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Executives

Alex Vlasto – VP Marketing & Communications

Peter Carrao – President, Chief Executive Officer

Michael Cutler – Chief Financial Officer

Rob Roe – General Manager and Senior VP

Analysts

Eric Martinuzzi – Craig-Hallum

[Collin Gillis – Brigantine Advisors]

Miva, Inc. (MIVA) Q1 2009 Earnings Call May 20, 2009 5:00 PM ET

Operator

Welcome to the Miva Inc.'s first quarter 2009 financial results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Alex Vlasto, Vice President of Marketing and Communications.

Alex Vlasto

Thank you and good afternoon. Welcome to Miva's first quarter 2009 financial results conference call. Joining me on the call today are President and Chief Executive Officer Peter Carrao, Chief Financial Officer Mike Cutler and General Manager and Senior Vice President Will Brown.

I'd like to remind everyone that today's comments include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially from those expressed in the forward-looking statements. These risks and uncertainties will be outlined at the end of this conference call and also detailed in Miva's filings with the Securities and Exchange Commission.

To begin, let's review how we measure our financial performance. In addition to the standard GAAP measurements, we utilize certain profitability based metrics to evaluate our period to period and year over year performance. They are; adjusted EBITDA, adjusted net income/loss and adjusted net income/loss per share.

We believe that adjusted EBITDA, adjusted net income/loss and adjusted net income/loss per share provide meaningful measures and comparison of the company's current and projected operating performance with its historical results due to the significant changes in non cash amortization that began ion 2004 primarily due to certain intangible assets resulting from mergers and acquisitions that have since been written off.

Miva defines adjusted EBITDA as EBITDA, earnings before interest, income taxes, depreciation and amortization plus non cash compensation expense and plus or minus certain identified revenues or expenses that are not expected to occur or be representative of future ongoing operation of the business.

Miva uses adjusted EBITDA as an internal measure of its business and believes it utilizes an important measure of performance by the investment community. Miva sets goals and awards bonuses in part based on performance relative to adjusted EBITDA.

Miva defines adjusted net income/loss as net income/loss plus amortization and non cash compensation expense plus or minus certain identified revenues or expenses that are not expected to recur or be representative of future ongoing operation of the business, in each case including the tax effect if any of the adjustment.

Miva defines adjusted net income/loss per share as the adjusted net income/loss as previously described divided by the average basic or fully diluted number of outstanding shares of Miva common stock over the reported period.

For a detailed review of our first quarter 2009 results, including the corresponding GAAP financial measures and a reconciliation of our non-GAAP financial measures to GAAP financial measures, please refer to the press release we issued today and to our Form 10-Q for Q1 2009 filed with the Securities and Exchange Commission.

To comply with the SEC's guidance on fair and open disclosure, we've made this conference call publicly available by audio webcast through the investor relations section of our website and a replay of the conference call will be available for 90 days after the call.

I'd now like to turn the call over to our President and CEO, Peter Carrao.

Peter Carrao

Good afternoon everyone and welcome to today's call. In Q1 '09, there were significant changes to our business following the asset sale of our Miva Media U.S. and E.U. operations to the advertising network Adknowledge. The transaction marked an important final stage of our strategy of transitioning out of our third party ad network business and into our consumer oriented Miva direct business.

Following the transaction we were reduced head count to approximately 50 people down from 129 on December 31, '08. This reduction included the transfer of approximately 65 of our Miva media staff and 10 of our corporate staff to Adknowledge. Our remaining team today works almost exclusively out of our New York City office with a small number remaining in Fort Myers, Florida.

Importantly the sale of Miva Media increased our available capital and enables us to now focus our resources on Miva Direct business and specifically to develop our ALOT product portfolio which we'll talk about in detail on today's call.

Let me turn now to our financial performance for our continuing operations, Miva Direct for the first quarter of '09. Q1 '09 revenue was $6.2 million compared to $8.5 million in Q4. The reduction in revenue from Q4 '08 to Q1 '09 was primarily a result of the both the decline in users of our toolbar home page and desktop products and a decline in our average revenue per user.

I'm going to spend some time talking about these two areas in detail. Firstly, the decline in the number of users of our toolbars, home pages and desktop products; as a reminder our primary channel for acquiring new users is direct response and display advertising. As we focused on managing our balance sheet in the lead up of the Miva Media sale, we reduced our advertising spend and this impacted our base, and in turn our revenues that we generated.

Advertising spend in Q1 2009 was $4.3 million, down from $5.2 million in Q4 of '08. This reduction in spend resulted in a decrease of live users of our toolbar products from $4.6 million on December 31 '08 to a low of $3.8 million on March 11, 2009. We actually ended Q1 '09 with $4.4 million live users.

Our drop in ad spend over the last 12 months have been significant and we have focused on managing our balance sheet. To put this into context, in Q1 '09 spend of $4.3 million was 43% less than the $7.6 million we spent in the same quarter in '08.

We believe that while necessary for the business, these drops in spend have had a significant impact on the number of users of our toolbar homepage and desktop products and in turn, the revenue we've been able to generate from them.

With our newly streamlined business and our strengthen capital position however, we believe we have now reached a bottom in the number of active users of our toolbar, homepage and desktop products.

We put in place a strategy for '09 that we expect will deliver growth in the user base through Q2 and Q3 followed by a slight decline in users in Q4 due to the usual effects of seasonality. Overall we expect to end 2009 with approximately five million toolbar users. We expect the increase in our user base is the way, and this way will result in an increased search and queries and this will in turn increase the revenue we generate.

Before I talk to you more about this strategy, I want to move on to discuss the second area we believe impacted revenue in Q1 which was an unexpected decline in RPMLU or revenue per thousand live users across our toolbar, homepage and desktop products.

Since we started ramping our advertising spend again following the sale of Miva Media, we've experienced a decline in RPMLU across both the ALOT and our legacy brands. RPMLU decreased by almost 10% from January 2009 to March 31, 2009 and while unexpected, we believe this decline is due to a number of factors.

Those factors that we know of now are specifically a reduction in revenue sharing rates in available service in certain of our advertising partners, reduction in the number of revenue generated events across our products, reduction in search volumes triggering lower revenue sharing rates for our advertising partners and tiered rate structures and general adverse economic conditions broadly affecting the value of search advertising.

While the broader economic conditions are largely outside of our control, our engineers and marketers are working diligently in testing a broad range of enhancements to design the increase the usage of our products and ensure the revenue delivered by our users. We believe that small changes to our products can have a positive affect on RPMLU and I'll update you on the progress of these initiatives over coming quarters.

In order to maintain margins in light of the recent unexpected decline in RPMLU, we've consequently lowered our CPA or the cost of acquiring targets for the remainder of 2009. So put simply, for generating less revenue from our users then we need to pay less to acquire those users to maintain our margin.

The impact however of reducing our CPA targets is that we need to be even more targeted with our ad buying and this limits the speed with which we're able to expand our base. As a result of this issue, our expectations for growth and active users of our toolbar, homepage and desktop product are more conservative today than they were in our prior expectations.

We are now anticipating ending '09 with around five million active toolbar users. Our projection is based on our new lower CPA targets. However, if RPMLU improved, then the CPA targets can be increased and we believe this could further speed our growth and head us back towards where we predicted last quarter.

Despite our more conservative expectations for growth, we believe that our advertising strategy for '09 should still enable us to deliver year over year growth in our toolbar, homepage and desktop user base. We anticipate that this growth coupled with our reduced cost base following the sales of Miva Media will see us adding cash to our balance sheet and reaching EBITDA profitability in Q4 2009 and into all of 2010.

Importantly, this growth strategy has been developed with a close focus on managing cash. We believe that even with the unexpected softness in RPMLU we have recently started experiencing, our advertising plan for '09 is achievable with our existing capital and we do not envision any need for further financing.

While we believe in our growth strategy, we do expect in the short term to continue feeling the effects of the cuts in advertising spend that we made in the lead up to the sale of the Miva Media. When advertising spend is ramped quickly as we did after the unprecedented cuts made prior to the sale of Miva Media, there is of course a lag between the spend is increased and when the revenue is realized from the new users who have been acquired by the increased spend. We expect this revenue lag will negatively impact margins in the second quarter of '09.

The short term impact on margin in Q2 '09 is expected and as we mentioned previously, with the drop in advertising spend made over the course of 2008 and early 2009 were unavoidable, as we managed our balance sheet in the lead up to the sale of the Media company.

Let me move on now to talk about some of the developments that we're working on across our ALOT product portfolio. First, enhancements to our search results, the majority of our revenue from ALOT comes from search traffic. In Q1 2009, our users conducted over 150 million searches across our toolbar, homepage and desktop products. We monetize this search traffic through third party agreements.

Earlier this year, we began a new two year agreement with Google which continues to provide algorrhythmic and page search listings to our users in response to typed in search queries. As I mentioned briefly on our last quarterly call, we now have supplemented this search agreement with a new agreement with another leading search engine.

This partner is now providing a new speed and image search results as well as associated pay per click ads. Additionally we have agreements in place with some of the largest e-commerce providers on the internet who are providing shopping related search results as well.

So now, when our users conduct searches though any of our ALOT products, they can access not only traditional web search listings but also latest news, image and shopping results for their specific items they're interested in. We believe that expanding our search results in this way not only provides our users with a richer experience, but should also help maximize the revenue we generate from the high volume of searched that our users conduct.

We believe that making these changes are particularly important given the softness in the advertising market that I mentioned earlier on the call.

Another initiative that we're optimistic about is the international expansion of our ALOT product portfolio. As I mentioned pre this call, our model today is primarily focused on the vertical expansion of our products where we make versions of our product that are tailored specifically for people that are interested for example in cooking or finance or sports or music.

This vertical expansion is continuing and we're also now actively exploring horizontal expansion of our products across multiple international markets. This international expansion is made possible in part by our in house engineering team who have developed proprietary tools that enable our products to be scaled with considerable ease.

Using these new tools, our marketing teams can now build and roll out a new toolbar and homepage product in a matter of minutes. We believe these new tools coupled with our knowledge of direct marketing will help pave the way for international expansion. Importantly, we believe that the international expansion can be spearheaded from our New York office with no need for local offices and little need for additional personnel.

Before handing the call over to Mike to discuss our financial performance, I want to take a moment to discuss two initiatives that I mentioned on previous calls. First is our rebranding. Following the sale of Miva Media, our intention is to rebrand our Miva Direct division to ALOT and to introduce a new corporate name for Miva, Inc.

This rules a Nasdaq ticker symbol change and our corporate name changing. We anticipate this change will occur in the next two months and I'll update you further on details when they are available.

The other thing I want to briefly mention is corporate costs. Over the course of 2008 we made substantial cuts in our corporate head count. Additionally, as part of the sale of Miva Media we transferred 10 of our corporate staff to Adknowledge. Following the transaction, we moved from a business with thousands of client relationships to a business with a small number of high value vendors.

We expect this will result in a savings on the legal front, accounting, auditing, and we remain focused on maximizing our cost efficiencies.

So in summary, we're pleased the sale of Miva Media is behind us and we can now focus our resources on the development of our ALOT product portfolio. While we anticipate margins being impacted in Q2 '09 as a result of our recent cuts in ad spend, we believe in our growth strategy we've developed for the ALOT brand.

I look forward to updating you of our progress in the coming months. With that said, let me turn the call over to Mike who will cover our financial results.

Michael Cutler

As Peter mentioned, we are pleased to announce the completion of the sale of our Miva Media U.S. and E.U. operations to Adknowledge Inc. and it was done on March 12, 2009. I wanted to start this afternoon by presenting more detail on the sale.

The asset purchase agreement between Miva and Adknowledge involved the sale of certain assets relating to our Miva Media division including the Miva name. The transaction was for cash consideration of approximately $11.6 million plus an assumption of certain balance sheet liabilities and subject to certain retained assets and liabilities including assets and liabilities of the Miva Media division in France and post closing adjustments estimated at approximately $0.7 million.

This resulted in a gain on sale of approximately $6.9 million during the quarter ended March 31, 2009. We incurred approximately $1.2 million of legal and financial advisory fees in connection with the Miva Media sale which are included in the net gain on sale.

In connection with the Miva Media sale, we agreed to provide to and receive from Adknowledge certain transition services. As of March 31, 2009 approximately $0.9 million is due to Adknowledge as a result of net cash collected on their behalf and expenses incurred by the company for transition services provided by Adknowledge since the date of sales, and the estimated post closing adjustments of $0.7 million offset by certain expenses paid on behalf of Adknowledge by the company.

This is included in accrued expenses in our condensed consolidated balance sheet filed today with the U.S. Securities and Exchange Commission. As a result of the Miva Media sale, and our decision during the quarter ended March 31, 2009 to cease operations of the Miva Media division in France, all operations of the Miva Media division including those in France are presented as discontinued operations.

As such, operating results are segregated and reported as discontinued operations in our condensed consolidated statements of operations for all period detailed in today's filings.

Now turning to our financial results for continuing operations in Q1 2009, Q1 2009 performance from continuing operations was below our expectations due primarily to the unexpected decline in RPMLU across our toolbar, homepage and desktop users that Peter detailed earlier.

Revenue for continuing operations in Q1 2009 was $6.2 million and that compares to $8.5 million in Q4 2008. EBITDA was a loss of $2.7 million in Q1 2009 compared to an EBITDA loss of $9.2 million in Q4 2008.

Q1 2009 EBITDA included $0.5 million non cash compensation expense whereas Q4 2008 EBITDA included $7.9 million non cash tangible and intangible asset impairment charges as well as $0.5 non cash compensation expense.

Adjusted EBITDA was a loss of $2.3 million in Q1 2009 compared to adjusted EBITDA loss of $0.9 million in Q4 2008. Q1 2009 adjusted EBITDA loss excluded $0.5 million non cash compensation expense while Q4 2008 adjusted EBITDA loss excluded $7.9 million non cash tangible and intangible asset impairment charges and $0.5 million non cash compensation expense.

Cash and cash equivalents increased from $6.7 million at the end of Q4 2008 to $11.6 million on March 31, 2009. The Q4 2008 figure includes a $4 million draw down from our credit line with Bridge Bank North America. This amount was paid back following the completion of the Miva Media sale on March 12, 2009.

Gross margins were 93% in Q1 2009 compared to Q4 2008 gross margins of 96%. Gross margins exclude advertising spend of $4.3 million in Q1 2009 and $5.2 million Q4 2008 which is included in consolidated operation expenses within the marketing sales and service line.

Total operating expenses were $8.5 million in Q1 2009 compared to $17.3 million Q4 2008. The operating expenses in Q1 2009 included $5.9 million of non cash compensation expense. The operating expenses in Q4 2008 included $7.9 million non cash tangible and intangible asset impairment charges and $0.5 million of non cash compensation expense.

As of March 31, 2009 the company had an active base of approximately 50 employees, down from 129 full time employees on December 31, 2008. The decrease in head count from December 2008 is due primarily to the sale of Miva Media. As part of the sale, we transferred approximately 65 of our Miva Media staff and 10 of our corporate staff to Adknowledge.

As Peter presented earlier, we expect our recent cuts in advertising spend to negatively impact margins across our continuing operations in Q2 2009. Despite these challenges, we expect our growth strategy for 2009 to result in us increasing live users of our toolbar products to approximately five million by the end of the year.

Additionally, we expect our growth plan will result in us adding cash to our balance sheet and reaching EBITDA profitability in the fourth quarter of 2009.

So now, I'll turn the call back to Peter for some concluding remarks.

Peter Carrao

In summary, our focus in the coming quarter and beyond is to continue to optimize our advertising spend and to focus on increasing the revenue we generate from our toolbar, homepage and desktop products. We're hopeful that as a result of these growth strategies we have in place, we'll be able to add to our cash balance sheet and deliver profitable EBITDA in Q4 '09 and into 2010.

With that, let me turn it over to Alex for Q&A. I believe you want to start with email questions.

Question-and-Answer Session

Alex Vlasto

Before we hand it over to the operator, we've had a couple of questions that have come in through email so we'll address these first.

First is Mike, can you give us your expectations for expense structure excluding ad spend going forward?

Michael Cutler

Our corporate expense structure right now is a little north of $1 million and as we become a smaller, simpler company, we are actively pursuing several initiatives to reduce our expenses. And by the fact that we're a smaller and simpler company, we expect that our audit fees, our legal fees will be reduced significantly.

We're also actively working to sublet one of the floors we have down in Fort Myers and we're making some good progress with that. Additionally we're working with our New York landlord to see if we can relocate to a smaller office and get the cost down for that.

As we work with our D&O insurance providers and other risk managers, by the fact that we're a smaller company, we expect to reduce those costs and Peter is working actively with our Board to retain them but at a much lower cost.

So this combined with any other opportunity that we have will be actively reducing our corporate cost structure as we move forward.

Peter Carrao

The only thing I'd add to that is as you said when you started, our corporate cost was $1 million a month, and in fact all of our costs not including ad spend are a little bit north of $1 million a month including OpEx, Corporate and everything else we've got.

Michael Cutler

Yes, that's all part of this structure. You're right.

Alex Vlasto

The next question is, what's the lowest point you expect cash to reach this year?

Michael Cutler

Per our original plan that we expressed before when we were expecting to get to eight million live users by year end, the low point that we were expecting to get to was about $4 million. As we've revamped the plan and as we manage towards the five million live users as the end of the year, by the fact that we're scaling down the amount of ad spend that we're going to expend, we also will hit the same point of about $4 million will be our low point.

And of course by the end of the year, with our recovery, with our improvement in revenue we expect that we'll start getting positive cash flow in the fourth quarter and starting to build up that cash balance again.

Alex Vlasto

The next question that came in, Peter, do you intend to buy back shares?

Peter Carrao

The truth is we've had discussions with our Board and with the recent changes over the last six weeks in revenue per user, and there are a lot of different metrics that we can talk about in Q&A on what's happened in the last six weeks, but I think that we now have to more than ever, so that's a surprise to us. And we haven't exactly figured out why we're getting less usage per toolbar, homepage and desktop apps.

So it's reasonably wise for us now to hang on to our cash and not look at share buyback unless and until we can get our RPMLU back where it was on a consistent basis and even then I'd like to know what it was that made it drop so severely in the last six weeks before we did that. So for now, I think we will not be entertaining a share repurchase until we get back to the point where we're generating cash again which as Mike said, will be late Q3 and early Q4 of this year.

Alex Vlasto

There are two questions that relate to our web property. The first part of it is what did Miva receive in exchange for stole.com and the second is, does Miva still own screensavers.com and are they considering websites?

Peter Carrao

I'll answer the first piece and let Rob Roe answer the second piece. What we got for Stole was $400,000. $200,000 of it was a cash payment upfront. $100,000 of it is in a note paid monthly for 12 months and another $100,000 is in the form of an earn out paid monthly for 12 months.

Rob Roe

We continue to operate screensavers.com and other web properties that we developed over the years. However, screensavers is not central to the ALOT strategy so it's become more of a lower priority for us as we move forward.

Peter Carrao

But we do still own it. Frankly, we would entertain selling it but have not sold it. We haven't had an offer to sell it.

Alex Vlasto

The next question is, will Media France be closed or sold within the current quarter?

Peter Carrao

Miva Media France for all intents and purposes is not operating today but is still open in that we have two employees that we're still negotiating with to their severances. Our office only has those two people in it. We've stopped servicing accounts in France through Adknowledge. We stopped servicing partner accounts in France through Adknowledge and as soon as we can officially have France shut down, we will. But more importantly when exactly that happens will depend on our negotiations with the two remaining employees in France that are ongoing and negotiations happening even today with them.

Alex Vlasto

The next question, how many toolbars and/or homepages can our current infrastructure support without significant additional CapEx required.

Rob Roe

We currently spend about $50,000 a month total on two co-location facilities to support all of the current user base. I'm happy to say that the capacity we have could definitely support about double our current user base. As you may recall, at one point we did have somewhat higher user numbers than we have today.

Alex Vlasto

The next question, can you provide some insights into ALOT's non pay per click revenue?

Rob Roe

The primary source of revenue for pay per click is the advertising that's generated from search but we do also have opportunities in display advertising, also in monetizing the widgets or buttons we have in our properties. So an example of that would be CPM advertising that we display on our homepage. We have a CPM banner and other kinds of placements.

We also have shop and search features that are integrated with the toolbar and home that generates commissions to several different shopping relationships. In terms of the buttons, and buttons can be displayed from the toolbar, also on the homepage and also on the desktop, we have buttons of various types. One example would be a partnership we have with Star Pulse for gossip and entertainment where we get compensated for sending any traffic to them.

We also have CPA deals where we get paid for commissions generated through Amazon.com or EBay and then we also have some display buttons. And lastly, we also do sell data regarding the use of our products to third parties.

Alex Vlasto

The final question is how many active end users do we currently have?

Peter Carrao

We should remind everyone that we talk very much about our user base or our active user base, and those numbers are really about the toolbar, the install client software. The homepage is a website so we have different metrics and our standard website metrics for those. For our homepage, our daily unique count is approximately 300,000 visitors per day and our monthly unique is over two million.

Alex Vlasto

That concludes the questions that have come in via email, so operator I'm going to pass it back to you to take questions that are coming into the phone.

Operator

(Operator Instructions) Your first question comes from Eric Martinuzzi – Craig-Hallum.

Eric Martinuzzi – Craig-Hallum

The balance sheet as of April 30, what's the cash look like?

Michael Cutler

It's close to $8 million.

Eric Martinuzzi – Craig-Hallum

So in those 30 days from March 31 to April 30, the $3.6 million that you spent, what did that go for?

Michael Cutler

We had some residual expenses related to the carryover organization. Of course we had to pay off Google and normal operating expenses.

Eric Martinuzzi – Craig-Hallum

How much of that was tied to advertising spend to drive new toolbar, homepage and desktop downloads?

Michael Cutler

$2 million.

Eric Martinuzzi – Craig-Hallum

What do you characterize as your monthly expense? If I just turn that into a quarterly number, is it safe to say that your quarterly expense run rate outside of the ad spend is $3 million?

Michael Cutler

Yes. A little bit north of that. Take into consideration this first quarter that we incurred some extraordinary expense as it related to Perrault, as it related to the wind down of the operation, legal fees, high audit fees and things like that so there's going to be some distortion that you'll see in the first quarter and then also in the second quarter as well.

Eric Martinuzzi – Craig-Hallum

How much distortion are we talking about in Q2, those anticipated expenses? The stuff I assume makes up the accrued expense line on your balance sheet.

Michael Cutler

Pretty much. When I look at that, I'm thinking it's going to be in the area of maybe $500,000 to $600,000 additional each month.

Eric Martinuzzi – Craig-Hallum

And when does that end?

Michael Cutler

I expect that to end at the end of those quarters.

Eric Martinuzzi – Craig-Hallum

So we'd be looking at somewhere between $1.5 million and $1.8 million of that further balance sheet erosion just on the obligations you have. So really the $8 million minus the $1.5 million to $1.8 million that explains how you got this $6 million. What I'm trying to back into here is, if I've got $3.2 million roughly of expenses and I just finished a quarter with $6 million of revs, I've still got roughly $2.8 million normalized that I could spend for toolbar downloads, efficient toolbar advertising and still be roughly breakeven. What is it, is my revenue assumption too high? Is $6 million not the trough for your business?

Michael Cutler

That's the trough. We believe that is it.

Eric Martinuzzi – Craig-Hallum

So really what you're saying is you're going to be spending, if $6 million is the trough and $3.2 million is the ongoing expense side, X'ing out the one timers in Q2, we're going to be spending in the neighborhood of $4 million to $5 million a quarter on acquiring new users.

Michael Cutler

I think that's about right.

Peter Carrao

The only thing that would change that, since RPMLU in the last six weeks dropped unexpectedly, almost 20%, if it came back and there's a lot of metrics on why it dropped, if it were to come back, then we would be able to afford a higher CPA and if we could afford a higher CPA we would actually put more money in the ad spend and be back on our ramp towards 7.5 million to 8 million toolbars by the end of the year instead of 5 million.

Eric Martinuzzi – Craig-Hallum

It's a little bit disconcerting for me. Now that you're sort of a one trick pony in that end user search oriented whether its toolbar, desktop or homepage, to hear you, it is basically a play on monetizing those users and to not have a good sense for why it's off. Is there, you've always talked about a good relationship with Google. What is it about that relationship that doesn't allow you insight into the fall off?

Rob Roe

I think what I'll do is list the things that we know and then we can have a sense of what we don't know. There are certain things that we do know. For instance, as we moved into the new year, some of the revenue sharing rates that we got were reduced.

Eric Martinuzzi – Craig-Hallum

When you say rev share rates were reduced, what they pass through to your for your toolbar traffic or your end user traffic, that was changed? I thought that was contractually obligated.

Rob Roe

Remember we entered into a new agreement at the beginning of the year.

Eric Martinuzzi – Craig-Hallum

So the new agreement was less beneficial.

Peter Carrao

So that's pretty minor though. He's telling you now what things we know about.

Rob Roe

I'm just listing the things that we know. We did have compensation rates go down starting at the beginning of the year and that's an issue we had, and this is fairly obvious is we had a significant reduction in advertising spend. So quarter over quarter, from Q4 of 2008 to Q1 of 2009, we had a spend reduction of about 13% or so. And just to be clear here, I'm using the numbers now of what we actually spent.

What is reported, includes some adjustments so this is the actually effective spend that occurred during the period is down 13% quarter over quarter and then if you go year over year, from Q1 of 2008 to Q1 2009, the spend reduction is much more dramatic. It's about 45%.

Now that reduces the overall volume, but it also does change the dynamics of the activity rates of the users and revenue per user rates because it changes the dynamics of the mix of the user base. So that's the second thing that we know, is that we had an unprecedented long period of very low advertising spend.

Eric Martinuzzi – Craig-Hallum

I'm struggling with that because I assume you're really servicing two advertisers. It's Google and its Yahoo and I guess they're the intermediaries, but in the end it's about the action of those two entities that is driving this 45% reduction. Is that correct?

Rob Roe

What I'm talking about is the advertising we spent, the advertising spend to acquire users was reduced by 45% on a year over year basis Q1 to Q1.

But that has a significant, overall it greatly reduces the volume and again, this is a very long period, a much longer period of shut down that we usually would have gone through before. So a very, very low level, so it was unprecedented. So that's the second thing that we know.

The third thing that we know is because volume went down, we have in some of our agreements tiered rate structures that are dependent on volume and we fell below thresholds which also changed our rates during the period. So that's the third thing that we know.

And then the other thing that we do know, and this kind of relates back to your question is that there is overall softness in the advertising market and we are definitely seeing the results of that and there are probably other sources you could go to to learn about what some of our partners have been experiencing over the quarter, and we've definitely seen those kinds of changes as well.

So we can't really point to any one thing and say, oh it was all on this. In terms of the relationship we have with Google, it does continue to be a very strong relationship. We consistently hear from them that we deliver them the highest quality traffic and we believe both sides are very pleased with the relationship. I think the issue right now is how do we increase our volume.

One thing we don't fully understand is why did user activity rates go down over the period. They have gone down. That's one of the main drivers of this that we don't fully understand. It could be related to things that we have done and we are doing everything we can to understand that better, but it could also be external to us.

Peter Carrao

When he talks about per user, what he's saying is for each toolbar that we've got, versus only six or seven weeks ago, the user is only about 80% or 81% as active as they were six and seven weeks ago.

Eric Martinuzzi – Craig-Hallum

That's not a foreseeable trend to juxtapose this with from a year ago?

Rob Roe

I wouldn't want to pin it on that. There's not doubt that the months after February are softer for us every year so we've always seen some decline in that period. But the scope of this is certainly greater than we anticipated and it's greater than we could explain by any one variable.

Eric Martinuzzi – Craig-Hallum

So the variables that you've laid out here though, if I could put them in my own words, you've got four points you've given me. You've got a new contract. You've got fewer toolbars out there. You've got a lower payout rates and then the fourth thing is the softness in the overall economy. Are those four accurate?

Peter Carrao

They are. The only one you missed which may be the biggest one which is our usage per toolbar which is about 20% less. So if they were clicking once a day, they're now clicking .8 times per day. That is the biggest thing we've got out there which wouldn't be related to our web share if you will with Yahoo and isn't related to it. It's simply less clicks going through.

While we're on that, because it is our issue right now. Can you help dimensionalize of those issues that we know and those issues that we don't understand, why don't you help diminsionalize how much as a percentage of our falloff of 20 which one of those various items. I don't want Eric to think the new contract with Google is a big issue because it just isn't.

Rob Roe

I would say there are two pieces in the structure. In terms of 20% fall off I would say that a significant chunk of that is the user activity rates. That's certainly the most significant factor. I would say the overall softness is the advertising market is relatively, it's there, but it's significantly less. I can't put a number of that.

The other thing is the rate structure, one is a permanent change related to contractual change. The other is one which is related to volume, and the volume piece is actually pretty significant, and if we increase volume across our threshold again, we will enjoy a reversal of that. That is calculated on a monthly basis, so basically we have an opportunity every month to bring ourselves back above.

Peter Carrao

With our new lower ad spend while revenue is off, with our newer lower ad spend, I think we still click into the higher volume threshold in late June of July.

Rob Roe

That's our expectation.

Operator

Your next question comes from [Collin Gillis – Brigantine Advisors]

[Collin Gillis – Brigantine Advisors]

Getting back onto the usage, is this literally less clicks or is it less search volume? I guess what I'm trying to drill at is there a trend towards less commercial searches happening?

Rob Roe

It's really about search activity. So it's the average amount of activity generated by the user base and that can be measured both as average activity per user but also the number of users who are conducting search activity. So there's always a percentage of users who don't actually use the search function.

[Collin Gillis – Brigantine Advisors]

Is there a pick up in the de-install or churn of the toolbars at all?

Rob Roe

It has gotten better and I think that's something that we've also been looking at. I'm happy to say that we've been making some changes in the product side that have had positive impact in that regard. But I also believe as we change our acquisition strategy and be more focused and more targeted that we will see benefits from that as well.

[Collin Gillis – Brigantine Advisors]

There's been a lot of query volume data has been decent but obviously the revenue is reflecting the drop. Can you just give us some color how the months played out in the quarter in terms of the monetization and when you started to see increases?

Rob Roe

January we started off slightly lower than December, but it really began to increase in February, and we saw a significant drop in the month of March. And I think the issue for us is just to try to show why there's a lack of clarity is that it was concurrent with when we cut off our advertising spend.

Peter Carrao

To be real specific, forget December because December is always pretty high for us. If you look back to October/November, February looked at standard. January was off 10% and March and current is off 20%.

[Collin Gillis – Brigantine Advisors]

I think that the data points I've been picking up is that April continued to see monetization continue to weaken. You're not seeing a bottom yet are you?

Peter Carrao

I think we are seeing a bottom to be honest with you. We've already seen it. It depends of which measurement. One of the measurements that we have been seeing a bottom on, we haven't seen further deterioration but I don't think we'll call it a bottom is this number of clicks per user has dropped precipitously and fast, like in days. That happened slightly in January and tremendously mid February through mid March.

Rob Roe

And really concurrent with when we cut our advertising spend. That's why I consider that part of the mix because certainly change ad spend in any dramatic way up or down, it does have an affect on all of these metrics.

Peter Carrao

The biggest effect is we don't leave them hanging on what an effect is. The biggest effect on a usage basis is that a new homepage toolbar or desktop ad user is slightly more active than a long term virulent homepage desktop or active user. So if you've just gotten your toolbar, you tend to type in more key work searches than you do if you've had it for awhile.

But that's not enough because of the turnover in new users. It's frankly not enough to explain this whole 20% drop which is why we're still looking for what the explanations are including by the way, we don't believe this is the case and we've tested everything known to man, but including we're questioning if the technology, there could be a bug someplace.

We've got so many releases that it's almost impossible because of how many releases we have over the years and how many of those releases are held inside of our current base. We don't have any release that's more than 20% of our base, so it's not likely that we're going to find, we haven't found a bug of some sort. It's not likely we're going to because it would have to be something that was prevalent across the entire base, and we just don't have that. There isn't anything like that out there.

[Collin Gillis – Brigantine Advisors]

What are the verticals telling you when you look out at the data across the different verticals?

Rob Roe

There are some variances, but it's broadly speaking. This is again one of the issues. It's not affecting our top three verticals only which comprise a larger share of the traffic and therefore we know what the issue is. We see it in almost all of the distribution and in varying degrees.

[Collin Gillis – Brigantine Advisors]

When you dropped the bounty on the CPA side to acquire customers how did that impact the effectiveness? Is it a smooth formula, as the lifetime value changes you can adjust on the amount you'll pay for a new customer?

Peter Carrao

It's almost perfectly smooth in that we've always used as an example only, a CPA of $1.00. We've never said specifically because we don't want to let go our secrets of what it is but it's a good example and very close to the actual, but $1.00 has always been our target. With the reduction of 20% of our RPMLU yield, we've now jiggered down CPA as an example to $0.80 and are getting almost exactly 20% less.

Now if you simply take that and flow it through, it's why we're calling for a little bit more than five million toolbars at the end of the year now versus where we were two and a half months ago with eight million toolbars because we could flow through that extra 20%, that's where you end up.

[Collin Gillis – Brigantine Advisors]

That's got to be comforting that the model and the equation works at least from that angle.

Peter Carrao

That part works. But the issue for us is, here we are this new tighter company and even with all of our reduced costs, we still have OpEx. So at some point, and we think that point is Q3 and Q4 which we've talked about, you've got to be sizable enough that the numbers of toolbars, homepage and desktops that we have can cover that OpEx and still make a profit, and so just pure scale frankly would have been better the eight million way.

But you're right. It is comforting that we can get to profitability and cash flow profitability even on lesser toolbars but amongst all of us, I'd rather be getting there with the eight million than the five million.

Operator

There are no further questions. I'd like to turn it back over to management for any additional or closing remarks.

Alex Vlasto

This conference call contains certain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. Words or expressions such as plan, will, intend, anticipate, believe or expect or variations of such words or similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. Key risks are described in reports filed with the U.S. Securities and Exchange Commission including Form 10-K in Q1 2009.

In addition, past performance cannot be relied upon as a guide to performance. That concludes our call today. Thank you for listening.

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Source: Miva, Inc. Q1 2009 Earnings Call Transcript
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