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Marchex Inc + (MCHX)

Q3 2006 Earnings Call

November 8, 2006 5:00 pm ET

Executives:

Ethan Caldwell – General Counsel and Chief Administrative Officer

Russell Horowitz – Chairman, Chief Executive Officer

John Keister – President, Chief Operating Officer

Michael Arends – Chief Financial Officer

Analysts:

Safa Rashtchy – Piper Jaffray

Stewart Barry – ThinkEquity Partners

Christa Quarles – Thomas Weisel Partners

Sameet Sinha – Kaufman Bros

Clayton Moran – Stanford Financial Group

Presentation

Operator

Good evening, ladies and gentlemen, and welcome to the Marchex Q3 earnings conference call. Operator Instructions. It is now my pleasure to turn the floor over to your host, Ethan Caldwell. Sir, the floor is yours.

Ethan Caldwell – General Counsel and Chief Administrative Officer

Thank you. Good afternoon, everyone, and welcome to Marchex’ Q3 2006 conference call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer, John Keister, President and Chief Operating Officer, Michael Arends, Chief Financial Officer, Peter Christothoulou, Chief Strategy Officer, and Cameron Ferroni, Chief Technology Officer.

During the course of this conference call, we will make forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts included on this call, regarding our strategy, future operations, future financial position, future revenues, acquisitions, projected costs, prospects, plans and objectives of management are forward-looking statements.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on a forward-looking statement. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. There are a number of important factors that could cause Marchex’ actual results to differ materially from those indicated by such forward-looking statements as are described in the risk factor section of our most recent periodic report and registration statement filed with the Securities and Exchange Commission.

All of the information provided on this conference call is as of today’s date and we undertake no duty to update the information provided herein. During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity, including OIBDA, adjusted OIBDA, adjusted EBITDA and adjusted non-GAAP EPS. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today’s earnings press release, which is available on the Investor Relations section of our website, and definitions of these measures as used by us and the reasons why we believe these measures provide useful information to investors will be referenced during this conference call and are also contained in today’s earnings press release.

At this time, I would like to turn the call over to Russell Horowitz, our Chairman and Chief Executive Officer.

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Russell Horowitz – Chairman, Chief Executive Officer

Thank you, Ethan, and thank you everyone for joining us for today’s conference call. On today’s call we will cover several items, including our operational and financial progress for Q3, selected trends we are seeing in the current quarter, investments we’re making in our business and our expectation for how those investments will play into our future outlook. Most of you have probably read our earnings press release that includes the results of our quarter, so I would like to start by providing some context and discuss our highlights in Q3 as well as our forward outlook.

One, we saw an increase in certain metrics which drove an increase in revenue attributable to proprietary traffic sources to $12.3 million, our strongest quarter to date and up 58% over last year.

Two, we saw sequential increase in revenue per click rate from proprietary advertisers accessing proprietary traffic of more than 10% over Q2 2006, which is a continuation of the growth we saw in Q2.

Three, we saw increases in monetisation per user from proprietary traffic sources.

Four, we continue to win third party distribution relationships with leading online publishers such as thestreet.com and others.

Five, we made substantial progress with our search platform, including continuing to substantially grow traffic and revenue with Open List integrations and expanding our category index to include more than 15 million US business listings and related pieces of content covering more than 20,000 categories, which is up from approximately 1 million business listings and three categories when we acquired Open List in May 2006.

In light of a market that has been challenging in certain ways over the past few months, we believe we are making very good progress with respect to developing and launching products that will fuel future growth, winning the distribution relationship and further monetising our own sites with our own direct advertiser listings. In Q3, this progress translated into a revenue increase of more than 26% over the prior year period and Q3 EBITDA margins of 32%, a metric that few companies online have been able to attain. Simply put, we feel very good about our business, our recent product progress and the parts of our business where we have more direct control.

We believe that it’s important to be forward thinking and concentrate on our long-term goal to build a strong and highly relevant base of traffic that can be monetised with our own direct advertiser relationships as well as our partner’s advertisers. We will grow this base of traffic through three primary means:

One, integrating Open List content and search functionality on the vast majority of our websites so that as many of these sites as possible are true destinations within their respective categories.

Two, position Open List as a destination for consumers looking to research and find information on any commercial category, such as travel, auto, employment, professional services and thousands of other categories and sub categories.

Three, in addition to organic traffic increases, continue building traffic to our website network through selective marketing, partnerships and acquisitions. We are still a relatively young company and we think it is important to take a long-term approach to our business and continue to make decisions on investments in our company that will provide growth and stability as we move into 2007 and beyond.

Looking back over the last couple of years, we have grown Marchex significantly while realizing margins that few companies in our industry had achieved. We have also gone from effectively no proprietary traffic to more than 28 million unique users over the last two years. We intend to extend our current strategy, drive these metrics higher and continue to scale our business meaningfully in the coming period.

Now to provide an update on our operational progress in Q3 and discuss our focus to the end of the year and into 2007. Starting with proprietary traffic, according to internal logs, our websites were accessed by approximately 28 million unique visitors in September 2006. With the exception of certain verticals such as finance and real estate, traffic trends for Q3 were generally consistent with normal trends seen in prior year periods. As we have stated before, Open List is an important component to our proprietary traffic strategy and Marchex’ strategy overall.

Our intent over the next several years is to invest significantly in our search technology and leverage that technology to encourage repeat usage and increase proprietary traffic. As highlighted in today’s press release, one of our main goals is to connect millions of consumers online to personally relevant information, products and services through our website including our network of local vertical websites and openlist.com.

As has been previously communicated, we believe that it’s critical for the long-term strength and growth of our website network that we integrate dynamic content to increase utility, drive user acquisition and user retention. The advancements we have made with the Open List product in the last few months have set the stage for us to achieve these goals. We plan on accomplishing this by using our search technology to first aggregate vertical and local micro content from across the web and second to provide a unique, compelling and efficient user experience on all of our websites through highly targeted and refineable results.

We have always intended to build out additional verticals beyond travel and the work that our product development organization has done in the last few months and years has proven that our technology is very flexible and scaleable. When Marchex acquired Open List in May 2006, the technology and service consisted of approximately 1 million listings and related pieces of content that were focused solely on the travel category, including hotels and restaurants.

Our vision was that we would add dozens of categories over the next year to both add content to our network of websites and add to the relevancy of Open List as a destination site. As most of our websites relate to specific locations and business categories, it makes sense to build out such business categories as the next step. To be more specific, today we announced we have developed an expanded version of Open List that now consists of relevant and searchable content that covers more than 20,000 additional business categories and includes more than 15 million listings and related pieces of content.

While this data is not yet incorporated on openlist.com, today we announced that we have deployed this expanded platform in content to more than 50 of our category and local vertical websites, including remodelling.com, locksmith.com, bostonmortgage.com as examples of the showcases of the underlying technology. To be clear, this is a milestone product release for Marchex. Going forward, our proprietary traffic plan is centered on developing Open List into a powerful consumer destination and leveraging the technology to build out our network of websites with increased user relevance and utility.

Specifically we intend to relaunch Open List during 2007 as a comprehensive, standalone search guide that will be accessible at openlist.com adding the expanded platform of content and data announced today as well as additional categories and additional content we are working on now and going forward.

Open List will also serve as the platform for the gateway to our network of websites that we will launch in 2007. During 2007, we also intend to extend our content functionality to all of our relevant local and vertical websites similar to the beta tests launched today. Given that in a few short months, Marchex has been able to grow the categories and content covered by our search technology exponentially, and given the under?developed real estate through which we can leverage this expanded content, we feel we are very early in our overall opportunity. We believe if we bring the pieces together, we have a huge opportunity to emerge as an innovator in the online search market while dramatically increasing our relevance with online consumers.

Now let’s discuss follow up data and trends associated with our initial Open List integrated local vertical websites that were launched in May 2006. Selective results and trends from the beta websites are as follows and represent data for the full month of September 2006 versus data for the average of the months of March, April and May 2006, which were the three months prior to launch.

Page views to these beta websites increased more than 300% for the month of September over that average page views for the month of March, April and May. Revenue from these beta websites increased more than 90% for the month of September over the average revenue for the months of March, April and May. For the month of September 2006, referring traffic to the beta websites was 10% from natural and algorithmic search engines and the remainder principally being from direct type in traffic or user bookmarks.

In terms of search keywords, data indicates that referring traffic to the beta website from natural or algorithmic search engines was driven by more than exact match search queries, which we believe is important as it signifies the growing relevance of our web properties. For the month of September 2006, an average beta website generated algorithmic traffic from search engine referrals resulting from 60 unique search keywords or keyword phrases. We believe this demonstrates that our websites are relevant algorithmically across a growing number of user search queries.

While this data may not be indicative of future results, we are encouraged by this data and it is still early in our development and deployment strategy. The continuing strong data from these tests indicates that our focus on user utility is manifesting itself in meaningful progress in metrics we track for determining quality. The increase in page views and inclusion in algorithmic search indexes suggests that our Open List content can have a meaningful, positive impact on Marchex content deployment strategy and our overall financial profile.

For the next 24 months, we will be investing significantly in building out our search functionality and unifying our network. At scale, when we have extended our search technology to cover all the major commercially relevant categories, we believe the significant majority of our websites will benefit. At that point, we will have taken more than 200,000 individual websites and created millions of pages of dynamic, targeted content with a highly relevant user experience and valuable advertising inventory.

I would now like to turn the call over to John Keister, our President and Chief Operating Officer.

John Keister – President, Chief Operating Officer

Thanks, Russ. Now let’s focus on our advertiser facing business as well as our partner distribution network. In Q3, we continued to focus on promoting the unique characteristics of our proprietary network to our direct advertisers, highlighting the potential to access the critical mass of targeted users which we have seen lead to high conversion rates. As a result of those efforts and combined with the compelling conversion data, our direct advertisers are experiencing for the second quarter in a row increased RPC (revenue per click) rates on our proprietary network.

Despite the fact that inventory remains relatively constant when compared to Q2, we saw average RPC rates increase more than 10% sequentially in Q3 2006 over Q2 2006, resulting in an increase of revenue from proprietary advertisers in our network. In a relatively flat CPC environment for search generally, this trend over the past two quarters has been encouraging. Over time, our goal is to monetise more of the available inventory in our proprietary networks with our own direct advertisers.

Today, we offer advertisers the ability to buy our inventory based on either categories or keywords, a source of some of our most significant investment centers on creating a unique advertising platform that gives our advertisers the flexibility to purchase inventory across Marchex’ distribution including both proprietary and partner distribution. This will be an iterative process with several product milestones announced over the next several quarters. As a first step, yesterday we announced the formal launch of Marchex’ network, where advertisers can sign up to be included directly in our proprietary websites.

Over time, this process will improve in various ways and based on this demand from advertisers accessing our network, we believe this trend bodes well for additional monetisation platform improvements. As our technical capabilities increased to match our increasing direct inventory, we believe Marchex will be in a strong position to continue to scale the number of direct advertiser relationships in the Marchex network and capture an increasing share of search marketing dollars over time.

Additionally, we have seen strong interest from advertisers and seeking placement on our websites that have Open List integrations. We are optimistic that as we integrate Open List on more of our proprietary websites, we will win additional direct advertiser deals. At the end of the day, we know advertisers look for two things when they place a media buy: quantity and quality. We believe that the quality measured in conversion rates of our proprietary website traffic is strong and advertisers have an appetite for this traffic. Therefore, the continued growth in our direct advertiser business on our proprietary traffic base will largely be a function of the absolute growth of that proprietary traffic base.

As Russ mentioned, we have a three-pronged strategy to grow our traffic base and we’re confident that we will take meaningful steps in executing this growth strategy in 2007. In regard to our third part distribution, we continue to make good progress in adding new inventory and new relationships. In the last few months, we have added several new relationships including line56.com, which is a leading sources of global news and analysis on e-business technology and strategy, as well as thestreet.com, a leading provider of financial commentary, analysis, research and ratings as well as many other new partners.

As traffic growth returns to verticals such as finance, we believe we will see benefits from those verticals. Over the past year we believe we have won a disproportionate share of premium third party inventory distribution deals with brand name publishers and more specifically we have done particularly well with the leaders within the finance and technology verticals. As Mike will touch on in a moment, some verticals can be subject to seasonal and cyclical advertising trends, but we continue to note that there is tremendous value in adding premium inventory partners as part of our long-term strategy for creating a robust network.

This strategy will be important as we ramp our efforts to sell direct advertisers a combination of high value publishers like Forbes and USA Today combined with our proprietary website traffic. This combination will become a more meaningful buy for advertisers as we grow this offering. At this time I’d like to hand the call over to our CFO, Mike Arends, to discuss our third topic for the call today, our quarterly financial results and a summary of our 2006 guidance.

Michael Arends – Chief Financial Officer

Thank you, John. Marchex continues to realize growth while increasing the cash generation capabilities of our business. As Russ and John have already mentioned, we believe Marchex is making considerable progress on the products that have been the source of our most significant investment and that as these products roll out, we believe they will continue to positively impact Marchex’ growth profile. Now moving to the financial results for Q3.

Revenue for Q3 was $32.3 million, which represents a 26% increase over our year-ago results of $25.6 million. It is important to note that during Q3, we were disproportionately impacted by weakness on both partner volume and spending levels of advertisers in the finance and real estate verticals. This included rate impacts from third party monetisation providers. As John mentioned, given our disproportionate success in winning new, finance-related third party distribution agreements over the last 12 months, weakness in those categories during Q3 impacted results. While this has been a short-term challenge, we continue to believe in the opportunities in these core verticals, in the intermediate and long term.

Total operating costs, excluding stock-based compensation, amortization of intangible assets for Q3 2006, were $23.7 million. In the year-ago period, total operating costs, excluding the previously mentioned items, were $18.8 million. In looking at the mix in operating costs for Q3, our service costs, excluding stock-based compensation, decreased as a percentage of revenue on a YoverY basis largely due to an increase in revenue coming from proprietary traffic sources. The increase in sales and marketing costs on a YoverY basis were largely due to increased personnel costs, initiatives at industry brains and marketing of proprietary websites.

Other operating costs included additional investment in personnel, product development, as well as increased technology infrastructure costs and certain costs related to being a public company compared to last year. Adjusted operating income before amortization for Q3 was $8.6 million, which represented a 26% increase over $6.8 million in the year ago period.

Adjusted earnings before interest, income taxes, depreciation, amortization, stock-based compensation expense and gains and losses on sales of intangible assets, or adjusted EBITDA for Q3 was $10.2 million, which represented a 26% increase over $8.1 million in the comparable period last year. Adjusted operating income before amortization and adjusted EBITDA are two of the principal metrics we use to measure the progress of our business, liquidity and our ability to generate cash. Adjusted operating income before amortization includes a reduction for depreciation charges and excludes amortization costs and costs related to our acquisitions, as well as other non-recurring charges.

One item of note. Beginning in the first quarter of 2006, due to recent accounting rule changes we, like all other public companies, began to recognize increased stock compensation charges as a non cash expense that will impact our GAAP results. Stock-based compensation expense for Q3 was $3.2 million compared to $558,000 in the same period in 2005. GAAP net loss applicable to common stockholders for the quarter was $411,000, or $0.01 per share compared to net income of $27,000, or $0.00 per share in Q3 2005.

Going forward, our GAAP results may be impacted by a number of factors, including stock-based compensation charges, increased amortization costs associated with our acquisitions, other potential future acquisitions, our preferred stock dividend and increased public company costs which will also impact our adjusted operating income before amortization and adjusted EBITDA results.

Adjusted non-GAAP earnings per share, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.13 per share for Q3. Adjusted non-GAAP EPS represents adjusted net income divided by weighted average, fully diluted shares outstanding for adjusted non-GAAP EPS purposes. Adjusted net income generally captures those items on the statement of operations that have been, or ultimately will be, settled in cash exclusive of certain non-recurring items and represents net income available to common shareholders, such as stock-based compensation expense, amortization of acquired intangible assets, gain or loss on the sale of intangible assets, and other income or expense.

Turning to the balance sheet, we had approximately $69 million cash on hand as of September 30, 2006. During Q3, we continued to generate significant cash flow from our operations. Going forward, we anticipate that we will use our cash principally to continue investing in long-term growth initiatives including internal product developments and sales initiatives, and selected acquisition opportunities.

I would now like to discuss our revised outlook for 2006. While we continue to make substantial progress in executing our product roadmap and rolling out new initiatives across our business, there are certain factors affecting near-term growth. First, parts of the search market are in transition and as a result the RPC rate we receive from some of our third party monetisation partners has not experienced the seasonal up tick we have seen in prior quarters and years. Second, while certain verticals indicate normal seasonal spending patterns, we continue to see impacts on the finance, vertical and real estate sub vertical, which may offset some of the strengths and some of the other verticals.

As a result, today we are revising our revenue guidance for the year to a range of $128 to $131 million. Likewise, we are revising our adjusted operating income before amortization guidance range to $33 to $35 million. Over the long term, I would note that we are highly focused on seeing competitive returns on the investments we are making in our business, and are therefore reiterating our long-term adjusted operating income before amortization margin guidance of 30% or more, which is a level few companies online have been able to attain.

I would now like to hand the call back over Russ.

Russell Horowitz

Thanks, Mike. We are very confident in the future of Marchex and our opportunity. Again we believe the search marketplace is going through certain transitions and in any such period there are opportunities that need to be recognized and decisively pursued. Some of the largest players in our industry are investing heavily in their monetisation platforms to provide additional value for advertisers. Additionally, many new entrants are seeking to develop their own monetisation platforms as a means of providing efficient access to online traffic for advertisers. We believe Marchex’ unique blend of assets combined with our operational and product execution will continue to place Marchex in an increasingly unique and defensible position.

The pieces are coming together and the Marchex equation is simple. A strong traffic base plus quality returns for advertisers plus unique consumer utility and monetisation tools equals high margins, user stickiness and meaningful long-term growth. We’re looking forward to 2007 being a milestone year for Marchex. We have a lot of excitement attached around what is going on throughout the company, especially with our product development initiatives. We believe we have the people we need to drive our strategy and specifically with scaling and extending the Open List opportunity into our proprietary website network which is a key catalyst for our business overall. At this time, Operator, we’d like to give the call back to you to take questions from the audience.

Questions-and-Answer Session

Operator

Operator instructions. Your first question is from Safa Rashtchy – Piper Jaffray.

Q - Safa Rashtchy – Piper Jaffray

A couple of questions and you might have touched on these and maybe I missed it. Can you talk about the dynamics of your core segment, which saw a decline in revenue compared to last quarter? What is causing that and how should we look forward for growth patterns in the core segment? I have a quick follow up as well.

A - Russell Horowitz

During the quarter we saw good sequential growth and revenue attributable to proprietary traffic sources and did not see the same growth in revenue attributable to third parties. We cited in our press release and also on this call that some of that comes from weakness in a few verticals like finance and we have noted in the past that we think finance is a very relevant online category and one that we are disproportionately exposed to, which in the long term we think is a very good thing, but in the short term it has created some challenges in terms of that overall segment. Finance and real estate have been somewhat weak. I don’t think we are the first to cite that, but we have seen it in our business. Again, we think intermediate to long term, these are good categories for us, based on strength and proprietary traffic in this we feel pretty good over all.

Q - Safa Rashtchy – Piper Jaffray

Can you give us a sense of what is happening with your outside monetisation partners. You alluded in the call that there was some weakness in terms of the revenue and we understand some of them have taken steps to improve the quality of traffic which may impact some of the partners. Has that impacted you? What is your outlook on that?

A - Russell Horowitz

We’ve included that in our outlook. We have known from the beginning that advertisers ultimately are trying to acquire customers and today they predominantly do that by buying clicks. They need to translate the bit they pay into the value of those acquired customers so understanding the quality of how you get the right customers to those advertisers is critical to building the relationship. We understand that, our third party monetisation providers understand it as well. This isn’t a new concept. Quality has always been in the forefront of Marchex’ mind and it’s in the mind of other industry leaders as well. Right now, in that context, it isn’t new except that we continue to manage and see a validation in the conversion characteristics of our traffic. Whatever third parties we work with will collaborate closely on how to optimize the value of the advertisers and relevance they are providing for our traffic and the targeted element of appropriate users going to those advertising links to get the best conversion characteristics and in turn drive the greatest long-term opportunity for all of us. There is nothing really new on that front. We do understand that people increasingly focus on it and we encourage them to because ultimately quality is what feeds the ecosystem and that is something we continue to think is a real priority to understand and build.

Operator

Your next question is from Stewart Barry – ThinkEquity Partners.

Q - Stewart Barry – ThinkEquity Partners

To what extent are you driving direct relationships with local advertisers? Are you still trying to partner on that front? How is the pay per call technology developing?

A - Russell Horowitz

When it comes to your local advertisers, clearly a lot of the tools we offer are self serve and we offer the targetable inventory. Some folks may be coming in, but predominantly the way we view it as most efficient so we can get the best returns is to leverage large partners like yellowpages.com and our Arbuckle relationship, AT&T, Bellsouth etc. They have tremendous expertise in local relationships. We just want to be a valuable partner to assist them in acquiring those direct local relationships and help them fulfill by utilizing our technology and whatever distribution we can offer to the extent they decide that’s relevant. That continues to be our theme and we will continue to try and tackle local with a pincer movement of increasing the quantity of high quality local traffic and increasing through those relationships the volume of local advertisers that want to buy that traffic. As we have noted in the past and will reiterate today, we think this will be one of the disproportionate high growth segments going forward. Getting either of those right is a catalyst for Marchex. Getting both of them right would be very, very meaningful in the next couple of years. We’re optimistic we’re doing good things on both fronts.

Q - Stewart Barry – ThinkEquity Partners

Is it reasonable to assume that your CPCs at some point will be higher than the search engines? When do you think that might happen, given that you’re much further down the (inaudible) that the search engine?

A - Russell Horowitz

Today we have areas where our direct cost per click rate from advertisers may be higher than the search engines and there are areas where theirs may be higher than ours and clearly we monetise our traffic with a blend of our own advertisers and partner advertiser listings. Our goal is to continue to drive as many high quality advertiser relationships that get us the value we think we’re delivering and we do believe that means upside in our network as it stands today based on the conversion characteristics, which is why we think it’s important to take a balanced approach between aligning yourself with good outside long term partners and having some direct control over your own monetisation strategy. That would just be something we could continue to manage. That is the dynamic analysis. You look at core verticals, like finance, where the volume has been a little bit slower, we’re getting multi dollars per click in many cases. That’s something we’re going to continue to try and build into other verticals as well.

Operator

Your next question is from Christa Quarles – Thomas Weisel Partners.

Q - Christa Quarles – Thomas Weisel Partners

I was wondering if you could give your net revenue growth? Clearly the fact that direct nav is growing as fast as it is, is kind of suppressing the overall revenue growth.

A - Russell Horowitz

Could you clarify that question for us so we answer it appropriately?

Q - Christa Quarles – Thomas Weisel Partners

Sorry – revenue after tax?

A - Russell Horowitz

So like net of partner share.

A - Michael Arends

In terms of growth I think it’s in the 20% range, north of 20% or at least in there.

A - Russell Horowitz

So the organic growth rate net of tax is north of 20%.

Q - Christa Quarles – Thomas Weisel Partners

So not too dissimilar from your overall growth rate?

A - Russell Horowitz

Yes. If you look at our organic growth YTD, it’s been in the twenties and this number is also in the twenties.

Q - Christa Quarles – Thomas Weisel Partners

Could you give the exact percentage that you guys are driving on your own in terms of the direct navigation?

A - Russell Horowitz

Last quarter we said that approximately 30% of inventory is being allocated to our own listings. That’s where we are today, that’s the current integration as well.

Q - Christa Quarles – Thomas Weisel Partners

Okay, so it hasn’t meaningfully changed from last quarter. On industry brains – do you have relationships with large ad agencies or is it mostly direct ad relationships? I’m just trying to understand, you know, how cultivated is the mindset around working with you guys and the product you have given that it’s a little bit unique out there. How many sales people do you have out there, looking at the process?

A - Russell Horowitz

We do both. We’ve got direct relationships but we also leverage agencies. Given the quality and depth of distribution we have, in categories like finance and technology we end up being a relative mug(?) for a lot of agencies targeting those categories so it ends up being a pretty good mix of direct relationships and agency relationships as well.

A - John Keister

My only follow up on that is we really haven’t had as much focus on the agency side in the past as we will in the next couple of years. That’s largely a function of building our sales team as well as just building the tools on the monetisation side to get advertisers into our own proprietary traffic, so it will become an increasing focus to get in front of the big agencies.

Q - Christa Quarles – Thomas Weisel Partners

Taking a step back, when you first became public and did the secondary, it felt like the strategy was somewhat ahead of the execution. Now with Open List and industry brains and some of the pieces, are you feeling like the execution on the strategy is starting to marry up more closely? How much further along until you feel like you have the pieces in place to start to hit the accelerator?

A - Russell Horowitz

We said today, the pieces are coming together and we feel that right now it’s about product building and integration. There are things in running your business you have more direct control over and there are things you have less direct control over. When you look at the things where we have more direct control, we’re seeing a lot of progress and we feel very good about it. The things where we have less control and where we haven’t seen some of the seasonal benefits we saw last year, if we look at a set of pro formas on what our performance would have been, it would have been very strong. Our financial performance as it stands, when you look at the efficiency of our model, we feel very good about it. When you look at launching a new product with Open List with more than 15 Xs, the available proprietary content we can leverage into our proprietary network of websites in combination with a business model we know is very leveragable, a management team that had the highest quality at any point in our history and increased clarity around which parts of our business really make the difference, we think the pieces are very much coming together and that’s why we look at the balance of this year and 2007 as being key windows in taking the next step. In the grand scheme of looking at the long term, in any business in any industry, there are going to be points where the cycle of work works for you and makes it easy, and there are going to be times where parts of it may make it harder. During those times, you can’t lose sight of the big picture, which is what is your opportunity and where is the long-term drivers of increased value. For us, we think we’ve got the right assets, the right people and we are now seeing the pieces come together in a way that increasingly makes that tangible. We feel like we’re in that window and we’ve just got to execute well and continue to deliver new products.

Operator

Your next question is coming from Sameet Sinha – Kaufman Bros

.

Q - Sameet Sinha – Kaufman Bros

You mentioned during that call that you’re planning to invest more money into Open List, creating it as a destination site. Can you give us more color on how you’re planning to do it and what’s the end goal there?

A - Russell Horowitz

Yes. Right now, that’s a continued theme, investment in consumer-facing products and infrastructure to support our ambition. We think Marchex has a significant opportunity to be very relevant to online consumers and we want to take steps to support that. That just means as part of our ongoing theme, investing in it. That’s something you’ve heard in recent quarters and something that you’re hearing again today. As we talk about building out openlist.com, as a means to showcase the progress we’re making, we have currently about 28 million unique monthly visitors that come to our site, each one recognizing that unique asset and not understanding the network umbrella. What we want to do is start to get the ecosystem benefits of folks coming into our network and leveraging them into other products we offer so we can monetize those users better, create greater stickiness, user retention – all the characteristics that we know are core in driving value and defensibility. When we look at creating an umbrella destination for the Marchex network, we’ve got the ingredients, we’re just doing our best in making it a reality. That’s one of the key things when we look at 2007. We’ve got the platform to do this now across a very broad range of categories and now it’s about continuing to pull the pieces together and create that umbrella for the consumer destination.

Q - Sameet Sinha – Kaufman Bros

Can you give us a timeline as to how quickly you can deploy Open List aggregated content across the majority of your domain names?

A - Russell Horowitz

Yes, 2007.

Q - Sameet Sinha – Kaufman Bros

The middle of 2007 or end of?

A - Russell Horowitz

It’ll be a rolling process throughout. This isn’t a case where we’re looking to deploy everything on December 31, 2007. We want to make consistent and measured progress quarter by quarter, throughout 2007.

Q - Sameet Sinha – Kaufman Bros

One last question for Mike, stock compensation came down significantly – could you comment on that and is that a sustainable level going forward?

A – Michael Arends

Can you go through that again for me?

Q - Sameet Sinha – Kaufman Bros

The G&A line item, ex stock based compensation?

A – Michael Arends

Excluding the stock based compensation. I think one of the things we should forecast in perspective is just given the year end reporting requirements, some of the professional fees that come near and after year end, I would anticipate that some of our G&A expenses are going to trend upwards in the near term.

Operator

Your next question comes from Clayton Moran – Stanford Financial Group.

Q - Clayton Moran – Stanford Financial Group

Getting back to the quality of traffic, can you talk about anything you’ve seen over the past month or so from your monetisation partner in regards to denying clicks? Have there been any changes there and if so can you talk about how meaningful it is and then along the same lines, could you talk about eh amount of clicks to your direct navigation sites that are coming from international sources?

A - Russell Horowitz

We have a number of third party partners that we work with on monetisation and if you look at last month versus the last year, there’s probably nothing new to report. It’s been business as usual. We haven’t seen anything really change. If that helps clarify the question. AS relates to sources of traffic, the majority of our traffic is US and Canada based. Predominantly US and that’s been the case a year and a half or two years ago, or a year ago, or six months ago, and it’s the case now. That’s pretty much the same as well.

Q - Clayton Moran – Stanford Financial Group

So the change in guidance is driven solely by monetisation challenges and the finance category, you’re not seeing anything in regards to quality of traffic and traffic denial?

A - Russell Horowitz

In terms of the quality of traffic, our third party told us two years ago they felt we were a good quality partner, they told us a year ago they felt we were a good quality partner and they told us in the last weeks that they felt we were a good quality partner. There is nothing new in that regard. What we’re updating today is between our last quarter and today as we have hit the seasonal time of year. We think we haven’t seen the same benefit we had in past periods and that’s something we didn’t necessarily foresee and we think it makes sense to update it into our guidance as well as some of the volume and advertiser weakness in the core verticals like finance. Then again, we think it’s short term, we hope it’s short term because these are markets we believe in for the long term and we think they’re going to be key differentiators for Marchex. Around all of those items, nothing specifically new and our guidance today is really being driven by those two points we highlighted, both in our press release and on this call. Thank you, everybody, for joining us today. We appreciate your questions and participation in today’s call.

Operator

Thank you, ladies and gentlemen, this does conclude today’s conference call, you may disconnect your phone lines at this time and have a wonderful day.

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