Marchex Inc (MCHX) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Marchex, Inc., sponsored Fourth 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 Fourth 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, 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 those 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 items.

One, a brief summary of 2006 and our operational priorities for 2007; two, a review of the fourth quarter in the context of the priorities that we [inaudible] will drive our growth this year; and three, financial results for the fourth quarter of 2006 and our initial guidance for 2007, which Mike will speak to.

Moving to the first topic, a summary of 2006 and operational priorities for 2007.

We have been, and continue to be, focused on building a market leader over the long term and believe we have established ourselves as such in several areas, with direct navigation and local search being the clearest examples.

That said, 2006 had its challenges as well as its successes.

It was a year in which we continued to build upon the foundational elements of our Company to position ourselves to take advantage of opportunities in the search industry to capture both market share and mine share.

While there were several highlights that led to year-over-year growth of 35%, and EBITDA margins exceeding 30%, I will focus on the areas that both moved the needle and laid the foundation for what we anticipate will be a better and stronger 2007, with accelerating growth.

These highlights include one, we increased the quality of our third party distribution network by adding several new contextual and pay-per-click syndication partners, providing a meaningful amount of inventory per advertisers on our proprietary traffic network, continuing to focus our efforts on distribution partners that deliver solid conversion rates for our advertisers, and adding premium advertisers that pay premium rates.

Two, from the first quarter of 2006 to the fourth quarter of 2006, we increased the pay-per-click rate from direct advertisers on our vertical network of websites by more than 35%, and the corresponding revenue attributable from direct advertisers on our network by more than 60%.

And third, we increased our local advertiser market share as we significantly increased the advertisers in our system, and exited 2006 with thousands of local advertiser relationships that we will build upon this year.

And fourth, we increased our proprietary traffic to approximately 31 million unique visitors per month in December, up from 27 million unique monthly visitors in the prior year period.

Five, while our largest monetization partner was rolling out a new technology platform for their advertisers, in Q4 we increased the revenue attributable to our proprietary network of websites by more than 27% over the prior year period.

This growth was accomplished through developing and integrating proprietary optimization technology, selected marking of certain websites, and monetizing more of our traffic with our own pay-per-click and contextual advertisers.

And six, we expanded our open list search technology and developed a system that increases the utility, relevance, traffic and revenue for our vertical websites.

For example, we saw average monthly page use increase 70% for websites that integrated open lists versus prior month average volume pre-integration.

So, while 2006 had certain challenges, we believe we have managed through most of them and successfully laid the groundwork for what we believe will be a strong 2007.

We have started the year with good momentum and there are several unique catalysts to our business that we believe will lead to accelerating growth throughout the year.

As such, while our current outlook has annual revenue growth rates of 8% to 10% in Q1 of '07, we expect to exit 2007 with annual growth rates of 20% to 25%.

Specifically, we believe our focus on the following initiatives will make this acceleration in our business a reality.

One, we are focusing on signing new distribution relationships to add quality and drive partner network growth.

Since the beginning of the year we have added more than a dozen new third party pay-per-click and contextual distribution or syndication partners, including [DeWalt.com], InvestorVillage.com, HomesandLand, CIOIndex.com, and WorldGolf.com.

We expect these partners to increase the overall quality of our network and, in turn, advertiser spending.

We expect to continue adding new search and contextual syndication relationships throughout 2007, and specifically are focused on adding to and deepening our tier one relationships.

At the same time, we continue to do a very good job of maintaining our existing relationships in the face of aggressive inquiries from other providers while, at the same time, winning many new high quality partners.

Two, we are intent on increasing new advertiser acquisition and also increasing advertiser spending to drive growth in our partner network.

We are seeing very positive local advertising trends that we anticipate will continue throughout 2007, including increased local advertiser acquisition and increased spending on our platform, generated by our super-aggregator partners.

Our super-aggregator partners, such as AT&T, are driving their existing customers to adopt search marketing programs as a complement to their off-line Yellow Pages advertising and we are seeing the benefits of this push.

In addition, we have begun to consolidate our advertising services organization and realigned the group under the leadership of several experienced Marchex executives, which we expect to lead to increased penetration of existing advertiser accounts and new national advertiser and agency signups.

Three, we are improving our advertiser tools to provide even greater transparency, which may lead to increased spending and drive partner network and proprietary traffic revenue.

We are launching several advertiser-facing tools, including conversion tracking and an improved advertiser interface in Q1 of 2007.

We believe these tools will potentially lead to increased advertiser spending on both our third-party syndication and proprietary traffic networks.

Four, we are fully integrating Open List on our vertical network of websites to increase traffic.

As we continue to increase the relevance and utility of our websites through integrating our Open List content and functionality, we are seeing positive trends.

For example, in November of 2006 we deployed Open List across a group of more than 50 of our vertical websites, including Remodeling.com, Locksmiths.com, BostonMortgage.com, NewYorkLawFirms.com, and SeattleInsurance.com.

For the full month of January, 2007, versus data for the average of the months of August, September and October of 2006, which were the three months prior to an Open List integration, average monthly page use increased 70%, and average monthly revenue also increased.

We expect the continued integration of Open List will increase traffic and revenue metrics across our network over time and, therefore, plan to launch Open List across more than 100,000 websites by June 30th of 2007.

Additionally, we are also planning to relationships-launch OpenList.com as a stand alone destination and search guide that will provide relevant searchable content and data on more than 15 million businesses segmented into more than 20,000 categories.

Five, we will continue to optimize our proprietary websites to drive revenue growth.

As highlighted above, we anticipate improvements in the monetization of our proprietary network through integrating proprietary optimization technology, selectively marketing certain websites, and increasing the pay-per-click rates from our direct advertisers.

This is a trend we anticipate continuing throughout 2007.

And six, we will support our monetization partners' new advertising system, which may potentially increase pay-per-click rates on proprietary websites.

As has been widely discussed in the media, our largest monetization partner, Yahoo!, has recently migrated its advertisers to an updated system, Panama.

While it's too early to draw any long-term conclusions, initial indications point to a current neutral impact in monetization as we believe that advertisers are still adjusting to the new system.

As advertisers gain more comfort with the new system, we do expect to see a positive impact on monetization in our network over time, especially in the second half of 2007 as we believe and have been told that we have one of the highest quality networks in their partner network.

Now, moving on to our second item, our operational progress for the fourth quarter of 2006 and ongoing initiatives that will support our growth in 2007.

First, we will focus on proprietary traffic.

Crossing the 31 million users per month in December was an important milestone for our company.

We have our sights set much higher, of course, but we are beginning to the see the growth that is possible when we fully roll out our three-pronged attack.

This strategy consists of thoughtful, Open List integrations, a methodical approach to building sites focused on consumer utility and optimized for search, and targeted marketing efforts.

Growing a base of quality users and traffic in a highly competitive search marketplace is an important accomplishment for Marchex.

Two years ago, we had nominal proprietary traffic.

Now, we have approximately 31 million monthly visitors, and we believe we have the strategy, people, processes and infrastructure to grow this number annually and in a meaningful way.

In an industry where high quality search market share is very competitive, we believe that we have built the foundation to grow our traffic base significantly.

We are highly focused on growing our proprietary traffic network.

And as the verticalization of the web continues, we believe Marchex is well positioned as an online leader given the unique composition of our assets.

Online users want to find information quickly.

Our core philosophy with our Open List technology and platform is less about search technology and more about find technology.

We want to help consumers find what they're looking for as fast as possible.

We believe that the large search portals struggle with this concept of efficiently helping users get to their needs since there is not a one-size-fits-all approach.

We believe this trend supports the verticalization of the web, and it is also why we believe Open List has an opportunity to become an important way for users to find the information they're looking for on the web.

Furthermore, as advertisers are looking to connect with more and more qualified leads in a high competitive marketplace, they are increasingly looking to vertical sources of traffic where the conversion rates have the potential to be equal to, or better than, major search engines, given user intent.

Existing the fourth quarter with approximately 31 million unique monthly visitors that accessed more than 200,000 vertically focused websites, we believe that we have critical mass of consumer traffic in each commercially relevant category, from autos to travel and many categories in-between.

Within these categories, we include local, which we categorize as a vertical.

The local vertical continues to grow in importance as more local advertisers purchase search marketing packages every month.

Additionally, we still have plenty of runway in the areas that have allowed us to make proprietary traffic progress throughout 2006 and in the fourth quarter including, one, Open List technology enhancements and websites integrations; two, website optimization enhancements; and three, increases in pay-per-click rates on our websites from direct advertisers.

All of these traffic growth drivers should become even more impactful in 2007.

Therefore, as we move into the new year, we believe we are now at a place where we can accelerate our vertical footprint and extend Marchex's position as a leading online network.

During the fourth quarter we announced the expansion of our Open List search technology and content aggregation engine to provide relevant searchable content and data on more than 15 million businesses in more than 20,000 commercial categories, including auto, employment services, professional services, and personal services.

This represented an increase of nearly 15-fold in the amount of content from its prior version, which focused solely on the travel category.

With Open List serving as a publishing system for our websites, the relevance and utility of our vertical network has vastly improved through the addition of highly targeted content and the ability for consumers to quickly sort through that content based on personal relevance.

These enhancements and integrations have led to both traffic and revenue increases as the websites have generated increased usage based on [inaudible] inclusion and algorithmic search indexes, and adding relevant sub-pages to each site.

We basically moved from sites with a single page with paid listings only to sites that contain hundreds of vibrant sub-pages with unique content and targeted advertising listings, including contextual listings.

This past quarter we also improved our website optimization technology, which is our dynamic keyword generation tool and user interface template tester.

This system has allowed us to rapidly AB test various website templates to determine which is the most effective from a modernization perspective, and also analyze user click patterns to determine intent and place the appropriate advertisements and content on the page.

We have seen very positive monetization improvements by applying this proprietary system to our websites and we plan to continue to invest in this platform as a means to optimize our entire proprietary network and drive relevance and growth.

Another point of continued progress during the quarter was our proprietary monetization for the continued increase in pay-per-click rates generated by our direct advertisers.

Specifically, pay-per-click rates on our proprietary websites from our direct advertisers sequentially increased more than 6% for the fourth quarter of 2006.

This marks the third quarter of sequential increases and continues to highlight the impact that quality traffic or conversions has on advertiser spending levels.

We've always believed that owning the capabilities and advertiser relationships to directly monetize proprietary consumer traffic rather than exclusively outsource is very important.

For example, in certain verticals our proprietary advertiser pay-per-click rates can exceed the average industry rates.

As we continue to make progress with respect to proprietary monetization, we will continue to increase our direct monetization with a goal of maximizing revenue and profit contributions.

At this time, I'd like to hand the call over to John Keister to discuss our advertising services area.

Thanks, Russ. 2006 was a challenging year for our advertising services area as this part of our business did not grow at the rate we expected coming into the year.

The primary reasons for this were, one, a challenging environment to develop new distribution relationships; two, a transition of our pay-per-click client facing team from both a geographical and strategic perspectives; and three, the short-term impact of decreasing our focus around advertisers acquiring traffic from us at wholesale rates, while increasing our focus on premium advertisers paying premium rates.

[Technical difficulty.]

Thank you for your patience, ladies and gentlemen.

Your conference will begin momentarily.

Again, we thank you for your patience and please continue to hold.

Sorry about that, folks.

We had a technical error here.

We dropped off the line.

This is John Keister, President and COO of Marchex.

Thanks, Russ, for that opening.

Now, to advertising services.

2006 was a challenging year for our advertising services area as this part of our business did not grow at the rate we expected coming into the year.

The primary reasons for this were, one, a challenging environment to develop new distribution relationships; two, a transition of our pay-per-click client facing team from both a geographical and strategic perspectives; and three, the short-term impact of decreasing our focus around advertisers acquiring traffic from us at wholesale rates, while increasing our focus on premium advertisers paying premium rates.

We are increasingly aligning the priorities of our proprietary traffic base with the priorities of our advertising services area.

As such, we have taken a number of important steps over the last few months to ensure that our advertising services area has a more successful 2007.

The first step we have taken is to consolidate the core leadership of our pay-per-click business area.

We believe this will bring renewed focus on the growth of our distribution footprint, expansion of our advertiser base, and more rapid product development.

We have already seen better planning and execution out of this group in the past few months.

One example of this is in the business development area where we have signed more than a dozen new partners since January 1.

The second step we have taken is to renew our focus on strategic pay-per-click clients, having made some critical hires to address the large agencies and biggest online spenders.

We anticipate that this will result in key advertiser and agency wins in the next few months as we focus the advertising opportunity with Marchex on getting advertisers exposure to our proprietary direct navigation traffic, as well as other premium sources.

And finally, the third step we are taking is to transition away from traffic sources where advertisers have been able to get wholesale pricing.

As we prepare for branding consolidation later this year, we continue to focus on attracting premium advertisers paying premium rates across our proprietary network, as well as our premium partner network.

As part of that process, we are moving away from certain traffic sources that are preferred by certain advertisers for their wholesale pricing characteristics.

For these advertisers who previously benefited from wholesale pricing levels, the transition to higher rate network sources has influenced their spending patterns as they haven't been able to buy within their historical parameters and, as a result, revenue was impacted during the fourth quarter.

Our focus on premium quality traffic and premium advertisers is designed to lead to increasing revenue per click rates throughout our network in 2007 and beyond.

We believe that this focus is the appropriate one for our advertising services group, and is more aligned with a focus on quality that exists within our owned and operated network of websites.

Over the last several years, we have built a leading search marketing services organization that has tens of thousands of advertisers focused on leveraging our services, ranging from pay-per-click listings to contextual marketing, to local search marketing fulfillment at a major scale.

And we have established ourselves as a high-quality websites monetization partner for more than 100 branded vertical sites, including Business Week, the Motley Fool, and Investors.com.

As Russ mentioned earlier, our goal in 2007 will be to increase our direct to advertisers' exposure to tier one traffic over the course of the year, from both a publisher and search engine perspective.

We believe that this will benefit our advertisers and lead to growth in our advertiser base and our associated spending budgets with us.

The other area where we have made great progress is in local search.

We have thousands of local businesses in our system as a result of the success of our relationship with AT&T and YellowPages.com.

We saw solid growth from this area in 2006, and we expect further growth in 2007.

As we get more and more local advertisers in the system, we believe we will get increasingly better coverage across our proprietary local websites and zip code websites powered by Open List.

In addition, over the last few quarters we began the process to transition Marchex from a diverse branded set of search marketing services and brands to an integrated, technology-driven media company, aligning the priorities of our separate product groups to match our long-term strategy.

From transitioning client and account personnel to building a larger, more integrated agency group, to working on various advertiser-facing user interface improvements, we have been taking the necessary steps to migrate to a single unifying brand with diverse proprietary and third-party distribution options.

This has been a process that has involved restructuring in some areas, as well as simple iterative changes in others.

This process, which includes the consolidation of our office in Provo, Utah, as well as the meaningful expansion of our local group, will continue throughout the first half of 2007 and will be a source of investment as we bring in new client-facing personnel to capitalize on our expected product and partner progress.

Additionally, during 2007 we will look to consolidate some of our product brands as we work to simplify our brand strategy with advertisers and, therefore, make it easier for them to purchase advertising with Marchex.

We will share more details on these initiatives going forward.

To sum up our marketing services focus for 2007, here are our major priorities.

One, distribution.

The fourth quarter represented the continued wins and new distribution or syndication partner relationships.

For example, we added new valuable vertical partners, including the Rob Report and IT Toolbox, as well as others.

And on Tuesday we announced agreements with seven additional premium vertical publishers.

Agreements with third-party distribution partners continue to be very competitive and we generally expect revenue share or service cost percentages to continue to increase.

That said, we believe Marchex is in a unique position to grow distribution market share due to the competitive monetization rates we provide our partners, coupled with our substantial breadth of advertisers.

Since the beginning of 2007 alone, we have added several new syndication relationships and expect this momentum to continue.

Number two, advertiser growth.

With the combination of a more focused agency group, large advertisers looking for exposure on direct navigation traffic and continued increases in local advertisers in our system, we have the pieces in place to increase our advertiser base from its current levels.

And three, proprietary traffic.

As the traffic to our Marchex website continues to grow, our direct advertisers will be increasingly exposed to higher quality and higher converting traffic.

As such, we expect that the pay-per-click side of our business will continue to see growth in revenue per click rates resulting from exposure on our proprietary network.

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

Thank you, John.

Now moving to the fourth quarter financial results.

In the fourth quarter, we generated revenue of $32.6 million, which represents a 9% increase over our year-ago results of $29.8 million.

It's important to note that, during the four quarter, we saw strong growth in our revenue attributable to proprietary traffic.

Meanwhile, revenue attributable to advertising services sources did not meet our expectations, primarily due to a shift in focus from advertisers who buy at wholesale rates to building relationships with premium advertiser who pay premium rates for premium traffic sources.

This had a greater impact than anticipated in the short term.

These advertisers decreased their overall spending in Q4, 2006 as they were not able to continue leveraging wholesale strategies that were effectively lowering overall revenue per click rates within our partnered network.

In 2007 we are focused on adding new premium publishers as part of our partnered network, as well as taking the necessary steps to align our sales organization to attract premium advertisers paying premium rates.

Total operating costs, excluding stock-based compensation, and amortization of intangible assets for the fourth quarter of 2006 were $24.4 million.

In the year-ago period, total operating costs, excluding the previously mentioned items, were $21.6 million.

In looking at the mix in operating costs for the fourth 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 in 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 IndustryBrains, marketing of proprietary websites, and advertiser acquisition programs.

We anticipate increasing costs associated with selected website marketing initiatives and advertiser acquisition programs throughout the balance of 2007, particularly as we make progress with our Open List integrations.

Other operating costs included additional investment in personnel and 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 fourth quarter was $8.3 million, up from $8.2 million in the year ago period.

Adjusted earnings before interest, income taxes, depreciation, amortization, stock-based compensation expense, and gains or losses on sales and disposals of intangible assets, or adjusted EBITDA, for the fourth quarter was $10 million, up from $9.5 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 fourth quarter was $2.6 million, compared to $770,000 in the same period in 2005.

GAAP net income applicable to common stockholders for the quarter was $5 million, or $0.13 per basic share, compared to net income of $980,000, or $0.03 per share in the fourth quarter of 2005.

GAAP net income included a non-cash, non-recurring discount on the preferred stock redemption of $5.8 million associated with the Company's repurchase of approximately 132,000 preferred shares.

Excluding the effect of the preferred stock redemption, net dividends, GAAP diluted earnings per share represented a loss of $0.01 per share, compared to $0.03 per share for the same period 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 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 fourth quarter.

Adjusted non-GAAP earnings per share 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, other income or expense, accumulative effect of changes in accounting principles, and less the discount on the preferred stock redemption.

Turning to the balance sheet.

We had approximately $46.1 million cash on hand as of December 31, 2006.

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

Based on that fact, our outlook for cash flow generation this year, and the fact that we were given a compelling opportunity to retire the majority of our preferred equity issue, we repurchased approximately 132,000 of our preferred outstanding shares during the quarter for approximately $26 million.

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, selected acquisition opportunities, and our common stock share repurchase plan, which we also announced in the fourth quarter.

I would now like to discuss our financial outlook for 2007.

2007 is off to a solid start as we are making significant progress toward the operational and strategic goals that will drive growth for this year and beyond.

As a result, today we are releasing our first guidance for 2007.

For the year, we are currently anticipating revenue in the range of $144 million to $150 million.

For color on our quarterly revenue expectations, we currently anticipate that our annual revenue growth rate will accelerate from 8% to 10% in the first quarter of 2007 over the first quarter of 2006; to 20% to 25% for the fourth quarter of 2007, over the fourth quarter of 2006.

Our revenue guidance is based on, one, increased third-party distribution relationships; two, the impact of additional advertisers in our system; and three, monetization increases from both our direct advertisers and our monetization partners, the latter of which we expect to impact the back half of the year; and four, increased investments in personnel, product development initiatives, marketing, and other traffic initiatives.

For adjusted operating income before amortization, we are currently anticipating a range of $35 million to $39 million.

For adjusted EBITDA we expect to add back approximately $6 million in additional depreciation and amortization to this range of $35 to $39 million of adjusted operating income before amortization.

For color on our quarterly expectations, given our investment initiatives, we expect the first quarter of 2007 to have lower adjusted operating income before amortization than the fourth quarter of 2006, based on certain increased public company costs, increased personnel costs, increased product development costs, costs associated with office consolidation, and increased costs associated with selected website marketing initiatives and advertiser acquisition programs.

We believe these increased expenses will disproportionately impact the first quarter of 2007, and we expect the rate of expense increases will moderate during the balance of the year.

Given our current expectation for accelerating revenue growth rates throughout 2007, and our expected moderation in the expense rate increases, we anticipate that our adjusted operating income before amortization will be increasing in the back half of 2007.

Our adjusted operating income before amortization guidance is based on, one, increased service costs associated with new distribution partners; two, increased public company costs, which particularly impacts the first quarter; three, investments in new sales in technical personnel based on our expectation to increase third-party distribution, increase the number of advertisers on our system, and develop and launch new products, including Open List related items; and four, increased marketing costs for selected websites and advertiser acquisition programs.

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

We look forward to sharing our financial progress with you throughout 2007.

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

Thank you, Mike.

We believe Marchex has the unique opportunity to emerge as one of the largest, highest quality vertical networks online.

The bottom line is that we are growing our high quality proprietary traffic base at a time when quality traffic is getting harder to come by and traffic acquisition costs or partner revenue shares are increasing, which bodes well for us in 2007 and beyond.

We have fairly simple, yet aggressive goals in 2007 that we believe we will meet based on the early product and relationship momentum we have in 2007.

To recap, these goals include, one, significant new third-party distribution or syndication agreements; two, the delivery of Open List into the majority of the websites in our network by the end of the second quarter; three, the launch of the next version of OpenList.com by the end of the third quarter, with tens of thousands of incremental categories and millions of additional pieces of content; four, meaningful visitor and page view growth in our proprietary unique user base; and five, growth across our business in all areas from the top line and bottom line perspective.

The search industry has been highly competitive for the last 10-plus years, and every company in the industry is dependent on both internal execution and external partners for their success.

We understand this balance and have worked very hard in the last years to make sure we are addressing both of these critical areas.

From an internal perspective, our people, our systems, our technology and our planning are in a better place than ever.

From a partnership perspective, our relationships are deeper and continue to expand.

From a proprietary traffic perspective, we have passed 31 million unique users per month and now have the pieces in place to continue this growth in 2007.

Therefore, more so than any time in our history, we believe that we are well positioned for expansion and accelerating growth, and we are highly focused on making 2007 our best year yet in every sense as we focus on executing against our needle-moving priorities.

I again want to thank our employees for their hard work that they've put in over the past year, and it's due to their efforts that we're excited about our prospects for 2007.

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

[OPERATOR INSTRUCTIONS.] Christa Quarles.

A couple questions.

First, looking at the unique visitors now over 31 million, I was wondering if you could highlight any frequency, page view or time spent metrics just so we can get a sense as to whether or not that 31 million is sort of more robust, if you will.

And then the second question really focuses in on your monetization partner.

I was just wondering if, A, you could give a sense as to what the revenue impact would have been flat, and then also as you look at the guidance in fourth quarter, what is suggested in that growth of 25% or so?

In a sense, does that assume that you renegotiate with your largest monetization partner, or even switch to a different one?

Thanks.

Sure.

In the context of metrics around user frequency, we're not offering more metrics than those that we've given in the conference call and also in our press release, but we have provided some kind of global data.

Clearly, in both places we've done Open List integrations.

And where we've been able to optimize sites to make sure that both the ads and content are really targeting what users expect from those sites.

Without giving specifics, we've been very encouraged by the characteristics around repeat visits and the bookmarking of those sites.

And so that's one of the reasons why we're pretty optimistic about accelerating growth and why we think we've got a really good foundation at this point to see those unique user numbers continue to progress.

In the context of the last question about are we making assumptions on increased contributions from our third-party monetization providers, we're optimistic on our quality of traffic and what it could mean, but we're not counting chickens until they're hatched.

And to the extent that we do get visibility on opportunities or benefits from that, we'll share it.

But, that's not part of what we're providing today.

And I believe there was a second question, which was about what would our revenues have been had our third-party monetization providers been flat in the fourth quarter.

While we can't offer specifics, clearly we were eager for them to get to their new system and validate a lot of the kind of key benefits that they had been highlighting.

And we've seen good progress with their system, particularly with the relevance of their ads.

But in Q4, again, we know that those are very high margin dollars.

There are some that had it been flat would have been very beneficial.

But at this stage, we're glad to be on the new system and very optimistic about what it could mean for us, particularly in the second half of the year.

Okay, great.

That's helpful.

And just one quick follow-up.

Were there any share repurchases since you made the announcement in December?

Well, we have -- again, we had the announced repurchase of the $26 million of the preferred shares, and we have our plan in place on the common shares, but do not have any specifics under that part of the repurchase plan as of now.

Clay Moran.

Good afternoon.

A couple of questions.

Unique visitors is up 15% year-over-year, but we know you acquisition Open List and Area Connect during the course of the year.

Can you give us an idea of what the organic growth rate was?

Sure.

We can't offer specific numbers, but what we can say is that, when you look at kind of the different buckets that contribute to that they were all favorable.

And the bulk of that growth was organic, separate from those acquisitions.

Clay, this is Mike.

Just to give some more color, it wouldn't be substantively different from that percentage increase.

Okay, great.

And can you update us on the enhancement of the zip code sites?

Sure.

We think the zip code sites are going to be huge beneficiaries of -- considering Open List content, given that so much of it is leveragable and local -- very local in nature.

So, we continue to see very favorable metrics with usage patterns to our zip code sites.

And we think that the number of sub-pages we'll be able to add as part of our rollout forecast for -- to be accomplished before the end of Q2 will make those sites more robust, even deeper and accelerate the growth.

And then just to follow up on one previous item to be clear.

We talked about accelerated revenue growth through the year reaching 20% to 25% in Q4.

That does not factor in any increased monetization beyond our current relationship with our third-party providers.

So, just to be clear, that does not factor in any benefits there.

So the guidance doesn't factor in anything for a change in the existing relationship with your third-party monetization partner?

Exactly.

The accelerating growth is based on status quo.

And obviously, any benefits we were able to obtain there would be incremental when those went into effect.

But I thought that you mentioned that you did assume increased monetization as in improvements from -- I would assume that meant improvements from Panama, not a change in the actual contract.

That's correct.

As you assuming improvements from Panama?

We do think there'll be some benefits as we get later in the year, both in terms of monetization rates of our own advertisers into our own network, which have already been seeing a favorable trend, and some benefits from Panama continuing to deliver growth as well.

But to your point, not any contractual benefits.

William Morrison.

Russ, I was wondering if you could -- I know I may have missed this, but could you draw out what the -- you gave us growth from the direct proprietary revenue was.

Can you give us what the growth in the quarter for IndustryBrains was?

And then looking to next year, could you help us understand how the components add up to your guidance?

In other words, what are you expecting or what is implied in your guidance for [inaudible] growth next year?

And then I have one more.

Sure.

Right now, again, we report our aggregate results, and then we also provide specific revenue attributable to proprietary -- our proprietary network.

And so, kind of breaking it out beyond that isn't something we're doing at this point.

But, we do plan on continuing to provide those breakouts.

And as you may have noticed today, we did provide more detail and specificity around how we see the year developing than we have in the past.

And our goal is to provide more specificity as appropriate going forward.

Today, I can't offer you more detail than that.

Going forward, our goal is to get more specificity around the parts of the business that make sense to provide.

Would that include possibly at some point this year breaking out your different operating segments and operating income by segment in your -- in like your Q and K?

Right now, our business is very integrated.

And so, I don't want to commit to which additional specifics we'll provide going forward.

Just reiterate our goal.

Today we provided more specifics than we have in the past.

Our goal, we'll continue to do that, although I can't tell you which ones those will be today.

But, I understand why you ask.

Stewart Barry.

Hey, guys.

This is Neil Doshi calling in for Stewart.

A couple of questions.

One, I wanted to know, given that you have a higher quality of clicks, is it possible that you guys can charge higher prices than your competitors, like some of the larger search engines?

Well, yes.

Clearly, one of our core themes at a strategic level has been trying to make sure we're getting the appropriate value for our proprietary traffic, which we know from our own data and we've been told by third parties, converts very well relative to other high quality providers.

And so, we've made a big investment.

We'll continue to make an investment and making sure we're selling that efficiently.

And one of the reasons why we disproportionately win so many new distribution relationships in certain premium verticals is because we are monetizing better and providing more relevant ads in some core verticals.

And so, our focus is extend that lead in the verticals we've got leadership, whether its things like local, finance or technology and, at the same time, extend leadership into new verticals as well.

And so, that's what we're really focusing around is where do we have critical mass of our own traffic, where can we complement that with high quality third-party premium vertical publishers and, in turn, how do we reach out and most effectively sell that premium inventory to premium advertisers paying premium rates.

That's very much a strategic theme that we're internally focused on and we encourage people externally to understand about what we're doing as well.

Great.

And then also, can you give an update on your local search bid management technology, as well as your [inaudible] initiative?

So, we've got a variety of initiatives with our local partners.

And rather than kind of preempt some of our product progress, we'll plan to share some of those specifics as we achieve certain milestones.

Look, we appreciate everybody's involvement, and today's call ended up being fairly long.

And so, based on the fact that we've run over the time, we want to end it now.

Appreciate your involvement and all the questions, and we very much look forward to updating you throughout the year.

Thank you.

Thank you very much, ladies and gentlemen.

This does conclude today's conference.

You may disconnect your lines and have a wonderful day.