Move, Inc. Q2 2009 Earnings Call Transcript

| About: Move, Inc. (MOVE)

Move, Inc. (NASDAQ:MOVE)

Q2 2009 Earnings Call

August 5, 2009 5:00 pm ET


Todd Friedman - The Blueshirt Group

Steven H. Berkowitz - Chief Executive Officer & Director

Rob Krolik - Chief Financial Officer


Analyst for Jeetil Patel – Deutsche Bank

Mitch Bartlett - Craig-Hallum Capital Group, LLC

William Morrison - ThinkEquity

Jason Helfstein - Oppenheimer & Co.

Mark May - Needham & Co.

David [Nuremburg] – No Company Listed


Welcome to the second quarter 2009 Move Incorporated earnings conference call. (Operator Instructions) At this time I would like to turn the call over to your host for today’s conference, Mr. Todd Friedman. Mr. Friedman please proceed.

Todd Friedman

Thank you. Good afternoon everybody and welcome to our second quarter 2009 earnings call. On the call today is Steve Berkowitz, our Chief Executive Officer and Rob Krolik, our Chief Financial Officer.

Today’s call is being webcast from the Investor Relations section of our website and will be available for replay shortly after we conclude. A copy of our press release issued earlier this afternoon is also available on our website.

Please be advised that some of the comments that will be made today constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act that involve potential risks and uncertainties concerning Move’s expected financial performance as well as Move’s strategic and operational plans. These potential risks and uncertainties include, among others, decreases or delays in advertising spending and market acceptance of new products and services.

Additional factors are discussed in the company’s annual and quarterly reports which are filed with the SEC and are available on our website. All information discussed in this call is as of August 5, 2009 and Move undertakes no duty to update this information. Results projected on the call today may differ materially from actual results and should not be considered as a guarantee of future performance.

On the call today, we will also be discussing non-GAAP financial measures in talking about the company’s performance. Reconciliations of those measures to GAAP measures can be found in the table attached to our press release. I’ll now turn the call over to Steve.

Steven Berkowitz

Thanks Todd. Thank you all for joining us. It was a busy quarter and I would say by my scorecard it was a successful quarter. On the last earnings call, at conferences and at meetings with investors this quarter I have mapped out an expansive set of priorities and initiatives that will serve as the foundation for Move’s next growth cycle.

We have been making progress against our vision to create relevancy for Move throughout the entire home ownership life cycle so I thought it best our approach for this earnings call to be to continue that conversation and talk about the second quarter in the context of where Move is executing today and where we need to go in the future.

So to start, let me quickly review the quarter. I believe we executed well against the continued weak real estate market and general weakness in the economy. Revenue continued to hold up relatively well in the current market while we made more progress on the expense side of the equation.

Revenue for the quarter was $54.6 million and adjusted EBITDA was $7.1 million or 13% of revenue. It is notable that on a year-over-year basis while revenue declined 11% EBITDA grew 24% which is a reflection of the expense cuts we put in place last year. Keep in mind as I said before I expect that over time we will reinvest some of these savings in new initiatives.

Our focus is on controlling things we can control and mitigating the impact of things we cannot. As I said in the last quarter we have a business that should do well even in a bad market and should thrive in a good market. So I am pleased to say our EBITDA results for the past three quarters shows the progress we have made on that front.

In addition to the financial results, what were some of the operational accomplishments of the past quarter? We continued to build out the executive team by hiring Rob Krolik as our new CFO; we promoted Aral Samuelson to Chief Revenue Officer and began interviewing candidates for our Chief Technology and Chief Product Officer openings.

We began the much larger process of consolidating and integrating our broader functions to achieve greater scale and efficiency. We completed a realignment of our consumer media group, we launched a number of new product enhancements, we sold Welcome Wagon and we have mapped out a long-term strategy for Move to lead our industry into the next wave of growth.

As I will discuss later on this call we began to see the results of these efforts as our sales productivity picked up in the second half of the quarter in Consumer Media and Top Producer; two areas I believe will be important to our future success. There remains some work to be done but I am satisfied with the early results.

Shifting to a discussion about the quarter, over the past six months I have commented about the assets, challenges and opportunities in front of Move. For those of you who may have missed those remarks, the abbreviated version is simply this; by any measure Move is a leader in a sizeable, yet largely untapped online real estate market. We are unmatched in our audience size and engagement. We have built a very hard to replicate sales model that has tremendous capabilities at both the local and national level. Through our relationships with the National Association of Realtors, approximately 900 multiple listing services and realtor associations and hundreds of thousands of real estate professionals we have created by far the deepest relationships throughout the real estate industry and we have the deepest databases and technology resources to build a superior real estate consumer experience.

Those are some of the assets. In terms of the areas we need to improve, fix or replace, we need to continue improving and evolving the user experience. We need to improve our sales efficiency. We have to improve our underlying architecture, data structure and integrate disparate technologies. We have to expand our network and grow our data sources and we need to invest in people to drive Move to the next level.

If we execute in these areas I believe we have a unique opportunity to transform not only Move’s business but the entire industry in a meaningful way. That will not only result in growing Move’s business opportunities but it will also grow the category overall creating an even larger market opportunity where we can leverage our existing advantages.

We believe that we have the ability to accelerate the shift of marketing dollars online from the inefficient offline sources and Move has the market leadership to capture a large share of those dollars. To do this we have a vision to move from the focus of one million home transactions to focus on the more than 100 million properties in the U.S. If we can do this successfully we will extend our reach beyond the relatively short window of home buying and selling to create relevancy throughout the entire home ownership life cycle. I believe that Move is well situated in that we have many of the required pieces to be successful in our industry.

So let me provide some specifics about the second quarter and you will see just how much progress we have made against a very aggressive set of initiatives. I will start with the shift from individual business lines to a more cross functional organization. We started to see the benefits in productivity and strategic thinking. I will talk about our progress in each one of those functional areas starting with sales.

If you will recall from the last earnings call, we named Aral Samuelson as our Chief Revenue Officer. Aral has what I call full paid revenue responsibility. This cuts right to the heart of what I think was a growth inhibitor to Move in the past. Our products were developed, marketed and supported in silos which not only limited our ability to leverage our strengths across the product lines but also created inefficiencies in our sales organization.

This quarter we began integrating our Top Producer and sales forces as a way to expand our reach and increase our penetration across both those products. We have begun leveraging our events team to sell Top Producer as well. The team travels the country, running more than 150 events every year for real estate professionals. In the past they have only sold services. This past quarter they have integrated Top Producer into their road show, creating what has effectively become a more consultative sales approach and we have begun to see a benefit.

We have also been training our previously silo sales forces on all of the products to gain better efficiency in our sales efforts. Ultimately, integrating our sales team to leverage the strengths of our products will have the following impact: It will lift sales productivity. It will help make real estate professionals more productive and more effective in their relationships with their clients. It will help increase our consumer engagement and it will create a more informed consumer and a more informed real estate professional leading to an increased engagement between all parties.

As a result of our strong presence in the real estate market place we signed agreements this quarter with many of the leading real estate companies including Century 21, Long and Foster and Realty Alliance. These agreements demonstrate the unique value we can bring to our partners and the strength of our assets. With complete national coverage, with deep local expertise, support capabilities to provide excellent customer service to hundreds of thousands of agents and leading audience engagement across the nation.

Along the same lines, we have also had more success in consumer media sales as we continue to transfer learning’s from the Realtor sales force to the consumer media team. There is simply no other company in our space that can meet those requirements and it shows why I strongly believe that as our market continues to grow and evolve Move will take the leader’s share of total revenue.

The second functional area I would like to highlight is product. We ramped up our product efforts this quarter releasing significantly more fixes and product enhancements in this past quarter than we have in the past several quarters. For example, we made it easier to get listings of open houses in the area. We added the capability for consumers to easily expand their search area from one city or one zip code to surrounding areas. We redesigned the featured homes carousel to allow real estate professionals to make their listings more appealing and give the professionals better branding on the sites.

This is just a small sample of the product releases for the quarter and we are planning on releasing many more updates and enhancements in the months to come. We operate in a dynamic environment where the relationship between consumers and real estate professionals has undergone dramatic changes in the past decade driven by the growth of the Internet and the volumes of information available at the touch of a mouse.

In terms of key product areas, we have put a high priority on search and content. We have begun testing new search capabilities that will significantly improve our search functionality and dramatically improve the user experience. These initiatives will reset the bar higher for other companies trying to deliver a valuable experience for both the real estate consumer and professional. We plan to launch portions of the new search capability in the second half of the year.

We have also increased our investment in content, focused on relationships with the MLS’ to utilize more sold data and explore new opportunities with our existing capabilities such as find home values which currently allows consumers to see home values in detail in relationship to other properties on the street, in the neighborhood and in the town.

We still have work to do to better leverage all of the deep historical data assets into the larger user experience. This kind of functionality is relevant to the larger vision because competitively we need to build our assets to continue to separate Move from the other players in the space. So what’s next?

All of these initiatives are obviously ongoing and will continue to represent our focus for many quarters to come. As I have said repeatedly, Move will be operating in a parallel processing environment for the foreseeable future. We continue to lead our industry in traffic, engagement and data as we did in the second quarter. To give you a sense of how Move continues to remain well ahead of our competitors, the second quarter was one of the strongest quarters for audience metrics in our history.

We averaged 10.8 million average unique users per month in the quarter which is more than 50% greater than our nearest competitor and more than triple any other companies. We averaged 247 million minutes of user engagement per month in the quarter which is five times our nearest competitor and 40% greater than the combined traffic of all our major competitors; Yahoo, Aol, MSN, Trulio, and Zillow. We averaged more than 300 million page views per month this quarter which is about six times any other competitor in our space.

We need to continue driving revenue where we can and tightly manage our expenses to free up our existing capital. We will maintain and fix our existing technology platforms but to be clear while we are actively searching for a CTO, we are not waiting for the position to be filled before starting that process. We have a great group of managers in our IT area and they are already moving forward on several key efforts.

We will continue to work on better integrating all of our product lines across a cross functional structure sharing technology, sales and strategic resource to lift the performance of all our products.

I expect that we will continue to make good progress across all these fronts and deliver tangible proof points throughout the second half of the year. We have already made great strides on the management front hiring Rob and promoting Aral and I have a number of good candidates for the Chief Technology and Chief Product Officer positions.

Without getting into too many specifics in the second half of the year we will launch our new search capabilities, continue to deliver new features and functionalities for Top Producer, continue to enhance, update our rental site and fill out our management team.

In conclusion, I want to take a moment to thank our employees who have been asked to deliver tremendous results in a short time. In my first few months I had the usual new CEO experience of drinking from the fire hose as I ramped up quickly. When I was done, I turned the fire hose around on our employees and they responded in a terrific fashion.

Our business today is better positioned strategically and on a significantly stronger financial footing than it was last year at this time. We have successfully preserved our strategic investments while weathering this perfect storm in order to extend our market leadership when the real estate market recovers. We have a lot of work to do but I am confident it will pay off. As we move through the strategic initiatives we will have a better experience for consumers, a better audience for customers and advertisers and better monetization opportunities to drive greater success.

I also would like to take this moment to thank Lew Belote and welcome Rob Krolik. Lew has been a great asset for me as I have come up to speed on our business and our history and I am particularly appreciative that he will help Rob with his transition. As for Rob, I am looking forward to having him on board as we plot the course for Move’s next wave of growth. For those of you who don’t know Rob, he has the perfect background for helping take Move to the next level. He also has a long history of working with consumer oriented Internet companies like and EBay and understands the specific financial challenges and strategies needed to drive success. He also has a long history of working with public companies which in the current regulatory environment is a must have for any CFO. I am looking forward to having him on the road with many of you in the coming months.

With that I will now turn it over to Rob to walk you through the financials.

Rob Krolik

Thanks Steve. I have to tell you all I am very excited about joining this company given the large opportunity before us. I joined Move because I see it as the real estate vertical expert. Utilizing our technology, our relationships with real estate professionals, our traffic and the people that work here we will create a more engaging user experience. If we do this right we will increase both audience engagement and people’s interest in the home ownership life cycle.

That said, let me tell you a little bit about me. Over the past several years I have spent my time helping EBay scale both internationally and more recently domestically as the company needed to be more operationally focused. I worked with the business operators to drive focus, financial discipline and help set the strategic direction. I also had a hand in the advertising business given my prior role and knowledge as CFO of, helping advertising on EBay grow significantly over the past several years. I enjoyed challenging the business and helping people realize they can do more than they thought. At the same time, I will ensure accountability for myself and others in the organization.

I look forward to working with the talented team here to delight our customers and drive shareholder value. I also look forward to meeting many of you in the coming months.

Okay, let me get started with the second quarter results. Clearly we are still dealing with a very tough real estate market yet we continue to operate smarter and more efficiently. It is a testament to the strength of our assets and our organization.

Revenue for the quarter was $54.6 million and our adjusted EBITDA was $7.1 million excluding litigation settlement and non-recurring severance costs totaling $1.5 million and stock based compensation of $1.3 million. At a time when the real estate market is in a continued downturn our sequential revenue remained relatively flat and we have successfully managed our cost structure to drive an adjusted EBITDA margin of 13%.

Revenue declined 11% compared to Q2 2008 and was a result of a decline in each of our businesses with and Top Producer being down just slightly but New Homes and Media were down 56% and 22% respectively. We are not going to predict when the housing or advertising markets will recover. However, we did see our first sequential increase in media revenue since the second quarter 2008 and total new subscriptions to Top Producer grew in the quarter which hasn’t happened in over a year.

We continue to be successful in marketing to highly productive realtors; those with more than ten listings per year. Residential real estate sales of existing homes in the first half of this year has been difficult, as we said. To be more specific, home sales in the first six months of the year dropped 4.6% while median home prices dropped by 15.9% impacting the income our customers generate by 16% or even greater over a two year period of time.

In spite of this bad news, there is still the expectation of $4.9 million resale transactions in 2009. While our customers are facing a challenging environment there are still millions of residential transactions generating nearly $1 trillion in transaction value and the associated commissions. Given the changes in our business model and our management team in 2009 it is important to note the improvement in our core operating expenses so you can better understand how efficiently we have been managing the business.

Core operating expenses are defined as the four major expense categories minus stock based compensation and non-recurring charges. In the second quarter they were $50.2 million, just slightly below the $50.9 million we incurred in Q1 and a 14% decline compared to $58.6 million in the second quarter of last year when we began our cost reduction efforts.

You can see how we have been successfully reducing our costs both to create efficiencies in our organization as well as to free up investment dollars for future opportunities. In fact, our annual savings run rate is in excess of our $20 million goal we set out last year. To be clear, we do expect to make additional investments in the business but remain committed to our initial savings goal.

Operating income from continuing operations for the second quarter was $1.5 million compared to $650,000 in the second quarter of 2008. Given the decline in revenue during that period the improved operating profit is a result of our focus on operating expense structure. We had a $2.4 million gain from discontinued operations in the quarter. Included in this number was our settling of the dispute with Experian in which we received $1.1 million in cash reflected as a gain in the quarter and the sale of our Welcome Wagon business reporting a modest gain on sale from that transaction.

Net income applicable to common stockholders for the quarter was $3.2 million compared to a net loss of $2.2 million in the same quarter of 2008. In reviewing our consolidated results gross margin for the quarter was 77%. The decline from 82% in Q2 of last year was primarily due to the large fixed cost component that remained the same even when revenues declined as well as higher fulfillment costs in the current quarter.

One line item that has had significant change from last year and prior quarter was G&A. G&A expense declined by $8 million or 41% compared to the second quarter of last year and about $12.6 million or 52% from the first quarter of 2009. The decline from 2008 is primarily due to our cost reduction efforts and the decline from last quarter was due to unusually high severance costs and stock based charges that were non-recurring.

Turning to the balance sheet, cash and short-term investments at June 30 decreased $2.2 million to $109 million. While we generated $7.1 million in adjusted EBITDA the primary reason for the decline in cash was due to the decrease in accrued liabilities and the continued decline in our deferred revenue as more of our realtor revenue is being generated through our company showcase products which is billed monthly instead of annually.

We continue to monitor the value of our auction rate securities and did not see any deterioration during the quarter. While we believe we will ultimately recover the value of our auction rate securities we will continue to take a conservative approach to valuing those assets on our balance sheet. Our $129.4 million in par value securities are reflected on the balance sheet as $111.8 million. As announced yesterday by Constellation Software we sold certain assets and liabilities of our Enterprise business in July.

Enterprise, based in Milwaukee, developed custom web sites for real estate brokerages and home builders. A modest gain on sale will be recorded as other income in Q3 and you will see a reduction in quarterly revenue of approximately $750,000 as a result of the sale of Enterprise.

Given the difficult market we are operating in, we are encouraged by our results and our market leadership position including the coming changes we plan to implement to improve on that position. I will be looking more closely at our revenue and expense base over the next few months as I get acclimated and hope to provide you additional color on the next call.

With that we will open the call up to questions.

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Analyst for Jeetil Patel – Deutsche Bank.

Analyst for Jeetil Patel – Deutsche Bank

I am wondering if you could talk about the trends in that business. Are you seeing any moderation in the decline of the number of realtors or if you could comment on the change in the velocity of sales that would be helpful. As a follow-up as well, the Enterprise sale was that a profitable business? What sort of impact on EBITDA should we expect as a result of that? Finally, in terms of the cost reduction initiatives how much more initiative should we expect to hit in the second half of the year relative to the activity you have done in the first half?

Rob Krolik

As far as the Enterprise business it was about a break even business so you would expect both top and bottom to be about the same. Zero.

Steven Berkowitz

In terms of what is going on in the market place we don’t talk about go-forward trends but I think what you are seeing just from looking back in terms of what is happening on the realtor side is there has been a significant decrease in the number of realtors out there. Most of that realtor decrease has come from more of the less active agents. So in terms of the percentage impact to our revenue it is less than the impact of the number of realtors that are leaving the industry. I think there are a couple of things that when you think about the market place and it is one of the reasons why we talked a little bit about commission income is to understand where the income from our customer comes from.

We hear what is happening in the news and we want to be able to kind of put that out there. You are seeing a fairly significant decrease in their current revenue stream. We have been able to hold our revenue fairly close to in line with last quarter. So, I think we are seeing again a continued difficult environment on the realtor side but I think we have been able to moderate that and I think we are hoping that if we can continue to do some new product releases in the future we can actually help mitigate that even more.

Analyst for Jeetil Patel – Deutsche Bank

In the past cycles, I think you typically could have expected to see a seasonal spring bump in listings. Can you comment on what sort of trends you saw take place in this environment?

Steven Berkowitz

We did not see a bump in listings this year in terms of the average number of listings that were out there we normally would see in the quarter. I think what we actually believe, and this is more my own gut intuition what it is worth, but if you kind of look at the unemployment figures out there you kind of say they were reporting 9 something percent. If you were to ask people it is probably 3-4 points higher because people have stopped looking for jobs. I think the same thing has happened in the housing market place. There is probably a pent up demand of listing out there. People just aren’t putting them out there until prices have stabilized because there is no point. Why put my house out there if I have to sit on it and it is going to be on the market for 12 months or it has to be on the market for 10 months.

Again, I think part of that will be interesting to see. We hope one of the things we will start to see as housing prices stabilize is an increase of listings as people will feel like they have kind reached a bottom. That is just one way we look at the listings count. For the spring year it was a very difficult year from the standpoint of listings although I think the demand to sell is there. Demand to buy is not.

On your last question on cost reduction, I think what you are seeing is the impact of the cost reductions we did last year. I don’t’ think you will be seeing any impact in the next two quarters. I think what you are going to hopefully see us do is continue to reallocate resources and then pick and choose the spots we believe we should be investing in. Whether it be in the area that can move the most in terms of increasing at any one point would be marketing but we have been fairly consistent the last couple of quarters. In terms of people we are just right now we are focusing on the leadership positions.


The next question comes from the line of Mitch Bartlett - Craig-Hallum Capital Group, LLC.

Mitch Bartlett - Craig-Hallum Capital Group, LLC

Would you mind detailing what might be coming as far as the search experience? What enhancement to the search experience and what additional content you are trying to drive towards?

Steven Berkowitz

I won’t talk about the search enhancements only because I think that stuff needs to come to market. A lot of it is driven by some of the investments we have been making over the past few years in technology that has been kind of more in a lab environment than it has been in a production environment. I just don’t want to let that all out. I just wanted to let you all know that we are making I think some very good strides in terms of what we are going to be able to deliver to consumers.

Some of it being just basic features that we needed to have delivered in the past that we haven’t delivered and some being interesting enhancements. In terms of content, a lot of our strategy is around how do we aggregate content? How do we find a way to add value to that aggregation of content? We are looking at lots of different ways to aggregate whether it be public records data, crawling data on the web, adding value to the taxonomy of search or data. One of the things we have is an expertise in the language of real estate which allows us to create, I think, ways for people to search in a better way and ways for us to attach the content in a better way.

It is bringing together the assets that we have and realizing that our ability to put it into a more focused way to approach a single home I think will give us some advantages in the coming years.

Mitch Bartlett - Craig-Hallum Capital Group, LLC

You also talked about sales productivity picking up in terms of both Consumer Media and Top Producer. What was interesting on Top Producer was that subscriptions were up quarter-over-quarter I guess?

Rob Krolik

New subscriptions were up.

Mitch Bartlett - Craig-Hallum Capital Group, LLC

Does that mean revenues were up quarter-over-quarter or is that just lagging?

Rob Krolik

We recognize revenue on a 12-month basis so sales will eventually turn into revenue.

Steven Berkowitz

When you look at that I think it is more that underlying trend we are realizing there is a greater value proposition to Top Producer than we have been selling in the past. I think that when I talked about that content strategy that content strategy isn’t just on one side of the equation. It isn’t just on the consumer side of the equation. We believe there are a lot of things we can do to help the realtor be more productive and give them more tools to be productive. We are very, very committed to helping figure that out with them whether that be at the individual agent level, the office level, at the brokerage level or even at the state association or national level.

Our goal is to realize that we have this ability to close the loop which is to bring consumers into the realtor environment or potential leads or potential buyers or potential relationships actually. I would really call them more potential relationships. And our ability to help them track that, enhance that and make the relationship more valuable to both sides. We believe very strongly that realtors add a lot of value to the process. We believe if we can help them with the tools to make them more productive we will then help them in turn market to their constituency and hopefully our goal would be to help them sell more homes.

Mitch Bartlett - Craig-Hallum Capital Group, LLC

This came about because you aligned the sales forces and went on kind of the tour of the country?

Steven Berkowitz

We do that all the time. I mean, we have events teams that are on the road all the time out talking to realtors whether it is a broker sponsored event or it is an association sponsored event or an event we sponsor ourselves. We are out there helping them understand how to market. We understand how to help train them. We have always focused on their business to consumer offering and helping them understand that but we also realize we can also help them understand how to do their business to business, our business to their business to their consumer. There is a real alignment around that. Again, it is about the productivity of the lead and it is about the productivity of the agent at the agent level.

A lot of it was just in the early stages now has been knowledge transfer between the organizations and us starting to not look at the world in a vacuum and realize that one of the huge added values we have out there between our sales and service organizations which we believe are a competitive advantage is that ability to actually move the selling process from just selling advertising to actually hopefully become a consultant to help the realtor then be better at what they do. To be more productive at what they do. We are educating our sales people to that idea of being a marketing consultant and a productivity consultant to help the realtors.

We have a lot of work to do there but it is an exciting opportunity to see when you can do both. The ability to talk to realtors has been a very positive outcome.

Mitch Bartlett - Craig-Hallum Capital Group, LLC

Maybe you talked in the script, I may have missed it, how Realtor did in the quarter percentage wise? Also how the broker component of the larger agreements did. Maybe you could talk to that.

Steven Berkowitz

As you know we don’t break out our revenue between Realtor. What we said that it was slightly down in the quarter from the previous quarter. Overall Realtor revenue which is Top Producer and It is to me we are getting and seeing a little bit of that consultative sales helping us.

Mitch Bartlett - Craig-Hallum Capital Group, LLC

And the broker side?

Steven Berkowitz

On the broker side again everybody out there is having a tough time. Again, we are working diligently in helping the brokers be more productive so they can understand their agent’s productivity and all those things. We are seeing the same challenge with everybody which is their marketing dollars overall are down but their spending online is still a very important part of what they do. They are shifting more of their dollars from offline to online but it is still a challenge for them as they look at the outcome.


The next question comes from the line of William Morrison – ThinkEquity.

William Morrison - ThinkEquity

One follow-up on the cost side. I was wondering if we assume your revenue is down modestly quarter-over-quarter similar to the same magnitude of Q1 to Q2, should we then assume that if costs are flat margins will go down or if revenues continue to go down you will manage the margin a little bit?

Steven Berkowitz

We are committed to managing the margin. I can’t tell you whether or not it is going to be plus or minus. The revenue is a big driver for us. We have taken a lot of costs out of the business. I think really it is going to come down to us continuing to focus on productivity. I think getting Rob into the organization and getting him up to speed he will have a chance to get a brand new set of eyes on these things and see what we have to do.

We don’t really give guidance in terms of what those margins will be but we have taken a big chunk of expense out.

William Morrison - ThinkEquity

Let me ask you a little bit longer term question. When the cycle turns and returns to kind of a more normalized state what do you think the incremental margin profile is of the business? Do you have a sense?

Steven Berkowitz

I’m going to let Rob get settled before we…it is an important exercise for us to do and we have models to do that but I think getting Rob up to speed and giving him a chance to really look at that. One thing about Internet businesses we know is they are leverageable once you get past that certain point. The flip side of that of course is they don’t de-lever as fast when you get into tough times. I think it is impressive the company has been able to do that and maintain and actually grow its EBITDA margins. I think the challenge for us is going to be at some point in the future to actually hopefully come forward with some sort of way for us to all look at the business that is aligned around a set of opportunities and characteristics. That is just something Rob needs to get his hands around and we will see where that takes us.

Rob Krolik

I am looking forward to that. On the enterprise piece we talked a little bit about revenue. I want to make a note that revenue on a go-forward basis given the fact that Enterprise will be out of the business effective middle Q3. That will be taken out. I wanted to highlight that.

William Morrison - ThinkEquity

You threw out a lot of metrics on the call. If you had to pick a couple that you think we should focus on as you move forward as the most important metrics in terms of driving the business forward what would they be?

Steven Berkowitz

Of the ones I talked about I think engagement is critical right? I think at or near the top. It is going to be about engagement. I think one of the things we are doing internally is again looking at what metrics can give you a better view of the business. For example, this is just an example, it is not based on any numbers yet, how many people are saving searches? How many people are saving listings? Is that number going up? If we understand that in the context of people who are clicking through our sales. What we are seeing out there today which is really again a function of the market place is there is a tremendous amount of browsing going on.

What we are seeing is really interesting. If you look at home sales they are flat and if you look at where they are coming from it depends who you ask. A significant number are coming from foreclosures. If you kind of look at the market place what we are seeing, and this is kind of why we are focused on the engagement number and the page views number is that we are seeing a lot of people engaging more. They are doing more shopping. They are doing more comparison shipping. They are spending more time looking rather than buying. It is no different than a lot of what is happening in retail in a lot of stores where the high end stores people are walking through the store and shopping but they are not buying.

I think that to me is ultimately over time if we are going to be able to get those kinds of statistics and we are learning about them ourselves inside of the business, or I am anyway. Hopefully we are going to be able to give you more color on those kinds of things going forward at some point. Just earlier Rob talked more about how realtors are generating revenue. Those are things we are learning about and are going to help us guide the business in terms of the plans that we have going forward. I would focus on engagement and page views as well as the order of the engagement, page views and unique users.

As long as we are significantly closer at the top of that number on the user side, actually when we do the numbers for the call it is pretty impressive.

William Morrison - ThinkEquity

What was CapEx in the quarter? Can you give us any kind of a sense for what we should expect for CapEx for this year and/or next?

Rob Krolik

We spent around $2 million in the quarter. I think last year it was about $2 million to $2.5 million last quarter.

Steven Berkowitz

Pretty consistent. About $1.5-2.5 million a quarter. It is somewhere between $8-10 million in the prior 12 months. We may have a little bit of an increase. I wouldn’t see anything that…as soon as we get more of an understanding to the level of investment in data integration and data technology those things probably may have a slight increase in CapEx at some point. We will be storing more pictures and storing more content but I don’t see anything significant.


The next question comes from the line of Jason Helfstein - Oppenheimer & Co.

Jason Helfstein - Oppenheimer & Co.

Any projects or initiatives that could cause expenses to increase in the second half? If so, and this is hypothetical because you don’t give guidance, should we assume there is revenue targets associated with those so if more costs come in presumably there would be revenues to offset that? Maybe not specific in the quarter but within some time frame. That is question one. Question two, just to clarify on Realtor and Top Producer you said they were slightly down from the first quarter. Was that in dollars or do you mean the growth rate slight decelerated? Lastly, any progress in connecting comp producer data with the consumer data you are collecting for Realtor? I have kind of always thought that was the Holy Grail. Any comments on that.

Rob Krolik

The Realtor and Top Producer slight decline was dollars.

Steven Berkowitz

We break our projects out, breaking our go-forward projects into some of the things I call the costs of playing the game. That is an area the company historically hasn’t invested in, i.e. things like connecting data. Things like analytics. There are things we need to do. Part of our investment will be in those areas. I think the areas in which investments will have more of a direct relationship to revenue is when you hear me start talking about ad products or products that we are starting to create for the advertiser and the realtor in terms of the consumer piece and when I start talking about enhancements to Top Producer from a productivity perspective.

What I talk a lot about is this idea that we need to fix a lot of the basics. Over the next two quarters, which you are going to see us do I hope and I believe we will do is to really lay down that foundation and get us off what I call landfill and onto bedrock. I tell people if you live out here in California you really want to live on bedrock because when it shakes things fall. We are in that process of moving the company.

I have to say I am feeling pretty good about some of the projects we have going and some of the things we are doing and the way people are attacking those problems. I talked about the parallel and moving to a parallel processing environment. We have to get past fixing the symptoms and get to the cause especially in the technology area. My guess is in the next six months we will give you more color on what those investments are and as we separate those out you will get a better idea of what has revenue potential and what is just an expense of fixing it.

Some of the things we do hopefully over time will also have an effect on lower costs in doing business. So there are things we need to do, probably three areas of investment we need to make. One area is where we increase efficiency in the organization in which you should see us lower the cost structure of our business by creating efficiencies.

The second area is foundation building which I think will be more of a blip in costs in terms of the ability for us to do it in a parallel processing environment and so you may see a blip. The third piece would be where we are really getting down and saying we are going to look at full page relevance and full page productization and really start to deliver new and exciting ad products from both a B2C side on and from a B2B side for Top Producer. So when you see us start talking about new things not just things like market snapshot that we do. We will start adding products to those areas of our business.

Those are the areas you will start to see revenue correlation. Again, knowing our revenue model on the Internet side is more of a subscription model we need to be looking at how we are going to evolve that too so we can actually get some more variability in terms of the up [front] of it.

Jason Helfstein - Oppenheimer & Co.

On my question relating to connecting Top Producer to the content side of the business and connecting the data versus what you collect?

Steven Berkowitz

I think there are a couple of things. The side of Top Producer in which we have the really exceptional product to help the realtor manage contacts as well as actually trade marketing materials. One of the things we are looking at doing is how do we make that contact list more valuable for realtors. How do we help them connect to their consumers through different methods? I think there are things we are going to be able to do in terms of just making sure both of those systems are driven off the same content databases. Not necessarily where we can actually eventually look at consumer data and look at people’s properties they are looking at and give that feedback back to realtors.

So we are looking at different ways to do that. It is more theoretical at the moment but I agree with you there is this underlying idea that we actually have a unique opportunity to close the cycle which is the B2C cycle in which we are bringing leads and bringing branding out to consumers and where we are then giving realtors the opportunity to be significantly more productive, a significantly better way to manage those leads. Actually a way to market not to just customers who are in the market but actually a way to market to customers who are not yet on the market but may be on the market in six months. Or more of those browsers that are in the market today to maybe turn them into more concrete contacts for the realtor.


The next question comes from the line of Mark May - Needham & Co.

Mark May - Needham & Co.

I had one question and one comment. In terms of renewal rates in the second quarter or if you want to talk about it in terms of the first half what was the churn rate or renewal rate, however you want to address it versus your historical averages? What kind of price concessions did you have to give at renewal time?

The comment is, given the business is primarily still a subscription business my recommendation for Rob or whoever is making these decisions would be to start giving quarterly metrics around what drives the sub revenues such as the number of subs or I know you have the brokerage business so maybe number of live or something like that. The average number of products that are subscribed to. Overall ARPU for the sub business.

Rob Krolik

I appreciate that. I am going to be looking at that, as I said in my prepared remarks as I get more acclimated to the business I will be definitely diving into that to see what it is we can provide.

Steven Berkowitz

In terms of renewal rates we don’t disclose the renewal rates. It has been flat. In terms of pricing we don’t really discuss pricing as it is a competitive issue. In terms of what has been happening out there in the industry you are seeing again the fact we have been able to keep revenue fairly flat quarter-over-quarter, down slightly when you are seeing a big decrease in the number of available people who actually subscribe. So I think we have been able to hold a pretty steady view of that.


Our final question comes from the line of David [Nuremburg] – No Company Listed.

David [Nuremburg] – No Company Listed

My recollection is that the timing of your arbitration event with Citi Corp. over the auction rate securities was perhaps in the next couple of weeks. Is that correct?

Rob Krolik

It has to be filed in our 10Q, our 10K said we were expecting the arbitration hearing to be held at the end of August. That has now been postponed at least one month.

David [Nuremburg] – No Company Listed

When that does happen approximately how long does it take and how long do we have to wait to get the verdict, if I can put it that way?

Rob Krolik

Honestly I don’t know. I would have to talk to our legal counsel about the specifics. I’m sure there is a process involved there and I don’t know that.

David [Nuremburg] – No Company Listed

Since our last caller had a recommendation, as a large shareholder I want to give you one too if I may. That is I think the company has in fact done a good job of cost reduction in the last several quarters. As Steve has noted several times in the past, we are not going to be able to cost cut our way to driving the stock up to where it has the potential to go. The comments from Steve about the importance of sales force productivity and driving revenue growth at a time when our newspaper competitors continue to collapse. That is the key to success. We do understand as a long-term shareholder why people who publish quarterly estimates want to understand on a quarter-to-quarter basis how many pennies of earnings we are going to have.

But speaking for ourselves as a long-term shareholder what we are looking for from you is profitable growth.

Steven Berkowitz

Thank you for that. We agree that the opportunity is strong. The opportunity is large. As I said earlier is that you can’t cut your way to success but you have to create an efficient organization that allows you to leverage your success. Our goal is to position ourselves for that whether the market turns around or not. That has to be our goal.


There are no further questions in queue at this time.

Steven Berkowitz

Thank you everyone for dialing in. We will talk to you next quarter.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and everyone have a wonderful day.

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