Inuvo Inc (INUV) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to today's MIVA Third Quarter 2007 Financial Results Conference Call. (OPERATOR INSTRUCTIONS)

At this time, I would like to turn the call over to Mr. Peter Weinberg, Vice President of Investor Relations and Corporate Development.

Please go ahead, sir.

Thanks, Dana. Thank you and good afternoon. Welcome to MIVA's third quarter 2007 financial results conference call.

Joining me on the call today are Chief Executive Officer, Peter Corrao, Chief Financial and Operating Officer, Lowell Robinson.

I would 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 from those expressed in the forward-looking statements.

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, adjusted net income or loss, and adjusted net income or loss per share.

We believe that adjusted EBITDA, adjusted net income/loss, and adjusted net income/loss per share 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, taxes, depreciation and amortization plus non-cash compensation expense and plus or minus certain identified revenues 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 [inaudible] is an important measure of performance by the investment community. MIVA sets goals and bonuses in part based on performance relative to adjusted EBITDA.

MIVA defines adjusted net income/loss as net income/loss plus amortization and non-cash compensation expense plus or minus certain identified revenues or expenses that are not expected to recur or be representative of future ongoing operation of the business, in each case including the tax effects, if any, of the adjustment.

MIVA defines adjusted net income/loss per share as the adjusted net income/loss as previously described divided by the average basic or fully diluted number of outstanding shares of MIVA common stock over the reported period.

For a detailed review of our third-quarter 2007 results, including the corresponding GAAP financial measures and a reconciliation of our non-GAAP financial measures to GAAP financial measures, please refer to the press release we issued today and to our Form 10-Q for the third quarter 2007 to be filed with the Securities and Exchange Commission.

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 after the call.

I'd now like to turn the call over to our CEO, Peter Corrao.

Peter?

Thank you, Peter. Good afternoon, everyone, and welcome to today's conference call. We appreciate having you on it with us.

While we're dissatisfied with our consolidated revenues and operating results, we are pleased that our MIVA Direct business generated significantly higher operating profit and an increase in monetization per active user in Q3 '07. We're also pleased that the total company gross margins increased sequentially.

During Q3 '07, we reported revenues of $36.4 million and an EBITDA loss of $300,000 excluding the $1.4 million non-cash asset impairment charge. These results were slightly below our pre-announced approximate range for revenues of $36.7 million to $37.1 million and breakeven EBITDA.

The revenue shortfall is attributed to weaker-than-anticipated MIVA Media U.S. and MIVA Media E.U. third party ad network revenues and MIVA Small Business being treated as a discontinued operation.

The EBITDA shortfall is a function of lower-than-anticipated revenue and higher-than-forecast costs largely related to the implementation and ongoing execution of the Company's outsourcing plan.

The higher-than-forecast estimated outsourcing expense was partially offset by lower-than-anticipated compensation expense due to not meeting certain thresholds in the Company's 2007 bonus plan and lower-than-expected headcount of approximately 229 at the end of Q3 2007.

We believe our third quarter 2007 results underscores the rationale for our strategy to build MIVA-owned consumer media while we lessen our dependence on third party ad network.

Our strategy has not changed and our goal to deliver valuable digital audiences to advertisers hasn't changed. We're increasingly focused on growing the scalable and more profitable MIVA Direct and consumer media business.

Through MIVA Direct and our consumer media, we develop direct marketing relationships with our audience and seek to create value for them and our advertisers seeking to reach them through our 7 million active toolbars, our start pages, and our growing portfolio of MIVA owned and operated websites such as spill.com and screensavers.com.

We're making progress against our strategy to build consumer media as evidenced by our recently launched ALOT brand and our ALOT start page initiative. ALOT represents a rich, integrated user experience with multiple consumer touch points across toolbars, web search, and start pages. The new ALOT properties incorporate premium content and provide search with attribution from our monetization partner.

Our challenging second quarter ad spend taught us to refocus on margin and profitability. As we shared with you previously late in Q2 '07, we made the strategic decision to concentrate ad spend on more profitable toolbar channels. Consequently we reduced our ad spending in many low performing channels and active users and search volumes declined as a consequence during Q3 '07.

Due in part to the reduction in ad spend from $9.1 million in Q2 '07 to $7 million in Q3 '07, the total number of active toolbar users declined from 8.3 to 7 million over the same period. The result of fewer active users was a decline in revenue from $13.5 million in Q2 2007 to $12.2 million in Q3 2007, but a significant increase in operating profit.

The decline in revenue was anticipated given our strategic decision to focus ad spend on more profitable toolbar channels, which effectively reduced our overall spend.

With the ALOT properties and our focus on more profitable toolbars, we believe we're positioned to generate better margins and have a more stable platform for growth.

The early ALOT metrics including attrition rates are encouraging and we expect to ramp the distribution of ALOT toolbars off our now more profitable toolbar pace. Further, we expect to increase our active toolbars during Q4 2007.

Entering Q4 2007, we're pleased to see the product investments we made this year beginning to bear fruit. While our active users and search volumes are down from the peak in Q2 2007 due to the reduction in ad spend during Q3, our revenues per active users have actually returned to the range where it was in the beginning of the year. We believe the lesson here is that we can create more value through a combination of product and advertising changes.

We expect to introduce new vertical channels with premium content partners and continue our horizontal expansion into new markets. We continue to see an encouraging spread on the media buy versus the monetization potential in parts of Europe and we are studying new and other geographies where our monetization partner has a strong presence.

We anticipate MIVA Direct's Q4 2007 revenue and quarter-end active users will be above Q3 2007.

With that said, I'll turn the call over to Lowell, who will cover our financial results and our outlook for Q4 '07.

Lowell?

Thank you, Peter.

Our consolidated Q3 2007 performance was slightly below our pre-announced expectations and below our Q2 2007 results. However, as Peter said, we are pleased that MIVA Direct generally performed to our expectations as a result of our strategic decision to focus on profitable toolbar growth.

Before I review our financial results, it should be noted that in Q3 2007, MIVA Small Business results were reported as a discontinued operation. We completed the asset sale of MIVA Small Business on August 1, 2007.

MIVA's consolidated revenues were $36.4 million in Q3 2007 compared to $39.2 million in Q2 2007. The revenue decrease was due primarily to a decrease in revenue per click and our third party ad network for Media E.U. and the Media U.S. segments.

EBITDA loss was -- EBITDA was a loss of $1.7 million in Q3 2007 compared to an EBITDA loss of $14.2 million in Q2 2007. The third quarter included a $1.4 million non-cash tangible and intangible asset impairment charge related to our Media E.U. business and the second quarter included the $14 million non-cash goodwill impairment charge related to this same business.

Adjusting for the non-cash impairment charges, our EBITDA loss was slightly below Q2 at $300,000 loss compared to $200,000 loss in the second quarter on a $2.8 million decline in revenue.

After excluding non-cash comp expense of $1 million in Q3 and $1.2 million in Q2, we would've had adjusted EBITDA of approximately $800,000 positive in the third quarter compared to $1 million positive in the second quarter of 2007.

Cash, cash equivalents increased by $900,000 sequentially from the second quarter to the third quarter from $23.9 million to $24.8 million. The increase was due to the timing of several large remittances.

Receivables days outstanding were flat quarter on quarter at approximately 40 days outstanding. Consolidated gross margins were 52.9% in the third quarter, above the 52.1% we reported in the second quarter.

Gross margins before advertising spend were 93% for Direct in the third quarter compared to 94% in the second quarter of 2007. And gross margins increased from 30% to 34% for Media E.U. from Q2 2007 to Q3 2007 while the Media U.S. gross margins were flat at 31%.

The Media E.U. gross margin increase was due primarily to the impact of our initiatives for scaling out of unprofitable revenue share deals.

MIVA Direct contributed 33.6% of total revenue in the third quarter compared to 34.5% in the second quarter of 2007. Given our planned reduction in the third quarter ad spend, our revenue mix shift did not materialize during Q3 2007. However, we expect the mix of MIVA Direct revenue to increase as a percentage of the overall revenue during the fourth quarter of 2007 and beyond.

MIVA Direct generated $12.2 million in revenue in the third quarter, below the $13.5 million in the second quarter of 2007. This is due to the strategic decision to reduce the ad spend from $9.1 million in the second quarter to $7 million in the third quarter and to focus on getting out of unprofitable toolbar channels.

The total number of active toolbar users declines from 8.3 million to 7 million over the same period. This was the primary reason for the revenue decline and yet we were able to achieve higher operating profit on those fewer toolbars.

MIVA Direct's gross margin was approximately 93% in the third quarter of 2007, which is marginally below the second quarter of 94%. MIVA Direct's gross margin excludes advertising spend of $7 million in the third quarter and $9.1 million in the second quarter, which is included in consolidated operating expenses within the marketing, sales, and service line.

Including the advertising spend, MIVA Direct's gross margin was 36% in Q3 2007 compared to 27% in Q2 2007.

We expect to increase ad spend in Q4 2007 over Q3 2007 as we focus on proven, more profitable high margin toolbar growth. The planned reduction in ad spend in Q3 2007 yielded a significant EBITDA increase from MIVA Direct quarter over quarter.

In our total MIVA Media third part ad network, we recorded 352 million total paid clicks in Q3 2007, up from 299 million in Q2 2007 and up from 310 million in the third quarter of 2006.

Q3 2007 revenue for our total media third party ad network was $24.2 million compared to $25.7 million in Q2 2007. The approximate $1.5 million decline in total media revenue was due primarily to a decline in Media E.U. and U.S. revenue per click.

In Media E.U., average revenue per click was $0.14 in Q3 2007 compared to $0.17 in the second quarter of 2007. In the Media U.S. segment, average revenue per click was $0.05 in the third quarter compared to $0.06 in the second quarter of 2007.

In our total Media U.S. business, revenue was down approximately $1.1 million sequentially from second quarter 2007. Media U.S. gross margins were 31% in the third quarter and flat compared to the second quarter of 2007.

In our Media E.U. business, revenue was down $300,000 sequentially from the second quarter. The gross margins in the Media E.U. increased from 30% in the second quarter to 34% in the third quarter of 2007.

Traffic acquisition costs were down as a percentage revenue from the second quarter to the third quarter due primarily to our initiative for scaling out of unprofitable revenue share deals.

Operating expenses were $23.3 million in Q3 2007 compared to $37.1 million in Q2 2007. Excluding the $1.4 million non-cash tangible and intangible asset impairment charge in Q3 2007 and the $14 million non-cash goodwill impairment charge in the second quarter of 2007 -- all related to the E.U. -- operating expenses were $21.8 million in the third quarter and $23.1 million in the second quarter of 2007.

Adjusting for the non-cash impairment charges, the approximate $1.3 million decrease in operating expenses included an approximate $2.1 million decrease in ad spend for MIVA Direct.

The adjusted operating costs, which were higher than forecast, are largely related to the implementation and ongoing execution of the Company's outsourcing plan. The higher-than-forecast estimated outsourcing expenses were partially offset by lower-than-anticipated compensation expense due to not meeting certain thresholds in the Company's 2007 bonus plan and lower-than-expected headcount of 229 at the end of the third quarter 2007.

Adjusted EBITDA was $800,000 in Q3 2007, which excluded the $1.4 million non-cash impairment charge and non-cash compensation expense of $1 million. This compares to adjusted EBITDA of $1 million in the second quarter of 2007, which excluded the non-cash impairment charge and non-cash comp expense of $1.2 million.

GAAP net loss of $3.7 million or 11% loss per basic share in the third quarter of 2007 -- this compares to GAAP net loss of $16.4 million or $0.52 loss per basic share in the second quarter of 2007.

Cash and cash equivalents were $24.8 million at September 30, 2007, an increase of $900,000 from June 30 cash of $23.9 million.

As of September 30, 2007, the Company had an active base of 229 full-time employees, down from 265 at June 30, 2007 and 401 at December 31, 2006. The decrease from December 2006 is primarily due to the Company's Q1 2007 restructuring plan and the second quarter outsourcing of our technology function to Perot Systems.

The Company is forecasting Q4 2007 revenue, EBITDA, and cash to be below the third quarter of 2007 due primarily to an anticipated decline in MIVA Media third party ad network revenue.

The Company is forecasting MIVA Direct's fourth quarter 2007 revenue and active toolbar users will be above the third quarter 2007 performance.

I would also like to mention that Peter Weinberg, who has managed Investor Relations and Corporate Development over the past couple of years, will be relocating to the Northeast for personal reasons. Peter has made many valuable contributions and we wish him continued success.

I will be playing a more active role in IR and Sloan Gaon, one of our senior executives, will assist in business and corporate development.

In addition, we have decided that for 2008, we will provide annual guidance instead of quarterly guidance. We believe it is critical that we focus our attention on achieving our long-term objectives for shifting into owned traffic rather than on short-term results.

Many companies have moved in this direct and we feel this is appropriate for MIVA at this time.

We expect to update the annual guidance on a quarterly basis. Additionally, we expect to provide current and new metrics on MIVA's operating performance on a quarterly basis.

I will now turn the call back to Peter Corrao for some concluding remarks.

Good. Thanks Lowell.

Peter, I also want to thank you. You've been a terrific team member and a great partner and I wish you well.

In conclusion, we are encouraged with the fundamental performance of our MIVA Direct division and we look forward to updating our progress on building consumer media in the coming quarters.

Peter, let me turn that back over to you.

Okay. Dana, we can take questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) And we'll take our first question today from Matt Hewitt from Craig-Hallum Investments.

A couple quick questions. First of all, I'm wondering if you could provide a little bit more color on what's going on in the media business. It's down sequentially now about five consecutive quarters. I'm just trying to get a better sense of where this business could base or if you expect it to continue to decline.

Well, hi Matt. It's Peter Corrao. We've continued to talk about trying to find a bottom in our MIVA Media business. And, of course, our whole strategy is to be able to supplant MIVA Media's revenue with higher quality and higher margin MIVA Direct revenue.

Generally we feel good about being able to do that, making the switch. But when we started down this path, we were at 16% or 17% of our revenue was MIVA Direct. The rest was MIVA Media. We've gotten it up to what, 35%, 36%. And the rest is now MIVA Media left over. We're doing our best to change the, you know, low quality, lower margin business into a high quality, higher margin business.

And we continue to be befuddled by being able to make the Direct business in total completely growth. We're still looking for a bottom in. We still are encouraged by switching over to the precision channel and trying to put a spike in this ever declining revenue per click.

But as is obvious by what we've been trying to do, we really are simply trying to put a bottom in that, perhaps get it back to growth in future quarters and really focus our efforts on our Direct business, where we own and operate our own traffic. We know we add specific value to consumers and we're able to grow the business then sequentially off of that.

You know, I -- my sense is we're somewhere near a bottom. But every time I say that, we have yet another problem with traffic partners. And the issue for us really is traffic. We still have thousands of clients that are willing to consume all of the high quality traffic that we can give them. And we tend to struggle with the partner side of the business and the publisher side of the business with finding enough high quality traffic that isn't our own that we can send back out and then get it monetized.

So I'm happy to even talk more about that, Matt, and answer more specific questions on it. But that should give you a good general direction on it.

All right, thank you.

Secondly, maybe you can clarify this a little bit. I thought you said earlier in the call that revenues have returned to a range seen earlier in the year. What segment was that? Just for the Direct segment? Or--

Yeah, okay MIVA Direct.

Okay. All right.

What had happened is we had a revenue-per-live-user base falloff from our MIVA Direct business right after we switched from Yahoo! to our new monetization partner.

Okay.

And that had to do with their own algorithms and really nothing to do with our effort, the point being there that now that we've figured out how to have these high quality toolbars come in that are profitable, so all of our toolbars now have a buy low, sell high strategy to them and margin inside of them. We've now gotten back in Q3 and the numbers that we've seen so far in Q4 where we're back to the ranges on a revenue-per -live-user that we were at when we first turned this on back in February.

A couple of reasons for that. One may just be seasonality as it relates to our partners at Google. The other is that we've increased the value of the toolbars by introducing the ALOT brand. And we're proud to say that the ALOT brand attrition is actually better for us we go, so pretty much everything we're doing on that side of the business is working for us.

Now as revenue per live user goes up instead of going flat to down like it did right after we turned on with our new partner, it takes all of the guesswork now out of how to grow that business. The only thing we have to do now is set our sights on increasing our volumes and our numbers of toolbars, looking at where we can expand into either more channels through different product or more geographies wherever our partners at Google are. So that's exactly where we've set our sights and we're going to continue marching down that path.

Now two different kinds of products that we've introduced that we've been excited about. One is our general toolbars, which are all thematic around different affinities. And I think everybody here has toolbars turned on and know what they look like. We've got recipe toolbars. We've got lottery toolbars. We've got toolbars for calorie counting and the rest.

And we've introduced start pages. All of our start pages too have type-in search and all of our start page type-in search now has attribution back to our partners. So the hope is and what we're seeing early evidence of and we're proud of at this point is toolbars are lasting longer as we switch them over to the ALOT brand.

And entire new products like start pages have more staying power as well and more monetization than the toolbars did. So we think we've gotten this -- we think we've got the Direct business back on track for continued sequential growth. And we think we've taken a lot of the combination and have gotten it figured out and are now back on just growing those toolbars and start pages.

All right, thank you.

Thank you.

And we'll take our next question from Colin Gillis of Cannacord.

Hi Peter.

Hi Colin.

So have you thought about just transitioning to a smaller, hopefully profitable direct company?

Well, we don't talk about -- on the call about M&A activity and predict the future like that. But I sure do like that business a lot. It's growing for us. It's got good margins. And we're doing our best to put a bottom in it. But, of course, you'd have to think about that. But we're doing our best to put a bottom in the direct business, try to add traffic -- I mean the in the media business, I'm sorry.

Yes.

Try to add traffic to it. The precision network is working. The cost controls that we've put in place are helping, of course. Thank God we're not still dealing with 561 people and all of the costs that we had going with it. But it is difficult, Colin. No doubt about it. So we're reviewing every option, but we don't have anything specifically in the works and I can't really talk about it anyway.

I understand.

In terms of the cash balance, any commentary about how that could get used and any color as to the number of sites that you'd like to build out in 2008?

Yes, so the first thing we're doing is -- well, cash, I'll let Lowell specifically talk about that. But, of course, I'm thrilled that we're up nearly $1 million in cash quarter over quarter. Yeah, so sites specifically, let me talk about that because it's an important part.

Our number one focus and where we would spend any incremental dollars that the Company had would be on hurrying up with ALOT. So we've got multiple toolbars, but we've sort of whittled it down at this point. So as we sit here right now, we've got 15 toolbar verticals that are profitable and work well for us. And subsets of them work well for us virtually in all geographies.

So the most important thing for us is to put our effort on converting those toolbars from our old StarWare brand to the ALOT brand. And there's all sorts of better monetization methods as we go over to ALOT, including the most important thing, which is that we get attribution from our partners at Google on everything that's ALOT and we don't at every -- have it on anything that's StarWare.

So first and foremost, the effort is is to get all of the conversions done and done quickly. The second thing we're doing is we're then taking those subsets, dividing them by the six countries that we currently make the offers in, and the first place that we're going and buying advertising for them to get onto consumers' browsers is those places that have the highest margins for us and the easiest take-up rate.

We've talked about that in the past. Depending on the toolbar, it might be a strong go for the U.S., a strong go for Spain, and an intermediate or a weak go for France. So we take that very approach to it.

The second thing we're doing then is trying to build out our more robust start page, which we've launched here just a couple of months ago. We're having fabulous success with that and we're very excited about it. And ditto with the start pages. The first thing we'll do is take start pages from generic, which they are now, to more specific, which they will be in the very near future.

So if you've found your way to a -- an ALOT start page by coming off of an ALOT recipe toolbar, we're going to try to make that start page in the future one that's affinity oriented to the very consumer that gets it so that he or she doesn't have to do much changing on it on their start page to make it a relevant one from them and yet have the start pages still be available for everybody that comes on. So we're really just taking sort of a programmatic approach to how we're delivering on the toolbars and on the start pages, where can we make the most money and where can we buy keywords inexpensively enough to grow that business out.

And the third place that we're looking would be into and beyond geographies that we're not in already. So as you know, we don't have a MIVA Media as an example presence in as an example only Australia. But Australia is English speaking and Google has a good presence there. So it would be another geography that we would look at, begin to test toolbars, begin to get -- test start pages, begin to distribute things like screensavers there and Spill there. And we would go there, the next place once we'd done our testing. And really English speaking countries would be best for us. If not English speaking, of course, French or Italian, German or Spanish speaking countries would be the place to go.

In terms of cash, we're still -- we're continuing to try to preserve cash, keep it inside the Company. We would look at investing our cash into anything that to do more with owning and operating our own traffic. And we do have several initiatives that we're looking at that are external to the Company where we could perhaps get into other methods of using our distribution system and find our way to adding consumer value. And then that consumer value would find its way back to monetization either inside of MIVA Media and our third party ad network or off to our partners that are our monetization partners at Google.

And then just on the media side, have we unwound all of the unprofitable European deals or both U.S. and European deals?

We had -- I wish that we had a better quarter to give my guys credit for that. They did a fabulous job. As of -- well, actually now, past, behind us already, by the end of Q3 -- of course we're into Q4 already -- we had unwound virtually everything that we had targeted. We got I think frankly lucky in that some of our partners didn't leave us. They renegotiated with us where we could get into above-water deals. And I think Lowell mentioned this in his script. The biggest reason that we've been able on lower revenues to increase our margins was that we were able to get out of those bad deals, not able to -- didn't lose all of the revenue that we might've had we just completely left the partner and have been able to turn our fortunes around. So that is virtually all behind us now.

Now we still have a few -- but, I mean, very few. You could count them on one or two hands -- prestige partners that may or may not ultimately ever have a buy low, sell high payout. But only those partners that we've decided we want to keep, you know, we think add to the whole pie are those that we've kept. Otherwise we've gotten out of all of the publishers. And that whole endeavor other than keeping up with it now is completely behind us. And I think I'm accurate, Lowell, that we don't even have anybody at this point that's working they're way out. I think we've completely got them done already, so.

No, that's correct, Peter.

Yeah, it's not even to the extent that we're trying to work our way out of them. It's done, behind us, the activities happened, new contracts set and we're off to the races.

Okay, great. And then just a quick comment to Peter Weinberg -- you're best in class. Stay in touch.

Thanks Colin.

(OPERATOR INSTRUCTIONS) We'll go next to Jim Leahy of Morgan Joseph.

Hi guys. Two quick questions for you. First if you can just give me -- or give us all a look at where the MIVA Direct's weakness or declines are? Is it U.S.-based? Is it international? Any color there would be greatly appreciated.

And then second, any color also on what's driving the higher spending for the Perot outsourcing?

Thanks.

Yeah, I'll let Lowell cover the higher spending. And just let me ask a question on your questions. When you said weakness in MIVA Direct, did you mean Direct or MIVA Media?

Oh, I'm sorry, MIVA Media.

Yeah, MIVA Media. So it's sort of across the board for us. We continue to deal with this low quality traffic. I won't give you the specific numbers where the revenues were and all of that by country and all of that, but generally it's across the board for us. This low quality traffic business is a tough one. And unless we can replenish it with higher quality traffic, it's just not a long-term sustainable business.

So generally speaking, the U.S. has sort of bottomed out with and on the back of the help from our precision network. We've had good results from that. We don't have the technology needed in the E.U. yet, although we're working on it, to get the precision network and meta-feed environment launched in the E.U. And the consequence there is we think we're going to continue to struggle with the E.U. until we can get that technology put in place some time mid maybe Q2 or Q3 of next year.

So generally the tough business that this company faces is anything inside of MIVA Media. Specifically we just have more visibility into the U.S. and less visibility into the EU. And that -- I'm not giving you a specific answer for the quarter three by the way. I'm just talking in general. In general, E.U. is still the anomaly for us. We still have -- we still struggle to get out of all of the costs that we'd like to. And we don't have the margins there in total that we do in the States.

On the higher spending, it's really -- I'll let Lowell answer it in particular, but it's really more of a forecasting issue than an actual spend issue. So I'll let Lowell talk about that for a second.

Yes. Well, let me first comment that we are all extremely pleased with our outsourcing partner, Perot, in terms of what they've delivered to us, the quality, the people, etc. And the higher-than-forecasted cost in the outsourcing expenses was really more of a forecasting thing versus the costs that we're incurring. The costs that we're incurring are [technical difficulty] and they've done some programming for us on some projects and we're very pleased with the work that they've done.

Hi Dana. Is Jim still on?

I'm done. Thanks guys.

Okay, thanks.

And gentlemen, we have no further questions at this time. I'll turn the call back over to you for any additional or closing remarks.

Thank you. This conference call contains certain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934.

Words or expressions, such as plan, will, intend, anticipate, 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 2006 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 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 are dependent on our ability to establish and maintain relationships with advertisers and advertising 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; the risk that we will not be able to continue to enter into new online marketing relationships to drive qualified traffic our advertisers; the risk that in early 2007, we replaced an advertisement [feed] provider that accounted for a significant portion of our revenue in 2006, which could result in reduced revenue; the risk that our average revenue per click has been decreasing of the past few years, which could materially adversely affect our revenues and results of operations; the risk that we rely on a patent license from Yahoo! for certain portions of our pay-per-click business.

That concludes our call today. Thank you for listening.

And that does conclude today's call. Thank you for your participation. You may disconnect at this time.