Marchex Inc (MCHX) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Marchex first quarter earnings conference call. [OPERATOR INSTRUCTIONS] 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 first quarter 2006 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; and Peter Christothoulou, Chief Strategy 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 in 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 statement 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 will also reference certain non-GAAP measures of financial performance and liquidity, including OIBA, adjusted OIBA, adjusted EBITDA, and adjusted non-GAAP EPS. A 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. And 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 three primary topics -- one, a summary of our operational focus during the first quarter and for the remainder of 2006; two, an update on our progress in specific business areas, as well as some recent developments; and, three, a detailed review of our quarterly financial results and a summary of our 2006 financial guidance.

Our first topic is to highlight our operational focus during the first quarter and for the remainder of 2006. Coming off a seasonally strong 2005 fourth quarter, we're pleased with our progress as we continue to execute on the initiatives that are core to our strategy. During the first quarter, we benefited from a number of trends including growth across our proprietary traffic base, as well as growth in our third-party network; an increase of local and national advertiser customers choosing to fulfill their search marketing campaigns through Marchex's proprietary websites and our partner traffic sources; distribution partner relationship wins, as well as extensions of existing relationships; and, lastly, continued cross integration of our direct advertiser relationships across our business areas.

These trends continue to favorably impact our business as a result of product and investment decisions we made months and years ago. Today and throughout the first quarter we continue to make product development decisions that we believe will help ensure that Marchex is well positioned to benefit from the industry macro trends of more users coming online, users transacting more frequently, and advertisers allocating an increasing portion of their overall ad budgets to online marketing and search-based marketing.

Specifically, 2006 is dedicated to four initiatives designed to aggressively grow our business. In no particular order these are our current areas of focus in further investment. Our first initiative is to increase our base of advertisers. Our business is fueled by increasing our advertiser network and increasing the amount each advertiser spends within the network. We add advertisers on a direct basis through Marchex's sales and marketing teams, and on an indirect basis by leveraging partners such as online advertising agencies and local super-aggregators. We believe it is important to keep investing against this initiative by increasing the personnel we have dedicated to advertiser growth.

In the first quarter we continued hiring sales, marketing, and account management personnel who can support our direct and indirect relationships. The market for qualified online sales and marketing professionals, as well as the markets for other positions, have significantly changed in recent months and are becoming increasingly competitive and expensive. As such, we'll adjust our compensation levels as appropriate to address the realities of today's job market, as we must continue to expand our highly-qualified employee base in order to support our growth initiative.

Our second initiative is to invest against the local search opportunity and local technology platform, which we outsource to super-aggregator partners. We have committed to increase the account management, training, and support levels we provide to our partners that use our technology platform. We are big believers in the local advertising opportunity and believe that the growth in the online ad market will be driven by local advertisers and by locally-targeted advertisements.

Industry research indicates that the paid search market will grow approximately 20% per year through 2009, and specifically, that local search revenue will grow at 80% per year through 2009. Therefore, local search should be a major driver of the growth in the overall paid search industry in the next few years. We believe that Marchex is an accelerator within the local search market and is positioned to be a major player in this sector, based on our relationships with large industry-leading aggregator partners and our large and growing base of locally-targeted online traffic.

We believe Marchex is a leader in the local advertising market in terms of the number of local advertisers supported and the number and scale of super-aggregator partners that leverage our technology platform and distribution network. For example, today we have thousands of local advertisers who leverage Marchex's technology to connect to our proprietary traffic and to our third-party network, which include such traffic sources as Google and Yahoo!. Our network of super-aggregator partners who push their advertisers into our system, including YellowPages.com, AT&T, BellSouth, the Houston Chronicle, and LM Berry have a combined direct sales force of more than 3,000 representatives selling search marketing services to, potentially, millions of local merchants.

In order to maximize this opportunity, it is critical that we continue to -- one, innovate for these partners to provide them with additional selling opportunities, such as the ability to include pay-per-call packages, which may also increase the sales volumes of this channel; two, continue to invest in the scalability and flexibility of the platform so it can handle the addition of a significant volume of new advertiser accounts; and three, leverage our expertise, abilities, and track record to increase our partner base in order to maintain a leadership position as this local market expands.

We also believe it is important to keep resourcing against our local initiatives by increasing our personnel dedicated to this channel. We have hired and are continuing to hire employees who can focus on our local technology products and on extending our leadership position in this emerging market.

Our third initiative is to work diligently to increase our proprietary traffic levels. Today, with more than 28 million unique monthly visitors for the month of March 2006 according to internal estimates, and excluding the recently-acquired AreaConnect assets, we are building a meaningful online footprint with millions of monthly unique visitors visiting our vertically and locally targeted websites. While we believe that more than 28 million monthly visitors represents critical mass and is a level few companies in our industry have attained, we would characterize our website as being in the developmental stage. And we'll feel strongly that current traffic levels represent a starting point in terms of where Marchex can potentially take this opportunity.

We are methodically executing on our plan to upgrade each of our more than 200,000 websites by the end of this year, while concurrently implementing our product strategy and across select vertical categories and across select websites within those categories. Furthermore, the model by which we drive revenue on certain websites may change with future product introductions and technology integrations.

Our focus is to continue hiring technical resources to support these testing and developmental phases while we focus on building deeper websites to create an increasingly rich user experience. Additionally, we may also continue to acquire assets that add to our local traffic footprint, similar to the recent AreaConnect asset acquisition. As we have all of our websites, we believe that we have the opportunity to create highly useful and targeted sites, particularly as it relates to vertical and local search, which is a key part of Marchex's product road map.

Building a strong proprietary network has always been a goal of Marchex ever since we founded the Company. We know that high-quality, owned-and-operated traffic offers a key point of strength and differentiation for Marchex, and we fully intend to grow this traffic methodically as we move forward.

And our fourth initiative of 2006 is to continue to develop a third-party traffic network that provides advertisers with competitive returns on their advertising dollars. Having access to a critical mass of high-quality, targeted traffic is very important, as one of Marchex's value proposition is that we provide advertisers with access to a very wide spectrum of distribution points to reach qualified customers.

Over the past month, we have continued to grow our base of premium vertical publishers through adding partners like ECT Networks, one of the largest e-business and technology news publishers in the United States, and while renewing high-quality partners such as BusinessWeek and The Motley Fool. The market for these relationships has been, and we expect will continue to be, highly competitive as each publisher is pursued by several potential providers.

The reality is that there's an increasing number of companies vying for a limited universe of quality distribution for their advertisers. As you all know, this has come about due to an increasingly hot market. In some cases, certain providers have offered very aggressive revenue sharing arrangements that we believe potentially lead to operating losses on a per-partner basis for those providers. I'm pleased to say that to date, in the renewal discussions we've had with most of our vertical premium publishers, we have maintained our relationship, due to the flexibility of our product solution, which also monetizes at rates that typically exceed the industry or vertical average, while maintaining a high service level that creates customer loyalty.

We believe it is important to defend our relationships and continue to cultivate new ones. As such, we will be aggressive in maintaining and pursuing high-quality distribution sources for our advertisers, which could potentially result in slightly increased distribution costs over time.

Now I'd like to touch on the second topic of today's call, an update on our progress in specific business areas, as well as some recent developments. I'd like to start with our proprietary traffic from our vertical and local websites. According to internal logs and excluding traffic related to our recent AreaConnect asset acquisition, our proprietary traffic base grew to more than 28 million unique visitors in March 2006, up from more than 27 million in December 2005. The growth this quarter was due to two factors -- one, seasonal traffic trends; and, two, product enhancements at certain websites, coupled with selective marketing as part of our broader testing and branding initiatives.

In looking at the first factor, the first quarter has historically been the second strongest quarter behind the fourth quarter in terms of user traffic. In our experience, following a seasonally high fourth quarter, we have seen traffic levels stay consistent to modestly increased for the first two months of the following year, as users return from holiday vacations. The second and third quarters, and specifically the months from May through August, tend to be the slowest periods for Internet traffic, as consumers tend to take advantage of the summer months. We believe that as our network continues to evolve, we will be subject to seasonal trends in consumer Internet usage, as well as online ad spending.

In looking at the second factor, in recent months we have made some progress on product enhancements to certain websites, coupled with selective marketing as part of our broader testing and branding initiatives. During the past few months, we began preliminary testing of an upgraded user interface across four verticals, including finance, travel, shopping, and home and garden, which comprised more than 30,000 websites. We have not opened these sites for algorithmic search crawlers yet, as we are testing a variety of interfaces and potential integrations with new content partners to test their impact on user behavior before opening them up to a broader audience.

We are pleased to see that the early data suggests that modest improvements to many of the websites may potentially improve overall monetization. In the coming quarters, we will continue to make progress toward our 2006 goal of upgrading every one of our more than 200,000 websites. As such, in the coming quarters, we will launch several new vertical category interfaces, as well as look to add relevant content to our enhanced interfaces through new business development relationships.

During the first quarter we also applied our search bargaining expertise to test user responses to various new product enhancements, and also to test the impact of sponsored search on driving customer acquisitions for certain high-impact sites in our network, such as Yellow.com. Broadly speaking, we continue to test a variety of strategies around identifying and marketing select websites.

We believe a rich, well-rounded website receives diversified traffic through many sources, including direct type-ins, algorithmic traffic from search engines, and selected marketing. These sources of traffic can profitably contribute to the operating profile and to the recurring usage of any website in our view, and are necessary components of building a significant footprint for certain of our websites. We will continue to update you on our progress, as we remain in active-development mode on additional categories of websites as well as specific premium sites.

As many of you have seen, last week we announced our AreaConnect asset acquisition, a provider of local online traffic to yellow and white page publishers. The AreaConnect assets are unique in the local search landscape, both in their scale and the character of their user base. AreaConnect provides Marchex with more than 1 million incremental, unduplicated, locally-targeted, unique visitors. With AreaConnect, we believe Marchex owns one of the most significant locally-trafficked online networks. In addition, AreaConnect provides deep, locally-focused content, which integrates well with tens of thousands of our locally-focused websites.

We believe that there are several opportunities to evolve our local websites, including AreaConnect, to create a rich, local search experience that retains users, while providing new monetization opportunities that are unique to Marchex. Throughout the remainder of the year, we are focused on building deeper, locally-targeted websites and have begun to invest and test against that vision.

I'd now like to pass the call to John Keister, our President and Chief Operating Officer, to discuss our local business and our search marketing and monetization platform progress.

Thanks, Russ. In looking at our progress within the local sector, we continue to build a leadership position in enabling super-aggregators and merchants to sell search marketing packages to their customers; for example, yellow page advertisers and the newspaper classified advertisers. In the first quarter, we announced a new customer win with The Berry Company, a leader and innovator in the yellow pages industry, responsible for advertising sales into more than 800 directory titles nationwide and serving more than 1 million advertisers.

Our local platform continues to provide a unique product offering for super-aggregators looking to sell search marketing campaigns to their base of local merchant partners. While we are still investing heavily in our local platform and in resources supporting this platform, we believe that our super-aggregator partners are gaining traction in pushing the adoption of search marketing packages for local merchants.

As mentioned previously, the growth of the local market is validated by third-party projections and is evidenced by increasing focus at industry conferences and by the increased investment from the largest companies in our industry. Marchex is positioned to benefit from this growth, as we believe we are one of the very few Companies that has built the tools and processes necessary to deliver high value, high quality, local advertising campaigns at scale on a consistent basis. We have found that most companies working on creating and fulfilling local advertiser campaigns have struggled with consistent quality and fulfillment at scale. Other providers have also struggled with their interactions and processes in shipping campaigns to large search engines, which we believe is due to a heavily reliance on manual processes.

Marchex's local platform benefits from the experience we have in supporting large, sophisticated advertisers who have hundreds of thousands of product SKUs and complex search marketing needs. By virtue of this experience, Marchex has invested and will continue to invest in a sophisticated, automated system that, while more expensive to build, positions us much better for long-term growth and customer satisfaction. Over the course of the year, we will continue to update you on our progress as momentum continues to build in our local business.

Now I will turn to our search marketing businesses, where we continue to win new, valuable, vertical distribution relationships which augment our third-party network or partner traffic sources, as well as maintain and deepen our relationships with existing vertical partners. For example, we recently had several announcements, including the previously-noted contextual distribution partnership with ECT, a renewal of our exclusive distribution relationship with The Motley Fool, and an extension and deeper contextual integration of partnership with USATODAY. These wins, combined with the large base of vertical publishers which we have added over the past two years, provide our merchant advertisers with traffic from a broad and diverse network, which we believe produces a compelling value proposition for advertisers looking for value in an increasingly competitive online marketplace.

We continue to focus in the short term and medium term on building Marchex's third-party network of traffic by adding new, valuable, vertical market distribution partners and integrating each partner, so that over time all of the advertisers in our system can have access to any appropriate partners. Building this capability is part of our product road map and is also a source of some of our most significant investments. Once complete, Marchex will incrementally offer merchants the ability to purchase multiple distribution sources on a self-serve basis including vertically- or locally-targeted distribution, our own network of vertical and local websites, site- or page-specific distribution on particular publishers, or a broad network such as search engines or shopping engines.

At this time, I'd like to hand the call over to our Chief Financial Officer, Mike Arends, to discuss our third topic for the call today, our quarterly financial results and a summary of our 2006 financial guidance.

Thank you, John. Our first quarter represented continued progress, despite fact that we are investing heavily to capitalize on several of the opportunities that exist in our business. During the first quarter, Marchex recorded revenue of $31.1 million, a 69% increase over our year-ago results of $18.4 million. Total operating costs, excluding stock-based compensation, amortization of intangible assets for the first quarter of 2006, were $22.8 million. In the year-ago period, total operating costs, excluding the previously-mentioned items, were 14.2 million.

In looking at the mix in operating cost for the first quarter, our service cost, excluding stock-based compensation, decreased as a percentage of revenue on a year-over-year basis, largely due to an increase in revenue coming from proprietary traffic sources.

The increase in sales and marketing cost for the quarter were largely due to increased personnel costs, the integration of IndustryBrains as compared to the previous year, and marketing of proprietary websites, such as Yellow.com, as we test and implement a variety of strategies to market a limited number of properties within our network. Other operating costs included additional investment in sales personnel, product development, as well as increased technology infrastructure costs and certain costs related to being a public Company compared to last year.

Adjusted operating income before amortization for the first quarter was $8.3 million, or a margin of 27%, which represented a 98% increase over the $4.2 million, or a 23% margin in the year-ago period. Adjusted earnings before interest, income taxes, depreciation, amortization, stock-based compensation expense, and gains or losses on the sales of intangible assets, or adjusted EBITDA, for the first quarter was $9.6 million, which represented a 102% increase over $4.7 million in the comparable period last year.

Adjusted operating income before amortization and adjusted EBITDA are two of the principle 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 non-recurring charges.

One item of note, beginning in the first quarter of 2006, due to recent accounting rule changes we, like all other public companies, began to recognize increased stock compensation charges as a non-cash expense that will impact our GAAP results. Stock-based compensation expense for the first quarter was $3.5 million. The first quarter 2006 results also included an after-tax gain of $151,000, as a cumulative effect of change in accounting principle associated with Marchex's adoption of the new rules regarding option expensing.

In addition, during the quarter we recorded a one time charge of approximately $970,000 recorded as convertible preferred stock dividends and conversion payment associated with the conversion of approximately 81,000 shares of the Company's preferred stock into approximately 825,000 shares of Class B common stock.

GAAP net loss applicable to common stockholders for the quarter was $1.2 million, or $0.03 per share, compared to net income of $388,000, or $0.01 per share in the first quarter in 2005. Going forward, our GAAP results may be impacted by a number of factors, including stock-based compensation charges, increased amortization costs associated with our acquisitions, other potential future acquisitions, our preferred stock dividends, and increased public company costs, which will also impact our adjusted operating income before amortization and adjusted EBITDA result.

Adjusted non-GAAP earnings per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.09 per share for the first quarter. Adjusted non-GAAP EPS represents adjusted net income, divided by weighted average fully-diluted shares outstanding for adjusted non-GAAP EPS 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, cumulative effect of changes in accounting principles, gain or loss on the sale of intangible assets, and other income or expense.

Turning to the balance sheet. We had approximately $72.5 million cash on hand as of March 31st, 2006. During the first quarter, we continued to generate significant cash flow from our operations, despite the fact that we used our cash to invest in certain initiatives we believe will strengthen our position within direct navigation and local search marketing, as well as to convert a portion of preferred equity instrument.

It's important to note that we do expect timing differences on working capital to impact our cash balance in perspective quarters. For example, tax installments will impact us more significantly compared to the first quarter as part of our regular tax payment schedule. In addition, going forward, we anticipate that we will use our cash to continue investing in long-term growth initiatives, including internal product development and sales initiatives and selected acquisition opportunities, including our recent AreaConnect asset acquisition.

I would now like to discuss our outlook for 2006. We continue to invest significant resources in product development initiatives and integrations, as well as in strategic initiatives like AreaConnect that are designed to continue building momentum across our business and, specifically, in the local channel. Given our product progress to date, we believe some of these investments will begin to pay off this year, and, in particular, in the second half of the year. As such, we are raising our guidance for 2006.

For the year, we are now anticipating revenue in the range of $130 million to $134 million. For adjusted operating income before amortization, we are now anticipating a range of $34 million to $38 million, as we will invest in integrating and building the newly-acquired AreaConnect properties and in other initiatives designed to continue our product progress across all areas of our business. We believe some of our recent strategic investment of adding costs by growing our employee base in the product development and sales areas will factor into our short-term cost structure, although this is already factored into the increased financial guidance we are providing as of today for higher revenue levels and also higher operating income before amortization levels for 2006 as a whole.

I'd note, however, that we believe these investments will be recouped over time, and we are, therefore, maintaining our long-term target for adjusted operating income before amortization margins of 30% or more.

To summarize our progress, our results in the first quarter were driven by investment decisions we made in 2004 and 2005. Today, our 2006 guidance highlights our commitment to further investment against our opportunities to position Marchex for long-term growth. We remain focused on our goals and will continue to invest against the people and technology that will position us to succeed in various business areas.

I'd now like to hand the call back over to Russ.

Thanks, Mike. These are exciting times. The industry is expanding rapidly, and we see dozens, if not hundreds, of new players coming to the search category each year. The Interactive Advertising Bureau tells us that paid search grew from 1% of online advertiser budgets in 2000 to 40% of advertiser budgets in the first half of 2005. As advertisers move major portions of their budget from display ads or other forms of advertising into paid search, this sector becomes more and more competitive. At Marchex we have a group of people that enjoy the challenge of growing and driving more value for our customers each and every year.

Marchex will continue to work aggressively and methodically to build our Company into a leader with growth rates and profitability margins that are at the upper end of the industry, while also supporting our increased investment in existing and future opportunities. Since our inception three short years ago, we believe we have made a series of product and strategic decisions that have positioned Marchex for long-term expansion.

We believe Marchex is in as strong a position as ever to extend our industry position. We remain intent on delivering strong financial performance every year, while continuing to make the right investment decisions to ensure Marchex's next three years are as successful as our first three. 2006 is promising to be our busiest year yet, and we are excited to continue sharing our progress with you as we build momentum throughout this year.

I'd like to take a moment to thank our employees for the incredibly hard work they've exhibited in our first three years. And we all look forward to working diligently and collaboratively against our plan of expansion in the quarters and years ahead.

At this time, Operator, we'd like to give the call back to you to take questions from the audience.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Christa Quarles. Please announce your affiliation, then pose your question.

Sure. It's Thomas Weisel Partners. The first question I have for you guys is, there's a couple of other competitors that are sort of starting to emerge in the space, either [Internet Read] or [Yesteract]. I was just wondering -- and they kind of have a little bit of different take on the business in that they maintain a business in domain name trading. I was just wondering if you could expound upon, sort of, where you think the difficulties of this business are, i.e. as it relates to the distribution of content across all of the sites?

And, then the second question I have is just on the marketing and proprietary websites. You indicated that you were continuing to do that with Yellow.com. And I was just wondering if you could give us some order of magnitude as to how much that was in the quarter? Thanks, guys.

This is Russ. On the first question, yes, look, we look at the category and we see how it's changed over the last year plus since we came into these markets and helped people start to understand the magnitude of the opportunity in the direct navigation space. When we look at a few other competitors -- and we knew, kind of, our success in highlighting the opportunity inevitably would bring additional committed capital and other folks who try and emulate some of the things that we did. But, that's always the nature of all markets -- one company's success is a rod map for others.

There are a couple of things that I think are actually pretty interesting. One, we've been at this for well over a year now in terms of creating the infrastructure to support a real product road map in the context of adding utility across our vertically- and locally-focused areas. And it's a non-trivial effort and it requires a large investment, and in the context of a public setting, we really have the greatest scale. And, so, those guys are just getting started with it, and time will tell, but we like our position and we like where we are in the context of our product road map for the rest of '06.

The other part is they're also in the business of selling domains, and that's part of their P&L and their revenue stream. And, for us, that's not part of our profile. We do periodically sell domains that aren't strategic, but we don't recognize that as revenue, because we just don't think that that's a suitable thing based on our product strategy and our long-term focus on recurring revenue streams. So we do think it's apples and oranges.

As a public Company, we're trying to provide as much insight into that process as possible. As young, private companies, we wish them well in tackling these markets, but we're pleased with where we are, and the last year plus we've been able to build infrastructure to support this. And seeing them just get started with that, we think they'll have some interesting challenges and opportunities ahead.

On the second front, as we've noted, from our entry into this business more than a year ago, we see the opportunity to take the technologies and services we provide to third parties and apply those to our own properties as a means to extend those and selectively grow the user bases and incrementally add profitable revenue. And that's something we'll continue to do on a selected basis where we think the properties make sense and are suitable for that type of application.

And, then, we'll also use selective marking to test enhanced templates or enhance interfaces so we can validate the utility and validate user behavior based on those changes. With where we are, we think that the levels we're spending in this area are kind of at the levels that we need, and we don't necessarily see that expanding from here at this point.

And just a quick follow up on that. Did you guys say how much IndustryBrains was in terms of driving revenue on your own properties, or, alternatively, I guess, if you say what percentage Yahoo! was of the total?

Yes, we've not broken that out as part of today's in terms of inter-company contributions. And we're just getting started with IndustryBrains listings in recent periods. And, so it has increased, but it's not a separate number that we've provided so far.

Okay, thanks.

Thank you.

Next question is coming from Jordan Rohan. Please announce your affiliation, then pose your question.

Sure, it's Jordan Rohan from RBC Capital Markets. Russell, you told some people, including myself, that you'd be adding some disclosure to your P&L on EBITDA margins by segment. I don't notice any of that today in today's release. A few questions about that. Why no improvement in disclosure? Second, should we assume that the margins on the revenue attributable to the proprietary traffic sources continue to go down as you invest? Third, will the acquisition that you just announced a few days ago lead to further contraction in those margins? I guess, a separate final question is -- Can you talk about Yahoo!'s improvement in search monetization? The plans that they've announced have been widely reported today. And could that potentially be a help to margins in the future? Thank you.

Hopefully I digested all those questions in a proper order. Yes, first off, we have been not been specific regarding which additional metrics we would provide, but we have said, as I've said to you and others, that we do look forward to providing more metrics as we go forward and we believe they're metrics that we can live with for the long term. And, so, that's something we're omitted to doing as we have the opportunities to. And we'd like to see some progress in additional metrics this year. We just don't want to be schizophrenic with metrics, so we want to be comfortable that when we provide them, we're prepared to live with them.

Second, when we look at the increased investment we're making in our business areas, there are a couple of things. A lot of folks who are close to the industry, and you're probably as close as anyone, Jordan, see an emerging arms race as companies like Google are spending 1.5 billion on CapEx and hiring 1,000 employees per quarter. Now, clearly, we're not making that kind of investment. But we're focused on leadership positions in what are $1-billion-plus markets. And we do think it's the right time to incrementally be investing in these areas because we see momentum building in our business, and we see opportunities to capture more of it. And, so if we can scale our business on the top line, and incrementally take some of that and invest it back in to hopefully see accelerating growth rates in go forward periods, we do think that makes sense. And, so when you look at incremental margins across our business, we are factoring in taking some of that growth and reinvesting it in the business. And that's reflected in the guidance updates we gave today.

And the last question in terms of the Yahoo! press release is we have not factored in a list from Yahoo! monetization technologies into our guidance. And over time, we have seen product enhancements, some of which, some folks might have thought would increase monetization. And sometimes they have, and sometimes they haven't. And, so, we're taking a wait-and-see attitude. And to the extent that they can increase monetization, no one will be happier to see that than us.

Thank you, very much.

Thank you.

Your next question is coming from Clay Moran. Please announce your affiliation and pose your question.

Yes, thanks. Stanford Group. A few questions. Can you talk a little bit about same-site traffic growth year over year across the direct navigation sites if possible? Also, can you talk a little bit about the year-over-year monetization rates and have you made gains in that regard and what the trends are, I guess, for both of those metrics?

Secondly, I understand AreaConnect has -- and the synergies there in terms of distributing ads. Are there any synergies there in driving traffic to the other local sites like the zip code sites? And could you possibly at some point be creating or turning that site into a destination site whereby you'll drive traffic there and then out to the other sites you've developed?

Lastly, on the guidance, you've raised the guidance based on expectations of a little bit more strength in the second half. Is there any data that you've seen that supports that? I mean, what has caused you to increase the revenues a little bit? Is there some data from the initial release of the zip code sites that's causing that? Or what is driving that? Thanks.

Thanks. Let me -- if I miss any of these, let me know, but, first off, the same -- kind of same-store sales metrics is not one we've provided yet. What I will tell you is I do think it's a good question and one to note, and one that we think will be important, kind of, on a go-forward basis. So, while we're not offering specific numbers, I can tell you same-store sales were favorable.

At the same time in the context of monetization, again, we do a lot of testing with 200,000 plus sites. You can see some variance, but, overall, also favorable. When you look at your specific questions on AreaConnect and are there opportunities to leverage it as part of our zip codes and other locally-focused websites? The answer is absolutely.

When you asked the question about possibly creating a destination in the local space, it's a good question. The answer is we are focused on that. And we think the local search opportunity overall, of course, is a significant one, when you potentially look at growth rates for that subsector of search being four times the rate of overall paid search, generally. And when you look at the mix of our assets, clearly we're committing capital and incremental investment to being leaders in local search, both in terms of the outsourced platform and having one of the largest networks of specific, locally-targeted traffic online. So, having a destination or having destinations on that area are on our product road map.

And, then, when you look at our guidance for the back half of the year, again, we have a little more visibility in terms of where our opportunities are and the run rates of our business. And based on what's in the pipeline, and things impacting our business, it made us comfortable taking the numbers up. And we know the landscape has been kind of a mixed bag for a lot of folks, but right now we feel pretty positive about it.

Okay. I think you got them all, Russ, thanks.

Thanks.

The next question is coming from Safa Rashtchy. Please announce your affiliation, then pose your question.

Yes, hi. This is Nat Schindler calling in for Safa Rashtchy. Piper Jaffray. Two quick questions, one on AreaConnect. Can you go in a little more in depth into the financial impact of that deal and how that's affecting the rest the of the year outlook? Additionally, if you could give us a little more color on the rollout of your area code websites and how that is progressing?

Well, yes, with AreaConnect, when we announced the asset acquisition last week, we said that in 2005 they did about 1.2 million -- 1.2 million or more in revenue and that for the stub period, for the balance of '06, we expected 1 million or more of incremental revenue contribution from AreaConnect. And that we would look to take whatever operating income they had and largely reinvest it, given our priority focus on building out our local traffic network. And so those are the metrics we provided around AreaConnect.

In terms of our zip codes, we are focused on the next version of that, as most folks know. We had a beta version that we implemented some months back. Last quarter, we provided metrics about the traffic growth and monetization increases of those as part of our five-month test. Those have continued to perform well. And, right now, we're focused on enhanced integrations that can allow us to hopefully grow that part of our direct navigation business even more.

Great, thank you.

Thanks.

Next question is from Steward Barry. Please announce your affiliation, then pose your question.

Hi. It's Stewart Barry with ThinkEquity. Could you talk a little bit about your bid management -- the local search bid management technology and, kind of, the growth and breadth of advertisers -- local advertisers using that product?

Sure. John Keister is going to step in to give you guys -- to mix it up a little bit for you.

Excellent.

So, in the local space, as many of you know, we got into this business a year-and-a-half ago and really used a lot of the background that we had in servicing some of our larger customers on the traffic-leader side, such as Office Depot, REI, Nordstrom. And where we are now is, we've been able to really focus on scalability, because when we're working with our large super-aggregators, they've got access to millions of merchants and they're shipping us thousands and thousands of advertisers. And it's critical that, for us, we can keep up with the growth and with the periodic sales force focus that they give on, perhaps, a monthly or quarterly basis where they're really pushing the search product. We've got to be able to handle the growth as it comes from our local super-aggregators.

The bid management product itself, I mean, as many of you know, there's a lot of bid management providers that are out there. But in terms of being able to handle thousands and eventually tens of thousands of merchants in the local space and manage campaigns that are sometimes quite small, up to campaigns that are very large, it's a very difficult proposition to be able to manage keyword strings that are effective for lots of different local merchants and be able to fulfill those campaigns on a very consistent basis.

So that's really where, in our case, we've been able to differentiate ourselves is, we've got a system that scales. We've got a good system of fulfillment. And we also have the people behind it to make sure the quality control is there month after month, so that our aggregators are pleased with the consistent fulfillment that we driver.

And, the one other point where our product is differentiated in the marketplace is, again, being one of the first to implement this just gave us a window of opportunity that we're investing against and are super excited about. But the other thing that Marchex can do that a variety of these other players, particularly bid management folks who are trying to extend that platform, perhaps into the local space, is a lot of these super-aggregators want to fulfill these campaigns through Google, Yahoo!, or Marchex's network, but ultimately, they also want to include their own websites as distribution modules.

And because Marchex has the ability to turn their site into its own destination or its own distribution module, it's just another differentiator for us. So we're just continuing to listen to our customers, understand their needs, and invest against that opportunity, because we think it's an opportunity in its own right, and at the same time, it offers tremendous ecosystem benefits for Marchex overall.

Russ, to what degree do you think the domain names will kind of resemble, I guess, the ideals of Web 2.0 in terms of user generation -- user-generated content, community, video, and so on? I mean, is that sort of a goal in terms of the content of the domain names?

Yes, I'll share with you, kind of, something that we internally talked about here, which is, when we looked at the, kind of, what's called the domain market, and we clearly don't focus on these as domains, we focus them as vertical and locally-focused websites. But coming into this, a lot of folks are familiar with that graphical image, the evolution of man, where you've got, kind of cave man hunched over and he evolved to upright and well groomed.

Yes.

And we look at the domain space very similarly. And we're out there. It isn't going to take 200 million years, but again, we look at these and we see opportunities for deep, integrated, highly-useful vertical and locally-focused sites. And that's what we're investing against and that's what we're excited about each day we come to work, is just making that product a reality. And each day, each week, each month, we're making progress against that vision. And for a lot of folks, including yourself, who have been believers in what we've been doing, we just want to continue to demonstrate as much progress against that as we possibly can.

Great. Thanks a lot.

Your next question is coming from William Morrison. Please announce your affiliation, then pose your question.

Hi. It's Bill Morrison from JMP Securities. Russ, I was wondering if you could -- I'm not sure you can do this or not, but maybe you can give us some sense, if you look at the 28 million users in March, give us a sense of where they are coming from. Are they coming from direct navigation typing the -- one of your couple hundred thousand URLs into this -- into the URL box? What percent are coming from your algorithmic SEO activities? And, then, what percent are coming from SEM spend driving traffic to those domains?

And, then, a second question, I was wondering if you could just give us a sense, and if I missed this, I'm sorry, I've gotten kicked out of the call a couple of times on my cell phone. But if you could let us know what, roughly, the IndustryBrains contribution was in the quarter from a revenue perspective so we could get a sense of the size of your core marketing services business in the quarter? Thanks.

So, again, first off, I don't believe that we have broken out IndustryBrains as part of today's communication. In the context of traffic sources to our direct navigation network, we haven't provided specific breakdowns of, kind of, referring links or referring traffic sources. That being said, what we've said in the past is pretty much the same today as it was then, which is vast group or majority of our traffic are people typing it in. And we have seen growth through search engine referrals and some selective marking. But the vast group or majority of it today comes by the same means it did a year ago.

And as we've talked about in the past, when we look at direct navigation, we see opportunities for growth through macro growth in search, where it historically grows at similar rates, and also through the product enhancements that we continue to make. And those continue to be the primary drivers. And that at least gives you a flavor for the mix.

Great, thanks.

Thanks.

Your next question is coming from Sameet Sinha. Please announce your affiliation, then pose your question.

Hi, yes. Good evening. It's Sameet Sinha from Kaufman Brothers. Three questions for you. Can you -- you've spoken about the direct advertiser relationships. Can you talk about what percentage of your revenues comes from these direct relationships? And, also if you can shed some light on the trend there, how it's trended over the last couple of quarters? That's the first question.

Secondly, can you talk about the progress at YellowPages.com and other such super-aggregator relationships? What's the order of magnitude? What are the margin in this business? I think it's been a few quarters, so maybe you have initial parts on them.

Next question is on your hiring. Obviously, you've done significant hiring in this quarter and plan to continue doing so. Can you give us a sense -- in sales and marketing side, specifically, how long does it take for an average salesperson to ramp up to, like, an average volume and -- yes, so, those -- these three?

I'm sorry. Can you just repeat that last one really quickly?

The sales and marketing, the hiring that you'll be doing in your sales and marketing.

Yes.

Can you talk about how long does it take for these sales and marketing professionals to ramp up on their quotas and how quickly they reach some sort of an average productivity?

Sure. So, I'm starting with the last one. When we add folks, clearly, there is some ramp time. And in the course of our guidance, we talked about adding a lot of folks and incrementally taking that expense in the short term. Although, in the course of our year, we raise guidance and that factors in what we're looking at in terms of increased expense. But, yes, from a timing perspective that is a factor. In terms of what that means, a lot of it comes down to the individual and their relationship, but you can see anywhere from 30 to 120 days is a typical ramp time amongst new folks coming on board.

In looking at the direct advertiser relationships, direct advertisers represent a majority of Marchex's revenue. It's not a specific number we provided, but we can tell you that a majority of the revenue does come from those direct relationships. And I believe there was one other question you had?

Yes, this was regarding your progress of relating super-aggregator relationships, like Yellow Pages. What's the order of magnitude? And what's the margin characteristics of that business?

So, it -- this is an area that we haven't provided specific numbers. But what I can tell you is, while I can't offer you specific data today, that is one of the areas when we've talked about having some expanded metrics that we would like to be able to do that. Clearly, we need to do that in a manner that our partners are comfortable in terms of providing some additional transparency into their businesses. But those are metrics we'd like to share and are working with them to be able to hopefully do that in the go-forward periods.

Okay, thank you.

Thank you.

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Just in terms of a final comment in closing the call. The main thing is, is we're happy to see the business performing well. We're happy to see opportunities in areas where, perhaps, we could see some acceleration of growth. At the same time, we really feel we're investing in the right areas when we look at what we think are huge markets, and Marchex being in a unique position to be able to extend our position in some of these core markets. So, we're at a point where we think we have a unique and exciting opportunity, and the Company is very focused and aligned in terms of our priorities to execute and make that a reality.

And we continue to thank you all for your support in helping us accomplish this mission. And 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.