Marchex Inc (MCHX) 2006 Q3 法說會逐字稿

Welcome to the Marchex Third Quarter Earnings Conference Call. [Operator Instructions] Ethan Caldwell - sir, the floor is yours.

Thank you.

Good afternoon, everyone, and welcome to Marchex's Third 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, 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 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 they 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'll cover several items, including our operational and financial progress for the third quarter, selected trends we're seeing in the current quarter, investments we're making in our business, and our expectation for how those investments will play into our future outlook.

Most of you have probably read our earnings press release that includes the results of our quarter, so I'd like to start by providing some context and discuss our highlights for the third quarter, as well as our forward outlook.

One, we saw an increase in certain metrics, which drove an increase in revenue attributable to proprietary traffic sources to $12.3 million, our strongest quarter to date and up 58% over last year.

Two, we saw a sequential increase in revenue per click rates from proprietary advertisers, accessing proprietary traffic, of more than 10% over the second quarter of 2006, which is a continuation of the growth we saw in the second quarter.

Three, we saw increases in monetization per use from proprietary traffic sources.

Four, we continue to win third-party distribution relationships with leading online publishers, such TheStreet.com and others.

And five, we made substantial progress with our search platform, including continuing to substantially grow traffic and revenue with Open List integrations, and expanding our category index to include more than 15 million business listings and related pieces of content, covering more than 20,000 categories, which is up from approximately one million business listings and three categories when we acquired Open List in May, 2006.

In light of a market that has been challenging in certain ways over the past few months, we believe we are making very good progress with respect to developing and launching products that will fuel future growth, winning new distribution relationships, and further monetizing our own sites with our own direct advertiser listings.

In Q3, this progress translated into a revenue increase of more than 26% over the prior-year period, and Q3 EBITDA margins of 32%, a metric that few companies online have been able to attain.

Simply put, we feel very good about our business, our recent product progress, and the parts of our business where we have more direct control.

We believe that it's important to be forward-thinking and concentrate in our long-term goal, to build a strong and highly relevant base of traffic that can be monetized with our own direct advertiser relationships, as well as our partners' advertisers.

We will grow this space of traffic by three primary means.

One, integrating Open List content and search functionality on the vast majority of our websites, so that as many of these sites as possible are true destinations within their respective categories.

Two, position Open List as a destination for consumers looking to research and find information on any commercial category, such as travel, auto, employment, professional services, and thousands of other categories and sub categories.

And three, in addition to organic traffic increases, continue building traffic to our website network through selective marketing, partnerships, and acquisitions.

We are still a relatively young company and we think it's important to take a long-term approach to our business and continue to make decisions and investments in our company that will provide growth and stability as we move into 2007 and beyond.

Looking back over the last couple of years, we've grown Marchex significantly while realizing margins that few companies in our industry have achieved.

We have also gone from effectively no proprietary traffic to more than 28 million unique monthly users over the last two years.

We intend to extend our current strategy, drive these metrics higher, and continue to scale our business meaningfully in coming periods.

Now, to provide an update on our operational progress during the third quarter, and discuss our focus through the end of the year and into 2007.

Starting with proprietary traffic, according to internal logs, our websites were accessed by approximately 28 million unique visitors in September of 2006.

With the exception of certain verticals, such as finance and real estate, traffic trends for the third quarter were generally consistent with normal seasonal trends we've seen in prior-year periods.

As we've stated before, Open List is an important component to our proprietary traffic strategy, and Marchex's strategy overall.

Our intent over the next several years is to invest significantly in our search technology and to leverage that technology to encourage repeat usage and increased proprietary traffic.

As highlighted in today's press release, one of our main goals is to connect millions of consumers online to personally relevant information, products, and services through our websites, including our network of local vertical websites and OpenList.com.

As has been previously communicated, we believe that it's critical for the long-term strength and growth of our website network that we integrate dynamic content to an increased utility to drive user acquisition and user retention.

The advancements we have made with the Open List product in the last few months have set the stage for us to achieve these goals.

We plan on accomplishing this by using our search technology to first aggregate vertical and local micro content from across the web, and second, to provide a unique, compelling, and efficient user experience on all of our websites through highly targeted and refineable results.

We have always intended to build out additional verticals beyond travel, and the work that our product development organization has done in the last few months and years has proven that our technology is very flexible and scaleable.

When Marchex acquired Open List in May, 2006, the technology and service consisted of approximately one million listings and related pieces of content that were focused solely on the travel categories, including hotels and restaurants.

Our vision was that we would add dozens of categories over the next year, to both add content to our network of websites and add to the relevancy of Open List as a destination site.

As most of our websites relate to specific locations and business categories, it made sense to build out such business categories as a next step.

To be more specific, today we announced we have developed an expanded version of Open List that now consists of relevant and searchable content that covers more than 20,000 additional business categories and includes more than 15 million listings and related pieces of content.

While this data is not yet incorporated on OpenList.com, today we announced that we have deployed this expanded platform and content to more than 50 of our category and local vertical websites, including Remodeling.com, Locksmith.com, BostonMortgage.com, as examples of the showcases of the underlying technology.

To be clear, this is a milestone product release for Marchex.

Going forward, our proprietary traffic plan is centered on developing Open List into a powerful consumer destination and leveraging the technology to build out our network of websites with increased user relevance and utility.

Specifically, we intend to relaunch Open List during 2007 as a comprehensive, stand-alone search guide that will be accessible at OpenList.com, adding the expanded platform of content announced today, as well as additional categories and additional content we're working on now and going forward.

Open List will also serve as the platform for the gateway to our network of websites that we will launch in 2007.

During 2007, we also intend to extend our content and functionality to all of our relevant local and vertical websites, similar to the beta sites launched today.

Given that in a few short months, Marchex has been able to grow the categories and content covered by our search technology exponentially, and given the underdeveloped real estate through which we can leverage this expanded content, we feel we are very early in our overall opportunity.

We believe as we bring the pieces together, we have a huge opportunity to emerge as an innovator in the online search market while dramatically increasing our relevance with online consumers.

Now, let's discuss follow-up, data, and trends associated with our initial Open List integrated local vertical websites, that were launched in May of 2006.

Selected results and trends from the beta websites are as follows, and represent data for the full month of September, 2006, versus data for the average of the months of March, April, and May, 2006, which were the three months prior to launch.

Page views to these beta websites increased more than 300% for the month of September over the average page views for the months of March, April, and May.

Revenue from these beta websites increased more than 90% for the month of September over the average revenue for the months of March, April, and May.

And for the month of September, 2006, referring traffic to the beta websites was 10% from natural and algorithmic search engines, and the remainder principally being from direct type-in traffic or user bookmarks.

In terms of search keywords, data indicates that referring traffic to the beta websites from natural or algorithmic search engines was driven by more than exact match search queries, which we believe is important, as it signifies the growing relevance of our web properties.

for the month of September, 2006, an average beta website generated algorithmic traffic from search engine referrals resulting from 60 unique search keyword or keyword phrases.

We believe this demonstrates that our websites are relevant algorithmically across a growing number of user search queries.

While this data may not be indicative of future results, we're encouraged by this data and it's still early in our development and deployment strategy.

The continuing strong data from these tests indicate that our focus on user utility is manifesting itself in meaningful progress in metrics we track for determining quality.

The increase in page views and inclusion in algorithmic search indexes suggests that our Open List content can have a meaningful, positive impact on Marchex's content deployment strategy and our overall financial profile.

for the next 24 months, we will be investing significantly in building our search functionality and unifying our networks.

At scale, when we've extended our search technology to cover all the major commercially relevant categories, we believe the significant majority of our websites will benefit.

At that point, we will have taken more than 200,000 individual websites and created millions of pages of dynamic, targeted content with a highly relevant user experience and valuable advertising inventories.

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

Thanks, Russ.

Now let's focus on our advertiser-facing business as well as our partner distribution network.

In the third quarter, we continued to focus on promoting the unique characteristics of our proprietary network to our direct advertisers, highlighting the potential to access a critical mass of targeted users, which we have seen lead to high conversion rates.

As a result of those efforts, and combined with the compelling conversion data, our direct advertisers are experiencing for the second quarter in a row increased RPC rates, or revenue per click, rates on our proprietary network.

Despite the fact that inventory remained relatively constant when compared to the second quarter, we saw average revenue per click rates increase more than 10% sequentially in the third quarter of 2006 over the second quarter of 2006, resulting in an increase of revenue from proprietary advertisers in our network.

In a relatively flat CPC environment for search generally, this trend over the past two quarters has been encouraging.

Over time, our goal is to monetize more of the available inventory in our proprietary network with our own direct advertisers.

Today, we offer advertisers the ability to buy our inventory based in either categories or keywords.

A source of some our more significant investment centers on creating a unique advertising platform that gives advertisers the flexibility to purchase inventory across Marchex's distribution, including both proprietary and partner distribution.

This will be an iterative process, with several product milestones announced over the next several quarters.

As a first step, yesterday we announced the formal launch of Marchex's network, where advertisers can sign up to be included directly in our proprietary websites.

Over time, this process will improve in various ways, and based on the demand from advertisers accessing our network, we believe this trend bodes well for additional monetization platform improvements.

As our technical capabilities increase to match our increasing direct inventory, we believe Marchex will be in a strong position to continue to scale the number of direct advertiser relationships in the Marchex network and capture an increasing share of search marketing dollars over time.

Additionally, we have seen strong interest from advertisers in seeking placement on our websites that have Open List integrations, so we are optimistic that as we integrate Open List on more of our proprietary websites, we will win additional direct advertiser deals.

At the end of the day, we know advertisers look for two things when they place a media buy - quantity and quality.

We believe that the quality, measured in conversion rates, of our proprietary website traffic is strong, and advertisers have an appetite for this traffic.

Therefore, the continued growth in our direct advertiser business on our proprietary traffic base will largely be a function of the absolute growth of that proprietary traffic base.

As Russ mentioned, we have a three-prong strategy to grow our traffic base and we are confident that we will take meaningful steps in executing this growth strategy in 2007.

In regards to our third party distribution, we continue to make good progress in adding new inventory and new relationships.

In the last few months, we have added several new relationships, including line56.com, which is a leading source of global news and analysis on e-business technology and strategy, as well as TheStreet.com, a leading provider of financial commentary, analysis, research, and ratings, as well as many other new partners.

As traffic growths returns to verticals such as finance, we believe we will see benefits for those verticals.

Over the past year, we believe we have won a disproportionate share of premium third-party inventory distribution deals with brand-name publishers, and more specifically, we have done particularly well with the leaders within the finance and technology verticals.

As Mike will touch on in a moment, some verticals can be subject to seasonal and cyclical advertising trends, but we continue to note that there's tremendous value in adding premium inventory partners as part of our long-term strategy for creating a robust network.

This strategy will be important, as we ramp our efforts to sell direct advertisers a combination of our high-value publishers like ``Forbes'' and ``USA Today'' combined with our proprietary website traffic.

This combination will become a meaningful buy for advertisers, as we grow this offering.

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 guidance.

Thank you, John.

Marchex continues to realize growth while increasing the cash generation capabilities of our business.

As Russ and John have already mentioned, we believe Marchex is making considerable progress on the products that have been the source of our most significant investment, and as these products roll out, we believe that they will continue to positively impact Marchex's growth profile.

Now moving to the financial results for the third quarter.

Revenue for the third quarter was $32.3 million, which represents a 26% increase over our year-ago results of $25.6 million.

It's important to note that during the third quarter, we were disproportionately impacted by weakness on both partner volume and spending levels of advertisers in the finance and real estate verticals.

This included rate impacts from third-party monetization providers.

As John mentioned, given our disproportionate success in winning new finance-related third party distribution agreements over the last 12 months, weakness in those categories during the third quarter impacted results.

While this has been a short-term challenge, we continue to believe in the opportunities in these core verticals in the intermediate and long-term.

Total operating costs, excluding stock-based compensation, amortization of intangible assets, for the third quarter of 2006, were $23.7 million.

In the year-ago period, total operating costs, excluding the previously mentioned items, were $18.8 million.

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

The increase in sales and marketing costs on a year-over-year basis were largely due to increased personnel costs, initiatives at [Industry Brains], and marketing of proprietary websites.

Other operating costs included additional investment in 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 third quarter was $8.6 million, which represented a 26% increase over $6.8 million in the year-ago period.

Adjusted earnings before interest, income taxes, depreciation, amortization, stock-based compensation, and gains or losses on sales and disposals of intangible assets, or adjusted EBITDA, for the third quarter was $10.2 million, which represented a 26% increase over $8.1 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 recognized increased stock compensation charges as a non-cash expense that will impact our GAAP results.

Stock-based compensation expense for the third quarter was $3.2 million, compared to $558,000 in the same period in 2005.

GAAP net loss applicable to common stockholders for the quarter was $411,000, or $0.01 per share, compared to net income of $27,000, or $0.00 per share, in the third quarter of 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 results.

Adjusted non-GAAP earnings per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.13 per share for the third 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, gain/loss on sales and disposals of intangible assets, and other income or expense.

Turning to the balance sheet, we had approximately $69 million cash on hand as of September 30th, 2006.

During the third quarter, we continued to generate significant cash flow from our operations.

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

I would now like to discuss our revised outlook for 2006.

While we continue to make substantial progress in executing our product roadmap and in rolling out new initiatives across our business, there are certain factors affecting near-term growth.

First, parts of the search market are in transition, and as a result the revenue per click rate we receive from our third-party monetization partners has not experienced the seasonal uptick we have seen in prior quarters and years.

Second, while certain verticals indicate normal seasonal spending patterns, we continue to see impacts in the finance vertical and real estate sub-vertical, which may offset some of the strengths in some of the other verticals.

As a result, today we are revising our revenue guidance for the year to a range of $128 million to $131 million.

Likewise, we are revising our adjusted operating income before amortization guidance range to $33 million to $35 million.

Over the long term, I would not that we are highly focused on seeing competitive returns on the investments we are making in our business and are therefore reiterating our long-term adjusted operating income before amortization margin guidance of 30% or more, which is a level few companies online have been able to attain.

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

Thanks, Mike.

We are very confident in the future of Marchex and our opportunities.

Again, we believe the search marketplace is going through certain transitions and in any such period, there are opportunities that need to be recognized and decisively pursued.

Some of the largest players in our industry are investing heavily in their monetization platforms to provide additional value for advertisers.

Additionally, many new entrants are seeking to develop their own monetization platforms as a means of providing efficient access to online traffic for advertisers.

We believe that Marchex's unique blend of assets, combined with our operational and product execution, will continue to place Marchex in an increasingly unique and defensible position.

The pieces are coming together and the Marchex equation is simple - a strong traffic base, plus quality returns for advertisers, plus unique consumer utility and monetization tools, equals high margins, user stickiness, and meaningful long-term growth.

We're looking forward to 2007 being a milestone year for Marchex.

We have a lot of excitement and passion around what's going throughout the Company, especially with our product development initiatives.

We believe we have the people we need to drive our strategy, and specifically with scaling and extending the Open List opportunity into our proprietary website network, which is a key catalyst for our business overall.

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

[Operator Instructions] Safa Rashtchy.

A couple of questions, and you might have touched on this and maybe I missed - can you talk about the dynamics of your core segment, which saw a decline in revenue compared to the last quarter, and what are the things that are causing that, and how should we look forward for growth patterns in the core segment?

And I have a quick follow-up.

Sure, there are a few parts.

During the quarter, we saw, you know, good sequential growth in revenue attributable to proprietary traffic sources, and you know, did not see sustained growth in revenue attributable to third-parties.

And we cited in our press release and also in this call that some of that comes from weakness in a few verticals, like finance, and we've noted in the past that, you know, we think finance is a very relevant online category and one that we're disproportionately exposed to, which, in the long term, we think is a very good thing.

But in the short term, it's created some challenges in terms of that overall segment.

So, finance and real estate have been somewhat weak, I don't think we're probably the first to cite that, but we've seen that in our business, too, although again, we think intermediate to long term, these are good categories for us, and based on strength in proprietary traffic initiatives, we feel pretty good overall.

Great, and can you give us a sense of what is happening with your outside monetization partners?

You alluded in the call that there was some weakness in terms of the [inaudible] revenue and did we understand that some of them have taken steps to kind of improve the quality of traffic, which may impact some of the partners.

Has that impact your- or what is your outlook on that?

Well, we've included that in our outlook, which is, you know, we've known from, you know, the beginning that advertisers ultimately are trying to acquire customers, and today that predominantly do that by buying clicks, and they need to translate the bits they pay into the value of those acquired customers, and so understanding the quality of how you get the right customers to those advertisers is critical to building the relationship.

We understand that.

Our third-party monetization providers understand that as well, and so you know, this isn't a new concept.

Quality has always been in the forefront of Marchex's mind, and it's in the mind, I believe, of other industry leaders as well.

So right now, in that context, it isn't new, it's something we continue to manage, we continue to see a validation in the convergent characteristics of our traffic, and whatever third parties we work with, we'll collaborate closely on how to optimize the value of the advertisers and relevance that they're providing for our traffic and the targeted elements of appropriate users going to those advertising links to get the best [convergence] characteristics, and in turn, drive the greatest long-term opportunity for all of us.

So, nothing really new on that front.

You know, we do understand that people increasingly focus on it, and we encourage them to, because ultimately quality is what feeds the ecosystem, and that's something we continue to think is a real priority to understand and build.

Great, thank you.

Thank you.

Stewart Barry.

Good afternoon, ThinkEquity.

To what extent are you trying to drive- are you driving direct relationships with local advertisers?

Are you still trying to partner on that front, and how is the pay-per-call technology developing?

Yes, when it comes to local advertisers, clearly a lot of the tools we offer are self-serve, and, you know, we offer targetable inventory, and some folks may be coming in, but predominantly the way we view it as most efficient, and where we get the best returns, is to leverage large partners, like YellowPages.com, and our RBOC relationships, you know, AT&T, BellSouth, et cetera, since they have tremendous expertise in local relationships.

So we just want to be a valuable partner to assist them in acquiring those direct, local relationships and help them fulfill it by utilizing our technology and whatever distribution we can offer, to the extent they decide that's relevant.

That continues to be our theme, and we'll continue to try and tackle local with a pincer movement of increasing the quantity of high-quality local traffic and increasing, through those relationships, you know, the volume of local advertisers that want to buy that traffic.

And as we've noted in the past and we'll reiterate today, we think this will be one of the disproportionate, high-growth segments going forward.

Getting either of those right is a catalyst for Marchex; getting both of them right, we think, can be very, very meaningful in the next couple of years, and we're optimistic we're doing good things on both fronts.

Just one more question - is it reasonable to assume that your CPCs at some point will be higher than the search engines, and kind of when do you think that might happen, given that you're much further down the per click [inaudible] file than the search engines?

Well, today, we have areas where our direct cost per click rates from advertisers may be higher than the search engines, and there are areas where theirs may be higher than ours, and clearly we monetize our traffic with a blend of our own advertisers and partner advertiser listings.

And so our goal, of course, is to continue to drive as many high-quality advertiser relationships that get us the value we think we're delivering, and we do believe that means upside in our network as it stands today, based on the conversion characteristics, which is why we think it's important to take a balanced approach between aligning yourself with good, outside, long-term partners, and having some direct control over your own monetization strategy.

So that will just be something we continue to manage and [is the] dynamic analysis.

So, you know, you look at core verticals like finance, where volume has been a little bit slower, you know, we're getting multi dollars per click in many cases, and that's something we're going to continue to try and build into other verticals as well.

Christa Quarles.

Sure, it's Thomas Weisel Partners, and I've got a couple here.

First, I was just wondering if you could give your net revenue growth?

I mean, clearly the fact that direct nav is growing as fast as it is is kind of suppressing the overall revenue growth, and then I'll ask my next one after that one.

Maybe- could you clarify that question for us, so we answer it appropriately?

I- I'm sorry, revenue after tax?

Oh, revenue after tax? [inaudible] net of partner share--

In terms of growth, I think it's the 20% range- north of 20% range.

It's in the 20s.

The organic growth rate, net of tax, is north of 20%.

So, not too dissimilar from your overall growth rate?

Yeah, that's- if you look at our organic growth year-to-date, it's been in the 20s, and this number is also in the 20s.

OK.

And then could you give the exact percentage that you guys are driving on your own in terms of the direct navigation?

Yeah, we have not- last quarter, we had said that approximately 30% of the inventory is being allocated to our listings, and that's where we are today.

That's the current integration as well.

OK, so that hasn't meaningfully changed from last quarter?

Correct.

OK.

And then as you- just kind of some questions on industry brands - as you think through- I guess, do you have relationships with large ad agencies, or is it mostly direct ad relationships?

I'm just trying to understand, you know, how cultivated are- is the mindset around kind of working with you guys and the product that you have, given it's a little bit unique, out there, and just how many, you know, salespeople do you have out there?

Are you kind of looking at the process--

We do both.

You know, we've got direct relationships, and we also leverage agencies, and given the quality and depth of distribution we have, in those categories like finance and technology, you know, we end up being a relative must for a lot of agencies targeting those categories.

So it ends up being pretty good mix of direct relationships and the agency relationships as well.

And John, do you want to add anything?

Yeah, my only follow-up on that is we really haven't had as much focus on the agency side in the past as we will in the next couple of years, and you know, that's largely a function of building our sales team as well as just building the tools on the monetization side to get advertisers into our own proprietary traffic.

So, it will become an increasing focus, to get in front of the big agencies.

OK, and just the last question - I mean, I think- just kind of taking a step back, I mean, you know, when you first, you know, became public and did the secondary, I felt like the strategy was somewhat ahead, perhaps, of the execution.

Now, with Open List and Industry Brains and some of the pieces [inaudible] are you feeling like, you know, the execution on the strategy is starting to marry up a little bit more closely?

And I guess how much further along until you feel like you have the pieces in a place to really to start kind of hit the accelerator?

Look, we said today, the pieces are coming together and we feel that, you know, right now, it's about product building and integration.

You know, we talked about- there are things in running your business you have more direct control over and there are things you have less direct control over.

When you look at the things where we have more direct control, you know, we're seeing a lot of progress and we feel very good about it.

The things where we have less control, and you know, where we haven't perhaps seen some of the seasonal benefits we saw last year, you know, if we look at kind of pro forma, what our performance would have been, you know, it would have been very strong, and our financial performance as it stands, when you look at the efficiency of our model, we feel very good about.

So when you look at launching a new product with Open List, that's more than 15Xs the available proprietary content we can leverage into our proprietary network of websites, in combination with a business model we know is very leverageable, a management team at its highest quality of any point in our history, and increased clarify around which parts of our business really make the difference?

We think the pieces are very much coming together and it's why we look at, you know, kind of the balance of this year and 2007 as being kind of key windows in taking the next step.

In the grand scheme of looking at the long term, in any business in any industry, there are going to be points where the cycles work for you and make it easy, and there are going to be times where parts of it may make it a little harder, but during those times, you can't lose sight of the big picture, which is, ``what is your opportunity?'' and ``where is the long-term kind of drivers of increased value?'' And for us, we think we've got the right assets, the right people, and we are now seeing the pieces come together in a way that increasingly makes that tangible.

So we very much feel like we're in that window and we've just got to execute well and continue to deliver new products.

Sameet Sinha.

Yes, Sameet Sinha from Kaufman Bros.

You had mentioned during the call that you're planning to invest more money into Open List, creating it as a destination site.

Can you give us more color on how you're planning to do it and what's the end goal there?

Yeah right now, that's a continued theme, is investment in consumer-facing products and infrastructure to support our ambitions.

You know, we think Marchex has a significant opportunity to be very relevant to online consumers, and we want to take steps to support that, and that just means, you know, as part of our ongoing theme, investing in it.

So that's something you've heard in recent quarters and something that you're hearing again today.

As we talk about building out OpenList.com as a means to showcase the progress we're making we have, you know, currently, about 28 million unique monthly visitors that come to our site, each one kind of recognizing that unique asset and not understanding the network umbrella.

What we want to do is start to get some ecosystem benefits of folks coming into our network and leveraging them into other products we offer so we can monetize those users better, create greater stickiness, user retention, all the characteristics that we know are core in driving value and defensibility.

So when we look at creating an umbrella destination for the Marchex network, we've got the ingredients, we're just going to invest in making it a reality, and that's one of the key themes when we look at '07.

We've got the platform to do this now across a very broad range of categories, and now it's about continuing to pull the pieces together and create that umbrella for the consumer destination.

Can you give us a timeline as to how quickly you can deploy Open List aggregated content across a majority of your domain names?

Yeah, 2007.

Would you think it's the middle of 2007, end of--

It'll be rolling process throughout.

This isn't a case where we, you know, we're looking to deploy everything on December 31, 2007.

We want to make consistent and measured progress, quarter by quarter, throughout 2007.

OK, and one last question, probably for Mike - Mike Q&A, X stock compensation, came down significantly.

Could you comment on that and is that a sustainable level, going forward?

Can you go through that again, Sameet?

I wasn't- stock-based compensation is down?

G&A line item, X stock-based compensation-

Oh, excluding the stock-based compensation?

Yeah.

I think one of the things we should forecast in, prospectively, is just given the year-end reporting requirements, some of the professional fees that come near and after year-end, I would anticipate that some of our general and administrative expenses are actually gong to trend upwards in the near term.

OK, thank you very much.

Thank you, Sameet.

Clay Moran.

Thank you.

It's Stanford Group.

Getting back to the quality of traffic, can you talk about anything you've seen over the past month or so, from your monetization partner, in regard to denying clicks?

Has there been any change there, and if so, can you talk about how meaningful it is?

And then along the same lines, can you talk about the amount of clicks to your direct navigation site that are coming from international sources?

Sure.

You know, we have a number of third-party partners that we work with on monetization and if you look at the last month, versus the last year, there's really nothing new to report.

It's been business as usual.

So, you know, we haven't seen, you know, anything really changed.

If that helps clarify the question.

As it relates to sources of traffic, you know, the majority of our traffic is U.S. and Canada-based, predominantly U.S.

And you know, that's been the case, you know, a year and a half, two years ago, it's been the case a year ago, it's been the case six months ago, and it's the case now, so that's pretty much the same as well.

So, the change in guidance is driven solely by monetization challenges on- and the finance category?

You're not seeing anything in regards to quality of traffic and traffic denial?

Yeah, in terms of the quality of traffic, our third parties told us two years ago they felt we were a good, quality partner, they told us a year ago they felt we were a good, quality partner, and they've told us over the last weeks that we're a good quality partner.

So there's nothing new in that regard.

What we're updating today is, you know, between our last quarter and today, as we've hit the kind of seasonal time of year, we simply haven't seen the same benefit we have in past periods, and, you know, that's something we didn't necessarily foresee, and we think it makes sense to update into our guidance, as well as some of the volume and advertiser weakness in the core verticals, like finance, that again, we think is short-term, and we hope is short-term, since these are markets we believe in for the long-term and we think are going to be key differentiators for Marchex.

But around all those items, yeah, nothing specifically new, and our guidance today is really being driven by those two points we highlighted, both in our press release and on this call.

OK, thank you.

Thank you, and thank you, everybody, for joining us today, and we appreciate the questions and participation in today's call.