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The Knot, Inc. (KNOT)

Q2 2006 Earnings Conference Call

July 27, 2006 2:30 pm ET

Executives

Amy Shey Jacobs - IR

David Liu - President, CEO

Richard Szefc - CFO

Analysts

Richard Fetyko – Merriman, Curhan, Ford & Company

Barton Crockett – J.P. Morgan

Trina Choudhury – JMP Securities

Gary [Schnerel] – J.P. Morgan

Presentation

Operator

My name is Lisa and I will be your conference facilitator. At this time, I would like to welcome everyone to The Knot’s second quarter 2006 conference call. (Operator Instructions) At this time, I would like to turn the call over to Ms. Amy Shey Jacobs.

Amy Shey Jacobs

Good afternoon and welcome to The Knot’s second quarter conference call and webcast.

During the course of this conference call, comments that we make regarding The Knot that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements.

Any such forward-looking statements are made pursuant to the safe-harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words like may, should, expect, plan, intend and other similar terms.

You are cautioned that these forward-looking statements speak only as of today’s date. Our internal projections and beliefs upon which we base our expectations may change, but we will not necessarily inform you if they do. The Knot’s policy is to provide expectations only once per quarter and not to update that information until next quarter.

The important factors that could cause actual results to differ materially from any forward-looking statements mentioned today include, but are not limited to, our unproven business model and limited operating history, our history of losses, significant fluctuations to which our quarterly revenues and operating results are subject to, the risks and related costs associated with ongoing litigation, the seasonality of the wedding industry and other factors described in documents that we have filed with the Securities and Exchange Commission.

Additionally, if you have not received a copy of today’s press release, the release is now posted on the Investor Relations section of the company’s web site at www.theknot.com.

We have allotted up to one hour for today’s conference call, including the question-and-answer session that follows. Please take note that the company is operating under the SEC Regulation FD and encourages you to take full advantage of the Q&A session.

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

David Liu

Thank you, Amy. As our earnings release indicates, The Knot continued to deliver strong financial results in the second quarter of 2006. Our net income grew to $3.9 million, a threefold increase from last year’s second quarter and a $2.2 million increase from this year’s first quarter.

Second quarter revenues were up 30% to $17.7 million, with all three of our revenue streams contributing to the gain.

Continuing the trend of our first quarter, national advertising produced the highest gain of 61% over the prior year and local advertising was up 28% over the prior year.

Most encouraging was the 20% increase in our merchandise revenue, principally wedding supplies, which is showing steady improvement from prior quarters.

Our new commerce platform and improved merchandising strategies are beginning to pay off, and Rich will cover all the financial results in his presentation shortly.

A lot has happened since our last earnings call and I’d like to take the opportunity now to walk everyone through the major announcements of the past few months and to address some of the common questions we’ve been getting from our stockholders.

On June 5, we announced that we had entered into a merger agreement with Wedding Channel and with the announcement of the merger, we also announced our intention to finance the cash portion of the purchase price through previously existing cash resources and a follow on offering of our common stock pursuant to a registration statement which obligated us to observe the SEC's pre filing quiet period.

We are excited by the potential of the merger between our two companies. Over the years, because The Knot and Wedding Channel have been the most visible wedding related companies on the Internet, investors considered Wedding Channel to be our main competitor and with the announcement of the merger, many saw this deal as a consolidation of the wedding industry.

However, it is important to understand the differences between our business and Wedding Channel’s business, to recognize the complimentary nature of the two organizations.

The largest revenue source for us is advertising and sponsorships. Advertising, both national and local, online and in our magazine, represents over 70% of our business.

Wedding Channel’s single largest source of revenue comes from commissions of registry gift purchases they handle for their retail partners. To put this into perspective, registry-related revenue for us in 2005 represented less than 1% of our total revenue.

There is little overlap between our two businesses from either a revenue or an audience standpoint. In the first four months of the year according to the Nielsen ratings, the average percentage of traffic that overlapped was less than 20%.

So while the merger’s not a consolidation of the industry, it does represent an aggregation of the online bridal audience.

We do not plan to combine the web sites. Instead, we plan to run both brands at separate destinations and to continue to build out the key advantages for both brands.

But we do plan our online reach of our audiences. If you compare the online traffic of the top revenue-generating magazine brands servicing the wedding media industry, the differences are startling. According to Hitwise, in June the [non end] Wedding Channel online sites attracted four times the audience of Martha Stewart’s web site, and that is compared to her whole site, not just the wedding portion of her site.

We were 13 times larger in terms of the traffic than brides.com, which is the web site for Brides, Modern Bride and Elegant Bride magazines from Conde Nash, and we were 17 times larger than instyle.com. Again, this is compared to InStyle magazine’s entire site, not just the wedding portion. In fact, The Knot by itself has an online audience that is larger than brides.com, marthastewart.com and instyle.com combined. When you add Wedding Channel’s traffic into the mix, no one comes even close.

If we complete the merger of our two businesses, we will increase our already substantial market share. We also believe that the additional traffic we drive through our brides and their wedding web pages provides us with an opportunity to increase the registry revenue at Wedding Channel, and that the added inventory for local and national advertisers on Wedding Channel will provide additional opportunity to leverage our core assets of our local and national sales force.

Shortly after the merger announcement, we received considerable interest from new and existing stockholders. Based on this demand and an increase in our stock price which occurred following the announcement of the merger, we decided to conduct a private placement of shares of our common stock with a purpose of raising capital for general corporate purposes. Our goal is to have $75 to $100 million in cash on our balance sheet following the closing of the follow-on offering and the closing of the merger after giving effect to the cash we pay out in the merger.

In order to help us achieve that goal, on July 10 we completed a $50.2 million common stock private placement at $18.25 per share with three existing, long-term stockholders.

When we filed our registration statement for our proposed public offering with the SEC last week, the size of the offering may have surprised some investors. The 3.5 million share portion of the deal, that are the shares being issued and sold by The Knot, will be used to finance the cash portion of the merger, together with previously existing cash resources and as I explained, we are using the proceeds of the private placement to build up our cash balance for general corporate purposes. The rest of the shares being offered in the follow-on offering are being sold by selling stockholders, so called secondary shares, and will not result in any dilution to existing stockholders.

Just over 4 million of the secondary shares are currently held by Comcast. Comcast had indirectly acquired the stake in the company through its historical ownership of QEC and their ownership stake in The Knot is a financial, rather than a strategic, asset for Comcast. A few months ago, Comcast had contacted us, expressing its interest in selling its position and it was decided then that rather than have a 4 million share overhang in the market, it would be more beneficial for Comcast, the company and our stockholders to include the shares as part of the follow on financing.

We look forward to continuing our operational relationship with Comcast in our video on demand and broadband content distribution efforts. We believe the additional flow to be created by the sale of shares by Comcast may be beneficial to our stockholders.

With the S3 filed, we are waiting to hear whether or not our registration statement will be reviewed by the Securities and Exchange Commission staff. If our filing is not reviewed, we expect to complete the public offering during August. If our filing is reviewed, we expect the closing of the offering to be in September or October, depending on the nature of the SEC's staff review.

Other news in the quarter includes the continued extension of The Nest brand offline. We signed a distribution deal with McClatchey-Tribune, formerly known as Knight Ridder Tribune, to syndicate our editorial content from The Nest to newspapers across the country. The Nest magazine will be arriving in the homes of newlyweds in August and the first book of four, entitled “The Nest Newlywed Handbook: An Owner’s Manual to Modern Married Life,” will be published early this coming fall.

Finally, earlier in the week we announced the acquisition of lilaguide, the nation’s leading independent publisher of information guides for parents. Lilaguides are pocket-sized guidebooks that have been created from the submissions of thousands of parents who offer ratings and reviews of baby and parent-friendly businesses, products and destinations for 23 cities. With over 32,000 local businesses and destinations reviewed and rated by parents, lilaguide offers the most comprehensive local resource guide to new parents.

To date, lilaguide has only used the Internet as a way to harvest business and product reviews from parents. It has not built out a publishing platform. The combination of the rich user-generated content from lilaguide and The Knot’s local and advertising sales infrastructure, our technology platform for editorial and community applications, and the continuous flow of first-time parents from The Nest makes for a compelling extension of our life-stage media strategy.

As you can tell, this is a very exciting and challenging time for us. We will be happy to answer any questions you may have about any and all of these developments during the question-and-answer period.

Now I’ll turn the call over to our CFO, Richard Szefc, who’ll give you the financial picture. Rich?

Richard Szefc

Thank you, David, and good afternoon.

For the second quarter of 2006 we reported net revenues of $17.7 million, which represented a 31% increase from second quarter revenues of $13.6 million a year earlier.

Net income for the second quarter rose to $3.9 million, or $0.17 per basic and $0.15 per diluted share, from net income of $1.3 million, or $0.06 per basic and $0.05 per diluted share in the second quarter last year.

For the first six months of 2006, total revenues grew to $32.5 million from $25.5 million a year ago for a gain of 27%.

Net income for the first six months of this year was $5.6 million, or $0.24 per basic and $0.22 per diluted share compared to $1.7 million, or $0.08 per basic and $0.07 per diluted share for the first six months of 05.

Revenues from online advertising program for national clients and local vendors increased by 38% to $8.4 million in the recent quarter as compared to $6.1 million in the second quarter of 2005.

National and local advertising programs contributed approximately $1.1 million and $1.2 million, respectively, to this increase, with national growing by 61% and local by 28%.

The growth for the recent quarter continues to be driven by increases in the average spending by our national clients on expanded programs and increases in the number of, and advertising spending by, local vendors. Our local vendor base increased over 14,200 by the end of the recent quarter as compared to 12,400 as of June 05, or by roughly 15%.

Average spending by these local vendors was up approximately 13% due to price increases and higher usage of premium programs. The growth in local online vendors and the pace of the related revenue growth approximated the trend, which we saw in the first quarter of 2006.

As we indicated during our last call in the middle of June, we instituted price increases for all local online advertisers. While these price increases have averaged 10% in recent years, last month we implemented more aggressive pricing, particularly in larger markets and in certain vendor categories which generally drive a greater amount of revenue from an individual wedding.

Even with these higher prices The Knot remains less expensive than many local marketing alternatives. The weighted average price increase across all local markets, services and categories was in excess of 20%.

For the six months ended June 30, our overall online advertising revenue grew 4.3 million, or 37% when compared to the corresponding period in the prior year.

Again, the national and local components of this revenue stream for the six months grew 54% and 29%, respectively.

As David mentioned earlier, we saw a rebound in merchandise revenue for the second quarter, a continuation of the trend we saw developing at the end of March. This revenue stream primarily represents the sale of wedding supplies that retail to our members. Merchandise revenues also include a component for [wholesale] supply sales, specialty shops and department stores and in 2006, registry commissions, which together account for about 5% of this overall revenue line.

Total merchandise revenues were $4.9 million in the second quarter of 06 as compared to $4.1 million in the prior year. The sale of supplies at retail rose by $1 million to $4.6 million in the recent quarter, or 28%. The combination of site improvement, our new e commerce platform and more effective marketing strategies helped drive both an increase in orders and average order size. Our goal for this revenue stream is to continue to increase the percentage of our members who purchased their wedding and reception supplies from us.

In the recent quarter, we continued to see a small decline in wholesale revenue of approximately $100,000 and a similar decline in registry revenue. We are now generally receiving only commissions from the sale of registry products through our retail partnerships as we have phased out the sale of our own registry items.

Merchandise revenues for the six months increased by approximately $600,000 or 8%, with growth in retail supply sales also offset in part for this period by small declines in wholesale supplies and registry product sales.

Publishing and other revenues for the second quarter in 2006 amounted to approximately $4.5 million, a gain of 30% over the comparable period in 05. For the six months ended June 30, 06, publishing and other revenues grew to $8.3 million from $6.2 million last year, or a gain of 33%.

The most significant component of this increase was local print revenues, which increased by $875,000 and $1.2 million for the three and six months ended June 30, 2006 respectively, or just under 30% for each period. These increases were primarily the result of an increase in local advertising pages, including pages associated with the local section of our national magazine and a small increase in rates.

In addition, we have now delivered two new books in 2006 in connection with our current book program, which encompasses both wedding and newlywed related topics. We recorded related author royalty revenue of $130,000 in the second quarter of 06, and $360,000 for the six months.

In the second quarter, we also hosted a series of bridal events in partnership with the Four Seasons Hotel and Resort. To date, we have viewed this program as an element of our marketing strategy although we derived approximately $260,000 in revenue from the events. This revenue generally offset the impact of certain one time other revenue items booked in the second quarter of 2005.

Finally, revenue for the six months ended June 30, 06 also included a gain of $300,000, or about 20%, in advertising revenues from our February 2006 national magazine due to a combination of increased advertising pages sold and higher rates.

With respect to margins, our gross profit percentage was approximately 77% in the second quarter of 06 as compared to 79% in the second quarter last year.

Margins decreased by about two percentage points with respect to our merchandise revenue stream as a result of additional retail product promotion.

Also, we incurred direct costs related to the bridal events program noted earlier, which impacted publishing and other margins negatively by about five percentage points in the second quarter. The events program is completed for the current year.

Margins for the current six months were slightly higher than last year, generally as a result of the higher mix of online advertising revenue offset in part by the impact of items noted for the recent quarter.

Our total operating expenses before depreciation and amortization for the recent quarter were [$9.5] million compared to $9.2 million in the comparable quarter last year. For the last six months, operating expenses increased to $19.3 million from $17.6 million in 2005.

After factoring out incremental legal fees primarily associated with the Wedding Channel litigation our operating expenses increased by $1.7 million and $3.4 million for the three and six months ended June 30, 2006 when compared to the corresponding periods in 2005.

The principal components of these increases were additional investments in national and local sales staff of about $470,000 and $1.2 million for the three and six months ended June 30, 2006 in part as additional support for the sales efforts related to our new initiatives, including The Nest. We also increased our investment in our information technology and editorial staff by $175,000 and $350,000 for the respective period.

In 2006 within our general and administrative expenses we have incurred costs aggregating $320,000 and $587,000 for the three and six months related to the development of a formal disaster recovery plan for the company and consulting costs incurred in connection with work being performed to ensure our compliance with Sarbanes-Oxley.

Apart from these increases in the second quarter of 2006, we also recorded stock-based compensation totalling $361,000, the majority of which related to the issuance of restricted common shares for which we have recorded expense regardless of the new stock-based compensation rules. For the six months, stock-based compensation amounted to $689,000.

The impact of adopting Statement of Financial Accounting Standards No. 123R was $144,000 and $272,000 for the three and six month periods respectively, which is related to the cost of outstanding options and the cost of rights under our employee stock purchase plan. We recorded no stock-based compensation in the first six months of 2005, but at the end of June 05 we had awarded shares of restricted stock as our primary form of stock compensation. However we may elect to resume granting stock options in the future. We currently believe that our stock-based compensation expense will range from $1.6 million to $1.7 million for all of 2006.

As of June 30, 2006, cash, cash equivalents and short-term investments were approximately $34.3 million, representing an increase of slightly over $5 million from the beginning of the year. This additional cash was primarily due to the income for the period prior to depreciation, amortization and non cash charges.

In the six months, we also further reduced our investment in accounts receivable net of deferred revenue by approximately $1 million due to continuing strong collection results, and further use of credit cards and the use of our subscription payment option by local vendors.

This resulting cash, combined with proceeds from the exercise of stock options or sales of stock through the company’s stock purchase plan of over $500,000 in the first six months primarily funded our capital expenditures over the period. These expenditures amounted to $1.9 million. Our current estimate in the range of capital expenditures for all of 2006 is $3.5 to $4 million, largely due to the acquisition of additional computer hardware and software that would support backup systems as part of our disaster recovery program for the company.

Also with respect to cash, as David noted, in early July we completed a private placement of 2.75 million shares of our common stock, which yielded us net proceeds of approximately $47.6 million.

That is the financial review for the The Knot for the second quarter of 2006.

Before opening up the call to questions, I wanted to review certain financial information pertaining to Wedding Channel which was included in our recent registrations statement filed in connection with the proposed stock offering. The offering remains subject to the registration statement becoming effective and market conditions.

In 2005, Wedding Channel reported a loss of $6.7 million, however there were several items negatively impacting their results which would be eliminated going forward. These include $4.8 million is costs associated with the litigation with The Knot which, of course, would end assuming the merger is completed. This amount of legal expense is similar to what The Knot spent last year.

In addition, in March of 2006 Wedding Channel shut down their magazine publishing program, which had generated a loss of approximately $2.4 million in 2005.

Finally, Wedding Channel [inaudible] and marketing expense in 2005 included slightly over $2.3 million of non cash charges. These charges related to prepaid advertising credits recorded in connection with an earlier investment in Wedding Channel and are almost fully amortized.

David, in his comments, talked qualitatively about opportunities for growth in advertising and registry revenues afforded by the increased online market share the combined companies would attain. From a cost standpoint, while there will be additional transition expenses in the near term, there can be longer-term operating synergies and cost savings given that certain components of the two businesses are similar.

Two sources for possible cost savings are staffing as well as general administrative expenses apart from the litigation. These costs aggregated approximately $11.8 million for Wedding Channel in 2005. It should be noted, though, that in many instances cost savings may be realized by using existing personnel resources from Wedding Channel to fill what would otherwise be ongoing additional personnel resource requirements for the The Knot’s existing business or to support incremental growth for the combined businesses.

Another area for potential operating synergy would be Wedding Channel’s wedding supplies business, which we would plan to incorporate into our existing warehouse and distribution facility in Reading, California. The added volume may provide economies of scale for purchasing, personalization labor and other fulfilment costs associated with this revenue stream.

On a final note, again, as David mentioned, earlier this week we acquired the lilaguides. The purchase price was $2 million in cash. The major asset we acquired was the database of information and ratings on over 32,000 local vendors. Lilaguides currently has a small revenue stream from the sale of the physical guides. It is our intention to develop an online publishing platform and once traffic [develops] we would charge local vendors for premium listings. We would also begin to sell national advertising on the site, and the site should also expand the e-commerce opportunity for us in the baby market. We have recently begun to adds this opportunity through certain partnerships and the recent loss of our own baby shop on the net. We currently expect to begin deriving revenue from these new sources in early 2007.

With that, we will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Richard Fetyko with Merriman, Curhan, Ford & Company.

Richard Fetyko – Merriman, Curhan, Ford & Company

Hi, guys. Congrats on the quarter. Just some housekeeping questions first, if I may get the gross margins one each individual segment.

Richard Szefc

That’s for the quarter. Basically the online advertising margins were 96.5%, the merchandise margin was 52.3% and our margin for publishing and other was about 68.2%.

Richard Fetyko – Merriman, Curhan, Ford & Company

Great, thanks, and in terms of the decision to do with the Wedding Channel, I guess you can’t really quantify them but, you know, it looks like from what we see in the historical numbers, you know, the synergies will have to be quite significant for that to, the acquisition, I mean, when you looked at the acquisition, I guess, let me rephrase it, did you feel like the cost synergies were extremely important to making that decision or was it more on the sale synergy side or eliminating competition or eliminating the litigation expenses?

David Liu

It’s probably a combination of all of the above. The opportunity that we see for the actual merging the two businesses comes from, you know, the scale that we will have, the fact that there will not even be a close second, more of a distant second. There are certainly growth opportunities across all revenue streams, but you’re really talking about two businesses who have evolved over the years into two very different business models. Ours is far more media-driven; theirs is much more transaction driven. The relationships we both bring to the table are very different and so we think that there’s an opportunity to really build on the assets of both companies.

Richard Fetyko – Merriman, Curhan, Ford & Company

Gotcha. That’s helpful and then, in terms of the sales staff, I know you’ve been staffing up a little bit to expand on thenest.com site advertising with the local vendors. Could you just give us an update on how many salespeople you have and how many of those are dedicated to The Nest?

David Liu

Right now we have about just around 60 on the local side, which include about a half dozen or seven that are devoted to The Nest. The balance will sell both Knot and Nest profiles. On the national side we have about 10. We’ve added staff there as well, obviously, in connection with general growth in national advertising as well as, obviously, The Nest magazine and Nest online.

Richard Fetyko – Merriman, Curhan, Ford & Company

Gotcha and, you know, you’ve been selling The Nest on the local side for perhaps up to six months. Can you just give us some color on what you’re seeing? How easy or difficult it is relative to what you’ve experienced on the Knot side? Thanks a lot.

David Liu

Sure. It’s coming along pretty nicely. I mean, we’re having certainly the benefit of the traffic that comes from The Knot organically to The Nest to drive a lot of the consumer awareness and in terms of the local adoption, we’re certainly getting a decent amount of traction there as we’re growing the local vendor base in The Nest. It’s a very different media product and as a result the consumer behavior’s very different so we have to adjust accordingly in terms of the types of promotions and the types of media packages we can actually offer local vendors.

What we are seeing is the productivity of the dedicated Nest local sales people being much higher than the productivity coming from our existing Knott sales folks so that may adjust how we look at how we want to grow at least the local segment of The Nest.

Operator

Your next question comes from the line of Barton Crockett with J.P. Morgan.

Barton Crockett – J.P. Morgan

Okay, great. Thank you very much. I was wondering if you could talk a little bit about your approaches in [acquire], which is now becoming, you know, quite evident in obviously the Wedding Channel acquisition, lilaguides. In particular, do you have, you know, what assurances can you give us that you’re exercising some type of approach to get a return on the capital you’re investing in these acquisitions. Do you have a minimum ROIC threshold that you meet or some other way to approach it? Some period of time that you’re looking for to get a return?

If you could just give us a sense there and then secondly, you know, related to that, I mean, you guys, you know, you said you expect to have the $75 million plus or so of cash on your balance sheet when all is said and done. I assume that that level of cash, part of that is that you would expect to be an acquirer but, you know, if there are other uses you see for free cash flow if you could outline that as well? Thank you.

David Liu

We certainly are looking to have cash on our balance sheet to make additional acquisitions. We think there’s a lot of opportunity as we continue to expand our business within these different life stages. You know, there’s a great deal of opportunity in the wedding space alone once you start in the different types of services and products that a newlywed’s interested in as well as now first-time parents, it really expands the scope by which we can begin to not only benefit our advertisers but also our consumers.

The investment we’ve made, or the cost of lilaguide, is hopefully very low and so we expect to be able to derive a great deal of opportunity within that brand on a local level, on a national level and even with e commerce.

When you look at the different components that are being put together with this merger, or this acquisition of lilaguide, they have deep, deep user-generated content. You know, this is not editorial that could be written by a series of freelance people. These are thousands of parents who have actually reviewed the different maternity shops, the different hospitals, the different restaurants. Everything that you may be interested in as a first-time parent is being reviewed by your peers and by other first-time parents to we think this is really valuable content. And you would take that and you look at the continuous supply of consumers that we have who are having their first babies, coming from The Knot and The Nest, and then you have our local ad sales force and our national ad sales force that has already been selling advertisers who want to reach this consumer, we think there is a real nice combination of assets within that acquisition.

I mean, I’ll let Rich talk about sort of the Wedding Channel, which we think also has strong [opportunity] as well.

Richard Szefc

Yeah. You know, we don’t have a specific ROI or a specific payback period when it comes to the Wedding Channel acquisition. We basically looked at the historical financial information for Wedding Channel. We noted the various charges which I talked about earlier on the call in terms of what has impacted them historically in 2005 and in the first quarter of 2006, and if you factor those out, you put them into a positive EBIT after 2005.

After that, we considered, you know, the areas of possible cost synergies. [A lot of the lines] of the payroll costs that I talked about, that didn’t cross. In terms of the general administrative costs, not only from the standpoint of cost savings per se but also cost savings in the light of being able to reduce amounts [on] investments that’s been making and [plans] to make going forward to support the growth of its own operations or the growth of the combined operations with Wedding Channel.

So we kind of looked at the historical, adjusted for some of the unusual items, and looked at the potential opportunities for cost synergies as well as what David mentioned before, the opportunity of being able to build the revenue because of the market share, the combined company would attain online in the wedding space.

Barton Crockett – J.P. Morgan

Okay but you know, since you are looking at acquisitions in the future, I mean, would you guys employ some type of threshold that you’d expect to see a return on your investment above your cost of capital and, you know, as part and parcel of that, do you expect that the Wedding Channel deal will [inaudible] a return above your cost of capital and, if so, would that be driven more by costs or by revenue or by both? Cost synergies, revenue synergies or both?

Richard Szefc

I think the ability to drive that additional income would be a combination of both the cost synergies as well as the revenue growth.

Barton Crockett – J.P. Morgan

Okay, I’ll leave it there. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Trina Choudhury with JMP Securities.

Trina Choudhury – JMP Securities

Hi, guys. We had a few questions in [inaudible]. I’m calling in for Bill. First of all, wanted to know if your approach to building out the baby category was going to be pretty much the same or different from the way you’re growing out traffic to The Nest and The Knot, essentially word of mouth?

Secondly, we were wondering what amount of cost do you think you could cut out from the Wedding Channel merger?

Then lastly, we were also wondering how much of your merchandising business upside came from [The Baby] deal with J and J, and if we can expect merchandising to continue to grow at the same rate?

David Liu

Taken in reverse order, in terms of the merchandise revenue growth, to date very little of it has come from The Baby. It has obviously been an increasing factor but it’s been a small contributor to the overall revenue stream. We had hoped to be able to, you know, continue to build that revenue stream further. We just, as I said, we just recently launched our own baby shop on The Nest from which we can control the marketing so we think there’s an opportunity there and then down the road, once we develop less [inaudible] as a result of our acquisition of lilaguides, we think there’s opportunity for further e commerce growth with that.

As far as the existing, we generally don’t comment on existing trends. I will say we did say at the end of the first quarter in March that we saw favorable trends developing. Thus far for a couple of weeks here in July, the trend is continuing.

Richard Szefc

In terms of costs savings of the Wedding Channel, there is obviously duplicative operations, things like your technology, that licensing for and servers, message boards, publishing systems and for the time being, the two companies are still operating as competitors in the marketplace and so there is very limited access to what technologies and what infrastructure is available there to leverage on our behalf and so there’s going to be a lot of decisions that will be made as we get closer to the completion of the merger, and certainly thereafter.

In terms of the growth of our baby space, we actually look at the acquisition of lilaguides, it’s comparable to our acquisition of Wedding Pages back in 2000. It’s a business that has a great deal of content. There is a database and infrastructure that we think is leveragable not only in the baby space but even other categories, and we also like the – we actually like the brand execution that the founders for lilaguides has been able to create for that brand. When we look at the advantages of this particular sort life event, it resembles more The Knot than necessarily The Nest. While The Nest acts as a feeder, the newlywed time span does not have the same deadline and urgency for information and urgency to spend as the prenatal timeframe and that’s where we think lilaguide is going to really be able to provide a platform of depthful content that we can leverage against our audience that is essentially transitioning, graduating from engaged, newly married to now, first time parent.

Trina Choudhury – JMP Securities

Okay. Lastly, any plans for the $175 million that you’re raising?

David Liu

None that we can actually talk about.

Trina Choudhury – JMP Securities

Okay. All right, well, thank you guys.

Operator

Your next question comes from the line of Gary [Schnerel] with J.P. Morgan.

Gary [Schnerel] – J.P. Morgan

Hi, David. Hi, Rich.

David Liu

Hey, Gary. How you doing?

Gary [Schnerel] – J.P. Morgan

David, can you elaborate regarding the less than 20% traffic overlap? Is that because Wedding Channel has more guests for the registry and Knot is more brides?

David Liu

You know, I was actually pretty startled with that stat when I saw that. That is our belief. If, you know, we always believed that a significant portion of Wedding Channel’s traffic are the guests buying gifts and therefore if you factor that out, then we would probably have a larger percentage of their brides who are overlapping with us. But I think the end analysis, or my assumption is, that what happens with wedding web sites is that people generally will go to all of them in the first week or so, right after getting engaged or maybe right before they get engaged, but when they are actually in the depthful planning process, they will choose one site and they’ll stick with it. Most women will not create multiple budgets for their wedding across multiple sites. They won’t create multiple wedding web pages. They won’t, you know, upload their guest lists into multiple guest list managers or have different checklists. So once they stick with one, they generally stay on one and therefore over time, when you look at the actual traffic patterns, it would be logical that there wouldn’t be that much of an overlap of the actual bride traffic to each site.

Gary [Schnerel] – J.P. Morgan

Is there any way for you to know if you have brides on The Knot that are using the registry on Wedding Channel?

David Liu

Not as of yet but certainly, you know, post-merger we’re going to look at the different membership databases and we would be able to find, you know, see where everyone is registered. Right now, we do know a significant number of our brides do register at the Federated Department Stores, whether it be Macy’s or Bloomingdales so just by default there is an overlap in terms of what we can provide in terms of access.

Gary [Schnerel] – J.P. Morgan

Do you think there’s a slightly smaller ability to sell content on Wedding Channel, as it is more about guests and registry? Even if it’s not so extreme, it’s a little bit?

David Liu

You mean, in terms of advertisers?

Gary [Schnerel] – J.P. Morgan

Yeah.

David Liu

No, because what we find is that we have a lower overlap. You’re really reaching a different consumer and so, you know, we view it as, really, an add-on as opposed to potentially destroying, you know, revenue opportunities. There’s just additional reach and so, you know, our ability to now package a larger and more comprehensive program that reaches across two different brands, that has local and national relevance across these two brands, we think is actually an enormous opportunity.

Gary [Schnerel] – J.P. Morgan

Again, can you touch on the rates, the advertising rates at Wedding Channel in relation to The Knot?

David Liu

Historically, they have been more aggressive than us. We look at that as a, you know, a tactic of a competitor which, you know, not necessarily needs to continue. You know, I think that there will be an opportunity to preserve our rates across both brands once we begin to leverage the larger audience.

Gary [Schnerel] – J.P. Morgan

But if they were, I mean, were they 10% below where you were at the beginning of the year or more significant than that?

David Liu

It’s not a real apples-to apples comparison. From a CPM level, they were willing to probably discount more aggressively than we were. We turned - we probably turned away business because we wouldn’t go very low with some of the advertisers who wanted discounts. So, one of the things that we believe internally is that there is less of an opportunity to raise the [CPMs] but there’s more of an opportunity to preserve them on a national front. On the local’s a whole different ballgame, but on the national front we just think that there’s added reach and really, right now, there’s no one else who can actually even provide an alternative. When you look at the size of the traffic and the impressions that are generated by our competitors online, no one even comes close. So advertisers really won’t have an alternative if they want to reach a, you know, significant bridal audience online with a branded message.

Gary [Schnerel] – J.P. Morgan

Okay, and if we look at the Wedding Channel’s sponsorship and advertising line of $5.8 million for 05, can you break that down? National versus local?

Richard Szefc

The line was predominantly national. Their local advertising revenue was a very small amount.

Gary [Schnerel] – J.P. Morgan

Was that more a function of not having a staff, or just being unsuccessful?

David Liu

I think it was just focus. They were really focused on the technology and supporting their retail partners and over time, that’s really how the organization evolved. Then, this is purely my subjective analysis, you know, I’m sure the folks at Wedding Channel may differ with me, but I think the emphasis of that business has been, you know, growing their registry business and just as our registry business has been very small and then not have been the primary focus, I think that’s the way the media side of the business was probably looked at.

Gary [Schnerel] – J.P. Morgan

Okay and just finally, the payroll expense line for 05 for Wedding Channel, $9.6 million, can you break that down between registry and, you know, advertising sales?

Richard Szefc

No, but what I will say in the registration statement, in the pro forma, we did break it down into the categories that we report payroll for The Knot along with other costs in the areas of product and content sales and marketing and general administration and so with that, of that $9.6 million, product and content, which is IT and editorial and related staff, they’re about $4 million of that amount. Sales and marketing are about $2.9 million, and general administration of about $2.6 million.

That’s for all of 05.

Gary [Schnerel] – J.P. Morgan

Okay, great. Thank you.

Operator

Your next question is a follow up from Richard Fetyko with Merriman, Curhan, Ford.

Richard Fetyko – Merriman, Curhan, Ford & Company

Yeah, guys. Rich, you mentioned some transitional expenses in the near term. Just wondering if you could provide more color on that and what areas and perhaps quantify those and then, if I understand it right, you plan on taking lilaguide and have that form of foundation for the baby web site or are you planning acquiring a separate baby web site for that purpose?

David Liu

Lilaguide is going to really become a content base. We do not rule out additional acquisitions in the baby space. Right now we are looking at continuing to organically grow the baby community that’s formed on The Nest. The fastest growing and the largest community right now on The Nest is the women who populate the Babies On The Brain board and so now we actually have a brand that will be able to supply a tremendous amount of content. We think that once we are able to fully localize the experience and provide a lot of the editorial expertise as, you know, [inaudible] brings to the table, we’ll be able to create even more interest and a larger audience group for that. The opportunities that are in the prenatal space we think are pretty large simply because there hasn’t been a real dominant brand dedicated towards first-time parents. Baby Center by far is the leader in that category and we don’t intend on competing with them. We view this much more of a life stage, lifestyle content and community play.

Richard Szefc

In terms of [inaudible], we’re not commenting on the dollar amounts of integration costs but, you know, over the next several months following the completion of the merger there’s going to be a lot of activity going on in terms of integration. We’ll probably have some additional staffing to deal with that. We’ll have support for legal, accounting, and other professional services in connection with that. There’ll be costs, smaller costs in relation to let’s say just moving inventory and [inaudible] from their facilities to our facility in Reading, California. So there’ll be those kinds of costs but typically those are ongoing costs and those typically aren’t costs that are included as part of the purchase and put into the purchase accounting.

Richard Fetyko – Merriman, Curhan, Ford & Company

All right. Thanks a lot.

Operator

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

Amy Shey Jacobs

Yes. We’d like to thank you again for joining us this afternoon. If you’ve missed any part of today’s call you can access the replay of the entire conference call on the Investor Relations section of the company’s web site at www.theknot.com. A telephone replay is available for the next two weeks at 800 642 1687, Reference No. 3164202. If you have any additional questions, please don’t hesitate to contact us at IR@theknot.com. Thank you and goodbye.

Operator

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

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Source: The Knot Q2 2006 Earnings Conference Call Transcript (KNOT)
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