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TheStreet.com, Inc. (TSCM)

Q3 2006 Earnings Call

October 26, 2006 11:00 am ET

Executives

Chaela Volpe - Investor Relations Manager

Thomas J. Clarke - Chairman of the Board, Chief Executive Officer

Eric Ashman - Chief Financial Officer

James Lonergan - President, Chief Operating Officer

Analysts

Douglas Kass - Seabreeze Partners

Trina Choudhury - JMP Securities

Michael Moskoff - MRM Partners

Frank Gristina - Avondale Partners

John Evans - Wells Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to TheStreet.com third quarter 2006 earnings conference call. My name is Rachel and I will be your coordinator today. At this time, all participants are in a listen-only mode, and we will be conducting a question-and-answer session towards the end of today’s conference.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Ms. Chaela Volpe, Investor Relations Manager. Please proceed, Madam.

Chaela Volpe

Thank you. Some of the statements made on this earnings call not related to historical fact may be deemed to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which may concern TheStreet.com’s financial performance, as well as its strategic and operational plans, are subject to risks and uncertainties that could cause actual results to differ. The company undertakes no duty to update any such statements.

The risks and uncertainties are described in the company’s SEC filings, which are on file with the SEC and available at its website at www.sec.gov.

Additional information will also be set forth in TheStreet.com’s quarterly report on Form-10Q for the quarterly period ending September 30, 2006, which will be filed with the SEC in the near future.

I now turn the call over to Tom Clarke, TheStreet.com’s Chairman and Chief Executive Officer. Tom.

Thomas J. Clarke

Thank you. Good morning. Thank you for joining us today to review our third quarter 2006 financial results. Sorry for the delay in getting started. There was some technical difficulty.

Following the format of previous calls, our CFO, Eric Ashman, will review our numbers in detail with you, and then we will hear from Jim Lonergan, our President and Chief Operating Officer, who will provide an overview of some of our forward-looking business drivers.

Let’s take a quick look at the top-line results, and then move on to the big news of the quarter, TheStreet.com’s recent acquisition of Weiss Ratings.

Overall, we had a quarter with all revenue streams contributing to this performance. We had a year-over-year net revenue increase of 58%, with advertising, subscription and other revenue increasing 77%, 49%, and 108%, respectively.

Net income for the quarter was $3.1 million, or $0.11 per basic and diluted share, as compared to net income of $1.6 million, or $0.06 per basic and diluted share last year. All of this helped produce a gross margin percentage of 62%.

In all, we are extremely pleased with our ability to execute on our mass market penetration strategy, and more specifically, we are pleased with the strong impact that success has had on the advertising side of the business.

With a 77% year-over-year revenue increase, and a 145% year-over-year increase in our non-financial advertising category, I believe that as a vertically niche content site, we are nicely positioned for future growth.

However, in analyzing our subscription business, we are disappointed with our third quarter performance as it did not meet expectations. One reason is the company does not employ steep discounts through its subscription services, a tactic publishers traditionally use in the summer months. As a result, our revenue per subscriber increased to 345 from 330 without any contribution from the ratings business.

The real question is, do I think this is a long-term trend? I do not, but as I have mentioned in the past, this will be a slower growth revenue stream than our advertising one. We are being proactive in our measures to reinvigorate this side of the business. I will give you a specific example.

To more actively engage our subscribers, we are making enhancements to our current services. In September, we introduced a free video component into our Action Alerts Plus offering, where once every quarter, Jim Cramer makes an intimate address to the subscribers from his office at TheStreet.com. The quarterly address includes a portfolio review with methodology behind stock picks, as well as an overview of the market and where it is heading. This will be an enhancement we make in all of our subscription alert products.

We recognize the value in continually enhancing our services as well as adding variety through bundling and introducing new offerings, both of which you can expect to see more of in the near future.

However all of the above does not mitigate my disappointment with the current quarter subscription business. This is why we are transitioning from slow growth to high growth with our strategy of penetrating the mass market with an advertising supported model.

I believe the business and the underlying operating structure is in a position to use its cash to accelerate revenue by acquisitions, as we believe the Ratings acquisition will demonstrate.

As mentioned last quarter, one of our strategic goals was to improve our offerings for the mass market, while moving our revenue mix towards one where advertising will become a larger percentage of that mix over the next couple of years.

On August 7th, we took a big step towards meeting that goal with the acquisition of certain assets of Weiss Ratings Inc., a wholly-owned subsidiary of the Weiss Group, for $4.7 million, representing a purchase price of one-time revenue.

The business has been rebranded as TheStreet.com Ratings, and we have begun successful integration of ratings content into our free online offerings.

Let me share with you why this acquisition makes sense for us, but let me first review what was purchased.

Weiss Ratings, now TheStreet.com Ratings, was founded in 1988 and provides financial evaluations in industries where it believes investors are at risk. Ratings tracks the risk adjusted performance of more than 16,000 mutual funds and more than 6,000 stocks. In addition, Ratings uses proprietary quantitative computer models to evaluate the financial strength of more than 13,000 financial institutions, including life, health and annuity insurers, property and casualty insurers, HMOs, Blue Cross, Blue Shield plans, banks, and savings and loans.

There were two revenues streams for the Ratings business. One was an offline print component, where quarterly directories had been produced for the library market. Today, we count more than 1300 libraries as customers of this information. Going forward, this segment of business will fall under subscription revenue.

The other Ratings revenue stream falls under syndication, where TheStreet.com Ratings is an independent research provider as part of the global analyst research settlement. This means that when brokers who participate in the settlement issue account statements to their customers, in addition to providing their own stock ratings on each statement, they must also provide an independent stock rating. In this case, one from TheStreet.com Ratings.

We currently serve 7 of the 12 firms involved with the settlement -- Merrill Lynch, Bear Stearns, UBS, Credit Suisse, Lehman Brothers, Deutsche Bank, and Thomas Weisel. This will allow us to expose TheStreet.com Ratings brand to a group of potential customers we would not be able to reach through our traditional marketing channels.

How will we use Ratings information to grow TheStreet.com? Our first goal is to move all the content into an online, fully searchable environment. This past Monday we announced that the first stage of this migration has been implemented, and free stock ratings are now available on our free flagship website, www.thestreet.com. Links to stock ratings have been embedded into all new stories, as well as selected stories from our archives.

Additionally, we announced that all 6,000 stock symbols on the site that have been assigned a rating are now fully searchable. This will be an advertising supported revenue stream for us, and we view this as a springboard for page view growth.

In the upcoming quarter, we will make available an equity research report for a fee for those who want more in-depth information in addition to the rating itself. We expect that such an offering will allow for both one-off purchases and monthly and annual subscriptions.

Keeping our content integration undertakings in line with our mass market strategy, the next phase of the migration of ratings content online will include the migration of mutual funds and ETF information. This is information that we have only minimally covered in the past, and considering that the majority of individuals in the country own mutual funds, we anticipate that this will increase page views and unique visitors to our websites.

We plan on making all of this information available for free to take advantage of the fact that these topics have proven to be high on advertisers’ lists of where they want to place their ads. With a totally independent rating structure, and an advertising support business model, we believe we can be a dominant player in this space, similar to what Lipper and Morningstar have achieved.

The following phase will include the migration of the rest of the ratings information, and we expect to have it completed in the first quarter of 2007.

In summary, we have significantly broadened our content inventory and audience reach, one of our main goals in looking at a mass market strategy. The ratings content will be a catalyst of traffic growth to our sites and will support our strategy of aligning our content offerings with advertiser demand. It will also aid our movement toward our desired revenue mix to one where advertising is the larger portion of the overall revenue composition.

I welcome the Ratings team to TheStreet.com and I thank them for their collaborative efforts thus far. With the addition of the reliable, well-regarded independent ratings content to our wealth of top-grade services, we are working toward a truly integrated, end-to-end content solution for members of our investment community.

Now I will turn the call over to Eric so he can explain our numbers in more detail.

Eric Ashman

Thank you, Tom. Throughout this call, as I review the financial statements of our third quarter, I will provide a breakdown of the impact of the Weiss Ratings acquisition on our results. I want to note upfront that it is our intention to fully integrate the Ratings business into TheStreet.com and that integration is already well underway.

We do not intend to run Ratings as a separate, reportable operating segment. However, we do want to provide extra detail on this call to help you understand the acquisition and its expected impact on our business.

In the future, as Tom mentioned, the revenue from ratings will be reported as subscription and syndication revenue. As we previously announced, on August 7, 2006, TheStreet.com acquired substantially all of the assets and certain liabilities of Weiss Ratings, a wholly-owned subsidiary of Weiss Group. As consideration, the company paid $4.7 million, which was then reduced by the estimated value of assumed deferred revenue liabilities totaling approximately $1.5 million. The net cash paid as a result of this acquisition was $3.2 million.

The purchase price is subject to adjustment within 90 days of closing date of the transaction, based upon the actual amount of deferred revenue liabilities. Additionally, the company has accrued for legal and other transactional fees in connection with the acquisition totaling approximately $150,000.

Moving on to our third quarter financial results, we ended the third quarter with net revenue of $12.9 million, an increase of 58% over the third quarter of 2005, and a sequential increase of 4%. Year-to-date, our net revenue is $36.5 million, 54% or $12.7 million greater than the same period last year.

Excluding total revenue of $700,000 from Ratings for the partial third quarter, which impacts both the subscription and other revenue lines in our P&L, total revenue was $12.2 million, a 49% increase over the same period last year, and a 1% sequential decrease in what is traditionally a seasonally slow quarter.

Looking at the advertising side of our business, advertising revenue for the third quarter of 2006 totaled $3.7 million, a 77% increase over last year and a sequential increase of 1%.

Despite traditional seasonal slowness, during which advertisers usually decrease their spending, the company actually increased its advertising revenue sequentially and delivered our highest quarterly advertising revenue since the fourth quarter of 2000. This was driven by the enhancement of our personal finance, life style, and video content on our free site, as well as strong execution against our strategy of diversifying our advertising base beyond our financial advertisements.

Year-to-date, our advertising revenue totals $10.7 million, 69% higher than the same period last year.

Revenue from non-financial advertisers has continued to increase as a percentage of total advertising revenue. For the third quarter of 2006, we experienced 145% increase in non-financial advertising over the same period last year, and a sequential increase of 61%. Non-financial advertisers represented 30% of total advertising revenue, as compared to 22% in the third quarter of 2005 and 19% in the second quarter of 2006.

In the third quarter, page views increased 51% over the same period a year ago, and decreased 10% from the previous quarter. The average number of unique visitors per month in the quarter was 4.1 million, a 30% increase over the year ago period and a 6% sequential decrease.

As Tom previously mentioned, we believe that the Ratings acquisition, along with some new initiatives that Jim will speak about shortly, will be a catalyst for both page views and unique visitor growth.

Initial page view indications in the month of October are very positive in this regard. For the first 25 days of October, page views are up more than 20% versus the same period in the last quarter.

With respect to page views, we believe that not all page views are created equal, particularly as we work towards ongoing growth in gross and operating margins. With that in mind, we are as focused on improving our monetization of page views as we are on overall page view growth.

We were pleased to deliver a revenue per thousand page view metric of $19 for the quarter, an increase of 17% over the third quarter, and 12% sequential growth.

As Tom also noted earlier, the subscription side of our business was weaker than we had expected in the third quarter. Subscription revenue for the third quarter of 2006 was $8.6 million, a 49% increase over the same period last year and a 3% improvement from last quarter’s total of $8.4 million. Year-to-date, our subscription revenue is $24.7 million, 49% higher than last year.

Excluding subscription revenue of $300,000 from Ratings in the partial third quarter, subscription revenue was $8.3 million, a 43% increase over the same period last year and a 1% sequential decrease.

We booked subscription orders of $7 million during the quarter. This represents an increase of 15% over the same period last year and a decrease of 23% from last quarter’s $9.2 million. Year-to-date, our bookings totaled $23.6 million, 41% or $7.6 million greater than the same period last year. Excluding bookings of $200,000 from Ratings in the partial third quarter, bookings were $6.8 million, an 11% increase over the same period last year and a 26% sequential decrease.

Jim will speak in a few moments about the initiatives we have underway to reinvigorate growth in the subscription side of our business.

Our total number of subscribers at the end of the third quarter was approximately 95,000, up 20% over last year’s total of 79,000, and down 9% sequentially. Part of this decline is attributable to a bulk subscription legacy agreement that expired. This was the last bulk subscription arrangement of this kind.

Excluding these roughly 10,000 bulk subscriptions, total subscribers were up 1% over last quarter’s total of 94,000. The acquisition of Ratings brought us an additional 5,600 subscribers. Excluding these subscribers from our third quarter subscriber count, total subscribers were 89,000, representing an increase of 29% over the same period last year and a decrease of 4.9% from the second quarter.

The average annual revenue per subscriber was $348 in the third quarter. This represents an increase of 13% over the same period last year and an increase of 5% from last quarter’s $330. Excluding both subscription revenue and subscriber totals attributable to Ratings for the partial third quarter, annual revenue per subscriber was $345 in the quarter, representing an increase of 12% over the same period last year and an increase of 5% from last quarter.

Deferred revenue of $13.1 million was up 39% over last year and down 1% sequentially. Deferred revenue at the end of the third quarter attributable to Ratings was $1.5 million. Excluding deferred revenue related to Ratings, deferred revenue totaled $11.6 million at the end of the third quarter, up 23% over last year and down 12% sequentially.

Other revenue for the third quarter of 2006 was $600,000, 108% higher than last year, and a sequential increase of 104%.

Year-to-date, other revenue was $1.1 million, 32% greater than the same period last year. Ratings contributed $400,000 to other revenue in the quarter. This revenue is primarily syndication revenue. Excluding this amount, other revenue is $200,000, a 32% decrease over the same period last year and a 33% sequential decrease.

Our third quarter operating expenses before depreciation and amortization totaled $10.1 million, an increase of 47% year over year and up 7% sequentially.

Year-to-date, total operating expenses before depreciation and amortization total $28.1 million, 42% higher than the same period last year.

Excluding operating expenses related to the Ratings business in the third quarter totaling $750,000, total operating expenses were $9.3 million, an increase of 36% from last year and a 1% sequential decrease.

Year-over-year increases in operating expenses were driven primarily by increases in costs directly associated with the growth of our business over the past year, including increased headcount, higher bonus accruals, revenue share costs, outside contributor payments, advertising serving costs, and credit card fees, as well as non-cash compensation related to the expensing of stock options.

Stock option expense totaled $500,00 and $1.3 million in the three-month and nine-month periods ending September 30, 2006.

Stock option expense related specifically to the Ratings business in the third quarter totaled $50,000.

Depreciation and amortization expense for the third quarter of 2006 totaled $300,000, an increase of 65% over the same period last year and a sequential increase of 45%. Year-to-date, depreciation and amortization expense was $700,000, an increase of 49% from the same period last year of $500,000. Excluding depreciation and amortization expense attributable to Ratings of $100,000, total depreciation and amortization expense was $200,000, an increase of 8% over the prior year and a 4% sequential decline.

Of the $4.7 million in total consideration paid for the acquisition of Weiss Ratings, $1.9 million was allocated for various intangible assets, including client lists for software rating models, and a non-compete agreement. These intangible assets will be amortized over the next three to five years. Of the total depreciation and amortization expense of $100,000 in the third quarter attributable to Ratings, $83,000 was amortization of these intangible assets.

Total third quarter net income was $3.1 million, 93% higher than the same period last year, and a $100,000 or 4% decrease from last quarter’s net income of $3.2 million.

Year-to-date, our net income is $8.9 million, $10.4 million greater than the net loss of $1.5 million for the same period last year.

Excluding the net loss of $200,000 attributable to Ratings in the partial third quarter, third quarter net income was $3.3 million, an increase of 104% over the prior year and a sequential increase of 1%.

With respect to the impact of Ratings on 2006 full year net income, excluding the amortization of intangible assets related to the acquisition, we expect the Ratings business to be break-even to slightly accretive.

Fully diluted earnings per share from continuing operations for the third quarter were $0.11, compared to $0.05 per diluted share for the same period last year and $0.12 for the second quarter of 2006.

Year-to-date, fully diluted earnings per share from continuing operations of $0.33, compared to $0.15 for the same period last year. On September 15th, the Board of Directors declared a quarterly cash dividend of $0.025 per share, which was paid on September 29th to all shareholders of record as of that day.

Our gross margin for the third quarter was 62.2%, up from our gross margin of 60.8% in the third quarter of 2005 and down sequentially from our second quarter gross margin of 63.4%. Excluding the impact of ratings in the quarter, our gross margin for the third quarter was 63.9%.

Our operating profit margin for the third quarter was 19.9%, up from our operating margin of 14% in the third quarter of 2005, and down sequentially from our operating margin of 22.2% in the second quarter of 2006. Excluding the impact of Ratings in the quarter, our operating margin was 22.4%.

Turning to our balance sheet, our cash, restricted cash, and short-term investment position stood at $44.3 million at the end of the third quarter. This represents a 41% improvement over the same period last year and a 3% sequential decrease.

We spent $3.2 million in cash on the Ratings acquisition. Excluding the impact of the acquisition, our cash flow for the quarter was $1.7 million, a 12% decrease over last year’s third quarter cash flow of $1.9 million, and a 72% decrease from last quarter’s cash flow of $6 million.

Inclusive of the cash used for the acquisition, net cash earned for the quarter was $1.5 million.

We have no bank debt.

With that, I will turn it over to Jim.

James Lonergan

Thanks, Eric. Looking forward into Q4, there are a number of initiatives behind our advertising supported mass market strategy that we will focus on strengthening over the remainder of the year.

In terms of content, the acquisition of the ratings business during the third quarter provides us with new content that allows us to serve expanded readership and channel partners. With the abundance of financial information available on the web, readers seek ways to sift through it all to find the content tailored to meet their needs, personalized information, or content in the form of specific and attractive lists, such as our top five growth stock offering.

Ratings’ content and the models that sit behind the content act as a filter for readers, saving them time and delivering them valuable information. We have published Ratings’ top list stories on our free web site. What we are seeing are results of at least three to four times our average page views per story, validating our understanding of the needs of the mass market.

During Q4, we will implement processes to help increase the production of these stories and lists, including separate features on TheStreet.com editorial calendar, which will facilitate advertising sponsorship opportunities.

The Ratings acquisition brought with it a content set that is attractive to an audience beyond just active investors and that includes more mass market content. Mutual fund and ETF ratings, insurance and financial institution ratings, many types of health care insurance coverage, such as home owners, elder and long-term care, Medicare choices -- things that go beyond individuals’ investing needs and address their long-term financial well-being.

As you heard during the call, we already incorporated some content. Stock ratings are now available on our free website. Adding to that, we expect to launch a similar free offering of our mutual fund and ETF ratings in the fourth quarter.

Our video efforts continue to reflect strong growth in terms of production, a 33% sequential increase and viewership, 125% sequential increase. We continue to expand the production and mix of content to meet the demand we are seeing in terms of our advertisers, channel partners and viewers.

In Q4, we will be launching our new video player, which will allow for better user interaction and allow us to increase distribution and syndication opportunities for our video and programming.

Included in this will be the ability to dynamically rotate different advertisements through videos to keep our video ad offerings fresh and new throughout the day.

While we increase and expand the free content available to our current readers, resulting in more page views per reader, we are seeking ways to better monetize traffic and expand our distribution and syndication efforts to attract more visitors to our free website.

We have already begun a number of initiatives that we believe will pay dividends for us in the future.

On a technical level, we began the sourcing process for rebuilding our current web properties to take advantage of the many benefits from using Web 2.0 technologies. We also began the build out of a new publishing system in late Q3 that we anticipate completing and benefiting from in Q107. The initiative will allow for more advertising revenue opportunities, such as greater sponsorship, the ability to increase revenue per page, the ability to better capture natural search results, and dynamically serve content and advertising to meet a specific readers interest.

To bolster our operational abilities, we are in the process of growing our business development team, with a heavy emphasis on building traffic and unique users within specific channels. We anticipate hiring two more candidates by year-end, and continue the ramp up of this department in 2007.

In terms of partnerships, we are working on expanding current opportunities while seeking to close more deals, helping us drive more traffic, better utilized search, and increase our subscriptions.

Toward ramping search optimization and improving ROI, we have recently entered into three partnerships, one with Quigo, one with Performix, and one with Marketing Experiments and, as we announced in the press release just yesterday, we have entered into an agreement with the Foundation for Investor Education in an educational partnership helping promote their financial program, the Stock Market Game, a website geared toward helping students understand investing. This relationship will make our content available to over 10 million students nationwide.

We also expanded our agreement with Yahoo!, under which our video content appears on the Yahoo! Finance homepage -- valuable brand exposure that funnels traffic to our site.

On the subscription front, a key component of driving our subscription business is to expand the unique user base and attract more visitors to our site. As important as generating new traffic is for subscription margins, so too is optimizing the experience of each visitor, including optimizing their exposure to our subscription offerings once they arrive on our free site.

Toward optimizing the user experience, we have partnered with an outside firm to launch a Street.com subscription lab that will allow us to test and optimize all of our traffic for our premium services.

In late Q3, we partnered with a number of firms to test search marketing and paid search optimization for subscription offerings, and we have already begun to see the strong results through a significant increase in our paid inclusion testing.

In terms of increasing our subscription retention rate, one technique we will implement is adding video to our subscription offerings that help tie contributors to our subscription products closer to our subscribers.

Another technique is bundling. In September, we launched our first official bundled consumer offering, Real Money Silver. The offering allows users to seamlessly access components of five subscription services with a single interface at a discounted subscription rate.

We expect to launch our first subscription Ratings offering during the quarter, which will allow readers to purchase either one-off, full equity Ratings research reports, a paid subscription to access unlimited Ratings reports, or purchase an alert service for a select number of ratings.

What is unique is that this is the first time TSC has given readers the opportunity to purchase one-off reports at much lower prices than having to pay a full subscription. We believe these on-demand requests will allow us to capture a wider audience, a wider paid audience while creating an incentive to eventually purchase the full subscription to the Ratings product.

In the coming quarter, we will leverage some of the partnerships we inherited when we acquired the Ratings business, including the online brokers, libraries, and settlement customers who gained greater exposure with TheStreet.com Ratings brand among their customers who, as Tom said earlier, are an audience we might not be able to access through our traditional marketing channels.

We recently included the TSC subscription offerings into the printed directories that we distribute to the public library market.

As the Ratings content is further integrated into our product platform, we will launch new consumer and professional subscriptions, target broader audience with that content, and enhance our overall product platform to drive traffic and subscription levels. Tom.

Thomas J. Clarke

Thank you, Jim. This quarter, we have moved the needle into the mass market space, and have begun to meet the needs of this demographic by increasing our free content offerings. Whether it included more educational content through TheStreet.com University, more video offerings throughout the free site, or the timely expansion of our personal finance initiatives, we remain focused and committed to increasing our overall reach in the investment community.

As Jim conveyed, we intend to continue to concentrate on exploring the mass market opportunity we have embarked upon, and we believe we are well-positioned to make as much of an impression this space as we have within the active investor and professional spaces.

I would like to open up to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from the line of Douglas Kass from Seabreeze Partners.

Douglas Kass - Seabreeze Partners

As you know, through that e-mail I sent you yesterday, I am fascinated by this Foundation for Investor Education. You are going to offer -- is this going to be -- can you explain the distribution, how you are going to access these .edu addresses, and is this going to be a new site? Or kind of a conglomerate of the three sites together?

Thomas J. Clarke

Doug, the way it really works is where the Foundation for Investor Education has educational programs for students, teachers around the country, and what they do as part of their stock market game, they are looking for news sources to help them with the education of understanding how to invest in the market.

Douglas Kass - Seabreeze Partners

So it is on their site, basically.

Thomas J. Clarke

Correct, on their site.

Douglas Kass - Seabreeze Partners

So it is going to be a point-and-click.

Thomas J. Clarke

Correct.

Douglas Kass - Seabreeze Partners

In terms of distributing it to all these kids, or all these students, I presume that they have basically the list.

Thomas J. Clarke

Correct. They have it on their site and they have access to all the stories.

The other thing is on our site, if you look on TheStreet.com University, some of their content will be there, and one of the things we thought would be good is that when there are winners in states or stuff like that, that we would highlight and make it available for all the places for them to be able to look at this.

One of the other initiatives we have, Doug, also out there is that in conjunction with some of Jim Kramer’s college tour visits, we have started an initiative where for students in college who do have an .edu at the end of their e-mail address, we have opened up some of our subscriptions offerings to them to really develop the next generation of investors. We are making that access to them for free during their semester, so as long as they have an .edu address and they are in college, they do have access to our material now, so we think that will broaden the ultimate user base for content that comes from TheStreet.com.

Douglas Kass - Seabreeze Partners

In addition to broadening that base, last question, I presume you will have some revenue benefit from this?

Thomas J. Clarke

Absolutely.

Douglas Kass - Seabreeze Partners

Thank you.

Operator

Our next question comes from the line of Trina Choudhury with JMP Securities.

Trina Choudhury - JMP Securities

I just wanted to confirm with you some of the metrics you put out already. Page views down 10%, quarter over quarter, was that right?

Thomas J. Clarke

What was the number you had again?

Trina Choudhury - JMP Securities

10%.

Thomas J. Clarke

Yes, that is right.

Trina Choudhury - JMP Securities

What was that number year over year?

Thomas J. Clarke

It was up 15% year over year.

Trina Choudhury - JMP Securities

Unique visitors, was that down 6%?

Thomas J. Clarke

That was down 6% sequential, up 31% year over year.

Trina Choudhury - JMP Securities

Great, and then the total number of ending subscriptions?

Thomas J. Clarke

Total number of ending subscribers was 95,000.

Trina Choudhury - JMP Securities

95,000, okay, great. I heard you guys say something about 89,000, and I was just wondering if I misheard, or there was another metric there.

Thomas J. Clarke

No, the 89,000 was excluding the 5,600 subscribers that came in from Ratings, just to compare like with like.

Trina Choudhury - JMP Securities

Okay, got it. The annual revenue per subscriber was $345, was that right?

Thomas J. Clarke

$348 -- excluding the impact of Ratings, it was $345.

Trina Choudhury - JMP Securities

Got it, okay. Also, would you guys state your churn rates?

Thomas J. Clarke

Sorry, could you repeat that question?

Trina Choudhury - JMP Securities

Your churn.

Thomas J. Clarke

Stayed consistent with what we have seen in prior months, so monthly at 88%, with annual churn at the 60% level.

Trina Choudhury - JMP Securities

The last one was, what is your sell-through rate?

Thomas J. Clarke

Could you say that again?

Trina Choudhury - JMP Securities

Your sell-through rate.

Thomas J. Clarke

Sell-through rate for the quarter -- let me just make sure I pull the right number here, 89%.

Trina Choudhury - JMP Securities

One last one, your stock-based compensation.

Thomas J. Clarke

Stock-based compensation was $500,000 for the quarter.

Trina Choudhury - JMP Securities

Thank you so much.

Operator

Our next question comes from the line of Michael [Moskoff] with MRM Partners.

Michael Moskoff - MRM Partners

I have a bunch of little questions here. What does the other revenue consist of again?

Thomas J. Clarke

Syndication.

Michael Moskoff - MRM Partners

Like radio and things like that?

Thomas J. Clarke

Correct.

Michael Moskoff - MRM Partners

The legacy commitments that you said was about 10,000, could you explain exactly what that was?

Thomas J. Clarke

Sure. What had happened was when I first got here, there were a lot of what we would classify as bulk subscription deals where you would have 10,000 people accessing the information, let’s say on average, for $2.95 kind of sub. Over time, Mike, as you know, we have placed a lot more value on our content than I guess was previously done. We have raised the prices and stuff like that and longer term, those are not deals that I find beneficial for the firm. So as they have come up and the expirations come, we let them go.

Michael Moskoff - MRM Partners

Okay. The total advertisers was how many?

Thomas J. Clarke

71. There were 17 new ones in the quarter.

Michael Moskoff - MRM Partners

Okay. Last quarter, video was about 4% to 5% of advertising, I think you said. What was it this quarter?

Thomas J. Clarke

This quarter, it is probably, since we had such an increase in the advertising, it has probably stayed relatively flat.

Michael Moskoff - MRM Partners

First of all, CNBC ratings, the radio show that Cramer is on, how have they been holding up?

Thomas J. Clarke

Again, they are their numbers, but I will just tell you what has been reported. The numbers for the show continue to increase and the exposure on radio continues to increase also, so both of them are moving in the upward direction.

Michael Moskoff - MRM Partners

Anything regarding you guys on TheStreet Insight, Cooper is no longer around, for whatever reason. Is there going to be a replacement for him, or --

Thomas J. Clarke

We are evaluating that now with our editorial staff. We will go through that and see if it is necessary. We have other technical contributors on the site. Lee [Mizler] came in earlier in the year and is doing a product for us. We will evaluate and see if it is necessary there. That is one of the decisions we will look at over time.

Michael Moskoff - MRM Partners

Last question, with the stock getting hit today, would you guys plan on buying, using some cash to buy back some stock?

Thomas J. Clarke

I think you know, we are in a, as you see from our cash balance, we are in a real good position to do so. I think it really depends on what the fallout is if there is any today on where the stock winds up, but it is certainly something we are going to look at.

Michael Moskoff - MRM Partners

Thank you.

Operator

Our next question comes from the line of Frank Gristina with Avondale Partners.

Frank Gristina - Avondale Partners

Good morning. Thanks for taking my questions. In terms of the subscribers, obviously it seems like you had net losses in subscribers for the quarter. Tom, what do you think was a principal driver of that? Was it just contracts that probably came in as Cramer’s popularity was really taking off and you were not able to convert those, or were there any products that were cancelled that had subscribers? What are your thoughts? How do you improve that? In particular, can you give us the actual number of subscribers that you lost, the net number?

Thomas J. Clarke

You have a bunch of questions wrapped up there, so let me try to address them one by one.

I think the first question is an overriding one about the subscriber business in general and the net loss, if there is anything I think you could point to and say that -- I think one, you have a little bit of seasonality in the third quarter, as we have talked about in the past. But look, I am not a person who likes to make excuses for that. I think that there are a couple of things that were out there. One, I think there was a -- while the market was up, I think the quarter started out a little shaky, and I think what happened was that put off some purchase decisions that typically would have happened earlier in the quarter, and then did not happen in the quarter at all.

Two, I think we could do a better job in our performance in some of our products. I think we did not perform up to where we thought we should, and I think that always plays a factor into it, so we are looking to improve that and taking a hard look on where that is.

I think we have to do a better job in bringing more people into the funnel, as we have talked about many times. We use content as a driver of traffic and ultimately, into our free site, where we then use additional paid content as a teaser to get them to buy product.

I think we have to do a better job in looking at how we utilize those marketing activities, and I think as Jim had mentioned, we have a bunch of initiatives in there that do that.

Frank Gristina - Avondale Partners

Thank you. That is helpful. So it sounds more like it was not a renewal issue, but a gross add issue.

Thomas J. Clarke

I would believe it is a gross add issue. The other thing I think, and I do not want to -- I am the guy who does not want to talk about things that are on to the -- I think that one of the things that is out there is that with the Weiss acquisition, now that we have put Ratings on the site for free, for those individuals who do want to get a more detailed research report, we are going to make that available for a fee and a one-off type of basis, which is the first time that we have actually looked at providing content on a one-off kind of menu.

I think that as we get into that, that may provide other opportunities for us to look at selling information that way that we have not done in the past, and that would fall in the subscription category.

Frank Gristina - Avondale Partners

Tom, the last question, or the last part of that question was what was the actual -- you used to give a net add number.

Thomas J. Clarke

The net loss was about 5,000. One thing, Frank, and I am glad you brought it all up, because I think as investors have questions, we should answer them all as best we can. I think the overriding thing that I said, and I said I am disappointed with the subscription business, but the strategy, and it is one we have talked about for a few quarters now, is the fact to get out of -- not get out of, but certainly look at putting our resources behind faster growing segments of the business, and we certainly think advertising does that, and we think the acquisition of Weiss kind of is the springboard to do that.

As you heard Eric talk about in the call, the trend we are seeing in the beginning of October already, in terms of page views and stuff, we are showing a 20% gain already, so we think that this is a strategy we have articulated over time, but we think it is actually starting to come to fruition.

Frank Gristina - Avondale Partners

In terms of G&A, that margin moved up, or the expense cost moved up, but that is a function of the Weiss acquisition. Do you expect to get some scale over that as you integrate it?

Thomas J. Clarke

We do. I think the way to look at that is if you looked at the gross profit margin, if you take Weiss out of the equation, the gross profit margin actually went up sequentially quarter to quarter, and the same thing with the operating margin. I think we have, as we have said and Eric said in his part of the call, is that the acquisition was break-even, as we said it would be when we did one. It will be accretive in this quarter. I think as we integrate these things and can look at the cost structure, as Eric said earlier, we are going to fully integrate this into TheStreet.com. This is not going to be something where we are not going to get cost synergies and benefit from it.

Frank Gristina - Avondale Partners

Last question, on the video side. How is the consumption of downloads or streaming, video streams from the website?

Thomas J. Clarke

It is very strong. As Jim mentioned in his call, we were up sequentially. Just in production, we were up significantly. We were up over 100% in kind of looking at the consumption of it, so we think that is still a good driver for us. We think that the viewer ship continues. We are actually testing content that is more lifestyle type content into that. The relationship with NASDAQ that we announced is certainly being a positive, so we think that is also another catalyst for us as we look to grow our reach.

Frank Gristina - Avondale Partners

Were any of the 17 new advertisers, did they come first to the video? Is it bringing in any of the new ads?

Thomas J. Clarke

It certainly does. I think as we mentioned last call, but if we did not, I will talk to you hear, is that when an advertiser comes in now, they are really looking for a broader buy. Basically, they are including a buy in the video with a buy they typically would have done on the site. We have seen a couple of advertisers that got intrigued with us because of video, and therefore came to us kind of through that channel, and subsequently bought on the site.

We were really happy with the 145% increase in non-financial advertising. I think a lot of people have always been concerned about what our financial advertising component is, and I think that we are demonstrating that as we grow our reach and our audience, that the advertisers are coming along with it.

Operator

(Operator Instructions)

Our next question comes from the line of John Evans with Wells Capital.

John Evans - Wells Capital

My questions have been answered. Frank asked them. Thank you.

Operator

At this time, there are no further questions in the queue. I would like to turn it back to our presenters for any closing remarks.

Thomas J. Clarke

Thanks, everybody, for being on the call. We look forward to talking to you again in the future. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the presentation and you may now disconnect. Have a wonderful day.

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Source: TheStreet.com Q3 2006 Earnings Call Transcript
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