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

Executives

Laura Cave – Corporate Communications Officer

David Liu – Chief Executive Officer

John P. Mueller – Chief Financial Officer

Analysts

Jeetil Patel - Deutsche Bank Securities

Richard Fetyko - Merriman Curhan Ford & Co.

Meggan Friedman - William Blair & Company

Randy Katz for Sameet Sinha - JMP Securities

George Askew - Stifel Nicolaus & Company, Inc.

[Jennifer Dance] – Oppenheimer & Co.

Aaron Kessler - Kaufman Brothers

[Mark Romer] – Private Investor

The Knot, Inc. (KNOT) Q4 2009 Earnings Call February 18, 2010 4:30 PM ET

Operator

At this time I would like to welcome everyone to The Knot’s fourth quarter and year end 2009 conference call. (Operator Instructions) At this time I would like to turn the conference over to Miss Laura Cave.

Laura Cave

Thank you. Good afternoon and welcome to The Knot’s fourth quarter and year end 2009 conference call and webcast. During the course of this conference call, comments that we make regarding The Knot that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements. Any such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words like may, should, expect, plan, intend and other similar terms. You are cautioned that these forward-looking statements speak only as of today’s date. Our internal projections and beliefs upon which we base our expectations may change, but we will not necessarily inform you if they do. The Knot’s policy is to provide expectations only once per quarter and not to update that information until the next quarter.

The important factors that could cause actual results to differ materially from any forward-looking statements mentioned today include, but are not limited to, the potential failure of The Knot’s online wedding related and other websites to generate sufficient revenues to survive over the long-term; our history of losses; the significant fluctuation to which our quarterly revenues and operating results are subject; the seasonality of the wedding industry; our dependence on a limited number of customers, in particular Macys, for a significant portion of our revenues; the dependence of our registry services business; on the continued use of WeddingChannel website by our retail partners; the potential for losses on our investments and auction rate securities; or our inability to liquidate frozen investments at desired times and in desired amounts; and other factors described in the documents we have filed with the Securities and Exchange Commission.

Additionally, if you’ve not received a copy of today’s press release, the release is now posted on the Investor Relations section of the company’s website at www.theknot.com. We have allotted up to one hour for today’s conference call including the question-and-answer section that follows. Please take note that the company is operating under the SEC regulation SD and encourages you to take full advantage of the Q&A section.

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

David Liu

Thank you, Laura. Good afternoon and thank you all for joining us today. Entering into 2009 we expected that advertising, both the online and in print, would be under severe pressure. Print advertising began to decline in 2008 and continued to be weak throughout 2009. Our national advertising experienced significant cancellations and struggled in the fourth quarter of 2008 and the first quarter of 2009, but we actually saw improvement with a strong second half and we were pleasantly surprised to close the year down only 1%.

Our local online business, which had a record fourth quarter in 2008, maintained its sales momentum, growing every quarter in 2009 both sequentially and over prior year quarters. Now John will review the quarter and year end performance of each revenue stream in detail with you later on the call.

In general, the wedding industry proved to be recession resistant, and during the course of 2009 over 1.9 million members enrolled on The Knot and WeddingChannel just as they did in 2008. One thing to note about our membership total is that although a total combined membership on The Knot and WeddingChannel remained consistent in 2009, the mix between the two sites shifted slightly as more members enrolled on The Knot and fewer enrolled on WeddingChannel. Our e-commerce revenue is highly sensitive to trends in membership, so even though total membership was flat, The Knot Shop saw modest gains in revenue which were offset by declines in revenue at The WeddingChannel Store. However, merchandise revenue overall grew 20% for the year, largely because of the revenue from the e-commerce acquisition we made in May.

Registry services exhibited weakness in the first half of the year as some consumers shopped outside our network of high end retail partners. But in the second half of the year we started to see positive signs as revenue from our non-Macy’s retail partners improved. For the year, revenue from our non-Macy’s retail partners grew 21% versus 2008.

Since the end of 2008, we completed a number of acquisitions. With the acquisition of WedSnap, we brought in Facebook and mobile development expertise; eWish.com and Felicite.com added a local registry business and patent portfolio; we completed the acquisition of a wedding supply e-commerce business that was accretive to our financial results; and Breastfeeding.com gave us an organic flow of first time parents to bolster The Bump brand and traffic. These are strategic add-ons, but they’re all relatively small and none the size of the e-commerce company contributed meaningfully to our top line this year. They did, however, impact the bottom line, adding an incremental $2.3 million in operating expense.

We believe these businesses are key catalysts that support our strategy to extend our brands onto social and mobile platforms, to create a truly universal registry service, and to expand our ability to identify first time parents who are not yet members of our core branded sites. We continue to search for additional acquisitions to augment our strategies and we’re in a unique and enviable position; we expect the balance of our auction rate securities to be liquid at the end of June this year; that we grew top line only 2% this year, we generated over $12 million in operating cash flow; we have no debt; and we ended 2009 with cash and short term investments totaling $131.5 million. So we will be looking to put our cash to work this year.

Now this leads me to our outlook for 2010. With the progress we made in 2009, we have much to be optimistic about. For example, our new content management system enabled one editor, with the assistance of a small team of interns, to launch over 275 niche sites last year. In December, 2009 this network of niche wedding sites added 34% more visits to our local media on The Knot.com. Our ability to innovate has allowed us to maintain our market dominance, and in 2010 we should begin to see the benefits of the investments we’ve made over the last 18 months. We also believe the weakened state of our competitors, many who have experienced double digit declines in 2009, along with what looks to be a longer road to recovery for the broader economy, has created a unique opportunity for us to invest more aggressively in our growth this year.

However, I cannot talk about our growth strategies for 2010 without first addressing the impact of the early termination of the old Macy’s registry contract and making sure you all understand the potential impact this has on our financials this year. Macy’s registry commissions were about $7.4 million in 2009. Now while we’re not going to lose 100% of those commissions, because Macy’s has signed a new three year link out affiliate agreement similar to the agreements we have with our other retailers like Crate and Barrel and Williams-Sonoma, we do believe a substantial percentage of those 2009 registry commissions from Macy’s are at risk. A more precise percentage is difficult to predict because the new agreement has only been in effect for about three weeks. We won’t have a definitive idea of the impact of the new agreement until we see more traffic data and commission payments that reflect the impact of Macy’s new registry platform and marketing programs. We expect we will see the brunt of the impact in the second and third quarters of 2010, which are seasonally the larger quarters for the registry services business.

As part of the new registry agreement with Macy’s, we received an early termination fee and a one time guarantee of a multi-million dollar national advertising campaign to help offset the impact of the lost registry commission. It is important to note that while Macy’s has been a major advertiser for the past several years, we have no guaranteed advertising commitments from Macy’s beyond this provision after 2010. We certainly hope we will re-sign Macy’s for national advertising in 2011 and beyond, but we would do so under a program to be negotiated in the future.

There were other indirect benefits to the old Macy’s relationship that we will no longer have going forward. WeddingChannel received a significant amount of traffic from Macy’s as all traffic to the registry link on Macy’s homepage was redirected to WeddingChannel. Therefore a percentage of WeddingChannel membership and by extension e-commerce in The WeddingChannel Shop originated from Macy’s. So besides the anticipated loss of registry commissions, we also expect declines in WeddingChannel membership and wedding supply sales through The WeddingChannel Shop.

Early data since the Macy’s registry platform launched in the last three weeks confirms this expectation on a preliminary basis. Again, we expect that the overall impact of Macy’s early termination will be most acute in the second and third quarter as the bulk of our registry commissions and wedding supply sales are earned in the high wedding months between May and October.

We have not been idle in anticipation of this transition. Over the past year we have been building out our new Gift Registry 360 platform. We successfully soft launched the platform on our Facebook application, Weddingbook, in the late summer of 2009 and our plan is to launch a Beta version online on the Internet at least in the summer, if [inaudible] at all earlier. Gift Registry 360 will over universal gift registry management and shipping that is completely synchronized with the retailer partners system. No matter where a bride creates her registry and no matter where her guest shops, the universal registry will be updated in real time by data feeds from our participating retail partners.

We don’t believe any other universal registry is able to do this and we see this as a major differentiator. Couples will also have enhanced tools to allow them to register for virtually any product on the web. Thanks to the acquisition of patented Group Gifting technology from Felicite in 2009, we will be able to offer guests the ability to make partial payments towards a big ticket group gift like a honeymoon or home entertainment system.

If a bride is limited today by the time it takes to manage multiple registries, in the future she will be able to register with any number of retailers without inconveniencing her guests. Our add from anywhere functionality will allow brides to register for virtually any product sold on the web, the entire Internet becomes a product catalog. While we still think it will be difficult to overcome the decline in revenue from our changing relationship with Macy’s this year, we are excited about the long-term potential of Gift Registry 360 as a one-of-a-kind gift registry solution.

Now as far as 2010 prospects for our advertising business, the outlook is mixed. We enter 2010 with decent momentum in both national and local. We continue to see a healthy pipeline of RPs on the national front, but visibility remains limited as I believe a new normal is shorter planning cycles for most brand advertisers. On the local front, our sales force continues to do an extraordinary job closing new business. We continue to watch our turn rate closely, and in the first half of 2009 overall turn was temporarily depressed, while our new $50 vendors were in their preliminary six month commitment. But even if you factor out this group of vendors, churn for our standard vendors also steadily declined. We saw those trends as quite positive and an indication of the value of our media. Towards the end of last year, however, both core and $50 vendor churn began to tick up again. This is something we’re carefully tracking and we have launched a number of initiatives to combat this trend.

The Vendor Dashboard, which launched last fall, has been universally well received by our local advertising community. And Self Service went live quietly a month ago. With no marketing or promotion, the Vendor Dashboard and Self Service have shown early signs of promise. We spent many months working to upgrade our infrastructure so we could innovate in the local business. With the vast majority of our platform fixes behind us, it is exciting to see these products launch as we continue to shift tech resources away from completed maintenance projects in fact to building on our upgraded platform.

Over the coming months we have a number of product launches that we expect to transform our service offerings to our local vendors. Many of our competitors have been chasing us by incrementally improving on our baseline services. Our next evolutionary step will set a new level of service that we believe very few if any of our competitors will be able to match. Due to competitive reasons I can’t go into more detail here on the call, but I ask all of you to stay tuned for some exciting developments.

An area of focus that may seem a bit counter intuitive is our investment in publishing this year. As many or most publishers are buckling under their cost structures and closing magazines, we believe there’s an important opportunity to serve advertisers who remain committed to spending money in the print medium, as well as to promote our brands via newsstands across the country. With the closure of three major titles in our space, advertisers are looking to advertise with trusted bridal media brands. As a result of our announcement that we will increase the frequency of our national magazine from two times to four times in 2010, we have seen healthy demand and in fact much of the premium inventory in our new issues is already sold out.

Finally, a significant 2010 initiative we have begun to invest in is the launch of our business in China. On the last call I mentioned we created an offshore software development center in China during 2009. And that center has not only improved the productivity of our software development efforts, the experienced team there has provided us a useful launching pad for our media business in China. For some time we’ve been interested in the opportunities to increase our brands and services to international markets with scalable market opportunities. Due to recent changes in consumer interest and demographic composition, it has become apparent that China is an ideal place to start. Because of the One Child rule, Chinese families place a tremendous amount of resources behind their only sons and daughters wedding celebrations. China has over 10 million couples getting married every year, where roughly $57 billion is spent on weddings each year.

And most importantly, however, is the cultural change that is influencing this young generation of engaged Chinese couples. 80% of Chinese couples today incorporate western wedding traditions into their wedding, and there are over 200,000 wedding planning companies with over 2 million employees to help these couples pull off the wedding of a lifetime. As the recognized authority on weddings in the United States, we believe The Knot is perfectly positioned to provide advice and services to help the Chinese bride plan a western style wedding.

Our newly formed software development center in [Guangzhou] will provide development and technology support for the new operation based in Beijing. We are forming a local Chinese operation and are currently setting up the Beijing office. In total, we anticipate spending approximately $2 to $4 million in China in 2010.

We are at an exciting inflection point for the business. With major infrastructure investments behind us, we are working on exciting opportunities to radically transform our services for brides and advertisers alike, from local advertising to registry to China, we are surrounded by massive market opportunities. And we have the cash and the consumer audience to pursue them.

There are execution risks ahead and from where we stand now, our expectations for near term results remain modest. But our financial position is strong, our competitors have weakened and now is the time to push forward. I hope this helps provide you with an understanding of how our long-term vision is evolving.

We look forward to updating you on our progress throughout the exciting year ahead. And with that, I’ll turn the call over now to John for the financial review.

John P. Mueller

Thanks, David. I’d like to go over the results reported today in our press release, add a little bit of detail and then afterwards we can take your questions.

For the fourth quarter of ’09 we reported net revenue of $25.1 million, which represented a 3% increase over the fourth quarter of ’08. Excluding revenue from our e-commerce acquisition, net revenue declined 2% compared to the fourth quarter of 2008. Our national and local online advertising business had combined growth of 4% over the prior year’s quarter. The e-commerce business that we acquired in the second quarter drove 28% growth over the fourth quarter of ’08 in our wedding supplies business. These gains offset a 14% decline in publishing and other revenue. Our registry services business in the fourth quarter increased 1% compared to the fourth quarter of ’08.

For the year, revenue increased by 2% to $106.4 million compared to 2008. Excluding the e-commerce acquisition, our year-to-date revenue declined 2%. Overall, our diversified business model provides stability to our revenue for the year. Online advertising and merchandising businesses offset declines in publishing and other revenue.

Operating income prior to impairment charges for the first quarter of 2009 was $1.7 million compared to operating income before impairment charges of $719,000 for the fourth quarter of 2008, an increase of about $1 million. Growth in revenue and lower operating expenses, primarily related to the recovery of certain bad debt during the fourth quarter of ’09, drove the increase.

For the year, income from operations prior to impairment charges was $4.1 million compared to $6.1 million for 2008. The $2 million decline in operating income was primarily due to increased expenses related to the full year effect of investments in information technology infrastructure, marketing and national sales support staff that occurred in mid ’08, stock-based compensation, expenses related to acquisitions, increased bad debt expense, and the accelerated amortization of the Macy’s intangible assets.

I want to point out that we did have an operating net loss for the quarter and year ended December 31, ’09, primarily because of the pretax impairment charges of $10.7 million related to our 2006 acquisition of WeddingChannel.com. The impairment charges reduced the carrying value of intangible assets associated with the WeddingChannel.com trade name, technology and Macy’s relationship. The impairment charges accounted for approximately $0.33 per share pretax on both a basic and fully diluted basis for both the fourth quarter and year ended December 31, ’09.

As David mentioned earlier, one of the most significant recent events for this company is the change in our Macy’s relationship. This change led to an accounting analysis which resulted in the impairments I just mentioned. I’d like to provide you a little more detail about that analysis. Prior to the impairment we had intangible assets on our balance sheet net of amortization of approximately $22 million at the end of the third quarter. $19.5 million of that amount relates to our acquisition of WeddingChannel.com in 2006, and it consists of our patented registry tool, contractual advertising relationships and the WeddingChannel trade name. On an annual basis, we perform a computation of the value of the intangibles based upon long-term revenue projections, assumptions based on the potential licensing value of comparable trade names and technologies, and the present value of cash flows from customer relationships. We use this analysis to determine whether the values recorded on the balance sheet for intangibles are fair.

The current economic environment has been particularly difficult for both the advertising and retail industries, and the outlook remains uncertain. The decline in the projected growth of these industries requires that we reassess and reduce the long-term growth rates we had been using in our valuation model for the WeddingChannel intangibles.

The new relationship with Macy’s began this month and replaced the previous agreement that had been scheduled to expire in 2011. As David mentioned, the new agreement will be similar to our other WeddingChannel.com retail partnerships, whereby the company will only receive a commission for registry purchases originating from its websites. The reduced growth rates and revenue assumptions in our valuation model indicated a need to write down the carrying value for the trade name, technology and relationship intangibles in question. I would like to emphasize, though, that we continue to pursue new initiatives to leverage the patented technologies acquired in the acquisition across the significant registry retail market opportunity, including the Gift Registry 360 application that we are rolling out on the web this year.

Now I’d like to give you a little more color on each of our respective business areas in more detail. First, national online advertising increased 310,000 or 6% from the prior year’s quarter. National online revenue for the year was $21 million, a decline of 1% compared to 2008. For the year, the decline in national online was mainly due to cancellations and lower renewals, primarily in bridal travel categories. And as David stated, advertisers continue to plan for short campaigns which limits the visibility into our pipeline. The fourth quarter benefited from several last minute campaigns that drove revenue higher. However, we can’t be certain that headwinds in this market have turned. The share of non-bridal and bridal advertising revenue shifted slightly for the quarter to approximately 26% non-bridal and 74% bridal from about 32% non-bridal and 68% bridal at the end of the third quarter.

Local online advertising revenue continued to grow, increasing by 202,000 or 2% for the fourth quarter of 2009 compared to the same period in ’08. Year-to-date local online advertising revenue was $34.7 million or up 4% for 2008, which more than offset declines in the national online business. As of December 31, ’09 we had over 19,900 profiles, an increase of 17% from the approximately 17,000 profiles at December 31, ’08.

The vendor growth rate is significantly higher than the revenue growth rate due to the fact that the average revenue per vendor is now $2,100 compared to $2,400 at the same time last year, a decline of about 13%. The decline in average revenue per vendor is largely due to the increase in the $50 profile vendors. The churn rate increased to 33.3% from 31.5% at the end of the third quarter. We attribute the increase in churn rate to higher churn among our $50 profiles, which tend to be smaller customers that have more volatility in their businesses. It’s possible that the churn rate could remain the same or increase slightly in the coming months. On a sequential basis, compared to the third quarter ended September 30, local online revenue increased by 1%. Our profile count increased by 2.4% and our annual revenue per vendor has remained constant at about $2,100. As we continue to rollout variable pricing, we will be updating you on these metrics so you can see the impact our pricing changes are having on total local online revenue.

Let me turn to the e-commerce parts of our business, registry and wedding supplies. Registry services revenue increased by 1% compared to the prior year quarter and declined by 3.5% for the year ended December 31, ’09 compared to ’08. The poor economic environment is disproportionately impacting our higher end retailers, but certain new registry partners are helping to stabilize the business.

As we discussed previously, our new contract with Macy’s will reduce revenue in this business in 2010 because the company will no longer host and receive commissions on all Macy’s registry transactions. The new relationship with Macy’s began this month and is similar to our other retail partners whereby the company receives a commission for registry purchases originating from its website.

Our wedding supplies business grew by $869,000 or 28% over the prior year fourth quarter, primarily as a result of the second quarter acquisition of another e-commerce wedding supplies retailer. Excluding the revenues from this e-commerce acquisition, the wedding supplies business declined 7% over the prior year fourth quarter. For the year, our wedding supplies business grew by 20% compared to ’08. Excluding the effects of this acquisition, our wedding supplies business was flat compared to full year 2008.

The impact of the e-commerce acquisition on our financial results is as follows. For the fourth quarter, it added approximately $1.1 million of incremental revenue on a 46% gross margin, operating expenses were $453,000 and operating income was $46,000. For the year, this acquisition added $4.2 million of incremental revenue at a 48% gross margin, operating expenses were $1.6 million and operating income was $407,000.

Publishing and other revenue declined by $776,000 or 14% to approximately $4.7 million for the fourth quarter of ’09 compared to $5.5 million for the same period in ’08. For the year, publishing and other are down 14% or $2.6 million to $16 million. Publishing remains a positive contributor to our business, though, and with the demise of some competitor magazines, our increase in the frequency of The Knot national magazine from two times to four times, and slightly better market environment, we expect this business to improve on a sequential basis.

For the fourth quarter our operating expenses, excluding impairment charges, declined by $506,000 to $19 million compared to operating expenses excluding impairment in the fourth quarter of ’08, which were $19.5 million. The decline is primarily related to the collection of previously reserved bad debts, lower consulting and lower depreciation and amortization. These declines were partially offset by higher stock-based compensation, operating expenses of $668,000 at our acquisitions that occurred throughout the year and the newly formed software development center in China.

For the year, operating expenses, excluding impairment charges, increased by about $2.4 million. The increase in operating expenses on a year-over-year basis is primarily related to the following, employee compensation associated with the full year effect of headcount increases in ’08; stock-based compensation; operating costs of $2.3 million related to our acquisitions, which were not part of our operations in ’08; transaction costs associated with these acquisitions; bad debt expenses of the newly formed software development center in China; and higher depreciation and amortization. These items were partially offset by lower travel and entertainment expenses, lower recruiting expenses and lower consulting expenses.

On a sequential basis, our total operating expenses, excluding impairment charges, declined $1.4 million in the fourth quarter compared to the third quarter of ’09. The decline is due to the reversal of bad debt reserve previously discussed and lower rent, largely due to a one time charge in the third quarter for a facility that we closed related to our e-commerce acquisition.

Interest earned on the company’s cash and investments declined by $586,000 and $2.9 million for the fourth quarter and year ended December 31, ’09 respectively compared to the same period in ’08. The significant decline in interest income was due to lower interest rates during 2009.

Our effective tax rate for ’09 is approximately 19% compared to 26% for ’08. The decline in the tax rate is due to the increase in the impairment charge.

Cash flow from operations for the fourth quarter of ’09 was approximately $475,000 and approximately $12.3 million for the year ended December 31, ’09. Capital expenditures for the year ended December 31, ’09 were $2.4 million, which was half of our total for 2008.

The company’s balance sheet reflects cash and cash equivalents of $95 million and short term investments of $36.5 million consisting entirely of auction rate securities. The auction rate securities balance declined to $36.5 million at December 31, ’09 from $52 million at December 31, ’08, primarily due to $15.6 million of issuer redemptions at par value throughout 2009. The company retains and plans to exercise its right to put its auction rate securities at par to UBS beginning June 30, 2010.

The company has no debt. These investments were previously classified as long-term investments but have been reclassified to short term investments as we plan to exercise our right to receive par value for these investments on June 30, 2010, less than five months from now. The auction rate securities are debt securities collateralized by student loans and the Federal Government guarantees a substantial majority of these loans.

I hope this commentary has helped everyone understand our results for the fourth quarter and full year ’09 as well as some of the key items on our balance sheet. This concludes our prepared remarks and I will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

I guess first of all, can you talk about I guess 60% of the historical WeddingChannel revenue came from registry and merchandise. Is it safe to assume that most of this is going to be out of the P&L given the new deal and the impairment you took on the acquisition and the intangibles? Second, I guess when you look broadly across the different business lines, you know I guess which ones would you expect to show growth in 2010 as it looks like advertising probably could and maybe even publishing if your increasing the number of national mags. Could you elaborate on that? And then I have a quick follow up.

David Liu

We’ll answer in reverse and I’ll take the end and you can take the front, John. I would say we expect to be able to grow all of our businesses except for registry. We think that if the recovery doesn’t sort of lose steam, advertising should at least stay status quo and if things continue as they are, you know, we’ve been able to show decent progress on both national and local side. You know we wouldn’t be investing in the publishing side of our business if we didn’t think there was a growth opportunity there. And e-commerce, you know with the acquisition and with the productivity we’ve seen on The Knot Shop, I think we think that we should be able to grow that business as well. Registry clearly is the one that we’re going to start the year off with in a pretty significant hole.

John P. Mueller

Jeetil, I’m not sure I quite understood your question but let me take a stab at it and you can come back at me if this isn’t right. But the WeddingChannel website is going to have a decline in traffic. It is coming in right now at what we thought it would be, but it’s too early after only 18 days in this relationship to make any final judgments on it. And I wouldn’t want to announce anything to anyone on the call today for fear of making, you know, I’m giving you information that would later prove to be incorrect this early stage of the relationship. It’s no longer, you know, a separate P&L. It’s all consolidated. But the WeddingChannel Store is a separate store, a separate website that obviously gets all of its traffic for the wedding supplies business from WeddingChannel.

So if you’re going to see a decline in traffic at the WeddingChannel website, you’re going to have two impacts. You’re going to have one impact on the registry revenues, which are going to go down because of the fact that Macy’s is now link out and we’re only earning commissions on guests that are referred by us from that website to Macy’s to make a purchase at Macy’s rather than before that and before this new deal, we hosted Macy’s entire registry and whether a guest came to the website directly or came to our website through the Macy’s registry portal, we earned a commission. So commissions from Macy’s are going down. And as a result of the decline in traffic, the revenue for the WeddingChannel Shop will go down as well. By how much at this point we’re not willing to speculate other than, you know, I think you’ve got to make your kind of your best estimate based upon, you know, your knowledge of what, you know, Macy’s made up about 80% of our registry commissions in 2009 as David described, and make your best estimate as to what you think is going to happen right now.

And obviously you’ll see quarter over quarter comparisons in Q1 and Q2. As David mentioned, Q2 and Q3 are the big registry quarters so that’s where you’re probably, we’re all going to get actually the best visibility of what that impact’s going to be.

Jeetil Patel - Deutsche Bank Securities

In China I guess can you discuss maybe for this year what kind of incremental expense that you take off to ramp up in that region? And second I guess when do you start to see the revenue impacts start to flow into the P&L?

David Liu

We don’t think there’s much revenue this first year. And if you look at the operations that we have set up there and that we’re looking to build, we’re estimating anywhere from $2 to $4 million of additional expenses will be incurred this year in our efforts in China.

Operator

Your next question comes from Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

Just a follow up to the prior question on China, $2 to $4 million investment, is that OpEx or some CapEx out of that?

John P. Mueller

It’s all OpEx.

Richard Fetyko - Merriman Curhan Ford & Co.

The Macy’s advertising agreement you mentioned multi-million dollar agreement, could you tell us what Macy’s ad spend was in 2009? And the timing of the sort of the new ad budget from Macy’s, will it start in the first quarter or second quarter, the sort of the elevated level of ad spend from Macy’s anticipated?

David Liu

I think in prior calls I think it was safe to say we benefited from $1 million and change from spending by Macy’s. And by multi-million obviously it means more than $1 million, but I don’t think we would want to disclose what they’re spending other than to say that when you’re launching a new registry portal like they’re doing, they’re obviously going to ramp it up from what they were spending historically since they want to drive the success of that new launch. So we will get benefit from it. I don’t have the specific media plan laid out for all four quarters of the year but I think for purposes of modeling, we assume a quarter of whatever incremental amount you’re going to [inaudible] every quarter. You know it’s been a straight line across the year. That should be pretty accurate. The only thing is their fiscal year ends I think on June 31, so you know some of that incremental spend may end up hitting us in 2011, but it shouldn’t have a very big impact because most of it will I think still hit in 2010.

Richard Fetyko - Merriman Curhan Ford & Co.

I would have thought that, you know, with the second and third quarters being sort of heavier wedding season periods that perhaps they would commit more of their ad spend, incremental ad spend, in those quarters.

David Liu

The media spend is really to drive registry creation and for a bride they create their registries months in advance of the wedding. Commissions are generated when the weddings occur because generally guests procrastinate and they don’t buy the wedding gift until the week before the wedding, and that’s why you see the clustering of commissions being in the second and third quarters.

Richard Fetyko - Merriman Curhan Ford & Co.

John, can you give us the segment gross margins, if you have it handy?

John P. Mueller

Q4 was 95.8% for online advertising, 47% for e-commerce, obviously 100% for registry and 65.6% for publishing and other. On a combined basis, that was 82.8%.

Richard Fetyko - Merriman Curhan Ford & Co.

And then lastly, if I may, how much did you benefit in the quarter from the bad debt credits or reversals or collections I guess?

John P. Mueller

Half a million.

Operator

Your next question comes from Meggan Friedman - William Blair & Company.

Meggan Friedman - William Blair & Company

On registry you gave a pretty good number for the growth from the non-Macy’s retail partners. Is that a same store number or what would that look like if you backed out some of the newer additions over the course of this year?

David Liu

It’s not a same store number. It’s an absolute growth from the non-Macy’s. I don’t have that handy. I can get that and email it back to you.

Meggan Friedman - William Blair & Company

In terms of the additions over the course of the year, is it fair to say that they were more back half weighted then on the registry side?

David Liu

Yes. Yes. I think of the newer retailers, there were a handful that were probably added towards the back half of the year.

John P. Mueller

Yes. And certainly became operational and we received the benefit of in the second half of the year.

Meggan Friedman - William Blair & Company

And then to follow up on some of the initiatives that you guys have been working so hard to rollout, can you provide an update on the variable pricing initiative? Any metrics that you can share from the original test market? And then on the niche site, any guidance or thoughts on how many you expect to rollout in 2010? And I know its early days, but can you talk about the feedback to date or share any usage metrics on the Self Service platform?

David Liu

Sure. Variable pricing now is in all markets. That was rolled out at the end of the fourth quarter so the vast majority of the markets were rolled out in the fourth quarter. So the full effect of how this is going to impact pricing and the price per vendors is yet to be determined, even though it did stabilize between the third and fourth quarters. We didn’t see a decline in the dollar value per vendor.

On the niche sites, you know, it really is as many ways as we can slice and dice our content will be how many sites we can launch. We could easily double this output based on the types of categorization of content that we have. And so you know our goal is just to continue to push the envelope. If you look at a lot of the trends in online media, you know, the dynamic creation of destinations and content, the way to get SEO benefit and to drive traffic is really something and everyone’s really pursuing that. We think we have a bit of a head start in our category certainly. So we’re going to continue to push that.

And as you can see from the early results that we’ve gotten from the SEO benefit, and remember we’re not promoting these niche sites at all, we are not buying any keywords to support it, all the traffickings we’ve received from the network of sites is entirely organic from SEO. So we’re pretty pleased with the results that this has been delivering for us.

And also keep in mind one of the things that we’ll be looking at this year is actually creating premium inventory on these sites so we can now monetize, because right now they’re not being monetized at all.

Self Service, about a quarter to a third of the vendors who have received access to their Self Service environment has been using it so that’s a very positive sign. You know with our vendor base it’s always hard to predict whether or not there’ll be technologically savvy to use the tools that we’ve built for them, so that’s been very positive. Over 5,000 have access now and the rest are going to be getting it within the next month or so as we iron out some of the remaining back end issues that we’re discovering as more and more people have access to it. And you know Self Service, which we launched 30 days ago, some point in January, and we did this very quietly. We essentially just linked it from the advertisement uplink on the main screen and on the corporate site has actually been doing quite well. If Self Service were an individual sales person, they would be my top sales person right now so we’re pretty pleased with the traction we’re getting and we hope to certainly drive more growth as we begin to promote it.

Operator

Your next question comes from Randy Katz for Sameet Sinha - JMP Securities.

Randy Katz for Sameet Sinha - JMP Securities

A couple of questions, first one pertains to the China expense, $2 to $4 million this year. Is any of that one time or should we expect that to all be ongoing as well?

John P. Mueller

We’ll have to come back to you on that. We’ve got I think you could assume half of it would be ongoing right now and then the other half may be one time but there’s a lot of different things, a lot of different balls in the air right now and we’ll update you as we progress throughout the year.

Randy Katz for Sameet Sinha - JMP Securities

Now on the Macy’s side, of the $7 million plus on the registry revenue, you know, you’re not clear as to what’s going to happen there. I guess there’s some variables in terms of how they were marketing their sites, driving traffic, you know whether it was directly to the WeddingChannel or themselves. Can you at least provide us a sense of how much of the traffic that you were fulfilling was from proprietary sites versus the Macy’s site? And then at least leave us the work to do to make the assumptions on what that could mean to loss of revenue.

David Liu

Well, let me first clarify one point. Any marketing that Macy’s was doing for the registry was essentially marketing WeddingChannel. The actual URL for Macy’s registry was Macys.WeddingChannel.com and they were spending a decent amount of SEM which I actually can’t even tell you the amount they did spend to support the registry business, which was essentially supporting the WeddingChannel site. We cannot right now disclose the actual traffic contribution that Macy’s was providing in the past year.

Randy Katz for Sameet Sinha - JMP Securities

One last one on the e-commerce acquisition, can you at least give us a sense now of percentage of transactions revenue that’s fulfilled now by The Knot as opposed to its previous arrangement? And what kind of impact that’s having on the gross margins in the segment?

John P. Mueller

On the e-commerce acquisition in terms of what it’s contributing in 2009?

Randy Katz for Sameet Sinha - JMP Securities

Right. My understanding is with the [inaudible] you can fulfill most of those orders yourself which should drive some improvement to your gross margin line. I was wondering where you are there.

John P. Mueller

We’re 100% inhouse now.

Operator

Your next question comes from George Askew - Stifel Nicolaus & Company, Inc.

George Askew - Stifel Nicolaus & Company, Inc.

What were the amount of the costs spent by The Knot to support the Macy’s relationship in 2009?

John P. Mueller

We really haven’t disclosed that information I don’t think in the past, so I mean I think you’ll have to make your best judgment on that. But you’re trying to assume will we get some cost savings right now. We don’t think there will be significant cost savings because I think what we’re going to do is transition a lot of the expenses associated with registry to our Gift Registry 360 business.

George Askew - Stifel Nicolaus & Company, Inc.

On the local vendor churn, remind us please how you calculate that given you’ve kind of morphed from unique accounts or vendors to a profile strategy. Is it churn of profiles or actual vendors?

John P. Mueller

Vendors.

George Askew - Stifel Nicolaus & Company, Inc.

So it’s still vendors?

John P. Mueller

Yes. A vendor can have more than one profile and we’re really just dealing with the loss of customers on that, so the numerator is cancellations and the denominator is take your vendors at the end of the period and you add cancellations that have occurred throughout the period to that number. So that’s the simplest, cancels in the numerator, vendors at the end of the period plus cancels that happened.

George Askew - Stifel Nicolaus & Company, Inc.

Did you see any local vendors with many profiles churn away for example?

John P. Mueller

We’ve had that and every once in a while you’ll get a vendor that represents a lot of other smaller businesses and those are obviously accounts that we put our sales people with a lot of time and effort to to make sure that we keep them happy, but yes, we’ve had throughout the year of ’09 we’ve had a few losses. We’ve also had a few good wins, too, but that’s part of the ongoing competitive nature of that business.

George Askew - Stifel Nicolaus & Company, Inc.

My math suggests the Macy’s advertising revenue was about $1.5 million in 2009 and to kind of following up to question before, is this multi-million dollar advertising contract from Macy’s for 2010 on top of what their normal spend has been, based on ’09? Or are you kind of rolling that in to the new contract?

David Liu

It’s inclusive. Essentially a new advertising deal. They’ve been advertising on a manual basis, so it’s a new advertising deal that’s multi-millions.

George Askew - Stifel Nicolaus & Company, Inc.

If my assumption of $1.5 million is correct and it’s based on numbers you guys have provided for 2009, what has their annual spend been say the last three or four years for advertising? Around that number or lower, higher?

David Liu

It’s been lower.

Operator

Your next question comes from [Jennifer Dance] – Oppenheimer & Co.

[Jennifer Dance] – Oppenheimer & Co.

I just have a few questions on advertising. On the national sites have you one off, have last minute spend in 4Q?

John P. Mueller

Right.

[Jennifer Dance] – Oppenheimer & Co.

Can you guys quantify that? I mean should we expect to see similar growth in 2010? Or does the Macy’s offset that one off spending?

David Liu

You know, this is something that sort of happens every fourth quarter and if the economy’s in decent shape, you’ll see a flurry of activity where people are just trying to spend their marketing budget before they and if they don’t spend, they’ll lose it, so you know it’s not something that you can either predict or model. We try to be poised to take advantage of the opportunities that arise and then basically the goal is to try to build on that and ideally renew the business when the term comes up.

[Jennifer Dance] – Oppenheimer & Co.

So how much of that growth was attributed to that business?

John P. Mueller

Minor.

[Jennifer Dance] – Oppenheimer & Co.

On the local side and sequentially your year-over-year growth has gone down. I’m assuming this is because of the annual spend keeps getting lower. Do you expect that trend to continue too or is it just it’s a difficult comparison?

John P. Mueller

It’s a little bit difficult to predict right now because we’re now finally fully operational on variable pricing in every market that we’re in. It did stabilize a little bit from Q3 to Q4. We did not see much of a change but, you know, the mix of advertisers will vary from quarter-to-quarter so I think you’ll see quarter-to-quarter fluctuations in it. And we’ll keep giving you that stat every quarter so we can track it.

Operator

Your next question comes from Aaron Kessler - Kaufman Brothers.

Aaron Kessler - Kaufman Brothers

First on the local advertisers, did you give a number for that? I know you did give profiles. Do you have an update on the advertiser number? And also on the local growth as we look at it over the next couple of years, what do you view as maybe the couple of key drivers for that? Is it going to be the Self Service platform, the niche sites or I guess how do you address the bigger 100,000 enchilada advertiser opportunity? How do you expand your awareness to drive that advertiser account?

David Liu

The actual total number of vendors we had as of the end of the year was 16,800. The target goal I’ve given my local sales force is to cross the psychological threshold of 100,000 vendors. And so we’re really getting everyone to laser focus on what it means for the organization to be able to sustain and to grow the business and reach 100,000 vendors. You know I think for those who haven’t been with us for a while that seems like a very large increase. For those who have seen how we’ve been able to transform the old wedding pages acquisition on the local advertising base that we have there, it’s a growth rate that we’ve been able to accomplish in the past. And that’s just something that we think the investments we’ve made, not only with the Vendor Dashboard, the Self Service and with some of the other services that we’ll be rolling out will enable us to achieve those numbers.

Keep in mind, we reach 80% of the brides who are planning a wedding in the United States. We are currently servicing less than 3% of the vendors. And so one of the ways that we believe we can actually begin to drive toward that number is really utilizing our community and the social dimension of our site to bring the other vendors in. 100,000 should be doable when you have 80% of the consumer base. There are 800,000 vendors who service weddings in the country, so it just puts things into perspective a bit.

Operator

Your next question comes from [Mark Romer] – Private Investor.

[Mark Romer] – Private Investor

Hi David. This is Mark.

David Liu

Hi Mark.

[Mark Romer] – Private Investor

Hi. First let me start by saying been a long time Knot investor, probably the better part of the last decade, so I’m kind of gone on this ride with you and let me first say that I think.

David Liu

You are very well known in our offices, Mark.

[Mark Romer] – Private Investor

Are you kidding?

David Liu

No. We’ve enjoyed reading your posts.

[Mark Romer] – Private Investor

Okay. Well, super then. And you can tell by my post I’ve been a long time supporter of The Knot. I think you’ve got a neat little franchise there. But the first thing I wanted to say is David, I think you’ve done a heck of a job over the you know basically about ten years that Knot’s been around. Second thing I wanted to say, a little bit of a critique, I wanted to start with that but there’s an expression in journalism, you know, bearing the lead. If I’m wrong, didn’t you guys make money this quarter? If you pull out the impairment I think it was a profitable quarter and you never would find that in the press release, so just as some input for you as I was reading the press release I was a little disappointed with how you guys presented it. It did some like the whole lead was the impairment, which I don’t know why you guys would really want to emphasize that.

David Liu

Well, you’re right in pointing that out. I think we had some debates as to how we wanted to position the tonality of the release. I think one of the things that, honestly for me was a concern that people were not properly understanding the impact of this transition with Macy’s. And so you know I am a huge believer in many of the things that we’ve done and I think the opportunity for us to build on what we’ve created is enormous, but I do think we are going to be running into a couple of quarters this year where the impact of the Macy’s relationship is going to have a pretty negative impact on our financials and I just want to make sure everyone who has been shareholders and who follows the stock is aware of what’s going to happen in the next six months.

[Mark Romer] – Private Investor

Got you. And I certainly can see that in the press release. I will definitely concede that. I guess the last thing is a question. You know, love to see the Australia expansion and now the China thing sounds great, too. Can you talk a little bit about how Australia’s going and you know just kind of an update on that?

David Liu

Yes. In Australia we essentially licensed the brand to a media company there and they’ve been a wonderful partner. We will be able to participate in the upside. They are still in start up mode and building the business, but the traffic traction has been good. They’ve been getting great press and PR so you know we’re looking at ways that we can continue to help support them because they’ve been a great execution partner in terms of how they’ve implemented the brand. You know China is just simply a unbelievable market right now and what’s happening there is really outpacing in many respects some of the things that we do in the states. And so it’s exciting to have an opportunity to pursue that market.

We would not have gone on into it if the goal was to build the business to help a Chinese bride plan a Chinese wedding. We don’t have the authority nor would we have the hubris to think that a U.S. company could do that. But it is really the social trend where this young generation is looking for western traditions and that puts us in a very unique position. Unlike other U.S. Internet businesses who’ve entered the Chinese market, we actually come in with the credibility of being the only group who can truly provide comprehensive coverage of western traditions for the domestic market there. So we’re pretty excited about the investment we’re making there.

[Mark Romer] – Private Investor

Great. And that one will remain a Knot operation as opposed to being licensed out?

David Liu

Yes. That will be a Knot operation.

[Mark Romer] – Private Investor

Super. Well again, David, thank you very much and thanks for your comments.

David Liu

Thanks Mark.

Operator

Your next question comes from Richard Fetyko - Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co.

Yes, just a couple more questions on the China investment, guys, regarding the timing of the $2 to $4 million investment, how will it ramp up throughout the year, perhaps if you could give us an idea? And then just kind of wondering about the strategy in China, it sounds like it will be a Knot operation, it’s not a licensing deal. Are you thinking about launching your own site or perhaps do some acquisitions? And will you launch bridal magazines? Maybe just a little more, as much as you can or have figured out in terms of the strategy in China.

David Liu

Yes. It’s a little bit all of the above there, Richard. I mean you know China is a very difficult market to be operating in when you are in the Internet media space, first, so just as a clarification to the extent that there is ownership that is allowed by a foreign entity to run an Internet business we will be at least controlling that entity. But the technical definition of ownership is probably something we can’t say. We are looking at a cross platform media strategy as we’ve executed in the United States which only further complicates the licensing and legal issues. Magazine licensing numbers are very hard to come by in China. It requires partnerships, so we are in discussions with a number of publishers there right now. And we are looking at a television opportunity as well.

So some of the reason why there is a range in what we think will be the investment is the money we spend when the opportunities arise, so we’re not hell bent to spend the amount we’ve articulated but when the opportunities come up and we can actually execute against those opportunities, we will do so.

Richard Fetyko - Merriman Curhan Ford & Co.

And then on the niche sites, the 275 or so that you’ve launched so far, you mentioned that they’re not being monetized. Curious what kind of premium ad inventory you’re thinking about introducing in 2010? What sort of ad units are you thinking about? Are these local listings or display ad units for national campaigns?

David Liu

These will be locally focused. So you know we kind of covered, I think, the local city guides where you can be a featured vendor in that city guiding your category. We’ve created additional badges and new inventory within those areas. Currently in the niche sites we don’t have the same premium inventory. You know it kind of punches through to the directories that we offer on The Knot, but because we’re covering so many more locations, for example in North Carolina a very strong site for us is the Outer Banks. There’s an opportunity to sort of slice off a premium slot for all 30 categories within the Outer Banks and give vendors the opportunity to compete for those positions.

So the content management system was infrastructure that was launched prior to all the back end fixes for our locals, so we were really not able to implement the premium inventory, Self Service and sort of infrastructure required to have premium inventory available on the niche sites. Having most of that stuff done now will enable us to focus on building our components and creating inventory that we can now sell to the local vendors on the niche sites.

Operator

We have reached our allotted time for questions. Are there any closing remarks?

Laura Cave

Yes. We’d like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the Investor Relations section of our website. If you missed any part of today’s call you can access the replay of the entire conference call in the Investor Relations section of the company’s website at TheKnot.com. A telephone replay is available for the next week at 1-800-642-1687, reference number 56807112. If you have any additional questions, please don’t hesitate to contact us at irs.theknot.com.

Operator

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

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

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

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

Source: The Knot, Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts