TechTarget Inc (TTGT) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TechTarget second quarter 2008 earnings conference call.

My name is Michelle and I will be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

The following members of management will be participating in today's call, Greg Strakosch, CEO, Chairman and Co-founder; Don Hawk, President and Co-founder; Eric Sockol, Chief Financial Officer and Treasurer; and Rick Olin, VP and General Counsel.

I would now like to turn the presentation over to your host for today's call Mr.

Rick Olin, General Counsel at TechTarget.

Thank you.

I would like to remind everyone that during the course of this conference call, TechTarget will make certain statements that may be considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including particularly our guidance as to future financial results.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements.

These risks include market acceptance of our products and services, relationships with customers, strategic partners and our employees, difficulties in integrating acquired businesses and changes in economic or regulatory conditions or other trends affecting the Internet, Internet advertising and information technology industries.

For a description of other risks, we encourage you to read the section entitled Risk Factors in our Annual Report filed on Form 10-K as well as other filings that we have made with the Securities and Exchange Commission.

In addition, our forward-looking statements speak only as of the date of this call, and we undertake no obligation to update these forward-looking statements.

TechTarget's policy regarding financial guidance is as follows.

As part of our quarterly earnings call for the quarters Q1 through Q3, we will provide guidance for the then current call in which the call is occurring.

As part of Q4 and year-end earnings call, the company will provide guidance for both Q1 as well as the full year.

The company does not intend to further update full-year guidance on a quarterly basis or quarterly guidance until the next scheduled earnings conference call.

I will now turn the call over to Greg.

Thanks Rick.

I would like to welcome everyone to our call.

Although like most other advertising businesses, TechTarget has been affected by the slowdown in economy especially in the second half of Q2, we are disappointed with our results.

However, it is important to point out that despite these macro challenges, TechTarget is a growing and profitable company.

During the quarter we grew online revenue 28% and reported our highest revenue quarter ever.

Despite a shortfall in anticipated revenues, we still achieved a healthy adjusted EBITDA margin of 26%.

We continued to see the largest IT vendors migrate to our ad budgets online.

Online revenue from the 12 largest IT vendors was up 53% in the quarter.

As a result, overall branding spend was up as well.

Conversely we are seeing mid-size and smaller companies who make up the majority of our revenue being very cautious.

As we have discussed in previous calls, the small customer segment was the core strength of KnowledgeStorm.

There are two main buckets of advertising dollars where online growth comes from, the first is the migration of dollars from both traditional media to online media to catch up with the change in audience behavior and the second is the migration from non-measurable media to measurable media with the increased focus on ROI.

This migration is occurring but is still in its early stages and we are getting those dollars and gaining market share against our traditional media rivals.

The second bucket of online growth comes from additional incremental marketing dollars.

When new dollars are added into marketing budgets, a larger percentage of these dollars are allocated to online advertising versus traditional offline campaigns.

Obviously in a tougher macro, marketing budgets are growing at a slower pace as our customers are telling us that it is taking them longer to close their deals.

This plays out when you look at the results by different sectors that we are in.

For example, in our storage and date center groups, which are our two biggest online groups in terms of revenue, these market segments are very healthy on a relative basis compared to other IT segments.

Storage is benefiting from the increases in online data being stored and the compliance requirements around that.

The data center markets [benefit] from the growth in the server virtualization and power conservation.

These are two growing markets where we benefit both from the migration of ad budgets and the new incremental market dollars.

Both of these groups' online revenue grew by over 75% in Q2 '08 compared to Q2 '07.

Conversely in other IT segments that are more challenged, we experienced growth rates below what we were originally expecting.

Examples include the Windows market, which is suffering from the lack of demand that was anticipated from the Vista launch, the networking market where I think company has may design an upgrade but have decided to postpone the upgrade to continue to get by with what they have in place.

I think that same scenario is playing out in the Enterprise Applications and Vertical Software markets where the current application may benefit from an upgrade but the feeling is that it is good enough for now.

The weaknesses in the Vertical Software market and the Enterprise Applications markets have especially impacted revenues associated with our KnowledgeStorm property.

Historically these two market segments contributed the largest portion of KnowlegeStorm's revenues.

In regard to events, we did achieve a growth rate of 14% in the quarter however later in the quarter we started to see softness due to two primary factors.

First, travel budgets are being cut and scrutinized from both the exhibitors and attendees and secondly event marketing budgets are under pressure.

To be proactive and control costs, we have scaled back our events schedule in the second half by cutting approximately a dozen one-day events.

Turning to print, we continue to see advertisers migrate away from it.

We expect this trend to accelerate during the downturn.

While print only makes up 4% of our overall revenue, the decrease in revenue depresses our overall growth rate.

With the macro headwind slowing our growth rate, we are working proactively to align our expenses appropriately with revenue.

Approximately 75% of our cost structure is labor, so we've slowed down our rate of new hiring and is [exempting] all discretionary spending.

In October, our 2009 budget process begins and our goal to produce a budget where all expenses and revenues are properly in line.

We expect to remain profitable and continue to invest in our growth.

We will continue to launch new websites, expand internationally and be opportunistic in regards to tuck-in acquisitions.

In the meantime, I want to assure you that management is extremely focused on the business.

We believe that downturn is an opportunity to strengthen our competitive position and gain additional market share.

We view the long-term trend as clearly in our favor.

The migration away from offline to online advertising and the shift from branding to lead generation will allow us to continue to grow and we believe these trends will negatively impact our competition.

In the last Tech downturn in 2001 to 2003 our growth rate slowed but we continued to gain market share, which we believe was a critical catalyst allowing us to accelerate our growth from 2004 through the first half of 2008.

We are confident in our business model and our ability to do that again when the macro environment picks up.

I will now turn the call over to our CFO, Eric Sockol.

Thanks Greg.

I'm pleased to share with you the financial results for Q2 2008.

Before I get into the results, I want to comment that the actual results are in line with the preliminary results we communicated on July 24.

We're reporting revenues for Q2 of $29.3 million, which represents an increase of 19% over Q2 2007.

Our revenues broken out by individual revenue stream are as follows; online revenues of $20.8 million, which is an increase of 28% over Q2 2007 and represents 71% of total revenues for the quarter.

As we have discussed previously, 2008 organic growth rates are difficult to extrapolate because we have completely integrated and merged KnowlegeStorm's products and operations into those of TechTarget's.

During Q2, approximately $300,000 of revenue came from existing contracts that were acquired from the KnowledgeStorm as of the acquisition date.

Excluding these contracts online revenue growth for the quarter is approximately 26%.

Event revenues of $7.3 million, which is an increase of 14% over Q2 2007 and represent 25% of total revenues for the quarter.

Print revenues of $1.3 million, which is a decrease of 34% over Q2 2007 and represent only 4% of total revenues for the quarter.

Our customer concentration and renewal rates remained favorable during the quarter.

Our top 10 customers represented 26% of total revenue and no one advertiser represented more than 5% of total revenue.

Our Q2 quarterly customer renewal rate for our top 100 customers was 97%.

Moving on to gross profit for Q2 2008, total gross profit margin decreased slightly to 69% compared to 70% for the comparable prior-year quarter.

Regarding our largest revenue stream, online gross profit margin decreased to 74% compared to 76% in Q2 2007.

As we have mentioned on prior calls, and as Greg also mentioned, labor costs make up the majority of our cost structure and therefore our cost structure can produce positive or negative leverage based on how much revenue we achieve during a quarter.

During Q2, we experienced a shortfall of approximately $1.5 million in anticipated online revenues which in turn resulted in a decrease in gross profit margin as well as adjusted EBITDA margin.

For the quarter, we're reporting $7.5 million in adjusted EBITDA, which represents less than a 1% decrease compared to Q2 2007.

We define adjusted EBITDA as earnings before interest taxes, depreciation and amortization as well as further adjusted for stock-based compensation.

Our adjusted EBITDA margin for the quarter was 26% compared to 31% in Q2 2007.

The midpoint of our Q2 guidance anticipated an adjusted EBITDA margin of 29%.

Moving on to operating expenses, please note that all of the amounts I will be discussing exclude depreciation, amortization and stock-based compensation.

Q2 2008 total operating expenses as a percentage of total revenues was 44% compared to 40% in Q2 2007.

As a general comment, our total operating expenses as a percentage of total revenues are higher than anticipated as a result of the shortfall in revenues.

For each of the specific expense line items as a percentage of total revenues selling and marketing expenses increased 2%, product development expenses increased 3%, and general and administrative expenses decreased 1% from the prior-year period.

The increase in selling and marketing as well as product development is primarily attributable to increased labor costs.

Our selling and marketing organizations had an average of 49 additional heads over Q2 2007.

The labor increases and product development are related to the additional technical resources gained through the acquisition of KnowledgeStorm, these employees were not included in Q2 2007 and the decrease in G&A is primarily [favorable] leverage as a result of stable G&A costs over the prior year combined with increased revenues.

For Q3, we expect total operating expenses, as a percentage of revenues, to continue to be higher than planned due to the sudden changes in the macroeconomic environment as well as the historical nature of Q3 being a slow revenue quarter.

This cost revenue relationship is factored into our Q3 guidance.

The midpoint projects an adjusted EBITDA margin of 18%.

We are proactively controlling costs by slowing our rate of hiring and closely monitoring all discretionary costs.

As Greg mentioned, our online revenue is experiencing healthy growth and we expect that to continue.

For the remainder of 2008, we expect our quarterly operating cost to be flat with Q2.

Q4 historically is our strongest revenue quarter and we expect the increase in Q4 revenues to result in favorable operating leverage producing an adjusted EBITDA margin of approximately 30% for the quarter.

In approximately 60 days we will begin our formal and highly structured 2009 budget process.

A key goal of the budget process is to properly realign operating costs with our 2009 revenue expectations.

As a reminder, 2009 guidance is included as part of our year-end earnings call.

Net income for Q2 2008 was $1.7 million compared to net income of $3.2 million in Q2 2007.

Net income per diluted share for the quarter was $0.04 compared to net income per diluted share of $0.08 for Q2 2007, and that's on a pro forma basis.

Net income adjusted for amortization and stock-based compensation, as further adjusted for the related income tax impact, was $4.3 million for Q2 2008, a decrease of 12% compared to $4.9 million in Q2 2007.

Adjusted net income per diluted share was $0.10 for Q2 2008 compared to $0.13 in Q2 2007.

In closing, our balance sheet and financial position remained strong.

As of June 30, 2008, our cash and short-term investments totaled $67.7 million, and our bank debt was $4.5 million.

This wraps up my review of the financial results and at this time, I'll turn the call over to Don.

Thanks, Eric.

As Greg mentioned, we see an economic downturn as an opportunity to further extend our lead.

I would like to share some thoughts about the short-term trends that we are seeing in our lead gen business and how they play out for various segments of our customer base.

I would also like to talk about how the KnowledgeStorm acquisition is playing out for us both in the immediate macroeconomic environment and with regard to its long-term impact.

Lead generation is clearly the largest component of our online revenues.

In a negative economic environment, lead gen has some important protection against weakness but it is not entirely immune.

One thing that is important to note is that the impact of an economic slowdown plays up very differently based on the size of the customer.

Our larger customers tend to have lead generation as one component of a diversified marketing strategy.

As these larger customers look to tightening their marketing spend in a down economy, they are most likely to make cuts in the areas of their marketing spend that are the least efficient or the least directly measurable.

In this context we would anticipate that they are spending with us would hold up well.

For smaller IT vendors however, online lead gen may already represent a large share of their overall marketing spend.

So, when these customers look to tightening their marketing budget, there aren't as many non-measurable or non-efficient areas in which to cut back.

While wholesale cutbacks are unlikely, the pace of these smaller customers' spending throughout the year is susceptible to a slowdown.

In the down economy, it takes our customers longer to convert the leads that we send them into actual sales.

We may see these customers slowing the pace of their spending with us to match their ability to closed leads that we generate for them.

These short-term dynamics are playing out in our results.

Greg alluded to the very strong growth that we have been seeing with the largest IT vendors.

Larger IT vendors are interested not just in lead generation but also in increasing their brand awareness and establishing thought leadership.

With these vendors, not only is our lead generation business holding up well, but we are also seeing strong growth in our product offerings to support these other objectives.

For example, heightened demand from large advertisers was the primary driver behind nearly 70% year-over-year growth in our display advertising and sponsorship offerings as well as strong growth in our video offerings and custom content creation.

We see considerable upside for this type of business and it is good evidence of our continued ability to grow as traditional marketing budget's shift to online.

Conversely, the short-term challenges to our original 2008 revenue assumptions have been centered around those areas of our business that had the highest exposure to small and mid-size customers.

Our continued emphasis on sales penetration and our successful retention of many of KnowledgeStorm's customers have allowed us to grow our customer base substantially.

The total number of online advertisers in Q2 '08 was up 43% versus the previous year.

But many of these incremental customer additions are small-to-mid size spenders and we are seeing increased caution on their spending.

I will provide a data point to illustrate this dynamic.

While our top 50 online customers in the quarter grew their average spend by 36% year over year, the average online spend of customers outside of our top 50 declined by 15%.

We are succeeding in diversifying the customer base and successfully delivering ROI to a new base of small-to-mid size customers, as these customers ramp up their spending in a more favorable economic environment, we'll gain additional benefit.

Although it is not possible to track revenues from our acquisition of KnowledgeStorm specifically given how we have integrated the product offerings, it is clear that both of these short-term trends that I am discussing, the weakness in the specific market segments and the cautionary spending by smaller accounts, have had an impact on the 2008 revenue contribution from that acquisition.

KnowledgeStorm's two largest market segments were Enterprise Applications and Vertical Software and it had a high percentage of small-to-mid size customers.

However, the primary rationale for that acquisition was to ensure our scalability over the long term and on that basis we feel that KnowledgeStorm will prove to be a key driver of our success.

The addition of KnowledgeStorm has increased our enterprise IT related monthly website visits by over 80% on a year-over-year basis.

The KnowledgeStorm team's core competency on SEM and SEO has augmented performance on vendor campaigns.

The site's existing registered user base has increased our e-mail list with new members and the site is serving as an important source of new member acquisition for us.

Most importantly, our position as the clear leader for IT lead generations resonating in the market is evidenced by the dramatic growth in the customer base.

In summary, we are very bullish in our prospects.

Our largest customers are willing to spend with us despite a tougher economy.

We increased our penetration to small-and-mid size advertisers and anticipate gaining additional benefit as the macro environment improves and these advertisers increase their lead generation spending.

And with the successful integration of KnowledgeStorm into our already strong network of sites, we are the clear market leader in IT lead generation and we are growing rapidly in online branding.

So, with that I look forward to your questions and I will turn it back over to Greg.

Thanks Don.

I would like to share our guidance with you.

In the third quarter of 2008, we expect revenues to be between $25 million and $26 million and adjusted EBITDA to be between $4.3 million and $5.1 million.

For 2008, we are maintaining our previous guidance of revenue between $108 million and $112 million and adjusted EBITDA between $25 million and $27 million.

I will now open up the call for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of David Joseph of Morgan Stanley.

Please proceed.

Hi this is [Mayuresh Masurekar] speaking for David Joseph.

You have talked before about a large percentage of your cost, 75% of them, being fixed.

I was wondering how that spread over online, events, and print and how well are you planning to bring efficiencies in this challenging economic environment, and then I have a follow-up question.

This is Eric Sockol and I will respond to that question.

As far as the 75% of the cost, we are referring to labor and for online that number and for print -- for online in particular, the percentage is possibly even higher because there isn't really a third-party cost associated.

In the area of events, again there is a big labor element but there is specific costs related to the location of the event and [F&B] and as far as print is concerned, I print is a very small part of the business and again there are some publication costs.

We only have two monthly publications.

So, as Greg and I had mentioned, what we have done is slowed down our rate of hiring.

Again, it is important to note that we are a growing profitable business and we are continuing to invest in the business but we have slowed down our rate of hiring and we are also very closely looking at discretionary costs.

[We are] where the corporate headquarters controls all the costs, there aren't like cost being spent remotely and things of that nature.

So, we have a very good handle on cost.

Thanks.

My follow-up question is that you have also talked about longer sales cycles, so I was wondering if you are taking any initiatives in terms of more competitive pricing to reduce the sales cycle.

No.

We are not really seeing any pressure in terms of pricing and it is not our strategy to lower pricing.

So, it is just a matter -- our customers are telling us it is taking them longer to close the leads that we are giving them.

Yes, to clarify the point there, the longer sales cycles that we are referring to are on behalf of the people that we sell to.

So, the IT vendors that we sell advertising to are telling us that their sales cycles are elongating in this period.

It takes them longer to close the leads that we provide to them and therefore that has an impact on their spending with us.

Good.

Thank you.

Your next question comes from the line of Doug Anmuth of Lehman Brothers.

Please proceed.

Hi, this is actually Brian Fenske on the call for Doug.

I had a couple of quick questions I was hoping you could help with.

First one, what percentage of your customer base would you classify as a small or medium size, you had sort of segmented the large versus those guys?

Second question, what percentage of your business or just even on a relative basis, if you could just qualitatively talk about it, would you classify as display and sponsorship versus the lead gen?

Finally, it is hard to strip out, but would you say that KnowledgeStorm revenues were down year over year?

Thank you, that's it.

Well, in terms of what we disclosed about our top 10 customers who tend to be very large IT vendors, it is 26% in the quarter.

So, there are some other large vendors beyond the top 10 but roughly two-thirds of our revenue comes from companies that I would characterize as under $1 billion of revenue.

The second question, if I remember correctly, I wish I got this correct, was what percentage of the revenue was coming from display of sponsorship versus lead gen, is that correct?

That's correct.

So, it is a little difficult to draw a clear line of demarcation on those because for example we run sponsorship programs that had lead generation aspects to them and we were on lead generation programs that do have branding elements to them as well in terms of how the content aspects enter in the website and where they are displayed and things like that.

By the way, the answer to your question is if you take display and sponsorship and if you were to categorize them as 100% branding related, which would be inaccurate given what I just said, but if you were to characterize it as 100% branding related, that is less than 20% of our overall online revenues.

Does that answer the question?

Yes absolutely.

The third question?

I was just saying if you could strip out, I know it is near impossible to do, but if you could strip out KnowledgeStorm with the revenues being done year over year this quarter.

I think all three of us communicated with communities in the past, we can not do that because of the way the business has been integrated, the product, the sales people, etc, so really can't respond to that.

I think Don gave some color anecdotally on what he has seen in the marketplace but we can't quantify that.

Yes, it's the way we have integrated the products.

We can't do an apples to apples but keep in mind our online revenue was up 28% in the quarter but we just can't, the way we have integrated the products, we can't attribute it in a black and white way like that.

Alright.

Thank you very much.

Your next question comes from the line of Ross Sandler of RBC Capital Markets.

Please proceed.

Hi guys, Ross Sandler for Ross Sandler here.

If I am doing the math correctly, I know we are talking about reining in some of the expenses but the implied margins for 3Q are in that 18% range, EBITDA range, and then it jumps up to around 33% range for 4Q.

If I am doing this correctly, you have never had a 33% margin in 4Q previously even when the environment will look better, so what gives you the confidence that you are kind of reining in the expense growth given the current environment?

Then I have got one follow up.

Ross this is Eric.

Actually we have had two quarters where we have been 32% EBITDA margin.

In Q4 2006, we were 32.5% I think but it was north of 32%.

And then in Q2 of 2007 we were 32% and we probably would have been in that same ballpark last Q4 except if you recall we acquired KnowledgeStorm in the beginning of November and we had to carry a lot of cost and we weren't able to recognize a lot of revenue from our purchase accounting.

So that depressed our EBITDA margin.

So, we have achieved greater than 30%, 32% as a matter of fact historically and Q4 has been a quarter that has done that.

So, our internal projections feel that that is attainable.

Okay, and then one follow up on that.

Do you think that -- I know the environment is tough and it is going to take some time for a recovery to take place but at what point do you view that hiring has slowed down and related expense reductions as kind of a detriment to longer term growth?

Then I have got one other follow up.

We are still hiring, we are still investing because the business is growing.

What we are doing is we had a plan for higher revenue so that the expense plan was matched with that higher revenue so we are just matching the expenses with the revenue.

But since we are still growing, we are still hiring, we just don't need to hire as many people as we originally anticipated.

So with that we are still in investment mode, still gaining market share, still very bullish on the opportunity, our competitive position and the long-term thesis -- the macro headwinds does not change the long-term thesis at all.

Okay.

The last one, so when you sell these integrated packages with white papers and webcasts and other things of that nature, are you seeing any pushback like the pricing for the packages or is it just a case of budgets are now smaller than what you had expected before and you are going to give them less for -- give your advertise less if the budget is coming in less, so is there a pricing reduction?

It is far more the latter.

It is far more that budgets are getting curtailed than it is including pricing concessions.

We have always been a premium priced alternative in the market, which makes sense given the model, how targeted we are relative to other alternatives.

So, even in the midst of a downturn, we maintain that position in the marketplace, we maintain the position of being a premium price player given the kind of ROI that we are driving on our solutions.

What we are seeing is that customers are coming with smaller budgets and they are trying to align their lead gen spends in particular with how long it takes them to quote (inaudible).

Really that is the metric they use as the success metric and it is a metric they use to gauge their spend level is what is their close rate against the leads that are being provided.

So, if you are in a situation where leads are taking longer to close, that is going to impact spend.

Last question and I will turn back to the queue, have you guys ever kind of run the analysis on -- it is probably hard to discern what the ROI is for certain offline channels but within the online can you back into like an ECPM or an ECPA cost per lead however metric may define things and then once you have that number, what leverage or what pricing flexibility do you think you still have?

Like, or you under priced by 50% relative to where you think you might be when the macro gets better or is it more?

I mean, that's a hard question to answer.

There are a couple of things.

One, it's very different by segment by segment.

Some people are selling $500,000 software packages with 80% gross margins, other people are selling $10,000 hardware with 50% gross margin.

So, it's that number is all of the board and typically our customers don't share with us their backend close rates because then we would just -- we are already the high price guy in the market, they are not going to give us any more ammunition.

In general, because of the strong ROI and high renewal rates and customers increasing their spend with us and because of the (inaudible) inventory, we have been able to increase pricing every year and we don't see anything that makes us change our view on that.

Yes, thanks guys.

Your next question comes from the line of Mark May of Needham & Company.

Please proceed.

Hi, thanks for taking my questions.

The first one has to do with metrics which I know you are not accustomed to providing every quarter but given the environment that we are in, I think it would be helpful if you could give us a sense of the number of integrated programs that ran in the quarter and how that changed both sequentially and year-over-year?

Any other metrics in terms of number of leads or anything else that you would provide would be helpful.

Next question would be I think in the prepared remarks you talked about '09 planning and how you will look to realign your cost to correspond with your revenue outlook.

What kind of target margin do you have for the business over the next year or two?

Hi Mark, this is Eric.

On your first question about the metrics, we don't share that information, so I can't really respond to that on this call because we don't share that,.

I don't know how to respond otherwise on that.

What about the change, if you don't give the number, can you talk about the rate of change and the number of leads or the size of the programs or the average spend per program?

Yes, Mark this is Don, I would be happy to give some color on that.

As I alluded to in my prepared comments, what we are seeing is that with increasing customers the deal sizes are getting smaller, right, again and that is really centered on the small-to-mid size customers because as we said in the comments, at the large end of the market we are growing the business, right.

So, at the small-to-mid size end, the number of deals that we are doing isn't going down as evidenced by the fact that the number of customers on a year-over-year basis was up 43%, we are seeing these customers that we are adding are spending more cautiously than what we have seen historically or what was baked into our original revenue assumptions.

So that would be my comments on the kind of number of integrated programs.

You were also asking about number of leads.

Number of leads in the aggregate isn't a terribly meaningful number for us, internally is an operational metric and the reason for that is the lead programs that we have won tend to not just be kind of gross worldwide leads.

We run a lot of programs for customers who actually want all the leads we can deliver to them, they want specific types of leads.

They want leads that are North American and particular company size or particular vertical industry.

So, if you find track aggregate lead metrics on year over year, period-over-period basis, you end up with a lot of apples to oranges comparisons on that.

What I state here is that the number of leads that we generate on a period-to-period basis is determined by the size of the deals that we are taking down and the number of customers and I have already commented on those trends, number of customers up, size of deals especially in the mid-to-small end of the market down.

What about the trend, I know some of your deals have guaranteed minimum leads and has there been any change in terms of your ability to fulfill the minimum requirements of some of the programs?

Has there been an increase in shortfalls in recent months?

A lot of our programs are lead guaranteed and we fulfill 100% of the programs that we sell.

So, we continue to do that.

In an environment where customers are buying less in the IT market, you certainly see some of that show up in the lead generation programs but at the end of the day, we deliver on 100% of the programs that we sell and that is the guarantee that we make to customers, we continue to be able to do that.

Now turning to your question mark about target margins, in 2007 our EBITDA margin was 26%, then what we have said that is with the inherent operating leverage in the model that we will look to increase that every year, so that will certainly be top of the mind as we are planning for 2009.

I am sorry, that you will be over 26% in '09?

Tell you, we haven't gone through that process yet but what we said before the macro turn was that '07 was 26% and we thought that we could increase that percentage each year.

So, that definitely would be top of the mind as we think of the '09 plan.

Could that mean that you would contemplate some cost reductions in your planning or account reductions?

No, we are [rolling] so we don't need to reduce costs because we are growing revenue.

We are going to try to reduce the rate of increase of cost but we are not in a position where we are cutting cost because of the growth.

We took 28% growth in the quarter.

But obviously as we go through that process and we are looking at the margin for next year when we go through that process over the coming months, we are obviously going to weigh all of those things.

I just had one other quick follow up, I wanted to clarify you mentioned, I think it was Eric, $300,000 contribution from KnowledgeStorm but there was a specific way that you characterized that, there were contracts that I think had been signed since you acquired?

Yes Mark, what I was stating was when we acquired KnowledgeStorm there was a certain amount of contracts that had been entered into prior to the acquisition.

There was only $300,000 of revenue associated with contracts that existed before we acquired the company.

So, I am trying to show that this month -- and then as the nature of our business is that the average length of our contracts are about 90 days so we acquired KnowledgeStorm seven, eight months ago or whatever it is and not only have we combined the products but any existing business in KnowledgeStorm has elapsed and our sales force had to go out and sell those new product offerings.

So, I was showing that as a data point that there is very little contractual legacy business related to KnowledgeStorm.

Yes, now I understand.

But just to clarify the -- my memory is not great but if I remember correctly, KnowledgeStorm prior to you acquiring them was kind of in a $3 million a quarter revenue level, is that right, ballpark?

Yes, in that ballpark.

In that ballpark, yes.

Alright, thanks a lot guys.

Your next question comes from the line of Jim Friedland of Cowen and Company.

Please proceed.

Hi, thanks.

This is Kevin Kopelman in for Jim.

Could you give any more color on the timing on the weakness, I know the second half of the quarter was worse than the first half, but could you talk about how June compared to May and if you could give any color on initial takeaways from July or how it compared?

Yes, in terms of the quarter, June was definitely, in terms of expectations, the weakest quarter of the month.

And then in terms of Q3, July is historically a slow month anyway.

So, it is hard to take much away from that and what's happened so far in the quarter, we have incorporated to our Q3 guidance.

Okay and then in the largest categories in storage and data center you had really strong growth, was that kind of consistent throughout the quarter or did that change at all?

Did you feel like it could have grown even faster or was it totally unimpacted do you think by the macro environment?

I think everything is being impacted by the macro right now.

There is nothing that is being -- every segment is being affected.

So, the macro is absolutely across the board, we are hearing it from everybody.

Okay, that's fair.

As far as just a clarification on the cost, online cost of revenues since it is pretty highly labor oriented, you would not expect that to decline on a sequential basis quarter to quarter just in general right?

I think you can expect that to be flat not declining.

Well actually online made the cost of revenue associated with online slightly down because there is from Q2 a decrease in online revenue, and that is also something that is very seasonal.

If you look back last year there was a decrease from Q2 to Q3 of about 10% in online revenue.

So, we would see that type of decrease naturally in liaison with the macro.

The part of about online revenue as a cost structure, if you step back from online revenue, we have got an editorial cost that is classified in cost of sales on the revenue and the type of what we call third-party costs are relatively minimal relative to online revenue.

We have got some hosting costs related to webcast and some other type of cost related to list rentals but very minimal, single-digit-type percentage.

So the majority is labor related and the majority is in the area of the creation of the content.

Okay thanks.

When you said that you expect operating expenses to be similar to the second quarter, that was including cost of revenues, that is cost of revenues plus operating expense lines or is it --

Actually I was referring to operating expenses, was the selling and marketing, product development and general and general administration when we are saying that they are in line.

Total cost of revenues for Q3 will be slightly down and for Q4, will be more in line with Q2 because the revenue is more in line with Q2 revenue, it's a little bit higher actually.

Okay thanks.

One more on the cost on G&A, was G&A lot of leverage in the quarter, was there anything unspecific there in Q2 that you were able to take out?

Nothing really material.

Okay thanks.

Then last, are you seeing any changes in the competitive landscape?

Do you have a sense of how your competitors are reacting to this environment or a change in their willingness to invest in their websites maybe kind of on those lines what is the acquisition pipeline look like?

Are you seeing less competition for acquisition and what does the multiples look like?

Thanks.

In terms of acquisition pipeline, we are very optimistic there and we are always looking at things and that hasn't really changed.

I don't think the competitive environment in terms of acquisition is changed significantly either.

In terms of competition in general, nothing, no major changes.

The one thing I anticipate though is as the macro gets tough, we know the customer behavior changes and they get much more focused on measurability and we are hearing some customers talking about shifting their focus from branding to lead gen and that benefits us.

Okay thanks a lot for taking my questions.

Your next question comes from the line of Sandeep Aggarwal of Collins Stewart.

Please proceed.

A couple of questions.

One is can you talk about your ramp up efforts for your international business and specially what kind of traction you are seeing for the new international focus websites you recently launched?

Then I have a couple of follow ups.

International is still a very small part of our business but it is growing very rapidly and it is a place where we plan on making, continue to make investments.

What about like any signs or traction for the new sites you launched in the last six months?

Yes.

They are still relatively small, would be expected but they are growing nicely and we continue to invest in them.

We continue to grow traffic and grow revenue.

During the call you mentioned about some small tuck-in acquisitions, can you talk about -- are they largely going to be vertically focused or regionally or geographically focused?

I think in general they will be vertically focused.

So, the strategy is to build the international business the same way we built the U.S.

business which was organically and then have a tuck-in acquisition model.

Last question, actually it is on the metrics and I know you don't share much maybe you can help directionally, but you mentioned that there was a 97% renewal rate for the 1,200 advertisers, I was wondering what was our revenue retention rate for those hundred advertisers, was it at 100%, 110% or 90%?

Yes, we don't disclose that, it's a very, very healthy renewal rate.

Our customers are getting very good ROI from our programs and they continue to renew and spend more obviously by the 28% online growth rate.

As well as evidenced by the metric that I put out, which is the growth rate on the top 50 customers for online in the quarter, which was if I remember correctly over 50% on a year-over-year basis.

Thanks very much.

That does conclude your question-and-answer session.

I will not turn it back to Greg Strakosch for closing remarks.

Great, thank you everyone for joining us and we'll talk to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the presentation, you may now disconnect.

Have a great day.