Tucows Inc (TCX) 2009 Q2 法說會逐字稿

Welcome back to Tucows Inc., second quarter fiscal 2009 conference call. I would now like to advise everyone that this conference call is being recorded.

I will now turn the call over to James McNally. Please go ahead, James.

Thank you, operator. Good afternoon. Thank you for joining us today.

With me is Elliot Noss, our President and Chief Executive Officer; and Michael Cooperman, our Chief Financial Officer. Yesterday, Tucows issued a news release reporting our financial results for the second quarter of fiscal 2009. News release and financial statements are available on our website. Visit the www.tucowsinc.com and click on investors.

Before we begin today, I would like to point out that the matters we will be discussing include forward-looking statements, 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, typically the most recent reports on forms 10K, and 10Q. 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, James. Good afternoon and thanks for joining us today.

Before we start, I would like to apologize for breaking our normal practice and issuing our results a day before the conference call. I was in Washington D.C. for a hosting con, which is a very big event for us, and there was a reception that was scheduled for Wednesday night at the last moment where some U.S. government officials were going to be there as well as the incoming ceo for I-can. This came up at the last moment and required me to change my plans. We were--I had to travel morning because we were unable to have our board meeting today as we had originally planned. I apologize for that. I apologize for that day lag and we will certainly do everything to see that that doesn't happen again.

With that said, I will begin with a brief overview of our financial performance and some of the operational highlights for the second quarter of 2009. After which, Mike will provide a detailed review of our financial results for the quarter. I'll return for some concluding comments and to take your questions.

Q2 was another solid quarter for Tucows. Revenue once again topped $20 million, more or less unchanged from the second quarter of last year and from the first quarter of this year. I note that the second quarter of last year included revenue from both the web hosting customer portfolios that we sold, and the first quarter of this year included close to $1 million generated by a one-time domain portfolio transaction.

We generated cash flow from operations of $2.6 million driven by revenue growth, continued solid cost control, and low capital expenditures. As we are now clearly benefiting from the investments we have made over the previous couple of years. We are especially pleased with our performance in the context of a quarter in which the majority of public companies are reporting financial results that are weaker and often much weaker than last year.

On our last call in early May, we flagged the first indications of market weakness in the internet services space. And we saw that trend continue through the remainder of the second quarter. While we did feel some of the effect of this weakness during the first quarter, the impact on our business was offset by a stronger competitive performance, all of which netted out to overall solid financial results, as I said earlier. Excuse me

Operationally, the overall business continues to perform well. Let me walk through some of the highlights for the second quarter. Our OpenSRS domain service saw continued growth in domain registrations in both a new and renewal basis. New registrations grew 10% compared to the second quarter of last year, while renewals were up approximately 15%.

While we are always very conservative in projecting our gross margin to continually tick slightly down in this very competitive market, we did see the margins pretty much hold during the second quarter with overall transactions up 12% and billed gross margin up 11%. We think this is the strong competitive performance, especially given the weakness that has started to creep into the industry.

This strong performance contributed to very healthy year-over-year growth in domains under management of 14% to roughly $8 million. In our OpenSRS email service, we are starting to close a few deals. It is a tough environment, but we have now been at it with our new platform for almost a year and we believe that the reliability of our new platform this year has given us more credibility with prospective customers. And those customers are no longer concerned about trusting their email to a new and unproven platform.

Remember, our customers are quite savvy and like to look under the hood. In our YummyNames domain portfolio business, we completed one large portfolio transaction sale during the second quarter with another following subsequent to quarter end. Both transactions were comfortably in the six figure range. In general, as you all know, we have been working towards providing some more consistency here. And we're typically going to see one such deal per quarter with additional deals being an added bonus.

Advertising revenue from YummyNames decreased, in part because our success with the sale of domain name portfolios has decreased the number of direct navigation domains we have. We note also that syndicated search-based advertising continues to suffer for the same reasons that I have discussed on past calls. We continue to identify and execute on opportunities to further optimize parking revenue. And as this business unit continues to evolve, we're also testing and evaluating alternative monetization options for the portfolio.

Our switch to a new expired domain auction partner last quarter, continues to be a steady source of revenue with more domains selling at a higher average selling price than in the past. Our greatest focus, and we believe the greatest long term opportunity for YummyNames, continues to be in the sale of brandable names. Our efforts there continue to be encouraging with strong growth both quarter on quarter and year on year; and now that we have the other pieces in the YummyNames business, direct navigation, direct navigation sales, parking, and auctions well in hand this is where the bulk of our attention will go.

On our last call, I talked at length about the relaunches of Butterscotch and Hover and how these businesses fit into the Company. Each of these units performed well in the second quarter, and in both cases we saw the types of positive indications that you like to see with new business directions.

In summary, the second quarter, like the first, was a good solid quarter. Operationally, we are executing well and we're winning business from our competitors. We continue to add large customers and are making good progress on redesigning OpenSRS to be a success with even the smallest of service providers.

Our costs are well under control. And we are seeing the benefits from the work we have done over the past couple of years on operational and capital expenditures. I have talked previously about 2009 looking a lot more like 2007, than 2008, from a cash-flow from operations perspective. And the first half of the year has proven that out and I know that in terms of free cash flow we expect CapEx to come in at less than half that of 2007.

I would now like to turn the call over to Mike to walk through our financial results in detail. Mike?

Thanks Elliot.

Net revenue for the second quarter of fiscal 2009 was $20 million in line with revenue for the second quarter of last year, of $20.5 million and revenue for the first quarter of this year of $20.1 million. In comparing revenue across quarters, I would note that both the second quarter last year and the first quarter this year included larger than usual portfolio domain name sales in the $1 million range.

In addition, revenue for the second quarter of last year included roughly $400,000 from the web hosting assets that we have since sold, and email services revenue declined by some $700,000 compared to the second quarter last year for the reasons that we have discussed at length on previous calls. These decreases in revenue were largely offset by higher revenue from domain registration, driven by a combination of factors. Most important being higher transaction volumes, and the impact of the 7% registry price increase from last October.

Cost of revenues, before network costs, for the second quarter increased by just under 14% or $1.6 million, and $13.2 million from $11.7 million for the same quarter of last year. This increase was also primarily the result of the 7% registry price increase that was levied by some of our domain name suppliers last year. I will again remind that you I Can has given the registries the right to levy two additional price increases of up to 7% in two of the next four years.

Network costs for the quarter decreased by $1.2 million or 42%, $1.7 million from $2.9 million for the second quarter of last year. The decrease is primarily the result of lower co-location costs stemming from the closure and relocation of our U.S. based co-location facilities following the successful completion of the email migration at the end of last summer. In addition, the decrease is also the result of the restructuring we implemented last November, as well as the decline of 330,000 in network depreciation costs primarily due to our retiring most of the older hardware used at our closed co-location facilities.

Gross margins for the second quarter decreased to 26% from 29% for the same quarter of last year. Decline is primarily the result of a shift in sales mix from higher margin services such as domain name sales and domain registration services as well as the impact of the 7% registry price increase I mentioned earlier. The decrease in gross margins was partially offset by the decreasing network costs that I mentioned a moment ago.

I will now review gross margin for each of our service categories. You will note that as of this quarter, we have realigned the way we present our service categories. Elliot will discuss the rationale for this in a few minutes. I would also direct you to our financial results news release, which contains a complete breakdown of revenue and cost of sales for each of these categories.

Gross margin from OpenSRS services, which includes domain services, email services, and other whole sale services was $4.2 million or 25% of net sales compared to $5.1 million or 32% of net sales. Breaking this down into key components, gross margin from domain services, which we in the past have referred to as traditional domain registration services, was $2.8 million essentially unchanged from the second quarter of fiscal 2008. A percentage of domain service revenue gross margin decreased to 19% from 21%.

The decrease in gross margin percentage was essentially the result of shifting our sales mix to higher volume, lower priced customers from higher priced old volume custom customers, and the impact of the 7% registry price increase discussed earlier. We continue to take to fortify our already strong competitive position in the domain services market are continuing to have their intended affect as we continue to achieve growth in new registrations and domains under management in the context of an overall weaker market.

Gross margin from email services decreased $721,000 from $1.6 million for the second quarter of last year. This decline. which was expected and which we have discussed at length in the past, is due to two factors. The loss of the nonstrategic enterprise customers acquired from Critical Parts that we considered not to be a strategic fit for us going forward; and a loss of the three media portal companies who made the decision to (inaudible) the email services as part of a larger supply contracts, competitive and cost control reasons. I will remind that you while we had originally expected the remaining media portal company to have completed their--their migration by the end of the first quarter, they have delayed their plans such that they will now only migrate later this year.

Gross margin percentage for email services fell to 83% from 102%. The lower gross margin is primarily the result of the higher licensing and royalty costs we pay third party providers. In addition, in the second quarter of last year, we reversed an estimated migration costs that was lower than originally anticipated.

Gross margin for YummyNames, a domain portfolio service category, was $1.2 million or 83% of sales compared to $7.1 million or 90% of net sales for the same quarter of last year. Decreasing gross margin contribution was largely the result of our concluding above-named sale of roughly $400,000 during the quarter compared to a bulk name sale of $900,000 during the second quarter of last year.

In addition, we experienced a small decrease in margin from the delivery of third party advertisements and parked pages of about 100,000. This decrease resulted from the impact domain name sales have on advertising revenue and the generally slower advertising environment that the advertising market is currently experiencing. These decreases were partially offset by our increasing auction revenue that we are now achieving through a new vendor relationship by roughly 100,000.

Gross margin from our retail services group, Hover, decreased to $783,000 from $1.5 million for the second quarter of 2008. This decrease resulted primarily from the impact of the sale of our retail hosting assets partway through the second quarter last year. It--the decrease was also attributable to the reclassification of certain customers acquired in the IYD acquisition that did not meet our definition of retail customers, OpenSRS as well as our decision to deemphasize new customer acquisition while we were transitioning our retail customers from our old domain Direct Net identity and IYD platforms to Hover.

Gross margin percentage for Hover was 2% complete--72% for the corresponding quarter last year, with a decrease primarily reflecting the sale of our retail hosting assets that I mentioned a moment ago. Gross margin for Butterscotch, our content services business, increased to $603,000 from $568,000 for the same quarter last year primarily as a result of increases in advertising, and video revenue. Total operating expenses for the second quarter of fiscal 2009, decreased by just under $2.5 million or 49%--$2.6 million or 13% of net revenue from $5.1 million or 25% of net revenue for the second quarter of fiscal 2008.

Full operating expenses, which we define as those expenses relating to ongoing sales, marketing, development and administrative costs, decreased by $1.1 million to $3.7 million from $4.8 million, second quarter of last year. This percentage of revenue core operating expenses decreased 19% from 24%.

The decreases are primarily the result of three factors. One, as we have discussed in the past, a significant portion of our expenses are incurred in Canadian dollars. Thus the weakening of the Canadian dollar relative to the U.S. dollar during the three months ended June 30, 2009, when compared to the three months ended June 30, 2008 has had a positive impact on core operating expenses in the quarter. Two, the reduction in head count that we implemented in the fourth quarter of last year; and three, our ongoing focus on cost control.

Other operating income increased by $1.4 million, $1.1 million, or 6% of net revenue from an other operating expense of $255,000 or 1% of net revenue for the second quarter of last year. The increase is primarily the result of the impact of foreign exchange and relates to the foreign exchange contracts we buy in our endeavors to mitigate our exchange rate risk.

During the second quarter of this year, we recognized a gain on exchange of $1.6 million inclusive of a mark to market gain of $1.9 million. This compares to a gain on exchange in the second quarter of last year of $226,000 inclusive of mark to market loss of $223,000. Net income for the second quarter of 2009 increased to $4.5 million or $0.07 per share, compared to--with $2.2 million or $0.03 per share for the same quarter of last year. I will note that there were a number of one time items that impacted both of these periods.

In the second quarter of this year, net income was favorably impacted by other income of $2.6 million, $2 million of which was generated by the receipt of the second tranche from the sale our equity stake in Afilias last year, and $600,000 was generated through a royalty we received on some old (inaudible) patents has that we assigned to a third party in 2002 that continued to be commercialized. By comparison in the second quarter of last year, net income benefited from other income of $1.5 million related to the sale of our retail hosting asset.

In addition, net income in 2009 has been further impacted when compared to 2008 as it is the first year that we have recorded a current tax expense. Prior to this year, the taxes we have been recording have primarily related to our estimate federal alternative minimum tax obligation. For the second quarter, we expect to incur a current tax expense of $757,000, which is based on the effective tax rate of 14% that we expect to be in effect for the 2009 year. After taking into account any remaining lot carry forwards or tax credits that we have. This accrual for current taxes was partially offset by our recognizing a refundable research and development tax credit in Canada of $175,000 during the quarter.

Turning to our balance sheet. Cash and cash equivalents at the end of the second quarter of this year increased $7.4 million from $2.9 million at the end of the second quarter of last year, and $4 million at the end of the first quarter of this year. This increase of $3.4 million in cash from the first quarter, is primarily the result of the generation of cash flow from operations during the quarter of $2.6 million, as well as the receipt of the additional $2 million payment and the sale of our stake in Afilias that I mentioned a moment ago. This generation of funds was partially offset by our repaying $1.2 million of our bank loan, $500,000 for capital repayments, and $700,000 for the annual cash sweep payment.

I will remind that you subject to having sufficient distributable reserves, Afilias will be repurchasing the remaining portion of our investment for approximately $2 million before the end of this year. Deferred revenue at the end of the quarter was $56.9 million, up 4.6% from $54.4 million at the end of the second quarter of last year, and up marginally from $56.7 million at the end of this quarter of this year.

In summary, our financial results for the second quarter, especially when viewed in the current--in the context of the current economic conditions, are demonstrative of the overall strength of our business; as well as our success in improving our cost structure. Our core OpenSRS domains business continues to show growth and we are benefiting from the initiatives we have undertaken in our other service categories--positioned these for future growth. All of which supports our objective to consistently generate cash flow from operations and realize value for our share- holders.

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

Thanks Mike.

As you may have noticed this quarter, we changed the way in which we break out the various components of our business in our disclosure. We have always endeavored to have our public disclosure mirror the way that we look at and operate the business on a day-to-day basis so that investors are hearing a message that is consistent with what customers and other stakeholders are hearing.

Over the last 12 months, we've started to operate the business much more along the line of business units. To be clear, this is not segment accounting. We still have a lot of shared expenses; but operationally, we have been able to bring additional focus and create better execution by using more of a business unit paradigm. And we're seeing the benefits of this in our performance.

There are three reasons for the change. First, for reasons we have long discussed, our OpenSRS email service has not developed into as large a proportion of the business as we had originally expected it to. Second, YummyNames has emerged as an important component of our business. And third, we have relaunched our content and retail businesses in the form of Butterscotch and Hover.

As a result, you will now see our business broken out into four components in our news release and quarterly filings. One, OpenSRS our wholesale service offering, which is subdivided into domain services, previously referred to as traditional domain name registration, email services and other OpenSRS services. Other OpenSRS services includes digit certificates, website building tools, blogware and billing services.

Two, YummyNames through which we monetize our domain portfolio. Three, Butterscotch our ad supported contents business. And four, Hover, our retail service. We're confident that this new disclosure format will be beneficial to investors, much as it has been for us in our operation of the overall business.

Before I open the call up to questions, I would like to review the results of our second modified Dutch auction tender offer and talk about the new Dutch tender announced yesterday. Under our second Dutch tender offer, which we initiated near the end of the second quarter, shareholders had the opportunity to tender their shares at a price from $0.36 to $0.45. As a result of the tender, we have purchased just over $1.1 million shares, which--which was much less than we were originally seeking, at a price of $0.45 per share for a total dollar investment on our part of just under $0.5 million.

Through the two Dutch tenders combined, we have purchased a total of 5.3 million shares. We have been clear about our intention to return capital to shareholders and in our belief that with a small public company like ours, there is no way to predict what the response to a tender will be, other than to just do it.

With that in mind, yesterday, we announced the initiation of a third modified Dutch auction tender offer. This one with the objective of repurchasing up to 5 million shares plus overallotment. Shareholders are this time invited to tender some or all of their shares at a price from $0.40 to $0.60 per share which represents a significant premium to yesterday's closing price. And the top end of which is in line with our stocks' 52-week high.

Our continued share buyback program shows our belief in our business, and the value of our shares at these prices. It also shows our commitment to return capital to shareholders. We believe that contrary to current wisdom, there are real advantages to being a small public company. As I have mentioned before, it is superior for employee compensation purposes, it is superior in allowing investors to get in and out of the investment, and it is especially superior for returning capital to shareholders.

With that I would like to open the call to questions. Operator?

Thank you.

Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question comes from David Shore from Research Capital. Please go ahead.

Yes, thanks. Good evening, guys.

I apologize, Mike, if you said some of this earlier, I had to step away during your comments for a few minutes. Can you just remind me on the promissory note how much is left and when that is due?

You--you mean on the loan?

Yes.

On the loan, there is $4.2 million due at the end of June.

Well, by the end of June of next year.

June 2010?

No. Go ahead, Mike, sorry.

No, the--the loan is payable back at roughly $0.5 million a quarter, and there is an obligation to do a cash sweep once a year based on our order to financials and we estimate that the cash sweep for 2009 will be in the $1.2 million range.

Okay.

G&A expenses as a percent of revenue had dropped, I believe, this quarter. Do you see that kind of as the level going forward?

I remember that G&A is the line item where we do deal with the impact of foreign exchange.

Yes.

And it is impacted by that on a quarterly basis so there is no way that I can really predict which direction that will. But absent that, (inaudible) we think it will be pretty steady.

Okay.

On taxes, where--where does the--where do you stand as far as when you would be paying taxes?

We're--we--we're in a taxable position at--now, and have already started providing for current taxes. We have estimated that our effective tax rate for '09 will be roughly 14%, and have been accruing taxes at that rate and will obviously start paying taxes this year.

Okay.

And, CapEx plans for--for the rest of this year? What would that look like?

Well, it--we have talking about the year coming in, in the kind of $1.5 million to $2 million range and we're really comfortable with that.

Okay.

And David just a quick note on G&A. It is really kind of the level of G&A that is going to remain pretty consistent so as the business continues to grow, always talked about there being leverage in the business. That percentage should tick down slightly as we go forward.

Right, yes, okay that's what I meant. Okay. So that's it for me for now, thanks guys.

Thanks David.

Your next question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

Hi, good afternoon.

I missed a bit of the opening remarks, I apologize if this was covered. But Elliot, you'd mentioned last call that the economy might start to have an impact on some of your business, especially the domain registration business. Didn't look like it from the numbers. Can you just comment as to what effect you're seeing, if any, from the economy?

Yes, we're seeing--what I would call a continual slight downward drift, and I am glad to bring a little more color to that. So we definitely see broadly all kinds of weak macro factors just like everybody does; and the way it seems to be kind of manifesting itself in domain registration is at a market level. Slightly less new registrations than we would expect, slightly less renewals than we would expect; and again, that is kind of an industry piece. We think we have been, at least, sort of covering whatever softness there is with kind of good competitive wins and competitive strength. So when you say you didn't see it in the numbers that is because we're doing fairly well competitively. That is kind of picking up for some of that weakness, but we definitely do see that weakness there.

Okay.

And I think you said you feel good about where you are as far as getting market share. Do you have sort of any quantity of metrics as far as where your share ranks or is that just kind of really hard to put together given a lot of the lack of disclosure on some of the numbers out there?

Well, it is not the lack of disclosure. I mean, Thanos, you know all of the public materials that are out there. The zone file is public and there are a couple websites that track--

I guess I meant things like--yes, the--the stuff like our people registering on behalf of their own account or for customers. Right, yes.

That's the stuff--and that is possibly even getting a little--well, it may or may not be less prevalent. It is getting more complicated. You have watched this business, when I say you've watched this industry, domain registration for years now.

It never stops evolving, and so it's--well, the absolute level of some of those kind of--those registrations that we don't really consider from a market share perspective, has probably, if anything, maybe slightly gone down. Being able to tell what's what has gotten more complicated.

Okay. Fair enough.

I apologize if you already disclosed this. In the G&A line, with the 4x translation what would your loss have been?

Sorry, that's to me. In the G&A line, the--you want to know in the G&A line what the 4x is?

Yes.

The part--around $300,000, or in the quarter.

Okay. And sorry, was that gain or loss?

That was a loss.

A loss. Okay, perfect. Okay.

As far as the email business, I guess did it reach an inflection point at--at some point, or how do we think about that going forward? Is there still a bit more downside to come when the large customer finally makes the transition?

Yes. I mean I would say once that large customer is gone, the numbers are just up from there. We're very solid with all of our existing customer base, very low concentration, and we're starting to see some--some rays of sunshine on the sale side. So--and by the way, I should note that on the kind of pure anti-SPAM side, not email, but we also offer the anti-SPAM service separately, there was another existing competitor that got bought, Amex Logic got bought by I think it was McAfee this quarter. And those situations always tend to help us because they will generally be a little more, and rightly, a little more enterprise focused. And it tends to make it a little bit easier in the service provider sector. So we think there is some good opportunities going forward.

Okay.

As far as sort of the ongoing ramp of the premium domain business, what can really help drive that going forward? Is it more a function of access to capital returning or is it sort of the ad market getting better or a bit of both? What would really drive some good growth there?

Well, I would identify three things. I would take access to capital and kind of the--the ad market returning in this business as one. That's the same thing because, it is that--as that ad business returns, the typical buyers of certainly the direct navigation portfolios, that is their source of capital, right?

Yes.

I think that the days of large pools of private equity money--what we saw some of in 2007, that is not coming back.

Right.

But there is still loss of action. So thing one--point one, would certainly be that ad market coming back. I think the second point is we see just now at a market level, a little more efficiency, a little more efficience every quarter. The services--some of these multiple listing type services, they get a little bit more mature.

It is the case that the segment of the market that we like to really pay attention to small/medium-sized businesses buying domain names to run a business or a website on; which again, we think that is the best long term opportunity, there is always a few more and a few more of them every quarter. That is just efficiency coming to the overall market.

And then I think the third thing is really just time. Every quarter that YummyNames business gets a little better, gets a little tighter, is able to move on to the next level of opportunity. One of the things that we will, hopefully, start to do very soon is take our brandable name portfolio, and be listing those in some of these multiple listing service type offerings. And that should immediately provide a lot more exposure for the portfolio.

Each quarter, you will see that efficiency, both at a market level and then for YummyNames in particular, getting a little bit better. And one--the thing that the internet is most magical at is bringing efficiency to inefficient markets. And I think we see that always taking one step forward and another step forward as it relates to secondary market for domain names.

Okay.

As far as your investment in acquiring new names, just from the expirations, has that changed--has that changed a lot from quarter-to-quarter, is it sort of a steady stage, a bit of ramp as your registrations ramp or what has that been like?

Well, let's call it the take--what we're adding to our brandable names portfolio tends to be fairly consistent, and it does tick up with the size of our customer base. But you're going to see that very slowly because if the size of our names under management grows 8% or 10% in a year, that is not going to be very perceptible. Remember that we're still adding to our portfolio, at a--vastly in excess of our ability to sell it. So--the most important variable for our financial results--for at least the next couple of years is going to be our ability to generate higher and higher levels of inventory turn.

Okay.

And then finally, you alluded to this in the prepared remarks, I think I missed some of it. Can you just clarify, again, what the impact is of the increased registry feed? Did that sort of affect the margin in the domain registration business?

Go ahead, Mike.

Yes, yes. We recognized that the registry--the registry fee increase can be a challenging item for people going forward and we actually moved, if you remember, to a cost plus model so that we would keep our fee consistent in spite of these registry increases. But obviously when we report revenue, we report revenue which includes that registry fee component. And as that goes up, obviously it affects the margin.

Okay. I see. So for the most part the customers haven't moved to the cost plus model over time?

Well, they have.

Our customers have.

But the way that it sits in the numbers, right. If our margin, if our dollar are staying the same, and the registry and Ican portion of it is going up, then the percentage is going to change.

Two things about that. One, they have--and I believe it is now baked, that there will not be an increase this year. There is something else that is quite interesting that we're starting to see for the first time, boy, in I don't know how long, maybe since the onset of competition; but some of the very large retailers have actually started to tick up in price.

So there has been one or two price increases that we have seen out in the market place. And whether that's tests, whether that is chasing growth, we don't know. Whether it is successful or not, we don't know; but it certainly doesn't hurt us. And more importantly, our customers reaching out to end users competitive position.

Right. Okay. That's it for me. Thanks guys.

Great. Thanks.

(Operator Instructions) Your next question is from Aram Fuchs from Fertilemind Capital. Please go ahead.

That is Aram Fuchs.

I was wondering if you could do a little--to give us a little more data on Hover and the popularity of that? Specifically, can you quantify the renewal rate that you're getting from your previous retail customers? So like an IYD customer, what is the likelihood that they are renewing, compared to what they are renewing on the IYD side?

Well, we're not breaking that out. It is a tough number to sort through for a couple reasons. There are some IYD customers in particular who were at extremely low prices. Prices that, frankly, it was business and we work at pretty slim margins, Aram. It was business that we weren't really interested in supporting.

So, we started really--it was kind of June or so, certainly July and the current month where we're starting to see what we would call a clean set of numbers. So there is nothing--we're not breaking anything out right now. What I'll tell you is, that we were certainly pleased with--as it got cleaned up, June was decidedly better than April and May were; and that was really just the kind of the tail end of working through the transition. And finding out who was going to stick around and who wasn't.

So you're saying, for the--for Q3, we will have--we could have a clean number you think? You will have a clean--?

Yes. We're able to--so it is not going to be--when I say "clean number" we have now kind of a place where we're very comfortable starting from, to say, here is where we want to improve from.

Right, right. Okay.

Then on Butterscotch, I was wondering if you can give us a little more detail on the operations there? And, maybe if you can give us a breakdown on the revenue there between the old Tucows download site and the revenue that you're getting from the new ad model on Butterscotch?

Sure. So the two comments I will make there. First on--it will be probably for the next anyway three or four quarters that the revenue is overwhelmingly coming from the old Tucows site. From the old--from the existing revenue streams. Over time, and, Aram, I know you're somebody who will always poke around, you will--I'm sure you've seen deeper and deeper integration. And for instance, we added on the Butterscotch side, a freeware search tab. That had an immediate positive impact in traffic.

Now that's content that's coming from the Tucows side that's driven from butterscotch. So the egg kind of gets more and more scrambled. But what I would call unique new revenue opportunities from the video efforts, we're really just getting at that and it is going to be--we're very positively encouraged by the business we're starting to write there, and by the level of interest. But it is going to be three or four quarters before you're really going to start to see that be a meaningful part of that total content pie.

The old Tucows site was still very large and still generated real money. And I think there is one more point I would want to make about both Hover and Butterscotch. I talked lots about them sort of strategically and how they fit in last quarter. Over the next quarter or two we're going to be figuring out what operating metrics make the best sense there, and it will help you to follow along, but we're not there yet.

And I think that I should note that we're really encouraged by the traffic growth on the Butterscotch side. People are really taking to the content. Very positively received, and both page views and video views, both on the site and syndicated continue to go up very, very nicely.

And then on the YummyNames business. Is that sale that you quoted as comfortably into six figures was that a Gem, brandable, or was that a Direct Nav?

No, that was Direct Nav. I don't mind giving you a little bit more color on that. What we have been striving for the last couple of years, really since we started selling those Direct Nav portfolios to bring more consistency to it and I talked a couple quarters ago about being able to--where we finally think we are bringing some consistency to it. And so, there you should see at least a transaction a quarter.

That's pretty established now. And that will be in the low-to-mid six figures. Then on top of that, there will be once or twice a year, an additional transaction, that could have a whole range. That's is purely on the Direct Nav side I am talking there.

Right. Okay.

If somebody wants to come along and be very, very aggressive and one off again, that is possible but not as likely as it was in the past where there was that old--the $3 million and the $1 million and the $1 million transactions. We think we have been successful in bringing a lot more consistency to that.

Okay.

And then on the Gem's category, there was a really big sell this quarter Candy.com. I was sort of surprised in this economic environment. Can you talk about your Gems there and--talk about the sort of art of pricing those?

Sure, so--it is art, not science. I will tell you, I don't think we have a name in our portfolio that I would quite put in the category of Candy.com. And I will give you--I will give you a great example. "Candy", single word generic, you will see--you could see a similar single word or generic verb, read, write, talk, walk. Talk might be a bad example because that does brand well.

Read, write, walk, things like that where you might see a transaction in the mid to high five figures. So there's a big discrepancy. If you're Mars or one of the world leading candy companies, there really is a nearly incalculable level of value in that and so there's no right price. You want to get it, you've got to go out and get it. I think you saw--I don't know if you saw some of those interesting acronyms. The OMG.com sale for instance.

Right.

So it is really--that is very difficult. On the brandable side--it's a Gems--I can tell you, when we're--when we're going to be sitting down soon for the 2010 budget, we're not going to really think about Gems as part of that. Brandables on the other hand, that is where we're really paying a lot of attention putting a lot of effort in.

And on Hover.com, you have the ability to allow the person to upsell to personal names, but you're not selling your--nor is there any way to even find out about the brandable or the Gems.

Right.

Are you worried that might be short sighted?

I think that we have got a lot of--first of all, inside the Hover experience, I think there are a few points I would want to make. The first is that you and I have talked lots about--we really want to keep that extremely clean. And the second point I would make there is we're iterating all the time. And I think that you will--you're a customer, if I am not mistaken, and you will see constant changes there.

And the third point I would want to make is that, we think that the best short term opportunity there is around personal names into the large percentage of existing Hover customers, who don't have a personal names offering right now. And we just literally in the last few days started our first test campaign there. Where we plan on just getting better and better and marketing that personal names product. And we think that there's great lessons that we can learn in there and roll back out to the wholesale channel.

I think down the road, when we have kind of mined some of what we think are these richer veins, I would expect that you will see premium names as part of the Hover experience.

Great, thanks for your time.

Thanks, Aram.

Mr. Noss, there are no further questions at this time. Please continue.

Great. Thanks all--to all of you for joining us and I look forward to seeing you again next quarter.

Ladies and gentlemen, this concludes our conference call for today. Thank you for participating. You may now disconnect your lines.