The Knot, Inc. Q3 2008 Earnings Call Transcript

Nov. 7.08 | About: XO Group (XOXO)

The Knot, Inc. (KNOT) F3Q08 Earnings Call November 6, 2008 4:30 PM ET

Executives

Laura Cave – Corporate Communications Officer

David Liu - Chairman of the Board, Chief Executive Officer

John P. Mueller - Chief Financial Officer

Analysts

Jeetil Patel - Deutsche Bank Securities

Richard Ingrassia - Roth Capital Partners LLC

Meggan Friedman – William Blair & Company, LLC

George Askew – Stifel Nicolaus & Company, Inc.

Jennifer [Dance] – Oppenheimer

William Morrison – Thinkpanmure, LLC

Operator

At this time I would like to welcome everyone to The Knot third quarter and nine month 2008 conference call for the period ended September 30, 2008. During the presentation all participants will be in a listen-only mode. After the speakers’ remarks you will be invited to participate in a question and answer session. As a reminder, this conference is being recorded. At this time I would like to turn the conference over to Ms. Laura Cave.

Laura Cave

Welcome to The Knot’s third quarter 2008 conference call and webcast. During the course of this conference call comments that we make regarding The Knot that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements. Any such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words like may, should, expect, plan and other similar terms. You are cautioned that these forward-looking statements speak only as of today’s date. Our internal projections and beliefs upon which we base our expectations may change but we will not necessarily inform you if they do. The Knot’s policy is to provide expectations only once per quarter and not to update that information until the next quarter. The important factors that could cause actual results to differ materially from any forward-looking statements mentioned today include but are not limited to our unproven business model, our history of losses, significant fluctuations to which our quarterly revenues and operating results are subject, the seasonality of the wedding industry, the dependence of our registry services business on the continued use of wedding channel website by our retail partners, and other factors described in documents that we have filed with the Securities and Exchange Commission.

Additionally, if you’ve not received a copy of today’s press release, the release is now posted on the Investor Relations section of the company’s website at www.theknot.com. We have allotted up to one hour for today’s conference call including the question and answer section as follows. Please take note that the company is operating under the SEC regulation FD and encourages you to take full advantage of the Q&A section.

At this time I’d like to turn the call over to our Chief Executive Officer, David Liu.

David Liu

I’d like to start things off by introducing you all to our new CFO, John Mueller, who is on the call today and will take you through the numbers a little later. It has been pleasure working with him since he came on board in September and I hope I’ll have the chance to introduce him to you in person in the coming months.

Before John covers the financial results of our third quarter, I want to take a few minutes to give you my perspective on the short- and long-term prospects for our business in this challenging economic environment. The macroeconomic conditions have changed dramatically since our last earnings call. Three months ago it was still unclear how badly the economy would deteriorate and what impact it would have on our advertising and registry businesses.

Now there is no question that in recent months we have experienced softening across some of our revenue streams. In particular we began to see some national advertisers, both current and in our pipeline, delay or cancel their third and fourth quarter commitments. However the wedding industry remains as resilient and recession-proof as ever and as a company we are on pace to record our best year in terms of member enrollment.

This presents us with some tough challenges as well as some unique opportunities. No one knows with any certainty how deep or long the downturn in advertising and retail will last but we have faced economic downturns before and in spite of the obvious differences between the economic crisis and the dotcom bust seven years ago, I am reminded of the strategies that helped us survive.

Entering the year 2001 national advertising which represented 40% of our total revenue at the time was decimated virtually overnight. In three months we lost 90% of our national advertising revenue and for a five-year-old company, such a turn of events could have been a death sentence.

Yet in 2001 we managed to drive growth in other segments of our business so that by year end our top line remained flat to the prior year, and despite losing a revenue stream that enjoyed gross margins of over 90%, we managed that year to improve our bottom line. We accomplished this by balancing our efforts to control costs with a focus on investing in our platform for growth.

The similarities between the economic fallout of 2001 and today are alarming and a cause for concern. We know how bad it can get and we know what it takes to ride out this crisis. The Knot however is a different company today and it is in the differences between now and then that we find reason for confidence and even cautious optimism.

Back then we were running low on cash and although our operating expenses were declining, we were not profitable and as a result our stock hit $0.26, we were delisted and we had ferocious competitors in the wedding channel and wedding network with strategic investors with deep pockets. Federated department stores and [inaudible] Brides magazine were investors in the wedding channel, the May department stores and Prime Media’s Bride magazine were investors in the wedding network.

Our competition actually faxed our stock turn to our advertisers spreading rumors of our imminent demise to scare our advertisers from spending with us. Today, despite an endless flow of bad news from the financial markets and the economy as a whole, we are in a great position. Our competition continues to aggressively spend in an attempt to catch us yet we continue to dominate the online wedding space and are experiencing a record membership year.

We are profitable, debt free, generating strong cash flow and holding a significant cash balance. Therefore as we look ahead into the end of this year and into 2009, our goal is to preserve our financial health while continuing to implement strategies to leverage our assets to drive growth.

Even before the economy began to slide, we had a vision to transform the company with the kind of growth that we could not achieve on our aging technological systems. So as many of you know we have been investing a great deal of resources in updating our backend systems. When these new systems are in place, they will provide the scale and flexibility to drive growth through variable pricing, self service and auction-based ad sales.

In advance of our full implementation of our new contract entry system, in September we launched a new program in our local sales division as a test of our variable pricing strategy. In an analysis of our vendors we learned that of our total vendor base over 93% were from primary wedding categories such as reception sites, caterers, photographers, etc. Less than 7% of our vendors were from secondary categories like calligraphers, soloists and rehearsal dinner sites.

Seeing that there was an opportunity to increase our penetration of these secondary categories without impacting our primary business, we signed a group of eight sales reps to sell online profiles in secondary categories for the monthly price of $50. While the results are not fully reflected in September’s revenue of profile accounts, I’m happy to report that we sold an astonishing number of secondary profiles in the first month of the program. In a single month this team has grown the number of secondary category profiles on our site by 40% and enabled us to nearly double our monthly average in new vendors sold.

This has far exceeded our expectations and shows that there is both tremendous demand for our media and an opportunity to improve the productivity of our sales force by arming them with programs strategically priced to target vendors in particular categories.

While one would expect a positive lift from dropping our price point in these categories, it is our efforts on the high end that have been most surprising. Over the summer we tested a premium program in two of our local markets: Dallas and Detroit. Vendors had the opportunity to buy placement in the locally targeted television commercial that we produced running on popular cable channels. In addition the vendors commercial ran with premium placement on the local market city page on www.theknot.com.

Given the positive response to these tests, we rolled this program out across 10 of our top markets. In just a few weeks of selling, we are over 50% sold. What is most impressive about these results is the fact that these are three-month commitments for a total price of $4,800 which is by far the most expensive online local media we have ever sold.

Therefore despite the economic headwinds we are making good progress. These results are a strong indication that implementing variable pricing across all categories and markets is the right strategy t hat will allow us to improve our revenue yield and penetration of the local markets. Our churn rate has remained just over 30% during the quarter, but as these new programs bear fruit in the fourth quarter we expect to see both revenue and vendor counts begin to climb.

This leads me to the topic of our vendor count. Over the course of the quarter it became increasingly apparent that reporting vendor count does not always provide the best visibility into our local business. There are two main reasons why. First, regional companies often buy into multiple markets to increase their visibility in the territories where they do business. Second, a client like a resort may decide to buy profiles in multiple categories like reception and ceremony sites, guest accommodations, rehearsal dinners, spas and fitness, etc. So while in these two instances our vendors pay for multiple profiles, they’re only counted as one vendor.

Over time the difference between a vendor and profile counts have not been consistent, but with the addition of a low-cost profile in secondary categories we’ve seen some of our existing vendors buying into additional categories and we anticipate that the vendor count and the actual profile count may begin to diverge. Since our revenue is driven by the number of actual profiles we sell, we are going to begin reporting a profile count instead of the number of vendors.

So to provide you some context, at the end of the third quarter there were 15,875 profiles versus the 14,187 vendors. As of October 31 however, our profile count in a single month is up 2.3% to 16,247 and our vendor count grew by 2.8% to 14,579. We believe the tide of vendor attrition is beginning to turn as we have already rebuilt our vendor base to surpass our first quarter levels.

Regarding our technology initiative, we are in the process of converting the weddingchannel.com site into our new content management system. We expect this process will be complete in early December. We are in the QA testing phase in the development of our new contract entry system and the asset tracking system is nearly complete.

The timing of the rollout of the new platform depends on two things: First, the number of issues and bugs we uncover in the testing phase will determine how much more work the system needs, and second, we will be timing the sales rep training so as to minimize any disruption of their selling efforts during the transition.

After the completion of the CES project, our plan is to redeploy tech resources against our 2009 priority projects. First on the list which has actually already begun production is the development of 10 local niche sites that are expected to launch by the end of the year. As I’ve explained on previous calls, our content distribution strategy includes developing hybrid local and niche theme sites that will expand the reach of our content and increase local ad inventory. The results will be a network of sites that feature real weddings, expert bloggers, vendor profiles and local and themematic message boards.

To launch these sites our technology team has to repurpose and integrate some of our more powerful applications like our message boards and objects database that serves up our real weddings so that they can function inside a new template. Once this work is complete we can deploy this technology across any number of niche sites in the coming months.

Finally, at a time when uncertainty about the economy and the media industry can cause organizations to panic, lose focus and abandon sound strategies, we view this time as ripe with opportunity. We are pursuing a strategy for a business that will truly transform our company and our industry. When we launch the services and applications we have planned for the coming year, we will be tapping the one resource that is uniquely ours and which we have in abundance; and that is our vast network of members, vendors and audience. As a result these services will be unique to our brand and will be impossible for our competitors to replicate.

I have the smartest and most talented executive team in the industry and company morale is at its highest in years. We plan to stay focused and execute our plan to drive long-term growth and shareholder value. That said, we remain watchful of the economic realities that will continue to impact our industry, and should the market dramatically worsen over the course of the next year we are prepared to implement contingencies that will allow us to control our costs without sacrificing our long-term growth opportunities.

With the talent and commitment of my staff, the strength of our brands and the passion of our audience, I look forward to pursuing the opportunities that are ahead of us.

It is my pleasure now to introduce you to our new CFO, John Mueller, who will take you through the financial results for the quarter.

John P. Mueller

Great to be here with you on your management team and also to transition with [Rich Sheff]. As this is my first call as CFO of The Knot, I want to thank everyone on the call and look forward to speaking to you in person in the near future.

I’d like to go over the results reported today in our press release and add a bit of detail after which we’ll spend some time taking your questions. First, a quick summary.

For the third quarter of 2008 we reported net revenues of $27 million which represented an 8% increase over the same period of the prior year. The increase was primarily driven by growth in national and local online advertising. Net income for the third quarter of 2008 was $2.2 million or $0.07 per basic and diluted share as compared to net income of $2.9 million or $0.09 per basic and diluted share in the third quarter last year.

For the nine months of 2008 total revenues grew to $79.5 million from $74.5 million a year ago for a gain of 6.6%. Net income for the nine months was $5.1 million or $0.16 per basic and diluted share as compared to $9.3 million or $0.30 per basic and $0.28 per diluted share in the corresponding period of ’07. The decline in net income is primarily attributable to the ongoing investment we are making in strategic initiatives to extend our brands and improve technological systems that we believe will ultimately enable us to attract greater market share of advertising and commerce dollars.

Now to get into a little more detail on the revenue growth. Revenue from online advertising programs from both national clients and local vendors increased by 12.5% to $13.9 million in the third quarter of ’08 from $12.4 million in ’07.

We had impressive growth in national online advertising which increased 23% to $5.6 million compared to third quarter ’07 of $4.5 million.

For the nine months of ’08 national online revenue was $15.7 million, a 22% increase over the prior year revenue of $12.9 million. This growth is composed of gains in both endemic and non-endemic categories which demonstrates our increasing share of bridal marketing budgets and growth in advertising for our other life-stage brands. As an example, we continue to generate growth in the niche online advertising which year-to-date has increased by approximately $700,000 compared to the prior year’s period.

Local online advertising increased to $8.4 million in the third quarter from $7.9 million in ’07 or about 7%. Revenue growth in this segment was primarily due to the continued impact of last summer’s price increase. For the nine months of 2008 local online advertising was $24.7 million which represents an 8% gain over 2007.

As David explained, during the quarter we implemented two new local programs and we have begun to see progress in the number of new vendors signing up in both primary and secondary categories, particularly in the last half of September. Due to the production time necessary to post new online profiles, roughly the last two weeks of September sales are not reflected in our third quarter revenues or profile counts. But based upon the profile count that David quoted for the full month of October of 16,247, we believe that these new programs will make a positive impact on both profile count and revenue into the future.

Merchandise revenue from the sale of wedding supplies was $5.8 million in the third quarter of ’08 compared to $5.3 million last year. The Knot Shop enjoyed improved growth in the quarter due to our recent redesign of the shop’s home page. We recently applied a similar redesign to the wedding channel shop and we believe this will help to improve contribution from that online store as well.

Registry services revenue represents commissions earned from our retail partners. During the third quarter registry revenues declined by $200,000 compared to the prior year’s quarter as a result of the general weakness among retailers in this economy. For the nine months ended September 30, ’08 registry services revenue was $8.5 million down slightly from $8.8 million in the prior year.

While sales have slowed with our retailers we think that this is a business that has a lot of potential and we are now working to implement new partnerships and programs to drive registry creation by our brides and wedding guest traffic through our patented search and purchase tool.

Publishing and other revenue for the third quarter of ’08 amounted to approximately $3.8 million compared to $3.6 million last year. For the first nine months of 2008 publishing and other revenue was $13.1 million as compared to $13.6 million in ’07.

Local print revenue was up slightly for the nine months of ’08 compared to ’07 primarily due to revenue from The Bump guides, while revenue from national print was down approximately $400,000 primarily due to lower designer and national advertising pages in The Knot Weddings magazine.

Like much of the print industry we have seen a general weakening in print advertising pages. With pressure on advertising budgets, many advertisers are choosing to deliver their messages online rather than in the more costly print media. Though the impact was not significant during the quarter, this is a trend we have been anticipating for some time. It has been recently exacerbated by the macroeconomic environment so we are expecting to see a more significant impact on our print business in the fourth quarter when we publish the large majority of our local magazines.

Now an update on our outlook. As we indicated in our press release, we are reducing our outlook for percentage revenue growth for the full year 2008 to 5% to 7% based on the weakness in print advertising, registry sales and risks associated with national online advertising. That pretty much covers revenue.

With respect to margins, our overall gross profit percentage remained at approximately 81% for each of the three and nine months ending September 30, ’08 and ’07.

Turning to operating expenses, for the recent quarter these totaled $19.1 million or approximately 71% of net revenues and represented a sequential quarterly decrease of approximately $1 million. As our growth rate slowed in the second and third quarters we immediately began to reduce spending in targeted areas, in some cases representing permanent reductions for the year. We expect that operating expenses in the fourth quarter should approximate third quarter levels.

Stock-based compensation was $549,000 in the recent quarter compared to $626,000 in 2007 and was $2.4 million and $1.7 million for the nine months ended September ’08 and ’07 respectively. Our outlook for stock-based compensation expenses amounts to approximately $3 million for all of 2008.

With respect to the provision for taxes, our estimated effective tax rate for ’08 is now forecasted at approximately 38% reflecting a decrease from the first half of the year of 1% point primarily due to the increasing impact of tax exempt interest income from our auction rate securities.

Cash generated through operations for the third quarter of ’08 was approximately $4.4 million and amounted to $18 million year-to-date.

Cap ex for the first nine months of 2008 was $4.7 million and should approach $6 million for the year. Our outlook for cap ex in 2009 returns to our historical levels of approximately $2 million to $3 million as we complete the major portion of the technology upgrades we commenced in ’07.

We ended the quarter with $69 million of cash on the balance sheet which was an increase of $6.6 million from June 30, ’08. As of September 30, ’08 we continued to classify our additional investments in auction rate securities of $48.9 million as long-term investments. We recorded a temporary impairment charge of $3.2 million in stockholders’ equity with respect to these securities. This represents an additional charge of $100,000 in the current quarter compared to the second quarter and is primarily due to changes in the discount rate that we used in our valuation model.

Based on a settlement between UBS and other governmental entities, UBS is offering its customers at zero cost, auction rate security rights. If we accept the offer, we will have the right to require UBS to purchase our auction rate securities at PAR + accrued interest. That would be effective starting in June of 2010. Basically the UBS settlement agreement can be viewed as fixing the value of the auction rate securities at PAR value and providing us a path to liquidity for these securities.

In the meantime I want to emphasize that, one, we are currently receiving interest payments on these securities; two, none of the interest payments are in default; and three, both we and UBS will continue to seek buyers for these securities. In fact $1.9 million PAR amount of these securities was redeemed by an issuer at PAR during the third quarter.

To conclude, we are confident that the strength of our widely recognized brands and strong financial position will enable us to continue to grow our business over the long term. At the same time we are also taking prudent steps to identify areas in which we can make further reductions in spending should the economic environment continue to deteriorate. With the infrastructure investment coming to an end, we are uniquely positioned to grow our revenues, leverage the strength of our brands and improve our profit margins.

That is the financial review for The Knot for the recent quarter, and we will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

On the registry side, what are your retail customers or partners doing in terms of spending activity to potentially drive the registry business or are they kind of clamping down as they are across their core retail operations online? Second, can you talk about as it relates to visibility on the national ad front, obviously things are changed, but what percentage of the quarter is booked at this point in the quarter especially in light of I guess October which seems to have been pretty weak in general?

David Liu

We have seen some pullback and some of the advertisers and retail partners are really re-examining their fourth quarter spend. Some of them have really pushed their commitments. Interestingly enough, we are actually seeing though a decent amount of demand for ’09 media inventory. We continue to receive a pretty large volume in response to our large volume of RFPs. So on the one hand, while I think they are pulling back a log of their marketing for their general merchandise sales, I think for bridal we seem to be still weathering the storm pretty well in context.

John P. Mueller

With respect to your other question regarding what percent of our Q4 revenues are booked, we basically have got a pipeline in advertising revenues probably $1 million or $2 million which represents maybe 15% that we don’t have booked at this point. So 85% of it’s pretty well locked in.

Jeetil Patel - Deutsche Bank Securities

As it relates to just the local side of the business, obviously you’re looking at variable pricing models. How granular are you going to be as it relates to local pricing? How many different pricing buckets or pricing schemes have you come up with at this point as you go to market?

David Liu

The test on both the high and the low end has been very encouraging but keep in mind the challenge that we’re still working with in the old system is that when you implement this one price strategy, it is universal for all categories in all markets. The reality is there is a pretty significant difference between the geographies and between categories.

So we really have looked at the local transition to being from right now a matrix of six prices given their (a), (b), (c) territories and core and non-core categories to an enormous number. When you think about how Yellow Pages slices and dices pricing by category and by market, we are looking to emulate really a pricing model and a rate card that has that level of complexity.

Jeetil Patel - Deutsche Bank Securities

What kind of price increase do you think net net looks like between the six to myriad?

David Liu

It’s hard to say right now. We’ve just brought in a new VP of Local Sales who is working furiously at that. The goal is to test the concept fully in one full market and then begin to roll that out in 2009. That’s probably the best clarity I can give to you right now.

Operator

Our next question comes from Richard Ingrassia - Roth Capital Partners LLC.

Richard Ingrassia - Roth Capital Partners LLC

Pretty shocking I think that you guys were able to get more than a week’s commitment out of your premium unit trials let alone three months. Can you speak to the trend in average spend and length of commitment in your legacy ad units?

David Liu

On the local side we’re pretty rigid so the commitments are minimally six months. The way most of our programs work they’re pretty much long term. We won’t really give people the opportunity to get in and out very quickly. If you cancel within the first six months, you still pay us for the six month exposure so you’re sort of disincentivized to do that.

And you’re right. I mean, I think the lesson learned here is that we’ve always suspected that we were driving tremendous value to many of our advertisers and particularly the high value categories. Certainly the high price that we’ve been able to charge for the premium product is something that we’re looking to explore ways of creating more premium inventory on our site.

Richard Ingrassia - Roth Capital Partners LLC

Do you feel that you’re leaving any local commitments on the table by enforcing that six month commitment?

David Liu

I don’t think so. I think the question really becomes how precise can we get with our pricing strategy. When you think about the secondary category that we identified in the September test was really looking at the categories that were underpenetrated with the assumption that our pricing was a little too high for them, so introducing the $50 price point has clearly dramatically introduced and shown the demand and pent-up demand for the media.

I think when we started allowing for variable pricing across every single category in every market so that a caterer in New York is paying a very different rate from a caterer in Kansas City and the ice sculptors to tent rental people all have a very customized price point, I think we’ll be able to really recapture a lot of the revenue that we’re currently not able to harvest because of the rudimentary price structures we have.

Richard Ingrassia - Roth Capital Partners LLC

The impact of the retail environment on the registry business is obviously pretty easy to see but how do you assess your position competitively? Specifically how did your strategy in the segment change if at all as retailers get smarter online for example and increasingly develop in-house registry capabilities?

David Liu

We think we’re actually working in concert with the retailers so our goal is to drive business to them, whether it’s through registry creation, by marketing their registries on our site or through the search and purchase tool that we have. We do have a patent on this tool so nobody else can actually offer a multiple registry search tool and that is something that we’re looking to leverage and distribute more aggressively.

I think the challenge of the registry industry is that it is a constant state of flux and as consumers are availing themselves to more choices of both products and retailers, we have to respond by expanding our networks. So I think one of the bigger focuses for us going into the next couple of years is to really dramatically increase the number of retailers who are able to search and incorporate into the wedding channel systems.

Richard Ingrassia - Roth Capital Partners LLC

Just a last quick question maybe for John, how close are we now to a run rate on quarterly op ex.

John P. Mueller

All I can mention is Q4 will be approximately the same as Q3. Q3 did have a little bit of a benefit because we actually had very strong collections and we were able to reduce our bad debt expense a little bit and we probably won’t get that same benefit in Q4 but there are a couple of other areas that I think we will be a little bit lower. I think we’re getting for Q4 maybe a pretty good proxy for our full year quarterly run rate. Going in to the next year it might go up 1% or 2%.

Operator

Our next question comes from Meggan Friedman – William Blair & Company, LLC.

Meggan Friedman – William Blair & Company, LLC

Can you talk a little bit about some of the national advertisers who cancelled or delayed their plans with you guys in terms of in particular what industries they represented? Were these endemic non-endemic?

David Liu

It really ran the full gamut, everything from consumer packaged goods, beauty, retail, financial services, it was broad in its scope of categories. Now, a percentage of them have pushed in to the ’09 schedule so I think it’s really indicative of marketers sort of recalibrating their plans to try to maximize every dollar that they’re spending. We still believe that we’re well positioned because being online and being measurable and also addressing an audience that has such a high propensity to spend in categories.

We actually think in industries and categories where we were originally considered too small we’ve actually become more relevant because of the high purchase intention.

Meggan Friedman – William Blair & Company, LLC

Then have you had conversations with some of your national advertisers and frankly local vendors about their budgets for ’09?

David Liu

Absolutely. It is ongoing discussions. As I said, what is surprising is the sheer volume of RPs that we continue to respond to so that’s a positive. But, we are very cautious with what we think is going to happen in the next six months.

Meggan Friedman – William Blair & Company, LLC

Then, if you can talk a little bit just about the phasing over the course of the quarter for national ad revenue/cancellations and delays, local vendor additions and attritions and then the publishing side that’d be helpful.

John P. Mueller

Well I guess starting in national I think we’ll still see pretty strong growth in the fourth quarter compared to fourth quarter in ’07 on both the national and the local side. Probably national actually growing a little bit more strongly than local and then with respect to the other areas it will probably be registry will be flat to down a little bit primarily as it relates to the general economic conditions offset by the weddings supplies business which will probably be up 4% or 5%.

Then our publishing and other as I mentioned, most of our local books come out in the fourth quarter and I think you’re going to see the impact in decline in print advertising there and that will probably be down 10% or 11%. But, I think all in all over fourth quarter of ’07 we’re going to be up but it’s not going to be a huge up.

Meggan Friedman – William Blair & Company, LLC

Then in terms of in the third quarter kind of how some of these things trended over the course of the course of the quarter, did things get better, worse, were they the same?

David Liu

Well local got better.

John P. Mueller

Local got better, national I think it has started to actually improve a little bit. It was initially in September, that’s when we started to see a few of the national accounts either postponing in to ’09 or even cancelling ads. But, it slowed down a little bit and the pipeline that we’ve got seems to be holding in tact in terms of what we’ve got left to sell here for the rest of the year.

Operator

Our next question comes from George Askew – Stifel Nicolaus & Company, Inc.

George Askew – Stifel Nicolaus & Company, Inc.

Two questions, I’m impressed with your cost cutting sequentially $1 million in the third quarter, what exactly did you go after? And, you suggested that some of these changes or cost cuts are permanent, can you give us a little detail there?

John P. Mueller

First of all we were on a fairly strong ramp up in terms of headcount that we were adding to pursue all of these strategic initiatives. It was a combination of I think attrition of people that normally left the company and then decisions not to hire as well that have kind of helped us maintain the costs.

Additionally, we had some benefits in this quarter as I had mentioned from lower bad debt expense which contributed to that decline as well.

David Liu

I think we identified certain trends that had us look at throttling back some of our expenses even as the second quarter was coming to a close.

George Askew – Stifel Nicolaus & Company, Inc.

Then secondly, you talked about the variable pricing strategy for the secondary categories and you talk about going on a many more variable pricing option for primary categories. What’s the timing for the new pricing structures for primary categories? Is it this quarter? First quarter?

David Liu

It will be unlikely that we’d be able to squeeze it in this year. As I said, one of the key choke points for us right now is actually the sales rep training. To get them transitioned on to a new platform will require a day or two of in person training, bringing them in to regional centers and we are loath to take them out of the selling process right now.

So, we have opportunities probably in the early part of the first quarter where we’ll be looking at scheduling some of this stuff. The other aspect of it is obviously making sure that this application is bullet proof and so we don’t want to launch with that and there’s probably even some SarbOx issues in making sure that the auditing process of this is complete.

John P. Mueller

One other thing on your other question about the sequential decline in operating expenses. I forgot to mention that in the second quarter we had a little bit higher legal expenses related to a couple of the lawsuits that we had that were going on. That has cleared and its much lower now as well.

Operator

Our next question comes from Jennifer [Dance] – Oppenheimer.

Jennifer [Dance] – Oppenheimer

I just have a quick question on operating expenses, fiscal ’09 can you guys give us any guidance on an absolute run rate? Is there any kind of specific IT products or anything that would cause this to bump up again?

John P. Mueller

No. I think what I said to Rich was pretty much where we see it. The fourth quarter probably in line with the third quarter and maybe the run rate for ’09 is maybe a little bit higher, 1% or 2% higher than that.

Jennifer [Dance] – Oppenheimer

So overall year-over-year it could be down?

John P. Mueller

Total operating expenses? I don’t think it will be down. I think it would be the same to slightly up from what it is ’08.

Jennifer [Dance] – Oppenheimer

Then on The Nest, what percentage of revenues, I mean a $700,000 increase is that all coming in online publications or is it also [inaudible]?

John P. Mueller

That was all online that I was speaking of there.

Jennifer [Dance] – Oppenheimer

And what is the total number?

John P. Mueller

We don’t typically break that out.

Jennifer [Dance] – Oppenheimer

Is the bumped up com, is that contributing to any of the local and online advertising?

David Liu

Not yet, it’s very small.

John P. Mueller

Negligible.

Operator

Our next question comes from William Morrison – Thinkpanmure, LLC.

William Morrison – Thinkpanmure, LLC

I know visibility but I was wondering if you’ve done any kind of scenario analysis depending on which way the economy goes. So, for instance if you looked at what you think your business will do if we’re in recession all of next year versus maybe a short shell recession just for the next couple of quarters? And, wondering if you could give us a kind of range of outcomes from worse to maybe best case scenario for next year on the top line?

David Liu

It’s probably too premature for us to actually give you any ranges or the outlook. We certainly have done a lot of sensitivity analysis towards what I would consider bad, worse and [inaudible] in terms of the potential deterioration of the economy. As I said currently, we are somewhat surprised with the resilience of the advertising side of it, the local has been a real pleasant surprise and even on the national front with regards to some of our categories where you would they are getting particularly hammered, we’re seeing commitments coming in to 2009 that are matching 2008 and so we’re pretty pleased right now.

Again, we’re certainly very cautious in wanting to promote too much optimism but we do believe that we represent a category where the advertisers are realizing that they do need to be spending with us even to protect their own businesses.

William Morrison – Thinkpanmure, LLC

Then two quick ones for John, John could you just clarify, I got a little bit confused on that last question about operating expenses which were down sequentially and then you said should remain constant in the fourth quarter and then I thought you said tick up 1% to 2% off that run rate. But now it sounds like are you saying that operating expenses might be up 1% to 2% off of the total 2008 op ex?

John P. Mueller

Q4 is maybe 1% to 2% up and you’re going to use Q4 for your run rate for ’09, therefore ’09 would be up 1% to 2%. That’s what I was saying.

William Morrison – Thinkpanmure, LLC

Can you just talk a little bit more about the pipeline? I think you said earlier that you got about 85% of the quarter booked at this point?

John P. Mueller

Correct.

William Morrison – Thinkpanmure, LLC

How kind of concrete are those bookings? On the national side can people still – they’re planning to spend in December, can they still cancel those?

John P. Mueller

On the national side they can cancel. We haven’t experienced much of that but that is definitely a risk and we review our pipeline during the week and every week. I took a look at it today and there have not been much movement in what our sales force is telling us what the feedback is they’re getting.

Now, it’s kind of in this market its day-to-day so we’re trying to keep our pulse on it as closely as we can because you just don’t know. But, like David even said, we’re kind of surprised by the resilience we’re seeing right now. But, we’re certainly not willing to go out on a limb and paint a picture of what we think ’09 is going to be like. We’re not going to do anything drastic until we get a little bit better visibility here going forward.

Operator

At this time there are no further questions. Are there any further remarks.

Laura Cave

We’d like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the investor relations section of our website. If you missed any portion of today’s call you can access the replay of the entire conference call in the investor relations section of the company’s website at www.TheKnot.com. A telephone replay is available for the next two weeks at 1-800-642-1687 reference number 70767097.

If you have any additional questions, please don’t hesitate to contact us at ir@TheKnot.com.

Operator

This concludes today’s conference call. You may now disconnect.

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