Marchex Inc (MCHX) 2007 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Marchex Third Quarter Earnings Conference Call.

At this time all participants have been placed on listen-only mode and we will 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, General Counsel and Chief Administrative Officer.

Sir, you may begin.

Thank you.

Good afternoon everyone and welcome to Marchex's Business Update and Third Quarter 2007 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, Cameron Ferroni, Chief Technology Officer, and Bill Day, Chief Media 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 the 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'll 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 Web site 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.

I'll start by providing a summary of the progress Marchex has made with our local strategy as outlined in last quarter's call.

John will then provide an update on our advertising services business and Mike will take you through our financial results and guidance for the fourth quarter.

In our last call, I outlined in detail the local market opportunity.

Marchex's areas of strength and growth, now the cross section of the two, led us to determine it was the right time to make a stronger commitment to local.

We believe, and leading analysts agree, that local will be the primary driver of online advertising growth for the next five years.

Fundamentally, we believe local is one of the rare market changing opportunities that, like e-commerce search and most recently, social networking, has the potential to create and transfer significant value to those in a position to capitalize on it.

In the past quarter we established the clear framework for the ongoing execution of Marchex's local strategy.

At the core of this framework are two fundamental strategic objectives that are guiding everything we do.

Our first objective is to build and deliver the most local-centric advertising platform in the industry supporting clicks and calls for local advertisers.

Doing this is helping Marchex drive increased adoption of local online advertising by the more than 15 million local and national advertisers that currently fuel the $100 billion local advertising market.

Our second objective is to deliver unparalleled utility and relevance to the millions of consumers who are increasingly turning to the internet for local information.

Let me now walk through the specific progress we have made with both of these objectives and the items outlined in our last call.

On the local advertiser adoption side, first we extended and expanded our long term partnership agreement with AT&T and its subsidiary YellowPages.com to create, manage, and fulfill local search advertising campaigns for their advertisers.

The agreement extends our already deep relationship into 2011, enhancing Marchex's role as a primary driver for bringing local advertisers online.

Marchex's ability to win this very strategic long term relationship was enhanced by the increased investment in our local products we mentioned last quarter.

The broad reach of AT&T's sales force combined with Marchex's scaleable technology and ability to provide traffic from our local content network makes this an ideal partnership that we believe will further accelerate Marchex's position as a local leader and supports our commitment to investing in this opportunity.

Second, in September we completed our acquisition of VoiceStar, a leading provider of call based services for advertisers including pay-per-phone-call, call tracking, and Web-form-to-phone.

Our product team has already begun integrating VoiceStar's offering into Marchex's advertising platform.

With the addition of VoiceStar's call based offering, we believe we have the most comprehensive and local-centric advertising platform in the industry.

We know that the majority of local advertisers, whether or not they have a Web site and are looking for clicks, rely on phone calls to drive sales.

We believe that large local sales organizations, many of whom work with Marchex and VoiceStar today, will grow their sales of pay-per-phone-call products dramatically over the next few years.

As such, we believe that call based services will be a key driver of the adoption of local online advertising and along with clicks, are a required component of an industry leading local advertising platform.

Third, we continue to see strong growth in new advertiser acquisition.

Through the third quarter, we added more than 20,000 new advertisers through our aggregator partnerships, direct sales channels, and the addition of more than 16,000 call based local advertisers, through our acquisition of VoiceStar.

This puts the total number of local advertiser using Marchex's products and services at more than 50,000.

Because of the sales momentum we are seeing from partners, our own direct sales efforts, and the addition of call based services to our platform, we believe we are on track to have more than 80,000 advertisers using Marchex's products and services by the end of 2009.

Let me now turn to the consumer traffic side of our business.

Again, our objective on the consumer side is to deliver unparalleled utility and relevance to the millions of consumers who are increasingly turning to the internet for local information.

We took several steps towards this objective in the third quarter.

First, we launched a new version of Openlist.com which is currently serving as the hub of our local content network.

Openlist.com includes 15 million business listings as well as refinable content across 20,000 categories covering virtually every city and town in the United States.

Second, we extended Openlist content to 50,000 additional owned and operated Web sites, expanding our local footprint and content to more than 150,000 owned and operated Web sites in total.

In tandem with this milestone, we announced that organic traffic to Openlist integrated Web sites on our network increased by more than 20% in September, over the average for the three month pre-Openlist integration.

Since then, traffic to the Openlist integrated Web sites has continued to grow.

At this point, the vast majority of our owned and operated Web sites are local and our highest traffic growth is from these local Web sites.

Third, we've deepened our local consumer utility by adding content including hundreds of thousands of user generated reviews from leading vertical providers including HealthGrades, Contractors.com, and OpenTable.com.

In addition in the third quarter, visitors to our local content network added more than 20,000 proprietary user generated reviews and ratings directly to our Web sites.

In order to be a leader in delivering local utility and relevance, we believe it is very important to offer consumers great local business information enriched with other value added information such as reviews and ratings from visitors to our Web sites and user generated and expert reviews from other leading authoritative sources.

This approach enables us to deliver proprietary content while also utilizing our technology to capture and deliver large amounts of highly relevant information across a wide spectrum of categories and topics.

This combination will provide local consumers the breadth and depth of information they need to make better, more efficient local decisions every day.

To ensure we have the proper resources to execute on our local strategy, in the third quarter we continued to invest in building a world class team, adding talent in each of the areas key to growing our local business.

Consistent with our message last quarter, we are actively hiring to support our sales and product efforts as both John and Mike will touch on more in a minute.

In addition, in October we added Nick Hanauer to our Board of Directors as Vice Chairman.

Nick's track record of success in identifying and executing against revolutionary advertising and consumer focused opportunities from Amazon to aQuantive makes him the ideal addition to our Board of Directors.

His experience, leadership, and in depth understanding of consumers, technology, and advertising, will provide significant value.

In summary, in the third quarter we made significant progress in the specific areas that one, further our position as a leader in the local marketplace and two, will continue to drive growth in our business going forward.

During the quarter, we also continued to be active with our stock repurchase program by purchasing 1.4 million shares of our outstanding Class C common stock which represents approximately 3% of our common shares outstanding.

We are committed to the Marchex opportunity and as a result, will continue with our share repurchase program as market conditions permit.

Mike will touch on this more, in more detail, in a few minutes.

With that, I'll turn the call over to John.

Thanks Russ.

In the third quarter we continued to align our advertising services business in order to add local advertisers more quickly, drive increased budgets, and deliver highly targeted traffic to our local advertisers.

The combination of owning local traffic and understanding how to target campaigns locally are important parts of differentiation for Marchex that allow us to win new advertiser business and expand that business once advertisers are actually in our system.

First, as Russ highlighted, we extended our partnership with AT&T and YellowPages.com into 2011 which enhances Marchex's role as a primary catalyst for bringing local advertisers online and buying through Marchex.

Every month, AT&T's approximately 5,000 sales representatives nationwide introduce search marketing to tens of thousands of local advertisers.

We believe our strategy of partnering with leading local aggregators such as AT&T, Comcast, and The Cobalt Group is a winning strategy to build the largest base of local online advertisers.

As evidence, the number of new local advertisers using Marchex products and services in 2007 is in the aggregate, 50% higher than the same period in 2006 primarily as a result of this strategy.

In addition, we have been expanding our direct sales force and concentrating their efforts on large advertisers with local interests.

In the past quarter, we added several leading national advertisers to our roster including Roto-Rooter, Cox Auto Trader, Geico, and Carnival Cruise Lines in addition to leading agencies including Avenue A and Reprise Media.

National advertisers are increasingly interested in local traffic and local targeting.

With our local content network, our locally focused advertising services platform, and proven fulfillment capabilities, Marchex is in a prime position to be a major beneficiary of this emerging trend as the primary provider of local traffic and services to agencies and national advertisers.

We are also highly focused on forming new partnerships with additional leading aggregators of advertisers.

By virtue of acquiring VoiceStar, we now have relationships with more than 100 local advertiser aggregators including Comcast, Yellow Book USA, and The Cobalt Group.

Our opportunity is now to expand this roster of partners and to grow our business with these existing partners.

Therefore, in order to grow these relationships and kick start integration with VoiceStar, in the last few weeks we have begun placing VoiceStar pay-per-phone-call advertisements on Marchex's network.

VoiceStar has hundreds of partners that are selling pay-per-phone-call advertisements and naturally, Marchex should be a distribution point for these advertisements.

Comprehensive integration will take time and is part of our ongoing product investment.

However, we are pleased that we have been able to begin the integration and cross sell process so soon after the acquisition.

We are transforming our advertiser services business from one primarily selling third party distribution into one selling a highly scaleable comprehensive local advertising solution with traffic from Marchex's own local network increasingly at the center.

Looking forward, as we continue to build our local content network and expand available inventory for Marchex's direct advertisers, Marchex will increasingly become a must buy for advertisers of all sizes interested in local inventory, local targeting, and local traffic.

With that, I'd like to hand the call over to Mike to walk through our financial results.

Thanks John.

Today I'll review our third quarter financial results and close with forward guidance for the fourth quarter.

Let me begin with revenue.

Third quarter revenue was $33.5 million compared to $32.3 million in the third quarter of 2006.

Revenue from proprietary traffic sources was $10 million.

Total unique visitors to our owned and operated network of Web sites was 26 million for the month of September according to internal logs.

The number of revenue generated events and referrals for the quarter was more than 35 million.

Consistent with our guidance last quarter, the principal impacting factors in the quarter were one, a decrease in the overall combined revenue per click rate as we continue to shift inventory to direct Marchex advertisers.

This decrease was in part driven by a decrease in our rate from direct advertisers which was expected as there is a time lag between increasing inventory allocation and subsequent advertiser sell through rates.

And two, a refocusing of our marketing resources toward a greater mix of Openlist integrated Web sites which led to a reduction in marketing spending.

Looking more closely at the factors that impact our revenue from proprietary traffic sources, we expect the first order impact as we take over more inventory on a direct basis and as Yahoo continues to roll out changes in Panama through the end of the year to decrease our average revenue per click rate from direct advertisers as well as third party sources.

As a result, we expect fourth quarter revenue from proprietary traffic sources to be at a level similar to what we saw in the third quarter.

However, over time as we continue to grow our direct advertiser base, improve the relevance of our local advertising targeting, and drive increased traffic to Marchex's owned and operated Web sites, we believe we will close the gap on the rate we receive from third parties and in turn, drive revenue from proprietary traffic sources higher.

The cumulative effect of these changes will lead to a second order benefit of stronger long term growth in revenue from proprietary traffic sources as well as greater defensibility and greater long term profitability.

Revenue from advertising services was $23.5 million.

The growth was driven primarily by one, the addition of more locally focused advertisers using Marchex products and services, resulting from our direct sales efforts as well as through our partnered relationships, and two, the addition of third party distribution partners and expanded relationships with existing partners.

Total operating costs excluding stock based compensation and amortization of intangible assets for the third quarter of 2007 were $28.7 million compared to $23.7 million in the third quarter of 2006.

In looking at the mix in operating costs for the third quarter, our service costs excluding stock based compensation increased as a percentage of revenue on a year over year basis largely due to increases in distribution partner payments, increased personnel, and contractor costs.

While our updated objectives and refocusing associated with our Openlist integrated Web sites has led to a decreased marketing spending in the short term, we believe this evolved strategy puts us in a better long term position to drive increased traffic and usage levels which we recognize as a key driver of operating leverage and value creation.

Moving forward, we expect sales and marketing costs to be in the range of 14% to 16% of revenue in the fourth quarter with spending particularly focused on the re-launched Openlist.com and other high utility local Web sites in our network.

Other operating costs included additional investment in personnel and product development, increased technology infrastructure costs, and additional professional fees including intellectual property initiatives.

Adjusted operating income before amortization for the third quarter was $4.8 million.

Adjusted EBITDA for the third quarter was $7.3 million.

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

GAAP net loss applicable to common stock holders for the quarter was $1.5 million or $0.04 per share compared to a net loss of $411,000.00 or $0.01 per share in the third quarter of 2006.

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 $0.07 per share for the third quarter.

For a reconciliation of GAAP EPS to adjusted non-GAAP EPS for the third quarter, please refer to today's press release.

Turning to the balance sheet, we had approximately $37 million cash on hand as of September 30, 2007.

During the third quarter we used approximately $13 million in our acquisition of VoiceStar as well as an additional $13.6 million to acquire approximately 1.4 million shares of out outstanding Class B common stock or 4% of our common shares outstanding as part of our share repurchase program.

Importantly, we continue to generate significant cash flow from operations.

Going forward, we expect to continue to generate significant cash flow although it will remain lumpy based on the timing of certain investments, payments, and other factors.

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 Q4 2007.

Our guidance for the fourth quarter of 2007 is revenue of $35 million or more compared to $32.6 million in the fourth quarter of 2006.

We believe continued momentum from our local advertising services business combined with normal seasonal strength in advertising budgets will be the primary drivers of year over year growth.

Fourth quarter adjusted operating income before amortization guidance is $4 million or more.

Consistent with our third quarter guidance, certain expenses related to our increased investment in local leadership including our investment in the integration and platform build out of our pay-per-phone-call services, increased personnel costs, development and technical operations costs, costs associated with communications and co-location facilities, and increased sales and marketing costs will continue in the fourth quarter and carry into next year.

For adjusted EBITDA, we expect to add back approximately $2 million to our adjusted operating income before amortization for the fourth quarter, implying adjusted EBITDA of $6 million or more.

In conclusion, we are encouraged by the initial positive returns we are seeing from our accelerated investment in products and people.

We will continue to invest in our areas of strength and growth to ensure that Marchex realizes increased leadership in local and increased value in our intellectual property.

With that, I'd like to turn the call back to Russ.

Thanks Mike.

Let me conclude by emphasizing a few key points.

First, we believe Marchex has the most local-centric advertising platform in the industry which can support large partners and direct advertisers looking for locally targeted fulfillment with clicks and calls.

Second, we have a clear focus on deliver unparalleled utility and relevance to local consumers through our network of owned and operated Web sites.

And third, we are continuing to realize strong growth in the number of local and national advertisers using Marchex products and services.

Over the last several months, we have sharpened the focus of our entire organization including our Sales, Business Development, and Product teams, around our local mission.

As a result, we believe Marchex is in a very good position to capture an increasing share of local advertising dollars as they migrate online as well as an increased share of consumers looking for local information.

I'd now like to open up the call for questions.

Thank you.

Ladies and gentlemen the floor is now open for questions.

If you have any questions or comments please press the numbers 1 followed by 4 on your touchtone phone at this time.

Pressing 1, 4 a second time will remove you from the queue should your question be answered.

Lastly, we do ask that while posing your question that you please pick up your handset if you are listening on speakerphone, for optimum sound quality.

Please hold while we poll for questions.

Our first questions come from Christa Quarles.

Your line is live.

Hi, first question is around your pipeline.

As you look at sort of the yellow page directories, newspapers, ISPs, etcetera, where do you see your platform and your offering differentiating relative to some of the others out there, Reach Local, WebVisible for example, and then second question is really just about where the state of the local market is.

I've seen Judy's Book and Insider Pages seem to go away I guess.

Just wondering if you think that the market continues to accrue toward the yellow page partners and therefore, is that sort of emblematic in how your strategy plays out?

Thanks.

When we define having the most local-centric advertising platform, for us that means can we support aggregators of advertisers and direct advertisers in the first place and can we sell them the products they want in the second place, which are clicks and calls.

And so our system takes complex technology and makes it very simple at mass scale and so that's the key part and clearly early adopters that are directory companies like the yellow pages, so we see this thing very relevant across all vertical categories whether it's The Cobalt Group in the auto space or other folks who are large aggregators of local advertisers across the United States.

So one of the key elements relative to the competition is there are folks who might be focused on calls or might be focused on search but may even have challenges with the kind of scale we're talking about or may just be looking at aggregators or direct.

In our case, we've made a big investment and we have greater scale than anyone in the industry and we're well positioned to support more growth with existing partners and at the same time add lots of new partners beyond that.

So that's really one of the key components to this.

On the other end, clearly the traffic side is important.

Where we have at this point one of the largest local ad networks in the industry, whether owned and operated, a local site is at the center of it.

Our next questions come from Brian Pitz.

Your line is live.

Great, thanks.

Just a further drill down on Openlist.

While it is improving visitation to the site, would you discuss how it is really impacting the velocity of ad clicks through the pages and then secondly, unrelated, how do you really think about valuing your domain name portfolio?

Do you try to mark these properties to market?

How do you guys globally think about that portfolio?

Thanks.

This is Russ.

I'll answer the first part and I'll let Mike answer the second.

I think that's a more technical question.

So, our focus on the consumer side is just relevance.

We can increase relevance that's monetizable.

That's great but first and foremost, we really want to deliver to consumers looking for local information because we think that's the fundamental driver of increased traffic over time and so for us, when we look at what we're doing with Openlist, we are focused on increased relevance of editorial content and monetizable content but over time, if we can add more monetizable content that's fine but our fundamental mission if more relevance, period.

We think we've seen confirming trends that's supporting the investment we're making and better business information distributed through Openlist and we're clearly going to invest more but getting to the heart of it, it's all about relevance and we think that's what drives higher traffic which is one of the key drivers of equity value creation.

Mike?

And just to answer the second part, I think part of the way we think about it, we don't get into a per Web site valuation per se, but how we do think about it is approximately three years ago, or the majority of our acquisitions have been close to three years ago, and we spent over $220 million and most of that was more than two and a half years ago and if you think about just where the market has gone for some of the investments that venture capital, private equity, and other investors have put into the marketplace and just the valuations of Webs sites, have they changed over that period of time?

It's quite likely that you could look at the valuation perspective and see a significant increase perhaps even a doubling at least of the valuation on the entire portfolio.

Our next questions come from Gene Munster.

You line is live.

Good afternoon and congratulations on getting everything moving in the right direction.

One of the things that I'm sure you guys get tired of is questions about Yahoo but it seems that all that was kind of as expected this quarter.

Do you feel that in terms of the impact of quality based pricing that we've kind of got that to a point where it's stabilized or is it still kind of a process of figuring it out as the changes are made at Yahoo going forward?

What we've seen is consistent with what we mentioned last quarter.

Q3 we didn't see much impact.

Q4 to date we have seen some impact and we think it gets better in 2008.

It's pretty much followed our expectation.

Our next questions come from Eric Martinuzzi.

Your line is open.

I want to understand a couple of the metrics that you gave.

The additional 20,000 advertiser, it looks like net of the VoiceStar, or excluding them, that would be a 4,000 additional advertiser.

Does that compare to the 3,500 that you talked about adding last quarter?

Yes it does.

Okay, and then just on the traffic side, you talked about 26 million uniques.

Does that compare to the 31 million uniques from June '07?

It does.

Okay, and could you go over again what that decline is due to?

Sure, predominately refocused marketing efforts which translate into sales and marketing decreasing to about 14% of sales on the third quarter from just over 20% of sales last quarter.

So the primary organic initiatives around Openlist and Openlist powered sites, as we mentioned in our metrics translated into an initial 20% growth which we think is very encouraging but that was offset in the short term by some of the reduced marketing spending.

Our next questions come from Jordan Rohan.

Your line is live.

Hey guys, it's Ross sitting in for Jordan.

Question about the revenue per click that you mentioned.

You said that the decline was from both your third party partner and something on the direct side.

Can you just clarify exactly what the two components of the monetization decline in even an operated business was and then second -- sorry, go ahead.

The principal thing, Ross, I think is clearly the marketing initiatives and the decrease in the sales and marketing from 20% of sales in Q2 compared to the 14% in Q3.

On top of that, the other contributing factor was our rate per click of just taking more of the advertising inventory over on a direct basis for ourselves and at the present time as we've talked about in the past, we do have a lower overall rate with our own direct advertisers than we do from some of our third party sources.

And the upside in the advertising services line you guys said was a combination of additional advertisers as well as new distribution partners.

Can you talk about the latter?

What's in the new distribution that you picked up in the quarter?

Thanks.

The primary driver in the quarter was the increase in advertisers and so that's -- both have been good contributors but the primary driver was that increased number of advertisers spending more money through us.

Our next questions come from William Morrison.

Your line is live.

Hi, this is actually Rob on the call for Bill.

Just going over the proprietary traffic side, a couple of follow up questions -- it looks like sales and marketing was down around 33% sequentially versus uniques being down about 16% sequentially so it looks like you haven't seen quite as much of a drop off in traffic as you have in marketing expense.

Is that in line with your expectations and where do you see that going forward?

And -- go ahead, sorry.

No, no, please.

You go ahead.

Alright, and then just secondly, I was just wondering if you could talk a little bit about the gap that you had mentioned between your inventory allocation and the sell through.

Is there any way that you can evaluate expected value from either third party campaigns versus your owned and operated sales?

First off, sales and marketing, we've had reduced Web site marketing but also in the quarter increased our hiring of sales and business development personnel and other related investments but net net, it went from 20% to 14% and to your point, the decrease in overall traffic was significantly lower which is consistent with our expectation of driving organic traffic through our consumer facing products initiative.

So we're very encouraged with that.

We look ahead and see, as we noted in this conference call, our highest growth area is our local Web sites.

We have catalysts to grow those further.

In 2008, that should be the significant majority of our traffic and we're on a very good track and we clearly understand that organic traffic growth is what drives our value and operating leverage so we feel like we've got a lot of focus around the right things in driving the value of Marchex forward.

On the second part of the question, can you just hit that again?

-- versus your own direct sales or a gap between third party monetization versus direct monetization.

Is there any way that you can, on the fly, evaluate one versus the other or is it a gap where you have to allocate to either a third party or direct, one or the other?

The methodology for us, while in the past we've talked about increasing the inventory we sell directly and there has been a range of 20% to 30% and we've moved that up but a lot of our focus aside from just overall percentage is uptaking the categories that we think we sell the best and deliver the most relevant listings and so clearly, taking a bigger percentage of local inventory makes sense.

We're looking at it overall but we're also looking at a category level since that's the way we can increase the depth and breadth first which are the keys to closing that gap on modernization and allow us to get there most quickly.

That's been our methodology and what's driving our business decisions.

Our next questions come from Clay Moran.

Your line is live.

I have two questions.

You just mentioned the direct inventory.

Can you tell us what percentage of inventory is sold directly now?

Sure, as I mentioned, historically we had driven from 20% up towards 30%.

We are up at that high end of the range with certain categories where we feel best equipped to sell through the quickest at much higher levels.

Okay and then second question, you were talking about the local advertisers.

What percentage of that 50,000 advertisers is active or was active in the past quarter and where are those ads going?

Are they going primarily to the props side?

Are they going to the distribution network and does the distribution network have any local emphasis?

Can you just sort of put some color on that?

Thanks.

First off, our definition of advertisers are active advertisers so all 50,000 plus are active advertisers using Marchex services.

So that is a net number and so in terms of distribution, the majority of these, if not all of these, are getting a combination of our owned and operated traffic plus partner sources.

Our next questions come from Maurice McKenzie.

Your line is live.

Just a couple questions.

First is, can you discuss the specific takeaways that you learned this quarter as you dialed back on your marketing spending with respect to, you know, from a search engine optimization perspective with respect to your owned and operated properties and also can you discuss the percentage of organic traffic versus pay traffic in the quarter?

The second one is the significant majority of our traffic is organic and all of our focus is on driving higher organic traffic over time and our marketing initiatives are actually geared towards creating organic users in the future so that's where we stand today when you look at the makeup of our network, the makeup of our traffic, and our focus going forward.

Those are really the key elements to it.

Our next questions come from Marianne Wolk.

Your line is live.

Thank you.

I had a couple of questions.

Can you give us a sense of the percentage of repeat visitors to your Openlist sites?

Is that better than your average?

Can you just talk a little bit about that and then secondly, you mentioned that you renewed your AT&T Yellow Pages contract.

Was there a positive financial impact from that renewal that quarter or maybe even a negative one because you did extend over multiple years?

And then finally, what do you do now for Yellow Book and what is the opportunity there?

Thanks.

Sure.

On the first one around Openlist, we haven't disclosed specific metrics but the frequency of users around our Openlist products have increased since we've re-launched Openlist.com and also had an Openlist enabled Web site.

So the trend there is supporting the organic initiative.

In terms of specifically what we're doing with Yellow Book, I'll ask John Keister to step in and give a quick description.

Yellow Book is one of more than 100 aggregators that VoiceStar works with and we are speaking with all the aggregators at VoiceStar about doing more with us on other parts of our platform but Yellow Book is one of, like I said, is one of more than 100 aggregators that VoiceStar works with today.

And on the AT&T relationship, there are volume thresholds that trigger certain economics from AT&T and certain incremental investment from Marchex.

Once again if there are any questions, it is 1, 4 on your touchtone phone at this time.

Ladies and gentlemen

We appreciate everyone's involvement in listening to our third quarter business update.

We appreciate the thoughtful questions as well and we'll look forward to keeping you posted on our progress as we move forward.

Thank you again.

Thank you ladies and gentlemen.

This does conclude today's teleconference.

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