Marchex Inc (MCHX) 2005 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] Good afternoon, ladies and gentlemen, and welcome to the Marchex fourth quarter earnings conference call.

At this time, all participants have been placed on a listen-only mode and we’ll open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Ethan Caldwell, Chief Administrative Officer.

Sir, the floor is yours.

Thank you.

Good afternoon, everyone, and welcome to Marchex's fourth quarter 2005 conference call.

Joining us today are Russell Horowitz, Chairman and Chief Executive Officer, John Keister, President and Chief Operating Officer, Michael Arends, Chief Financial Officer, Peter Christothoulou, Chief Strategy Officer and Cameron Ferroni, Chief Technology Officer.

During the course of this conference call we will make forward-looking statements that involve substantial risks and uncertainties.

All statements other than statements of historical facts included on this call regarding our strategy, future operations, future financial position, future revenues, acquisitions, projected costs, prospects, plans and objectives of management are forward-looking statements.

We may not actually achieve the plans, intentions, or expectations disclosed on our forward-looking statements and you should not place undue reliance on our forward-looking statements.

Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements we make.

There are a number of important factors that could cause Marchex's actual results to differ materially from those indicated by such forward-looking statements, as are described in the Risk Factors section of our most recent periodic report and registration statements filed with the Securities and Exchange Commission.

All of the information provided on this conference call is as of today's date and we undertake no duty to update the information provided herein.

During the course of this conference call, we also reference certain non-GAAP financial measures of financial performance and liquidity, including OIBA, adjusted OIBA, EBITDA and adjusted non-GAAP EPS.

The reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today's earnings press release, which is available on the Investor Relations section of our website.

Definitions of these measures as used by us and the reasons why we believe these measures provide useful information to investors will be referenced during this conference call and are also contained in today's earnings press release.

At this time I would like to turn the call over to Russell Horowitz, our Chairman and Chief Executive Officer.

Thank you, Ethan, and thank you, everyone, for joining us for today’s conference call.

On today's call, we will discuss four items.

One, a summary of Marchex’s financial results for the fourth quarter and our operational progress during the course of 2005.

Two, a review of recent developments and growth drivers in key business areas during the fourth quarter of 2005.

Three, a summary of our areas of focus and investment for 2006.

And four, a detailed review of our quarterly results and an initial summary of our 2006 financial guidance.

First, to highlight our financial results for the fourth quarter and our operational progress for the year.

The fourth quarter was our strongest quarter to date, capping a busy year in which we made significant progress across each of our business areas, while investing heavily in operational and strategic initiatives that will continue to drive growth in 2006 and beyond.

Our financial results for the fourth quarter of 2005 include revenue of $29.8 million, a 97% increase over the prior year period; adjusted operating income before amortization of $8.2 million, which represented a 27% margin compared to a 16% margin in the prior year period;

EBITDA of $9.5 million and GAAP earnings per share of $0.03; and adjusted non-GAAP earnings per share of $0.11.

Continuing the theme of recent quarters, the fourth quarter remained a period of significant investment for Marchex as we focused on several product related initiatives, including augmenting existing monetization technologies and developing new products for publishers and advertisers such as enhancing our private label contextual product; integrating our services for cross platform deployment such as enabling IndustryBrains listing to be included in our pay per click distribution network and continuing to integrate our own merchant listings into our proprietary network of traffic.

Testing and launching iterative enhancements to the monetization of our proprietary traffic and accelerating our investment in strong management and personnel to support and drive Marchex’s long-term strategy.

Our progress this past quarter and for all of 2005 was driven by our ability to create more opportunities to deliver targeted online leads to advertisers through both high-quality partner and proprietary traffic sources.

Mike Arends will touch on the specifics of our financial results in a moment, but I wanted to briefly highlight the strategic and operational progress we made this past year by comparing Marchex at the beginning of 2005 to the end of 2005.

First, in looking at our search marketing technology and monetization platform, we significantly expanded our partner distribution network in 2005 through the addition of more than 100 new partners.

Examples of these new partnerships include relationships with two of the largest search networks, MSN and AskJeeves.

We also added several of the largest shopping networks, such as Shopzilla, MSN Shopping and [Become].com and several premium vertical publishers such as Forbes.com, Business Week, Travel & Leisure, Investors Business Daily, Fodor’s and USA Today.

As a result of this progress, we believe Marchex now has one of the largest, high-quality third-party distribution networks online, as we have relationships with and access to top-tier partners in each online customer acquisition channel.

Second, in looking at our progress in local search, we added several new super aggregator partners in 2005.

These partners leverage our search marketing technology and monetization platform to sell local online search packages to their offline and online local merchant customers.

The addition of these new local super aggregator relationships, coupled with the growth of the advertiser bases of the existing super aggregator partners, led to a significant increase in the number of local merchant advertisers utilizing our search marketing technology and distribution network.

We now have thousands of local merchants utilizing our platform.

Additionally, we’re very pleased with our progress in this channel, as the signup and renewal rates of local merchants utilizing our platform continue to track favorably.

And third, proprietary traffic, which some folks refer to as direct navigation.

According to internal log files, we had more than 27 million unique visitors in December 2005 access our vertical and local websites.

Revenue attributable to proprietary traffic sources, substantially all arising from our name develop and Pike Street asset acquisitions, was $10.3 million.

Furthermore, during the quarter we were successful in increasingly monetizing our own traffic with our direct Marchex advertisers.

Prior to 2005, Marchex did not have a proprietary traffic source.

As we have previously stated, owning a proprietary source of traffic at critical mass, coupled with the ability to directly monetize that traffic is something that very few companies have been able to accomplish.

During 2005, we not only added this component to our business, but we believe that with continued focus and execution we will be in a unique position to grow into one of the industry’s largest vertically and locally focused online networks.

While we’re pleased with our progress in 2005, we believe that it’s still early in Marchex’s window of opportunity.

We fully understand and appreciate that the most significant online leaders have built their positions over a 7 to 10-year period.

Therefore, we will remain focused on positioning Marchex as a leader by, one, continuing to develop a unique technology platform that allows us to deliver any advertising type into any online environment.

Two, enhancing our local outsource platform for super aggregator partners by introducing product enhancements for local merchants for [discalled] tracking and enhanced reporting.

Three, building a vibrant base of users who frequently access our local and vertical websites.

Four, growing our proprietary traffic base into one of the largest and most relevant online.

And five, building increasingly better content and utility on our network of websites which will contribute to the growth and activity of our users.

We believe that continued focus and investment against these priorities in terms of product development, selective potential acquisitions, marketing and people will allow us to continue building a world-class company and translate today’s opportunities into tomorrow’s reality.

Now I’d like to touch on the second item, a review of recent developments and growth drivers in key business areas during the fourth quarter of 2005.

Starting with our proprietary traffic from our vertical and local websites.

As I mentioned earlier, according to internal logs, our proprietary traffic base grew to more than 27 million unique monthly visitors in December, up from more than 24 million unique monthly visitors in September of 2005.

This growth was primarily due to three factors.

The first was due to initiatives surrounding the development, testing and launching of our enhanced websites and data templates across certain verticals.

For example, Marchex launched 52 of our 74,000 beta zip codes in August 2005 to the remaining zip code beta sites in November 2005.

Prior to their upgrade, these zip code websites were directory pages which consisted of search listings related to popular categories, listings that weren’t necessarily relevant to the website name or URL.

Consistent with our efforts to provide more utility and relevance for users, we focused on several technology driven enhancements to these websites that included elements such as targeted advertisements related to the location, integration from local information services such as weather, maps, jobs, yellow pages functionality, travel information, demographics and an enhanced more intuitive user interface.

Internal data indicates that from September 2005 to December 2005, these enhancements resulted in the following data relative to zip code websites specifically.

We had more than a 120% increase in unique monthly visitors, which we believe was driven primarily by greater relevance to the user and better ranking in algorithmic search engines in response to direct or indirect search queries for specific zip codes.

And we had more than a 360% increase in monthly clicks, which we believe was driven by greater advertiser relevance on the page.

Although we believe we will need to continually evaluate the effectiveness of these and other website enhancements we will be launching, we are certainly encouraged by the early results and will continue to test, optimize and deploy new enhancements in the zip codes and other verticals.

The second factor underlying our growth was marketing initiatives designed to understand the impact of traffic and conversion characteristics through sponsored search channels.

We believe a well-rounded website receives diversified traffic through three primary sources.

One, direct type-in to the website.

Two, algorithmic traffic from search engines where a website ranked highly in response to a user search query.

And three, traffic from sponsored search results.

Additionally, we believe a website that receives meaningful amounts of traffic from each of these various sources, can in many cases achieve very favorable operating margins.

An example of website within our network that receives all three forms of traffic is Yellow.com.

Yellow.com receives direct type-in traffic, as the site has emerged as a leading resource for online yellow page inquiries.

Additionally, it also receives traffic from algorithmic search engines in response to user search queries on terms related to yellow pages, as well as traffic from sponsor search programs for terms related to yellow pages.

The combination of these factors made Yellow.com a meaningful contributor to the financial profile of Pike Street, which carries incremental operating margins of more than 50%.

We believe that once a website has appropriate utility and is relevant to users, it may be appropriate to drive traffic via targeted online marketing in order to extend that site’s online reach and expose it to new users.

As a market leader and providing a variety of search market services to merchants like Office Depot, Radisson and REI, just to name a few, we believe we’re in a position to directly apply our skillset and technology platform for our proprietary websites.

In effect, over time, we have the potential to leverage our own expertise in extending the reach of high impact websites to the relevant sources of customer acquisitions across the web.

Therefore, we can effectively become our own best customer.

We have started to test various search marketing initiatives surrounding a limited set of our vertical and local websites.

Today we are testing targeted sponsored search programs on less than 1% of or websites in order to understand the impact of these campaigns on conversions, repeat visits and incremental profit margins.

We will continue to look at sponsored search programs and other strategic marketing initiatives that leverage our existing search marketing knowledge across our network of web properties.

Over the coming quarters we believe that additional testing is appropriate to help understand the opportunity and impact.

The third factor underlying our strong growth in unique visitors in December was seasonal traffic trends.

The fourth quarter is typically the highest traffic period of the year, as many consumers are researching and purchasing products or gifts online.

We believe that as our network continues to evolve, we will be subject to seasonal trends in advertising spend as well as in consumer internet usage.

In the coming quarters we will continue to make progress toward our 2006 goal of deploying upgraded enhanced websites on the vast majority of our network of more than 200,000 websites.

In addition, we will also look to add relevant content to our enhanced websites through new business development relationships.

Now moving on to our local search effort and our search marketing and monetization platform initiatives.

Our focus during the fourth quarter was in supporting our local super aggregator partners to drive more local merchants online.

We view the local opportunity as a great growth driver that is relatively early in its lifecycle and we are encouraged with the signup and renewal rates for our existing local aggregator partners.

As we now support thousands of local merchant advertisers, we believe we are one of the largest providers of search marketing solutions to local merchants.

With the recent addition of the Berry Company into existing partners including AT&T, BellSouth, YellowPages.com and the Houston Chronicle, Marchex believes it supports local super aggregator partners who collectively have more than 3,000 direct sales representatives selling local search packages.

In total, these sales reps have access to potentially more than 2 million local merchants through their various businesses in offline yellow pages, online yellow page directories and newspapers.

According to a recent forecast by the [Kelsey] Group, the global online local search market, which includes internet yellow pages, local search and wireless, is set to grow to nearly $13 billion by 2010.

We believe there’s a strong need for technology providers to assist local merchants in creating, tracking, fulfilling and maintaining locally focused advertising campaigns and today this channel is vastly under-represented in online advertising spending.

Of the 10 million-plus local merchants in the United States, we believe that a small fraction are buying pay per click packages on the major search engines.

This channel represents a substantial opportunity that will be very competitive in the coming years.

That said, we believe Marchex’s local solution will be one of the driving forces in accelerating local merchant adoption of online marketing and as such we have invested and will continue to invest significant resources against the local opportunity to support our strategic partners and to set the stage for adding new partners.

Additionally, during the fourth quarter we continued to make significant progress toward expanding our base of quality search and product shopping partners as vertical distribution sources.

For example, during the fourth quarter we entered into search and product shopping distribution deals with AskJeeves, MSN, MSN Shopping and Become.com, as well as new publisher partnerships with Morning Star and the Chicago Board of Options Exchange.

With the addition of Become.com and MSN Shopping, Marchex now has relationships to place its merchants in a network that includes 10 of the largest product shopping networks online.

In addition, through our new agreements with AskJeeves and MSN, we now have direct access to place our merchants into 4 of the largest search networks online.

We believe these relationships, combined with the large base of vertical publishers that we added to our partner network during 2005, provide our merchant advertisers with one of the broadest, high-quality distribution networks online.

This ability to offer advertisers the opportunity to buy on all major search networks, as well as on the top shopping engines and vertical publishers is beginning to translate into better penetration into new direct advertiser accounts for Marchex.

Many advertisers simply want the ability to go to one provider for all of their online marketing needs and Marchex is in as strong a position to execute on this need as anyone in the space.

We expect this positive trend to continue in 2006.

I’d now like to turn the call over to John Keister, our President and Chief Operating Officer.

Thank you, Russ.

Now we will turn to a summary of our areas of focus and investment for 2006.

In 2006 and beyond we are committed to continuing to build Marchex into a world class company.

We intend to accomplish this by one, building a substantial base of traffic for our merchant advertisers across both proprietary and partnered sources.

And two, continuing to develop our marketing monetization platform for advertisers, publishers and locally focused super aggregators.

We are very focused on building our base of proprietary traffic beyond it’s current levels, with the goal of making Marchex one of the largest and most targeted vertical networks online.

We are pleased with our ability to grow our traffic base significantly over the last year despite the fact that the majority of the year was occupied with operational efforts, such as building infrastructure, adding key personnel, planning various product development and implementing select rollouts of early product enhancements in certain verticals.

During 2006 we will continue to invest in our websites and add personnel to evolve our technology platform.

In the current year the approach to our proprietary traffic business will revolve around 4 initiatives.

One, to continue to add various technology enhancements, such as smart keyword optimization technology, which is designed to improve the keyword relevance of a webpage by rotating and ranking listings.

Two, to continue to create, enhance and test various webpage formats and integrations, which will allow us to launch appropriate templates across all of our vertical and local categories.

Three, to develop strategic relationships with appropriate content partners for integrations across our network of websites.

And four, continue to work on integrating more of our own proprietary listings where appropriate.

Today we are currently monetizing an increasing percentage of the inventory on each page of our proprietary network with our direct advertiser relationships.

As we progress throughout the year, we plan on extending the value of our proprietary inventory by offering additional advertising formats as well as products to leverage our existing search marketing platform and large base of advertisers.

Additionally, we are intent on growing our partner traffic footprint and on supporting our existing publisher partners monetization efforts.

While the market for third-party distribution partners has always been competitive and that trend remains, we believe that Marchex is uniquely positioned to become one of the leading providers of vertical and local traffic to our merchant partners.

We believe our focus on providing unique product solutions will continue to attract more merchants as well as distribution partners.

As an example, we believe our contextual site-specific products offer unique capabilities with monetization rates that in certain verticals are in excess of the largest networks online.

As a result, our distribution continues to grow in several key verticals that we are targeting for expansion.

Regarding our technology and monetization platform, we will continue to invest in integrating our services and partner services such as call tracking or pay per call options onto one platform.

Our goal is to make the merchant choice as seamless as possible in choosing between the various Marchex products and numerous distribution options.

Whether a merchant is currently accessing our contextual distribution network or pay per click network or our proprietary network with traffic, they should be able to quickly and easily take advantage of any advertising unit format and any distribution they need.

The combination of these investment efforts, we believe will result in Marchex continuing to deliver differential growth and profitability over the long-term.

As we continue to build Marchex into a unique online partner that gives merchants a large network of proprietary and partnered vertical and local traffic, we believe we are creating a defensible and scaleable business model capable of long-term market leadership.

At this time I’d like to hand the call over to our Chief Financial Officer, Mike Arends, to discuss our financial progress in more detail.

Thank you, John.

While 2005 was largely a year of investment, those investments set the stage for our largest and strongest quarter to date.

Our financial highlights for the quarter included revenue of $29.8 million for the fourth quarter, a 97% increase over our year-ago results of $15.1 million.

Total operating costs, excluding stock-based compensation and amortization of intangible assets and acquisition related retention consideration for the fourth quarter of 2005 were $21.6 million.

In the year ago period, total operating costs excluding the previously mentioned items, were $12.7 million.

This quarter, our operating expenses included increased service costs, additional investments in sales and marketing initiatives, as well as increased technology infrastructure costs and certain costs related to becoming a public company compared to last year.

In looking at the mix in operating costs for the fourth quarter, our service costs decreased largely due to an increase in revenue coming from proprietary traffic sources.

The increase in sales and marketing costs for the quarter were largely due to three factors.

One, increased personnel cost as we continued to invest in the necessary infrastructure and resources to support our growth and partner development efforts, including search engines, product shopping and local super aggregator relationships.

During the quarter, incentive based compensation increased to match the progress our sales and business development teams are making in growing our business and expanding our business development initiatives.

Two, tests related to selective marketing of proprietary websites in order to better understand the impact of traffic from the sponsored search channel on conversion rates, in driving repeat traffic and incremental profitability margins prior to additional template rollouts.

And three, the impact of a full quarter of IndustryBrains, which carried a higher selling cost structure than Marchex.

Adjusted operating income before amortization for the fourth quarter was $8.2 million or a margin of 27%, which represented a 234% increase over the $2.4 million, or a 16% margin in the year ago period.

Earnings before interest, income taxes, depreciation, amortization and stock-based compensation expense, or EBITDA, for the fourth quarter was $9.5 million which represented a 270% increase over $2.6 million in the comparable period last year.

Adjusted operating income before amortization and EBITDA are two of the principal metrics we use to measure the progress of our business, liquidity and our ability to generate cash.

Adjusted operating income before amortization includes a reduction for depreciation charges and excludes amortization costs and costs related to our acquisitions, as well as other nonrecurring charges.

GAAP, net income applicable to common stockholders for the quarter was $980,000 or $0.03 per share compared to $607,000 or $0.02 per share in the fourth quarter in 2004.

Going forward, our GAAP results may be impacted by a number of factors, including stock based compensation charges, increased amortization costs associated with our Name Development and Pike Street Industries' asset acquisitions, our acquisition of IndustryBrains, other potential future acquisitions, our preferred stock dividends, and increased public company costs, which will also impact our adjusted operating income before amortization and EBITDA results.

As a note, beginning in the first quarter of 2006, due to recent accounting rule changes, we will begin to recognize increased stock compensation charges as a non-cash expense that will impact our GAAP results.

Adjusted non GAAP earnings per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.11 per share for the fourth quarter.

Adjusted non-GAAP earnings per share represents adjusted net income divided by weighted average fully diluted shares outstanding for adjusted no-GAAP earnings per share purposes.

Adjusted net income generally captures those items on the statement of operations that have been or ultimately will be settled in cash, exclusive of certain non-recurring items and represents net income available to common shareholders plus stock-based compensation expense, amortization of acquired intangible assets, acquisition-related retention consideration, facility relocation expense, gain/loss on sale of intangible assets and other income or expense.

Now turning to the balance sheet, we had approximately $63.1 million cash on hand as of December 31, 2005.

During the quarter we used our cash to invest in certain initiatives we believe will strengthen our position within direct navigation and local Search marketing.

Going forward, we anticipate that we will use our cash to continue investing in long-term growth initiatives, including internal product developments and sales initiatives and selected acquisition opportunities.

I would now like to discuss our outlook for 2006.

While we continue to invest in initiatives that we believe will drive differential growth over the long-term, we believe Marchex will continue to realize current benefits as well.

Today we are releasing our first guidance for 2006.

For the year we are currently anticipating revenue in the range of $125 million to $133 million.

For adjusted operating income before amortization we are currently anticipating a range of $33 million to $38 million.

In addition, we are maintaining our long-term target for adjusted operating income before amortization target of 30% or more, as we expect that we will realize benefits from our investments over time.

As a note, for the first time we are issuing a range of guidance, versus a floor.

This is largely due to the fact that many of our ongoing investments and operational initiatives remain in the early stages.

As we execute throughout the year, we will continue to provide additional details and updates on our progress and financial outlook.

To summarize our progress, our results in the fourth quarter were driven by investments we made throughout 2004 and 2005.

Today our 2006 guidance highlights that we are committed to investing against our products and strategic opportunities to position Marchex for long term growth.

We look forward to sharing our financial progress with you throughout 2006 and beyond.

I would now like to turn the call back over to Russ.

Thanks, Mike.

We’ve worked aggressively and methodically over just three years to build Marchex into a leader with growth rate and profitability margins which we believe exceed many of our peers.

We have managed to create this strong financial profile while adding components of defensibility to our business.

We believe that these components place Marchex among a select group of online leaders.

Most importantly, we believe 2006 will be our busiest year yet.

To name just a few examples, we expect to see new product rollouts, business development relationships with content and monetization partners for our proprietary websites, additional distribution relationships, new aggregator relationships and other important operational developments related to our technology and monetization platform.

We expect 2006 to be a time of unique opportunity and execution for Marchex as we focus on continuing to build a leader in providing vertical and local online traffic to our merchant partners.

As a Company we are energized by this opportunity and we are already driving hard toward another year of substantial progress in 2006.

At this time, operator, we would like to give the call back to you to take questions from the audience.

[OPERATOR INSTRUCTIONS] Safa Rashtchy from Piper Jaffray

Congratulations on a great quarter again.

A couple of questions if I may.

First, could you give us a sense of the growth in your own properties or direct navigation, excluding Pike Street?

And I know you talked about progress you’ve been making in monetizing it with your own network.

Can you give us some additional color as to how much additional growth were you able to generate by both updating the websites as well as using your own advertiser base?

And I have a quick follow-up.

In terms of looking at direct navigation and the different components, one of the things that we’ve been saying fairly consistently is, Marchex as a whole continues – we encourage people to look at it as an integrated company.

That’s really highlighted by our focus this quarter on progress in direct navigation being driven by a number of measures, including more monetization with our own advertiser listing.

So we haven’t broken it out and we really aren’t focused on segmenting out specific websites in the context of the broader contributions.

As we noted, this business contributed $10.3 million in revenue during the quarter and we feel that represented very good financial progress, which was driven by a lot of product progress.

And so, as we look at the contributions of those elements, the continued integration has benefited merchants as whole and direct navigation specifically and at the same time, when you look at the contributions of the underlying direct navigation business, there are some upgrades we’ve made that have impacted the whole business and then there are specific places where we’ve made upgrades that have helped as well.

Those aren’t things that we’re specifically providing more detail on today beyond that we did in the press release and the conference call.

Okay.

Can you, second, give us an idea of the advertisers that you’re able to engage, especially on the local side and to what degree are you able to migrate them to your own properties, especially on the direct navigation side and Pike Street?

Sure.

The way we look at our business is there’s basically 2 components to it.

One, we want to help advertisers place the most effective ads in the most effective places, and we do that with our technology and monetization platform.

The second part is the distribution network, which is comprised of 2 underlying components; third-party relationships and proprietary traffic.

And so when merchants of all profiles, including local merchants, we bring them in based on the breadth of services we offer in terms of monetization and then we also bring incremental value added by giving them the broadest opportunity to be placed where they’re relevant.

In the course of that analysis we include our own proprietary distribution as an option and some folks will take that and some folks may not perhaps.

But what we are seeing is a trend is that they increasingly want that traffic.

And one of the third-party elements I would site is some weeks ago, Westside Story, which is an online research and analytics company, highlighted conversion rate by distribution source and they specifically sited that direct navigation was the highest converting channel online with more than 4% conversions compared to 2% and change for search engines, which is also much higher than the next closest one.

And so as advertisers increasingly understand this channel generally and our distribution specifically, we continue to see higher uptake rates and for local merchants that’s been totally consistent, as well as across all the other business areas.

Jordan Rohan from RBC Capital Markets.

I was hoping you could clarify how much of the revenue in the quarter was from Yahoo specifically?

And secondly, have you seen any major changes from Yahoo in terms of how it’s changing its sponsored search ranking algorithm?

If not, any idea when the beta test for those changes will be conducted or whether your traffic leader subsidiary will participate in the beta?

Thank you.

Thanks for the question, Jordan.

To answer the second part first, with our traffic leader subsidiary we tend to be involved pretty rigorously with a lot of the things that we’re doing with Yahoo.

It’s a close and very strategic partner.

In the context of looking at Yahoo as a monetization partner for our proprietary traffic, without being too specific, I and a number of us have been in the industry for a decade, working with a lot of different partners.

They’re constantly kind of changing or tweaking their algorithm.

Clearly Yahoo has been working on some significant endeavors in that regard, but at times you’ll see tweaks or evolutions of their algorithms that don’t – right now it’s been business as usual for us.

Clearly to the extent that Yahoo can make progress in that area, that would be something we’d enjoy seeing.

And we’ll work closely with them to help them understand the areas that we think are most right for increased optimization of their program.

How much of the revenue in the quarter came from Yahoo?

I’m assuming it was at least a 10% contributor.

The specific percentages will be provided in the course of the 10-Q.

But again, they have been our one disclosed partner that’s above 10% and we can’t offer those specifics today, but we will offer them shortly and they’re relatively consistent with what they’ve been in the past.

And finally, when contractually is Marchex able to switch all or a portion of its direct mass sites over to another proprietor if it should decide that’s beneficial?

We have a number of relationships with Yahoo as well as other companies.

We have an existing relationship that covers specific areas of our distribution that runs into 2007 and some of that information is available publicly, so I have to be careful about potentially saying something that’s not.

But I would be happy supplementally to point you to what is available publicly that you can look at.

Sameet Sinha from Kaufman Bros.

Going back to your core business – and I know, Russ, you don’t like to look at your business in silos, but that again seemed to have slipped into low single-digit sequential growth.

Could you comment on what happened there?

Sure.

Again, all business areas that we’re focused on did well in Q4 and we continue to feel very good about in Q1.

The reason that we’ve been focusing on the benefit of Marchex as a whole in direct navigation specifically with increased monetization of our own merchant listings, is because when you try and break apart the elements – and I understand why people are trying to look at these components, since each business area has its own opportunities and business model characteristics, but it’s hard to get a super accurate picture.

Because for us, it’s all intercompany revenue and where it gets counted may in some cases make one business area look like it’s growing even faster and one other area look like it may not be growing as strongly.

So to the extent that direct navigation fulfills proprietary merchant listings where the advertiser was brought in through a search engine marketing part of our business, that’s going to benefit direct navigations growth and not necessarily show up in the search engines marketing part.

So that’s why we’re trying to encourage people, not discourage them from doing the analysis you’re describing.

Because it’s an important part of understanding the different components to what we do.

But at the same time, recognize that those aren’t directly correlated to the progress of those businesses.

And it’s why it’s also important to look at progress for Marchex as a whole and at the same time trying to get the context of how our businesses are working together, given their increasing integration, the dynamics of the intercompany revenue and where we recognize it.

So, we can look at the search engine marketing part and know that based on our existing customers’ increased commitment of dollars, new direct relationships, in combination with growth in traffic that Marchex as a whole had a very good quarter and we set the stage for what we think will be a very promising 2006.

And that’s really the best way I could encourage you to look at the different pieces since we increasingly feel very positive about growth opportunities with each.

Sure.

I have two more questions.

You listed your priorities for the next 12 months.

Can you give us a timetable for how many sites you expect to be deployed across your platform over the next 12 months and specifically can you give me a target the point that you made about adding content to your site?

What are some of the steps you’re taking in that direction?

It’s what I would describe as a pincer movement.

There’s two components to it.

One, our universal upgrades, whether that’s at that point the navigational and layout component in conjunction with content that may be relevant to every site we own.

And then the second part of it are individual specific websites and individual specific categories.

And this is something that we do constantly.

We do some product announcements, but a lot of them we just simply don’t do.

But as we continue to make progress and we think that we have milestones that investors really need to know, we will proactively share that.

But just because there haven’t been specific announcements – we’re doing this stuff every day and we’ll continue to do this on a weekly, monthly basis throughout the year and as we feel we have enough data we’ll share more.

Like we did today, with some of the metrics around increased paids using click rates on some of the zip codes.

So, it’ll be an ongoing initiative and one that increasingly we’ll be aggressive about through this year.

Sure.

The final question.

Your gross margins seem to have improved dramatically.

We also heard that on Yahoo’s call that traffic acquisition cost for them was going up.

Can you comment if there was a change in revenue spreads of payouts or any other trends that you saw there?

The trends have been pretty consistent with us in terms of what we saw through the year and what we see happening in 2006.

John touched on it.

High quality third-party distribution is always competitive and if you do a better job you’re going to keep your partners and I think we’ve been doing that.

And on the other side of it, we clearly benefit as a large and increasingly growing traffic owner, because we know that the more traffic you have, the more control you have of your own destiny.

So overall trends feel pretty consistent with what they were and for us we think that creates a pretty ripe environment for this year.

Christa Quarles from Thomas Weisel Partners.

First question is just on the local zip codes, you’ve been adding about 3 million net new UVs a quarter.

I was just wondering if that was a big contributor to the 3 million you had added this quarter?

And as well, as you look into 2006, the guidance, do you expect a big contribution there, i.e. to get to the high end of the range for local zip codes need to contribute well to revenue?

And then I have a couple of other questions.

Thanks.

The increases in terms of overall user base have been pretty diversified.

And so that kind of answers your first question.

The second one, when you look at our initial financial guidance, we’re looking at contributions from a number of areas of our business and so is there kind of one thing in our business that needs to happen to allow us to outperform?

There’s no one specific thing.

We want to execute across all or business areas and we think there are tangible catalysts in each area that will allow us to do that.

And it’s our job to want to do better.

So, that’s not concentrated either in one specific area, zip codes or otherwise.

So then a couple of other questions.

On the sales and marketing line, Mike, you broke out the different pieces.

I was wondering if you could get a little bit more specific, specifically related to first, IndustryBrains?

What sort of percent of sales and marketing revenues should that business be?

And then two, it’s interesting that you’re starting to spend on actual paid search and I was just wondering if you plan to concentrate that among a few of your URLs or if that seems to be a broad-based plan and does that conflict in any way with your agreements with Yahoo with respect to if you buy low-priced queuers and you’ve got high priced queuers on the site, how does that ultimately work?

And then the other question I had was, did you send anything in your URL acquisitions this quarter?

Thanks.

I’ll answer the last parts of the questions and then Mike Arends can answer the first part.

We continue to selectively look at the main acquisitions that are consistent with our overall strategy of generic commercial relevant websites.

In terms of what we’ve been spending in the past, I think it was on the lower end of the range of what we spent before.

On the second part, getting into kind of the components around selective sponsored search for websites, this is an area where there’s no one formula that applies to our business and one we’re learning a lot with the initial testing we’re doing.

But what we’ve been saying for the last year or more is that when you look at the opportunity, we think the combination of elements that can drive revenue growth and incremental profitability are direct type-ins, search engine referrals and selective marketing opportunities and that one of the reasons why we like this business area so much is we had an opportunity to apply effectively our best in class technology and monetization knowledge into effectively a proprietary asset.

And so what we’re finding there is there are certain websites that have characteristics that naturally may gravitate towards different combinations of those three sources but there isn’t necessarily a one site fits all approach to it.

We give the [owe it] [inaudible] example because it’s probably as balanced an example as we could offer, but we see somewhere perhaps doing sponsored search or trying to optimize for search engines doesn’t make any sense and there may be others that naturally are very well suited to try and build them out in a useful way so that search engines index them.

So there isn’t really a one size fits all and today our approach has been doing this in a way that’s strategic, sustainable and appropriate as contribution.

And I’ll hand it over to Mike to answer the first questions in terms of sales and marketing.

I believe the first part of the question related to IndustryBrains specifically.

And if you look historically at IndustryBrains and some of the sales and marketing initiatives and the spend that they’ve had, it’s ranged in 20 to 30% of what their revenue numbers have historically run at.

From our perspective, we continued with some of the growth and the initiatives and the success in the business development areas, to add personnel as well as pay out increased incentive based or commission based payments as well.

Just to follow-up, the thing I cited before was referencing a website statistic on the conversion rates of direct navigation we get the highest.

And everything that we’re focused on is this high quality traffic is the standard.

And being committed to delivering return on investment to our advertisers that compels them to continue working with us, seeing the value we can deliver to them and embracing online as a medium that deserves more and more of their budget.

And so all the initiatives that I described are absolutely consistent with our focus on creating the broadest network with the highest quality traffic to deliver that value to our merchant partners.

Do you think that some of your URLs will try to side into sort of being branded ones such that you’ll be able to drive – they’ll become sort of content players in their own right and that you’ll focus – or is it just going to be the content that you may develop or acquire would be pushed out across all of them as appropriate?

This may be the shortest answer I ever give.

Yes.

This is true.

Okay.

And what did you spend on URL acquisitions in the quarter, is it not too different?

At the low end of the range.

We haven’t disclosed it yet, Christa, but we did disclose some of the EBITDA and operating [inaudible].

It was at the low end.

Stewart Barry from Thinkequity Partners.

Could you update us on the progress of your pay per call product and the opportunity there?

And then secondly, might some of your new product rollouts include display or rich media advertising and in general, have you been able to attract brand advertisers sort of the same way that some of your larger search peers have?

Sure.

I’ll try to address those.

You may have seen our release, I guess it was a couple of months ago, with [Ingenio], that we’re going to be doing some pay per call testing on our sites.

And that’s targeted for March.

We’ll see how those results go.

We may have some more color for you over the next 60 or 90 days.

In terms of graphical ads, I think you’re probably referring to what we’re doing on our direct navigation network, is that the question?

Yes.

So, that again, we’re in the very, very early stages of testing that.

We think there are some opportunities to do some things there on a vertical basis and look at for example, advertisers who may be interested in the finance category, advertisers that may be interested in the electronics category and basically give them the opportunity to get access to those users which we know are high quality.

Bill Morrison from JMP Securities.

You mentioned in the release and on the call, some of the stuff you guys are doing on the SEO side, applying some of the lessons you’ve learned that you’ve been applying to your corporate customers on their websites and have begun applying some of those lessons on your own network and we’ve seen a dramatic increase in some of the rankings where your sites and zip code sites have been coming up in Google in the last three months.

I’m just curious if you could kind of give us an update on where you think you are along the curve and using SEO to drive the zip code portfolio as well as the broader portfolio demands higher on the algorithmic listings at the major search engines?

And specifically, we didn’t see much change on Yahoo and MSN and I’m wondering if you’re putting much of an effort there or if you’re kind of starting on Google and then you’re going to move to the other engines and just how hard it is to do SEO across the different platforms now that you’re dealing with multiple sites and algorithms?

If you’re going to get to the end of it, everything’s hard, nothing’s easy, but when it comes to understanding SEO, I sure as heck hope that we’re as good as anybody on the planet.

And we have the expertise to apply it, again, to our own proprietary assets as you would expect, it’s a pretty logical statement, you’re going to look at where’s the critical mass of market share and prioritize your optimization against those pieces that are largest and potentially most impactful and that’s exactly what we’ve been doing.

When we look at where we are in that process, we’re pleased with the progress in the direct navigation business.

I know a lot of people use sports or baseball metaphors of what inning we’re in.

I really think in that one we’re probably in pregame warm-up to the first inning.

And again, we’ve gotten enough data and we share it selectively, like we did with the zip codes, but we have enough data to, I believe, really validate that there is a significant opportunity in extending our own expertise across broader buckets of domains and in certain cases, to a point of a previous question, very specific individual domains where we think the characteristics of that website, in conjunction with the size of the commercial opportunity in its area of focus merit a lot of attention and increased investment of resource.

To a large degree we’ve determined what we ought to be doing and we’re doing it.

The next steps will be to hopefully get a validation that our assumptions were right and start to harvest those benefits.

But it’s very early in that process as it relates to what we’re doing with SEO.

We’re trying to focus on sites that are relevant to our users and at the same time, inventory that’s commercially valuable to our merchants.

Okay.

A couple of quick follow-ups, Russ.

You also mentioned on the call that during the quarter you monetized a significant percent of your traffic with your own PPC engine enhanced.

I was wondering if you could maybe quantify that a little bit more than just significant?

Is it in the single-digits, is it in the teens and where do you think you can take that as a percent of your traffic over the next year?

We increased that amount.

Again, we didn’t provide a specific percentage and it was with, again, all Marchex advertisers when we look at all the different ways that we acquire advertiser relationships.

And so it was an increasing percentage.

We think that the best customer experience and the best user experience is going to be driven by effectively having a meta feed approach of both content and advertising feeds.

And so this is an area that we believe it makes sense to increasingly be in control of monetizing our own traffic but at the same time for the benefit of relevance and user utility, we think it will always be important to have close relationships with other partners as well, either on a general basis or by vertical.

And so again, this quarter has increased.

It was one of the reasons why direct navigation outperformed so nicely and we’re very pleased to see that.

In the context of specific percentages it’s not something we’ve broken down at this stage.

And one last question for Mike.

Your business is seasonal in some aspects.

Is there any way you could provide a little bit of guidance at least on the top line for the quarterly progression of your revenue guidance?

In terms of 2006, I think we should see more of the same, just in terms of the concepts from a seasonal perspective and we do realize benefit in the latter part of the year, particularly as we get into the retail shopping season, September through December timeframe.

There are benefits that are attributable from internet search traffic from our proprietary traffic as well as just spend from our advertisers online.

So I think that’s the context of how I would put in looking at seasonality in the upcoming year.

And the other part, which we talk about frequently is, our business is really overlaid with two seasonal trends.

Search seasonality and retail seasonality.

And so understanding both of those kind of separately from Marchex’s specific growth initiatives can at least provide some color as to seasonal impacts on our overall business.

Gentlemen, there are no further questions in queue.

Do you have any closing comments you’d like to finish with?

We appreciate everyone’s participation on the call and we look forward to sharing our progress throughout 2006 with you as we progress through the year.

Thanks again.

Thank you, ladies and gentlemen.

This does conclude today’s conference call.

You may disconnect your phone lines at this time and enjoy the rest of your day.

Thank you for your participation.