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Executives

Laura Cave - Corporate Communications Officer

David Liu - Chairman and CEO

John Mueller - CFO

Analysts

Jeetil Patel - Deutsche Bank

Richard Ingrassia - Roth Capital Partner

Jason Helfstein - Oppenheimer

William Morrison - ThinkEquity

Meggan Friedman - William Blair & Company

Malindi Davies - Susquehanna

James Halloran - Stanford Group

The Knot, Inc. (KNOT) Q4 2008 Earnings Call February 12, 2009 4:30 PM ET

Operator

Welcome everyone to The Knot’s fourth quarter and yearend 2008 conference call. 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

Thank you. Good afternoon and welcome to The Knot’s fourth quarter and yearend 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 WeddingChannel 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

Thank you, Laura and good afternoon. I want to thank all of you for joining us on today's call and I appreciate those of you who have followed the company and have continued to support us. Many of you who I have spoken to recently know, that I am personally very bullish about the long-term future of this business. However, our challenges in the near-term are very real and we have little visibility into the coming year.

The challenges that we face today are reminiscent of the crisis that we experienced in the dot-com bust in 2001. And while the macro-economic underpinning of this recession are deeper, more systemic and severe than the bursting of the internet bubble, I take comfort in the fact that today our company is in a far better situation to weather economic uncertainty.

As a founder, my partners and I spent years sweating over the viability of this business and today I'm proud that we generated strong cash flow, we have no debt and our business model is fundamentally sound.

The questions is no longer, will we survive but rather, how do we utilize our balance sheet and market position to grow market share and what can we do now to ready the company for growth when this recession ends. Those are the questions I like to try to answer on today's call.

I will start with a review of our 2008 results by business to give you an idea of where we succeeded and where we felt short. And this should give you a sense of how the economy has impacted our business thus far and also, and also some things we are looking to improve. After that I will take you through our plans for 2009, focusing on where I think we can build value in the near-term and where we are setting ourselves up for scalable growth in the years to come.

In our national online advertising business, we are pleased to report 15% growth in 2008, which really does speak to the value of our targeted audience to marketers, and perhaps especially in this environment. Pressure on our national ad revenue began building late in the third quarter of last year, and due to the mix of delayed programs and some cancellations, the fourth quarter was roughly flat to the fourth quarter of 2007. Now, we feel that that’s actually a positive sign, that we maintained revenue levels in the fourth quarter, especially since we’ve not been forced to discount our rates.

Our marketing team continues to be very active in responding to RFPs, and we think this revenue stream could potentially benefit from print dollars coming online and marketers becoming more inclined to pursue targeted audiences rather than paying for reach. However, longer negotiations, shorter commitments, have all shrunk our pipeline and decreased our visibility relative to past years. Now, recently we have enjoyed healthy growth from non-endemic categories such as automotive, finance and insurance, and as these industries have come under extraordinary economic pressure, we probably will not see as much growth from those non-endemic categories.

Local advertising finished the year up 8.5% over 2007, with year-over-year growth of 9% in the fourth quarter. In December, the local sales team brought in our single largest sales month in the history of the company, measured both by the number of new vendors as well as in dollars sold, closing over 900 new accounts.

Now, if you listen to our last call, you remember that in September we conducted two tests of our variable pricing strategy. Since then we have actually seen very encouraging responses to both our new budget and premium advertising products.

In the budget, as we redirected a team of eight of our sales reps to sell a $50 per month profile into secondary categories, where we were historically under penetrated. The response was so strong that we have effectively doubled the number of new accounts we are closing every month, whereas in the average month in the first half of 2008, we might have closed 400 to 500 new vendors. In September, we began closing on average of over 800 new vendors per month.

In a test of premium pricing, we launched a television commercial designed to target both brides and other local vendors in 10 markets across the country. The response for only three advertisers per market and the program is only available to existing advertisers. The price of the three month flight was $4800, which included prominent placement into commercial running on TV as well as on the local city guide homepage on theknot.com.

Making this program by far the highest impact and highest value local media we have ever sold. Launched in October when the macroeconomic conditions were deteriorating around us, the response we received is surprisingly strong. We sold 27 out of the total 30 spots with waiting lists in several markets.

In the fourth quarter, we were able to turn the tide of vendor count erosion despite the fact that our attrition rate has not declined as we had hoped. After cycling through the last of the renewals affected by the 30% our rate hike in the first half of 2008, we believe the economic headwinds have kept the attrition rate steady at just over 30% in the second half of the year.

Our active profile count as of December 31, 2008 was 16,974, which represents a 7% growth since the end of the third quarter and 11% since the anniversary of the rate hike in June 30, 2008. So, we have strong momentum and much to be optimistic about as we enter 2009, and we will need all the momentum we can muster as 2009 looks to be the worst advertising market the nation has seen in decades.

The encouraging local sales test result gives us confidence to believe that the upside to rolling out of variable pricing model across all our regions and categories is significant compared to any potential risk.

As many of you already know, we spent the past year developing a new contract entry system. So, let me update you a little bit on where we stand with that. Now with the transition of senior executive and third-party developer in 2008, the progress of our contract entry system this past year has been slower than I desired. But I am pleased however to report the first phase rollout, which enables full variable pricing is scheduled to launch next week and I will go into greater detail on the rollout plans later when I discuss the 2009 priority initiatives.

In 2008 our registry business saw declines in the fourth quarter and the year as our retail partners struggled. Our partners representing a large percentage of high end registry retailers are all experiencing declines due to lower consumer spending.

Our declines in this business were exacerbated by our failure to implement certain marketing programs that we had planned for last year. However, the business is now in the leadership of our Commerce SVP Kristin Savilia, who has many years of experience in the registry business both at Macy's and Linens 'n Things. She and her team are working to implement several strategies designed to grow this business.

And our wedding supply business saw consistent growth throughout 2008 closing the year up 6.4%. Our shops offer hard-to-find products, the majority of which can be personalized and enjoy built-in customer base from our network of wedding sites.

Our publishing business on the other hand is under significant pressure and we expect this to continue in 2009. We view print as an important service for audience and despite the contraction of print ad avenues The Knot’s national and local wedding magazines continue to be profitable.

We expect economic pressure to increase in 2009, while we feel that for many industries the worst is actually still yet to come. We anticipate that 2009 will bring us unique and rare opportunities for growth and I would like to spend the next few minutes taking you through our own strategy for managing through what we anticipate will be a prolonged period of difficulty for both retail and advertising industries, and what we believe will become opportunities for growth for our company after this economic down cycle. I will then turn the call over to John who will give you the details of our financial results.

So we are looking forward to leveraging the investments we made in 2008 to drive progress in several areas of our business. With a content management system in place, we completed conversion of all our major websites last year, so we now operate from the same publishing system. This new system saves our editors time, allowing them to publish at a much more rapid rate. It also requires far less assistance from our engineers and front-end developers, freeing up valuable tech resources.

In fact, late December we launched the first ten of what we expect will be over 100 niche websites that will begin to roll out over the course of the year. These niche destinations provide front door access to our vast databases of real weddings, local vendor profiles alongside local expert blogs and message boards in a format that a bride can easily find through search engines.

TheKnot.com is a deep site with a lot of content that does not get picked up in natural search results. Now, a bride searching on Google for let’s say, ‘Miami wedding vendors’ can find our niche site, Miami.weddings.com on the first page. In fact, none of the national brands, including The Knot and WeddingChannel appear on page one of this search.

By actively growing the long tail of online wedding planning, we are expanding the reach and enhancing the relevance of our brands, content and advertisers through this network of niche online destinations. As our local vendors benefit from placement on TheKnot.com, WeddingChannel.com and a growing number of these sites, it would be increasingly more difficult for them to replace the value and exposure our network provides.

Our goal to steadily expand our network of sites will continue to increase the value of our media, which we believe will also increase switching costs and help us lower the attrition rate in this business.

Elements of our new contract entry system will become operational over the course of the first half of the year. In the first quarter, we will be conducting variable pricing tests in two markets using new functionality that has just been completed.

The first will be a test of variable pricing schedule spread over a geographic territory. In this test, we will be varying prices by zip coding regions to provide more targeted exposure for businesses that cater to specific demographic groups.

The second test will be conducted with price adjusted by category. When both tests are complete after a three month trial run, we'll take those insights and expect to systematically rollout a pricing schedule that is varied by both geography and category across all of our markets.

Midyear, we plan to launch the self service functionality, which will allow our local vendors the convenience of uploading their own photos and making edits to their profiles. This new self service area for our local vendors will continue to grow with new features and functionality throughout the end of the year. And we are cautiously optimistic about the kind of the growth we will be able to generate with the new programs.

However, the economy could continue to worsen, which could accelerate our attrition rate and hamper our ability to close new business. Therefore, we are closely tracking the data points that would indicate that the economic environment is adversely impacting our vendor base. As it stands, we think our ability to tap into additional demand through precision pricing will attract the thousands of local vendors who currently are sitting on the sidelines.

Now, our registry business has hit a difficult patch that requires us to develop new strategies to grow this business. In the short-term, the registry team is focused on distributing our affiliate link for a wedding guest, from the wedding web page, directly to a couple's registry on our partner's retailer's site. When the guest clicks through and makes a purchase; we get a commission on the sale.

The strategy actually leverages the natural marketing that couples do by posting registry information for their guests on their personal wedding web pages. Macy's is by far WeddingChannel's largest registry partner, representing approximately 80% of our registry commission revenue in 2008. Therefore, at the present time our registry fortunes are largely tied to the health of Macy's online registry business, which was down a little bit this past year.

In addition to the registry commissions we received from them, they are an important partner to the company in many other ways. In 2008, they spent over $900,000 in advertising with us and have committed to even more in 2009. They are a significant shareholder, owning 11% of our outstanding shares and their Chief Marketing Officer attends the Board meeting as an observer. However, the market conditions ten years ago when Macy's invested in WeddingChannel and when WeddingChannel built the Macy’s online registry have changed significantly.

With all high end retailers suffering in this economic downturn, we simply cannot rely on any one retailer for our growth and therefore we need to aggressively expand and diversify our registry offerings to achieve the returns that we believe are responsible for our registry aggregation business.

In 2009 we plan to leverage our patented registry technology to build the universal registry platform. Our dominant market share rights combined with our patent and protect ability to aggregate data from multiple registries positions us to offer a unique and powerful gifting services to retailers, brides and their guests. The average bride registries with three retailers today, generating an estimated $6 billion in retail registry gift sales each year. We believe there is still significant upside in this business.

We recently had a couple of M&A announcements with our acquisitions of Breastfeeding.com and WedSnap. Breastfeeding.com is a content and community site with strong organic traffic, which fits neatly into our network of baby sites targeting first time parents. With WedSnap we welcome in to our family of brands, the fastest growing and largest wedding community on Facebook. We plan to continue being aggressive in the M&A space as more and more opportunities present themselves.

2009 will be a challenging year, no doubt. We are focused on execution and sales and technology, opportunistic acquisitions and careful management of expenses. We are prepared to meet the challenges that may be presented to us should our business be impacted by further deterioration of the macroeconomic landscape. And as always, we are focused on the strategies that will build long-term shareholder value and despite the risks and challenges that we face in the marketplace, our new senior executives have hit the ground running applying their experience, energy and focus to improving the business.

Staff morale is very high, and there’s a great sense of anticipation as we roll out the new products and services that we have been building over the past year. And I want to thank our shareholders and marketing partners, who have supported us over the years.

But most importantly, I actually want to recognize the tremendous work, dedication and unwavering focus of our employees. The past 18 months have been a challenging period of operational transformation and executive transition. Add to that, the backdrop of the greatest economic crisis in decades, and anyone would have legitimate reasons for concern. It’s because of the talent, hard work and creative energy of my staff; I have never in my 12 year tenure here at the Knot been more optimistic about our company’s prospects for growth.

I would now turn the call over to Chief Financial Officer, John Mueller, who will take you through our financial results.

John Mueller

Thanks, David. I would like to go over the results reported today in our press release and add a bit of detail and afterwards we will we spend some time taking your questions.

First, a quick summary of the fourth quarter and the full year 2008. For the fourth quarter of 2008, we reported net revenues of $24.4 million, which represented a 1% increase over the same period in 2007. Our national and local online advertising businesses continued to show strength in the fourth quarter with a combined growth of 5.4% over the prior year's quarter.

Our wedding supplies business grew by 7.1% over the prior year's quarter, and together the strength in our online and e-commerce businesses offset declines in the registry and publishing and other segments, which declined by 10.3% and 7.2% respectively over the prior year's quarter.

Net loss for the fourth quarter of 2008 was $981,000 or $0.03 per basic and diluted share, as compared to net income of $2.6 million or $0.08 per basic and diluted share in the fourth quarter of 2007.

I want to point out that the net loss includes the following two items. First, a $4 million pretax impairment charge, which primarily relates to our WeddingChannel trade name. And second, approximately $300,000 of incremental amortization related to the intangible asset for our Macy's relationship. The $4 million impairment charge for long life assets, impacted earnings per share by $0.07 on a fully diluted basis for both the quarter and the full year ended December 31, 2008.

I will get into more detail on both of these charges in a moment. But now, for the year ended December 31, '08, total revenues grew to $103.9 million from $98.7 million in 2007 for a gain of about 5.3%, which is within our outlook of 5% to 7% growth over 2007.

Net income for the year was $4.1 million or $0.13 per basic and diluted share as compared to $11.9 million or $0.38 per basic and $0.36 per diluted share in 2007. The decline in net income is attributable to both the incremental operating expenses related to the investment we have been making in our technology and infrastructure, as well as the $0.07 per share impact of the non-cash impairment charges I mentioned earlier.

Total operating expenses increased by approximately $17.6 million, which is due to our strategic initiatives mentioned earlier, the $4 million of impairment charges and the incremental $300,000 Macy's relationship amortization.

Now, to get into a little more detail on the revenue growth. In the fourth quarter, revenue from national online advertising amounted to $5.5 million, which was flat with the fourth quarter of 2007. Local online advertising continued to show resilience, amounting to $8.6 million in the fourth quarter of '08, which represents an increase of 9.1% over the same period in 2007.

For the year, national on-line revenue was $21.2 million, a 14.9% increase over 2007 revenue of $18.4 million. This growth is composed of gains in both endemic and non-endemic categories, which demonstrates our increasing share of vital marketing budgets, as well as growth in advertising from non-bio categories. Local on-line advertising increased to $33.2 million for the year from $30.6 million in '07 or 8.5% growth.

Revenue growth in this segment was primarily due to the continued impact of our price increases in summer of '07 as well as progress on the two new local programs that we implemented in the third quarter that David just spoke about.

Merchandise revenue from the sale of wedding supplies grew 7.1% to $3.1 million in the fourth quarter of '08 compared to $2.9 million last year. The Knot shop enjoyed improved growth in the quarter due to our recent redesign of the shop home page. We recently applied a similar redesign to the WeddingChannel shop and we believe this will help to improve contribution from that on-line store as well. For the year, merchandise revenue grew 6.4% to $20.5 million compared to $19.3 million in 2007.

During the fourth quarter registry services revenues declined by $214,000 or 10.3% compared to the fourth quarter ended December 31 '07. For the year registry services revenue was $10.4 million, down from $10.9 million in 2007 or 4.4%.

As David explained, this decline is primarily attributable to economic headwinds that have caused lower sales at high end registry retailers. And as David mentioned earlier, we think there is a significant opportunity in registry. While sales have slowed with our retailers, we still think this is a business that has a lot of potential and we are now working to implement new partnership partnerships and programs to drive both registry creation by our brides and wedding guest traffic through our patented search and purchase tool.

Publishing and other revenue for the fourth quarter of ‘08 amounted to approximately $5.5 million compared to $5.9 million for the same period in 2007, a 7.2% decline. For the year, publishing and other revenue was $18.6 million, as compared to $19.5 million in '07, a 4.6% decline.

However, I think it is notable that local print revenue was flat for the year ended December 31, '08 compared to '07, 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; and I am sure it comes as no surprise to anyone on this call that with the 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 exacerbated recently by the macroeconomic environment, so we are expecting to see a more significant impact on our print business in 2009.

Now with respect to margins, our overall gross profit percentage remained at approximately 81% for the fourth quarter and the years ended December 31, '08 and '07.

Turning to operating expenses for the recent quarter, we have totaled $23.5 million. Excluding impairment charges and the accelerated amortization that I mentioned earlier, total operating expenses were approximately inline with the $19.6 million outlook that I had given on our Q3 call.

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.

Now, I would like to provide background on the accounting analysis behind our decision to record an impairment in the WeddingChannel trade name and also our decision to accelerate the amortization of the Macy's relationship intangible asset.

First the impairment. Prior to the impairment, we had intangible assets on our balance sheet, net of amortization of approximately $28 million at the end of the third quarter. And this was primarily related to our acquisition of the WeddingChannel in 2006. And this intangible asset consists of our patented registry tool, contractual and advertising relationships and the WeddingChannel trade name. The trade name was valued at $15.2 million of that total $28 million.

On an annual basis, we perform a computation of the value of the trade name based upon long-term revenue projections and assumptions based on the licensing value of comparable trade names. We use this analysis to determine whether the value recorded on the balance sheet for the trade name is fair.

The current economic environment has been particularly difficult for both the advertising and retail industries and the outlook continues to be soft. The decline in the projected growth rates of these industries require that we reassess and reduce the long-term growth rates we had been using in our valuation model for the WeddingChannel trade name.

Using the reduced growth rates in our valuation model indicated impairment for the trade name and trademark intangibles that we acquired in the WeddingChannel acquisition. This was the primary component of the $4 million non-cash charge in the fourth quarter of '08. We also made the decision to accelerate the amortization of the intangible asset related to the Macy's relationship.

The intangible asset value of the Macy's relationship, net of accumulated amortization was approximately $3.6 million at the end of the third quarter. We had assumed that we would amortize this value over a life of 10 years, which is predicated on an ongoing registry relationship with Macy's that extended beyond the current contract term that expires in January 2011.

Declines in the retail industry combined with our recent discussions with Macy's has led us to the conclusion that we should accelerate the amortization as intangible, such that the intangible asset balance of $3.6 million will be zero at the conclusion of the existing contract in January of 2011.

I would like to emphasize though that the value of our intangible asset related to our patented registry tool has not changed and as David described we are continuing to pursue new initiatives to leverage this patented technology across the significant registry retail market opportunity.

Our effective tax rate for 2008 is approximately 26%, reflecting an increased impact of our tax exempt interest income from our auction rate security. Cash flow from operations for the year was approximately $20 million and amounted to approximately $2 million for the fourth quarter of 2008.

Capital expenditures for the year ended 2008 were $4.8 million, which was below our previous outlook of approximately $6 million. CapEx in 2009 returns to our historical levels of approximately $2 to $3 million as we complete the major portion of the technology upgrades we commenced in '07.

We ended the year with $61.5 million of cash and $13 million in short-term investments on the balance sheet and no debt. Cash and short-term investments other than auction rate securities increased $2.5 million from September 30 and $24 million from the year end '07.

To give you a sense of the relative quality, credit quality of the short-term investments in the cash, about $7.1 million of our cash is in operating accounts, $10 million in US treasury bills, $10 million in money market accounts which are generally invested in US treasury securities and $44.4 million is invested in high quality commercial paper of some of the largest and well recognized consumer brand companies in the world.

We also hold approximately $52 million of auction rate securities. The auction rate securities we own are debt securities, collateralized by student loans, a substantial majority of which loans are guaranteed by the federal government.

In November of '08 we accepted the settlement offered by UBS relating to their marketing and distribution of option rate securities. Based on that settlement, the company received a zero cost right to require UBS to purchase our option rate securities at par plus accrued interest starting in June of 2010 or roughly 16 months from now. We believe the UBS settlement agreement can be viewed as fixing the value of the auction rate securities at par value, which we expect will provide us a path to liquidity for the securities beginning on June 30th of 2010.

Now the accounting for the value of our ability to put our securities at par to UBS essentially offsets the loss in the value of these securities of approximately $3.6 million that we had recognized as of December 31, 2008. However, we will continue to evaluate the auction rate securities and our related right to put these securities at par using our discounted cash flow model each quarter.

In the meantime, I want to emphasize that we are currently receiving interest payments on these securities; none of the interest payments are in default; and alongside UBS we will continue to seek buyers for these securities. In fact, we had 1 million of these securities redeemed last week and have $3 million that will be maturing in November of this year, which are now reflected as a short-term asset on our balance sheet - actually included in short-term investments.

So to conclude, we are confident that our widely recognized brands and solid 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 and we have focused our employees on cost savings, particularly those who travel, to aggressively manage their individual travel and entertainment costs.

With the infrastructure investment coming to an end, we believe 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 fourth quarter and year ended December 31, '08. And will now open the call to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer Session. (Operator Instructions)

Our first question comes from the line of Jeetil Patel with Deutsche Bank. You have the floor.

Jeetil Patel - Deutsche Bank

Thanks, Two questions. First of all, on the national ad side, it seems like you're seeing a bit of consolidation in terms of larger media networks maybe doing a little bit better. You’ve obviously done pretty well in national ads despite the environment. But I guess, David, just curious what your thoughts are about, maybe outsourcing the national ad business to a larger traditional major online media company to sell this segment of the market on behalf of you.

And then second question on the publishing and print side of the business. I guess, are there ways of perhaps reducing costs in light of the obvious revenue pressure that seems to be more of a multi-year process that is likely to continue, a way to reduce costs or move to more variable margin model or you can at least preserve some percentage margin as the business declines?

David Liu

Sure. On the national advertising front we really are getting a much higher premium than I think most people are able to achieve. So, it would not make sense for us to outsource that to other groups. I think what you are finding is that a lot of the rep firms that are out the ad networks had really been pushing scale, I mean building the business on scale and our belief is, at a time of economic uncertainty and certainly the downturn that the economy is experiencing is forcing marketers to forego issues of reach and then get results and focus on precision of the audience and the qualification of the audience.

So, I think our $30 to $40 CPMs have held. We continue to respond to RFPs. We have not had to discount. And it would be really hard to ask one of these other firms, who are normally used to selling single digit CPMs or premium to them in high teens to try to double down and sell our media. So, I think we top.

On the publishing side, we already have probably one of the most efficient business models for our publishing system. We don't do a lot of marketing to drive subscriptions. We are not playing around with rate bases to increase our CPMs.

Our national magazine goes out and it's a $10 cover price. We are not afraid of charging enough with the value the product is. I think it’s a segment of our business that's going to be under pressure for quite sometime, but we don't believe magazines will go away and in fact I think that when the dust settles and things should get back to a more normalized rate, we will be one of the few left standing and we will be able to reap the benefits of that.

In the short term, we actually are looking at ways to trim certain costs. For example The Nest Magazine is in a tough category, you’ve seen the closure of Domino, you’ve seen the closure of domino and other [shelter] categories. So, we cut back on distribution. We don't need to put out the full 400,000 units per issue; we’ve cut the pack on that and saved some money. And so, we are doing the incremental things to keep the brands fresh and relevant. But I think we start off with a bit of an advantage in the market.

Operator

Okay. Our next question comes from the line of Richard Ingrassia with Roth Capital Partner. You have the floor.

Richard Ingrassia - Roth Capital Partner

Thanks. Good afternoon, everybody.

David Liu

Hi Rich.

John Mueller

Hi Rich.

Richard Ingrassia - Roth Capital Partner

David, in the press release you mentioned seeking strategic opportunities. Can you expand a little bit on that? Does that relate to acquisitions, participation in ad networks, networks or finding additional search partners? And if it's the latter, would you expect margins to be affected in the future?

David Liu

Well, it's not the latter. I think, I was referring to the sheer volume of over the [transom], unsolicited opportunities have just increased tremendously. We are looking at a number of opportunities that we think could potentially really help us grow the business organically. I think there is lot of businesses that are under severe pressure, don't have the scale to build out their own operations to capture some of the values of the audiences they’ve built.

So we are going to be very prudent about how we approach it. We want to make sure that we’re not certainly wasting the money that we have on our balance sheet. But we actually think the next six to nine months are going to produce some once in a lifetime opportunities, and we just want to be ready for those.

Richard Ingrassia - Roth Capital Partner

That answer may be related to my second question, but I will ask it anyway. Does that explain the apparent disconnect, I guess between your better traffic, continued membership growth, acquisition of peripheral sites versus what are more modest -- I mean, growth, sure, but more modest growth rates in online ad revenues and I suppose client attrition also plays a role there?

David Liu

You know, it's a funny thing. It's a double edged sword. I always try to explain to people that, when our membership is not growing our unique visitors are not growing, you can use those data points as a proxy for revenue growth and we've always been able to outpace it on that end.

And the same goes with the inverse. Our business has never really been one of literally selling impressions. The local vendors are buying listings and then it's a monthly fee. The national -- the deals are so integrated between emails and online and tools that we really decoupled the online traffic metrics with our revenue growth. So, I don't think there is a connection for my last answer to what you're seeing as being the disparity between the growth and revenues.

I think if anything, we are pleased with how we grew our national advertising this past year. We think it's going to be tougher to grow going forward. And the local is just -- we are very cautiously optimistic about what we can do in local, I mean, December was literally a record sales month. And I'm not sure there are a lot of media companies that can say that December 2008 was a record sales months.

Richard Ingrassia - Roth Capital Partner

That's for sure. Last question and related to the local point. Can you talk about the segmented wedding community sites that are being rolled out here now, and how that impacts pricing and the breadth of the client basis -- by pricing, I mean, do you expect or are you getting the kind of premiums that one might expect from that kind of, from a more targeted user base?

David Liu

I think, right now, we are looking at this as sort of extending the reach of our network for our partners. In the last four or five years we've been pretty aggressive about raising rates and particularly in this macroeconomic climate. I think we’re going to give at the end a bit of a break and not really force down additional cost then for this expanded exposure. What we are able to do though is to become much more relevant and what the benefit we’ll be able to get from this is, launching the SCO, people using searches as a form of navigation and are finding very, very targeted bits of information in sites to help them.

The fact that we have the ability to rapidly deploy these niche destinations provides exposure and promotion for the local vendors through this network, it really makes it very difficult for the local vendors -- to say I’m going to cancel my contract and buy the keywords to get the same effect that I was getting from your network. And that's really the underlying premise of where the long tail will continue to erode portal traffic and any large content traffic site.

And we have enough content, we actually have the ability now with content management systems, we have invested in the last year to deploy and catalyze the growth with long tail and transit that into marketing benefit for advertisers. Now, to say that I'm never going to charge the benefit, is probably a false statement, but I think when we get passed this downturn and we start looking at the real value and you can really measure the traffic that we are getting from both the niche and from the mother ship. I think we will be able to come up with creative solutions for how we can monetize that better.

Richard Ingrassia - Roth Capital Partner

Okay, thank you.

Operator

Okay. Our next question comes from the line of Jennifer Dance with Oppenheimer. You have the floor.

Jason Helfstein - Oppenheimer

Yeah, thanks. It's actually Jason. How are you guys doing?

David Liu

Hi, Jason.

Jason Helfstein - Oppenheimer

Two questions. First, is there seasonality with respect to local contract renewals? And then if the attrition rate increases in 2009 just due to weaker economy, do you think this can be offset by new accounts to have new account growth?

And then secondly do you think we can straight-line product and content expenses as well as G&A for 2009, or would you expect some uptick in those expense lines? Thanks.

David Liu

Sure, I will do the sale side, I mean, I think we are tracking in a very close and frequent basis key data points around local credit card rejects or defaults, time to payments, the delinquency rates. We’re basically making sure that anything that is going to be an early indicator of the negative or down impact from the economy, on the local vendor base, who want to be able to respond to quickly

Thus far we have not seen anything. And in fact we have just been very pleasantly surprised by the success that our local sales force had. The productivity gains and the sales gains, we have gotten have not come from additional headcount that we’ve hired; this is really coming from just pretty spectacular effort on our local sales force's ability to close this new account.

Now, if attrition rate increases, we are going to sell as hard as we can to offset the decline in the vendor count. The hedge I have against this, though, is that part of the rationale for being able to launch this variable pricing strategy and having a much more complex rate card is that, when your pricing is more precise and accurate, my assumption is that you will see a decline in the attrition rate.

When you talk to vendors and the majority of them who canceled will say they’ve canceled for one or two reasons; it is too expensive or not enough leads. So, those are really one and the same answer, and if my cost was $0.50 a month then they would not be complaining about not getting enough leads and they surely would not complain about the cost. So, I think we will be able to address a lot of these issues as we are deploying the new contract, registry system and the variable pricing strategy.

As far as the operating costs, go ahead John?

John Mueller

Well, I guess I can only -- we're not giving out any outlooks for '09, Jason. But, I think what we said on our third quarter call was to use sort of the fourth quarter as a run rate and that probably the only thing you have to go on at this point, and I can't really reiterate it or confirm it or deny it at this point.

Jason Helfstein - Oppenheimer

Ok. Maybe I can ask you this. While there are some always incremental initiatives, more creative things you think you might want to do with the website, et cetera, you guys have laid in a pretty substantial cost base. Do you think you can reallocate expenses to give you the resources you need to creatively work the site and new projects?

John Mueller

I think the view, I think, David -- I'll turn it over to David. But, I think the view is that, the synergies and efficiencies I guess that we have gotten just from the content management system and all of the horsepower that we had working on that now can be redeployed to other revenue generating opportunities that we are looking at.

Clearly, we are in tough -- this year is sort of a tough year to really say whether or not we're being successful with everything we've invested in, because you have too many extraneous external environmental factors here that are muddying the waters to really evaluate things, but I think it does position us for growth.

David Liu

And I also say one of the things that we've always been careful about is managing the expenses and the bottom line. And I think, if anything has given us a little bit of pause about giving annual guidance or any kind of outlook is the fact that, going forward we have to be very sensitive to the thing that could potentially change the outlook of any one of our revenue streams and respond pretty quickly to it.

So, we don't think it's prudent to provide any kind of framework by which we want to operate, because we want to maintain maximum flexibility with how we want to manage the business going forward.

Jason Helfstein - Oppenheimer

Okay, thank you.

Operator

Okay, our next question comes from the line of William Morrison with ThinkEquity. You have the floor.

William Morrison - ThinkEquity

Thank you, couple of questions. I think you mentioned that you are having some difficulty with the non-endemic category. Just wondering if you could quantify what the non-endemic revenue was for the year and the quarter and then secondly and I may have missed this, but I was wondering if you could break out for the quarter the local print and national print. And I heard the national numbers, but if you could break that out and maybe also talk about the -- I believe there is usually around a million for the WeddingChannel show in this quarter.

John Mueller

We usually don't break out the endemic versus non-endemic. I will tell you that through the year '08 they grew at about the same rate. Actually I think endemic actually ended up growing a little bit faster than non-endemic and although I think non-endemic was in the lead up through the third quarter and then I think it fell behind trying to get across the finish line here in the fourth quarter as you might imagine; which is non-endemic being three of the industries that have been hit the hardest, finance, insurance and automotive. But nevertheless the relative percentage of the endemic versus non-endemic have held relatively constant for most of '08.

The second question is related to local print versus national print. Obviously, in the fourth quarter we had a lot of local books coming out. So I think substantially all of the revenue in print was basically from our local books in the fourth quarter that all came out. The national book, not national magazine came out in August and comes out again in February.

William Morrison - ThinkEquity

Great and one last follow-up. The roughly 300,000, I can't remember the exact number of tolerated intangible amortization for the Macy's relationship. That’s one-time right, this quarter; it should go back down or is that going to…

John Mueller

That’s a straight line and we’re basically taking what was normally amortized over 10 years, and now we’re going to amortize it over two. So, we’re going to see an increase now over every quarter from now until January of 2011.

William Morrison - ThinkEquity

Okay, great. Thank you.

Operator

Okay. Our next question comes from the line of Meggan Friedman with William Blair & Company. You have the floor.

Meggan Friedman - William Blair & Company

Thanks. Good afternoon.

David Liu

Hi, Meggan.

John Mueller

Hey Meggan.

Meggan Friedman - William Blair & Company

A couple of quick follow-up questions. First of all on the Macy's question, was that backed out, when you gave us what the incremental EPS impact would have been in the quarter without the one-time charges?

John Mueller

I said it was $0.07 that was just the impairment. The $4 million impairment was a $0.07 impact on EPS. Its 300,000, and it’s not a big, wouldn't be a big impact on the quarter.

Meggan Friedman - William Blair & Company

Right, okay, just wanted to make sure that was just the impairment. And then to follow-up on the local vendor attrition, have you been polling local vendors as they are leaving to find out why, is it cost, is it bankruptcy? And are you modifying your cancellation or pricing policies at all to work with them?

David Liu

Yes, we are actually pretty actively and continuously surveying the lapsed vendors. And as I said, the top two as one would imagine are too expensive and not enough leads, and as I said those are really one and the same in some respects.

We are looking at adjusting certain policies, certain minimums or requirements that we put in place. And a lot of this is really we looking at operationally, as we transition to a self-service model that enables people to come in and actually buy their own profiles and ideally begin to scale the business up over 100,000 vendors. A lot of the things that we are currently doing today won't scale and some of the policies that we have today just would break the bank, if we try to implement across a much larger set of vendors.

So, I think, we will be able to roll out certain things as a result of the test we are doing with these two markets and the variable pricing bits on geography and category. The rest of the market is going forward. It is a bit of a work in progress. Because I think we're going to have some interesting learning as we roll out these tests next week and over the next two or three months. But these things are all going to be designed to make it much easier for these vendors to work with us.

Meggan Friedman - William Blair & Company

And question on the merchandising segment. It may be hard to tell because all of the work that you've done there in terms of relaunching The Knot WeddingChannel, but are you seeing any differences in purchase behavior in the merchandising segment?

John Mueller

Not really, there is a shift in the products that are top sellers. If you look back historically, one-time used cameras were always like the leading product category, over the recent years that shifted. We actually, I think, saw a lot more cocktail napkins and there is a bit of product mix shift happening. People are just not interested in buying film cameras any more. So, but other than that, we've actually been improving the size of the shopping cards, the dollars value per customer pretty steadily.

Meggan Friedman - William Blair & Company

Great. What is the timing of the WeddingChannel shop re-launch?

John Mueller

Already it has re-launched.

Meggan Friedman - William Blair & Company

Right. Is it re-launched this quarter? I thought it was re-launched last quarter?

John Mueller

I believe in the last quarter. I think the fourth quarter.

Meggan Friedman - William Blair & Company

In Q4 in that?

John Mueller

Yeah, I mean, these are relatively slower months for that particular business line.

Meggan Friedman - William Blair & Company

Then finally, talk a little bit more about the WedSnap acquisition. What plans are there if the plan is to integrate it fully in to The Knot, WeddingChannel type branding or just run it separately. Kind of how do you see the level of integration and where do you see it most impacting the segments that are defined today for The Knot?

David Liu

The Weddingbook application that was created by WedSnap is a very unique platform, where we won't be subsuming it into the Knot brand or WeddingChannel brand. We will be keeping it as, sort of a separate ecosystem and probably because there is a bit of a nuance of difference.

If you are on the community of a Knot WeddingChannel, where it's very robust and there is a lot of activity. A significant amount of activity is generated by anonymous users and so there is a certain type of communications that happens in that environment. That tells us who you are and that is very transparent and as a result, it’s a very different level of quality discourse and transparency of who you are actually dealing with.

And so, interestingly said, the platform will enable us to provide almost a premium experience for some of our advertisers as we build us a book from our local and national point of view and it is important that we keep it very separate because the community and the folks who are actually on Weddingbook are a very different group of people.

And so we’re really excited about this because this is one of the fastest growing applications on Facebook. It is a very robust community. This is not like a little [path], this is actually an entirely rich experience where you are fully integrated into people’s social network and so being a company that was really built on the community and social kind of dimensions of our audience, we are really excited to get Weddingbook into the fold and it's part of the family brand.

Meggan Friedman - William Blair & Company

Okay?

Laura Cave

Thank you.

Operator

Our next question comes from the line of Malindi Davies with Susquehanna. You have the floor.

Malindi Davies - Susquehanna

Hi, good afternoon. I was wondering if you could be a little more specific on what's changed in your relationship with Macy's from the time of the WeddingChannel merger to make you amortize two years versus ten. And also I was hoping you could further expand on the changes in your revised registry strategy and when we may expect to see new partners or other announcements there. Thanks.

David Liu

Sure. I would say that we have been in a slow evolutionary process with Macy's. If you look at day one post acquisition of WeddingChannel, you really had two entities who sort of found each other as partners. Macy's inherited their equity interest through the acquisition of the May Department Stores; we inherited the operational relationship through the acquisition of WeddingChannel.

And if you look at what drives both our businesses, it actually is not something we have been really focused on in the last two years; we have been focused on supporting the legacy relationships. What drives our businesses is actually the creation of new registries for Macy's, and they are spending advertising across their network of sites. And so, incrementally each year Macy's has invested more with us from an advertising point of view. To us, that is really where we want to grow the relationship.

And while the operation side enables us to capture a commission on all registry transactions through Macy’s and Bloomingdale’s, the reality is, we also have a good deal of operational expense and engineering resources that are dedicated to supporting that business. And we are just not a – we have not built to be an ASP service, and so one of the things that we have been talking about is, how do we transition the relationship into one where it's much more marking based, it’s about registry creation, and they would be part of our search and purchase space and online registry center, but that the dependency on us for the technology and the platforms is alleviated in transition.

So I think, it's very premature to say, oh, I know for sure this is how the relationship is going to transition and it will become. But it is something that we've been actively discussing. And I think it is something that we're looking certainly to transition with the least amount of disruption for both parties.

Operator

Okay. Our last question comes from the line of Clay Moran with Stanford Group. You have the floor.

James Halloran - Stanford Group

Thank you. This is James for Clay. I still have a question, you guys have a lot of stuff you seem to be working on between the variable pricing, the contract system, the redesign publishing or redesign registry, et cetera. What are the priorities in the next three to six months, and can those priorities change if other things self serve with the advertising agencies, worse than maybe we expect? Thanks.

David Liu

Sure. I would say there are three priorities for the next six months. It's local, local and local. So everything we are really focused on is making sure that what we roll out for the local vendors the platform that enables them to self serve. The pricing strategies are all really tied together. They may be expressed as different projects but it all comes together around the local business.

Our registry is obviously very important to us. But the reality is, we are not going to be able to get anything launched in time for the '09 registry season anyway. So that is basically going to kick off in about 60 to 90 days. Starts around in early April and runs through October. And so, while we were doing a lot of marketing efforts and a lot of corporate development and business development deals to drive traffic and to grow that business, the technology investment we were making over the course of the year, you won't see until 2010.

So, I think the next six months and the immediate emphasis for us is really the full integration of the new local platform and everything that ties to our local vendors. And I think that ultimately, our best bet to check against a continuing deteriorating ad market because we actually believe we do represent a customer base that will continue to spend even as the economy deteriorates and these vendors need to get the business. And so if we can make that a simpler and more efficient and more effective process we think we will be able to at least ride this out.

James Halloran - Stanford Group

Did the niche launches sort of coincide with that?

David Liu

Yeah. The niche launches -- that train left the station. Basically the first ten was proof of concept. Later in the month we will be launching a number of [memorials] and keep an eye out with the press release. I think people will be little bit surprised with the number that we will be launching at that point. But it really speaks to the value of the platform investment we made. And since it's been a long time coming, we have been working on this for a long time, all of last year. But the benefit that we are going to be able to drive out of this is pretty breathtaking and we are pretty excited about the early results just on the traffic coming to these niche destinations and the type of keywords that are driving traffic and number of pages that they are triggering in terms of each session, have all been extraordinary.

James Halloran - Stanford Group

Great, thank you.

Operator

Okay. At this time there are no further questions in the queue. Are there any further remarks?

Laura Cave

Yes. We like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the Investor Relation section of our website. If you missed any part 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 the knot.com.. A telephone replay is available for the next two weeks at 1-800-642-1687, reference number 83869061. If you have any additional questions please don't hesitate to contact us at ir@TheKnot.com.

Operator

Thank you. This concludes today’s conference call. You may now disconnect your lines.

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Source: The Knot, Inc. Q4 2008 Earnings Call Transcript
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