investments to approximately $30 million while maintaining our record of no long-term debt. Note that this update does not factor in the $20 million raised in our recently announced private placement. It is also my pleasure to report that we are increasing our full-year 2003 revenue guidance to $70 million, representing a 64% increase from 2002. We are also increasing our full year 2003 pretax EPS guidance to 78 cents and our post-EPS guidance to 48 cents, up from 75 and 46 cents respectively.

This increase does factor in the additional one million shares in our recently announced private placement. As Phillip will elaborate later in the call, in Q2 we continued to build out our infrastructure with the addition of many FindWhat.com team members with our total team member count coming in at 160 at the close of the quarter. That was 115 at the close of 2002. Part of this buildup has been with our new sales team in New York and our existing sales team in Florida. As we have stated over the last two quarters, we have increased our sales efforts with an eye towards agencies and companies with larger budgets, placing the emphasis of our product offering on ROI as we continue to push advertisers to focus on post-click transactions versus just placement and clicks. We have also continued to build up our technical infrastructure to handle new initiatives we are identifying for later in 2003 and 2004.

On the point of new initiatives, in Q2 we announced our plans to merge with east body, creating what we believe will be a global leader in the performance-based marketing sector. I am happy to report that the formalities of the merged process are progressing nicely and with the recent consolidation announcement, a new global company will emerge as the largest independent performance-based marketing company in the world representing 11 countries, eight languages, over 40,000 advertisers, and several hundred distribution partners. As I pointed out when the merger was announced, we believe with this global footprint, we will be well positioned to take advantage of favorable market gains and introduce new products and services globally, spreading the costs over many different markets while receiving additional revenue from those same markets. Additionally, while we have not factored in any internal financial benefits from the merger into our forward guidance, we believe the enhanced resources and knowledge gained from the combined management teams will provide greater value together than either team could have achieved individually.

In fact, for the last several quarters, I've touched on our intentions to bring additional products and services in-house to serve new markets as we continue to differentiate ourselves within the sector. Now with the recent consolidation announcement and with the combined knowledge of the management team, our intent to leverage our existing global assets has never been more focused as we continue to believe that there are many opportunities to provide additional revenue-generating products and services as we become the largest independent performance-based marketing company. Before turning the call over to Brenda and Phillip for an overview of our financial and operational results, I would like to thank all the FindWhat.com team members as it's been through your hard work and dedication in a we continue to grow and further establish our leadership position within the industry. I would also like to thank all of the east body team members as we draw closer to becoming a global leader well positioned for future growth. With that, I'll turn the call over to Brenda for a detailed overview of our financial statement.

Thank you, Craig. I am pleased to report that in Q2 we continued meet and exceed our financial goals. We highly value the track record we've established of consistent revenue growth and strategically managed [INAUDIBLE] decision. With that said, I will discuss the company's second 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. Q2, 2003's revenue was approximately $17.5 million. This exceeded the revenue projection we provided on June [INAUDIBLE] by more than $500,000. When compared to the prior quarter, our Q2 2003 revenue exceeded Q1 2003 by approximately $1.7 million, or 10%.

We have increased revenues sequentially for 15 consecutive quarters. Moving down the P&L to our Q2 2003 operating margins, [INAUDIBLE] how operating margins declined slightly from approximately 26.6% in Q1 to 24.4% in Q2. 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: one, the revenue sharing payments we make to distribution partners; two, payroll; three, depreciation and infrastructure expense; four, professional fees. As a percentage of revenue, three of the four slightly increased with Q2 versus Q 1. Our revenue-sharing payments as a percentage of revenue remained roughly flat for the seventh straight quarter, coming in at approximately 60%. Our industry-leading operating margins [INAUDIBLE] operating efficiently.

However, we must continue to expand our infrastructure and our team so we have the ability to present multiple opportunities simultaneously without compromising our core business initiatives. Our overall goal for the remainder of the year is to continue the momentum of building out our technical capabilities as well as our corporate developments, sales, advertiser solutions, strategic developments, and [INAUDIBLE]. We believe the long-term impact of this spending will enable us to be a more diversified company with multiple revenue streams and provide us the necessary resources to integrate new initiatives. With that said, the short-term impact, along with the resumption of activity in our patent litigation [INAUDIBLE] has and will yield lower but well above average industry margins in Q2, Q3, and Q4. We currently anticipate that our revenue-sharing payments as a percentage of revenue will be flat in Q3.

So [INAUDIBLE] in Q4, perhaps 100 basis points. Turning to professional fees in our patent litigation with Overture, with the venue question out of the way, we are currently on a running rate of spending approximately $250,000 per quarter on our litigation. Within our current schedule, a trial will not occur until the second half of 2004 at the earliest. The litigation is still at an early stage and we continue to believe that we do not infringe on any valid or enforceable claim of Overture's patents. With revenue and operating margins out of the way, let's discuss pretax income and net income. Our second quarter pretax income which we believe is the best measurement of our company's overall performance relative to prior quarters represented the ninth consecutive sequential increase at $4.4 million, or 20 cents per diluted share.

This compares to a pretax net income of $4.3 million, or 20 cents per diluted share in the first quarter of 2003 and pretax income of $2.5 million, or 13 cents per diluted share for the second quarter of 2002. In Q2 2003, the company recognized a tax percent of $1.7 million, or 38% of its Q2 2003 pretax income. This compares to Q1 2003 tax expense of $1.6 million of pretax income. Additionally, the company's diluted shares outstanding increased from 21.3 million shares in Q1 2003 to 21.8 million shares in Q2 2003. As a result the increased shares out coupled with a slightly lower operating margin caused an expected decline in our diluted earnings per share from 13 cents in Q1 to 12 cents in Q2 2003. In Q2 2002, the company recognized a 1.8 million dollar deferred tax benefit which significantly helped our reporting EPS.

The recognition of this benefit resulted in the Q2 2002 diluted earnings per share of 22 cents. Moving forward, we anticipate an effective tax rate of approximately 38% to 40%. Turning toward our balance sheet, our financial position has never been stronger. At June 30th, 2003, we had $29 1/2 million in cash and no long-term debt. Our cash position on June 30th does not include the $20 million from July 15th when the company issued one million shares in a private placement to institutional investors. The funds from the private placement will be used to support continued growth and corporate initiatives. Finally, I would like to highlight the remainder of what we currently anticipate for 2003 and then Phillip can provide greater detail on the overall 2003 financial outlook. Our 2003 revenue is now estimated at $70 million, which represents 64% increase over 2002's revenue of $42.8 million.

Pretax income is estimated at $17.7 million, or 78 cents per diluted share which represents a 59% increase over a full year 2002 pretax income of $11.1m, or 58 cents per diluted share. And lastly, net income for 2003 is currently estimated at $10.8 million, or 48 cents per diluted share. This concludes the is Q2 2003 financial highlights. I will now turn the call over to Phillip. Thank you.

Thank you, Brenda. I want to spend some time on advertisers because we've talked a lot over the last few quarters about initiatives we've implemented to better serve our advertisers and to attract larger advertisers to the FindWhat.com network. These initiatives include CruiseControl, our branded suite of automated tools to allow advertisers to more easily manage and track their accounts and the expansion of our sales force including hiring a sales force in New York City to get in front of advertising agencies and large advertisers. We believe that we have made great strides to offer a better service to advertisers, although we see a number of areas where we can improve.

Including giving advertisers more feedback on key words they should be adding to their accounts to receive more traffic with a higher ROI and being more proactive in other ways to increase individual advertiser spending. In addition, we spent a fair amount of time with the E-spotting team, comparing notes on our respective sales initiatives, tools and procedures, and we are excited to try to find the best practices from each company to improve our collective efforts. CruiseControl has been an initial success with approximately 40% of our accounts using at least one of its features. We have also made progress with our sales staffs in both Florida and New York, with now four account executives in New York who are introducing our network to large agencies, both interactive and traditional. We also continue to hire more account executives in Florida.

In total, we have a target of approximately 20 account executives by the end of the year, up from eight at the end of 2002. We did a good job with retention of our largest accounts in Q2 and with adding new large advertisers, although as I mentioned above, we can and will improve. We did see a significant increase in average revenue per account in the quarter. Brenda covered much of what occurred in Q2 and our expectations for Q3 and Q4. I just want to close by reiterating that we are taking advantage of higher-than-expected revenue to continue to ramp up our capabilities, to work on the integration planning for E-Spotting and to review additional strategic opportunities.

Our industry is changing quickly with five transactions of over $100 million already announced in the first half of this year. We've historically done a very good job of managing the growth of our expenses in connection with the growth of our revenue, and in executing on the strategy we've articulated to our investors. It has led to now nine straight quarters of sequential pretax income growth. In order to continue to play a leading role in our industry, and to take advantage of the ever-shifting landscape, we need to add additional members to our team and continue to increase our technical capabilities. We've highlighted that to investors in prior conference calls, but we believe we have called the attention of a number of new investors and we want to repeat these plans to ensure clarity of our mission and our expectations. With that I will turn it back to Craig.

Thank you, Phillip. Again, I would like to thank all of you for attending our Q2 2003 conference call and again, thank all the FindWhat.com and E-Spotting team members for their diligence and dedication as we move towards becoming the world's leading performance-based marketing company. At this point we'll turn the call over to the operator for the Q&A session. Operator?

Thank you. Ladies and gentlemen, at this time we'll be conducting a question-and-answer session. If you would like to ask a question, please press star, 1 on your telephone keypad. A confirmation tone will indicate your line is in question queue. To remove your question from queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while I poll for questions. Our first question is coming from Youssef Squali with First Albany. Mr. Squali, please state your question.

Thank you and congratulations on a nice quarter, guys. Three quick ones. First, on traffic acquisition cost. Last quarter, Craig, you mentioned that you should be expecting potentially a 200 basis point increase by the end of the year. Now we're talking about an increase of 100 basis points. That's clearly good news. I was wondering if there is really, at this point, any basis for us to expect any increase, not just out of concern, but number two, on the E-Spotting transaction, I understand, Yahoo is still going month-to-month E-Spotting. Do you have any word or any color as to when E-Spotting might go away now that Yahoo has acquired Overture and clearly [INAUDIBLE] there and also, when you look at E-Spotting's roster of customers, they still have a fair number of Tier 1 and Tier 2 destinations. What is your local conviction, that you'll maintain these relationships? Thanks.

Thank you. I tell you what. I'm going to attack those in reverse. Let me take the third question, which was with our level of competence, quite frankly, that we're going to continue to develop, retain and develop those relationships. It's very high. Our strategy, as you are well aware, is to go out and aggregate middle markets and some of the smaller players because we know the traffic is highly profitable for our advertisers in terms of actually producing return on investment for them. E-Spotting is well aware of that and they were prior to our involvement with them and they have been developing good relationships in those areas, and it's important I point that out because the level of professional services -- and quite frankly, the differences in professional services that you must have available for the smaller, let's say the second tier and below advertisers -- or excuse me, distribution partners is very important to understand. It is a difference set-up of professional services. They are additional requirement. Over time I've used the example of traffic analysis [INAUDIBLE] something that we provide to our distribution partners because they don't have an IT staff in-house that can actually do the analysis in-house. And so just things of that nature that you must provide for the middle market is a differentiating factor on who can actually service those markets, and we continue to be very bullish on our opportunity in the middle markets in the U.S. and in the European marketplace. So that's the first question. Secondly, I'm going to leave the E-Spotting question to Phillip in just a moment -- excuse me, the Yahoo question to Phillip in just a moment, touch on tax. Yeah, we think it's important to project an increase in that particular number. You basically were asking, is it real and should you continue to pull that into the model, and we believe so. That's why we're continue to put that out there. Yes, we've changed our position slightly from potentially 200 basis points to 100 basis points. But we believe that because we continue to build out distribution relationships with existing distribution partners. And in some of those relationships, there are elevator clauses. I still point out often when this question comes in. Those elevator clauses, what they do is they incentivize our distribution partners to grow with the FindWhat.com products. So if they increase their distribution and they actually get higher levels of traffic, we'll pay them higher rev share. So it's not as if we're going out and actually paying higher from day one. What we're doing is we're working together in a true partnership with our distribution partners, incentivizing, and quite frankly, in some cases helping them build internal initiatives that will increase the quality traffic that we're delivering to our advertisers, and for that, we pay them more. It's a win-win-win relationship for everyone. So with that said, I'm going to turn it over to Phillip to answer the Yahoo question.

Thanks, Craig. At this point we don't have anything specific, Youssef, or any specific comments on that. I think as a reminder, we did not include Yahoo-Europe in E-Spotting and actually the combined company's projections going forward from Q4 2003 and onward not because we had any particular insight into a specific transaction that could be announced but just in general, due to the nature of that relationship, sort of a shorter term nature of that relationship. So I think we continue to think that that's the prudent move is to expect that the Yahoo-Europe will not be in the numbers going forward or not be in the guidance. As to exactly when, I think it's too early to comment.

Okay. Just one quick question, I guess for Brenda maybe. Brenda, do you have the percentage of revenues from agencies and larger advertisers and if you do, what was the number last quarter, just kind of to see a trend?

Thank you. Let me take that. It's a percentage that we don't follow specifically. I think we do have a little bit of a handle on it and a sense of it, for just the large advertisers coming in and the insertion orders coming in and maybe that's a better way to think about it is typically larger advertisers will spend with us through insertion orders as opposed to pay in advance and I think if you look at that percentage, we've gone from as low as sort of 10% of our revenue coming through insertion orders up to maybe 15% last year, and I think we're now sort of in the 20% range, maybe a little bit higher. That does lead to obviously a little bit higher days outstanding but the people that we allow to have insertion orders are obviously of the highest quality in terms of good credit risk.

Thanks.

Thank you. Our next question is coming from Mr. Jordan Rowan with SoundView Technology Group. Please state your question.

Thank you. I have a couple of questions. First, are you still receiving revenues from Applied Semantics. If so are they a Top 5 affiliate, can you address the number of affiliates with greater than 10% revenue contribution? And finally, can you please address the sequential quarterly downtick, if I'm reading it correctly, in managed active advertisers? What has happened, what programs have you instilled to cause that? Thanks.

No problem, Jordan. Taking the first, we're still receiving revenue from Applied Semantics, yes, we are. We do not break out what percentage it is. If you'll recall, when Google first acquired them, we did acknowledge them as being a top 5 partner. I can tell you that the relationship as we pointed out publicly, the relationship still is intact and has been continuing along pretty much the same lines as we've had in the past. So that's the extent that we'll go into details but the relationship still is in fact good and we are still working together. That's one. Two, you were asking about active advertisers. And the number of active advertisers. We've had a couple of things happen which actually speak to just how well some of our sales initiatives are going. Our agency sales division in the New York end quite frankly, and just the sales division in the Florida office, they have just done phenomenally well. They continue to bring in new accounts and larger IOs, increasing average spent per advertiser sequentially this quarter which we were very, very happy with. So we were pleased with the progress. In addition to that, we've been helping advertisers develop wider nets, so to speak, in terms of how many key words they are going after. So in other words, instead of the average advertiser coming into the FindWhat.com system and bidding on, let's just say I'm making this up, this is a hypothetical number because we do not break out specifics. Let's just say the average number of key words that they would bid on was 20 in the past. What we've done is we've gotten better at what we do. We're now helping advertisers say well those 20 are very important, you are right, but have you look at this other set of 20. So we're starting to help advertisers understand which key words, which key phrases actually deliver the high-quality traffic that they are looking for, and many times, and actually we're finding most times there is a large opportunity for us to help those advertisers spread the [INAUDIBLE]. What we've found over the past quarter and again it's misleading. [INAUDIBLE] it appeared as though our number of advertisers is going down which can point to a bad thing. Actually what's happening is the average spent per advertiser is increasing. [INAUDIBLE] and bidding on more key words. [INAUDIBLE] into the mix. We're seeing the largest increase, we're seeing people use the FindWhat.com advertisers [INAUDIBLE] and for the last, I believe you asked about [INAUDIBLE]. We seem to have one distribution process [INAUDIBLE] in Q2, which is I think the same as Q1, I think in all of 2002, just as a reminder. I think we had two that was between 10% and 15% of revenue.

Okay. Craig, can you go back to the explanation for why managed active advertisers went down. Because I'm not sure I understand if it is the efficacy of a platform goes up because you introduce advertisers to new and more productive key words, then they have a better ROI, shouldn't that be a positive? Why would that lead to fewer advertisers?

Actually we're seeing our larger advertisers bid and be more [INAUDIBLE] on more key words. So in the past, the smaller key words -- or excuse me, the smaller advertisers would get onto key words with really no competition. What we're finding now is the larger advertisers starting to become aware of what we refer to as a long tail, key words that don't have many active standards on them. In fact, we literally have hundreds of thousands of key words that have one [INAUDIBLE] on those particular [INAUDIBLE]. We've been helping advertisers realize is there is this huge, long tail available. And in fact, in most cases, those particular key words are more relevant to the product and service they are trying to sell versus the other -- versus the primary key words. And let me give you an example. The keyword "Computer," that's a highly competitive term and all of our clients that are in the computer sector tend to bid on the keyword computer but what we haven't seen in the past is people bidding on parts for computers like hard drives and specific model numbers, SKU numbers. In the past that was pretty much owned by one advertiser. In other words, one advertiser would go in and actually have a bid for a part of a keyword, a specific hard drive or a specific screen, if you will. What we've been doing is working with our advertisers, specifically over the last two quarters and really helping them understand the availability of the words that are more highly targeted for their business which in turn created an increased bidding activity on our lower key words but giving more of those clicks to the larger advertisers. So in other words, what you are seeing is a higher concentration of clicks going to fewer advertisers, obviously reflected in the numbers that we just posted but are overall a [INAUDIBLE], the average per advertiser has been steadily increasing.

So the way to tie this altogether is you wouldn't necessarily see it in the price per click? You would definitely see it in the match rate and you would see it in the volume as well, right?

Yeah, this is Phillip. You know, I think that's right. And I think the other thing to remember is that 24 - 25,000 in active advertiser accounts. We do have thousands of accounts that are relatively small or [INAUDIBLE] per month and again it a [INAUDIBLE] continue to see a rise of advertiser numbers rise and we believe over time that is a number that goes up. But as we sort of focused as Craig said, on broadening [INAUDIBLE] with some of the larger advertisers, in a sense, maybe some of those really, really small advertisers become a casualty because remember, our definition of an active advertiser account is one that received at least one click-through during the quarter. [INAUDIBLE] it's not a count of how many people have funds in their account or that kind of thing and oftentimes we will see especially a very small advertiser, they will be active one month with just a few clicks, maybe inactive the next month just because for whatever reason that word wasn't searched for or something like that and then they come back the following month. So again, I don't want to dismiss it. Certainly the goal is to continue to increase that number but clearly from a revenue perspective, you can see that with roughly the same number of active accounts or maybe a little bit less, we were able to do significantly higher revenue.

Thank you.

Thank you. Our next question is coming from Mr. Tom Underwood with Legg Mason. Mr. Underwood, please state your question.

Yes, thank you. Congratulations on a good quarter, guys. I just was wondering if you could give us a little bit of color on two things: One, which particular categories, if any, showed strength relative to others within the network; in other words, where are you seeing advertising increase relative to a particular segment and, two, if there were a change in control of Lycos, what impact, if any, do you think that would have on your relationship? Obviously the buyer would matter, but what sort of clauses in the contract, if any, exist, et cetera?

This is Phillip. Let me try the first question. What projects we've put in place is to have a better mapping of advertisers and advertiser accounts to categories. So I don't have real good specifics. But in general, travel was impacted somewhat for us in the first quarter by the [INAUDIBLE] situation. So to be perfectly honest, we did not see, I think the level of drops that maybe some people might have expected, especially because of the way the model works. People are only paying for, advertisers are only paying for qualified visitors that we send to their site. So I think we tend to be one of the last advertising mediums that a particular advertiser might drop in a period of time where the economy doesn't look so good. So travel came -- I don't want to say came back, but travel continued to improve, travel continued to be a pretty important sector for us. I think we've continued to do a good job with, a lot of the traditional areas that we do well in. Electronics and computers and gifts, finance continues to be a big category but I'm not sure I can tell you that there was one or two particular standout in Q2. Do you want to take a lick at that?

Sure. This is Craig. Just to address Lycos quickly, if there were a change in control with Lycos, we feel that we are well positioned with our relationship with Lycos to continue forward with, whomever may be in control of that company. The reason being is unlike a typical distribution relationship, we've been working with Lycos team for several quarters now, continuing to integrate more and more opportunities and enhancements into the service. So from our perspective, we're not looking -- first of all, we're unaware of any potential control of Lycos, just putting that on the table. Secondly, if there were, we are very much looking forward to continue working with the team that's running day to day now. My assumption would be that that same team that's running the search division today will continue forward and so at any rate, in terms of being a little more specific on the contract, unfortunately we cannot go into details. We did -- I mean, that's a long-standing agreement with Lycos since the day we signed but we do not disclose any details but I will go so far as to say I'm very comfortable with our relationship and continue to look forward to working with them for quite some time.

Great. Thank you a lot.

You're welcome.

Thank you. Our next question is coming from Mr. Richard Fetyko with Kaufman Brothers. Please pose your question.

Congrats on the quarter, guys. First of all, it looks like you've had quite a few people during the quarter. You are trying to scale the business and you have the opportunity with the increasing revenue top line. Where did you add those 32 people, if you could sort of break it down for us in general and maybe give us an update on the head count?

We did, we added 32 people during the quarter. It's been a great quarter for growth for us, Richard. We added probably about six people to our sales department, we added a tremendous number of people, I can't give you exact numbers on the 32, but we did add a tremendous number of people to our corporate and business development as we're entering into new business initiatives. Customer service obviously increases as our sales and new product line increase, so we've increased a couple in customer service but across -- very few people, it really was across the board altogether.

And how many more do you think you have to go to before year end?

We're looking at year end probably about 194 to 200 employees. And we're right on target with that.

Okay. And that's the end of the quarter, where were you? I'm sorry.

The end of the quarter we were at 160. We're looking to get anywhere between 195 to 200 employees by year end.

Very well. And just maybe a higher level type of question. Could you sort of assess the impact of the Yahoo/Overture combination of the competitive environment in the U.S. and Europe separately?

Sure. First of all, as you may recall, for the last few quarters, actually going back almost a year now, we've been talking about the possibility of the larger brand names bringing a big listing service in-house. Now, we will not comment on any particular acquisition or merger. We just don't feel that's for us to comment on. We will talk about the general, the sector in general and really, if you look back at what we've been doing, quarter over quarter, providing additional anti[INAUDIBLE] services to our advertisers as well as distribution partners in launching our private label initiative and this is something we've been anticipating. We have been anticipating consolidation in the sector or build-out quite frankly with some of the larger companies and we've intensified our focus on the middle market. I referenced earlier to another question that a level of professional services needed at the lower levels is different. It's actually more demanding in some cases and in other cases, a top, let's just say a Tier 1 distribution partner would need or a large brand site would need in house. Therefore there's been a huge gap in the marketplace. We've obviously filled quite well. So that's the overall U.S. marketplace and that's been our view for the last couple of years, specifically the last year. Talking specifically about the European marketplace now, we feel it's much the same. The Pan European marketplace in some respect is approximately 18 months behind the U.S. marketplace in terms of development, but the opportunity continues to grow in the middle markets and in some places in the Tier 1 marketplace, it's still existing, or exists, excuse me. So we're actually pretty excited about how the sector as a whole is shaping up. It is playing more or less into our strategy of what we thought would happen and what we've been positioning ourselves to actually take advantage of.

Okay. I guess, did the other, sort of the long-term concern that I have with your positioning in Tier 2 or 3 marketplaces as well, the margins are great, the traffic growth is not as robust and there's been some concern that the traffic may be consolidating in the top Tier 1 level and perhaps even taking market share from the lower Tiers. Do you see any trends at this point that would point to that or help you say one way or another?

This is Phillip. You know, I think the best evidence that the folks that we tend to deal with continue to drive more and more traffic and continue, I think, keep pace with sort of the overall industry in terms of qualified visitors to advertisers is our revenue growth and particularly our growth in paid quick through. So we continue to see sort of all throughout the tiers, whether it be the most visited portals and search engines or some of the second and third Tier sites that tend to make up our distribution network. You know, it's all growing extremely rapidly. And one reminder. I think we've said this in the past, is I think if you just look at search, especially if you look at sort of the nationally known search destinations, sure, there has been some consolidation there. That tends to be consolidation among the different Tier 1 players. So something that hasn't really impacted us since our inception, I can't really comment if it's going to continue or not, but from our perspective especially as some of the other players in the states realize the contextual marketing is someplace where you can find really high-quality traffic for advertisers. That's something that we've known for a while. And I think if you think beyond search, I think you'll realize this sector still has a tremendous amount of [INAUDIBLE] in terms of the number of visitors we can send to our advertisers.

Okay. Very well. Thank you guys. Thank you. Our next question is coming from Mr. Lennie Baker with Salomon Smith Barney. Mr. Baker, please state your question.

First. I have two questions. First, after, what did you say, 15 quarters of consecutive revenue growth, you are now pointing at no revenue growth from the second quarter to the third quarter. I know guidance can be kind of a tough thing to do and you want to be conservative about it but when I go back and look at what you were thinking for the second and third quarters three months ago, you beat the first -- the second quarter by a million and a half and you added only one million to the third quarter. I'm wondering if it's a loss of advertisers here or your expectation has some change in your traffic patterns or is it just being conservative on the guidance that where you are forecasting kind of to break that string? And I have a follow-up.

Sure. Well, there were a couple of things there, Lanny. You've noted that we've guided conservatively in the past. I think it's a very accurate way to describe what we've attempted to do on behalf of our performance, which is a responsible way of putting on [UNAUDIBLE] primarily because there is a lot of -- there are a lot of changes going on in this sector specifically and quite frankly with the recent consolidation that's been happening in the sector, we feel it's just responsible to put divide answer on what we see clearly. We are opportunist. We do anticipate that our initiatives will continue to pay dividends quite frankly but at the same time we are rather conservative in our approach. That is one. Two, three is historically the season that you see people going away on vacation and you see people not using their computers as much because obviously a lot of traffic on the internet is generally from people at work and obviously, on vacation or not, they are going to be doing as much searching or clicking. Now I would say first again we are rather conservative and we do want to see what we see clearly. In fact, Q3 consistently has always been a little bit of a slower quarter. And we just have to look at [INAUDIBLE].

Okay.

Just one other thing on that. You had asked specifically in terms of loss of advertisers. So let me just be really clear. No. That's just not there.

Okay.

And being more clear on that, we actually see the advertiser situation as a huge opportunity and we're just now trying to figure out how many things we can help teach the advertiser in terms of spending more money which turns into more sales for them and more revenue for us. So, not on the slightest.

Okay. My second question is a little bit bigger, kind of strategic, that is it has looked to us like Google is willing to operate their partner network at pretty close to break-even and our expectation is that Yahoo is probably prepared to operate the Overture partner network pretty close to break-even. I think you've made a pretty good case for - we've heard your case about sort of the more demanding layer of the market that you are all in and the different economics, but does it say anything to you about the sustainability of profits in this sort of partner market when the two biggest players aren't trying to make any money in that business?

Well, it tells us that they have a different business philosophy than we have, primarily because we do not believe that there is a relationship worth going after that's not going to be beneficial to us. Does that translate into some loss of opportunities? Well, I guess it may. But at the same time, we number one, have historically never gone after a relationship that would not be good for our company specifically. And number two, we know long term that the lower markets continue to grow. I mean, we see it quarter over quarter. There was a question just a few minutes ago about traffic consolidating in the primary search, or to the top tier, we'll say, and the primary search names, and, yes we see that in primary search, but we also see many different opportunities that continue to emerge. We continue to take advantage of. It's all [INAUDIBLE] competitive marketplace. We just continue to see more and more opportunities, insert our paid listings into very relevant positions in front of advertisers when they are looking for a product or service which obviously translates into two things, sales for our advertisers and revenue for FindWhat. In looking at the European opportunity, we see a marketplace that continues to develop and actually teach them a lot of what we've learned over the last two years. So we're actually pretty excited about our opportunities going forward.

I guess that makes the flat growth in the third quarter guidance look absolutely conservative. I mean, what you just said. Okay. Well, thanks. That's helpful.

Thank you.

Thank you. Our next question is coming from Mr. Stewart Barry with Delafield Hambrecht Please state your question.

It's pronounced Delafield Hambrecht. I want to get after, I know it's already been mentioned but I don't think it's been adequately addressed, the decrease in advertiser accounts because after nine straight quarters of double-digit increases and advertising accounts, you guys have now lost advertisers and what does that say about sort of the secular -- sort of assume that the demand for search marketing is going to be strong and now I'm concerned about, and so the secular growth. Number one. And number two, I don't like the answer that the changing nature of your base is going to be a casualty, the casualty is losing accounts because I think you guys have made your franchise off of small businesses and I think it is great that you are going after larger advertisers, but it shouldn't come at the expense of smaller businesses, and the other thing is if you are going to change your [INAUDIBLE] strategy and go after large advertisers, large advertisers have, their agency have large clients who need a lot of reach and if they need a lot of reach, you are going to have to go after a larger distribution in order to satisfy them and that's going to hurt your margins. Just look at Overture, for example. So if you could just address those concerns and that kind of thing, I would appreciate it. Thanks.

Sure. This is Phillip. Like I said, I don't want to minimize the fact that we believe that there is a tremendous number of advertisers out there that can use our service that don't use it today. We continue to believe that over the long term, we should increase the number of advertiser accounts. I guess the bottom line from our perspective, and I don't think we're trying to necessarily spin this, but I think the bottom line from our perspective is that revenue went from $15.8 million in Q1 with over $25,000 active advertisers to $17.5 million in Q2 with about 800 less active advertisers and that doesn't happen if you are not continuing to provide a really good service for advertisers. I think the casualty comment has to do with, again, our very small advertisers. We do have thousands of advertisers that spend very, very little with us and maybe just don't bid on a huge number of words and maybe their top position on any given word is 15th or 20th or 25th. As a result, they are just not going to get a whole lot of traffic and they may just not get click in the quarter which is, again, how we define it. I don't think if you looked at the number of accounts -- actually I probably should have this number but if you look at the accounts that have funds in them or the accounts whose total number of funds that we believe we can sort of access, I think that number certainly has increased because we keep adding larger and larger advertisers. Certainly we do not want to forget the smaller advertisers which have been kind of our bread and butter, but I think it's just a function of increasing critical mass and increasing the amount of traffic that we have to offer that we can now walk into advertising agencies and give them sort of a credible campaign where it's worth their time to spend money on FindWhat.com and that's the whole reason that we've focused on having that New York sales presence, getting in front of advertising agencies because a lot of these agencies are not going to pump down their credit card and just try us out for $25. You really do need to walk them through the plan and help them to a greater extent.

Okay. I mean, there's certainly plenty more competitors out there that are willing to pick up your lost, I guess smaller accounts, but again, address the question of having, if you go after larger agencies, I think that's great that you have more reach to offer them now, but you are going to need to steadily increase that reach, and the way you do that obviously is through distribution and the larger you go with the distribution partner, I just think that you are going to have to pay more out for that and that's going to hurt your margins. I'm not going to -- I think it would hurt your margins and I just use Overture as an example and I'm just saying that it looks like your strategy, as you get bigger, you are going to face a different challenge than you have in the past.

Yeah. I wouldn't agree with you. This is Craig. Actually our strategy has remained the same and that strategy is helping advertisers focus on the transaction, not a click. I made that statement.

Well, in terms of what kind of quality or the type of customers, advertising customers you're going to have, you are going after larger customers. You are going to lose smaller customers.

Actually I would say regardless, I really don't think that's necessarily what's going to happen. I guess we could point at one snapshot in time, which is a very core representation of an industry as a whole that continues to be educated on just how well this has converted into sales, this particular product. What we see is a continuing education of the advertisers and teaching them how to better monetize their listings by bidding on more key words, the way Phillip just articulated, bidding more key words, in some cases is very good for an advertiser as long as it's turning into sales and in this case it actually took away from click that would have went to smaller advertisers. Nonetheless, it doesn't mean the revenue opportunities [INAUDIBLE].

Oh, I agree, I agree, I agree.

That's one. But, two, we think over the next couple of quarters and probably into the later part of next year, you are going to start seeing an intense focus by large, small, medium and small advertisers on what's translating into sales. Okay. Well, number one, what brand name am I getting my listings on and number two, how many clicks do I get, are they actually coming through. Everyone talks about [INAUDIBLE], yet we're the only company -- well, we've kind of put our money where our mouth is. We've put an first [INAUDIBLE] analytic tool out to our advertisers to help them track not just click and what they think happens when someone comes to their site but exactly what happens and we think that trend is going to be adopted by all of the players within this sector. The reason being is we think that advertisers over the course of the next few quarters and the next couple of years. We think the advertisers are going to continue to look at what's converting. That's going to translate into a better opportunity for the large advertisers and the small advertisers. That does not mean we have to go out and try to figure out a deal with a large Tier 1 distribution partner, as an example, that's going to negatively impact our margins. I would just disagree and knowing how we're building our strategy, I can tell you pretty definitively that's just not what we're doing. What we're doing is building more and more products and services that do service our advertisers, that do increase the spend that they are willing to spend with us because our traffic that we're delivering to them is translating into actual sales.

I get your point, Craig, I agree. I agree. Thanks.

Thank you.

Thank you. Our next question is coming from Mr. Eric Martinuzzi with Craig Hallum Capital. Please state your question.

Thanks. Good afternoon, gentlemen and congratulations on an excellent quarter. I'm not going to ask about the managed active advertisers.

Are you sure?

Other than in the context of, I would have thought there would have been a bigger ride in the RPC. Is that solely because of the Lycos relationship, or are there other things contributing there?

You know, I think it is the private label relationship. I think one of the things that we've been really focused on, especially as we've spent a fair amount of money to bulk up the sales effort, especially in New York, is to really focus on good prices and what's happening in the categories that are most important to us on the FindWhat.com network separate and apart from the private label. We combine the two when we report numbers but we are seeing great results in particular categories where we've had success, and I don't want to just say it's New York. I think our Florida team is doing a great job as well. As simple as a flower category which has always been sort of my favorite thing to look at. Historically the good prices have sort of been -- our top bid prices have been 30, 40, 50 cent range, maybe increasing a little bit as we lead up to certain holidays. Today we've got some of the largest online florists into the system, they have come in just in the last few months and consistently you see big prices north of 6010 on flowers. That's just one sort of very small anecdotal example. That's been true in some of the pharmaceutical categories. We think there is a big opportunity there. A lot of, obviously the largest advertisers are drug companies and they are huge. Again, they don't pull out their credit card and just find us. We have to get in front of them. We've already had a little bit of success in doing that. I think that does take time to kind of focus through and show up in the numbers, especially when you combine the various things factoring into the reported revenue for click, too, including the private label.

You are coming up on about a year now with the Lycos arrangement. Are there other prospects? In other words, the prospects for the private label service, do you feel like they are closer with some prospects than you were maybe six months ago or so? What's the sense of momentum with that service?

Well, [INAUDIBLE] has not commented. In fact we've specifically stated that we would not build any new partnerships into our financial guidance. I will say, though, that we've increased the size of our corporate development division, which is responsible for that particular product and conversations have continued since launching. Actually, we had a brief period of time that we did not speak with any other partners. We wanted to make sure that we were servicing Lycos at a very, very high level which now we know we are doing and so in terms of anything being closer, I'll say that we continue to pursue opportunities there but again, we will not factor any new private label partnerships into our forward guidance.

Okay. Fair enough. And last question is on the balance sheet. Can you refresh my memory on the notes receivable, the $2 million?

Yeah. Hi, this is Brenda. Notes receivable $2 million to E-Spotting occurred immediately after we signed the agreement.

Okay. Okay, so that's why it was in the quarter.

That's an interest-bearing note.

Okay. And then the -- that covers it.

Okay.

Thank you.

Thank you, ladies and gentlemen. We are out of time for questions. This concludes today's conference. Thank you for your participation.