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PlanetOut, Inc., (LGBT)

Q1 2006 Earnings Conference Call

May 3, 2006, 5:30 p.m. EST

Executives:

Lowell R. Selvin, Chairman and CEO

Jeffrey T. Soukup, Executive Vice President and COO

Dan Miller, Senior Vice President and CFO

Analysts:

Jim Friedland, SG Cowen Securities

Richard Fetyko, Merriman Curhan Ford & Co

Karen Haus, WR Hambrecht

Bill Morrison, JMP Securities

David DeGraff, MFS

Jeff Osher, JMPS & Management

Operator

Good afternoon ladies and gentlemen and welcome to the PlanetOut First Quarter 2006 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please “*” followed by “0.” As a reminder, this conference is being recorded today, Wednesday, May 3, 2006. With us today we have Mr. Lowell Selvin, Chairman and Chief Executive Officer; Mr. Jeff Soukup, Executive Vice President and Chief Operating Office; Mr. Daniel Miller, Senior Vice President and Chief Financial Officer; and Mr. Kevin Noland, Vice President of Corporate Communications and Investor Relations. I would now like to the conference over to Mr. Kevin Noland. Please go ahead sir.

Kevin Noland, Vice President, Investor Relations

Good afternoon and welcome to PlanetOut’s First Quarter Financial Results Conference Call for the period ended March 31, 2006. I’m Kevin Noland, Vice President, Corporate Communications and Investor Relations at PlanetOut. Joining us today on the call today are Lowell Selvin, Chairman and Chief Executive Officer; Jeff Sourkup, Executive Vice President and Chief Operating Officer; and Dan Miller, Senior Vice President and Chief Financial Officer. By now you should have a received a copy of today’s earnings release, which is also posted on the IR section of PlanetOut’s corporate website at www.planetout.inc.com. The IR section of the website will include a transcript of the conference call tomorrow, while the slide presentation and management they reference in today’s call is available now. Keep in mind that today’s presentation is being webcast on PlanetOut’s IR website. Lowell, Jeff, and Dan will begin our call by providing an overview of the business and our financial results, after which we will open the line for a question and answer session.

As a reminder, during the course of the call, we may make forward-looking statements regarding future events or performance. We caution you that actual events or results may differ materially from those forward-looking statements and we refer you to those documents we have filed with the SEC including the annual report on Form 10-K for the year ended December 31, 2005, and other public filings. These documents identify factors and risks that could cause results to differ from the forward-looking statements.

During this call, we may also discuss several non-GAAP financial measures including adjusted EBITDA, adjusted net income, and adjusted earnings per share, basic and diluted. You should not consider these non-GAAP financial measures in isolation or as a substitute for net income, earnings per share, operating cash flows or other cash flow statement data determined in accordance with GAAP. Because these non-GAAP financial measures are not measures of financial performance under GAAP in United States and are susceptible to varying calculations, they may differ from and not be comparable to similarly titled measures of other companies. Numbers that we discuss today are unaudited and may be subject to change. We do not undertake an obligation to update any forward-looking information we provide today, and I would like to turn the call over to Lowell.

Lowell R. Selvin, Chairman and CEO

Thank you Kevin, and thank you all for joining us today. I’m very pleased to discuss with you PlanetOut’s successful performance for the first quarter of 2006. I will also revisit our strategic plan and overall objectives as we move forward in 2006 and beyond. Then, Jeff Sourkup will follow with an overview of our key operating activities during the quarter and discuss how we’re investing for continued success in 2006 and 2007. Finally, Dan Miller will provide both a detailed financial review of the quarter as well as our business outlook for the second quarter and the balance of the year.

We reported very strong financial performance for the quarter with revenues of $17.6 million, representing an increase of 164% compared to the first quarter last year. Our results reflect the strength of our diversified revenue base and the impact of PlanetOut’s newest brands, including the leading gay and lesbian print magazines out in the advocate and related websites, growing e-commerce businesses including bigay.com and RSVP, a top marketer of gay and lesbian travelling events. These moves have further solidified PlanetOut’s meeting position at the world’s largest LGBT focused media and entertainment company.

Our core competency is marketing to the global LGBT community. This target audience while expected to have an estimated $641 billion in buying power in the United States alone in 2006, an estimated of over 260 million people in developed countries worldwide remains largely underserved. At PlanetOut, as a primary market maker with the first move advantage, we intend to serve this market across a variety of platforms into multiple channels increasing our distribution in consumer touch points as we continue to transform the LGBT marketplace. We are executing successfully against our strategic plan, both by growing our heritage business as well as by deploying what are truly transformational changes through the acquisitions of LPI and RSVP as a result of the execution of our long range plans.

Since our October 2004 IPO, we have grown our revenue significantly with expected 2006 revenue roughly triple the revenue of 2004. In addition, our revenue base is more diversified and balanced. We are growing traffic and activity internationally and we now offer advertisers marketing opportunities across multiple platforms. We believe our quarter performance shows that the initiatives we undertook during the last six months are already taking hold. Our acquisitions of LPI in November 2005 and RSVP in March 2006 are already proving to be excellent sources for additional growth and strategic value. These acquisitions offer the cumulative benefits of cross-platform advertising, bundled subscriber growth, and broader and more lucrative consumer purchasing opportunities that we could present to our audience through a number of channels.

When we talk about making a market in the broader gay demographic and generating ROI from our major investments, this is where the rubber meets the road. Through these acquisitions, we are validating the scalability of our business model and unlocking revenue and expense synergies based on PlanetOut’s model of high incremental growth and low cost customer acquisition. As a combined entity, we expect to use PlanetOut’s ability to drive magazine circulating growth, deploying both our complementary marketing and editorial assets to create cross-platform programs and engage our audience and provide unique sponsorship opportunities for advertising customers. In addition, we believe RSVP enables us to leverage our consolidated user base and multiple marketing vehicles into the estimated $65 billion a year gay and lesbian travel market.

Overall, we remain attentive to our core objectives: first, year-over-year top line and bottom line growth; second, continued marketshare growth; and third, revenue diversification and balance. All of these objectives are designed to increase shareholder value as well as billed value for the lesbian, gay, bisexual, and transgender community we serve.

We are pleased with our progress to date and we intend to continue our success by focussing on three key opportunities. First, PlanetOut will focus on building deeper engagement with its audience and users of its products and services. We aspire to be even more relevant and essential in lives of LGBT people everywhere. To achieve that, we know we must deliver what consumers in the broader gay market desire. We increasingly provide the vibrant online community and resources on local events where gay people can find, create, and share the information and content they want and locate and interact with people with whom they want to connect. In our print and travel brands, we are aggressively expanding our consumer reach and touch points and enhancing the value of those products for LGBT people through new leadership or through bold marketing changing initiatives like chartering the Queen Mary II for the second quarter of next year.

Online, we are creating a more relevant and personalized experience that delivers greater value to our users as a marketing engine for all of the PlanetOut properties. Second, as we stay true to our admission to connect, enrich, and illuminate the lives of gay and lesbian people everywhere, we plan to continue to innovate and invest in our brands and to grow our audience over time. We intend to continue our growth in the women’s market and internationally, executing on a strategy to capture a larger share of the LGBT market in the U.S. as well as globally with international emphasis on Europe and Latin America and pushing forward in Asia as the market opportunities present themselves.

Third, we will also remain focussed on prudently integrating LPI and RSVP into the PlanetOut family. Consolidating activities were appropriate between and among all the heritage businesses, and working to leverage our extensive online user base to grow activity and revenues across all of our business lines. Executing on our strategic plans, staying focussed on core growth, old yet prudent investments, and the integration and consolidation of our lines of business continue to motivate and drive our operating plans and activities on a daily basis.

With that, I’ll turn the call over to Jeff for discussion of some of our key successes during the quarter and the investments we are making to continue to build economic value for the future.

Jeffrey T. Soukup, Executive Vice President and COO

Thank you Lowell and thanks to all of you for joining us today. The first quarter was the beginning of what we believe will be a strong year for PlanetOut as we grow our organic business, integrate LPI and RSVP, and invest in our overall growth and profitability. As a result of our recent activities and investments, we’re a much larger company with diversified revenue streams, deeper and broader market penetration, and expanded opportunities for additional growth throughout our entire business.

We generate revenue from advertising, subscription, and transaction services for online and offline business and consumer customers. Having multiple revenue streams with targeted, customized offerings for different market segments, it allows us to take better advantage of cross-selling opportunities and more effectively monetize the large user base that we have built through our multiple media properties. At the same time, our growing free page services provide valuable upfront working capital and improve our near-term revenue forecasting.

In positioning PlaneOut for further growth, market penetration, and revenue diversification, we executed on several key initiatives during the first quarter. First, during 2005, we grew our advertising service revenue rapidly and we continue this momentum during the first quarter of 2006. By offering more than just a single media channel, we are able to serve as a one-stop shop for advertisers who want to effectively and efficiency market to the LGBT community. Our full complement of online, offline event advertising delivered across multiple platforms allows advertisers to connect with many of their most valuable customers in a cost-effective manner. Both new and existing advertisers find our editorial content and cross-platform strategy increasingly attractive for reaching the LGBT audience.

During the first quarter, many of our existing advertising clients chose to increase their spending with us. Among these was GlaxoSmithKline for whom we are now running ad programs and multiple online properties and at the 2006 Gay Games. Additionally, we’re able to add a strong line of the first-time advertisers including BMW, Just for Men, Kohler, Omega, Ralph Lauren, and SKYY Vodka. As with a number of our repeat clients, many of these first-time campaigns utilize more than one of our media properties.

Through these properties we offer advertisers the ability to target customers with particular demographics such as age, education, and income, as well as interests such as news, entertainment, travel, fashion, auto, and health. For both our worldwide advertising services as well as our own internal promotions, we also earned revenue in generating marketing capacity based on available online ad impressions.

During the first quarter of 2006, across our wholly owned online ad network, we averaged approximately 550 million advertising impressions per month. This metric underscores our leadership position in making a market for advertisers to reach the LGBT audience of providing targeted, high-value impressions across our online network in addition to the reach of all our other properties. We believe strongly that PlanetOut offers an unmatched ability for advertisers to reach the underserved gay and lesbian market. Like BET and Univision before us, we believe we hold the frontrunner position in a unique marketing niche capable of reaching millions of potential receptive customers.

Second, we continue to grow our subscription service business including with new and unique bundles. As we saw, we increased our total page subscribers across our multiple media properties to over 515,000 at the end of the first quarter of 2006, approximately 475,000 at the end of the fourth quarter and 137,500 at the end of the first quarter of 2005. In addition to continued growth in our datacom subscribers, another element of growth came from an increase in the page subscriber base throughout in the advocate of over 12,700 during the first quarter by bundling these magazines with Gay.com’s online premium subscription offering. Ninety four percent of these new incremental subscribers to, either Out or The Advocate represented approximately 5% growth in their combined subscriber base in just three months. Note that this success is in stark contrast to the recent demise of magazines like Cargo, Lgirl, and Celebrity Living that did not have successful growth drivers as we do with our multiplatform marketing strategy.

We’re also executing on our strategy to capture a larger share of the global LGBT market through our international gratis campaign, which we began in October of last year and continues to gain momentum. During the first quarter, we increased finance for the gratis campaign by 50% from the fourth quarter of 2005 with approximately 300,000 international signups since we launched the campaign.

Third, we grew our transactions with revenue significantly during the first quarter with new products such as the Brokeback Mountain DVD, the additional of LPI’s e-commerce business, and the consolidation of our list management services.

During the first quarter, we also benefited from our acquisition of RSVP, a versatile and trusted marketer of gay and lesbian travel products. With a strong multiplatform marketing campaign, RSVP exceeded our revenue expectations and we look forward to carrying this success forward into the fourth quarter when we launch our next large ship itinerary. And also sponsored the Dyna, a powerful combination of events, entertainment, and sport, which drew an estimated 15,000 gay women and their friends who gathered in Palm Springs for fun and camaraderie. Events like this are an important part of the PlanetOut women’s brand and serves as an additional platform for advertising sales growth.

As we move towards the second half of the year, we will continue integrating our new properties and executing on the transformational opportunities we have created for PlanetOut. We are managing or actively planning a number of initiatives to continue growing each of our revenue strings. We believe these initiatives, which we plan to roll out later in 2006 and throughout 2007, will exploit the synergies among our online and offline properties using our proven multi-platform marketing approach to the worldwide LGBT community with advertising services, while we continue to expand our online inventory, grow our circulation base, and increase sales across multiple platforms. We’re also upgrading our local directory to drive advertising opportunities for local businesses that want to reach the LGBT market. By investing in our local services offering, we expect to increase the value of our online content, grow our page views, and expand this new and diversified advertising client base.

In subscription services, we are continuing our bundling efforts to increase the value of our online subscriptions and grow our print and advertising circulation base. Throughout this quarter we affirmed the success of this model by growing The Advocate announced circulation bases with low-cost incremental subscribers. Through bundling not only have we expanded our total subscriber base and continue to shift our online subscribers to longer term, higher value plans, we’ve also established a base for what we expect will be even faster advertising revenue growth in 2007. We will continue to explore opportunities to expand this low cost customer acquisition model to drive additional economic value.

In our transaction business, we see numerous cross-selling and cross-promotional opportunities. Throughout the rest of 2006, we expect to deploy several events with an integrated mix of consumer marketing, advertising sponsorship, and transaction revenue potential. We’re sponsoring the Gay Games in Chicago in July 2006 to promote and merchandise our consumer brands for both gay men and women, plus we are selling event sponsorships on behalf of the Gay Games, which enhances our suite of advertising services. We expect that our live reporting and daily coverage of the gay games and athletes will be among the most comprehensive coverage worldwide.

Also, we’re thrilled about the success that we’ve already had with RSVP and the growth opportunities that it offers. We’re very excited about the impressive itinerary RSVP has lined up for the rest of 2006 and throughout 2007. Upcoming trips include our Mexican Riviera Cruise in the fourth quarter and four large ship charters in 2007, as well as several small ship cruisers, riverboat trips, and land packages for gay and lesbian travelers. Recently, we announced a first ever gay and lesbian charter of the Queen Mary 2 for a transatlantic crossing from New York to Southampton, England over Memorial Day Week of 2007. Along with the other steps we’ve already taken to expand our travel offerings, we believe that this charter helps position us as the leader in the LGBT travel market.

We also believe that our expanded itinerary for 2007 demonstrates our willingness to invest strategically and actively in this lucrative market based on our ability to drive new customers at low incremental cost. In addition to growing revenue, we’re also focussed on both eliminating unnecessary expenses and improving operating efficiencies. As one part of this effort, we have made significant strides in integrating LPI and RSVP into the PlanetOut family. These included reducing management redundancies, cross-selling and marketing, and beginning to consolidate our facilities in each of Los Angeles and New York.

Finally, for those of you who may not have the pleasure of meeting him, I’m glad to report that Dan Miller has joined our leadership team as Senior Vice President and Chief Financial Officer. Dan is a seasoned financial leader who brings with him over 17 years of valuable experience. We are extremely pleased to have him onboard. Dan has already met with many of our investors and analysts. We expect that he’ll be meeting with many more of you in the months ahead. We’re proud of our accomplishments during the first quarter and believe we’ve only just begun to leverage the full potential of our business.

With that, I’d like to turn the call over to Dan for a discussion of our financial results and our business outlook for the balance of the year.

Dan Miller, Senior Vice President and CFO

Thanks Jeff. The first quarter of 2006 was a solid indicator that we are on the right track in executing on a sound business model. Again, net revenue for the first quarter was $17.6 million, up 164% from a year ago reflecting growth in all lines of business. Excluding the impact of the RSVP acquisition, which closed in March, revenue for the quarter would have increased 102% year over year. Adjusted EBITDA for the quarter was $1.2 million, up 45% from $0.8 million for the same quarter during the prior year, and net loss was $0.1 million compared to net income of $0.2 million last year. In quarters where our transaction business has a cruise or other event, our revenue mix and EBITDA margins will change. As Jeff mentioned, we delivered one cruise during the first quarter. Travel events revenue is recorded when cruises or events are delivered.

During the quarter we had capital expenditures of $0.5 million. We expect an increase in the rate of CAPEX sending along with an associated increase in depreciating expenses over the remainder of 2006 as we continue to invest in our technology and infrastructure. We ended the quarter with $11.3 million in cash on hand, down from $18.5 million in cash last quarter, which reflects the impact of the RSVP acquisition.

During the first quarter, our advertising service revenue was $5.3 million, an increase of 284% from last year. This strong growth was primarily due to deeper penetration into key advertising categories and our success in attracting larger advertisers’ commitments as we are now reaching the LGBT community in multiple ways. Advertising service revenue accounted for 30% of revenue during the first quarter, up from 21% for the same three months during 2005, due to the acquisition of LPI, and organically we’ve seen an increase in the average amounts spent by our advertisers and a total number of advertising campaigns last quarter versus a year ago. The increases are also a result of our strong TPMs and the growth in our overall subscriber base.

I’d now like to talk about local service or what we call local theme revenues. Though this program is still in its early stages, we are seeing significant growth in the number of local listings on gay.com. For the quarter ended March 31st, we provided over $4.8 million listing views on average per month and had over 16,000 total basic listings. We’ve recently added new leadership to drive this initiative and are very excited about this growth opportunity.

Our subscription service revenue was $6.3 million for the first quarter of 2006 versus $4.9 million for the same quarter last year, an increase of 29%. This increase was due to the addition of our LPI brand driving overall subscription growth, offset primarily by the impact of our international gratis campaign.

Our transaction services revenue totaled $6.0 million for the first quarter of 2006 versus $0.4 million in the first quarter of last year. Transaction services revenue accounted for 34% of total revenue for the quarter, up from 6% for the same period last year. This increase is primarily due to the incremental effect of the acquisition of RSVP and the acquisition of LPI. The increase also reflects e-commerce revenue from the first quarter shipment of Brokeback Mountain DVDs that were expected to ship in the second quarter as well as greater-than-expected onboard carryover sales from our Panama and Barbados Cruises. Overall, we believe the increase in transaction revenue as a percentage of total revenue demonstrates our commitment to diversifying our revenue streams. We continue to make additional marketing investments during the first quarter to accelerate our growth and deepen our market penetration including the launch of the areugay.com advertising campaign. Sales and marketing expenses were $3.9 million, an increase of 61% from last year. Sales and marketing expenses as a percentage of revenue were 22% for the quarter.

Turning to the integration of LPI and RSVP, during the first quarter, we had overall cost associated with integration of approximately $0.4 million. These consisted primarily of severance, travel, and other corporate services cost. We are pleased with our first quarter results, but want to point out that these results include, as we discussed, a number of items that impacted our profitability during the quarter. Among these factors are the inclusion of partial quarter results of RSVP, the timing of the shipment of Brokeback Mountain DVDs, and our integration cost.

I would now like to discuss our business outlook. First, we are reaffirming our guidance for the full year 2006. For the second quarter of 2006, we expect revenue to be between $15.5 million and $16.5 million, adjusted EBITDA to be between $1.75 million and 2.25 million, and GAAP net income to be between $0.25 million and $0.5 million. As a reminder we do not currently have any travel event scheduled in the second quarter. This outlook reflects our expectations with respect to several factors including revenue growth in all of our lines of business, including advertising, subscription, and transaction services. As we discussed, 2006 profitability can vary depending on integration cost and our continued significant investments in growth areas for PlanetOut such as in our advertising business, the ramping up of our local listings business that are not planned to have a significant revenue impact until 2007.

For our subscription business, both the gratis campaign and the bundling of Out and The Advocate for our premium online subscribers are not expected to provide significant topline benefit until next year. As we discussed, later this year, we may begin converting a portion of our international gratis members into page subscribers. While we’ll see some nominal increases in ad rates for our print publications in 2006, we do not expect to see the full revenue impact from our print ad rate increases until 2007.

For our transaction business, we have a 2007 travel events itinerary which includes four large ship cruises that we are marketing now versus two large ship cruises scheduled for all of 2006. The travel marketing business has long leap times and we are already incurring marketing expenses for our 2007 itineraries. Remaining revenue capacity for 2006 travel and events was committed to an early 2005, which we will be delivering and recognizing primarily during the fourth quarter of 2006.

Looking ahead, we expect to deliver strong revenue in EBITDA growth during the second quarter. Other costs such as the amortization of intangible assets acquired as part of the LPI and RSVP transactions and interest expenses incurred as a result of seller financing or the LPI acquisition are expected to increase.

In summary, we had a strong first quarter with solid revenue and EBITDA growth. We executed on our strategy to create a business with growing and diversified revenue streams and high margins. Throughout the rest of 2006, with the acquisitions of LPI and RSVP in place, we hope to build on this foundation and deliver strong returns to our investors.

Thank you for joining us today. We look forward to updating you on our progress when we report the second quarter fiscal 2006 results. Operator, we’d now like to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press “*” followed by “1” on our push button phone. If you would like to decline from the calling process, please press “*” followed by the “2.” We have a three-tone prompting acknowledging your selection and your questions will be polled in the order they are received. And if you’re using speaker equipment, you may want to lift the handset before pressing the numbers. One moment please for the first question. Our first question comes from Mr. Jim Freidland. Please state your company name followed by your question.

Jim Friedland, SG Cowen Securities

Hi, with Cowen and Company. First question relating to RSVP, it seems roughly like it’s for a big cruise about $2 million revenue or maybe $1.7 million to be exact. So, as we look to 2007 and start to think about what that business can be, should we just take four times $1.7 million and are there some incremental things that you might be doing there? That’s first question, and I do have a followup.

Jeffrey T. Soukup, Executive Vice President and COO

Hi Jim, this is Jeff. Thanks for the question. The $1.7 million is probably a little low for the cruises that we’re going to have for the balance of 2006 and the four cruises we’ve scheduled in 2007. Much of that is due to passenger capacity. I believe the ship that you saw at $1.7 million was roughly about 1700 passengers. The cruise, for example we’re going to have later this year, is about 2700 passengers, Caribbean at next year is 3100 passengers. So, we do believe that we’ll be able to increase revenue over time. So, yes, we do think that there’s a fairly simple direct model for managing and modeling up the RSVP transactions.

Jim Friedland, SG Cowen Securities

So, in addition to those four cruises that you…but basically as we modeled the company, we should really focus on how many big cruises you’re doing, anything else from RSVP is just incremental?

Jeffrey T. Soukup, Executive Vice President and COO

That’s correct Jim, yes.

Jim Friedland, SG Cowen Securities

Okay, and I just wanted to get a sense on the local scenes, I guess you call it the startup business there; how big can that become, is that just an add on to the advertising business or is that something that you see as being…I don’t know, let’s call it 10% of revenues or how you want to talk about it a couple of years down the road?

Lowell R. Selvin, Chairman and CEO

Hey Jim, this is Lowell. That business we believe can be a really nice and wonderful business for us, not just in the U.S. but on a global basis, and we think this is driven by an underlying need especially in the gay and lesbian community to bring people into your home to do business with and to have questions answered by professionals who understand and appreciate and accept gays and lesbians, so lawyers and doctors and plumbers and electricians and so forth, and of course you have your bed and breakfast and others. So, Community Yellow Pages that are in print are very non-aggregated and fragmented all around the U.S. and in Europe and elsewhere. We believe there’s a sizable online model and you can see with a pretty early start with 16,000 basic listings already and the kinds of listing views that we’re getting we think there’s a bear there. What I can’t do is give you numbers and model it other than to say that we believe it’s a nice sizable business for us.

Jim Friedland, SG Cowen Securities

Okay, then instead of numbers, when do you think it becomes that critical math, is it something we should look out in 2008, is it 2007 or is it really longer term?

Lowell R. Selvin, Chairman and CEO

Yeah, I think you’re going to see some lifts in 2007 and as we get away in 2009 we expect and we hope that there is quite a bit more left in this business, but we’re building it now. We recently hired a leader; her name is Cary Fischer. She was formerly with Window Media, which is somewhat of a competitor of ours on the East Coast in the U.S. with a large gay and lesbian directly classifieds business primarily in print. Cary is very experienced building a heck of a team, local sales people making outbound calls, receiving inbound calls and so forth. So, we have a lot of faith and belief not only in the business but also in the leadership that’s just joined us.

Jim Friedland, SG Cowen Securities

Okay great, thanks.

Operator

Thank you. Our next question comes from Richard Fetyko. Please state your company name followed by your question.

Richard Fetyko, Merriman Curhan Ford & Co

Thanks. This is Richard Fetyko from Merriman Curhan Ford and Company. Just on the followup on the local scene discussion, can you explain to us how you charge for that? And then on the advertising side, it sounds like you’re making a lot of progress there, could you talk about the overlap that’s between the advertiser base of the online and the offline businesses, if there is any, or how much, and the success of your sort of cross-selling and ability there to cross-sell the online advertising inventory to the offline advertisers that you’ve had in the magazines and vice versa?

Dan Miller, Senior Vice President and CFO

Okay Richard this is Dan, I’ll address the first question about our local scene business. What we do is we provide a basic listening service that a customer can upgrade to our subscription model — there are actually various levels — that then we would include in our advertising revenue line, but that’s how the model works, and again, it’s sort of getting traction now in terms of getting close to upgrades, but we think we have a real growth opportunity there.

Lowell R. Selvin, Chairman and CEO

Richard, this is Lowell, let me take the second question. In terms of the overlap between our print business lines and our print products and our online products, I would point you to Slide 18 that’s on our website. Last time we had an image that showed the digital advertisers and the print advertisers in an addition, and you’ll see a lot of differences between the logo mix and also by the way the opportunity for cross-selling on events and sponsorships now. So, we are only interested in cross-selling between online and print, online, print, and events, and we think we’re doing something very few companies are able to do and we’re just getting started at this. And I would offer that when we first look at LPI we were very surprised at the fact that our list did not coincide that much, the tough side, largest account, I think we shared one account in common. Of the 300 accounts we looked at, it was in the range of 15% in name and 20% in revenues or net range. So, we feel like there’s a lot of opportunity, and then in terms of event and sponsorship revenue, for example the Gay Games coming up in July, a very big opportunity for us to bring advertisers to gay and lesbian people where they are, in a place that they enjoy. And the spirit industry has done this fairly well, the Millers and Budweisers, and the Absolutes for many years. We’re bringing GlaxoSmithKline and others to these events. So, you’re going to see more of that from us, not only in 2006 but as we get to 2007, and already seeing good initial pickup from major advertisers and we expect more and more as we get better at this and as the market…we’re making a market not just online and not just in print but we’re making truly the holistic market that also now includes events and activities.

Richard Fetyko, Merriman Curhan Ford & Co

Okay, for my followup, it sounds there’s been a little overlap right now between the advertiser sets. The impact of the growing circulation as you in the first quarter have successfully driven, circulation up by 12,700, and the increase in the ad rates that you’ve instituted and expect to institute throughout 2006 on the magazine side, shouldn’t that be pretty material in the back half of this year, in terms of your impact on ad revenues from the magazine?

Jeffrey T. Soukup, Executive Vice President and COO

Richard this is Jeff. The primary source of ad rates really comes based on the audited circulation, which is why we’re spending so much of the first half of 2006 to grow the auditable circulation base of these various magazines. So, while we have instituted a rate card increase effective for July 1st, we believe that the real lift in this is going to come primarily in 2007, based on the December 2006 rate card increase. So, in our model, we have built nominal increases in revenue based on the July rate card increase, but we do think we’re really going to see the lift in 2007 versus 2006.

Richard Fetyko, Merriman Curhan Ford & Co

Got it. Finally, Lowell, you mentioned sort of the sponsorship opportunities with the events business, when will you set that for the first time, because I know that’s a sort of a novel idea?

Lowell R. Selvin, Chairman and CEO

We already have, so the GlaxoSmithKline for the Gay Games, for example, is a significant relationship that is not only going to be something that’s online but also at the Gay Games, and by the way not only is PlanetOut enjoying the benefit of that relationship but we’re able to share some revenues with the Gay Games, like the local community organizers. We’ve also done this with Dyna, we believe there are opportunities there, Out Hundred at the end of the year which is a big, kind of sexy event, the top Out Hundred people and their allies and friends in New York and the people Out did a terrific job at that event. We believe we might see sponsorship there, and then other RSVP things we might do -- cruises and the riverboat tours and other things where there might be opportunity for advertisers to partner with us. So, we’re seeing in the Gay Games, a little bit in the Dyna, and opportunities later in the year, we’re looking to get better and better at this as we move into 2007.

Richard Fetyko, Merriman Curhan Ford & Co

Okay, thanks guys.

Operator

Thank you. Our next question comes from Karen Haus. Please state your company name followed by your question.

Karen Haus, WR Hambrecht

It’s WR Hambrecht. I’m wondering if you could give us a little bit more color kind of on the sponsorship events that you guys are going to have in second quarter, namely the Gay Games, and could you remind us to what extent you guys are going to be involved with Gay Pride, I know you were kind of focused on some of that in San Francisco last year, is that going to be the case again this year? And then I have another followup?

Jeffrey T. Soukup, Executive Vice President and COO

Karen this is Jeff. Yes, we have been involved traditionally in Pride. We will continue to be involved in Pride across a number of properties. For example, not only do we attend a number of Pride events but we’re able to market our various products. We’re also able to take advantage of that from an advertising perspective. June tends to be a good month for us from an advertising perspective, and now with the addition of the LPI properties, we also traditionally had a larger June Pride addition of the various properties, particularly out in Advocate. So we do see Pride as part of a regular benefit for us in terms of the advertising and sponsorship opportunities. The Gay Games actually occurs in July in Chicago this year, so that will be in the third quarter. So, we think that’s an added benefit for us from the sponsorship perspective, and then as Lowell said, we’re also looking at the fourth quarter to events such as the Out Hundred.

Karen Haus, WR Hambrecht

Then, just a question about the local business, is that going to be a primary direct sales, do you guys kind of see it build up for the remainder of 2006 or how should we be thinking about what kind of investments you’re going to be making? It is going to be head count or are there some other investments that need to be made?

Dan Miller, Senior Vice President and CFO

Karen, this is Dan. It’s primarily head count, it is direct sales. We’ve got from the U.S. and…that are selling to direct local listening providers. So, it will be a direct touch type of sales model.

Karen Haus, WR Hambrecht

Great, thanks very much.

Operator

Thank you, our next question comes from Bill Morrison. Please state your company name followed by your question.

Bill Morrison, JMP Securities

Hi it’s Bill Morrison from JMP Securities. Several questions, in fact at least a few. One, it looks like the net point of your guidance and then if you look at your pro-forma revenue growth for last year, you’re looking for pro-forma growth on the topline this year of around 6%. It sounds like you’re indicating that there are several opportunities that accelerate growth next year. I was wondering if you could give us some kind of a range of what type of growth rate you’d like to see next year on the topline, and then if you could talk specifically and breakdown the drivers for that growth by your different business units. Secondly, I was wondering, Dan, if you could give us some guidance on the gross margin progress for the three quarters remaining in the year. And then lastly, on RSVP, I was wondering if you could give us the contribution from RSVP in the quarter and also maybe talk about whether or not there’s any limit to the number or what you think the limit to the number of cruises you could offer in a year. You clearly added a big one recently, I’m just wondering if there’s room even more ships next year. And then, you talked about the revenue side of RSVP, I was wondering if you could talk about what kind of operating or contribution margin you could expect from those through this next year? Thanks.

Lowell R. Selvin, Chairman and CEO

This is Lowell, I’ll take the looking into 2007 question in a general form as I can and then I’ll ask Dan and Jeff to pick up what growth we expect for this year and position and so forth. Just looking at 2007, we expect that we should be able to deliver as 2007 and 2008 unfolds the kinds of EBITDA margins that you would expect from a nicely profitable media and entertainment business, plus or minus a few percent for each year and a range of 20% EBITDA margins, and growing the topline, again plus or minus a few percent in the range of 20% topline. This year there’s a lot of sort of puckering down with LPI and RSVP and we’re really seeing now what the RSVP this year, we built the itinerary and a lot of that was built in, although we can help them market and make sure those ships get built, as we did unexpectedly nicely in March. At LPI Bob Cohen and the team there are doing a lot of rinsing of cost and getting behind that business and we’re growing circulation, which really won’t have an impact until we exit 2006. So, there is a lot of sort of focusing on the core business right now, but as you look at 2007 and 2008 I just wanted to give you a general feel for how we see the business unfolding in EBITDA and growth, and I’ll turn it over to Dan for the other questions.

Dan Miller, Senior Vice President and CFO

Bill, as I understand the second part of the question, you said gross margin. We typically have talked about EBITDA margins, so I’ll talk about it in that length. Yes, you said the first quarter integration costs and other items, more of that in the second quarter and we would expect that EBITDA margins would grow as we go throughout the year and breakout integration costs and be able to in a situation to grow the business overall. In terms of RSVP, the revenue contribution during the first quarter was $4.1 million on the revenue line. In terms of the number of shifts and how can we grow that, we feel we can grow it significantly. We talked about going from two to four large ships from 2006 to 2007. We think we can grow it more than that obviously but we are being prudent and just trying to grow this business in a reasonable manner, but we still think it’s actually obviously still a very significant growth.

Bill Morrison, JMP Securities

Okay, just a couple of followups. I know, I can see your EBITDA margin progression based on your guidance, what I was curious about is there was a big 1500 basis point decline in gross margin, I was wondering if you could give us any kind of guidance on where the gross margin goes from here throughout the rest of the year?

Dan Miller, Senior Vice President and CFO

Okay, got it. I can comment on that sort of broadly. I talked a bit about how during quarters where we have accrues there’s going to be a mixture that goes on, and in particular this quarter is because it was a partial quarter, we had a bit of a mixture. So, any quarter where we have a travel event, you’re going to see some change in margins. So, in this year, fourth quarter, you’ll see margins impacted a bit down from there because of the RSVP business.

Bill Morrison, JMP Securities

Dan, I had one other question. In the margins on RSVP, I know you said historically the company operated I believe at a 10% operating margin, I’m just curious that in 2007, on the revenue numbers you were talking about it, can we expect 10% operating margin in that business?

Jeffrey T. Soukup, Executive Vice President and COO

Yes Bill, this is Jeff. I think what we mentioned is that because it was a small privately held company, their margins were effectively flat or zero, because obviously they were paying out from their pockets in the form of salaries to the previous owners. At this stage we believe that under a regular model, a typical cruise business such as this could earn about 8-10% margins. We believe over time, because we have a lower customer acquisition cost that we can extend, particularly as we get in 2007 and we start taking the same fixed cost base and spreading it out across a much large revenue base, and we would hope to get that up into around the 15% range of the general guidance in 2007.

Bill Morrison, JMP Securities

Great, thanks a lot.

Operator

Thank you, our next question comes from David DeGraff. Please state your company name followed by your question.

David DeGraff, MFS

A couple of questions; on the integration front, did you say those were $400,000 in the quarter?

Dan Miller, Senior Vice President and CFO

That’s right.

David DeGraff, MFS

And those were adde back to EBITDA or not?

Dan Miller, Senior Vice President and CFO

No, they were just included in our operating expenses for the quarter.

David DeGraff, MFS

Okay, then adjusted EBITDA is 1.6, I guess, if I look at it that way.

Dan Miller, Senior Vice President and CFO

That’s right, if you want to look at it that way.

David DeGraff, MFS

On the RSVP, how much in EBITDA that got out in the quarter on the $4.1 million in revenue?

Dan Miller, Senior Vice President and CFO

We don’t talk about that in terms of breaking the EBITDA by business.

David DeGraff, MFS

Okay, but it’s surprising to see that it’s a probably a lot higher than the 8% that’s in our projections, second quarter and third quarter where there are now big cruises.

Dan Miller, Senior Vice President and CFO

I’m sorry…

David DeGraff, MFS

In the second quarter and third quarter there are no big cruises, right, so you said the full year EBITDA margins were 8-10%, so you’re hoping to get them there. The first quarter margins were probably a lot higher than that given that there was a big cruise.

Jeffrey T. Soukup, Executive Vice President and COO

Yes David this is Jeff. There were two reasons why normally the first quarter margins are a little bit higher than we would expect in the long run for RSVP. Number one, to the extent we can get them over the year into the 8-10% range that we discussed, that’s correct. There really will be a negative contribution from RSVP in the second quarter and third quarter, where there’s really no revenue coming in; none in second quarter and very little revenue in the third quarter. We also had a slight benefit in the first quarter because we picked up frankly the March time period for RSVP, so we got the revenue from their primary March cruise but didn’t have the expenses for the full quarter. So, yes, they did contribute more than the 8-10% range that we expect for the full year during the first quarter. In the fourth quarter, we also will expect it will be slightly higher in terms of the RSVP contribution as a result of these timing issues.

David DeGraff, MFS

And then on LPI, what was the revenue in the quarter from last year?

Dan Miller, Senior Vice President and CFO

Again we don’t disclose that. We run this business and we’re trying to truly integrate the businesses, so we look at our revenues as advertising, subscription, and transaction, and we’re trying to utilize the cross-platform approach and we’re doing that effectively, so we look at it that way David.

David DeGraff, MFS

Okay, I’m not sure if you can answer this next one then. In terms of the subscription revenues pro-forma, it looks like it was down 4% year over year. I was wondering if you could sort of just differentiate that to get to the underlying growth of the base business.

Dan Miller, Senior Vice President and CFO

I think you’re seeing there…we all agree that given the recent acquisitions we thought this would be useful information for investors. What you’re seeing there is the impact first of all of the gratis campaign, the biggest piece of staying there. In addition, we continue try and expand the footprint of our subscriber base, we in 2006 versus 2005 have run promotions and so you’re seeing some impact from that. And then, I think also to some extent we’re turning around the LPI business, we’re really getting more out of that business, extracting the value, unlocking the value as we talk about it. Finally, it’s fair to say that as we all know that we stumbled for a while on the technology side and we’ve now picked that up, and there’s probably some lag effect there with the subscriber base. So, we think there’s a lot of strength in the business and really some hope for the future in terms of the subscriptions.

David DeGraff, MFS

Okay, I know part of the plan is, as you said, growing the subscription base there, what is the goal in terms of…you were at 12,700 in first quarter in terms of subscriptions, what’s the goal to get to that next level, where you can raise the prices where you want to for 2007? How many subscriptions do you need to grow to get there?

Jeffrey T. Soukup, Executive Vice President and COO

David, this is Jeff. We haven’t put a specific number down on paper. What we’ve said is that…if you look at a lot of major national advertisers, the threshold for them is about $150,000 audible circ. When we bought out and Advocate, we were significantly below that. I think we’ve taken good strides in the first quarter to raise it above that level. Our expectation is that over time, certainly through 2006 and into 2007, we’d like to see these at 175,000 and 200,000 possibly as we move further into 2007. So, we’ll be watching that over the course of the year with a couple of things in mind, both where can we take the rate base but also ensuring that we maintain that overall subscription level. So, we’re making sure that we can continue with the bundling and grow it cost effectively.

David DeGraff, MFS

Okay, do you need to be at 175,000 to 200,000 each or is that in total between Out and Advocate?

Jeffrey T. Soukup, Executive Vice President and COO

Those numbers would be each, but I think the real target for us to be getting over the 150,000 level, which we think is really a significant line to cross; yes, we’d like to get both of them higher but we also want to weigh the cost of that and making sure that we’re really getting the advertising rate base increases and that we’re managing the cost side effectively.

David DeGraff, MFS

Okay, did I hear you say in your prepared remarks that you didn’t think there would be any benefits in 2006 from taking the gratis campaign? And then I wondered if you could comment on the shelf of file, if that was just required as part of the selling out or something?

Dan Miller, Senior Vice President and CFO

Yeah, this is Dan, there would be some mild impact from…so I think as we talked about it, the strategy there could vary from country to country, depends on whether we feel it’s sort of where the real value lies in terms of should we have it be an advertising base market or it should be a subscription base market. So, we’re going to look at that on a market-by-market basis, but we would expect in 2006, to answer question, a mild impact from the transitioning of the gratis campaign. In terms of the shelf, it’s fairly standard for companies to be having a shelf up these days. We obviously don’t comment on financing activities, but we’re $11 million in cash and we felt it was really prudent to have a shelf on file.

David DeGraff, MFS

Okay, thanks.

Operator

Thank you, our next question comes from Jeff Osher. Please state your company name followed by your question.

Jeff Osher, JMPS & Management

Hey guys, JMPS and Management. Just a couple of maintenance questions, call it. On your soft assets, your prepaid expenses…again I missed part of the prepared remarks, so I apologize if you went over this, but it looks like they jumped 4X sequentially from 2.5 to 6.5, I’m just wondering what the composition of that jump was?

Dan Miller, Senior Vice President and CFO

Yeah, what you’re seeing there is the deposits from the cruise for RSVP. So, we will have the long leap times and we take the positives from customers and you will see some dollar fluctuations, as we put deposits on cruise ships and we get deposits from our customers.

Jeff Osher, JMPS & Management

So, of this $4 million, what’s your typical deposit for a cruise?

Jeffrey T. Soukup, Executive Vice President and COO

Jeff this is Jeff. We aren’t breaking up the individual deposits by cruise. You can assume that the process is one of two things, either you put a letter of credit down upfront or you end paying for the deposit over the course of the year. You could imagine our preference of course was to pay it over time, which allows us to match the customer receipts that we receive, the customer deposits against our ship deposits. But as long as we have the appropriate financial capital and as long as it makes sense to charter the cruise and we think we can sell it at a profit, we’ll manage the timing of the various deposits in a way that helps us grow the business.

Jeff Osher, JMPS & Management

And you don’t have any contractual liabilities for the cruise. For instance, if for some reason you were unable to get the profitable number of individuals, you’re not on the hook for some certain amount?

Jeffrey T. Soukup, Executive Vice President and COO

We’re definitely not on the hook for the ship itself. I know depreciating assets, but it’s a different contract. Each contract is different. Obviously we try to get force majeure clauses if there’s some horrible thing like avian flu, but more importantly RSVP has consistently sold out its various cruises. So when they do have contracts that require they’re on the line, they’ve been successful historically in selling out those cruises. We think by coupling their historical success from this with our ability to drive customers at very low cost, that that’s not a significant risk for the business, but of course it is something we watch.

Jeff Osher, JMPS & Management

Then last question, the self-registration, has that been declared effective?

Dan Miller, Senior Vice President and CFO

No it is not.

Jeff Osher, JMPS & Management

Okay, thanks guys.

Operator

Thank you. Management, there are no further questions at this time, please continue.

Lowell R. Selvin, Chairman and CEO

Great, this is Lowell. I just like to close my hand and first of all thank you for joining us. We continue to believe, our staff worldwide in addition to leadership and our board that we’re only just beginning to further extend our reach into what we think is an amazing market. We’re a very well positioned business, very much like BET and Univision before us, and we believe we hold a strong early position and we’re capable of reaching millions of potential receptive customers over time. So, we invite you to continue to join us on this journey, and thank you for joining us today.

Operator

Thank you. Ladies and gentlemen this concludes the PlanetOut First Quarter 2006 Earnings Conference Call. You may now disconnect, and have a good day.

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Source: PlanetOut, Inc. Q1 2006 Earnings Conference Call Transcript (LGBT)
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