Marchex Inc (MCHX) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Earnings Conference Call.

(Operator Instructions).

It is now my pleasure to turn the floor over to your host, Ethan Caldwell, General Counsel and Chief Administrative Officer.

Sir, the floor is yours.

Thank you.

Good afternoon, everyone, and welcome to Marchex's business update and fourth quarter 2008 conference call.

Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; John Keister, President; Peter Christothoulou, Chief Operating Officer; Michael Arends, Chief Financial Officer and Matthew Berk, Executive Vice President of Product Engineering.

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 fact, included on this call regarding our strategy, future operations, future financial positions, future revenues and other financial guidance, 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 Factors section of our most recent periodic report and registration statement filed with the Securities and Exchange Commission.

All of the information provided on this conference call is as of today's date and we undertake no duty to update the information provided herein.

During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity including OIBA, adjusted OIBA, adjusted EBITDA and adjusted non-GAAP EPS.

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

At this time I would like to turn the call over to Russell Horowitz, our Chairman and Chief Executive Officer.

Thank you, Ethan, and welcome everyone.

Ladies and gentlemen, we're having some technical difficulties.

Please stand by.

Your call will resume momentarily.

Thank you.

You are now back live.

Thank you.

It's Russell Horowitz and our call was not intended to be that short so telecommunications hick-up aside, we'll continue.

Today I'll give you an update on Marchex's business and outlook as well as highlights from the fourth quarter of 2008.

Mike will walk through our financial performance and provide color on our financial outlook and then John, Pete and Matthew will join in during the Q and A.

Let me begin by saying that while the later part of 2008 and the beginning of 2009 have been especially challenging for a lot of companies including Marchex, we believe Marchex is well positioned to come out of this current economic cycle in a strong position.

When thinking about Marchex and the local advertising opportunity I'd like to highlight a few things.

One, the transformation of the local on-line advertising industry is universally recognized as one of the on-line industry's biggest opportunities over the next three to five years.

Two, Marchex is helping to solve the problems the local industry is facing by providing performance-based advertising products with value transparency for advertisers.

Three, while we want to understand all the factors relevant to our business, we're applying ourselves to the factors that we can most directly control or influence including supporting our customers at a world class level.

And four, Marchex is playing to win.

In the current uncertain economic environment, it's very difficult to predict near-term business performance.

While at Marchex we believe that we have a very promising future, some of our customers are experiencing significant challenges with their businesses and balance sheets.

Many advertisers, particularly larger advertisers, are re-evaluating their market budgets and deployment of available dollars over the course of the year leading to a variety of possible outcomes for the current and subsequent quarters.

Despite these challenging conditions and the short-term uncertainty they present to Marchex's 2009 outlook, we remain optimistic about Marchex's long-term opportunity.

With that as a backdrop, I'd like to highlight a couple of dynamics we experienced in the fourth quarter.

First, we continued to acquire local advertisers that --

Ladies and gentlemen please stand by.

We're having some technical difficulties; please stand by.

Your call will resume momentarily.

Are we live?

Yes, you're live.

Hopefully that's the last of the telecommunication's hiccups, but getting back to our highlights for the fourth quarter, we continue to acquire local advertisers at a solid rate.

In the fourth quarter of 2008 we added 5,000 net new local advertisers to our enterprise partnerships in direct sales channel.

This gain was offset by a decrease in overall advertisers resulting from a legacy voice services' customer, who as we messaged last quarter, completed its migration to another solution.

While we feel it's prudent for us to take a conservative view of advertiser growth in 2009, given the fluid economic conditions, we believe we'll continue to add thousands of new advertisers this year based on our ongoing progress and we'll exit 2009 with a meaningfully larger base of local advertisers and the 70,000 we support today.

There are three main reasons for this belief.

One, advertisers are shifting dollars into the type of performance-based advertising products that Marchex delivers.

Two, Marchex ability to deliver the intuitive and innovative products at the local advertising market as (inaudible) asking for; and three, the focused operational clarity and considerable experience of our Senior Management Team, which has a history of operating in both good and bad economic times.

The second dynamic to highlight is that traffic levels in December were down from September, primarily due to two factors.

The first factor was seasonality, which led to fewer overall consumer quires for local business information in December relative to September and were similar to last year.

And the second factor was a reduction in search referral traffic, which can happen from time to time in the normal course of business and is difficult to predict.

It is important to note that the decrease in traffic did not substantially impact revenue during the quarter.

In the fourth quarter we continued to create greater efficiencies in Marchex's business and keep a very close eye on our cost structure.

Our experience has taught us that exercising financial discipline is always prudent but it is particularly prudent in an uncertain market --

Ladies and gentlemen, please stand by.

We're having technical difficulties.

Please stand by.

Your call will resume momentarily.

A hiccup, something has happening beyond our control.

Hopefully this won't happen again and we'll create a contingency in the interim as we move forward.

Again as we discussed in the fourth quarter, we continue to create greater efficiencies in Marchex's business and keep a close eye on our cost structure.

Our experience has taught us that exercising financial discipline is always prudent but it's particularly prudent in an uncertain market environment where it becomes essential to winning the war of attrition.

Consistent with these efforts and as previously announced, we recently put a new organizational structure in place that unites our sales, business development, partner management and product development into a single organization.

Pete Christothoulou, who had already taken on a number of operational responsibilities over the past year, is leading this unified organization as our Chief Operating Officer.

This realignment puts us in a stronger position to provide greater support to our partners and advertisers and speed our product innovation, both of which are core to supporting our long-term growth and leadership objectives.

Additionally, it will enable our President, John Keister, to put significant direct focus on securing additional strategic partners and further developing our existing customer relationships.

He will also focus on further building Marchex's customer focus culture with a goal of over delivering for our key customers on a consistent basis.

Lastly, it aligns our entire product development organization under the leadership of Matthew Berk as our Executive Vice President of Product Engineering.

Matthew has a deep understanding of the opportunities in the local market and the vision, technical ability and management skills needed to rapidly capitalize on them as well as the know-how to take our product innovation to a new level.

With this organizational framework in place and the progress we've made over the past year executing on our major operational and product milestones, we believe Marchex is in a strong position to build leadership in the local advertising market and continue to win high value advertisers and partners.

It is no fun in the short term to face the growth challenges caused by the current --

Ladies and Gentlemen, please hold the line.

The call will resume momentarily.

All right, everyone, hopefully this won't recur.

We've switched phone systems.

I will continue with the script.

It's no fun to have this conference call interrupted and at the same time it's no fun in the short term to face the growth challenges caused by the current economic environment and the impact it's having on certain large customers who are experiencing operational and capitalization challenges.

However, we believe that these short-term circumstances will not define Marchex's opportunity over the intermediate and long term.

In fact, while it may be hard to appreciate at the moment, we believe that given our strong business model and balance sheet our opportunity to be a big winner in the local market may actually be enhanced over the long term because of the short-term circumstances that are impacting everyone, including our existing and would be competitors.

I want to stress that our belief in the local market is not predicated on the overall growth of local advertising as an environment.

Rather, it's out belief that local advertisers will continue to migrate their advertising dollars to performance based on line advertising and emerging sources of distribution such as mobile.

We believe this shift will be one of the most meaningful trends over the next several years because, as other advertising mediums have shown, advertising dollars invariably follow consumer behavior and also flow to the business models and products that offer the greatest value transparency for advertisers.

With that said, we continue to be laser focused on positioning Marchex at the center of the local advertising opportunities.

Recently and over the fourth quarter in 2008 we achieved a number of milestones core to building market share with key constituents including with large enterprises that sell advertising to local businesses with national advertisers who market locally and vertically and also with consumers searching locally.

First, we continue to innovate with Marchex Connect, our award winning local advertising platform, which today fulfills more campaigns for local advertisers than any comparable solution in the market.

In the fourth quarter we added the capability to deliver budget based click-and-call campaigns while continuing to deliver guaranteed click-based campaigns at unparalleled scale.

This is a key step in capturing more of the local advertising dollars that are migrating on line.

We also expanded our reach by optimizing our business profile pages with the most popular mobile devices on the market, including the iPhone and Blackberry.

With these pages we seamlessly give our advertisers a turnkey way to reach mobile consumers while providing consumers with the local information they increasingly want on their mobile devices.

This capability, which unites our call capabilities with the scale and feature richness that Marchex Connect platform delivers is a prime example of the type of product innovation we are able to deliver through our integration efforts.

As a result of our ongoing progress in establishing Marchex as an innovator and leader in the local markets, Google recently named Marchex as the first Google authorized technology platform provider.

This means that Marchex Connect is the first and currently only local advertising platform that Google recommends to its AdWords resellers to fulfill search marketing campaigns for their local advertisers.

We also continue to gain market share for Marchex Adhere, our premium performance advertising network recognized for its roster of premium vertical and local publishers.

In 2008 we added more than 50 new publishing partners to Marchex Adhere with more than 20 added in the fourth quarter alone, including Advantage Business Media, National Review and PBP Media.

In the fourth quarter we also added numerous mobile distribution partners further diversifying what we believe is already one of the broadest distribution footprints in the market today.

This continued momentum is a strong indicator of the differentiated value proposition we offer our advertisers and distribution partners.

Additionally, we continue to innovate with our local search products providing enhanced utility to consumers looking for local business information with our business profile pages which, as mentioned, support both an on-line and mobile consumer search experience.

Our priority product initiatives in 2009 are geared to towards serving the needs of our advertising customers and local consumers as well as positioning our products for long-term local leadership.

These initiatives include one, further innovating on Marchex Connect for both large enterprises selling advertising to local businesses as they look for new ways to leverage their existing assets, maximize their on-line revenue and meet their customers' changing needs as well as for direct advertisers.

This includes adding additional local targeting and budget based advertising capabilities; two, continuing to build our footprint of local, vertical and mobile distribution and adding new targeting capabilities to further position Marchex Adhere as a top media buy and distribution source for direct advertisers and enterprise partners alike; and three, releasing our next generation local search application later this year.

We believe these initiatives are key to further positioning Marchex at the forefront of the local opportunity.

Furthermore, as a reflection of our ongoing commitment to the Marchex opportunity and belief that our shares continue to represent a compelling value, we continued to be active with our stock repurchase program in the fourth quarter, which Mike will discuss in more detail in a moment.

In the current uncertain environment we are carefully monitoring our costs and are being prudent managers of our cash flow.

Because of this discipline and the momentum our products continue to gain in the marketplace, we believe that when the economy and advertiser budgets return to a more normalized state Marchex will be in a very good position to realize meaningful growth and operating profit margin expansion.

With that, I'd like to turn the call over to Mike.

Thanks, Russ.

Before I begin, I'd like to note that in the fourth quarter of 2008 our financial discipline in the face of a rapidly weakening economy enabled Marchex to produce $7.2 million in operating cash flow.

Despite the challenging short-term macroeconomic circumstances, we believe Marchex's business will continue to generate solid positive cash flow, which will give us the ability to support Marchex's strategic and operational initiatives, while also giving us financial flexibility.

Turning to details for the fourth quarter of 2008, revenue for the fourth quarter was $34.8 million compared to $37 million in the fourth quarter of 2007.

Revenue from publishing, otherwise known as our proprietary traffic sources, was $18.1 million.

Revenue from local advertising services was $16.7 million.

The principal factors that influenced revenue in the fourth quarter were one, lower overall budgets from advertisers, which impacted both publishing and local advertising services revenue.

In the fourth quarter, as well as in the beginning of 2009, we saw advertisers in several verticals reduce their advertising spending, including many in the finance, technology and auto verticals.

In addition, certain Yellow Page Director customers have been disproportionately impacted by the macroeconomic conditions and are dealing with highly leveraged capitalization structures and challenged operational results as they evolve to meet the changing demand from local advertisers.

As a result, we saw reduced overall spending from this category of advertisers in the fourth quarter; and two, consistent with the expectations we laid out on our third quarter conference call a decrease from our site box product and the migration of the voice services customer noted earlier.

Total operating costs, excluding stock based compensation and amortization of intangible assets for the fourth quarter of 2008, were $29.3 million compared to $31.7 million in the fourth quarter of 2007.

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

Excluding stock compensation expense sales and marketing was $8.4 million.

In the fourth quarter on a year-over-year basis sales and marketing included increased costs for brand related marketing initiatives and spending to acquire direct advertiser relationships.

We also increased marketing for our local websites on a year-over-year basis.

Other operating costs for the fourth quarter included additional investment in product development and technology infrastructure on a sequential basis.

Note that there was a $400,000 decrease in G&A on a sequential basis due to reversing performance based amounts.

While we continue to make investments that are critical to Marchex achieving leadership in the local advertising market over the long term, we are focused on our cost structure and driving additional efficiencies in our business during the uncertain near term.

Adjusted operating income before amortization for the fourth quarter was $5.5 million.

Adjusted EBITDA for the fourth quarter was $7.5 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 stockholders was $128.7 million or $3.67 per diluted share for the fourth quarter 2008.

This compares to a GAAP net loss applicable to common stockholders of $744,000 or $0.02 per diluted share for the same period of 2007.

It is important to note that we recorded an estimated $176.7 million non-cash goodwill and intangible assets impairment charge.

As part of our annual assessment, we determined that the current amount of goodwill related to past acquisitions and investments exceeded our current fair value by this amount.

This charge impacted GAAP results for the quarter and year end at 2008 but it did not impact the cash flow as we generated $7.2 million in operating cash flow in the fourth quarter and $26.5 million for the year.

Adjusted non-GAAP earnings per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.09 per share for the fourth quarter.

Turning to the balance sheet, we had approximately $27.4 million cash on hand as of December 31st, 2008.

During the fourth quarter we expanded our share repurchase plan by 1 million shares and used approximately $7.9 million to acquire 1.4 million common shares and the remaining preferred shares bringing our total shares acquired under our repurchase program to 6 million shares or 16% of our common shares outstanding.

Additionally during the quarter, we sold a small number of non-strategic domains that yielded more than $400,000.

There is still significant demand for high quality domains and we believe that will remain the case in 2009 and beyond.

Importantly, we believe Marchex will continue to generate meaningful cash flow in 2009.

We believe cash provided from existing operations along with the incremental cash we expect to generate from the sale of non strategic domains puts Marchex in a very good position to have financial flexibility going forward.

In terms of financial guidance, based on the uncertainty caused by the near-term macroeconomic and industry environment, we are not releasing guidance today.

That said, items that are currently influencing our business include first, many categories of advertisers continue to face significant uncertainty, which is impacting their near-term financial outlooks.

As a result, we are seeing a reduction in advertising budgets overall in the current quarter compared to the fourth quarter of 2008 as advertisers adjust to a slower consumer environment.

We expect this trend to impact both our publishing and our local advertising services revenue sources on a sequential basis.

As noted, there is still a wide range of possible outcomes for the quarter and year and we believe we are taking an appropriate view in an uncertain short-term economic and industry environment.

Second, we currently expect to see disruption with certain advertising customers from the Yellow Pages Directory industry due to their spending slowdown and capitalization situation.

We are monitoring this closely and are evaluating how circumstances may impact the level of their business we should be willing to support.

This will impact their spending with Marchex overall, particularly on our publishing assets.

And third, regardless of these factors and the challenge they present to our nears-term revenue outlook, we expect to generate a meaningful amount of operating cash in the current quarter.

It is important to note that in the current climate we are focusing our efforts on the things we can influence or control, which include our focus on winning high value advertiser relationships, innovating with our advertising and consumer facing products and gaining efficiencies with our cost structure and organization.

We believe these efforts will help us maintain financial flexibility in the short term while ensuring Marchex is well positioned for operating leverage and growth over the long term

Despite the current environment and the noted business challenges that have resulted, we are in fact gaining traction in the marketplace and seeing growth with a number of our very strategic products, including the Marchex connect platform and our call related products and services.

This combined with new offerings, such as our mobile business profile pages, continue to position Marchex as a leader in the local landscape.

In the long term we see growth opportunities across all of our core products.

I would now like to turn the call back to Russ.

Thank you, Mike.

Let me conclude by reemphasizing a few points regarding Marchex and the local advertising opportunities.

One, the transformation of the local on-line advertising industry is being universally recognized as on the on-line industry's biggest opportunities over the next three to five years.

Two, Marchex is helping to solve the problems the local industry is facing by providing performance based advertising products with value transparency for advertisers.

Three, while we want to understand all the factors relevant to our business, we're applying ourselves to the factors we can most directly control or influence including supporting our customers at a world-class level and four, Marchex's playing to win.

In a macroeconomic environment as challenging as the current one, companies need to be willing and able to redefine the tactics of winning.

Our team has learned from past economic down cycles that to win you first have to win the war of attrition.

While today I and we cannot tell you what Marchex's financial performance will look like in 2009, what I can tell you is this.

Marchex is focused on and will deliver increased value to advertisers and consumers.

Marchex is building great products and Marchex is positioned to win market share and mind share in the local advertising industry in 2009 and beyond.

Additionally and importantly, Marchex has no debt.

Marchex has a healthy cash position and while there may be variability in our revenue in 2009, Marchex should continue to spin off a significant amount of cash.

The problems Marchex is solving in the local markets need to be solved and over the next three to five years we will see a massive transformation of a $100 billion industry.

If we continue focusing on serving the needs of advertisers and consumers in this transformational opportunity we believe we will get our fair share of it.

With that, we'd like to take your questions.

(Operator Instructions).

Our first question has come from Christa Quarles.

First question, Russ, is just on the [Burrell] growth numbers on the local advertising market.

I think you said in your script that there are reasons why Marchex is not necessarily directly correlated with that growth result and I was just wondering what third-party metric makes sense for us to look at and why or why not in terms of why you correspond with those numbers?

And then the second question I guess is on the share repurchase.

Most of my companies even with hefty cash balance and cash generation are sort of pulling back and I am curious as to why you guys continue to feel confident enough to go forward with the share repurchase activity?

Thanks.

To answer your first question, as we noted in the script I, you know, schematically we haven't said and aren't saying that local ad dollars are increasing.

What we're saying is that they are moving from off line to on line since marketing dollars inevitably follow consumers and that they are also moving into performance based models with increased value transparency.

And so when you look at that dollar shift, we think schematically we're solving the right problems and if we keep doing the right thing by our customers, despite some of the short-term disruption, we can and will get our fair share of it.

And that's schematically what we continue to stay focused on and so when you look at kind of growth from a [Burrell Associates], as an example, there are subsets of growth highlighted by different industry research firms but we're kind of looking at the broader schematic in addition to some of those segmented growth areas to make sure we're applying ourselves to the areas we think have the most growth leverage exposure.

In terms of our share repurchasing, we continue to spin off a lot of cash.

Our operations spin off a lot of cash and we have the additional benefit of having a lot of value in our non-strategic domains that we think will be an ongoing source of incremental free cash generation and our business is not capital intensive.

And so we think when you look at kind of the broader uses of our cash, it does make sense to maintain a certain cash balance but at the same time we have and will continue to have flexibility to buy our shares and since we continue to think it's one of the best uses of our cash as an investment.

And just a quick follow up if I may, the headcount reduction that you guys talked about, the 4% in January, is there a dollar value associated with that?

I mean I can make my own assumptions but I didn't know if you had a specific kind of run rate level that we should be thinking about.

Why don't I take a step back and actually go back in the Q4 as well because that might be more helpful.

If you look at the total headcount reductions we are approximately from our high level in 2008 at the end of the year we're about 10% total down and if you look at from an average head count level of 2008 we're about 5% total down and the 10% aggregate number is a little more than $3 million and, just to give you some context, how we're looking at things we're constantly looking for efficiencies in the business and we do expect to realize savings.

There is a revenue mix shift that is going on with us today and, given how that flows through to the bottom line, we don't know exactly how much of the savings will flow through to the bottom line.

There is uncertainty, as we've mentioned and articulated already.

The key though for us is we're continuing to look proactively for efficiencies.

We will let the business performance dictate how we address the total bottom line flow-through impact.

Eric Martinuzzi.

You reported a number in Q3 for the total number of customers.

It was around 80,000.

That included the voice services customers and I was wondering if you could give us a normalized number for Q3 that we can compare to the 70,000 number in Q4?

So, Eric, 65,000 would be the normalized number and we added a net incremental amount then to get to the 70,000 of about 5,000 net advertising in the fourth quarter.

Okay and then on the cash flow commentary it's a pretty wide gulf between the year that you just finished and the guidance here.

By that, I mean you know you're reporting a year where you did $26 million, $27 million of cash from ops and your commentary now is that you expect to be positive.

You've used the adjective, "significantly positive," but you know, that -- are we down 20%?

Are we down 50%?

Because you guys have -- you've just gone through a headcount reduction that I am sure couldn't have been a pleasant exercise but having done that do you feel you've right sized the business or are there other steps there that you'll need to take to get to that significant cash flow?

Eric, this is Russ.

When you look at where we are today and you look at where we're organizationally set up, we really started this in early 2007 and have been building to kind of bring our businesses and our focuses together in a way that really positions our business to look at our customers first and have every part of our business optimized to supporting our customers.

And given that historically we have made some acquisitions in addition to organically built businesses, we knew there were opportunities for efficiency and then if you overlay kind of the recent macroeconomic backdrop, clearly getting those efficiencies was always a priority but it was even heightened and we've in turn translated that into increased efficiency.

Going forward, as Mike noted, we're going to let the business drive towards (inaudible) where it makes sense to either take out costs or add costs as well as continue to take a close look at where there are opportunities for greater efficiencies.

When you look at our comments today, where we're not providing guidance but effectively assuring folks in our business model, given the soundness and operating leverage it has, there are a variety of potential outcomes here because you look at a customer base across industries where there is financial instability and that translates to us having to consider a range of outcomes.

In considering that we think it most prudent today to not provide guidance to the extent we get a narrower view around our business and our outlook for the year, we may subsequently do so but I wouldn't interpret too much in there because, again, there are a variety of outcomes.

Some of them aren't so great; some of them are fine and we need to consider that in how we're managing our business.

Thanks for taking my questions.

Ross Sandler.

Just a couple questions -- Mike, can you talk about just in general terms the cost structure in terms of fixed versus variable and if you look at the scenarios for '09, even in the worst case scenario that you guys are internally planning, what kind of margin degradation would we see in that scenario?

And then I've got a couple of follow ups.

So I think the starting point to answer you the first part, about half or 50% of the costs are fixed in the short term and the other half would be variable obviously.

Any fixed costs are in the short term fixed but in the intermediate to longer term a portion of that could obviously become variable.

I think to answer the second part of your question, the key driver for us is for us to continue to proactively look for operating efficiencies in our business, and we're actively doing that and doing it on a proactive basis.

And then other than that, it really comes down to the business and the performance of the business is going to drive some of our decision making of how we address the flow through of any mix shift on the revenue or any impact we have from customers spending less.

Okay and I know you're not giving any formal guidance but can you guys help us with how the first quarter looks in terms of the firs half run rate?

You said you're expecting both revenue lines to be down sequentially.

Where are we halfway through the quarter?

I think the one thing we have said is we have seen in general advertiser budgets are down sequentially so in the first part of the first quarter we did note that advertising budgets are lower than what we saw in the fourth quarter and I think that's the framework that can comprise at this point.

Okay and then there was a section in the last 10-Q that highlighted advertisers A, B, D and E represent collectively about a little over 60% of accounts receivable.

Are any of these guys Yellow Pages customers and based on your conversations, you know obviously they're in a lot of stress right now.

Do you think there's any risk that you won't see payment from those guys or can you talk about timing?

So, Ross, the customers, we've talked about Yahoo in the past, so Yahoo is one of those referenced customers.

For the most part the other customers are our large aggregated partners and yes some of them are definitely in the Yellow Page Directory space and I think for some of those partner, some of those customers, they do have issues with their balance sheets and that has been publicly made available.

There are issues out there and they are working through that and that is part of the reason why we are in an uncertain situation.

We don't know exactly what the impact is going to be on a go forward basis from the issues that are impacting them and their capitalization structures and how they work through them.

And I think that's the best position I think we can share at this point.

Okay and then last question and then I'll just go back in the queue.

Russ, you mentioned in the early remarks you had -- on the traffic side you had a reduction in referral traffic from the search engines.

Was that organic or was that you guys were doing less marketing initiatives and if it was on the organic side, was that some kind of an (inaudible)?

That reference was to a lower level of referrals from search engines, search engine inclusions, and that can happen from time to time for a variety of reasons, kind of in the ordinary course, so there's nothing there that we see as being particularly noteworthy.

And the other part we noted was seasonality.

The visitor stats we give are for the last month of each quarter and December historically has been seasonally lower than September.

It was the case in 2007 and it was the case again in 2008 and so if you look at that I'd say that was the most prominent influencer was seasonality and then there was a lower level of search engine referrals.

That tends to normalize over time and there's nothing acute or specific we've seen that we could even translate for you.

It's pretty ordinary course.

(Operator Instructions).

Dan Salmon.

I just want to get back to this Yellow Page partner issue a little bit more and I think we all understand their capital structure issues that are going on there but can you maybe help us understand how we go from their specific issues with their capital structures and their broader revenue trends to how that filters through to you and some of the interactive tools that you offer them that theoretically they should maybe be driving their local customers into a little bit more and just help us connect the dots there a little bit?

Sure.

We don't think what's happening right now with a couple -- there are some of these folks who are just diversified companies and well capitalized and there are some who are highly leveraged and are currently more exposed and we're referring to the latter, not the former.

And the longer-term trend and intermediate-term trend we think is very favorable to Marchex when you look at ad dollars flowing and in terms of advertising spend and consumer behavior.

But on a short-term basis, while we are in the right trend of their overall business, their capitalization is influenced by the performance of their entire business and so while there's nothing specific that we're seeing today, we need to be prepared that their broader business circumstances can influence some of their short-term decisions or in turn what the appropriate level of business we should support with them is based on accounts receivable balances etcetera.

And so prudence dictates, given the conditions and the environment, that we look at what our risk exposure is to some of the balance sheet issues separate from the schematic trends around local advertising and so that's largely what we're communicating today.

Okay that's helpful and then on that variable cost structure side of the traffic acquisitions in there are there any significant changes in the dynamics going on there that you can share with us?

I think the revenue share, or the very little part of the traffic acquisition cost, for the most part is still playing out as we expected and we don't see a real significant change in 2009 at this point.

Ross Sandler.

Just one last one on just kind of competitive dynamics in the industry.

Are you guys seeing anything, given the environment and how tough it is out there, are you seeing less competition from some of the smaller start ups or is it still kind of the same?

Can you just talk about that for a second?

Yes it's, as we mentioned in the main part of today's call, the short-term challenges kind of apply to everybody in just about every industry and when you look at the longer term, as we noted, it's hard to think about right now.

Again, just given what a lot of companies are going through and on a relative basis we feel like we're in a pretty healthy position and we're exposed to the right industries schematically but there may actually be advantages because we clearly are looking for points of efficiency but we think we can play some offense on winning market share in customer relationships and, at the same time, our competition in most cases seems to be playing more defense against flawed business models or viability.

So that's one of the key themes and the second part, of course, is our would be competition just simply doesn't have access to capital.

And so when you look at the universe of potential partners, they clearly have to put a heightened value on companies that are financially strong as well as investing in their products and so on a relative basis we continue to invest more in our products than any other provider and we are in a better financial condition than any other provider.

So we do think some of the short-term circumstances actually enhance and may accelerate our position when you look at local leadership and that's where we're keeping our focus is in being practical in trying to manage the risks of our business similar to other companies but at the same time recognizing we're in a window that can actually translate to enhanced opportunity if we can maintain the proper focus.

And that's where our heads are.

(Operator Instructions).

Well, to wrap it up, thankfully the iPhone with an ATT wireless connection turned out to be reliable.

We appreciate you all working through the hiccups of some of the phone system issues and, again, we feel there is very promising opportunities and despite some of the risks that need to be managed for the short term we appreciate your continued interest in Marchex and we do look forward to communicating as we make progress in 2009.

Thank you again.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

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

Thank you for your participation.