Tucows Inc (TCX) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Tucows' second-quarter fiscal 2005 financial results conference call. Please note that today's presentation will be archived for replay, both by telephone and via the Internet, beginning approximately one hour following completion of the call. To access the archived conference call by telephone, dial 416-695-5800 or 1-800-408-3053 and enter the pass code 315-9569#. The telephone replay will be available until August 10, 2005, at midnight. To access the archived conference call via Internet, go to www.TucowsInc, and click on Investor Relations.

I would now like to turn the call over to Ms. Hilda Kelly, Investor Relations Resource, Tucows, Inc. This call is being recorded Wednesday, August 3, 2005. Please go ahead, Ms. Kelly.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for today's call. With me is Elliot Noss, Tucows' President and Chief Executive Officer, and Michael Cooperman, Chief Financial Officer.

Today, following market close, Tucows issued a news release reporting the Company's results for the second quarter of fiscal 2005, ended June 30, 2005. The news release is available on our corporate website, www.TucowsInc.com, by clicking on Investor Relations and then on Quarterly Financials. You can also contact me directly for a copy of the news release by telephone at 416-538-5493 or by e-mail at IR@Tucows.com. If you'd like to receive future news releases by e-mail, again, please contact me.

Before we begin today, I would like to point out that the matters we will be discussing include forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in our documents filed with the SEC, specifically the most recent report on Form 10-K, Form S-1 and Form 10-Q. We urge you to read our securities filings for a full description of the risk factors applicable to our business.

I would now like to turn the call over to Elliot.

Thank you, Hilda. Good afternoon, and thank you for joining us today to discuss our second-quarter fiscal 2005 results. I will begin with a review of the highlights for the second quarter, Mike will then discuss our financial results in some detail, and finally I will return to talk about important progress in our evolution as a public company.

First, the highlights. We continue to make progress in the execution of our strategy to build upon our dominant position in the wholesale domain market by adding higher-margin services that address high-growth segments of the Internet. Net revenue for the second quarter grew 13% year over year to $12 million, marking our second-highest quarterly revenue ever. And if we adjust for a one-time accounting transaction in the third quarter of last year, the second quarter -- this quarter -- was our sixth consecutive quarter of record revenue and our 11th consecutive quarter of growth in revenue.

Income from operations was $411,000, down slightly from the same quarter of last year, due primarily to the short-term impact of the relaunch of our content site, which I will discuss in more detail in a moment; the impact of the strengthening Canadian dollar; as well as other one-time costs during the quarter that Mike will discuss later.

We achieved our 12th consecutive quarter of profitability, at just over $0.5 million or $0.01 per share. We had cash earnings of nearly $900,000 and our 15th consecutive quarter of positive cash flow from operations at $1.5 million. And, by the way, we define cash earnings as operating cash flow net of working capital except deferred revenue and prepaid domain registry and ancillary services. While we generally do not like reporting non-GAAP measures, we do like to provide this metric, because it's what we actually use internally to manage the business on a daily, weekly and monthly basis. We think it helps our investors better understand the way we run our business.

Now, turning to our domain registration business, domain registration transactions for both direct and indirect sources totaled more than 1.1 million this quarter, our second-highest quarterly performance ever and our best performance in a second quarter ever. We note that, due to seasonality, the first quarter is typically the best quarter of the year, in terms of number of transactions.

The reason that we have added the indirect transactions here is that when comparing this metric to last year's number, a few of our biggest customers have now become customers of our OpenHRS or Hosted Registrar Service. And, as a reminder, OpenHRS provides larger domain registration resellers with all the tools necessary to manage new registrations, renewals and transfers using their own registrar accreditation. As we have talked about in the past, we have been building this segment of our domain registration business for some time, and we now have six registrars, representing more than 720,000 names under management. Obviously, these are large customers contributing significant gross margin build on a monthly basis.

Domains under our own registrar accreditation increased to more than 4.6 million. And, again, that's excluding that 720,000. This represented a growth of nearly 10% on a year-over-year basis. And remember that we posted that growth in spite of the previously mentioned large customers no longer being considered under that number. This reinforces our step, made years ago, in introducing this service to ensure that our largest customers had a migration path, and that we kept them in the door, allowing us the opportunity to sell them additional services.

And I remind you that a lot of the growth at an industry level for domain names is being driven by the market for expired names, a market in which we do not yet participate meaningfully. However, we intend to enter that market in the second half of this year.

Besides domain names, there were a number of positives this quarter that are specific to the most important element of our strategy, our ability to sell additional services. I want to mention three of these specifically. The first is our publishing segment, which includes Blogware. While the revenue for this line of business is still not what we would view as material, we would note that it snuck into five figures in Q4 of last year and has more than doubled in Q1 over Q4 and more than doubled again in Q2 over Q1. Clearly, we are seeing good traction here.

More importantly, we have a number of large customers engaged in ongoing marketing trials of various kinds. These trials are important, in that both our customers and us need to learn how to best market this service. The trials involve different approaches, ranging from simply selling the service in raw form by including it in the standard product offerings to offering free trials to a complete customer base, with marketing intended to generate usage and hopefully upsell to customers providing their user base with a mini block, one with limited bandwidth and storage in their standard customer bundle, and using usage, for example, the posting of a number of digital images or other uses of bandwidth, podcasts, to drive the upsell.

In addition, improvements to the Blogware service continue. We're improving functionality and usability with releases every couple of months at this point. Publishing in general and Blogware in particular are certainly the services where we are seeing the most demand and the most traction inside the building.

The second positive I'd like to highlight is billing. We are starting to see some positive signs in our billing business. First, billing revenue was up 17% in the second quarter of this year compared to the first quarter. This was primarily driven by sales of new licenses or subscriptions, which is encouraging in that it was not driven by a release cycle.

Next, as I talked about on last year's Q2 conference call when we first entered the billing business, there were two directions that we needed to take this service. We needed to evolve it from an ISP-specific product to one that more appropriately met the needs of web hosting companies and service providers generally, and we needed to offer the same functionality as the software in pure service form.

Again, web hosting companies make up the largest portion of our customer base, and in our view there are very, very few products that meet their billing needs. Next week -- in fact, this week -- we release Platypus 5.1, which is the first release that starts to move us down the path to meeting those needs. This release supports billing for domain names and Blogware out of the box, as well as being significantly easier for our customers to use to create web pages that merchandise and bundle multiple services. Now, our large base of existing Platypus customers who do not register domain names through Tucows will be able to do so much more easily, and will also find it dead simple to start offering Blogware. Next quarter, we will have a better sense of whether we are 25% or 75% down the road to meeting the broader needs of web hosting companies, but importantly, this will mark the first time that our sales force will be able to reach out to existing Tucows customers who are not ISPs.

The third positive for the quarter worth noting is the changing nature of the business. We're now starting to see changes in the way we generate sales opportunities. We're starting to see customers come to us around new services like Blogware and billing. These customers are not existing domains customers, but our other services are starting to open doors that previously were not open. We're starting to see good opportunities for services like e-mail defense come from smaller customers in terms of revenue, but who have large customer bases and needs for services in volume other than domain names.

And lastly, we're starting to see closer and closer integration across services. This week, in addition to the Platypus release, we are also introducing a completely new approach to our client code, which is software run by thousands of our customers to make it easier to integrate with our platform. This software is now simply much better at helping our customers market, bundle and merchandise their services, and for those that use Platypus to bill and provide customer care to them, as well. Greater usability and better merchandising will show up in a number of ways for us financially, in this case by helping service providers increase their browse-to-buy ratio through a superior checkout experience.

To summarize, all of this is encouraging, as it is reinforcing of our view that the leverage in the business comes from selling additional services to our existing customers. We're getting more indications that we are indeed the preferred supplier to our customers and that our service mix is meeting the market needs.

Now, before turn the call over to Mike, I would like to briefly touch on our content business. Last quarter, I noted that we were launching a significant redesign of our content site -- in fact, the first redesign of its kind in a number of years -- and I identified that in the short term, this may have a negative impact on revenue. The good news is that the redesign has generally been a success. The early data has shown that the ratio of downloads to visits has increased, and this is very important. However, revenue has decreased due to fewer searches, fewer clicks on paid placements and fewer clicks on syndicated pay-per-click adds. As users are finding what they are looking for, their use of alternative methods has decreased.

I want to be clear that this was exactly our intention when we started down the path to redesign. The impact was in the range of $250,000 on the quarter. Obviously, with this revenue being nearly all margin, it had a real impact on this quarter's net income results. While we have given back much of the gains we made over the last couple of quarters, I'd note that this is still up 8% over the same quarter last year, and we still expect this line of revenue to grow 10 to 15% over last year through the fiscal year.

One of the strongest emerging trends in pay-per-click is the fact that the greater the context provided by a click stream, the greater the value of the leads generated from it. Historically, we, like most sites, have made most of the revenue from the top of the site, the pages with the least context. We knew that, in order to maximize revenue from the site in the longer term, we needed to change the navigation and create different and more lucrative opportunities.

Now that we have started to create those opportunities, we need to begin to take advantage of them. In connection with this, we have also made the investment in a high-end web analytics tool that we hope will allow us to maximize the most profitable leads on the site. We believe that over the next few quarters, we will fill that gap and beyond, taking the content business to higher levels of revenue and a more successful user experience, which, of course, means a healthier line of business.

I would now like to turn the call over to Mike to review the financial results for the quarter.

Thanks, Elliot. Our operational and financial performance in the second quarter continues to underscore the momentum in our business, as we achieved our 12th consecutive quarter of profitability, our 15th consecutive quarter of positive cash flow from operations, continued growth in deferred revenue and continued evidence of traction for our other services.

Net revenue for the second quarter of fiscal 2005 increased 13% to 12 million from 10.6 million for the second quarter of fiscal 2004. Net revenue from domain names and ancillary services for the quarter increased by 1.3 million or 13% to 11.3 million from 10 million for the second quarter of fiscal 2004. Revenue from domain names for the second quarter decreased to 86% of total revenue, compared to 89% for the second quarter of last year, while revenue from ancillary services increased to 8% of total revenue, compared to 5% for the second quarter of last year.

Revenue from advertising and other content sources increased by 8% to 721,000 from 667,000 for the corresponding quarter of last year. However, as Elliot mentioned, the redesign of our software download website has had the effect of dampening growth in advertising and other revenue in the short term. We estimate that the effect of this on revenue for the second quarter was in the $250,000 range.

Gross margins for the quarter decreased to 39% from 38% for the second quarter of fiscal 2004 and 39% for the first quarter of this year. This decrease in gross margin was primarily caused by the change in sales mix that resulted from the tempered growth in advertising and other content revenue that I mentioned a moment ago.

Operating expenses for the quarter increased by 548,000 to 4 million or 33% of revenue, up from 3.5 million or 32% of net revenue for the second quarter of last year and down from 4.4 million or 37% of net revenue for the first quarter of this year.

To help you better understand our operating expenses, I'll break them into two components, core operating expenses and other operating expenses. Core operating expenses -- which consist of costs relating to ongoing sales, marketing, technical operations and development and administration -- for the second quarter of this year increased by 304,000 or 9%, compared to the second quarter of fiscal 2004. The primary contributor to this increase was people costs relating to our ongoing commitment to enhance and extend our OpenSRS platform as well as our ongoing initiatives to improve customer service, product management and expand our sales reach. As a percentage of net revenue, core operating expenses for the second quarter decreased slightly to 29% from 30% for the second quarter of fiscal 2004.

Other operating expenses for the second quarter increased by 244,000 to 485,000 compared to the second quarter of fiscal 2004, primarily for the following reasons. First, we incurred one-time costs of $100,000 related to a severance payment and approximately 64,000 related to professional fees and outside consultants. And, second, as a result of the continued strengthening in the Canadian dollar, we recorded a decrease in the gain on foreign exchange of 102,000 compared to the second quarter of fiscal 2004.

Income from operations for the second quarter of fiscal 2005 decreased to 411,000 from 623,000 for the corresponding quarter of fiscal 2004. The decrease was primarily the result of the strengthening Canadian dollar, the drop-off in advertising revenue and the one-time costs that I described a moment ago. Net income was 507,000 or $0.01 per share, compared with 666,000 or $0.01 per share for the second quarter of last year. As I mentioned earlier, this was our 12th consecutive quarter of profitability.

Turning to the balance sheet, our ability to consistently generate positive cash flow from operations has allowed us to continue to strengthen our balance sheet. Cash, short-term investments and restricted cash at the end of the second quarter was 15.8 million, an increase of 3.5 million from 12.3 million at the end of the second quarter of fiscal 2004 and an increase of 800,000 from 15 million at the end of the first quarter of this year. This increase in cash is attributable to cash provided by operating activities for the second quarter of this year of 1.5 million. I will note again that this was our 15th consecutive quarter of positive cash flow from operations.

Our deferred revenue balance at the end of the second quarter grew to 36.6 million, an increase of 11% from 33 million at the end of the second quarter of fiscal 2004 and an increase of 2% from 35.8 million at the end of the first quarter of this year.

Our financial results for the year to date continue to demonstrate the strength of the our strategy, as well as our prudent approach to financial management. We are committed to continuing to operate in order to fully leverage the strength of our business model in pursuit of growth in revenue, earnings and, ultimately, long-term shareholder value.

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

Thanks, Mike. For over a year now, I have indicated that it was our intention to raise the profile of Tucows as a public company, and to do so in a way that addressed a number of issues. More specifically, we have looked to improve upon our listing on the over-the-counter bulletin board, to generate coverage in the analyst community, to develop a Canadian shareholder base to take advantage of our location in Toronto and to improve the level of support for our US shareholders, all with an eye towards raising the profile of the Company and creating a more diverse shareholder base with greater liquidity.

Last month, in furtherance of these goals, we filed a longform preliminary prospectus in Canada and a Form S-1 registration statement in the US relating to our intention to engage in an offering. Concurrent with our treasuring offering, there was a secondary offering of shares from one of our long-standing shareholders who is in the process of winding down their venture fund. The secondary offering allows us to both remove an overhang on the shares as well as place more shares in the hands of long-term shareholders. In fact, concurrently with the offering, we have also applied for a listing on the American Stock Exchange, as well as the Toronto Stock Exchange.

Both Mike and I have been on the road for the better part of three weeks marketing the offering. Importantly, the offering process is providing us the opportunity to bring the Tucows story to a new audience, and we feel that with our anticipated new listings, our track record of success and our strong prospects for growth, in addition to being the only pure play public Internet company in Canada, our profile will continue to build in the months and years to come. This whole process marks a significant step forward for Tucows as a public company. While those of you who have followed us for some time know us well enough to know that we will never been promotional in nature, these steps forward -- the expected listings, anticipated analyst coverage and a healthier long-term shareholder base -- will all allow us to be more active in telling the Tucows story and letting the rest of the investment community know what those of you who have followed us for years already know. We believe that this will benefit all shareholders, old and new.

In conclusion, we're excited about where we are today. We have invested over ten years in building relationships with service providers. We have invested over five years in building our OpenSRS platform and helping our partners integrate with it, both technically and financially. We have invested the better part of two years bringing to market a number of additional services like Blogware and billing. We are in the growing market for Internet services. We have a business model and a strategy with leverage. We have a demonstrated ability and a track record of execution. In short, we're in a position where we expect to see the benefit of all of those investments through the next few years.

And with that, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS). Thanos Moschopoulos, BMO Nesbitt Burns.

Regarding the redesign of the site and the lost advertising revenue as a result, could you just clarify that? Is that a question of people now being able to find things easier, so they spend less time clicking around than they used to and, hence, see less advertising?

It's less about seeing less advertising. The Internet is great today, from an advertising perspective, in the sense it's all about the leads you generate. It's all about the action. And because, frankly -- and we've always been pretty upfront about this -- because the site was not well laid out, and we had let that get a bit stale, too many people were having to search and then click on page search results or click on syndicated pay-per-click results to find what they were looking for. We had reached a point where we had made it a little too difficult for them to -- you know, they had come to us for software, and we didn't make it easy enough for them to find it.

So now, when we have generated the behavior that we want, we now need to get smart about turning a satisfied user's actions into revenue. There's all kinds of ways to do that, and it need be done, again, in a healthier way. If somebody is looking for software that relates to managing digital images or managing audio online, I think you don't have to think too hard to imagine some of the revenue opportunities that you can lay up against that. So what you will start to see this quarter and next quarter is us learning our lessons around how to best take advantage of those opportunities.

Now, regarding the new services, you spoke about some of the traction you're having there. Can you just speak, I guess, where -- qualitatively, as to where we are in the sales process? By this point, have you pretty much approached all your top 100 largest customers and offered them these new services? Or is it still kind of early days in terms of approaching them and trying to upsell them on that?

So, it's less about the approach because, certainly, from the time we put something in market, we make all of our customers and especially the top 100 aware of it. It's really working through their availability and interest.

So we certainly are not trialing with anything near most or all of our top 100. There's a lot of fertile ground still to cover there. We think that the combination of things, by the way, because those big customers -- they obviously provide a little bit of a quicker path. But it's also the thousands of smaller customers. One of the numbers we've talked about in the past is that for us, customers from 100 to 2,000 account for about half of the business. And it's those guys who we need to make it easier, without our intervention, to be selling 10 blogs, 20 blogs a month, 20 accounts a month, in numbers that is really going to move the needle here. That's why you see me so excited about things like Blogware being baked into the billing software and Blogware being baked into the client code, because those are the things where you get that simpler user behavior.

You know what? It's "I'm just pushing a button to be able to offer this. Why don't I put it in front of my customers and see what happens?" And as time goes on, we learned much better how to help those guys market and bundle and lay in.

I'll give you a great example. For our customers very, very few of them are bundling a domain name in their blog presentation right now, in their blog merchandising. Not only is it hugely lucrative for them to do so -- it provides more value to the bundle, et cetera -- it also makes the service stickier, at least to their customers personalizing the service.

So it's really simple blocking and tackling like that that will move the needle, in my view, in a material way around this.

And just from a domain registration perspective, I noticed that ICANN approved a whole bunch of new top-level domains in the past couple of weeks. Historically, what kind of growth have you seen following that? Is that a significant event for your domain business?

I think the way we approach that is it's kind of classic expect the worst and hope for the best. It hasn't happened enough to really -- to have a great track record. So .info and .biz launched in 2001. They launched to a lot of fanfare and a lot of hype in the market. And, by the way, they performed, surely, financially pretty well. There was a round of what were called sponsored TLDs that followed on there. I would guarantee you that you probably haven't even heard of most of them -- things like .museum -- that were complete failures. The three that are sort of most talked about in this round are .mobi, which is in connection with mobile phones, .travel and .jobs. If the Registry operators, our suppliers, do a good job of grooming the market, then any one of them can really produce some success. But I can tell you that we will be, always, extremely conservative, for instance, in budgeting those in the '06 year.

Blair Abernethy, Tucows.

I think Blair is not from Tucows, but -- suit yourself there, Blair.

No, I'm not.

That would be a plant.

Let's be clear here. A couple of things -- you mentioned the expired names opportunity that you will be looking to enter the market in the back half of '05. Is there anything you can sort of tip your hat on in that regard?

There's a little bit we can talk about there. Just to make sure I kind of lay the groundwork a bit, when we are talking about expired names, there is today a fairly lucrative market for domain names that have not been renewed. And it has tended to be a market that has been a little bit of a gray market to date. Generally, the participants are what we call pro players, insiders who use domain names almost as a financial asset to generate pay-per-click revenue.

Now, we certainly -- some of the very, very biggest of those folks are customers of ours. So we certainly have a fair bit of visibility into that market. When I say they are customers, when they have acquired those valuable names elsewhere, they will manage them in our system for trust and reliability reasons.

Now, where we see the really interesting opportunity is in connecting the rank and file small business looking for a new name to name their company with some of those other markets, the market for expiring names and the secondary market, names that have previously been registered and are available for resale. So we like to refer to those buyers as strategic buyers. And, as anybody on the financial side knows, strategic buyers will typically pay more than financial buyers.

If you think about the tens of millions of searches that we conduct, you think about the well over a million names in our domain name base that expire every year, there's huge real estate for us to take advantage of in the expired names market. And one of the reasons that we have been a bit late here is that when you do these things on a wholesale level or through the service provider channel, there's more moving parts. It's a little bit more complex to roll out a service. About nine months ago, Network Solutions rolled something out here, and about three or four months ago, GoDaddy did, both at a retail level. We've got to take care of a few more players in the value chain, and that just means a little bit more thought needs to go into it and a little bit more work needs to go into it.

But there's a bunch of interesting opportunities that fall out of this, all of which, by the way, are primarily driven by some of the classic drivers of Internet advertising -- the rise in pay-per-click values and the rise in generally click revenue. Is that too arcane?

No, it sounds like you will be out with something for your customers to begin playing with later this year, but there's no real impact for you guys this year. It's probably a next -- '06 kind of (multiple speakers).

Yes, I think from a real kick perspective, that's '06, not '05. We may get lucky in '05; we don't know. But that would be, certainly, not what we're expecting.

Just turning to some of the other products, Elliot, Blogware seems to be coming along very nicely. Are you doing anything different there, or what are you doing that is really driving this? And what do you think the potential for Blogware is in your overall business?

In terms of what we're doing differently, it still is the case that we are really the only folks who are focused on an offering in that service provider vertical. The other players tend to be dealing at either a retail level or at an enterprise level. And for us, there's just an obvious and a natural nexus between blogging and web hosting. Frankly, in my view, they are the same thing. And we think that we are just -- we have the good fortune to have gotten out into the market early enough. In other words, this has been in the planning stages -- that now goes back over two years -- and to have the right customer base to really drive this.

And when you talk about top end, obviously, I'm the CEO, I'm an optimistic guy. We know there's great leverage; it's just around 50, 60, 80,000 accounts. But over the next couple, few years, I see no reason why that shouldn't be in the hundreds of thousands of accounts.

And the other new products or -- what else can you talk about that you're looking at or -- the update version to Platypus is great. What's sort of next on your product pipeline agenda?

There's really two things there. Expired names, for us, is new. It's more than just an extension of the domain names business, because we really have to deliver the service in a fundamentally different way with fundamentally different drivers. So, just from a bandwidth, inside-the-building perspective, that certainly fits into new service for us.

The other one, which I have referenced briefly in the past on these calls, is a Start Service. It's essentially a My Yahoo!, without paid advertising. You can go play with it today at start.Tucows.com, and we are actually, now, starting to get a customer or two who are trying to drag us into making this available more broadly. And the customer is always right, so we will be happy to try and satisfy them.

But this is really about about letting service providers get in front of some of the opportunities from their users' search revenue. And in the longer term, what we think this sets up for us is things like distribution of gaming subscriptions or subscriptions around various other type of media -- music, movies, just online content in general. And if you are a service provider, there's day-one benefit just from having a better opportunity to get in front of your customers by controlling that start page.

So I could bore you with a long history of that market but, again, the change in search and pay-per-click revenue opportunities really change the landscape around what people can do here. So we are pretty excited about that.

Last question and I'll drop the line here. Any sort of changes on the competitive landscape of note, in the last quarter or two, or sort of just overall, your feel for the environment?

Generally, what for us have been past trends are increasing. And I've referred to, in the past, the fact that most of the people we are competing for business with are selling a single service to multiple markets. We are selling multiple services just to that service provider segment. And, as the bundle gets more complex over time -- and you can see that at a business level, you can see it at a home user level -- more and more gets piled into the bundle. And every time it does, that complexity increases. The need for service providers to be able to kind of manage the bundle more easily increases. And the challenges for them around managing multiple supplier relationships increases. We think that a lot of the kind of trends are now just sort of coming home to roost, to our benefit.

(OPERATOR INSTRUCTIONS). David Shore, Desjardins Securities.

One area you haven't talked much about, and I just wanted to get an update on, is the security site. Any specific progress there? How is that business going?

Well, that business continues to tick along. This is the digital certificates business. We saw, for the last couple of years, really, some fairly outsized growth there. What has happened is, as Blogware has started to go a little crazy and some of the other stuff has really picked up, digital certificates, while still growing, has suffered from a bit of neglect. And we actually addressed that inside of this quarter, and we have put a little bit more dedicated resource on it.

So, nothing great to talk about this quarter, but we certainly hope that the added resource efforts start to bears some fruit. And there, it's really about look at the guys who are selling five and eight and ten units per month and figure out how we can turn them into 15 and 20 units per month. It's amazing sometimes -- we will look inside our customers' offerings, and you'll see somebody who is doing five or eight or ten units a month -- you'll go to the front door, and we won't even be able to find the service. We have no idea how they are selling any of them.

So we'll start to get a little bit more hands-on with merchandising. Again, that comes back to that execution and that blocking and tackling. And those refinements are just magic, because they really have a material impact on the number of units you move.

On the blogging site, Dave Sifry's latest blogosphere status has doubled again. We are over 14 million blogs out there, 80,000 a day, et cetera. So could you just talk about the sales cycle to your customers? What are you going to kind of push it out as quickly as possible, to kind of make sure you are riding the wave at the right time?

You know what? We are fulfilling there. They see what you see, and they are feeling that urgency from and through their customer base. So if you are a web hosting company and you have got a bunch of customers who are also using Blogger or MSN Spaces or something like that, boy, your throat is exposed. And that is what these guys are seeing.

So, our challenge is helping them integrate -- again, why we have really put a lot of work into the billing side, and into client code software to make that easier -- and helping the market, helping them get this stuff out in front of their customers in a successful way. Nobody inside of this building needs to spend much more effort to kind of push it out. We've got a lot of incoming.

Is that changing the sales cycle to customers, because they need more education, or is it making it faster because they have got to have it now?

No. Now, it's speeding up from where it was, certainly, three quarters ago and, to a lesser extent, two, et cetera. We used to have a lot of conversation -- if you go back four quarters, three quarters -- explaining why blogging was really web hosting, why this wasn't about just teens with diaries. For most of these guys now, they get that. That doesn't mean that there's never those conversations anymore, but, boy, they are so much less frequent than they were.

Really, you just see a fundamental change on their end. Service providers' businesses are driven by urgency. They are rarely kind of thoughtful two/three-year plan businesses. They are, "What fire is burning on my desk?" And, boy, for a lot of them, this is a fire right now.

Paul Lechem, CIBC World Markets.

A couple of questions. First one -- you talked a bit at the beginning about your domain registration tools at the wholesale level, your fixed registrars with 720,000 names. Are you doing anything differently to try and increase revenues in that larger end of the market, higher end of the market?

Really, that was and always has been -- I don't want to say defensive, because it does provide good value in and of itself. But it was really -- we recognized years ago that there was a risk of bigger customers wanting, primarily for presentation purposes, to be accredited.

And this is just a way -- typically, when they migrate from one service to the other, the build gross margin stays identical. We don't move their pricing an inch. The revenue changes, because now that registry fee portion of it is no longer included in revenue, but the amount of money that drops to our bottom line -- or is available to us for profit, for expenses, for investment, et cetera -- stays the same. And it provides us with opportunities to sell them more stuff. There's folks on that side that are trialing Blogware.

It gives us the ability to roll other country code top-level domains in, for instance. So we might have -- there's a customer where -- in the UK, customers -- there's a much lower bar to accreditation. So we have any number of customers who use us for .com and .net and .org and .ca and a bunch of others, but do their own for .uk. And now, as we migrated one of our customers to their own tag, we did the same for their .uk business and picked up a little extra gross margin. And for those guys, it's all about getting what they want out of it, which is, again, looking to their customers a little bit more, a little bit greater profile with their customers, and doing it in a way that completely nails down and limits their expenses -- and their risks, frankly.

You mentioned before that your customers 100 through 2,000 are 50% of your business. If you could segment, which is your fastest-growing customer profile right now?

You know what? Let me get back to you on that. It's one of the slices that we are looking at, but I want to look at that at more than kind of quarter over quarter. So anything I gave you right now would be a little early.

Last question -- you are building the cash and you're doing a little offering now. What uses do you have for that cash? Any acquisitions that you have in mind, or what's kind of the thought, longer term, there?

I have certainly said in the past that there's not a quarter that goes by where we don't have a number of conversations. I will say -- and, by the way, for anybody who has listened to me for 8 or 10 or 12 calls, this will probably be the first time I'll say this. We really are starting to see some of the winners and losers sort themselves out, and some of the opportunities present themselves a little bit more vividly. We always are going to be -- for us, M&A will never be kind of a central part of the strategy. So we do think there's probably some opportunities out there. At the end of the day, boy, it's always about value and about getting the right assets for the right price.

And then, in what kind of areas? Would there be sort of more services you could put through your channel? Is that kind of the idea?

I would say -- I've always broken it down into kind of tactical and strategic. Based on where I sit today -- probably for the next few quarters, anyway, maybe the next year -- I suspect acquisitions will more be in the nature of bolt-on customer base, and more in the nature of something that is pretty accretive to earnings. And that's just a function of what we're looking at right now or what we're seeing right now, and a function of the fact that we have got a fair chunk of new opportunities that we're in the process of digesting, and we really take integration pretty seriously. It's easier for us to pick up a bolt-on customer base than it is for us to enter a whole new line of business, learn a whole new skillset.

(OPERATOR INSTRUCTIONS). There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Noss.

Thanks, operator. I would like to, again, think everyone for joining us today. And we look forward to speaking with you on the next conference call. Bye-bye.

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