Inuvo Inc (INUV) 2006 Q4 法說會逐字稿

Good day, everyone and welcome to today's MIVA fourth quarter and full year 2006 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Peter Weinberg, President, Vice President of Investor Relations. Please go ahead, sir.

Thanks. Thank you, and good afternoon. Welcome to MIVA's fourth quarter and full year 2006 financial results conference call. Joining me on the call today are Chief Executive Officer, Peter Carrao; Chief Financial Officer, Lowell Robinson; and President and CMO Seb Bishop.

I'd like to remind everyone that today's comments include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties will be outlined at the end of this conference call and are also detailed in MIVA's filings with the Securities and Exchange Commission.

To begin, let's review how we measure our financial performance in addition to the standard GAAP measurements, we utilize certain profitability based metrics to evaluate our period to period and year-over-year performance. They are adjusted EBITDA and adjusted net income or loss. Beginning in Q1 '06, MIVA calculated adjusted EBITDA and adjusted net income loss by adding non-cash compensation expense to the calculation. Notably, beginning in Q4 '06, MIVA discontinued this practice. MIVA believes the use of these measures does not lessen the importance of GAAP measures.

We believe that adjusted EBITDA and adjusted net income loss provide meaningful measures for comparison of the Company's current and projected operating performance with its historical results due to the significant increase in non-cash amortization that began in 2004 primarily due to certain intangible assets resulting from mergers and acquisitions. MIVA defines adjusted EBITDA as EBITDA, earnings before interest, income, taxes, depreciation, and amortization, plus or minus certain identified revenue or expenses that are not expected to recur or be representative of future ongoing operation of the business. MIVA uses adjusted EBITDA as an internal measure of its business and believes it is utilized as an important measure of performance by the investment community. MIVA sets goals and awards bonuses in part based on performance relative to adjusted EBITDA.

MIVA defines adjusted net income or loss as net income or loss plus amortization plus or minus certain identified revenues or expenses that are not expected to reoccur or be representative of future ongoing operation of the business in each case including the tax effects if any of the adjustment. For a detailed review of our full year 2006 results including a reconciliation of our non-GAAP financial measures, please refer to the press release we issued today and to our coming 10-K filing for 2006. To comply with the SEC's guidance on fair and open disclosure, we have made this conference Call publicly available via audio webcast through the Investor Relations section of our website and a replay of the conference call will be available for 90 days. I'd now like to turn the call over to our CEO, Peter Carrao. Peter?

Thank you, Peter. Good afternoon, everyone, and welcome to MIVA's fourth quarter and full year 2006 conference call. We appreciate having you on our call today. 2006 was a critical turnaround year for MIVA, starting from the time I was named CEO in April of '06, we focused vigorously on implementing a series of course correcting steps to address our challenges and reposition MIVA for a return to positive operating margins.

In order to achieve our turnaround we concentrated on three specific objectives--Stabilizing our overall revenue base, rationalizing our operating expense structure, and redefining our strategy to leverage our existing assets, drive higher gross margins, and realign our business with the market opportunities where we believe we could effectively compete. Furthermore, on the leadership front, we brought in our new CFO, Lowell Robinson in December who has helped to strengthen our strategy implementation, ensure we invest behind high ROI opportunities and solidify our expense reductions announced in February of '07. Additionally, Brian Mukherjee took over our MIVA Media U.S. business last fall and we just recently consolidated our Media Europe business under his leadership. Most importantly, we've continued to invest behind our toolbar business which is beginning to show improved results here in Q1 '07 from our incremental advertising investments as well as our shift from Yahoo. We expect these initiatives will begin to show tangible results to our shareholders when we report on our quarterly progress during 2007.

As relates to revenue improvement and overall stability, our consolidated Q4 revenue was above our expectations due primarily to strength in our MIVA Direct primary traffic business. The $1 million sequential increase in MIVA Direct more than offset the decrease in our media third party ad network revenue which was generally in line with our expectations. Our overall Q4 revenue results follow similar pattern to Q3 where revenue is up marginally over Q2 of '06. In our Media Business, we continued to have some success adding new distribution partners to our third party ad network, particularly among established publisher brands. We are encouraged by recent partner additions such as TransWorld News, in the U.S., a leader in news and press release distribution, and the owners of FindIt.com, an interactive search engine. Our recent additions include Johnson Press, the UK's second largest local newspaper publisher, MIVA expects to display targeted paper click ads across a network of over 300 national, regional, and classified websites with them.

As relates to rationalizing our operating expense structure, as you know we took out approximately $6 million in annualized costs during Q2 '06 and we've just recently announced an expense reduction plan which we expect will further reduce costs by another $10 million annually. We expect the total savings for both restructurings will yield approximately $4 million in quarterly benefit to our bottom line. Notably, we are guiding for positive EBITDA in Q3 of '07. Our anticipated return to EBITDA profitability as a result of the course correcting steps we've already undertaken to reduce our operating cost base and our ability to stabilize overall consolidated revenues. As it relates to our strategy, we believe our Q4 revenue results underscores the momentum behind our strategy for transitioning into more of an online consumer oriented direct marketer, by increasing the overall mix of MIVA owned primary traffic. In Q4 '06, MIVA Direct, our MIVA owned primary traffic business contributed 24% of total revenues or $10.5 million. This compares to 19% in the prior year comparable period.

We're very pleased to have demonstrated success during '06 in delivering against our revenue mix shift objectives. In order to free up additional resources and continue investing behind our strategy during '07 we expect to scale out of certain business lines that fall outside of the new strategy. Since our MIVA Direct is a key component of our strategy and central to measuring our progress going forward, I'll spend a fair amount of time covering our online consumer oriented direct marketing transition within the context of our strategy and our objectives for 2007.

First, let's cover the basic notions that support our strategy. Online consumer audiences are becoming increasingly fragmented and more difficult to aggregate. Valuable audiences are not a commodity on the Internet and our advertisers have demonstrated an almost unlimited appetite for allocated spending towards relevant consumer groups. Second, phoning, our primary traffic, eliminates the revenue share associated with current third party revenues. Over the fourth quarter, the average revenue share we paid to our third party distribution partners or TAC was 61% of every net click through revenue dollar from our media business not including MIVA Direct. Third, our own traffic puts us back in control of our destiny and addresses challenges around revenue consistency by lessening our reliance on third party traffic sources. Our advertisers get their click through traffic from our network of third party partners. The traffic partner experiences a slow quarter or advertisers have less inventory and MIVA is subject to the negative consequences.

There are two high level objectives around our strategy. First, we will continue to invest in and grow our toolbar business and second, we'll leverage our extensive toolbar footprint, media buy and expertise, existing media ad network and other means to drive consumers back into our MIVA owned website properties. With all that in mind let's move on to our MIVA Direct division, our consumer focus primary traffic business.

This is a division that owns and operates our own primary traffic. MIVA Direct operates a growing portfolio of MIVA owned consumer destination websites as well as a range of consumer oriented interactive products including toolbars, customized cursors, and screensavers. MIVA Direct's consumer destination websites organize audiences into marketable, vertical categories and facilitate the distribution of toolbar products. Our active toolbar installed base enables direct marketing relationships with approximately 8 million consumers worldwide as of December 31, '06. This compares to approximately 6 million in the comparable prior year period. Interestingly before February 2007, we were only able to monetize a fraction of our toolbars in Europe. Today, we are positioned to monetize most of our European toolbars. Because of this, we began to increase our ad spending to drive new European based toolbar users over Q4 '06.

MIVA Direct derives the majority of its revenues through type in search. When the consumer searches with our toolbar, our toolbar serves relevant search results and ad listings. When the consumer clicks on an ad listing, we recognize our share of the revenue. Prior to and during 2006, our toolbar related search results and ad listings were primarily serviced by Yahoo. We switched providers on January 28, 2007, and today, our toolbars are powered by the single largest search monetization company in the industry. We believe this new relationship represents a large opportunity to advance our strategy. We believe this relationship underscores the traffic quality level generated through our toolbars, given that very high standards of our new partner that they set for all of their syndicated partners. Additionally, our new partner has significantly larger presence in Europe than our prior third party provider. As we expend our toolbar presence into Europe, we expect to leverage the benefits of their rich advertiser base and their broader geographic coverage.

Finally, our new partner is generally believed to monetize at the highest rates in the industry. Now, with that less than two months of data and it's too early to draw any long term conclusions but we're very pleased with the early indicators given the potential gains in the monetization, the anticipated accelerate in our revenue mix shift over Q1 '07 by several hundred basis points over Q4 '06. Supplementing search related click revenue, our toolbars generate direct marketing opportunities with engaged customers through e-Commerce, traffic related comparison shopping, and lead generation programs. Approximately 10% of MIVA Direct's revenue comes from toolbar button deals and various other advertising. In addition to our toolbars, MIVA Direct also maintains a portfolio of MIVA owned consumer destination websites including vertical content sites and entertainment oriented sites including an Alexa Top 100 ranked site. This is where the second objective for our strategy is focused, leveraging our extensive toolbar footprint, media buy and expertise, and existing media ad network to drive consumers back into our MIVA owned website properties.

We now have over 8 million toolbar users, once acquired we can extend our consumer relationships to other products and dramatically reduce our acquisition costs. We believe our existing consumer relationship represents significant synergistic value as we start to drive consumers back into specific affinity sites and across product lines. Keep in mind, our toolbar buttons are dynamic. This means we have the capability to modify the buttons on any active toolbar at any time. So for an example, we could place a mobile button on 8 million toolbars, send in every click back to a MIVA owned mobile-related website.

Our plan is to continue deploying MIVA owned sites along with the same verticals we constructed for our precision beta program by organizing audiences into these vertical categories, we believe we'll be able to increase high quality, marketable inventory for the benefit of our media advertisers and in some cases, third party ad networks. We believe our portfolio of sites will position us to monetize through multiple ad formats in addition to our bread and butter CPC, such as CPM display ads, CPA, lead generation, rich media, video, and other emerging advertising vehicles.

Currently our portfolio of sites includes Screensavers.com, SuperHoroscopes.com, jokebanana.com and weatherstudio.com to name a few. We will soon formally launch spill.com, that's spill.Com, a unique movie review site that we believe will have wide audience appeal with consumers and advertisers alike. Over the course of 2007, we plan to invest behind and launch additional sites and we expect to continue to optimize our portfolio of sites to drive monetization gains, revenue growth, and margin improvements. We believe our portfolio of website properties represents a compelling value for advertisers seeking access to high quality inventory. With that said, I'll turn the call over to Lowell, who will cover our financial results and our outlook for 2007. Lowell?

Thank you, Peter. Before I begin, let me just say that I am very excited to be here at MIVA and to be working with you again. In the coming months, I look forward to speaking and meeting with many of the investors and analysts that are on the phone.

2007 will be a transitional year. A year where we plan to maintain prudent cost controls as we execute against our strategy to transition into more of an online consumer oriented Direct marketer. We believe cost management coupled with our strategy for increasing the overall mix of MIVA owned primary traffic will facilitate higher gross margin and revenue on top of a more efficient cost base. Our longer term goal is to return to positive EBITDA margins. To that end we are anticipating positive EBITDA in Q3 2007.

Turning to our Q4 2006 results, we achieved consolidated revenues of $43.5 million compared to $43.3 million in Q3 2006, representing a marginal sequential increase. Consolidated revenues were above our expectations due primarily to MIVA's Direct approximate $1 million in sequential revenue growth which offset an $800,000 decline in MIVA Media third party ad network revenue in the U.S. EU revenue was flat quarter on quarter. The fourth quarter 2007 revenue of $43.5 million was $0.5 million above the $43 million in Q4 2006 due to the growth of MIVA Direct which grew $2.4 million or 30% year on year for the quarter.

Consolidated gross margins were 46.5% in Q4 2006 and essentially flat compared to 46.7% in Q3 2006. In our total media third party network including Media, U.S, B&B and Media EU, we reported 332 million total paid clicks in Q4 2006, a 7% increase when compared to 310 million in Q3 2006. Q4 2006 revenue for our total media third party ad network was $32.6 million compared to $33.4 million in Q3 2006. The $800,000 decline in total media revenue was attributed to a decline in media U.S. rate per click due in part to an increase in the number of lower priced remnant and one of network clicks in our B&B business. In total, our Media U.S. Business including B&B paid clicks were up 4% sequentially from Q3 2006 while on our lower price tier of B&B paid clicks were up 15% sequentially.

We are introducing higher minimum bid price rules in order to counter the rate per click decline. Media U.S. gross margins declined from 32% in Q3 2006 to 31% in Q4 2006, primarily due to a 1% increase in traffic acquisition costs. In our media EU business, paid clicks were up 16% sequentially from Q3 2006 and Media EU click revenue was flat over the same period offsetting the decline in rate per click. We are pleased to see Media EU stabilize in Q4 since it declined over the prior two quarters.

Media EU gross margins declined from 35% in Q3 2006 to 32% in Q4 2006. The gross margin decline was due primarily to an increase in other cost of sale items most of which are not expected to continue. Traffic acquisition costs were flat from Q3 2006 to Q4 2006. And our primary traffic business, MIVA Direct contributed 24% of total revenue in Q4 2006 or $10.5 million up 11% sequentially over Q3 2006. MIVA Direct had 7.7 million active toolbars, as of December 31, 2006, compared to 5.9 million in the comparable prior year period. MIVA Direct continues to grow in scale and we expect to continue investing in this business.

MIVA Direct's gross margin was 92% in Q4 2006 compared to 91% in Q3 2006. MIVA Direct's gross margin does exclude advertising spend of $6.6 million in Q4 2006 and $6.1 million in Q3 2006, which is included in the consolidated operating expenses within the marketing sales and service line. We anticipate margins to increase in the coming quarters due to monetization gains as a result of the switch to our new provider.

Small Business recorded $400,000 in revenue in Q4 2006 which was $100,000 below Q3 2006, of $500,000. Overall, the U.S. which includes U.S. Media, MIVA Direct, B&B and Small Business, recorded $27.3 million in Q4 2006 or 63% of total revenue while the EU recorded $16.2 million or 37% of total revenue. In Q3 2006, the U.S. recorded $27.1 million or 63% of revenue while the EU recorded $16.2 million or 37% of total revenue.

Operating expenses were $27.2 million in Q4 2006, compared to $24.5 million in Q3 2006. The $2.7 million increase in operating expenses included $1.5 million in non-recurring items and approximately $0.5 million in incremental advertising spend for MIVA Direct. Non-recurring items included $400,000 in public company related consulting expense, $400,000 in project based consulting expense, and $700,000 in severance charges related to the Company's former CFO. Q3 2006 operating expenses included $800,000 of non-cash benefit from certain European business tax reimbursements recorded during the quarter. EBITDA loss was $4.2 million in Q4 2006 which included $1.5 million in the above mentioned non-recurring items and approximately $0.5 million in incremental advertising spend from MIVA Direct. This compares to the EBITDA loss of $1.5 million in Q3 2006 which included $800,000 of non-cash benefit from certain European base -- European business tax reimbursements recorded during the quarter. We believe this loss will be significantly decreased in subsequent quarters and we anticipate positive EBITDA in Q3 2007. GAAP net loss was $6.2 million or negative $0.20 per diluted share in Q4 2006. This compares to GAAP net loss of $4.6 million or $0.15 per diluted share in Q3 2006.

Now, turning to our balance sheet review, cash, cash equivalents and short-term investments were $29.6 million at December 31, 2006, a decrease of $3.1 million from September 30, 2006. In addition to the cash impact from operating losses during Q4 2006, uses of cash included CapEx of approximately $300,000. CapEx for all of 2006 was $6.6 million. As of December 31, 2006, the Company had an active base of 401 full-time employees down from 483 at December 31, 2005. The decrease of 82 full-time employees over 2006 was partially due to the Company's second quarter restructuring plan. As a result of the Company's first quarter 2007 restructuring plan, the Company's active base is expected to decrease to approximately 320 full-time employees by end of May, 2007. As Peter stated earlier, the restructuring is expected to save MIVA another $10 million annually or $2.5 million per quarter.

Regarding our outlook for the Company, we are forecasting Q1 2007 revenue approximately in line with our Q4 2006 result. The ongoing revenue mix shift is expected to continue and the contribution from our MIVA Direct primary traffic business is expected to increase by several hundred basis points over the 24% of total revenue recorded in the fourth quarter of 2006. We expect MIVA's Direct gross margin could be well above the fourth quarter of 2006 as well. The Company expects its Q1 2007 EBITDA loss excluding the impact of its restructuring to reduce significantly over its Q4 2006 results. Q1 2007 cash restructuring charges are expected to total $3 million.

For the three months ended March 31, 2007, the Company expects cash, and cash equivalents to decline by approximately $7 million which includes the 2006 target bonus payments that are being made this week, restructuring expenses and the cash impact from operating losses which we expect to stem over the coming quarters. While Q4 2006 sequential revenue growth was minimal, we expect our financial performance will show continued improvements around 2007. This is the result of continued growth in MIVA Direct as well as the cost initiatives we have put in place. We look forward to sharing with you MIVA's accomplishments throughout the year as a materialized and as we return to anticipated positive EBITDA in the third quarter of 2007. Let me now turn the call back to Peter for some concluding remarks.

Thanks, Lowell. You've been a great addition to the team and we're thrilled to have you with us. So in conclusion, we're confident we've established an operational financial platform that's positioned for a return to positive operating margins. We're really encouraged to have our Q1 2007 $10 million restructuring plan mostly behind us. We thank our employees for their continued dedication. Overall, we believe we've made great progress in our efforts to turn around and reposition MIVA and while we expect challenges still, we believe we're moving in the right direction.

We've established ourselves as a leader in certain areas with our toolbar being the clearest example. We started 2007 with momentum behind us, our strategy and the success of our efforts is reflected in our Q1 guidance and our outlook for positive EBITDA in Q3 2007. So, thanks again for joining our Q4 and full year 2006 conference call. We look forward to updating you in coming months and quarters and I'll now turn the call back to our Operator for Q&A.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Eric Martinuzzi with Craig Hallum.

Thank you, and welcome aboard to Lowell. My question has to do with the source of the decline here for Q1 and by decline, I understand the MIVA Direct, you expect it to grow in Q1 versus Q4, but that implies then that you're going to see a contraction in the media business either North America or Europe. Can you address which area you expect to contract and some of the -- maybe an explanation for that?

Sure, hi, Eric, it's Peter. I think the biggest piece of the story, Eric, is that we're trying to maintain revenues on a quarterly basis in this 42, 43, $44 million range and then on an annual basis in the 175 or so range and in doing that try to do it strategically exactly the way I've talked to you guys is recognizing that the third party business that we've got has a lot to be desired in it. It's a very tough and competitive business and we make that business on the backs of third party providers that we're out of control with. So what we're trying to do is reduce the costs in that business as much as possible, harvest that business to a fair the well all we can while we continue to offer good service to clients and partners, and make that switch from third party traffic provisions to owned and operated traffic, and as you can see with both toolbars, and other initiatives that we've got going, we're actually -- are making that switch. So if you think of us today as sort of a 25% of our revenue comes from owned and operated traffic and 75% of our revenue comes from third party traffic, we've already begun off the strategy to make real inroads increasing that and my notion as it ties to more of our three year plan is to continue that pace. So if we can increase our percentage of owned traffic on a quarterly basis by 2, 3, 4 percentage points and we could make a switch over a several year period into a much more profitable business which Lowell will talk about in Q&A here too, into a much more profitable business where we could leverage off of our own traffic instead of having to do rev shares with third party traffic providers. So for me, it just ties into what I think we've been saying all along. The third party generated business is a rough one. It's got relatively bad margins inside of it. The owned and operated traffic business is a good one for us and we're doing everything we can to harvest the one and grow the other.

That's fair, and believe me, I'm a much bigger fan of 92% gross margin businesses than I am of 31% gross margin businesses. I guess I'm just trying to, one of the things is we want to be able to cast the Company as a growth company and certainly a troughing in either the North American media or the EU media would be a further step towards that. I know Seb is on the call as well. There were some significant partner announcements in Q1. Does that help put a floor on the European business, the third party?

Yes, in some cases, it does again. Europe is very different to the U.S. In the sense that that you have five different territories but I think as Peter highlighted, there is a focus towards MIVA owned and operated traffic which is partly where I think Peter is coming from.

Okay, and then a couple of housekeeping questions. The stock compensation charge for Q4 and the expectation for 2007, do you have that?

While Lowell is looking that up, let me add another piece to your revenue line that we were just talking about.

Yes.

Because I think it will add clarity. As I look out beyond '07 which we're frankly, I hope you guys can tell pretty excited about it, I look beyond '07, generally speaking, we're talking about keeping, I'm talking for a three year horizon, we're talking about keeping MIVA Media, and the third party business flat, and then the consequence of that is if 25% of our business grows, we should have a business that can get back to not only growth business on the top line but of course we would grow margins sequentially from that, right? So again, over a three year horizon, if you thought about MIVA Media staying flat in the $125 million range something like that while we grew the other part of our business, that is the expectation now, so I don't want to paint -- if I painted any sort of a picture that makes you think that that business is going to die, we don't think it will. We think we can hold it flat for that period of time.

Eric, this is Lowell. The stock based compensation charge was $1.4 million but let me just build on what Peter said and that is I wouldn't be too concerned in the flatness of the revenue from the fourth quarter to the first quarter and what you may see in -- from the third quarter to the fourth quarter we may see in the first quarter, because we're shifting to a higher growth, higher margin business as you said, and to the extent we stabilize the media business in the U.S. and in the EU and shift to a higher margin business, that is a great story that delivers more value to the bottom line to our shareholders and generates greater profitability and improvement in cash.

Okay, and then the CapEx expectation for 2007?

Probably about $3 million.

And we'll go next to [James Bosch] with [Dialectic Capital].

Hi, guys, it's actually [John Sighorne] for James. Could you talk a little bit about really -- and you kind of addressed it I think in answering the last question, but the changes between Q2 and Q3 that gets you to EBITDA positive and kind of in a broader sense ex-restructuring charges, what your annual EBITDA run rate is and if you want to separate it between the two lines of business, that may help or if you talk about kind of the profitability of the two businesses today versus in the future, maybe that's another way to approach it.

Basically, when I joined the Company in December and spent a little time looking at the financials and the growth strategies, et cetera, I basically spent some time with Peter Carrao and Seb and other members of the management team and what we decided to do was to rationalize our business and focus--. [Technical Difficulties]

What just happened?

I have no idea.

Pardon the interruption, everyone.

Hello?

We're waiting for our speakers to rejoin us. They have disconnected. If everyone could just remain online, please.

Hi, we're back. We had a small technical difficulty.

Okay.

Okay, let me -- let me just start from scratch on that. As I said, when I joined the Company in mid December and spent some time looking at the numbers and talking with Seb and Peter and Brian and the other members of the management team, it became clear that we had to invest in the more high growth, high margin areas of the business, also pulling back on certain other initiatives that were going on and then rationalize the business so that we get a more efficient cost base. As Peter Carrao said in the second quarter after he took over, think was a downsizing which took out $6 million in annualized cost, in the first quarter on February 7, we announced another 80 people would be leaving the business which would equate to $10 million in favorability so 10 and 6 is 16 or roughly $4 million a quarter to deliver to our shareholders or invest back in the business.

We feel it's prudent to get to profitability on an EBITDA basis and be cash flow positive as soon as possible and feel that while we need to invest in the business of the Media Direct toolbars which is going very well and has a high margin aspect to the business, we also want to prune back from certain other things and get to profitability in the third quarter, and so we have been very prudent about the different projects that are in place, the different programs that are in place, the people, the organization, and what people are focused on and we're focused on the need to dos versus the nice to dos and we fully anticipate and expect to get to profitability in the third quarter of 2007. Should the revenues in the second quarter be terrific and things turn better, there may be a slight possibility of getting closer to profitability in the second quarter but for now we're just projecting profitability in the third quarter of 2007.

What is the difference between the second quarter and the third quarter? Is it just the top line? Or is it -- is there an OpEx difference as well?

There's an OpEx difference as well.

So if revenues stay at this level, just for the sake of argument, post-restructuring charges, what would your annual EBITDA be?

On a quarterly basis?

Or annual, quarterly, annual, either.

Probably $3 million on a normalized basis in the fourth quarter.

So $12 million a year?

Correct.

And that's at these revenue run rates for restructuring?

That's correct but it's also a function of how much we want to invest in changing the dynamics of our business from -- to MIVA Media business to the Direct toolbar business.

John, that's also Lowell giving you a -- the $3 million that he gives you too is also looking at a flat business at 25.75, so remember if our revenue was to stay flat but our margins were to increase as we go from our mix of 25.75 towards 66.33 over several years, even on flat revenue, you'd have improving margins and then consequently improving EBITDA on that.

Okay. So even if the top line grows, either top line growth or margin growth through MIVA Direct growing should take that $12 million number higher over the course of the end of this year and into 2008?

Potentially. It's all a function of the dynamics of the business and how we decide to invest in other areas of the business too.

We'll go next to Christa Quarles with Thomas Weisel Partners.

First question is obviously it's pretty early on in the Google relationship. Could you give us an early read there as to improvements in monetization and then the second question is really just on trying to understand your Direct business a little bit better. I was just wondering of the 7.7 million users, how many of those are European, i.e, I think you said all of the revenue is U.S. based but I'm trying to figure out if there's a percentage of that 8 million that is actually European based and therefore, not monetized?

Yes, so let me tell you about that. So the Google relationship we've only had up and running since January 28. We're generally really happy with how it's monetized and it looks to us that even though we had to give up some revenues and some opportunities to take on Google that we've made the right decision by switching partners. As relates to to the 8 million toolbars, around a million of them are Western European based toolbars, but previous to January 28, we monetized it at a de minimus level that post-January 28, we've been monetizing at levels that we think are about at our U.S. levels or even slightly better.

And then when we talked earlier on, you'll recall we talked about an incremental investment in Q4 into toolbars, we're focusing virtually all of our incremental investment now on expanding our Western European toolbar base and in the future, we'll look at South America, Asia, Australia, and other places as well. So the volume part of -- so the rate part of your question we're very satisfied with, the volume part of your question is a pick-up of about a million toolbars that we are monetizing today that we weren't monetizing in previous days and most of our expansion we anticipate will come in Western Europe over the next several quarters.

Okay, and then I think the toolbars did grow at a 30% rate, obviously advertising helped that. I was just wondering if you could kind of give us a sense as to what you expect the growth rate of the toolbars to be with the step up in advertising? And then also, any information around the duration of a toolbar relationship, i.e., does it stay with you a year, three months or just trying to understand how long they stay with you once they are--?

It's information that we're trying to get more visibility on, but because of the new relationship with our new provider, we really don't have an answer yet.

Okay.

It appears that because just generally I can tell you, it looks like we can acquire a toolbar advertiser in Europe for approximately the same that we can acquire a toolbar download in the States, perhaps even a little bit better. And, it looks like our monetization on a European, especially an English-speaking European toolbar is actually a little bit better, perhaps. So the metrics there look really good.

What we don't have any information on now because we've got such a short relationship is what are the turnover factors, is it dramatically different? But again, for the last, again the two months that we have been up and running, it looks like it's de minimus and if anything, we've got a little bit more longevity in the turnover of our toolbars. I would tell you though that the ad spending, we plan to grow that business, Lowell and I look literally daily on how much we're going to spend on our advertising for investment into that toolbar expansion but I would anticipate as toolbars grow you'll see us investing a lot more into the expansion of those toolbars, because we know that once we put the money out, somewhere in the 120 day range later, we know that they monetize for us. So you'll see us begin to put more and more money into expanding the toolbars.

Just a final question. Is the contraction in CapEx spending due to the de-emphasis of the media business or why is that going down so much?

Well, basically, we invested in some data centers and some servers and feel that we have the capacity here to sustain us for a strong period of time. I don't think going down to the 3, 4 million range from the 6 million in CapEx represents a big decrease and some of that had to do with facilities, et cetera, last year which were pretty built out on.

We'll go next to Peter Schleider with Peninsula Capital.

Yes, I'm looking at your operating expenses and wondering as a percent of your OpEx, how much of that is salary headcount expenses?

Well, it was too much which we figured out in December when I came on board and that's why we went through a restructuring, et cetera. We haven't released how much our salary, employee related expenses are but when we looked at it across the businesses and in corporate, we felt it was too much and so thus we undertook another rationalization of the business and took out $10 million which equated to 20% of the workforce.

But if you look at at the $27 million you spent in the quarter or not really spent but the $27 million that's on the P&L, if you took 75% of the 20%, that alone gets you to profitability on a run rate basis.

Yes, but we have businesses that we're investing in and we do have other expenses that are going up so you can't just look at it from a stagnant perspective.

Okay. And then if you -- just to peel this onion a little bit more, if you were to look at your expenses on kind of a -- or your EBITDA, your adjusted EBITDA, on a quarter to quarter basis, adding in the 0.8 and then taking out the 1.5, I'm not going to really give you credit for the 0.5 million that you spent on MIVA Direct because I consider that kind of an ongoing business expense, but -- and then you take out the 1.4 of stock comp and the 1.1 in the previous quarter stock comp, you're almost exactly at 2.6 EBITDA loss quarter to quarter. Is that kind of right?

That's correct.

So let me ask the last question. On a cash flow basis, do you turn cash flow positive before you turn EBITDA positive?

That's also, it depends because EBITDA includes some accruals for things that happen during the year which we may not spend the money on, so it's really a function of how the money gets spent and as you look through 2006, we were declining about $3 million a quarter. The decline in Q1 is a function of the decline in operating expenses invested in the business about $3 million, $1.8 million in terms of bonuses for 2006 that were accrued for but paid out in 2007, and then money for the restructuring charge paying for the 80 people that have left. So we expect to be able to flatten out towards the end of the second quarter, beginning of the third quarter in terms of cash burn.

And we'll go next to me Malindi Davies with Susquehanna.

Hi, thanks. My question is about the toolbars. How are you marketing the toolbars, and how are most consumers accessing and downloading them?

Seb, do you want to handle that without revealing too much competitive information for us?

Yes, sure. That's what I was going to say. There's a secret source and we don't want to go into too much detail other than obviously, we have good experience in the toolbar business and we have been marketing them for awhile. There are various different ways and like Peter said, I don't want to go into too much detail because obviously there are competitors out there listening to this, but various different ways, I'll just leave it at that, sorry.

Okay.

I'm sorry I just don't want to go into too much detail.

In your portfolio of sites, can you share what verticals have been most successful so far? And also, what's the most efficient way you're finding to drive traffic to these sites? Is it the toolbars, or is it something else?

I think it's a mix of both the toolbars, like Peter pointed out, but the other thing to remember, one of MIVA's greatest asset is still the media business, so we still drive, as I think Lowell was pointing out over 320 million click throughs to various websites, we still own that media. We still own those clicks, and obviously we've got a huge number of users that are accessing our search engines all over the world, but we can drive to some of the sites that we own. So it's still a very powerful platform in order to deliver users straight through to some of the sites that we operate in.

And another piece, Malindi, that's important to understand too is that the 8 million toolbars that are out there and I talked about this earlier, have dynamic buttons on them that can direct consumers anywhere we want. Those dynamic buttons, of course, we utilize for ourself so when the consumer clicks on them, we send the consumer off to sites that we want to launch, so we talked here about getting ready to launch Spill which Seb will do here in a couple of weeks. One of the ways, if not the best way that Seb can get Spill launched and get it some notoriety right away is to dynamically push a button out to all 8 million of the toolbars, the button could say look here for cool movie reviews, the consumer clicks on them and finds themself right back on the Spill site.

Got it, and is there a vertical in general that's been most successful so far for you? Are you trying to buildout entertainment for example, or are there other--?

Yes, so we've got 16, maybe 18 verticals up in the United States right now and we've got four or five up in the EU, and it almost depends on what season you're in and what you're doing but it's very defined for us. We do have verticals that are bigger than others and again for competitive reasons, we don't say exactly which ones they are because then we get all of our competitors going and chasing the advertising and the traffic in that space, but, generally, there's the things that you would think about that work well on the Internet. Travel is hot for us, pharmaceuticals are hot for us, insurance is hot for us, credit cards are hot for us, auto insurance is hot, and again, we tend to be a little less pure retail E-commerce oriented so less widgets sold online and our hot categories tend to be more service-oriented so again, more like credit cards and less like shirts for sale online is the types of things that work well for us.

Secondly, we monitor them close enough that they're dramatically different in Europe than they are in the States, so as an example of the hot category in the states is pharmaceuticals, prescription drugs online is an example because of socialized medicine in Europe, that's a vertical that we don't even have there as an example. So we do monitor them closely. One of the reasons that we extended Brian who runs MIVA Media, Brian Mukherjee, who runs MIVA Media U.S. for us over to MIVA Media Europe said that we can leverage some of the success that we've had with the verticals here into our European community much quicker, which as you know, will keep that business growing, we're talking MIVA Media business that enhances our margins as we grow it.

If I can just add, Peter, the example you've been giving people is if you think of CBS in the U.S, we may promote a new show like CSI you'll see them promoting it on their own channel, again, we can use that to the benefit with the media division in terms of driving users through to some of the sites that we aren't.

[OPERATOR INSTRUCTIONS] We'll go next to Peter Schleider with Peninsula Capital. Your line is open, sir, please go ahead.

Operator, we can't hear Peter Schleider by the way.

Peter Schleider, your line is open. If you're on a speaker phone please pick up your handset or press your mute button. We're not hearing you at this time. We'll move on to Christa Quarles with Thomas Weisel Partners.

Just one quick follow-up, sites like Spill.com, will you be monetizing those exclusively through your own ad network or will you have augmentation there for monetization?

That's a good question. So, part of our strategy has been to send our traffic to where MIVA can get the most from it, so as an example, if Spill later was to carry a search box on it for type and search, perhaps that traffic would go off to another third party provider and yet if it had other forms of monetization of which it does you can see some advertising on Spill today, as an example, that would be advertising that we would sell ourselves and then realize that back directly.

So the broad answer is we're enabled with our own sites to send the traffic wherever we want it to and we can even bifurcate or trifurcate the traffic to send components of it one place to be monetized with other components of it at the very same time to another to be monetized. Generally speaking though, we're trying to send our type and search traffic back to our third party partner and our non-type and search traffic to be utilized four our MIVA Media partners.

Just one other point I wanted to add-on that point. If you do take the time to visit Spill, I appreciate it, it's still in beta, this is an example that we're giving in terms of other areas that we're looking to grow our advertiser base whether it's through type and click, CPM, CPAs, or even in this case, video advertising.

Thank you. And there are no further questions at this time. I'd like to turn the conference back over to Peter Weinberg for any closing remarks.

Thank you. This conference call contains certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Words or expressions such as plan, will, intend, believe, or expect, or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements.

Key risks are described in MIVA's reports filed with the U.S. Securities and Exchange Commission including the Form 10-K, for fiscal 2005 and its most recently filed Quarterly Report on Form 10-Q. In addition, past performance cannot be relied upon as a guide to future performance. The following factors among others could cause actual results to differ materially from those described in the forward-looking statements.

The risks that our business is dependent upon our relationships with and the success of our distribution partners, the risks associated with the fact that we have material weaknesses in our internal control over financial reporting that may prevent us from being able to accurately report our financial results or prevent fraud. The risk that we have in the past and may in the future incur impairment charges that materially adversely affect our earnings and our operating results. The risks that we are dependent on our ability to establish and maintain relationships with advertisers and advertisers agencies, the risk that we have made significant investments in new initiatives that may not meet our expectations in terms of the viability, success, or profitability of such initiatives, potential that demand for our services will decrease the risk that we will not be able to continue to enter into new online marketing relationships to drive qualified traffic to our advertisers, the risk that our distribution partners will use unacceptable means to obtain users, the risk that in early 2007 we replaced an ad fee provider that accounted for a significant portion of our revenue in '06 which could result in reduced revenue. The risk that our average earning per click has been decreasing over the past few years which could materially adversely affect our revenues and results of operations, the risks associated with our ability to compete with competitors and increase competition from distribution partners, political and global economic risks attendant to our business, risks associated with legal and cultural pressures on certain of our advertisers service and/or product offerings, other economic business and competitive factors generally affecting our business. The risks that we rely on a patent license from Yahoo for certain portions of our paper click business, our reliance on distribution partners for revenue generating traffic, risks associated with our acquired international operations, difficulties executing integration strategies or achieving planned synergies with acquired businesses and private label initiatives. The risks that we will not be able to grow or manage our growth, the risk that new technologies could emerge which could limit the effectiveness of our products and services, risks associated with the operation of our technical systems including system interruption, security breaches and damage, risks associated with Internet security including security breaches which if they were to occur, could damage our reputation and expose us to loss or litigation, risks relating to regulatory and legal uncertainties both domestically and internationally. That concludes our call today. Thank you for listening.

Thank you, everyone. That does conclude today's conference. You may now disconnect.