Match Group Inc (MTCH) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Ask Jeeves Q2 Earnings Conference Call.

At this time, all participants are in a listen-only mode.

Following today’s presentation, instructions will be given for the question and answer session.

If anyone needs assistance at any time during the conference, please press the star followed by the zero.

As a reminder, this conference is being recorded on Tuesday, July 22nd of 2003.

I would now like to turn the conference over to Mr. Derrick Neuman, Investor Relations Manager.

Please go ahead, sir.

Good afternoon, and welcome to Ask Jeeves Q2 earnings call.

Participating on the call today are Skip Battle, CEO, Steve Sordello, CFO, and Steve Berkowitz, President.

Today’s remarks should take about 20 to 25 minutes.

Before I turn then call over to Skip, please note that various remarks that we make on this call about our future plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities and Litigation Reform Act.

Actual results may differ materially from those indicated by these forward-looking statements, due to various important factors identified in the company’s filings with the Securities and Exchange Commission, including such things as lower spending environment for advertising sales, dependence on a third party paid placement provider, and dependence on third parties for content and distribution or advertising delivery.

The guidance provided in today’s call is based on limited information available to the company at this time, which is subject to change.

Although the guidance provided today may change after today, the company undertakes no obligation to revise or update these statements.

In addition, the financial results discussed on this call are on a pro forma basis, unless otherwise noted.

The company’s pro forma results, excluding restructuring costs, amortization of other assets, stock-based compensation, impairment of long-lived assets, gain on the dissolution of a joint venture, gain on an acquisition joint venture and deal costs and loss from discontinued operations.

At this point, I’ll now turn over the call to Skip Battle.

Thank you.

As we go through the stated – please remember that all these numbers apply only to web properties.

We closed the sale of Jeeves Solutions in early July, but given that we had announced our intention to sell, our Q2 numbers, include only web properties information.

That said, I’m happy to report we have good results for Q2.

Pretty much everything seemed to be clicking for us.

We’re executing well, and the market is hot.

Our revenue for Q2 was $25.6 million, as compared to guidance of $23.5 million.

Our pro forma earnings per share were 10 cents compared to guidance of 7 cents.

This performance was better than we’d anticipated, due to stronger than expected traffic and better than expected monetization of that traffic.

Going forward, we’re raising our guidance for 2003 by $8 million, from 94 million to 102 million in revenue, and we’re raising our guidance by 7 cents, from 26 cents to 33 cents per share pro forma earnings.

We’ll talk more about that later.

Let me explain the quarter in some detail.

First, traffic was very strong.

In the US, Ask.com queries grew 37 percent year-over-year, and in the UK, grew 29 percent year-over-year.

Second, the percentage of the queries we monetized increased to 16 percent in the quarter.

This is up from 14 percent in Q1.

There was some modest improvement in unit pricing, mainly in our own products, rather than our partners products.

The combination of all these factors resulted in revenue growth of 66 percent over Q2 of last year.

We believe that we are growing market share.

On Ask.com, our Q2 query growth of 37 percent year-over-year, exceeds industry estimates of 10 percent on average for search growth.

Now, there are discrepancies between our internal data and publicly available comparable data with respect to both unique users and to traffic levels.

Let me give you some data.

These are posted on our website.

Our unique users in the US for Q2 were on average – that is average for the three months, 25.6 million.

That represented year-over-year growth of 19 percent in unique users.

Neilson has us at around 11 million uniques.

ComScore Media Metrix has us at around 15 million during the quarter.

Neilson has us flat or declining for the three months and comScore Media Metrics had us declining also.

Our logs showed Ask.com page view growth of 13 percent year-over-year in Q1 and 30 percent year-over-year growth in Q2. comScore and Neilson data bear little resemblance to our numbers.

Now, we’re comfortable that our internal data are accurate, because we have to balance our numbers with Doubleclick, who we pay for ad serving and we have to balance our numbers with Google, who pays us for paid listings.

As near as we can tell, unique user growth in the industry as a whole in Q2 was pretty much nil.

Our growth was 19 percent over that period.

Again, as near as we can tell, page views across the industry grew in a range of 8-10 percent.

Ask.com page view growth was 30 percent.

So, we think we’ve got market share growth.

And this growth has come mainly from improvements we’ve made through our search experience.

Our expansion of our index, our introduction of smart search, our site redesigns, which improve ease of use as well as speed of response, all of these have resulted in an improvement in relevance and a more satisfying search experience.

This has increased the frequency of use to a recent high in May of 2.8 times a month, up from 2.4 in May of 2002.

It’s also increased the number of queries and it’s increased the time spent per visit.

We think there’s been a modest impact on traffic from our own marketing, but not much to date, because that’s just getting started.

The advertising we’ve done to date has worked pretty well.

Our radio ads in San Francisco, Los Angeles and Boston have resulted in better traffic there as indexed to our overall traffic around the country for June.

Our online advertising was a bit spotty, but we’ve learned what kind of ads work best online.

Bottom line for advertising is it appears promising, we know a lot more about what works and what doesn’t work for us and we’ll factor that into the larger spend re-plan in late Q3 and Q4.

The overall search ad market remains really strong.

We’ve got two main categories of revenue.

We’ve got paid listings and we’ve got branded advertising.

Both did very well in the US and in the UK.

Paid listings revenue comes from a combination of our own and our partners offerings.

As of June, our paid listing partner in both the US and the UK is Google.

Now, it’s important that you understand this partnership.

Google gives us an advertising feed against our monetizable queries.

They give us an advertising feed against our monetizable queries.

So if one of our users clicks on one or more of these paid listings, Google collects money from the advertisers and shares the revenue with us.

Google does not provide us with search results.

They do not provide us with search results.

They do not have any access to our search results and they don’t have any access to our search algorithms and they do not provide us with traffic in any way whatever.

We’ll talk about paid inclusion, which is a small part of our revenue in the forward looking part of our comments.

Before I turn this over to Steve Sordello, I want to announce the promotion of Steve Berkowitz to President of Ask Jeeves.

Steve joined us a little more than two years ago as General Manager of web properties.

During his tenure we’ve acquired and integrated our Teoma technology, we’ve rationalized our organization, we’ve revamped the management team and drove revenues to record levels.

He understands this business better than anybody I’ve talked to.

And I’m comfortable that he and his team will drive this company forward as effectively in the future as they have recently.

There aren’t any other organizational changes.

Steve Berkowitz, finance, legal and the other G and A functions will continue to report to me as CEO.

Now let me turn this over to Steve Sordello for more detailed comments on the quarter and our take on the rest of the year.

Thanks, Skip, and good afternoon.

I’m pleased to report another strong quarter for the company.

This is the fifth straight quarter of revenue growth and we achieved record levels in terms of both revenue and profit, as well as with many of our operating metrics.

Again, please note that the following numbers do not include Jeeves Solutions.

Revenues for the second quarter were 25.6 million, advancing 66 percent compared to the year ago period, and up 13 percent compared to the first quarter.

There were two favorable factors that occurred in the month of June that led to higher revenues than we previously mentioned in our May update.

First, with higher levels of traffic on Ask.com, as June queries were up about 40 percent year-over-year.

And second, our UK paid placement revenues were higher than anticipated in the month.

We break our revenue into four main product lines; paid placement, which represented 67 percent of total revenues, branded advertising, which represented 27 percent, paid inclusion, which represented 2 percent, and licensed revenues from our Japan joint venture, which represented 4 percent.

Paid placement of revenues increased by 11 percent compared to last quarter, and by 137 percent compared to the year ago quarter.

BPCs were flat to slightly up, therefore, the growth came primarily from the combination of improved levels of traffic, a higher proportion of monetizable queries and a better performance in the UK.

Branded advertising grew 20 percent compared to the first quarter and was flat with the year ago quarter, a quarter in which we were still selling banners and [innersticials] [phonetic] on Ask.com.

Our flagship branded advertising product, Branded Response, was up 69 percent year-over-year.

Finally, our UK operations continue to have strong performance, contributing record revenues of 7.3 million.

This represented 29 percent of total revenues.

In terms of volume and pricing, total paid views were a record 2.2 billion, up 2 percent compared to last quarter and up 26 percent compared to the second quarter of last year. 1.6 billion pages were generated on our proprietary sites in the quarter, an increase of 4 percent compared to last quarter and an increase of 30 percent compared to the second quarter of 2002. 600 million pages were generated through the remainder of our network in the quarter, flat compared to last quarter and up 17 percent compared to the second quarter of last year.

Due to normal seasonality, average unique users in the quarter in the US decreased by about 2 percent over the prior quarter to 25.6 million.

On a year-over-year basis however, unique users increased by 19 percent.

For the UK, unique users decreased by 9 percent to 5.9 million over the prior quarter, again reflecting normal seasonality.

Compared to the year ago quarter, however, unique users in the UK increased by 33 percent.

We continue to be successful in monetizing commercial searches.

As our percentage of queries monetized on Half.com reached 16 percent, up from 14 percent last quarter and double the 8 percent achieved in the second quarter of last year.

Our consolidated revenue per thousand page use increased to $11.35, from $10.24 last quarter and from $8.32 in the second quarter of last year.

RPMs on our proprietary sites were $13.62, up from $12.27 last quarter and $9.42 in the year ago quarter.

For the remainder of our network, RPMs were $5.28.

This compares to $5.17 for last quarter and $5.69 in the year ago quarter.

And revenues from our Japan joint venture accounted for approximately 1 million within the quarter.

I’ll now turn to the remainder of the P and L. Gross margins increased to 81 percent, up from 78 percent last quarter and 73 percent in the second quarter of 2002.

As a percentage of revenue, operating expenses were as follows; sales and marketing 28 percent, product development 13 percent, and G and A 19 percent.

G and A expenses were higher than anticipated due primarily to costs associated with tax planning initiatives and [Sarbanes Oxley] compliance.

Other income in the quarter was 193,000.

The increased revenues resulted in our improvement on the bottom line, where we out-performed our updated guidance by 3 cents per share.

Second quarter pro forma net profit from operations was 5.2 million, or 10 cents per share, compared to a profit of 3.5 million, or 7 cents per share in the last quarter and to a loss of 3.4 million, or 8 cents per share in the second quarter of 2002.

Our GAAP earnings from continuing operations were 9 cents per share.

This compares to earnings per share of 17 cents in the last quarter and to a loss per share of 12 cents in the second quarter of last year.

A detailed reconciliation between our GAAP results from continuing operations and pro forma recorded results can be found in our press release and on our website.

The fully diluted share count for the quarter was 53.5 million.

This share count includes the impact from the financing, which included the exercise of an over-allotment option by the underwriter.

I’ll now touch briefly on the highlights of the balance sheet.

Our unrestricted cash position at the end of the quarter was 160.5 million.

This compares to 39.1 million at the end of last quarter.

Cash proceeds from our financing were about 112 million, net of banker and deal costs.

We generated about 9.4 million in cash from operations and stock option exercises.

DSOs were at 30 days, down from 32 days last quarter.

And finally, total headcount as of June 30th was 288, roughly flat with the 286 at the end of last quarter.

Our productivity per employees continues to strengthen as our average annualized revenue per employee was 357,000 for the quarter.

This represents and increase of over 70 percent compared to the year ago quarter.

At this time, I’d like to go through some factors for your consideration.

When assessing our future business and compiling our financial models for Ask Jeeves, let me remind you of the remark that Derrick made earlier and that our guidance is on a pro forma basis.

Please see the tables attached to our press release for additional details.

Before we discuss specific guidance, I’d like to touch on the seasonality of traffic on our site.

The summer is slow.

Seasonality on our site had an impact in Q2 and will have a bigger impact on Q3, with the rest of the year pretty much mirroring Internet-wide usage.

Therefore we expect traffic to be sequentially down, offset somewhat by continued improvements and modernization.

For the third quarter we are targeting revenues of approximately 25.2 million and a net pro forma profit of 3.5 million or about 6 cents per share.

The breakdown of the four cent difference from the second quarter is as follows, 1 cent from revenue due to seasonal Internet usage patterns, 1 cent from increased R and D as we continue to invest in Teoma, and 2 cents for marketing as we expand on our earlier marketing efforts.

For the third quarter we are targeting gross margins of approximately 80 percent.

Operating expenses as a percentage of revenue are targeted as follows; sales and marketing, 32 percent, product development 16 percent.

And G and A, 18 percent.

From a tax perspective we expect to incur approximately 300,000 related to UK statutory profits and AMT in the US.

We are targeting net other income to approximately 300,000 and are basing our earnings per share estimate from a projected 58 million shares outstanding.

The projected share count reflects a fully diluted impact of the convertible offering as if all the shares had been converted.

For the full year of 2003 we are raising our financial targets.

On the top line, we are raising our estimates by 8 million, from 94 million to 102 million.

This represents top line growth in excess of 55 percent over 2002.

On the bottom line we are raising our estimates by 7 cents, from 26 cents to 33 cents per share, while allocating an additional 2.5 million to marketing and an additional 1.5 million to product development.

To sum up, we are very pleased as we look ahead.

We’re delivering healthy top line growth and bottom line profit.

Our key volume, pricing and productivity metrics have been positive, we’re generating cash, and with the financing completed this quarter, we’ve strengthened our balance sheet.

And as we continue to improve the site and market further, we’re excited about our business and to capitalize on the growing search market.

This concludes my remarks.

Thank you for your time and I’ll now turn the call back over to Skip.

Thanks.

When we spoke at our Q1 conference call I promised you a presentation of our strategy for paid inclusion.

Currently paid inclusion revenues are about .5 million per quarter.

That’s about 2 percent of our revenue.

But this is an important initiative, both from the standpoint of revenue and as a search capability.

Steve Berkowitz and his team have been working on our initiative and he’ll describe our approach to you.

Thanks, Skip and good afternoon.

Today I’m going to touch briefly on our strategy for paid inclusion and then cover some of the initiatives we are planning for our sites and Teoma Technology.

As you’re all aware, paid inclusion has the potential to be a growing revenue source for us.

To that end, we spent the last several months thoroughly analyzing the markets and what it would entail for us to create an expanded paid inclusion covering.

We’ve studied the current products of the marketplace in great detail and have spoken with multiple paid inclusion advertisers.

Through this process we have formulated a paid inclusion strategy that we believe will maximize revenue by also ensuring our relevance.

Our strategy will include a hybrid approach of building and partnering to complete the paid inclusion puzzle.

As we implement our paid inclusion strategy over the next six months, we’ll pass along the more specific detail.

The driving reason behind the decision for hybrid strategy is that paid inclusion involves many different systems and relationships and we don't need to take on all those projects in house.

One thing to mention is that our Teoma technology will be the cornerstone of our paid inclusion strategy as well as becoming our information serving platform for all of our sites.

Shifting to the initiatives for the upcoming quarter, speed of response as Skip mentioned earlier continues to be a function of our technology team and during this quarter you will continue to see improvements in this area.

In terms of Smart Search, we will continue to launch new features and tools.

Last week we rolled out our weather function.

In the UK we will release a new version of the site this quarter, which we expect will increase user satisfaction as well as start to bring the UK and the US sites into closer alignment.

Later this summer we’ll market important milestones for Teoma as we double the index to 1 billion, from 500 million.

This will greatly increase the relevance of our technology by increasing coverage.

We’ll also continue to increase the Teoma algorithm as we have done in the past two years to increase relevance.

We believe that we can continue to raise the bar for the search industry with Teoma.

To sum things up, I’m very excited about the prospects for Ask Jeeves.

We continue to make the business better by improving our sites and our technology.

I’ll now turn the call back over to Skip.

Thanks.

Sort of to wrap up our thinking, we’re really optimistic about the search market and we’re optimistic about our place in it, which is what’s led us to increase our revenue guidance by 8 million, to 102 million and our pro forma EPS by 7 cents to 33 cents.

Our estimated results for Q3 are 25.2 million in revenue and 6 cents per share.

The summer is the slow season for us and even though traffic hasn’t dropped as far as we expected, it still has dropped.

That's why we’re predicting a $400,000 drop in revenue from Q1 – excuse me, from Q2.

As to the 4 cent difference in EPS between Q2 and Q3, that is the 10 cents to the 6 cents, 1 cent is due to revenue, 1 cents is due to more spending in R and D, and 2 cents is due to more spending in marketing.

You may recall that we’ve said, if we had the chance to make 30 cents with more marketing spend or exceed 30 cents a share by keeping marketing costs down, we’d prefer to invest marketing money for payback in 2004.

And that is what we plan to do, both here in the US and in the UK.

By the time the year ends, we will have spent about 3 million more in marketing than we had originally projected.

And on the search side, we’ve more than doubled our group in the last year.

So we’re bullish on 2003 and beyond.

We’re working to grow market share and as far this year that’s been working.

We’ve become better known as a differentiated product, which gives us a measure of protection in the market place.

We are increasing our advertising and we hope to reap the benefit of that effort as we go into 2004.

We’ve developed some key competitive assets over the last two years.

We have a search technology that is distinctive and we believe competitive with any alternative search engine anywhere.

We have a user experience and a site that is differentiated and its growing more appreciated as time passes.

We have a brand that is widely known, our traffic growing and we’re starting to execute at very competitive levels.

And very importantly, we think we’re still in the very early days of a multi-linear secular shift to advertising to internet search - a big shift in advertising to internet search.

We expect continued growth in advertisers entering this space.

We expect continued growth in the number of search queries that we’ll be advertised against and we expect continued growth in unit pricing as well.

And we expect this to continue for years.

So we like our position in this environment as a search focus company with a differentiated product with growing traffic with improving monetizations and we would be happy to take questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question and answer session.

If you have a question, please press the star, followed by the 1 on your push button phone.

If you’d like to decline from the poling process, press the star, followed by the 2.

You will hear a three-toned prompt acknowledging your selection.

Your questions will be polled in the order they are received.

If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment please for the first question.

Our first question comes from Christa Sober, with Thomas Weisel Partners.

Please go ahead.

Hi.

A couple of questions.

First, Skip, I think you said that your increasing market share has come not really related to the advertising that you’ve done so far to date and obviously the increase in the overall page – URL that you’re going to have indexed at TMI isn’t going to increase until the end of December.

So, has this near-term growth really just been some low hanging fruit?

Or how do you think that that has – how you’ve managed to gain shares through that period?

And then second, could you give us the breakout in the UK operations between paid placement branded advertising, etcetera?

And then could you give us a sense as to the out-performance in the UK?

If that, in your opinion was due to the switch to Espotting to Google or how do you view that there?

And I’ll hold off for now, thanks.

Okay.

You’re absolutely right that the doubling to a billion for the index will occur at the end of this summer, so that hasn’t helped us yet.

But, we doubled to 500 million in the last six months.

We’ve increased a pretty large number of features on the site.

We have Smart Search, we’ve got picture search.

Relevance has improved pretty substantially.

And we’ve been hearing anecdotally that people are a lot happier with the site.

So, what’s happened is that the users who use us use us more.

And that’s because the site’s better.

And more users use us.

And I think that’s because eof work of mouth.

Because we’ve spent really very little in advertising.

We did some advertising in the first quarter in New York, San Francisco and Los Angeles.

And that worked reasonably well.

We’ve done some advertising in this quarter in San Francisco, Boston and Los Angeles and that’s worked pretty well.

But most of our growth has come from not those areas.

So, I think this is not because of marketing.

I think this is because of better product has essentially gotten higher use.

Now, I’ll ask Sordello to respond to the UK and then actually Christa, I’ve forgotten what your third question was.

I’ll take it.

Hi, Christa, this is Steve.

The breakout for the UK, their 7.3 million was roughly 5.3 million in paid placement and 2 million in branded advertising.

Okay.

And do you guys – the relationship between Espotting going to Google, is it where some of the lift has occurred?

Yes, that’s where some of the lift has occurred.

But going to Google, I don’t think has had any impact on the increase in unique users year-over-year.

And Google, remember, was only one month, June.

And then finally, do you have an expectation for the modernization that’s built into your guidance for the full year.

I mean, clearly the advertising education is helpful assuming that number is more and more advertisers are getting into paid surfs.

Well, the 16 percent is already above what we had said we’d do by the end of the year.

So, we’re comfortable with that end of year guidance.

We haven’t – I don’t think we’ve got guidance as to where monetization goes.

What happens in the summer is that the traffic drops, but it drops disproportionately in the non-monetizable queries.

So the reference stuff – the stuff that it’s practically impossible to monetize against, goes down very, very dramatically.

But queries on travel don’t go down hardly at al.

As a matter of fact, they may go up.

So, we expect – I mean, what we saw in June was a better monetization month than in April and May.

And what we’re betting is that July and August will be better percentage monetization months than September, October, November.

Great.

Thanks so much.

Our next question comes from Jeetil Patel, from Deutsche Bank Securities.

Please go ahead with your question.

Hey, Jeetil.

Operator, I think we’ve lost Jeetil Patel.

Okay.

Our next question comes from Safa Rashtchy, with Piper Jaffray.

Please go ahead.

Hi, guys.

Congratulations on a great quarter.

This must be called the incredible June for you guys.

Obviously you’re helping a great deal.

My first question to Skip, is you guys give guidance on May 28th that you expected $23.5m.

Was there this much acceleration that you didn’t anticipate in June?

And maybe you can talk a little bit more about what factors do you think caused this level of increased monetization, which sounds like from your comments would be continuing into the summer.

And my second question has to do with the marketing.

You mentioned you really haven’t seen anything measurable from the marketing efforts.

Is it just too early and it doesn’t really mean anything, it’s not a basis, but if not, since you’ve been doing it for a few months, why would you focus on increased marketing rather than just do what you’re doing, because it’s obviously working.

Yes, thanks.

June surprised us.

Honest.

I mean, we did not, on the 28th of May sandbag our guidance.

And what happened was, our traffic over the prior year was nice in April, quite nice in May, and really good in June.

But none the less, June traffic dropped compared to May.

But if you look at year-over-year stuff, the increases got better throughout the quarter.

What happened in June was that it seemed like the traffic that dropped was the traffic you can’t make money on.

So June was a very, very strong month in revenue.

And we had anticipated that June would be a weak month in revenue.

And we expect to have good revenue months in July and August, which is why we’ve got revenues almost flat.

I mean, it’s down almost 400,000 from the second quarter.

So there’ve been two times in the last two years when we have really been surprised by experience in the course of a short period of time.

One was this June and the last was the last two weeks in December of the fourth quarter, where both of those places, the money just seemed to really come rolling in.

On the marketing side – does that answer your question on the June?

Yes.

On the marketing side, I think we’ve gotten a little lift from marketing – a little lift.

But I think most of this is from the site.

If we look at what we did with radio in San Francisco and Los Angeles and Boston, our traffic there indexes better than it does in the other cities.

So it has a positive impact.

And we’ve acquired some traffic through our online advertising, although some sites were substantially better than others.

And we know back in the first quarter that some of the out of home advertising that we did in San Francisco, Los Angeles and Boston was effective.

But most of the growth is coming from the part of the country that we didn’t advertise in, which is why we think most of the growth is coming – one of the reasons, we think most of the growth is coming so far from the site.

Okay.

A quick follow-up, if I may first, Steve.

You talked about your plans for paid inclusion.

Can you give us a little bit more color on the timing?

When do you expect to start this new hybrid plan and can we look at, for instance, how Microsoft does paid inclusion as possibly a model that you would be adopting as well?

Well, first of all, we will be implementing this over the course of the next six months.

So the next three months for us are a lot involved in the technology building aspect of what we’re trying to do.

I don’t think we’ll be implementing under the Microsoft methodology of what’s been multi-sections on the page.

I mean, our goal is to leave Teoma as the serving platform for almost everything onto the page.

So that we can have a more relevant experience at the end of the day.

And when will you be announcing your partner selection or have you selected your partner for that or not?

There’s not any one partner that we’re talking about here.

I mean, there are multiple aspects of the process that will have many different partnerships to them.

So for example, for our site submit program, which is currently in place, we use I Need Hits.

And we have relationships with many different partners on the SCO side.

So, there’ll be lots of different partners as we look at this.

This is not a one partnership – this is not going to be like Google where we have one partnership that defines that space on our page.

Okay, great.

Thanks.

Our next question comes from Youssef Squali, with First Albany.

Please go ahead.

Yes, thanks.

Youssef Squali.

A couple of questions.

Number one, Steve Sordello, could you just go over reasons why your G and A was up so much during the quarter?

And number two, on the PPC, I think you said that it was flat this quarter.

I don’t know, maybe you still don’t have an answer to this, but last time we were trying to understand why Google’s CPCs were slightly down.

And I was wondering if there’s some sort of an explanation this time around for why it’s flat at a time when others like Overture, at least recently has stated that they have seen that number going up?

Yes, sure.

G and A, as I mentioned in the prepared comments, the main areas were professional service related projects.

We’re doing a number of tax initiatives, international tax structuring, things of that nature.

Other than that, there were things across the board that it was up, but nothing in particular.

On the CPC issue, I can let Steve elaborate, but it was flat to slightly up.

We saw the up-tick more in increase of coverage and people clicking through on results than we did on actual pricings.

But I can let Steve elaborate.

Our focus is on the RPM of the product for the revenue we get per 1000 pages.

And that was up.

Because we multiply the clicks times the coverage times the CPCs.

So, it’s more of looking at the growth in the RPM than we are looking at any one – CPC is just one element of the mathematics.

We saw actual increases in the RPM in paid listings.

But now, Google’s price per click for us was not up.

It just wasn’t up.

And I don’t know why it wasn’t up.

The good news was that the coverage in the percent of monetization was up pretty nicely.

So if you think of the unit as 1000 page viewers, which is the way we try to manage the business, that was up what, 6 or 8 percent quarter-over-quarter and 35 percent, year-over-year, something like that.

But if you look at the price we get on a click from Google, it has not returned to where it was at the beginning of the year.

So that softening – it hasn’t continued to soften further, but it hasn’t reversed that pattern.

Okay.

So, it’s in the 14 cents range as it was last quarter or would you say it is –

I don’t think we’ve ever said what the cents per click was and we don’t.

We don’t want to have that information out there.

I don’t know why their price per click has not increased.

There’s certainly been growing advertisers very handsomely.

And we’re happy with that partnerships and we’re happy with the way it’s operating.

But we talked in the past about there being three drivers of this business; traffic, the percent of the traffic we can monetize and the price we get for each unit of monetization.

If you’re down at the click level, those prices have not firmed.

I expect they will over time, but that’s sort of an economist’s expectation as opposed to knowing in detail what Google’s planning to do.

I mean, I’m just assuming as more advertisers chase fewer listings, the price is going to go up.

But so far it hasn’t.

Okay and just a quick housekeeping item.

What was the abandonment rate in the quarter?

Do you have that number?

About 21 percent.

Great.

Thanks and congrats, very nice quarter.

Our next question comes from Richard Fetyko, with Kaufman Brothers.

Please go ahead.

Thank you.

Congratulations, guys, on the quarter.

Most of my questions have been addressed.

But if you can elaborate a little bit on your marketing plans.

You’ve done some in selected cities.

Is this new rollout on the increase in marketing budget allocation going to cover additional cities, new verticals or new channels?

Steve Berkowitz, I’ll answer that question for you.

We spent small amounts in the first and second quarters to test different mediums.

And now what we’re going to be doing in the latter half of the third quarter and more in the fourth quarter is rolling out to one new medium, which is print.

We haven’t done print before.

And then building into more cities on both outdoor and radio.

And we’ll be looking at a more focused online campaign.

So we’ll see a much more expanded program in the latter half of September – early September, September and then the majority of October and November.

Okay, very well.

And Steve Berkowitz, first of all, congratulations on the promotion.

I was hoping you could also elaborate on the paid inclusion program.

What will this require from sort of an internal build-up.

What do you have to do internally in terms of R and D or staffing?

And when should we start seeing sort of a more aggressive ramp up in revenues?

In answering your R and D question first, we’ve been staffing over the last year.

Steve mentioned earlier that we’ve increased the staff dramatically in the search area and we believe that paid inclusion is just an integral part of delivering a relevant search engine.

So, I don’t think we’ll see tremendously dramatic increases in our staffing at all.

I think that we’ve basically got all that we need in our plan going forward, to build out the technology piece of it.

In terms of revenue, we should see some possibly in the fourth quarter, but most of the impact will apply into ’04.

Richard, when we were thinking about what a reasonable level of guidance ought to be for the third and the fourth quarter, we’ve got the expenses we’ve planned for paid inclusion in there.

So, there isn’t a decision that comes up that says we’ve got to do 4 million here or 3 million there or anything like that.

And we’re not expecting any material increase in paid inclusion revenue until we get to ’04.

Okay.

Thanks again and congrats.

Our next question comes from Steve Reilly, with B. Riley and Company.

Please go ahead.

Hey, good afternoon, guys.

Another question on the paid inclusion side.

I’m assuming that your plans for paid inclusion in terms of establishing partnerships in that area are included in the guidance.

Is it possible that there could be – you could establish certain partnerships that would provide upside to the numbers going forward?

Or should we just assume that’s it’s fully imbedded in the guidance?

I think you’d be going pretty far out on a limb to assume there’s some low-hanging money there in Q3 or Q4.

We haven’t included in our $8 million of extra revenue, there’s hardly any of that is coming from paid inclusion.

That’s coming from our branded advertising and our paid listings business in the UK and the US.

And I don’t think there’ll be anything out there material.

I mean, I don’t think this thing will get spun up in making much in the way of money until 2004 and just as I don’t think there’s going to be a large amount of money to spend between now and 2004 to get there.

Okay.

And in terms of presenting the paid inclusion links on the searchers whole page, are they just going to be included in the core search results or are they going to be broken out separately?

They will be included in the core search results, but all of the results themselves are going to be ranked by the algorithm, so there will be no paid placement involved in it at all.

It’s really going to be, you enter the system and the algorithm itself will decide where you appear.

And will you label that as an advertiser link or is it just going to be a link as any other sort of link?

It’s not an advertiser.

Because they’re not advertising.

They’re paying to be crawled more frequently and more deeply.

They have no – I mean, advertising, as I think of advertising, is I pay you as a newspaper or as a search engine to put me number two or on page eight in the upper left hand corner and if I don’t go there, you and I have a problem with our understanding.

This is not advertising.

This is people who want to have their sites crawled more frequently and more deeply and they’re willing to pay for that.

And then they’re willing to allow our algorithm to make a determination as to whether they’re more relevant or not.

Right.

Okay, it makes perfect sense.

Another question I had was you were talking about increasing the response time for Aquaries.

Any idea – can you quantify as to how much faster you can make that?

Do you see that as kind of a growth driver in getting more page views out of users?

Yes, I think you’re going to see, especially on dial-up modems, which we have a fairly large percentage of our base in, you’re going to see a dramatic improvement in speed – somewhere in the neighborhood of 20-30 percent and maybe more as we work on different pieces of compression technology.

And all that gets back to the overall experience, which is, it’s about frequency and it’s about retention.

And we believe that all these things we’re doing are going to increase the frequency and retention of our existing users.

Sure.

Okay, that’s good.

And last question I had was, any update on plans for the cash that you now have on the balance sheet?

Any potential acquisitions that are eminent right now?

Is there anything on the horizon?

Well, we did this financing for two reasons.

One was, running a technology company with 30 million of unrestricted cash in an environment that’s as topsy-turvy as this kind of an environment, that’s a fairly thin precautionary cash balance.

So, some of the reason for doing the financing was just to have healthier cash balances.

But you didn’t need 115 million to do that.

You needed a lot less than that.

We think that there’ll be acquisitions down the road for us.

I can’t speak to who they might be or when they might occur.

There’s a huge unpredictability in the timing of all this kind of thing.

But the reason we did the financing to the extent that we did it was so we would have the ability of mixing cash with stock as we looked at things that made sense for us to acquire as we sort of fill out our footprint in search.

The search marketplace is really, really strong.

And search is starting to mean more things.

And we don’t think that it makes sense for us to try to build everything.

Some places will partner, some places will acquire.

And I can’t be more specific than that.

I’d be disappointed if a year from now we hadn’t done something.

But you shouldn’t expect something to happen in August.

Okay, thank you.

Ladies and gentlemen, if there are any additional questions, please press the star, followed by the 1, at this time.

Again, if you are using speaker equipment, please lift the handset before pressing the numbers.

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Gentlemen, it looks like we have no further questions at this time.

Please continue.

Thank you and we’ll talk to you next quarter.

Thanks very much.