Marchex Inc (MCHX) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the First Quarter Earnings Conference Call.

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

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

Sir, the floor is yours.

Thanks.

Correction on that.

I'm the Chief Administrative Officer.

Thank you very much, everyone, for joining.

Good afternoon, everyone, and welcome to Marchex's First Quarter 2007 Conference Call.

Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; John Keister, President and Chief Operating Officer; Mike 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 positions, 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 Factor 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 earning 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.

On today's call we will focus on three topics.

First I'll give a summary of our operational and financial progress during the first quarter.

Second, John and I will comment on our ongoing operational initiatives.

And third, Mike will give a more detailed review of our financial results for the first quarter and comment on our guidance for the remainder of the year.

Moving to our first topic, a summary of our operational and financial progress during the first quarter.

We started the year with good momentum and there are several unique catalysts to our business, as we highlighted on our last quarterly call that we believe will lead to accelerating growth throughout the year.

Specifically, the initiatives we referenced were as follows --

One.

Increase the quality of our third-party distribution network.

For the first quarter of 2007 we added more than a dozen new contextual and pay-per-click distribution partners, as well as several third-party website owners who are interested in leveraging Marchex's content distribution and (monetization) systems.

These partners include Computer Shopper, Engineering.com, InvestorVillage.com, Wall Street Reporter, CIO Index.com, WorldGolf.Com, and many others.

We've added new partners every quarter for more than a year and believe this trend will continue during the balance of the year.

Two.

Increase the pay-per-click rate from direct advertisers on our proprietary network of websites.

For the first quarter we increased the pay-per-click rate from our direct advertisers nearly 50% on a year-over-year basis.

We continue to see favorable trends from advertisers who access our proprietary websites based on the quality of our traffic, and we expect this trend to continue.

Three.

Increase our local advertiser market share.

For the first quarter we significantly increased our advertiser base and exited March with a record number of advertisers on our system.

Additionally, with tens of thousands of local advertising relationships we believe Marchex has one of the largest footprints of local advertisers online, and just as importantly, we expect this number to meaningfully increase through the end of the year.

Four.

Increase our proprietary traffic.

For the month of March our proprietary websites were accessed by more than 31 million unique visitors, according to internal logs, which represent 11% year-over-year growth.

While we are entering a seasonally slow period, similar to last year, we believe that our product development initiatives, including the upcoming launch of 100,000 websites with open list content integrations will lead to meaningful traffic growth in the back half of 2007.

Five.

Increase the revenue attributable to our proprietary network of websites.

For the first quarter revenue attributable to our proprietary websites increased more than 34% over the prior year period.

This growth was accomplished through continued positive trends with Open List integrated websites, the relaunch of Yellow.Com and related directory sites, increased marketing at certain websites, including Yellow.Com and other directory sites, and increased monetization rates from our own pay-per-click and contextual advertisers.

Similar to last year we expect to see seasonality in revenue from proprietary traffic sources in the second quarter followed by strong growth in the back half of the year as we launch several initiatives which we believe will lead to increased traffic and revenue.

Our sixth catalyst is to expand upon our Open List content aggregation and deployment technology.

As most of you know by now, our Open List content aggregation platform has been designed to organize, localize, refine, and distribute relevant information to any website -- ours or a third party's.

While we believe that there is a powerful opportunity to take Open List off network, we are highly focused on integrating this platform onto our own network of websites as the first test.

We believe that the upcoming launch of 100,000 websites by June 30th and the Open List.com relaunch by the end of Q3 will have a meaningful impact on our growth in the back half of the year and into 2008.

We have started the year with good momentum around each of these initiatives, our first quarter revenue growth was 10% on a year-over-year, which was at the high end of our guidance range and we continue to expect that this product progress will drive annual growth rates of 20% or more as we exit 2007.

Now, focusing on the second topic, an update on ongoing operational progress.

First I will focus on those initiatives tied to our network of proprietary traffic.

As I recently highlighted our network was accessed by more 31 million unique visitors in March, 2007.

We are particularly pleased with this year-over-year growth given that the vast majority of our websites do not have our enhanced Open List functionality and as such, have not yet been indexed by search engines.

Given our ongoing progress with Open List, we believe the June 30th launch can have a meaningful impact on the long-term growth in users finding and returning to our network of more than 200,000 owned and operated websites.

In the first quarter revenue from proprietary traffic was $15.1 million, which was up 34% on a year-over-year basis.

The principle factors driving that growth were, one, traffic growth from several websites, including Yellow.com, associated directory sites and Open List integrated websites.

Two.

Marketing of selected websites, including Yellow.com and associated directory sites.

And three, an increase in the pay-per-click rate from our direct advertisers.

Although we expect that we may experience some seasonality in traffic similar to last year's trends and that may impact revenue, particularly ahead of our large website rollout at the end of June, we anticipate that we will continue to grow the metrics of our proprietary network over the course of 2007, including the amount of inventory we monetize on a direct basis.

Of course, the monetization coming from our primary third-party advertiser partner, Yahoo, had an important impact on the revenue generated from our proprietary traffic as well.

As you all know, Yahoo's new monetization system, Panama, launched in Q1.

The revenue impact to Marchex was relatively neutral post-launch as increased click-through rates were offset by lower pay-per-click rates.

While it's too early to quantify the impact that Panama will have for the remainder of the year, particularly as new features and functionality continue to be rolled-out by Yahoo, we were pleased to see its launch and will continue to monitor its progress closely.

Our strategy for traffic growth in our proprietary network of owned and operated websites is pretty straightforward.

Continue building relevant websites with targeted and relevant content, use our marketing tools and knowledge to acquire new user where appropriate.

Our Open List tests have shown that our content strategy will expose more users to our sites through increased indexing and search results and will help us retain users regardless of how they find our sites.

Today a majority of our websites with Open List integration show up in algorithmic search.

Whether for an exact match query or a related search query.

As a result the number of page views for every website that was indexed by search engines increased substantially over pre-integration periods, as did our repeat visitor and bookmark rates.

During the coming months and quarters we plan to drag significant product progress across our network of sites.

We believe that the June launch of 100,000 websites will be the beginning of a content rollout and refinement process that will help build Marchex into one of the most highly targeted vertical and local networks online.

Now, I'd like to pass the call to John Keister to discuss our advertising services business.

Thanks, Russ.

Today there are only a few companies that have tens of thousands of search-related or pay-per-click advertisers in their system and Marchex is one of them.

Continually adding to our advertiser base is a critical element to growing our business and, as such, we continue to focus on growing these relationships on a direct basis and on an indirect basis.

For example, through our local super-aggregators partners like AT&T.

We believe our leadership and innovation in the local channel has been and will continue to be a major driver of growing the number of advertisers in our system.

There are three elements of this strategy in the advertising services business that I will now highlight.

First, we are continuing to focus on growing our network with the addition of new quality partners.

We have grown the number of distribution partners in our system every quarter and remain very competitive in our efforts to add new premium publishers.

Additionally, and very importantly, we continue to test and innovate with new products to attract new partners.

For example, over the past number of months we have been testing a beta implementation of our content and monetization platform, the same platform that currently powers our owned and operated websites for third-party distribution opportunities.

This beta product is meeting with success in the channel as new third-party website owners are interested in improving the relevance, utility, and monetization of their websites.

We also expect that this new distribution will offer opportunities to drive incremental high-quality traffic for our own direct advertisers.

As we move forward in the coming quarters we expect this product's contribution to grow as our content and monetization platforms for our own websites continues to improve.

The search business is all about quantity and quality for advertisers.

Advertisers want good return on investment from a network that has sufficient volume to be relevant to their overall campaign.

Therefore, our goal is to continue to grow both the quality and volume of proprietary and third-party inventory within our network in a consistent and methodical way over time.

The combination of delivering our direct advertisers to both our growing base of proprietary traffic and third-party websites has been a catalyst for advertisers to see more volume and to realize improved return on investment within our system.

This has driven increasing pay-per-click rates from our direct advertisers over time.

Second, we continue to support our locally focused super-aggregator partners, such as AT&T and YellowPages.com as these companies are leveraging their direct sales forces to sell search packages to their Yellow Pages customers, which are in turned fulfilled by Marchex.

AT&T and YellowPages.com have done a tremendous job in becoming leaders in local online advertising and we are optimistic that they will continue to grow the number of local advertisers that are buying search packages.

Our local network of advertisers continues to be a major focus for Marchex and is a place where we continue to invest and realize growing success.

We have tens of thousands of local merchants flowing through our system and we are rapidly growing our share of local advertising dollars coming online.

We believe that this expansion of local merchants, combined with our initiative to continue to grow as a leading source of local online traffic puts Marchex in the unique position of being an early leader in one of the fastest growing segments of online advertising.

We will continue to invest against this local opportunity since we believe the local search will drive a disproportionate amount of the revenue growth in the search base over the next five years.

And third, we will continue to refine the rules under which advertisers and publishers can work with Marchex.

We continue to focus on transitioning away from advertisers that utilize wholesale pricing strategies and we will also deemphasize traffic sources where advertisers have historically received wholesale pricing.

While this will be a fluid process, as certain advertising and distribution partners may change their strategies from quarter-to-quarter the changes that we started in the fourth quarter of last year are mostly complete.

Our focus is to continue to attract premium advertisers paying premium rates across our proprietary as well as our premium partner network.

The goal is ultimately to drive a network with high revenue per-click rate which can compete effectively from new third-party distribution as well as feed the overall Marchex ecosystem.

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 third topic, a more detailed review of our financial results for the first quarter on comment on our guidance for the remainder of the year.

In the first quarter we generated revenue of $34.2 million, which represented accelerating growth from the preceding quarter.

During the quarter we saw strong growth in our revenue attributable to proprietary traffic.

As Russ highlighted earlier in the call, revenue from proprietary traffic sources was $15.1 million, which represented 34% growth from the prior year period.

The principle drivers for that growth were the increase in traffic, selected marketing of certain of our sites, and the rate we received from our direct advertisers.

The rates we received from our largest third-party monetization partner post-Panama launch were relatively neutral.

As we continue to move through the year we expect our enhanced content integration, selected marketing initiatives, and site relaunches will continue to favorably impact our overall monetization and growth.

However, it is important to highlight that certain months can be impacted by seasonal traffic and monetization patterns, which we expect will be the case for the current quarter, as it was in 2006.

That being said, we are launching several product initiatives in late Q2 and in late Q3 that may offset normal seasonal traffic and monetization trends for the summer months.

Though predicting the months of actual impact from certain of these initiatives can be difficult.

Revenue from our partner network or Advertising Services Group was $19.1 million.

The principle factors impacting revenue were, one, the continued transistioning away from advertisers and publishers utilizing wholesale pricing strategies, and two, the continuation of fourth quarter trends in the finance category.

As John mentioned, the majority of our Q4 advertiser and publisher changes were complete by April, though it is important to note that part of our network monitoring systems and rules are fluid as part of our consistent effort to adapt to changing search marketing practices.

Also worth noting, due to the progress of our initiatives tied to third-part distribution as well as those tied to the redesign of our sales force, we believe that revenue growth from our partner network will accelerate through the rest of the year, beginning in the second quarter.

Total operating costs excluding stock-based compensation, amortization of intangible assets for the first quarter of 2007 were $26.6 million.

In the year-ago period total operating costs excluding the previously mentioned items were $22.8 million.

In looking at the mix in operating costs 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 the increase in revenue coming from our own traffic sources.

The increase in sales and marketing costs as a percentage of revenue on a year-over-year basis were largely due to increased personnel costs, marketing of select proprietary websites and online advertiser acquisition programs.

It is important to note that some of the increase in marketing expenses on a year-over-year basis was influenced by Yellow.com and several of our directory sites as well as certain other customer acquisition initiatives.

In the current quarter marketing costs as a percentage of revenue may dip down ahead or our broader launch of 100,000 websites before possibly ramping up again to support our post-launch initiative.

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 first quarter was $7.6 million.

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 first quarter was $9.5 million.

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.

GAAP net income applicable to common stockholders for the quarter was $548,000, or $0.01 per basic share, compared to a net loss of $1.2 million, or $0.03 per share in the first quarter of 2006.

Going forward our GAAP results maybe 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 $0.11 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 a 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 or loss on sales and disposals of intangible assets, other income or expense, the cumulative effect of changes in accounting principles and less the discount on preferred stock redemption.

Turning to the Balance Sheet, we had approximately $59.1 million cash on hand as of March 31st, 2007.

During the first 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, selected acquisition opportunities and our stock repurchase plan.

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

We believe the momentum of the operational initiatives communicated over the course of this call will help us drive accelerating growth through the year.

Therefore we are reiterating our revenue guidance of $144 million to $150 million.

For color on our quarterly revenue expectations, we anticipate that our annual revenue growth rate will modestly accelerate from 10% in the first quarter of 2007 to 10% to 12% for Q2.

Based on this guidance we continue to expect that we will exit the fourth quarter with 20% or more revenue growth over the fourth quarter of 2006.

Additionally, for adjusted operating income before amortization we are reiterating our range of $35 million to $39 million for the year.

For the second quarter, given the mix in expected revenue contribution and continued product investments that are disproportionately weighted toward the first half of the year, we are anticipating that adjusted operating income before amortization to be similar to the first quarter.

We expect we will see efficiencies and margin acceleration in the back half of the year as our revenue growth continues to accelerate at a faster rate than costs.

Similarly, we are reiterating our adjusted EBITDA guidance as we expect to add back approximately $6 million in additional depreciation and amortization to the adjusted operating income before amortization range of $35 million to $39 million.

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

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

Thank you, Mike.

In our last conference call we walked through our outlook for product, operational, and financial progress in 2007.

The main points we wanted to communicate today are that so far this year we are seeing things unfold in the manner we communicated a few months ago.

Revenue growth rates quarter-to-quarter are accelerating.

We see (technical difficulty) in operating leverage as we enter the back half of the year, which will also set the stage for 2008.

In a time where quality traffic is hard to come by and few new sources are emerging for advertisers we believe Marchex has a unique opportunity to garner increasing market share in the online advertising market and specifically the local advertising category.

We are increasing our advertising relationships our (technical difficulty) our third-party distribution relationships and traffic to our proprietary network of websites.

Though the timing of the impact of certain of these initiatives can be difficult to predict, we believe that these initiatives will continue to add new opportunities and defensibility to our business.

We are very energized by the opportunity with the upcoming website launches we have scheduled in Q2 and Q3 that should drive growth in our proprietary traffic base.

We know that the growth of our proprietary traffic base is very important and we believe we are in a position to realize solid growth this year.

As always, I would like to thank our employees for their hard work.

It's due to their efforts that we continue to be excited about our prospects for 2007 and beyond.

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

(OPERATOR INSTRUCTIONS).

Please hold while I poll for questions.

Our first question is coming from Christa Quarles.

Your line is live.

Hi.

In planning your second quarter guidance, is that assuming marketing services still stays negative in terms of growth?

And then, second question I guess, is on the monetization of direct navigation.

We're almost halfway through the second quarter and I was just wondering if there has been, I guess, continuous improvement from Panama, or if you could just characterize either the stabilization, I think Mike indicated that it was still neutral in Q1, if there had been any improvement in Q2?

And then, the third question is just on sales and marketing.

It was a bit higher in this first quarter than I expected.

It sounds like it might take a dip in Q2 until you ramp the new sites, but I was just wondering if you could highlight any sort of commentary around what we should be expecting there and if you should start to see some leverage on that line going forward?

Thanks.

Okay.

I'll try and get these in order.

Yeah, first off, when you look at advertising services, Mike did make reference to that being an area we expect growth to accelerate.

And in 2006, in Q2, proprietary traffic had a small dip based on seasonality, and so we think there be some seasonality in Q2 and we do think that we will see advertising services grow and accelerate for the balance of the year.

In terms of monetization rates on our proprietary sites, we continue to see solid growth from our direct advertisers, and as it relates to Yahoo and Panama, yeah, the effects post-launch were neutral and they've been largely neutral to date.

As it relates to the balance of the year, we're just kind of building our forecasts off of what we know and we'll update it as we continue to know more.

On the last question, in terms of sales and marketing, your interpretation is correct.

We had a number of launches, particularly on new parts of our directory services site that we included marketing around.

We do think marketing will likely dip this quarter and we may see that ramp back up a little bit after we get past the launch of those 100,000 Open List enhanced sites as we roll into Q3.

Okay, so just to be clear, the -- in Q2 the marketing services, I think you guys indicated the -- the changes to the partnership have largely been done.

But does that still mean that it will be negative like it was in Q1, or should you see an improvement from Q1 growth levels?

No, the advertising services area we think will increase.

We -- there's -- we said most of that we think was largely done as of April, and the majority of it was done as of our last call.

So while there still need -- a little, that's predominantly behind us and we do anticipate our advertising services business to grow this quarter and to see that growth accelerate through the balance of the year.

Okay.

Thanks.

Thank you.

Our next question is coming from Clay Moran.

Your line is live.

Thank you.

A couple questions.

First can you talk some more about the -- the direct advertising on your websites, what percent of the inventory or of the revenues from those sites is now coming from direct advertisers.

And then can you -- you gave some numbers I didn't quite follow on price per click, what was the change year-over-year and what was the change sequentially?

So, yeah we did give -- in terms of the price per click on direct advertisers, that rate on a year-over-year basis was up about 50%, and we didn't give the specific percentage sequentially, but it was also up sequentially.

But we did provide 50% year-over-year, and it did sequentially increase in terms of those direct advertiser pay-per-click rates.

And then your first question was on how much inventory we're monetizing ourself?

It's still in the 20% to 30% range and our goal will be to increase that percentage over time, but as of now, it's about 20% to 30%.

Okay.

Can you give us any idea of the difference between your direct advertiser price per click and what you get from your outsourced ad?

Clay, it's really tough to do that in an effective way.

There are places our direct advertisers monetize better than our third-party sources and there are places where our third-party sources monetize better than our direct.

Clearly, one of the things that drives our ability to take more inventory to our direct advertisers is continuing to increase the depth and breadth of places we monetize better.

We're seeing good progress.

In every quarter we see those rates go up and we can continue to broaden the breadth.

It sets the stage for us being able to compliment that with more inventory.

Clearly, as we look at growth and local traffic, which is the key driver of our business and our position in being able to be really kind of the first stopping point for local advertisers coming online we think will give us the chance to accelerate monetizing more of our own inventory.

And, obviously, we're pretty specific today in that being an area we're excited about when we look at the rate of growth of local advertisers coming into our system and our ability to be a primary fulfillment option with our proprietary traffic.

We think that's a big theme as we go into the back half of the year.

Okay.

Second question.

You are generating a meaningful amount of cash.

Can you give us -- and you sort of talked about some potential uses of cash.

Can you give us your thoughts on stock buyback at this point in time?

I assume you didn't do any during the quarter -- why was that?

And then you also mentioned potentially acquiring some companies (technical difficulty) buying up domain up a domain name.

Well, there are a couple of things.

We do continue to look at domains that potentially are suitable for us to acquire.

And, right now, while we've been focused on giving enriched high-quality content we can deliver to our sites we continue to look at where we can compliment that with selective acquisitions, but that's an active, ongoing focus.

A stock buyback, we have done some small buybacks of our preferred shares on top of the $30 million approximately we had spent previously.

And so that is a place we continue to look to be active as well.

So the combination of taking our free cash, looking at acquisitions that may make sense, specific domain acquisitions that we think are very leverageable in the context of our strategy, and where we can reel in shares is continuing to be a focus of how we're utilizing our cash.

Okay.

Thank you.

So one -- clearly one of the focuses for us as we kind of are at a point where our platform and formula are getting clearer and clearer is both the domestic and international opportunity.

And so we think we're well positioned now to kind of take the next step, based on this major launch we have coming up and looking at how we can start to potentially extend that into -- into other areas as well.

Okay.

Thanks.

Thank you.

Our next questions come from Steward Barry.

And I'd just like to remind the participants in queue please limit your questions to one.

Thank you.

Stewart, you line is live.

Yeah, good afternoon.

Russ, could you just provide a little more color on why CPC with your direct advertisers are up 50%?

Is it that local advertisers are willing to pay more per click than maybe, general search advertisers are?

Or is it that they're using your new conversion tracking product?

I mean what are the advertisers, I guess, seeing that they're willing to pay that much more?

It's all about quality.

And when we expose advertisers into direct distribution points on our network they get more than competitive ROI, and advertisers are sophisticated and smart enough, when they see their ROI go up they're going to up their budgets and up their bids.

We've been focused on quality throughout.

We have one of the highest converting networks, based on our stats, and stats of third parties provided to us.

And so where we've been able to take advertisers and insert them into our systems, we have -- we've been able to deliver a very compelling value proposition, both in terms of how we can target geographically, how we can target vertically, and in turn delivering more than competitive ROI.

That theme of quality plus quantity, as we've grown to 31 million plus unique visitors on our own network, has been a catalyst of creating a virtual ecosystem that we think is a key component to driving and accelerating growth.

We've gone through a pretty important product development cycle and that I think is at least a data point that supports were doing the things right and advertisers are voting with their pocketbooks.

And do you plan on adding some additional advertising products for advertisers to purchase, I mean for example banner ads or (reach me ad formats)?

We definitely have a pretty clear view of how we think our advertising services ought to evolve, and that does include greater ability and control for advertisers in what they buy and how they buy it, including, over time, being able to deliver a unified user interface for advertisers.

And so that's just one of the themes we have going forward.

As we have tangible specifics, we'll share those through press releases and conference calls, as well.

Our next question is coming from Gene Muster.

Your line is live.

Hi.

And I guess just to kind of recap on Panama, you've mentioned that it's been kind of a neutral impact, and just to confirm that means that your guidance assumes that Panama's going to have essentially a neutral impact going forward.

Is that correct?

That is correct.

We think it's prudent to basically base our guidance at this point off kind of what we know.

Yahoo, with a recent launch has a variety of elements that they've got planned for the balance of the year and we think prudence dictates basing our guidance off of what we know and, as the year unfolds and we all know more, we can update it accordingly.

But that is a correct assumption.

Okay.

Is there any chance that the optimization through Panama could go down, or is it only neutral to up going forward.

Look, there are a variety of things they can do, some of which we have visibility into and some of which we don't.

We communicate closely with them, they've walked us through a variety of things that we think are positive in the long term, but shorter term we're not going to try and try and over guess at what those may be.

So we believe that Panama has been a -- we were very pleased to see it launched.

We think it's step one in them continuing to create better relevance for advertisers and monetization for partners.

Obviously on a quarter-to-quarter basis you don't know what effects will manifest themselves in what ways.

So we're going to stick with kind of status quo update and, in turn, as we have more data, we'll be sure to share it with you.

And just, in terms of industry, obviously Yahoo has been a great partner of yours.

When you originally, I guess, look back at the (tech rates) that you originally did the Yahoo deal with, how have those, I guess, industrywide, those tech rates changed?

High quality traffic we think continues to be at a premium, and people are willing to pay a lot for it.

And we like that as a large owner of a very high-quality of traffic.

So, on the one side we work with partners who also have high quality and that can lead to us, at times, needing to pay them more.

At the same time we believe we will be a benefactor of that, as well.

Our next questions come from William Morrison.

Your line is live.

Yeah, hi, Russ, I've got a product question for you.

Can you tell us -- I think your PPC market's enhancing good, but are currently -- they rank as when you monetize direct via kind of a modified Dutch auction top bid, kind of like the way Yahoo used to be.

And now that Yahoo has moved more toward a relevancy model I'm curious, do you plan to stick with a model where the top bid comes up first, regardless of relevancy, or are you looking at ways to include relevancy into that product.

We actually have a number of implementations, some of which are based on bid rates, and some of which do have a relevance algorithm dictate that placement.

And so when we look at kind of (directioning) where we're going we are exploring alternatives on how to implement and most effectively match advertisers with users.

Our next questions come from Jordan Rohan.

Your line is live.

Hi.

Yahoo's begun to communicate very specifically with their main channel partners about its plans to discount payments made to owners of traffic whose clicks convert below the Yahoo's search average.

Have you had these discussions yet?

And have you factored that into guidance yet?

Or is this one of those unknowable things?

Yahoo has communicated with us about a variety of initiatives which are all focused on trying to increase the vibrance of their system, ultimately, for the benefit of all.

I just answered, I think, in a similar way a prior question.

There are a variety of things that you can look at and you know make sense in the long term, and you can look at how that manifests itself in the short-term.

What they call quality-based pricing is one of the elements that they're telling us they're working through, and one of the key components there is quality.

And given our focus on high-quality, this is an area that we think, hopefully in the long-term will benefit us, but in totality our guidance is based on what we know today.

And we think that Yahoo's making good decisions in their product evolution and we hope to be a benefactor of that both in the second half of this year and potentially beyond that.

So, it's part of what kind of they've communicated as a broader roll out of a variety of product initiatives post-Panama.

Our next questions come from Sameet Sinha.

Your line is live.

Yes, thank you.

Very quickly, can you talk about your initiative to go after larger advertisers as you're transitioning away from the wholesale pricing?

Can we expect any announcements on that end?

And also, in that regard, if you can talk about some of the rules that you mentioned regarding the advertising services.

I was a little confused there.

Yeah, the two things -- and we talked about it some on last call in terms of the rules is increasing minimum bid rates and increasing the standards for ad relevance to be in our system.

And so those are really some of the key components.

Is -- ads are contents too, and we want to make sure we're delivering relevant content in whatever form.

And so, folks who may have a short list of keywords and lot of kind of identical ad copy that were bidding wholesale rates, we didn't think helped us deliver relevance to our partners, and so the changes were really around those two primary things.

But, in terms of large advertisers, we have had a variety of wins.

We haven't historically talked about or publicly announced advertiser wins but, John, maybe you can just give some color as to our initiative there, both in terms of our sales organization and our areas of focus.

So we have, as we've previously communicated, we've focused on migrating a large part of our senior sales staff here to Seattle and we've hired some very experienced folks in that area.

And we have -- we have some -- we have some specific initiatives on both the West Coast and the East Coast to address some of the Fortune 1,000, or the highest -- the highest profile advertisers and agencies.

This is a place where I would say we've done a pretty good job in the past, but going forward we definitely see this as an area of opportunity, especially as our proprietary traffic continues to grow.

Our next questions come from Maurice McKenzie.

Your line is live.

Yes, just a couple of quick questions.

The first is on really on Yahoo, the contribution in the quarter, what it looked like?

As well if you could discuss how close you are to renewing your contract?

And finally, if you could just discuss if you've been approached by any other major search engines on developing new partnerships and diversifying that revenue stream?

Thanks.

So -- I -- we obviously work with a variety of folks in the industry.

Yahoo's a primary partner.

You know that existing relationship goes through late this year, but we've got a variety of relationships with them that are ongoing.

And so this is an area that we're clearly thinking about things and having discussions.

And as it relates to, I guess, the other parts of your question, do you mind repeating those?

Maybe you've cut off.

Yeah, they're -- look, we're always in talks with a variety of players given the position in the landscape of having thousands of advertisers that we're delivering to all the relevant distribution points.

So, whether it's shopping engines, premium websites or search engines, we're always looking at ways to deepen relationships with any distribution source that can be viewed as a value proposition to our advertisers.

Thanks.

One more follow-up coming from Clay Moran.

Your line is live.

Thank you.

I guess, in terms of the Yahoo contract, or potentially moving over to another search engine, can you just give us a time frame when you think that might be completed?

Yeah, right now -- I think folks have -- have talked about our current relationship runs through late this year and, as we get closer or as appropriate, we'll provide some details, but that's not on today's agenda.

Thanks.

We have another follow-up coming from William Morrison.

Your line is live.

Sorry, I just wanted to ask Mike can you give us the operating cash flow and CapEx in the quarter, please?

Thanks.

The operating cash flow was north of $10 million, and we'll be publishing the 10-Q shortly, so we'll have the information in there.

And then, from a CapEx perspective, it was consistent with what we've done in past periods, around $1 million or so.

Hey, look.

We thank you all for participating in today's call and we look forward to giving you more updates in the coming months as we look at some significant product progress, and a variety of progress with other initiatives as well.

Thank you.

Thank you, ladies and gentlemen.

This does conclude today's teleconference call.

You may disconnect your phone lines at this time and have a wonderful day.

Thank you for your participation.