Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Knot, Inc. (KNOT)

Q1 2006 Earnings Conference Call

May 11th 2006, 2:30 PM.

Executives:

Amy Shey Jacobs, Director of Investor Relations

David Liu, President, Chief Executive Officer

Richard Szefc, Chief Financial Officer

Analysts:

Parham Ghorban, Roth Capital Partners

Richard Fetyko, MCF & Company

Kenneth Marcus, First New York Investments

James Lee, Americas Growth Capital

William Morrison, JMP Securities

Michael Perna, AAD Capital

Operator

Good afternoon. My name is Lisa and I will be your conference facilitator. At this time I would like to welcome everyone to The Knot First Quarter 2006 Conference Call. During the presentation all participants will be in a listen only mode. After the speakers' remarks, you'll be invited to participate in a question and answer session. As a reminder, ladies and gentlemen, this conference is being recorded. At this time, I would like to turn the conference over to Ms. Amy Shey Jacobs.

Amy Shey Jacobs, Director of Investor Relations

Thank you. Good afternoon and welcome to The Knot First Quarter 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, intend, 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 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 and limited operating history, our history of losses, significant fluctuations to which our quarterly revenue and operating results are subject to the risks and related costs associated with ongoing litigation, the seasonality of the wedding industry and other factors described in documents that we have filed with the Securities and Exchange Commission. Additionally, if you have 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 session that 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 would like to turn the call over to our Chief Executive Officer, David Liu.

David Liu, President, Chief Executive Officer

Thank you, Amy. As our earnings release indicates, our first quarter performance represents a strong start to this year. Our net income grew to $1.7 million, a fourfold increase on a 24% revenue gain.

If you are already familiar with our Company, you know that the main premise of our business model is to create cross platform media brands that service consumers at key life stages when they're hungry for information, they have predictable spending needs and they wield large budgets.

When we started The Knot ten years ago, we targeted the $74 billion wedding industry, an underserved market at the time. Over the years, through our multi-platform brand extensions and PR efforts, we have made The Knot one of the most recognizable and popular wedding media brands in the world. More importantly, because of our brand strategy, we have been able to grow our audience and business organically without spending on advertising or other costly customer acquisition initiatives. The power of our brand to aggregate a highly sought-after audience has enabled us to increase our share of the bridal advertising dollars spent both on and off line. And the fact that our audience replenishes each year provides for a continuous flow of consumers that we look to service through their engagement, wedding, newlywed and expected parent life stages.

We believe in our unique business model. We are a leading national life stage media company that is successfully building online and offline products, growing national and local ad revenue and all the while operating a high margin e-commerce business.

Over the past few months, a number of the same questions keep popping up in our investor meetings and I believe it would be helpful to address them now for everyone before Rich discusses the financial details for the quarter.

We are most often asked, what exactly is the overall size of the opportunity for The Knot? Well if you look at our three revenue streams, national advertising, local advertising and commerce, here's how we see the opportunity breaking out. The three top wedding magazines based on ad age estimates generate over $400 million a year in national advertising revenue. Now we believe that number is inflated as it is based on rate card ad rates and very few people sell off rate card today without discounting. Now our combined national online and offline advertising revenue in the first quarter was approximately $4.6 million. Therefore, given our reach of 2.4 million unique visitors per month and a million members a year, we believe there's significant room for growth in our national advertising revenue.

On the local advertising front, we compete with the Yellow Pages, local cable, local newspapers and other local wedding magazines and local wedding expos. And because the local market is disaggregated, the overall opportunity is hard to quantify but we estimate that over $1 billion is spent annually by the photographers, the caterers, the venues, limo companies and musicians on advertising their products and services through the various aforementioned media outlets.

Today The Knot is in 67 local markets online, less than half the number we could potentially feature. Our pricing to-date has been purposely conservative to achieve a critical mass of wedding vendors. As we begin to subdivide and increase the number of markets, achieve deeper penetration in the number of wedding vendors and become more aggressive with our pricing as we move to a variable schedule among categories and territories, we believe we can substantially grow our local advertising revenues, which for online and print combined were approximately 6.6 million in the first quarter.

According to our research, the largest bricks and mortar wedding supply retailer generates approximately $90 million annually. Given our reach of brides and then discounting that by a percentage, which would not be comfortable buying their wedding supplies online, we believe there is a nice growth potential for us in this segment of business.

But there is a lot of room to grow in our bridal business. But remember our business model was to leverage our replenishing flow of consumers into subsequent life stages. Advertisers covet our members in their first year of marriage. What makes this life stage unique is the concentration of spending decisions that tends to happen in the first 12 to 18 months of marriage. 48% plan to buy a car, 95% plan to establish joint bank accounts, 65% plan to buy insurance, 58% plan to buy a home, resulting in over $174 billion in new home purchases annually by our newlyweds. If you factor in the number of new industries we can now service -- auto, mortgage, insurance, financial services, real estate, and the marketing budgets these industries spent on lead generation online and branding offline, if you then apply our integrated media approach of national exposure with targeted local reach, online in print and through broadcast, I believe the opportunity for The Nest is as large if not larger than The Knot. We're still in the very early stages of building our media presence in the newlywed space with The Nest.

They are using the same multiplatform brand strategy that has proven to be so successful for The Knot. Our website is about a year old, we have signed a multiple book agreement with Clarkson Potter for books specifically written for newlyweds. The first book, The Nest, The Newlywed Handbook, an Owner's Manual for Modern Married Life, will be published in the fall. And in a few months, we will launch The Nest magazine with a guaranteed circulation of 400,000 copies.

And with 65% of our members planning to have a baby within three years of their marriage, we believe our ability to aggregate an audience of first-time parents, arguably the most valuable segment in the prenatal audience, could be as large an opportunity as The Knot and The Nest.

Keep in mind, the competition in the bridal market has been fierce, whereas there is no media products targeting the newlywed audience. The dominant brands generating the lion's share of advertising in the baby category come from Timing to Meredith whose strength is in their post-natal publications. Prenatal publications or pregnancy publications are mostly small titles with controlled circulations distributed in OB/GYN offices. None have access to the replenishing supply of consumers that we have in our membership database. Even fewer have the ability to create a national brand with local targeted reach.

Speaking of competitors, many have asked about the recent relaunch of Brides.com and how that will affect our business. I would like to point out that this is their second relaunch in three years. And this time, they've chosen to consolidate the websites for brides, modern bride and elegant bride under a single URL, which I think is smart as it uses their three magazine brands to consolidate their online traffic.

Conde Nast is a formidable competitor and we do not take this recent launch lightly. Their bridal publications are getting the lion's share of the ad dollars spent in the bridal media space. And if they can successfully leverage those advertising relationships online, they can pose a serious threat. However, early signs are that building an online audience for them is not as easy as distributing millions of magazines.

Let me share with you some stats from Hitwise, an online competitive analytics tool we use. The month prior to their relaunch, the Conde Nast bridal websites collectively had 8.5% of the traffic visiting wedding media websites. One month after their launch and after a strong PR push promoting the new website, their market share actually dropped by 1/10 of 1%. During the same timeframe, The Knot increased its market share by 4% to 63.3%.

We believe ultimately The Knot stands to benefit from the new online marketing efforts by Conde Nast. As they have begun to promote the efficacy of Internet marketing for the bridal industry, they're speaking with the exact advertisers we have been trying to reach. And as these advertisers migrate their ad buys online from Conde Nast print buys, they will not be able to avoid the fact that we are the dominant brand on the Internet. Hundreds of thousands of wedding magazines distributed 18 times a year have not been able to change that fact.

Organizationally, we thrive on innovation and being ahead of the curve. Traditional media business must protect their legacy business. We on the other hand are constantly looking to expand and build on ours. This mindset allows us to be more nimble and creative. Case in point, we launched our broadband video initiative over three years ago. While everyone is now just beginning to provide video content online, our three-year head start has enabled us to build an audience, a library of content and distribution relationships that will be hard for anyone to match. You can find Knot TV segments on Comcast Video-On-Demand service, MSN TV and currently one of our segments is even featured as a Google pick on video.google.com.

A final word on the competition, online media and audiences are not easy to build. eBay, for example, has the most sellers because they have the most buyers and more buyers go to eBay because they attract more sellers. It's the classic virtuous cycle. The Knot transacts in wedding related information, ideas and service. We attract the most brides because they find more brides to share ideas with on The Knot. We also attract the most brides because they find their wedding vendors on The Knot. And as a result, we have the most local advertisers because we have the most brides looking for wedding vendor information.

Wedding vendors in fact are a great litmus test for the effectiveness of a wedding website. Local wedding vendors focus on results. If the ad does not perform, they will not continue to advertise.

So let's take a look at local wedding vendor listings in the three major online wedding resources -- The Knot, WeddingChannel, and brides.com. Now please note that Conde Nast publishes 17 local magazines and has been selling online local advertising for at least the past three years. WeddingChannel has recently actually shuddered their local magazine business but has also been selling local online advertising for as long as we have been. By randomly picking neutral area, Minnesota and selected the category photography, on brides.com, they have ten photographers listed. On WeddingChannel, they have 35, over two-thirds of which appears to come from their relationship with a photo processor. On The Knot, we have 96 wedding photographers who pay to be listed.

And finally the last question we get asked is what is happening with the lawsuit now that the 60-day stay has expired. The 60 days was a minimum for the stay. So until one of the parties asks the judge to put the case back on the court calendar, the stay remains in effect. At this time, we have no further comment on the litigation or the stay but we'll keep you apprised of developments as they occur.

And now I will turn the call over to our CFO, Richard Szefc, who will give you the financial picture. Rich.

Richard Szefc, Chief Financial Officer

Thank you, David, and good afternoon. For the first quarter of 2006, we reported net revenues of $14.8 million, which represented a 24% increase from first quarter revenues of $11.9 million a year earlier. We also reported net income for the first quarter of $1.7 million or $0.07 per basic and diluted share, which compares to net income of $409,000 or $0.02 per basic and diluted share in the first quarter last year.

Revenue from online advertising programs for national clients and local vendors increased by 35% to $7.8 million in the first quarter from $5.8 million in 2005. National and local advertising programs contributed approximately $860,000 and $1.2 million, respectively, to this increase with national growing by 47% and local by 30%. The growth of the recent quarter continues to be driven by increases in the average spending by our national clients on expanded programs and increases in the number of and average spending by the local vendors.

Our average local vendor base over the course of the first quarter was a little under 13,500 compared to an average of roughly 11,000 over the first quarter of 2005 or a year-over-year increase of about 20%. Also the growth in their average spending was about 12%, driven by the impact of price increases from April 2005 and the purchasing of additional premium programs.

The growth in the number of local vendors in the first quarter was slower than the increase achieved in the first quarter of 2005 and the pace of revenue growth was lower than the 40% achieved in the fourth quarter of 2005. We typically get a significant increase in new vendors in the first quarter with a corresponding boost in revenue in advance of scheduled price increases, which historically have occurred on April 1. In recent years, these price increases have averaged 10%. Last year, we added over 1,000 vendors in the four to six weeks leading up to the rate increase.

For 2006, we have reevaluated our local pricing strategy and are implementing more targeted and more significant general price increases in larger markets and/or certain vendor categories as well as for various premium services. These increases are currently planning to take effect in June. We're allowing our local sales reps additional time to prepare for the introduction of these more significant changes. The weighted average upcoming price increase across all local markets, services and vendor categories is expected to be in excess of 20%.

Merchandise revenues primarily represent the sale of wedding supplies that retail to our members, now about 95% of its revenue stream. Merchandise revenues also include a component for wholesale supply sales to specialty shops and department stores and in 2006 registry commissions.

Total merchandise revenues were 3.1 million in the first quarter of '06 as compared to 3.4 million in the prior year. The decrease was due to declines in wholesale supplies in registry revenue.

As we have mentioned, we have eliminated many small marginal accounts toward the end of 2004 and through the early months of 2005. In addition, in 2006, we are no longer maintaining inventory and selling rate registry-related products. Another small revenue stream which we were in the process of phasing out over the course of 2005. We're now generally receiving only commissions from the sale of products through our retail partnerships.

Our sales of supplies at retail in the recent quarter were flat in comparison with the prior year, although we did note some improvement in the sales trend in the last half of March. We're hopeful that the benefits from our new e-commerce platform and current merchandising strategies will have a positive impact on our retail sales as we move into the seasonally stronger second and third quarters.

Publishing and other revenue for the first quarter amounted to approximately $3.8 million, representing a 38% gain over the $2.8 million recorded in the comparable period last year. Local print revenue increased by over 30% as a result of an increase in advertising pages, including pages associated with the local section of our national magazine and a small increase in rates.

Revenue from the February 2006 national magazine increased by over 20%, driven by increased advertising pages sold to both designers and national advertisers, as well as increases in our effective page rates. In the first quarter of 2006, we also recorded $230,000 in author royalties upon the delivery and acceptance of our first Nest book, The Nest Newlywed Handbook.

With respect to margins, our gross profit percentage increased from 76% in the first quarter of 2005 to 79% in the most recent quarter. The improvement was due to a higher mix of online advertising revenue, which represented 53% of our total revenue for the first quarter of 2006. In addition, margins for our print publications strengthened, primarily as a result of the increased revenue from advertising pages and in part to the impact of the aforementioned author royalties, which carry little cost of revenue. Merchandise margins decreased slightly as a result of additional retail product promotions.

Our total operating expenses before depreciation and amortization for the recent quarter were a little over $9.7 million compared to $8.4 million in the comparable quarter last year, or an increase of $1.3 million. The principal components of this increase were additional investments in national and local sales staff of about $650,000, in part as additional support for sales efforts for our new initiatives, in particular The Nest. This increase also included additional amounts for the expanded scope of our combined national and local sales conference, which we hold in the first quarter of each year.

Our investment and editorial and information technology staff also increased by $175,000, and we incurred additional variable sales commissions of approximately $150,000 that were earned as a result of the higher online and print advertising revenue. We also incurred about $200,000 of expenses in the current year associated with the development of a formal disaster recovery plan for the Company.

Apart from these increases in the first quarter of '06, we also recorded stock-based compensation totaling $329,000, the majority of which related to the issuance of restricted common shares for which we would have recorded expense regardless of the new stock-based compensation rules. The impact of adopting Statement of Financial Accounting Standards No. 123(NYSE:R) was $128,000 of this amount, which is related to the cost of outstanding options and the cost of rights under our employee stock purchase plan.

We recorded no stock-based compensation in the first quarter of 2005. Since June of '05, we have awarded shares of restricted stock as our primary form of stock compensation. However, we may elect to resume granting stock options in the future. We currently believe that our stock-based compensation expense will range from $1.6 to $1.9 million for all of 2006.

One element of operating expense that has been significant for the last couple of years declined in the first quarter of 2006, namely professional fees we incurred in connection with our litigation with WeddingChannel. As we have noted previously, a stay was entered in connection with this litigation in January for a period of not less than 60 days upon the joint request of the parties. The stay currently remains in effect. In the first quarter of 2006, these legal fees were approximately $500,000 less than what we incurred last year.

As of March 31, 2006, cash, cash equivalents and short-term investments were approximately 31.2 million, representing an increase of about 1.9 million from December '05. This additional cash was primarily due to the income for the period prior to depreciation, amortization and non-cash charges, as well as by a further reduction in our investment in accounts receivable, net of deferred revenue of 1.1 million due to continuing strong collection results and further use of credit cards and the use of our subscription payment options by local vendors.

We also received proceeds from the exercise of stock options or sales of the stock through the Company's stock purchase plan of about $400,000 in the first quarter. These cash resources more than offset the impact of capital expenditures, which amounted to 1.1 million in the first corner. I would note that we are taking up our estimate of the range of capital expenditures, which we currently expect for 2006 from the estimate provided during our last earnings call by another $500,000. This relates to additional leasehold improvements to be made at our Omaha-based facility. We now expect capital expenditures in 2006 to range from $3 million to $3.5 million. As I noted on the last earnings call, we were also making incremental expenditures in 2006 related to the acquisition of additional computer hardware and software to establish secondary backup systems in connection with the development of a formal disaster recovery plan for the company. That's the financial review for the first quarter of 2006, and now we will open the call to questions.

Question-and-Answer Session

Operator

Operator Instructions. Your first question comes from Parham Ghorban with Roth Capital Partners.

Q - Parham Ghorban

Thank you. I thought we could first start with the price increases on TheKnot.com. You'd planned 10%; it looks like you're going to get more aggressive to 20%. Can you talk more about the structure of the price increases? Are you looking at a variable structure, are you looking at taking another 20% across the board? What's that going to look like?

A - Richard Szefc

It's basically going to be a variable structure. We're going to raise the pricing for our basic profile in our larger markets in general, so there will be a higher increase in those markets versus the smaller markets. We're also looking at premium pricing, heavier pricing in certain categories as well. Some of the categories where vendors in connection with a given wedding will be earning a great deal more money typically than let's say a band or some of the other types of vendors. So it will be variable; it will be affected by the type of market and it will be affected by the type of vendor and we will also be increasing more aggressively our pricing for the various premium services we offer like the feature vendor program, the badges and to some extent, e-mails.

Q - Parham Ghorban

And in terms of how that will kick-in, Rich, should we model that in a linear way like we were able to with the 10% increases over the quarters?

A - Richard Szefc

Yeah, to some extent for new accounts, obviously, that will kick-in immediately but for obviously the large base of accounts we have now, those will come into play as vendors come up for renewal on their programs from June of this year through May of next year, basically.

Q - Parham Ghorban

And then the price increases from what I can tell were somewhere around $150 on The Nest. Based on what I have looked at in the price increases, does that apply to The Nest also? Do you think you have some leverage there?

A - Richard Szefc

We're still obviously building The Nest base of advertisers so we're going to be cautious in terms of our pricing. Typically right now we're also offering discounts, obviously, to the initial vendors that are coming on. So right now the pricing structure that we have in place for The Nest will remain.

Q - Parham Ghorban

Okay, and then you mentioned that you probably have half the local markets that you could have and you have 67 right now. Are you saying that you could potentially have 130 local market sometime in the future?

A - David Liu

Yeah, I think when you look at the breakdown of the market, the increase in the number of markets will come from entering the new territories where we don't have coverage currently, and then also the subdivision of existing markets into more precise and smaller targeted territories.

Q - Parham Ghorban

Okay and then last question regarding The Nest. Let's just assume you have 13,000 local vendors on The Knot right now. And just in terms of cross-selling those local vendors into The Nest at 150, 200, whatever it is. What percentage of those local advertisers on The Knot do you think apply to The Nest as well?

A - David Liu

Very few. We're really talking about whole new categories here. There's a lot less synergies on the local level than we're getting let's say on the national.

Q - Parham Ghorban

Okay. And then when you look at that and assuming you're at somewhere around 500 right now on The Nest for local advertisers and you saw the way it ramped on The Knot and you get to 1000 -- I mean I don't know how quickly you get there -- but I guess the first question is, how quickly do you think you can get to 1000 and beyond the 1000? And then in terms of doing the math there at $150, $200 a month, are we looking at basically if we do that math $2 million a year just at 1000 that drops directly to the bottom line? Or is there some cost there that I'm not seeing?

A - David Liu

Well, I think we don't really drill down to one segment like that. I mean the challenge with The Nest is multifold. Obviously, we do have the sales effort on the local level but we also are really looking at to build the brand out so that we can continue to service the consumers. You do that then there's going to be more interaction with the local vendors and that becomes increased velocity in sort of consumers and advertisers. The launch of The Nest magazine is critical to our strategy with building the brand. The multiple book deal that was recently signed and the publishing of the first book in a series is very important. We are looking for the equivalent brand extensions and all the other forms of media. And I think as The Nest brand takes hold as The Knot brand did, some local advertisers will follow. It doesn't really happen in isolation. In the early days, selling with local advertisers into The Knot was almost impossible because they really didn't know who The Knot was.

A - Richard Szefc

Or they didn't even have an online website to buy a profile.

A - David Liu

Exactly. So part of it is kind of the adoption of the brand will begin to drive the sales of the local advertising.

Q - Parham Ghorban

Is it not correct to assume that if you could get to 500 by the first quarter, you are getting to 1000 by the end of the year, is that a far stretch. Is it that much more to double it there?

A - David Liu

You know, we're hopeful. I mean I don't necessarily think that it's impossible to get there. There is a bit of a balancing act. We are very careful not to distract our local sales force away from what is really driving a lot of the growth, which is obviously could be continued penetration of the wedding vendors. So, there's a balancing act that has to happen between the attention to The Nest, local, as well as The Knot.

A - Richard Szefc

All I can mention on that is I think at the time of the last earnings call, you actually mentioned, Parham, that you had actually counted the number of Nest vendors that we had, which was something around the 230 range. And if you go to our site currently, you'll find that number is closer to 500. So for what that is worth, you can see what's kind of transpired over the course of the last three months anyway.

Q - Parham Ghorban

Okay. Thank you.

Operator

Your next question comes from Richard Fetyko with MCF & Company.

Q - Richard Fetyko

Hi guys, a couple of questions. First on the sales and marketing expense side, we saw a sequential increase. If you could cover that, you probably hired some salespeople on The Nest side but if you could just kind of cover in more detail what drove that increase sequentially? Thanks.

A - Richard Szefc

I think sequentially, well certainly over the course of last year, we were up about $600,000 and that's probably similar to the kind of number we had on a sequential basis. The main component of that was – one of the components of that was the increase in our sales force, primarily driven by The Nest. It's not only just the local sales reps but also the national sales staff that we've hired to basically support The Nest as well. We added about eight additional sales reps on the local side and a regional sales director to oversee them. Actually, they're selling The Nest specifically. Our other reps in the last month or two have begun now to sell both The Knot and The Nest. So in a sense, we have more reps selling The Nest than we do The Knot. We've added staff as I’ve said on the national sales side. And then sequentially, one of the costs that increased as well was the cost of our national sales conference. We expanded our activities on the conference and actually added a small conference geared to our top tier of sales reps. That's always done in the first quarter; that probably constituted about 25% of the increase versus last year. And the total absolute dollars related to those sales conference would be a sequential increase from the fourth quarter since these conferences are only held in the first quarter. In addition, we did bolster our efforts on the merchandising side with the addition of our head of e-commerce merchandising and some additional support staff for her that took place in the last half of 2005. And so there's about $100,000 of that increase versus last year, not sequentially, that relates to e-commerce merchandising.

Q - Richard Fetyko

All right, thanks. And then if you look at The Knot in your local sales force that just covers that product, what type of sales quotas do they have or what have they generated in the past on the average per salesperson?

A - Richard Szefc

Well basically, if you look at our local online sales last year, the total sales revenue earned was about $17.5 million. And with the sales force at that time, with sales management call it in the – call it about 50. You are looking at $850,000 to $900,000 of revenue that's being driven by each one of those salespeople. So that gives you a little historical. We tend to be very aggressive in how we set our targets for our sales force, and we tend to be very aggressive in terms of how we set our targets and our incentives when we deal with new initiatives where we're going out full out now this year in connection with The Nest. So I would say the targets are going to be very aggressive for them.

Q - Richard Fetyko

Okay great. On the litigation expense side, what should we sort of model out, what should we anticipate?

A - Richard Szefc

Obviously, that's always going to be a function of what happens, if the stay continues, if something resolves, if the stay is lifted and the litigation resumes. Right now, most of the cost that we incurred in this particular quarter, about 180,000 was really driven by the early part -- the early half of January before the stay actually went into effect since we were in the preparation of going into a trial phase. So, we haven't incurred a great deal of expense over the course of the last couple of months because of the stay and obviously going forward, it depends on what happens with that stay in terms of the impact on our expense.

Q - Richard Fetyko

Okay that’s all thanks.

Operator

Your next question comes from Kenneth Marcus with First New York Investments.

Q - Kenneth Marcus

Hi guys, another great quarter as we have come to expect. I wanted to ask one question, I guess with regards to your opening comments, David. First of all, you certainly don't need to convince me there's a lot of runway ahead just with regard to the wedding space. Talking about growing with your list sort of as they grow beyond the wedding stage. If you could talk about just a little more qualitatively on The Nest, and you know not even just from a financial standpoint but how you're happy with how that has progressed in terms of its reach and the extent to which people stay with you and stay clicking on the site past one year post wedding point. And then also should -- if you touch upon the baby stage of life, is that something that will be within The Nest or are we talking theAmericanbaby.com and the baby centered JV's and, is that something we should expect to see more SG&A devoted to? Or if you could just touch upon all those matters, that would be great.

A - David Liu

Sure, you know The Nest is progressing nicely. I mean when we compare to the process and the timeline as we develop The Knot, The Nest has one key advantage, which is this constant flow from The Knot. And there are various measurements that we track not only from the usage of the site but then also the advertisers that are coming on board. But what probably is most important to us in the efforts of building brand is less the data and more about how the brand is actually being adopted and being consumed externally. So as I said, the book deals actually, surprisingly, is a surprising important milestone for the brand. We will be getting this brand out there into bookstores. There will be a separate product that will be promoting the brand and also benefiting from the continued exposure to the brand. The launching of this magazine is also very important because it also creates a persistent outreach to this consumer base on behalf of our advertisers and on behalf of the brand itself.

You know, the fact that we have a branded credit card with American Express and that we have retailers signing up to provide special offers for people who use that brand also continues to create and reinforce the value of The Nest as a brand that's going to help you and provide services for you during that critical year or year and a half of your newlywed and newly met married years. So those are the things we look at and are continuing to push for because that provides the foundation that enables us to build the business without spending dollars on marketing and advertising, which is ultimately our goal and our framework, our blueprint for building these media entities.

In terms of babies, part of it is watching our consumers in The Nest message boards. As I said in prior calls, the most popular message board on The Nest right now is Babies on the Brain. So we do have a growing number of women who are contemplating getting pregnant or have just become pregnant. The anxieties of a first-time parent are very high. The purchasing around the first time baby is usually higher than subsequent children. So we believe that there is a very lucrative niche that we're going after. We do not want to become the ultimate destination for anyone who's pregnant. We just want to focus on the first-time parent because we think there's real value that we can bring to the table there. And so in terms of how we're going to execute, we are looking at acquisitions. We are looking at building internally. And our goal is to be as opportunistic as possible but we hope to have something accomplished before the end of the year in the baby space.

Q - Kenneth Marcus

Okay, great. Thanks so much. Great job once again, guys.

Operator

Your next question comes from James Lee with Americas Growth Capital.

Q - James Lee

Good afternoon. David, maybe you can talk about, you can share some traffic information about TheNest.com in terms of number of unique visitors and that being first. And second question is, maybe you can draw some reference from the success you have from TheKnot.com. And at what level of traffic you start seeing that advertising revenue ramping up, and maybe we can use that as a reference point for The Nest as well.

A - David Liu

Sure, you know our advertising channels are less tied to the specific impressions and unique visitor counts than most online media because we have integrated packages and timeframes, because we have specialized tools and databases that our advertisers pay to populate. We generally move away from the kind of fixed banner impression inventory to be sold on a monthly or quarterly basis. Our traffic numbers right now with The Nest is something that we guard closely. There are obviously people out there who are very interested in knowing how we are doing and we want to maintain a certain competitive edge and not reveal on that data. I think when you look at the traffic from The Knot, our page views and our visitor counts or membership counts have not really increased much over the last three years but if you look at our revenue and our ability to monetize this existing base continues to grow. So we certainly believe that once you're able to cultivate a relationship with a consumer and carry it through into that first year of marriage, that advertisers will pay and will pay continuously to reach every new generation of newlyweds.

Q - James Lee

Great, maybe you guys can talk about e-commerce platform. That ramped up pretty well for quarter-to-quarter. I was just wondering what was the major driver, product driver? Maybe you can talk about that. Did anything change to the average order value?

A - David Liu

Not so much from the e-commerce platform. Basically they're quarter-to-quarter from the fourth quarter to first quarter of this year. You're looking at seasonality. If you look historically at the revenue trends for wedding supplies, our strongest quarters are the second and third quarter, and they typically have volumes very similar to each other. The first quarter is a little weaker than the second and the third. The fourth quarter is actually our worst quarter when it comes to revenue historically. So basically the sequential change is really a function of the seasonality more than anything else.

Q - James Lee

Okay great. Thanks.

Operator

Your next question comes from William Morrison with JMP Securities.

Q - William Morrison

Thanks, a few questions. One, David, I was wondering if you could talk a little bit about the American Express deal. You were promoting it aggressively during the quarter on the homepage. And I guess you have at least a couple of months of data points from how that is tracking in terms of generating leads for them, and I was wondering if you could talk about either the contribution in the quarter or what you would expect that contribution for the rest of the year. Then secondly, I'm not sure I think usually you give a registered user kind of cumulative registered user number, I was wondering if I may have missed on the call and I have a follow-up. Thanks.

A - David Liu

The specific data around the American Express relationship is proprietary so we're not allowed to actually disclose any new card issuance or the number or cumulative number of card members. And you know that is guided by the contract we have with American Express. Suffice to say that we're pleased with how it's going. The value that we are trying to drive through this card is not only the ability to provide a really financial vehicle for our consumers to spend more with our existing advertisers but to actually give our existing advertisers just another venue by which they can actually promote their products and services. If you go online now and you can actually look at the number of offers that are being tied to each card on a month-to-month basis, you'll see that list grow. When we launched the card back in December, we in fact were not allowed to talk about the relationship and therefore were not allowed to actually market or sell and get these offers at the time of the card launch. But since its launch, you'll see that we made some decent progress in the categories that obviously are going to be very interesting and attractive to our consumers.

A - Richard Szefc

In terms of the membership, they've been fairly consistent over the last couple of years. We typically add between a million and 1.05 million and 1.1 million in terms of new members, and that’s about what we had in '05. The trailing 12 months through March, we're again in that kind of between a million and 1.1 million category. So it's been fairly steady since about 2003 actually. And cumulatively, we have a little over 7 million in terms of total membership over the years.

Q - William Morrison

Great. And, just a clarification, I think I may have misheard you on the call, Rich. Could you go over again the breakdown of local and national growth rates in the print category? I think total category was up, publishing up 38%?

A - Richard Szefc

38% was the total category; local print was up a little over 30%. And now the revenue associated with the national magazine was a little over 20%. There was about an 8% factor that was driven by the author royalties we received on that first Nest book that we delivered.

Q - William Morrison

Okay, and one last question on the online side. Is it safe to assume -- I guess on a year-over-year basis, there was a little bit more deceleration in the growth rates in local and national online than I had anticipated. I guess some of that might be from having anticipated that push from the local side before the price increase in April. Is it safe to assume that maybe we should see a reacceleration at least on the local side ahead of the price increase now in June?

A - Richard Szefc

All I can say is that historically, we do tend to drive additional vendor counts in advance of a price increase. So it's possible we'll begin to see some impact of that. The more evident impact, if obviously, we're successful with the implementation of these price increases is that as we get out into the third and fourth quarters, the impact of an excess of 20% price increase versus 10% in prior years is obviously going to start to boost some revenues.

Q - William Morrison

Great thanks a lot.

Operator

Our next question comes from Michael Perna with AAD Capital.

Q - Michael Perna

Hi, good afternoon, I just had a question on your vendor count. It looks like on a net basis, you added about 200 vendors in the quarter. What's the churn in your vendors?

A - Richard Szefc

We had about 13 -- on the average, we're averaging about 13.5 over the course of the quarter. It was actually a little higher than that. We were over -- between 13.6 and 13.7 at the end of -- actually at the end of March. At the end of December, we were at about 13.3. So we've added about 300 or 400. Typically, you would see a much larger increase. As I said, last year, if you looked from December to March, our vendor counts increased by over 1,000. And a lot of that -- actually close to 2000. A lot of that increase came in the period of March, end of February, as I said in advance of that pricing increase.

Q - Michael Perna

Okay. So what is the churn in your vendors? What's the typical turnover?

A - Richard Szefc

We basically -- the total churn is less than 15% and a lot of that, a good portion of that or certainly a chunk of it, is due to the fact that there is a natural churn in the local vendor base, where bands go out of business, limo drivers go onto other things. So there's a factor of several percentage points that relate to just the natural churn in the base.

Q - Michael Perna

Okay. At what point do you feel comfortable continuing to add more photographers? You used the example of Minnesota, where you have 96. What’s an appropriate number of photographers in a market like that? Or what would your goal be in that market?

A - David Liu

Well if you look at the industry stats, there are over I think 7,000 professional photographers who do some form of wedding photography. And I can guarantee you that we don't have 7,000 wedding photographers on our site. I wouldn't know offhand how many actual wedding photographers there are in Minnesota but I would imagine that there are quite a few just in Minneapolis alone let alone the rest of the state. So we really don't view our penetration of wedding vendors in any particular category exceeding 30% of available vendors even in our best markets.

A - Richard Szefc

We've also noticed that as you increase the number of vendors in a particular category, you actually improve the traffic because it's a better experience for the user and for our brides. So that if we are looking at it from the standpoint of you have got vendor fatigue if you are going over 50 or 60. Based on the traffic patterns we think adding additional vendors increases the traffic and kind of maintains the kind of activity and leads that they are getting through the local area.

A - David Liu

We've actually been able to demonstrate that vendor leads have increased as we've been able to increase vendors in the category listings.

Q - Michael Perna

Okay great. One last question, please. You're supposed to be entering more local markets. Just discuss the timing and how many local markets you anticipate to add. What's the typical costs in entering a new market?

A - David Liu

When we talk about increasing the number of markets, some of these new markets that we would enter -- and by this time we're really reaching second tertiary markets; so we are in most of the primary and secondary ones. We're not in the Dakotas, we're not in Alaska. Our recent launches were Arkansas, Utah and Toronto or places like that. In terms of increasing the size of the markets, we will be watching carefully how the next wave of price increases are accepted and taken by the local vendor base. And then the question is, do we break out New York into the five boroughs? Do you break out L.A. into Santa Monica, Beverly Hills and Orange County and other more precise areas? And we believe that there is going to be an opportunity, by doing so that we will begin to multiply the number of featured vendor listings, add placements, other inventory that a lot of these local vendors want to be able to avail themselves to get higher promotional value out of their listings. And so it's going to be a blend of going after the smaller markets and then breaking up our large markets into smaller pieces.

A - Richard Szefc

And also in terms of the cost, obviously, we have added staff or sales staff in terms of going after a major new initiative like The Nest. However, when it comes to expanding into markets with The Knot or going forward in the future, breaking out additional markets or going into the tertiary markets, we have been able to historically do that by leveraging our existing sales force. So the incremental costs are minimal.

Q - Michael Perna

I'm sorry, one last question, the 15% churn, was that on a quarterly basis or on an annual?

A - Richard Szefc

I'm just talking broadly over the course of the year. (multiple speakers) annual schedule.

Operator

Your next question comes from Richard Fetyko with MCF & Company.

Q - Richard Fetyko

Just a follow-up guys, I may have missed this but just kind of a housekeeping question. Did you disclose the gross margins on each segment?

A - David Liu

No, I don't think we did, actually. So the gross margins on the online business was about 96%, which was probably down a point; the absolute dollars were up a little bit because of the investment we're making in The Knot TV and the production costs associated with that and we put that into cost of revenue. The margins on the merchandise side of the business were about 50% or just over 50%. That was compared to about 52% or 53%; there was a couple of percentage points less because of additional promotions we were doing on the retail side of the business. And on the publishing side of the business overall, the margins were about 67% compared to about 59% last year. A good portion of that was the improved margins on our local and our national print advertising because of the increase in the ad page count and the advertising page revenue. We obviously -- we didn't increase any of the costs of distribution in terms of number of copies we were printing. And the other impact in reducing that cost was the additional royalty revenue. We brought in $230,000 in the quarter, which had very little cost of revenue associated with it.

Q - Richard Fetyko

All right thanks. That’s it.

A - David Liu

Okay.

Operator

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

Amy Shey Jacobs, Director of Investor Relations

Yes. We would like to thank you again for joining us this afternoon. If you have missed any part of today's call, you can access the replay of the entire conference call on the Investor Relations section of the Company's website at www.theknot.com. A telephone replay is also available for the next two weeks at 1-800-642-1687, reference number 7774984. If you have any additional questions, please don't hesitate to contact us at IR at theknot.com. Thank you and goodbye.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Knot, Inc. Q1 2006 Earnings Conference Call Transcript (KNOT)
This Transcript
All Transcripts