Marchex Inc (MCHX) 2007 Q4 法說會逐字稿

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  • Operator

  • Good afternoon ladies and gentlemen and welcome to the Marchex Fourth 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, General Counsel and Chief Administrative Officer, Ethan Caldwell.

  • Sir, the floor is yours.

  • Ethan Caldwell - CAO & GC

  • Thank you.

  • Good afternoon everyone and welcome to Marchex's Business Update and Fourth 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 will also reference certain non-GAAP measures of financial performance and liquidity including OIBA, adjusted OIBA, adjusted EBITDA, and adjusted non-GAAP EPS.

  • A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today's earnings press release, which is available on the Investor Relations section of our Web site and definitions of these measures as used by us and the reasons why we believe these measures provide useful information 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.

  • Russ Horowitz - Chairman & CEO

  • Thank you, Ethan.

  • I will start today's call with an update regarding Marchex's progress in achieving local online industry leadership and the role our focus had in driving our fourth quarter results.

  • John will then discuss our operational priorities for this year and Mike will take you through our financial performance and initiatives guidance for 2008.

  • I will then conclude with a few key takeaways before opening up the call for questions.

  • Over the past quarters, Marchex has established a clear framework for achieving local online industry leadership.

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

  • Our first objective is to build and deliver the most local-centric advertising platform in the industry at scale, delivering high quality local leads to advertisers through clicks and calls.

  • By providing one of the most comprehensive platforms for aggregators and advertisers in the marketplace today, Marchex is a primary catalyst for increasing the adoption of local online advertising.

  • Our second objective is to deliver unparalled utility and relevance to local consumers through our network of proprietary local websites.

  • In pursuing this objective, we have built one of the broadest footprints of local traffic online today.

  • We are focused on these objectives because we believe that local online advertising is in the early stages of a multiyear mega trend and that it will become one of the most valuable online opportunities.

  • Marchex is participating at scale in local as both an advertising services provider and as a publisher or traffic owner.

  • Today, there are no clear leaders in local and Marchex is uniquely positioned to fill that void.

  • Turning to the fourth quarter, we're pleased to see the investments we made in the local opportunity in our products, people, partnerships and infrastructure contribute to our fourth quarter financial performance and help us generate momentum for our business.

  • In the fourth quarter we continue to see strong growth in new local advertisers using Marchex products and services, adding more than 5,000 new advertisers through our direct sales channel and aggregated partnerships.

  • The number of local advertisers and national advertisers with local interests using Marchex products and services is now more than 55,000.

  • We're ahead of our scheduled pace to exceed our previously stated goal of more than 80,000 local advertisers by the end of 2009.

  • Today, we have partnerships with more than 100 local aggregators, including AT&T, Idearc and the Cobalt Group, the majority of which we believe are in the early phases of adopting Marchex products and services.

  • Furthermore, because the online business is a principle growth initiative for many of these partners, we believe local aggregators will continue to invest in click and call-based products essential to capitalizing on the local online opportunities.

  • We believe both of these trends support the continued growth of our advertiser channel through 2008 and beyond.

  • During the fourth quarter we also continue to see positive momentum in our local content network, otherwise known as our proprietary traffic, which is comprised of local reference websites and community content and features.

  • Local reference websites are those sites within our networks that help consumers find local businesses and services.

  • Traffic to these sites including Openlist.com, Yellow.com and sites such as ChicagoDoctors.com increased by more than 20% quarter-over-quarter.

  • As a result of this growth, local traffic now comprises a clear majority of our proprietary traffic and will continue to be the driver of our traffic growth in 2008 and beyond.

  • Community based consumer engagement on our sites also continues to increase.

  • In the fourth quarter, visitors to our network added more than 50,000 reviews and ratings, more than double the number added in the third quarter.

  • Our local content network now features more than 1.3 million user generated reviews and ratings, including those from our partnerships with leading vertical providers such as Health Grades and those added directly by consumers visiting our sites.

  • In addition, local merchants are utilizing recently launched Marchex tools to confirm the accuracy of their business information on our network and add additional content relevant to local consumers looking for the products and services they offer.

  • Consumers are increasingly using the internet to find local information.

  • According to a recent Neilson net ratings report, 86% of search engine users are performing local searches, up from 70% in 2006.

  • This trend will not only continue to drive significant growth in local online advertising, but we be will be a primary driver of overall internet advertising growth in the coming years.

  • As we said in last quarter's call, the primary winners of the lion's share of the local opportunity will be the providers that offer the most innovative local-centric approaches to driving local advertiser adoptions and addressing consumers' local information needs.

  • As our advertiser growth in 2007 demonstrates, our local advertising platform, the only one in the marketplace that delivers both clicks and calls at scale, continues to be a primary catalyst for bringing local advertisers online and does not show signs of slowing down.

  • As the momentum from our local content network indicates, we're in a prime position to capture an increased share of the growing number of consumers looking for local information online.

  • To do this, we'll continue to innovate on our local reference websites and build community content and features on our network to create the deepest, broadest and most relevant source of local information for consumers.

  • For example, to leverage the comprehensive geographic coverage of our websites and to drive additional traffic growth and repeat usage on our network, we're adding timely community focus content provided by local contributors from areas across the United States.

  • In the last few months we have launched a trial program on more than 100 select Marchex-owned zip code websites, where residents can publish content relating to businesses and events in their communities, as well as enriched local business listings which such things as reviews and photos.

  • We're at an early stage in the trial, but initial results in terms of consumer interest, traffic and usage growth are encouraging.

  • Again, while it's early in the trials, the average number of pages on these sites have more than doubled compared to prior pretrial levels.

  • We also believe that in order to deliver the most relevant local content to consumers and maximize monetization on our websites, we must deliver the most relevant local ads possible.

  • We're achieving this by continuing to invest in robust local ad targeting capabilities and by building one of the industry's largest local ad networks with our proprietary websites at the center.

  • New advertiser relationships with leading local aggregators such as our recently announced relationship with Idearc Media, which has tens of thousands of local advertisers, are providing us with a significant number of additional targeted local ads for delivery across our broad range of local categories.

  • These ads, in conjunction with those from the other 55,000 local advertisers, will enable us to better monetize our websites with the most relevant ads and unlock more value from our local content network.

  • While it's early in the year and prudent to take a conservative view, given the potential impacts to our advertising business in the event of an economic downturn, our local business is not showing signs of slowing down.

  • Local online advertising has a tailwind driven by local advertisers shifting their dollars online and national advertisers allocating more of their online advertising budgets to locally targeted advertisement.

  • Also today, as a further indication of our ongoing commitment to the Marchex opportunity and belief in our strategy, we announced that we are increasing our stock repurchase program.

  • Today we're updating our program to increase the total shares we can purchase to 5 million, up from 3 million shares previously.

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

  • With that as a backdrop, I'd like to turn the call over to John to discuss our operational priorities for 2008.

  • John Keister - President, COO & Director

  • Thanks Russ.

  • Our 2008 priorities are pretty straight forward.

  • We're focused on initiatives that will increase both our local advertiser relationships and our local traffic.

  • Specifically, we will focus on four main priorities.

  • One, continue to innovate on our local advertising platform by building and integrating new products throughout the year.

  • These new products include first, a new performance based local advertising product, which will integrate search packages with call tracking features in the third quarter.

  • Second, we will be evolving our pay per phone call marketplace throughout the year, which will involve multiple product releases at various points during 2008.

  • And third, a number of enhanced local ad targeting capabilities throughout the year that will enable us to consistently improve the matching of our local advertisers with our local traffic.

  • Number two, we will consolidate our brands to make it easier for both advertisers and consumers to interact with Marchex.

  • On the local advertising services side of our business, we will consolidate our brands to make it easier for advertisers to take advantage of our full suite of products and services.

  • We will also create an overarching consumer-facing brand for our local content network that engages consumers and reflects the utility, breadth and depth of our offering in terms of local reference and community.

  • Our third areas of focus is to continue to grow our local content network through several means, including one, launching new and enhanced tools that will further enable local consumers and merchants to contribute content that enriches the utility and relevance of our local business information.

  • Two, updating the user interface to provide a more intuitive user experience.

  • And three, launching features which encourage user interaction and increased usage.

  • Our fourth focus is to add category based call advertising units to our websites that can improve usability and relevance, diversify our advertising inventory and improve our local content networks monetization and yield capabilities.

  • These advertising units will be performance based, meaning the advertiser will pay Marchex when a call to the merchant is completed.

  • We believe that over time, these types of advertising units will become increasingly important to local merchants and that delivering them on our local network will enable us to capitalize on this trend.

  • Our focus on each of these priorities will leverage both the investments we made in 2007 and the investments built into our 2008 financial outlook.

  • We believe successfully executing on these priorities and other related local initiatives will position Marchex for accelerating growth rates in 2008 and higher growth rates in subsequent years.

  • Now I'd like to hand the call over to Mike to walk through our financial performance and our guidance for 2008.

  • Michael Arends - CFO

  • Thanks John.

  • Looking at our fourth quarter financial results, we are pleased that several of the initiatives we invested in during 2007 put us in a position to build increasing local leadership, while also driving financial performance.

  • Revenue for the fourth quarter was $37 million compared to $32.6 million in the fourth quarter of 2006.

  • Revenue from proprietary traffic sources, also referred to as our local content networks, was $11.4 million.

  • Total unique visitors to our proprietary network of websites was more than 26 million for the month of December according to internal logistics.

  • It is important to note that while our local content network performed well, we do expect it to be subject to seasonal trends and traffic.

  • For example, in the latter part of December, based on typical seasonality, there was an expected drop-off in traffic to local sites, similar to overall seasonal internet traffic trends.

  • The number of revenue generated events and referrals on our local content network for the quarter was more than 50 million.

  • The principle factors driving revenue growth in the fourth quarter were one, strength in our local advertising services business, underlined by the continued growth in the number of new advertisers using Marchex products and services.

  • And two, relative strength in our revenue from proprietary traffic sources on a sequential basis, driven largely by strength in our local reference websites.

  • We are experiencing strong demand from aggregators and other partners for traffic from our local reference websites due to its quality and high conversion rates.

  • In regards to monetization from third party sources, during the quarter we continued to be modestly impacted from the rates we receive from third party sources, consistent with our guidance last quarter.

  • Overall, we reduced dependence on our largest third party monetization sources, which we've communicated is one of our short and long-term strategic priorities.

  • As Russ discussed, we're highly focused on the initiatives we believe will unlock the value of our proprietary traffic.

  • Consistent with our message over the last two quarters, our strategic plan has been to gradually take over more of our own inventory to sell directly to our advertisers.

  • The first order impact of this effort can be a slower overall growth rate in our revenue from proprietary traffic sources in the near term.

  • However, taking control over additional inventory will increase our ability to secure new aggregator relationships such as our recently announced relationship with IDR, to advertise on our local websites through our pay-per-click network, as well as new direct advertiser relationships.

  • In looking at 2008 overall, we are highly focused on the priorities that we believe will lead to accelerating growth and gross margin expansion as the year progresses.

  • Including one, increased competitive bidding on our sites by adding thousands of new advertisers, which can drive rates higher over time.

  • Two, launching new products and features to help unlock the value of our existing advertisers by improving the relevance of our local advertiser targeting.

  • And three, continuing to grow the traffic and usage on our local content networks.

  • We expect each of these initiatives will help close the gap between the rate we see from third parties and the rate we see from our direct advertisers.

  • The cumulative effect of these changes will lead to a second order impact of stronger long-term growth in revenue from proprietary traffic sources.

  • This will also provide Marchex the strategic benefit of greater defensibility and greater long-term profitability as we capture margin benefit from taking greater share of advertising dollars on our local content network.

  • We believe local inventory is among the most valuable online and that the value of our traffic today, along with our strategies to grow that traffic over time, will lead us to accelerating growth and revenue from proprietary traffic sources, while at the same time, lessening our dependence on any single third party monetization source.

  • We believe the effects and benefits of this strategy will be increasingly evident as we move through 2008.

  • Revenue from local advertising services was $25.6 million.

  • The growth was driven primarily by the addition of more locally focused advertisers using Marchex products and services.

  • Total operating costs, excluding stock-based compensation and amortization of intangible assets for the fourth quarter of 2007 were $31.7 million compared to $24.4 million in the fourth quarter of 2006.

  • In looking at the mix in operating costs for the fourth quarter, our service cost, excluding stock-based compensation, increased as a percentage of revenue on a year-over-year basis, largely due to the shift in revenue mix, which led to increases in distribution partner payments and our contemplated investments in increased personnel, contractors and infrastructure.

  • Sales and marketing was 15% of revenue and included the addition of VoiceStar to our operating mix for the quarter, much of which is sales and marketing related.

  • We also won increased sales and marketing related hiring.

  • Two, increased marketing initiatives to acquire direct advertiser relationships and three, increased marketing for our local reference websites as aggregator demand for traffic from this channel is robust.

  • We are continuing to work on increasing the return on investment on our marketing spend for our local websites as we add new rich content and features to these sites.

  • As our marketing efforts improve on these sites, we may increase our marketing over time.

  • Other operating costs for the fourth quarter 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 fourth quarter was $5.3 million.

  • Adjusted EBITDA for the fourth quarter was $7.9 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.

  • GAAP net loss applicable to common stockholders was $1.4 million or $0.04 per diluted share for 2007.

  • This compares to GAAP net income applicable to common stockholders of $2.8 million or a $0.04 loss per diluted share for the same period of 2006.

  • The GAAP diluted EPS calculation in 2006, excludes the effect of the non-cash nonrecurring discount on preferred stock redemption of $5.8 million, net of the dividends on the redeemed preferred shares of $197,000.

  • Going forward, our GAAP results may be impacted by a number of factors, including stock-based compensation charges, increased amortization cost 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 $0.08 per share for the fourth quarter.

  • Turning to the balance sheet, we had approximately $36.5 million cash on hand as of December 31, 2007.

  • During the fourth quarter, we used approximately $8.5 million to acquire approximately 770,000 shares of our outstanding Class B common stock, bringing our total shares acquired in 2007 to 2.2 million shares or 5% of our common shares outstanding as part of our stock repurchase program.

  • As Russ also mentioned, today we are increasing the amount of shares available for purchase under our repurchase program to up to a total of 5 million shares, up from the 3 million shares previously authorized.

  • Less the shares repurchased to date, under this revised program, an additional 2.8 million shares remain available for repurchase.

  • We continue to believe our shares represent a compelling value in the strategic landscape and as such we'll be opportunistic with our stock 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 our stock repurchase plan and in long term growth initiatives, including internal product development, sales initiatives and selected acquisition opportunities.

  • I would now like to discuss our initial guidance for 2008, including guidance for the first quarter.

  • Our initial guidance for 2008 is for revenue of more than $150 million.

  • We expect 2008 will be a year characterized by significant progress as we expect to launch new products across our business throughout the year.

  • Importantly, we expect this progress will lead to accelerating top-line growth as we move through the year.

  • While the economic environment has led to some uncertainty with regards to advertiser budgets for our initial guidance this year, we believe our focus on local leadership will increasingly show that Marchex is in a position to grow faster, invest appropriately and also deliver increased operating leverage as we move through 2008.

  • We expect adjusted operating income before amortization for 2008 to be more than $21 million.

  • For the year, we are making the financial commitment to invest in and grow our business while also showing increasing operating leverage as we move through the year.

  • Based on our current revenue mix and anticipated growth, we expect to see adjusted OIBA margins increasing from the beginning of 2008 to the end of 2008.

  • For 2008 adjusted EBITDA we expect to add back approximately $9 million to our adjusted operating income before amortization, implying adjusted EBITDA of more than $30 million for 2008.

  • For color on the mix of operating costs throughout the year, as a reminder, our investment in VoiceStar and integration initiatives which we announced in August of last year, included $5 million of investment in 2008, the majority of which is weighted to the first half of the year.

  • Similarly, some of our investment in taking over greater control of our own advertising inventory, coupled with our investments in our local advertising platform to support our large partners like AT&T, will begin to pay off as new products launched throughout the year.

  • As these products launch, we expect our growth from existing and new revenue streams will lead to stronger growth in our overall business and to increased operating leverage, as we grow past the fixed costs components of this initiatives are disproportionately weighted to the first half of 2008.

  • Our guidance for the first quarter of 2008 is for revenue of $35.5 million or more.

  • For color on guidance for the first quarter of 2008, while we anticipate continued momentum in our local advertising services business, we do expect a seasonal impact from advertisers lowering their budgets relative to the seasonally high fourth quarter.

  • Additionally, we expect revenue from proprietary traffic sources to be in a similar range to or slightly better than the fourth quarter of 2007.

  • This is based on anticipated increases in consumer usage on our local content networks and increased amounts from third parties, with certain offsets from our ongoing initiatives to increase direct sales of advertising inventory and lower sales and marketing expenses on a year-over-year basis.

  • For the first quarter we expect sales and marketing costs to be in the range of 15 to 17% of revenue.

  • For adjusted operating income before amortization, in the first quarter we anticipate $4.5 million or more.

  • For 2008 first quarter adjusted EBITDA we expect to add back approximately $2.3 million to our adjusted operating income.

  • This add-back implies adjusted EBITDA of $6.8 million or more.

  • We're very excited about our opportunities in the local market.

  • Our investments are focused on continuing to make Marchex a leader in local, while delivering accelerating growth rates and operating leverage in 2008 and beyond.

  • We look forward to updating you on our outlook as we move through the year.

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

  • Russ Horowitz - Chairman & CEO

  • Thanks Mike.

  • I'll conclude by emphasizing a few key points.

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

  • Second, we have a clear focus on delivering unparalleled utility and relevance to local consumers through our network of proprietary local websites.

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

  • We continue to sharpen the focus of our entire organization, including our Sales, Business Development, and Product teams, around our local mission and opportunity.

  • As a result, we believe Marchex is in an excellent position to continue capturing an increased share of local advertising dollars as they migrate online, as well as an increased share of consumers looking for local information.

  • The opportunity in local is large and it's now.

  • In order to capitalize on this opportunity, in 2008 Marchex will leverage the momentum we have coming out of the fourth quarter to firmly establish ourselves as leaders in local in terms of first, our industry position, second, the value of our intellectual property, and third, our financial performance.

  • We'll accomplish these by continuing to emphasize the three pillars of Marchex, our business, our products and our people.

  • I'd now like to turn the call over to the operator for questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) Christa Quarles.

  • Christa Quarles - Analyst

  • First question is on this $25.6 million of local based revenue.

  • Obviously it was up 30% in the quarter.

  • I was just wondering if you could give us, a, a sense of the complexion of that between owned and the marketing services bit, and as well, maybe what the growth rate was for the year?

  • I guess what I'm trying to figure out is, is that growth rate ultimately accelerating on the local side?

  • And then a second question just on the margins.

  • Mike, you indicated that you're going to see or we should see increased leverage throughout the year, yet if I take your sort of base lined guidance it looks like you go from 19.2% EBITDA margins to 20% for the full year.

  • I was just trying to figure out, is that just conservatism on the full year side?

  • And then I guess, where do you stand on sort of the long-term greater than 30% margins?

  • Thanks.

  • Michael Arends - CFO

  • So Christa, the first part, think about we've given more than guidance, so I think that may help explain.

  • We have put conservatism, given some of the initial guidance at the beginning part of the year, and we do see things accelerating as we go throughout the year.

  • In terms of going in the long-term to 30%, I think that was the second part of that question, think about accelerating EBITDA margins and growing back into the mid-20s, we will look and give more updates probably in future periods as to what makes sense from that standpoint.

  • But our goal is to keep moving towards the mid-20s as the first starting point.

  • Russ Horowitz - Chairman & CEO

  • On your first question, the 37 million was broken into two buckets.

  • There was 25.6 million from local advertising services and 11.4 million from our proprietary traffic.

  • Within that 25.6 million, you've got a combination which includes our agency platform to partners like AT&T, as well as our marketing products like pay-per-click, etc., focused on national advertisers with local interests, as well as our call-based marketing products.

  • When you look at the contributions, we saw growth across all three of those contributing sources within local advertising services.

  • And on the other side, when you look at that 11.4 million from proprietary traffic, we saw, as noted earlier in today's call, 20% sequential growth in traffic, and at the same time, as we previously got into, we saw slightly lower monetization rates based on the mix of rates from third parties, as well as the rates we get on our own inventory.

  • But it did lead to a sequential growth of 15%, which we feel very good about when you look at traffic growth and balance on monetization between our own and third parties.

  • Christa Quarles - Analyst

  • Just one quick follow-up, if I may.

  • How does Ingenio affect your ability to work with AT&T in a call base now?

  • Russ Horowitz - Chairman & CEO

  • Ingenio is a relationship we had before AT&T acquired them.

  • We obviously have a very deep relationship with AT&T around a number of products as well as our traffic for fulfillments on advertisers that they sell.

  • And now with Ingenio being part of AT&T and given our focus in the call space, we think it can deepen the relationship.

  • We view ourselves as a meta integration point for local advertisers, whether they're focused on search campaigns or call campaigns.

  • And if Ingenio can give us call based advertisers to distribute into our network, it just brings efficiency of yield and relevance.

  • So, we think it's a good thing.

  • Operator

  • Eric Martinuzzi.

  • Eric Martinuzzi - Analyst

  • Two questions.

  • First, I'd like to know if the Idearc relationship, if AT&T had sort of any say or had a right to comment on that relationship and then go into what you think the Idearc relationship can mean?

  • And then secondly, I noticed you had an 8-K filing this afternoon that looks like Russ terminated one 10B5 plan and then he's got a new one that starts in December.

  • Could you address that, please?

  • Thanks.

  • Russ Horowitz - Chairman & CEO

  • Sure.

  • On the 10B5-1 plan, I originally filed a plan in early 2006 about two years ago, where I had a three-year plan that would sell a small minority of my shares over time.

  • In light of where the stock price is, it made sense to terminate that plan and so that's what we announced today.

  • At the same time I filed a new plan, which wouldn't go into effect until December 1st at the soonest.

  • But this time I added certain price limitations below which shares won't be sold.

  • So as of now, that initial plan is terminated and there wouldn't be any subsequent sales until December at the earliest, with price elements built in as well.

  • Hopefully that clears that up.

  • On the first side, the relationship with Idearc is an important one and clearly we have a deep relationship with AT&T around multiple products, but as we've noted, we think we're relevant to anybody focused in the local space.

  • We have two ways we address the local market.

  • We have a platform that allows aggregators to sell local products, search or calls, and we sell them direct to national advertisers with local interests.

  • Some of those local partners will take that platform as well as use our traffic to fulfill the spend.

  • Others may only use one or the other.

  • Now with Idearc we think it's great that they recognize the value and scale of our traffic and we're able to be a meaningful partner for them.

  • It gives us more competition in our network and more relevance as it relates to supporting local consumers, and at the same time it allows us to decrease dependence on any single third party monetization source.

  • In the past we've had single sources in the upper 30% range and now we're seeing a lot of those things really start to come down to moderate levels that we think is healthier.

  • Over time, our goal is to work with every major local aggregator in a way that's appropriate.

  • And as I mentioned, we think we're relevant to everyone in the space, given our focus on our local ad platform as well as our scale of local traffic.

  • Operator

  • William Morrison.

  • Robert - Analyst

  • This is actually Rob on the call for Bill.

  • Just wondering if you had given out an update on Open List integration?

  • And then I guess in sort of a related question, you saw I guess quite a sequential increase in the number of revenue generating referrals.

  • If you could maybe speak qualitatively to the impact that Open List integration might have had on that and where is that, while uniques are flat is that more a case of repeat usage and where are you seeing that more strongly?

  • Thank you.

  • Russ Horowitz - Chairman & CEO

  • Clearly, one of the favorable trends that we saw in Q4 was increased traffic and usage levels.

  • And as we noted, they increased 20% overall.

  • The strength in our local reference sites, which includes Open List and Open List integrated sites as well as Yellow.com, it clearly led the way.

  • So that was very favorable and is consistent with increased revenue generating events going up to 15 million and as we've noted and Mike walked through in today's call, the first order impact as we look at taking more inventory and diversified monetization sources can be lower rates and then the second order impact, as we get greater competition can lead to higher rates.

  • So, we're in that first window where we've got higher traffic, more user activity, with modestly lower rates.

  • The net impacts were very nice growth in proprietary revenue, which we know is good for our business model.

  • But we've been able to do that while having modestly lower rates.

  • We like the direction.

  • It's consistent with what we had in last quarter and we think it supports a very favorable trend between diversified monetization and at the same time higher traffic growth, which we all know is a critical driver of sustainability and value creation.

  • Robert - Analyst

  • And then just on the extent of Open List integration did you have an update on the number of sites that have been powered with Open List so far?

  • Russ Horowitz - Chairman & CEO

  • Right now we communicated it's more than 150,000.

  • We periodically add to that.

  • If there's a milestone that makes sense we'll update it, but given it's the vast majority of every website we own, and today we also noted the clear majority of our traffic's all local, we haven't updated it.

  • Those are the published numbers.

  • And last, the key there now is less about the numbers and more about the user experience with better features.

  • Operator

  • Jim Leahy.

  • Jim Leahy - Analyst

  • Two quick questions.

  • First, just an update on any specifics you can give us on how VoiceStar is tracking and how that business is being taken by your customers?

  • And second, just any comments on Yahoo as a third-party partner and what's going on with them at this point.

  • John Keister - President, COO & Director

  • Sure.

  • The VoiceStar integration is going very well.

  • Clearly, given our window of opportunity for local leadership, we accelerated investment on a post-acquisition basis and that theme carries through the first half of the year.

  • But its contribution is going arguably even better than we forecast at the time of the acquisition and when we look at cross-sale opportunities, while we're early in that cycle, it's going well.

  • And it's a very important part of our product launches when you look at our schedule for 2008.

  • When you look at performance based products that include both search and voice space products like call tracking.

  • And so that's a key theme and we're really pleased with that direction.

  • And when you look at Yahoo, your second question, I think at their peak we disclosed we had monetized the mid 30s to upper 30s as a percentage of our revenue.

  • In Q3, we disclosed that that number had declined to 28%.

  • And while the exact number won't be disclosed for Q4 until we file our 10-K, it decreased again in Q4.

  • So, we have a great relationship with Yahoo at a lot of levels, but we recognize that our long-term opportunity is diversification at that point, looking at minimal concentration across our business and at the same time, really looking at relevance with direct advertisers as well.

  • Operator

  • Jordan Rohan.

  • Ross Sandler - Analyst

  • It's Ross Sandler from Jordan's team.

  • Just, Russ, a quick question on kind of high level strategy.

  • Do you think now with the VoiceStar acquisition and some of the other ones you've made over the past 12 or 18 months, that we're finally at a point with the Marchex story that the acquisition portfolio is pretty much built out?

  • Is there any other services that you think are really strategic at this point or do you feel like you're in decent shape with the assets that you have?

  • And I have one follow-up.

  • Russ Horowitz - Chairman & CEO

  • I think we're in good shape with the assets we have.

  • We have the ingredients of our own success to be a leader in local, to drive higher growth rates and to deliver operating leverage.

  • In an industry like ours where there's consolidation, you look at things from time to time.

  • But, what we like is we have clarity of mission, clarity of focus and again, the ingredients of our own success.

  • So, we feel very good about where we are in our ability to deliver.

  • Ross Sandler - Analyst

  • Okay.

  • And at some point does it make any sense to take maybe some of the vertical domains that you guys have picked up over the years and look to divest some of them, given the inflationary pressures that are going on in that space, or is it going to be kind of hang on to that stuff and at some point look to take on a bigger strategy on the vertical side?

  • Russ Horowitz - Chairman & CEO

  • It may make sense to divest some.

  • That will be opportunity driven.

  • The thing that we talked about in the past is, certain verticals are very relevant in the local taxonomy and could be localized.

  • Remodeling dot-com is an example where you can create lots of localized sub elements of the sites as well as subcategorized versions.

  • So, when we look at all the different websites as distribution points for our enriched content, to get out to local consumers, clearly we're looking at which ones make the most sense and our logical distribution points for that content.

  • If there are those that don't fit and at the same time the opportunity merits it, yes, we would consider divesting those.

  • So, it's on the landscape and it will be opportunity driven.

  • Operator

  • (OPERATOR INSTRUCTIONS) Brian Pitz.

  • Brian Pitz - Analyst

  • Two questions.

  • Would you comment on how much of your direct navigation revenue was monetized by Yahoo in the quarter?

  • And then maybe any color regarding how click through rates on Open List enabled sites may have changed and how this may be offset by higher organic search traffic?

  • Thanks.

  • Russ Horowitz - Chairman & CEO

  • Sure.

  • I had mentioned that Yahoo as a percentage of revenue in Q3 was 28%.

  • Well we haven't filed the percentage today, it is a decreased percentage of a higher revenue total.

  • And so, we are growing our revenue and doing it with a diversified set of monetization partners, including our own advertisers.

  • So, that's an important theme.

  • And the second part of your question if you could reiterate that, please?

  • Brian Pitz - Analyst

  • Sure.

  • Color about click-through rates on open list enabled sites, how they may have changed and is this being offset by higher organic traffic?

  • Russ Horowitz - Chairman & CEO

  • The interaction rates have increased, but because we've integrated enriched content, which is a mix of editorial and paid, the paid events have gone down.

  • But when you look at the overall trend of organic aggregate growth, the trend is very favorable and we see more traffic flow through.

  • Brian Pitz - Analyst

  • Okay.

  • And that's pretty consistent?

  • Russ Horowitz - Chairman & CEO

  • It is.

  • Operator

  • There appear to be no further questions.

  • Do you have any closing comments you'd like to finish with?

  • Russ Horowitz - Chairman & CEO

  • We appreciate everybody's participation today and we look forward to keeping you posted as we progress throughout the year.

  • Operator

  • Thank you very much.

  • This does conclude today's conference.

  • You may disconnect your lines and have a wonderful day.