Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Better Than AdSense

Audible, Inc. (ADBL)
Q4 2006 Earnings Call
February 27, 2007 5:00 pm ET

Executives

Donald R. Katz - Chairman of the Board, Chief Executive Officer
William H. Mitchell - Chief Financial Officer

Analysts

Mark Argento - Craig-Hallum Capital
Ross MacMillan - Jefferies and Company
Steven B. Frankel - Canaccord Adams
Darren Aftahi - ThinkEquity Partners
Michael Olson - Piper Jaffray
Richard Fetyko - Merriman Curhan Ford & Co.
Barton Crockett - JP Morgan

Presentation

Operator

Good day and welcome to the Audible Incorporated fourth quarter 2006 earnings conference call. With us today from Audible are Don Katz, Chairman and CEO; and Bill Mitchell, Chief Financial Officer. Management will first provide a presentation followed by a question-and-answer period. We will provide instructions for asking questions at that time.

This conference call is being broadcast on the Internet and is available through the investor relations section of the Audible website. It is also being recorded. To hear a replay of this and future earnings announcements, you can go to the investor relations section of our website and click Webcasts and Presentations.

During the course of this conference call, Audible management may discuss some non-GAAP measures in talking about the company’s performance. You can find a reconciliation of those non-GAAP measures in the table of today’s third [sic] quarter results press release. The statements made in the course of this call which are not historical facts may be deemed to contain forward-looking statements. Actual results may differ materially from those anticipated and any forward-looking statements as a result of certain risks and uncertainties, including without limitation, Audible's operating history, history of losses, markets for services and its inability to license or produce compelling audio content, and other risks and uncertainties detailed in the company’s Securities and Exchange Commission filings.

Any reproduction of this call in whole or in part is not permitted without prior express written authorization of Audible Incorporated.

As a reminder, ladies and gentlemen, this call is being recorded.

I would now like to turn the call over to Mr. Katz, Chairman and CEO of Audible. Please go ahead, sir.


TRANSCRIPT SPONSOR

Better Than AdSense What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Donald R. Katz

Thanks, Operator and welcome to the call, everybody. I am happy to begin by reporting to our shareholders, our partners, customers and employees today that we are talking to you from our headquarters in Newark, New Jersey. Over the past weekend, we vacated the Wayne, New Jersey offices Audible has inhabited for a decade and moved to a fantastic new space in downtown Newark, a city just a few minutes from Manhattan by public transport and an urban area in the midst of a political, cultural and economic renaissance, of which our company is proud to be a part.

The headquarters is already buzzing with high energy and it is soon to be replete with many new state-of-the-art studios. After we get settled in, I would like to invite today’s listeners to visit us.

Another first for this call is the presence of Bill Mitchell, our new CFO. I know some of you had a chance to meet Bill already and plan to meet him in the future and we are thrilled to have him on board.

I will begin today’s call with a brief business overview and then ask Bill to provide details on our financial performance. I will return briefly to talk about some specific business items before opening things up for questions.

Now to the fourth quarter of 2006, a time of considerable improvement on both the top and bottom lines. Our revenue jumped over 16% quarter over quarter to $23.3 million and our deferred revenue was up by $2.3 million over the third quarter of 2006. Adjusted EBITDA, which Bill will talk about in light of our focus on this metric going forward, was close to $800,000 positive, an improvement of $3.6 million over the fourth quarter of 2005.

The quarter benefited from a seasonal sales lift and strong sales contributions from both iTunes and our U.K. operation, and a significant portion of the positive performance also came from a focus on higher revenue per user customer mix and from successful execution of merchandising efforts that increased revenue through both the consumption of audio credits and cash sales.

The fourth quarter completed a year in which net revenue came in at $82.2 million, up 30% year over year. The year was also marked by very important strategic advances, notably the extension and deepening of our partnership with Apple through the end of the decade and the success of our Audible U.K. start-up.

2006 was also a time of significant personnel changes, new technology infrastructure installations, and a level of packaging and pricing experimentation and probing of market sensitivities we think appropriate to a company still at the headwaters of the emerging digital distribution marketplace.

But it was also a time of performance disappointments we regard as hard but valuable learning lessons. Learning that helped us adjust in the fourth quarter and learning that will certainly influence our movement forward to profitable growth in our business.

With that, I am going hand the mic over to Bill for a closer look at the numbers.

William H. Mitchell

Thanks, Don, and good afternoon, everyone. As Don mentioned, total revenue in Q4 was $23.3 million, up nearly 28% year over year and a healthy 16% sequentially. Our revenue growth was driven by some solid merchandising results from sales in the October and December months, as well as our newly extended Apple relationship. Apple represented 27% of consumer content revenue, up from 24% in the third quarter.

During the fourth quarter of 2006, we added over 70,000 new AudibleListeners, bringing total AudibleListener membership to 367,000, up 59% year over year and 11% sequentially. We want to note that this quarter we are disclosing that this includes 142,000 Basic AudibleListener plan members. This plan, which was launched in November, 2005, carries a $9.95 annual fee and has provided customers a 30% discount on our product pricing.

While we were able to see some better consumption patterns from this class of AudibleListeners in Q4, overall the significant quantity of these members did have a depressive impact on average RPU in 2006.

It is important to remember that under our AudibleListener plans, customers pay for book results, book credits and access the discounts on sales as well as daily subscriptions to either the audio version of the New York Time or Wall Street Journal in advance for both annual and monthly plans. This provides our customers the flexibility of using their audio credits on their own schedule. However, since customers generally can carry over unused audio credits to prospective months, revenue recognition is delayed until the audio credits are used. This unrecognized revenue is included in the deferred revenue account in the balance sheet. Deferred revenue, which can be likened to sales pipeline, increased to $14.4 million at December 31st. This was an increase of $2.3 million from September 30 and nearly $8 million from the prior year.

The quarterly and annual increases in deferred revenue were principally due to our higher AudibleListener membership levels.

We had $395,000 of related party revenue stemming from payments we received or contributions we made to our German and French joint ventures. We record revenues for these ventures on a cash basis. When we get paid, principally for support services rendered, we recognize the revenue, hence the revenue is somewhat lumpy for this line item between quarter and, to a lesser extent, between years.

Turning to operating costs, we made some progress in right-sizing our costs but we still have some work to do. Our cost of content and services costs, including royalty expenses, were $10.2 million in Q4, or 44.9% of content and services revenues. This represented a modest increase from the Q3 level of 43.6% due to an increase in Apple sales.

Remember, Apple handles the operational and marketing aspects of this revenue stream, so we are willing to share a meaningful piece of our revenue with them. This in turn effectively increases our content and services costs percentages.

Expenses for operations increased slightly, but this was attributable in part due to more customer activity associated with the sales work we had in October and December. Our technology and development costs were lower during the quarter as we had a decline in consulting expense and a non-recurring, $144,000 charge for impairment of [word cast] value that was recorded in Q3.

G&A was up for lease expenditures in our Newark facility, even though we did not move into our Newark office until yesterday and we will not be paying full fare rent for a year, we needed to accrue rent expense on a straight line basis throughout the seven-year period. Accordingly, our rent will be coming down in Q1 and Q2, once we move into our larger and slightly more expensive Newark headquarters -- the systematic and rational wonders of modern accounting.

We also had some non-cash stock-based compensation charges tied to the change of CFOs, which impacted this increase.

In marketing costs, the cost per new AudibleListener was $49, so our subscriber acquisition cost, or SAC, was $49, up slightly from the $47 we recorded last quarter. It should be noted, however, that 54% of our additions this quarter were for Gold and Platinum customers. This was a healthy increase from Q3’s level of 47%, demonstrating that we are having improved success at getting more bang for our buck, which will have a great impact on ARPU as we move forward.

On a non-GAAP basis, our adjusted EBITDA was nearly $800,000 for the fourth quarter. Adjusted EBITDA, which we are introducing in this quarter as our principal non-GAAP disclosure, is the classic EBITDA term, which is net earnings before interest, taxes, depreciation and amortization, to which we add the significant non-cash items, stock-based compensation and impairment, to create the adjusted qualifier.

We believe adjusted EBITDA is the best way to assess the profitability of our business on an operating cash basis. Our adjusted EBITDA was a loss of over $300,000 in Q3 and a loss of $2.8 million in the fourth quarter of 2005. Our challenge will be sustaining the improvement we started to see this quarter and the seasonally weaker first quarter, but we clearly believe the organization can continue to experience healthy growth in adjusted EBITDA throughout the coming quarters and years.

The loss on equity investment of $94,000 was related to our Audible Germany joint venture. As many of you know, for the first 30 months of the agreement, or through February, 2007, Audible earns a monthly fee of $30,000 for the intellectual property Audible contributed to the entity. In order to provide additional working capital for Audible Germany, through September, we have decided to convert the most recent 13 months of this fee into an equity investment in our joint venture. We are also willing to provide the last three months’ fees for 2006 as a contribution, but are working out the terms for this with our German partners.

We continue to be very pleased with the progress of our Audible Germany property and I encourage you to visit www.audible.de to see all the creative things that our German team is doing.

In Q4, interest income increased to $822,000, reflecting the earnings on our average $64 million in cash and cash equivalents. We also had a nice $769,000 sale of some New Jersey State NOLs that benefited the income tax line. This may or may not recur in the fourth quarter of 2007 although we will certainly strive to take full advantage of the program.

With that, our net loss for the quarter was $700,000, or $0.03 per share on a GAAP basis, compared to a loss of $2.5 million, or $0.10 per share in the third quarter of 2006.

Finally, during the quarter, we continued our share repurchase program and repurchased 173,400 shares at an average price of $7.85. Total shares repurchased during 2006 were 635,700, for a price of $5.4 million.

Two notes I want to make sure are publicly available about our use of cash in 2006. We finished the year with $5.2 million in CapEx. This amount was driven by an abnormal level of investments in the underlying infrastructure of our website. During 2007, we are forecasting a slightly higher level of cash expenditures on capital assets, although the vast majority will also be non-recurring since they will be for leasehold improvements associated with our Newark facility. Our expenditures for development of this facility were very modest in 2006.

Now a word about guidance. Audible suspended providing net guidance early last year, a practice we are going to continue today. We are still evaluating our short-term pricing and packaging structures for the last half of 2007 and getting a larger sample of the churn associated with the new $7.49 offer Don will speak about.

I have no doubt that eventually we will resume providing guidance during this call but I am not enthusiastic about providing it before we get resolution and data feedback on these two critical areas.

Finally, let me say that I am very excited to be here and am extremely optimistic about the opportunity to provide a great product to our customers and a profitable return for our shareholders in the future.

Don, back to you.

Donald R. Katz

Thanks, Bill. Turning back to specific business highlights of late, some of the programs underlying improved numbers in Q4 included a far more successful merchandising e-mail newsletter as well as automated credit alerts to stimulate customer consumption rates.

We relaunched the Audible gift center during the quarter and this will continue to improve during the course of 2007, and we also simplified the web experience related to becoming an Audible member by decreasing the steps involved. The simplified sign-up process was complemented by a better download-and-install process to help customers get started with Audible.

We also launched the new introductory price Gold monthly membership Bill just mentioned during the middle of the fourth quarter, which was met with significant early success. The new plan is part of a focus on changing the new customer mix so as to achieve higher revenue per user. The traffic being driven to this new membership opportunity was optimized during the quarter via a paid search focus that brought us over 20% more customers via paid search over the third quarter and at 40% less cost per order.

The quarter also saw promotional program tests in various web verticals, as well as promotional programs focused on our affiliates. You may have seen our first use of print campaigns in quite a while, if you read the New Yorker, or have possibly seen our advertising on table trays on U.S. Air and Southwest Airline flights. We partnered with Entertainment Weekly magazine to increase awareness of Audible.com with a co-branded free sample of our Ricky Gervais program. Our products were also highlighted on ABC’s Extreme Makeover Home Edition and in a national television commercial created and financed by AT&T.

During the Christmas holiday season, the famed Neiman Marcus holiday catalog as well as Neiman’s website, offered purchased of the high-end Nokia N91 phone special access to Audible service, something we worked out as part of our developing partnership with Nokia.

Our new marketing department conducted focus groups in Q4 and other segmentation research which will allow us to sharpen our targeted marketing and marketing communication efforts as we move forward.

I do not think it will come as a surprise to anyone who studies or works in the world of new consumer products and services that one of Audible's tremendous opportunities is also our consummate challenge. We continue to have a limited level of awareness in the mainstream consumer marketplace, even among habitual media consumers. We intend to increase that awareness, and we will do so with a firm hand on return against the cost of these efforts, and with a realistic view of the challenges facing the creators of brand awareness in the current environment.

We expect 2007 to include an intensified focus on our partnership marketing efforts as well as in our customer-generated growth, an opportunity underscored by a survey we conducted during the fourth quarter that indicated that a vast majority of our customers love or like Audible and would recommend our service to colleagues and friends.

One thing that surveys and focus groups continually point is that customers tend to love the quality of our customer service. Our internal customer service quality measurements improved by around 9% in 2006 over 2005, and we intend to improve all related satisfaction metrics in 2007.

The Audible habit, and that is clearly what we create when a customer understands the core digital audio consumption techniques and makes the behavior change entailed in begin a regular listener to our audiobooks and other spoken word programming does involve some learning and sometimes the navigation of technology platform interoperability challenges, and this calls for the provision of great service.

We are often asked to list the various barriers to competitive entry Audible enjoys as we have worked to build this new category, and I would have to say the fact that we can and that we know how to offer first-class service is high on that list.

During the fourth quarter, we had 27 additions to the hundreds of existing Audible-ready devices. Specifically, 14 new embedded MP3 and GPS devices came into the marketplace. The devices range from the new Best Buy Insignia line to the Thump Pro, the first wireless MP3 player sunglasses from Oakley. We also added devices from iriver, Thompson, Creative, Garmin and of course four new iPods from our partners at Apple.

As I hope you already realize, the much-anticipated Apple iPhone will be Audible-ready and able to access Audible files via both the iTunes store and the global Audible.com sites when it premiers it June.

We also added 13 wireless devices that can download Audible content via our Audible Air automated wireless download application, 10 new Symbian Series 60 phones running the version 3.0 operating system, as well as two Pocket PC wireless devices and the newly launched Palm Treo 680 also came out in Q4.

Audible launched Audible Air on the Symbian UIQ 3.0 platform --

Operator

Sir? Sir, your line just blanked out.

Donald R. Katz

I’m sorry. Thank you very much. Sorry, everybody. I think the line blanked out and I am going to go back. Sorry if I am repeating. I’m a little sorry about that but I am going to go to the MP3 and wireless devices, and if I did already say this, I apologize.

Anyway, during the fourth quarter, we had 27 additions to the hundreds of existing Audible-ready devices. Specifically, 14 new embedded MP3 and GPS devices came into the marketplace. The devices range from the new Best Buy Insignia line to the Thump Pro, the first wireless MP3 player sunglasses from Oakley. We also added devices from iriver, Thompson, Creative, Garmin and of course four new iPods from our partners at Apple.

As I hope you already realize, the much-anticipated Apple iPhone will be Audible-ready and able to access Audible files via both the iTunes store and the global Audible.com sites when it premiers it June.

We also added 13 wireless devices that can download Audible content via our Audible Air automated wireless download application, 10 new Symbian Series 60 phones running the version 3.0 operating system, as well as two Pocket PC wireless devices and the newly launched Palm Treo 680 -- they all came out in Q4.

Audible launched Audible Air on the Symbian UIQ 3.0 platform with three new Sony Ericcson phones. The phones shipped largely in international environments with pre-loaded content on memory sticks, so the Audible service is being marketed by Sony Ericcson as a try-and-buy opportunity.

Well over 10,000 users have found their way to the Audible Air beta applications available at Audible.com and have activated Audible-enabled phones. We now have our Audible Air client running on five separate mobile handset operating systems, including Symbian Series 60, UIQ, Windows Mobile, Palm and Java, which is currently in beta.

Our new Java client will allow us to reach a large new global customer base via support for high-volume phones. It also extends Audible support to the popular Blackberry Pearl.

These wireless development efforts are carried out by a small team in our Audible-ready technology group and we expect this work will become a more meaningful engine of growth for Audible in later 2007 and during 2008.

Turning to the ultimate purpose of our technology innovations, the delivery of the best audio programming in the world, we now have more than 127,000 hours of premium listening available at Audible.com. With 39 new content partners joining up with Audible during the fourth quarter, we now source our content from over 397 different providers.

Some of our deal focus has centered on the kids and young reader market in recent months, and many of the new studios being constructed in our office will soon be creating a significant quantity of important listening for kids.

We have also increased our original content production levels with our partners at Harlequin and with Pearson Higher Ed, and we recently published original audiobooks as part of our partnership with Pearson’s business imprints.

The Pearson and Audible Vango Notes audio study guide products have been receiving a lot of publicity and positive reviews from students and faculty members. We officially launched Vango Notes in October of 2006 with 84 titles. We have grown the catalog to 138 titles with over 200 titles planned to be in the market for the fall of 2007 when the academic sales cycle picks up.

If you have been on a college campus lately or observed the amenability of people under 20 years old to the habit of digital media consumption, you will understand why we feel assured that with the passage of time, each year brings a new graduating class into the realm of the job market, expendable income, a commute and a related placing of a higher premium on the value of scarce time.

With this demographic inevitability, the awareness of Audible, the demand for our service, and the naturalness of the habit change entailed in becoming a Listener will create a customer base that will continuously grow with time.

In the meantime, we will continue to focus on the younger device-owning demographic with new products and marketing efforts. We have recently been piloting some word-of-mouth marketing programs for both students and professors on college campuses and will continue to do so during 2007.

Also last fall, Audible delivered the first downloadable audio program to students as their core reading assignments for Seton Hall University’s first-year experience program. Additionally, we have completed two primary field studies with Temple University Media Lab and with regional public middle schools designed to validate the use of audio to accelerate reading fluency and to develop literacy skills for young people.

Before closing up, I just want to mention our global operations. First, our U.K. team under the leadership of managing director Chris McKee, continues to grow and prosper, with a combined iTunes and U.K. operations running at a profit in a very short amount of time.

The U.K. sources content from more than 40 British content partners in total, including an important new deal with MacMillan, and 20 of their content partnerships are exclusive multi-year deals.

Our German JV, as Bill mentioned, saw a 280% revenue increase in 2006 and doubled its count of titles over the course of the year. The German team has also developed a tremendous following for its first-class original audio productions.

To help you all realize that our renewed Apple agreement is also a key part of our global strategy, since the agreement positions Audible as Apple’s exclusive audiobook supplier to the global array of 22 different iTunes stores, including the latest store launch in New Zealand.

Though we have not talked much about Asia before, Audible does have a small but very able team working in Tokyo under the leadership of [Kimhiko Shindo] who formerly ran in Japan the RealNetworks operations and NEXT Computer, and also worked for Apple Japan before that. iTunes purchasers in Japan are already listening to content sourced by our Japan team.

From global opportunities to the inflection point promised by wireless delivery to entirely new educational applications connected to learning how to read and learning to love the sound and meaning of raw words, the new growth leg to come continued to move into the spheres of revenue and profit.

These efforts will complement our consistent focus on a core business that enriches people’s lives by unleashing the singular capacity of words to captivate, to inform, entertain and to educate.

Q4 was a much-improved period for our core business drivers and we intend to continue that pace. We are feeling good about the path to improvement, particularly in contrast to how we felt in the middle of 2006, a time that clearly included a lull for music downloads and book sales as well as for Audible.

Bill and I look forward to keeping you informed about our progress as we focus on making 2007 a time of consistent profitable growth.

With that, Operator, let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We will hear first from Mark Argento.

Mark Argento - Craig-Hallum Capital

A couple of questions for you. First off, on the marketing program, it looks like the hardware rebates have been, that program in particular had been throttled back. Could you just give us a little bit of insight into the trends you have seen with those customers that you have brought on with the $100 rebate, if they are good customers, and in particular, is that something that we would see return going forward?

My second question for Bill, how much of the ’06 CapEx do you expect will be for the leasehold improvements relative to additional core CapEx for the technology?

Donald R. Katz

On the hardware rebate front, yes, it definitely was ratcheted back progressively throughout the course of the year. Remember, there are two kinds of supplements that we offer to a hardware customer. One was the rebate at retail, often it was $100 off against a high-end device in exchange for a six- or 12-month commitment to the service.

The other was actually giving away more inexpensive devices that we did for a long time. In both cases, they are valuable customers. I will say that it has not been a big part of the mix lately. In one case, it has to do largely with the data issues around Sarbox and the ability to actually track some of it going back to the beginning of the year. So some of it was kind of turned off and then very slowly reinstated. I think we will probably see something more of that.

In terms of giving away devices, part of that is that a lot of people have them, at this point, who come to Audible, but we are definitely still looking at some of the opportunities in the marketplace because we consistently see people who are turned on to Audible lock, stock and barrel by getting their first device from us and they do tend to be good customers.

I will let Bill take the CapEx question.

William H. Mitchell

On the CapEx for 2006, there was about $100,000 that would have been spent on leasehold improvements. In the past, the company had said that the total move project was going to have a leasehold improvement element to it of about $5 million, so I think you will see the $4.9 million remaining spill over into 2007. Does that get to your question?

Mark Argento - Craig-Hallum Capital

Yes, that’s good. Lastly, in terms of the iPhone, of course, much-heralded, the opportunity for you guys to ultimately be able to deliver your content wirelessly to a device like that, I know we have been talking about wireless for a long time. What is the real opportunity? When do you think it is feasible that we start to see the preferred method of delivery here being wireless, if it is the iPhone or some of these other devices? How soon does this become more of a reality here over the next few years?

Donald R. Katz

Obviously we are going to let Apple talk and Cingular talk more specifically about the characteristics of the delivery mechanisms in the iPhone when it comes out, and their future plans for different kinds of downloads. But in general, clearly we are looking to turn the significant technological advantages we have and the development we have done with wireless into awareness generation and revenue as soon as possible. I think that we are going to see some of that this year.

Clearly the opportunity to leverage our short-form programming in particular, the fact that the Audible Air application provides an auto-delivery feature so you wake up in the morning and your new edition of the newspaper or whatever your current program is already waiting for you and you do not have to go tether in terms of convenience is important.

But I think what we see is that the justification of some of our global efforts connects to the wireless opportunity as it develops later in this year and into 2008, because if you look at the statistics in terms of the downloadable music sector, for instance, the vast majority outside of the U.S. is wirelessly downloaded. The huge majority inside the U.S. is not wirelessly delivered, so I think we are going to get there and probably get there outside the U.S. first.

I guess the last point is that we do not have at this point a carrier deal which is probably a good accelerator. These are consistent discussions and you can tell how well we are doing with the handset guys. As you probably know, there is the off-deck market, the drivers of revenue that are not on the faceplate of the phone and with the carrier deals, is getting a lot of focus, so it still remains unclear how much of the revenue is going to drive through the on-deck and the off-deck places, but we intend to be there and I still believe it is a big inflection point, partially because it will be just so easy to use our service.

Operator

Next we will hear from Ross MacMillan.

Ross MacMillan - Jefferies and Company

This is Horacio for Ross. Just a question on the churn. Obviously I think these are new metrics, but it is coming down percentage wise. Can you just give us a sense for what drove the improvement here in Q4, and how that is consistent with what you have been seeing throughout the year?

Donald R. Katz

Churn is at 2.5%. It is a consistent fall throughout the year on the total base. I think last call I did mention that some of it is the mix of the customer, the number of annuals in the mix clearly has a mathematical effect that is positive, but I did also note that what we internally refer to as natural churn, which is the numbers of people who can churn out at any moment without some level of annualized commitment, has also come down precipitously. I think I reported 150 basis point drop in that number last quarter, and it has also been quite good.

Operator

Steven Frankel has our next call.

Steven B. Frankel - Canaccord Adams

Don, I wonder if you might give us some insight between the mix of annuals and the monthlies, and why are you cutting the price 50% on the monthlies? What do you expect to get from that?

Donald R. Katz

If you go to the website right now, the primary offer is a Gold plan with a discount to start off, as opposed to what you would have seen more regularly, depending on where you came from, which was a $9.95 one-time annual plan with a 30% discount. So clearly people who come in on a month-to-month basis are going to be recurrent revenue customers on a monthly basis as opposed to on an annual basis. So we have just seen that some very positive aspects of changing that out and of going for the monthlies. You want to add to that, Bill?

William H. Mitchell

I think it is important to note we are trying to move the business a little bit more towards a recurrent monthly membership model than the minimalist offer, if you will, which was the $9.95 annual plan, which represented about $0.89 a month in revenue, as well as the benefit of the 30% discount on purchases. One of the challenges there is getting people to come back to the store to make purchases on a monthly basis as opposed to already having a credit, if you will, where they then become much more incented to come back to the store regularly to make purchases and in fact remember how to make purchases, so it does not have the same kind of operational impact for you.

So it is a direction we are trying to take the business at this point in time.

Steven B. Frankel - Canaccord Adams

Is that something you hope to accomplish by this time next year, to have the business back to mostly a month-to-month focus?

William H. Mitchell

I think we have demonstrated this on a per unit basis -- I mean, on an ARPU basis, this company had a higher level of ARPU when it had a higher percentage of its customers in a monthly membership plan. So now the secret is going to be taking all the customers that we have and converting them to whether it is a monthly plan or a quarterly plan or a semi-annual plan, but a plan with a higher minimum level of consumption is I think where we are headed.

Donald R. Katz

Also, Q4 did show that we can stimulate more taking of content, more consumption across all the classes of our customers, and that some of the $9.95 customers are incredibly high-consumption customers, and also amenable for migration up to the other plans.

We have always had this challenge to people who want to just model a simple SAC churn and ARPU number, because people would fall out and still remain great customers and buy over plan. I think that we will continue to see the efforts on merchandising in concert with moving people towards the monthly plans.

Steven B. Frankel - Canaccord Adams

I apologize if you have to repeat this, but I lost a little bit at the beginning of the call, what was the Apple contribution to revenue in the quarter?

William H. Mitchell

27% during the quarter, up from 24%.

Steven B. Frankel - Canaccord Adams

And that is of total revenue or of content and services?

William H. Mitchell

Content and services.

Operator

Now we will hear from Darren Aftahi.

Darren Aftahi - ThinkEquity Partners

Just a couple of quick questions. With four quarters now under your belt under the sort of adjusted plan, can you give a little bit more color as to what you need to get your hands around in order to give guidance? I assume your visibility in usage patterns is much higher, relative to what it was six months ago.

My second question, on the carrier partnerships, especially as it relates to the U.S., is any of the reasoning behind that because of the economics in the U.S. for content deals and wireless, relative to other areas of the world? Is that reason why you think you are going to see potential partnerships outside of the U.S. before we see them here?

Donald R. Katz

I will mention the second one first. It has to do with having to do with bandwidth and the turnover of high-end phones that are smart enough to receive the content. It also has to do with whether our data plans that allow the downloads to be had without incremental costs, so those are the major factors between the U.S. cellular market and abroad.

I would like Bill to comment on the guidance element, because he already basically did, but the fact of the matter is when you are putting new programs into the market and they are popular, there’s elements of the relative take rate and the quality of the mark on and the tuning of the mark on, the character of the pricing, the perceptual benefits and then the revenue per user that is generated, as well as the merchandising elements, buying over plan, which need to play out before you can get full visibility when you are driving these kinds of programs.

William H. Mitchell

I think it is safe for me to guess, Darren, that you may infer -- I am not going to tell you this, but you may infer that we do have some good mileage under our belts in terms of understanding what we have been doing in the past and we might be inclined to do the same and provide some guidance for it if we were going to do it in the future.

The fact that we are not giving guidance at this point in time may be a hint that we might be changing some of the things that we are doing into the future.

Operator

Moving on, we will now hear from Gene Munster.

Michael Olson - Piper Jaffray

It’s actually Mike Olson here for Gene. Just a couple of quick questions. You kind of touched on this earlier, but what is going to be the focus of the company’s marketing efforts in ’07? Is marketing spending going to be up significantly in ’07 versus ’06?

Donald R. Katz

The focus of our marketing efforts is getting a lot of new customers at a reasonable cost and making them really, really happy.

William H. Mitchell

With a minimal SAC with a high ARPU.

Donald R. Katz

No mystery to it. I think we gave a fairly long list of some of the things we were doing in Q4 that we were not doing in Q3 and Q2, so you could see that the activity level is up.

Michael Olson - Piper Jaffray

Not to put you on the spot here, but do you know -- if you do not know, that is fine, but do you know the total number of audio devices and wireless devices out now that are Audible-ready? You mentioned adding 27 and 13 respectively.

Donald R. Katz

It just depends on how you count it and whether you are talking about model numbers or full different categories, but it is around 250.

William H. Mitchell

I would like to add, just back to the marketing thing for a second, without being cute about it, we actually have done a pretty good job of integrating on both banner advertising and search advertising. Search advertising would be the results of putting some targeted banner advertising out on the Internet to help drive interest in our website where we have been able to connect people into the $7.49 membership roles. That was an important component in our increase in monthly members during the fourth quarter.

Michael Olson - Piper Jaffray

Okay, that is really good to know. Just taking a step back from a really high level down, when you look at ’07, what is the biggest opportunity for Audible in ’07? Is it continuing to piggy-back on iPod sales as they grow and Audible Air-enabled handsets? What do you see as the biggest opportunity this year?

Donald R. Katz

I only could think of it in terms of intensive focus on the execution around the core business, and the good news is I would pull along with Audible.com, iTunes revenue as well as the U.K. into the core elements of the business. The U.K. has earned that very quickly. It will be an important contributor.

Beyond that, the accelerators which are fundamentally wireless and education and the global growth beyond the U.K. I think are there to be additive beyond the core.

Operator

Now we will hear from Richard Fetyko.

Richard Fetyko - Merriman Curhan Ford & Co.

Just would like to hear your thought process behind the Gold subscription plan that you introduced; what do you expect out of it in terms of -- why that price point? Why that structure of the pricing plan? I am just curious what sparked that change?

William H. Mitchell

Let’s make sure we have the history right. In November of ’05, the company introduced the Gold and Platinum plans, and then also the Basic AudibleListener plan, which also had the moniker value plan, which was a kind of $9.95 annual alternative plan to people who are going to join the Gold and Platinum plans, which were $14.95 for one book a month, or $22.95 for two books a month. That was all a November 2005 event.

We have suspended pushing people into the value plan. That is the one change that was made this year. We are not offering that as our principal offer to bring people into the front door as regular customers. We are more interested in trying to bring customers in as regular one-month, $14.95 a month recurring revenue customers, so they take and come back and visit us every month and take a book and maybe buy something else on sale and be more active members of our community as opposed to what we have learned from the value customers, where you could have some customers that came in and were very religious about buying and bought a lot but then others who came in and bought once and we didn’t see them for six months. Then when we saw them, they called three times to find out how to buy something.

That is one of the challenges that we have noticed here that we are going to be migrating away from. Does that clarify that for you?

Richard Fetyko - Merriman Curhan Ford & Co.

Yes, that is helpful. In terms of the -- I’m sorry, I kind of missed one of the metrics you mentioned, the 54% of new subs were --

William H. Mitchell

The monthly Gold and Platinum members, so they were either the $14.95 or the $22.95 or there are plans, and I am going to grasp at these -- I am not even going to guess the annual numbers. I think it is like $159 and $212 for the people who can buy 12 books or 24 books over a 12-month period, but they get their allocation of the books up front and they pay up front for the right to do that. Those guys I put in the regular monthly high-consumption recurring revenue pile as opposed to the basic Audible plan listener customers who are not quite into that same pile.

Richard Fetyko - Merriman Curhan Ford & Co.

So as you increase your focus on the monthly or subscription plan versus the value plan, your subscriber acquisition costs went up about $2 sequentially, but obviously your percentage of subscriber plans or monthly subscribers increased as well, and these are more valuable subscribers so clearly you are willing to pay more for them as well. Should we expect that trend to continue as we go into ’07? I mean, that is your focus in ’07, right?

William H. Mitchell

Yes, I do not think the SAC will go up. I do not think the SAC will go up that much more. It might go up a little more but as the percentage of lower cost customers go down, but certainly our ARPU should continue the nice turnaround we have got going this quarter.

Operator

(Operator Instructions)

We will now hear from Barton Crockett.

Barton Crockett - JP Morgan

A question about the education initiative, which you cited as one of a handful of things that would be accelerators looking into the future. When we look at the revenues for these study guides as they flow through to you guys, are these mainly flowing through as a la carte or would people be signing up for subscription packages? Just a little bit of color there. I realize it is probably a very small amount, not material, and if you could clarify that as well, but you expect it to be more important over time. That would be one question.

The second question, to the point you were just talking about in terms of getting away from subscribers in the lower priced plans, and those people tend to call up a lot of customer service. Would you expect as you transition your mix that you might see some improvement in your customer service costs that might help us a little bit on the P&L in the income statement? Thank you.

Donald R. Katz

The Vango notes study guides, for those who do not know about it, that are these very, very interesting products which are designed by the Pearson Higher Education group and packaged and marketed by us. They are meant to conform to the 200 best-selling college textbooks that they sell, and they are being sold by their channel sales force and also by Audible. The idea being that you put your iPod on and basically it walks you through a study guide experience of this very dense text. This is a huge, multi-billion dollar textbook market and it is very interesting.

It has been a fast-growing element of the business, although as you say, not hugely appreciable yet but the product is really just rolling out. I think it is going to be a very strong product and it is certainly getting well-received.

The other thing I mentioned is just our focus on kids and the related education applications there. We already sell millions of dollars worth of children’s and kids’ audio and a great deal of it is bought by parents to help both the appreciation of and efficiency at reading, and we are testing this out in schools and seeing a lot of validation. The kids book market is very large and in fact, on a unit basis, it is amazingly large. There are some tremendous opportunities there.

So it is related to education but it is also related to a consumer play that really is underserved in the audio market now, so it is I think another exciting element and kind of a book-end to the higher ed focus on older kids.

Barton Crockett - JP Morgan

But in terms of the recognition let’s say with the study guides, I assume people are not signing up for subscriptions that are mainly buying --

Donald R. Katz

No, you are absolutely right. They are a la carte products and they are actually sold two ways. One is you can actually buy each chapter as you get to it and the professor maybe assigning that you download that particular study when a mid-term is coming up, but the majority of sales so far have been the full packages of each chapter study guide.

Barton Crockett - JP Morgan

Then I assume that you just get from Pearson, or do you book the whole revenues and then pay them?

Donald R. Katz

The other way around, so we are doing the distribution and they get the revenue split.

Barton Crockett - JP Morgan

Okay, and then as for the expense impact of the mix change?

William H. Mitchell

I think the one thing that I balance out, because I did give some hopeful news that maybe our expenses come down if we eliminate the value plan. One thing to remember is these people were not calling it at all for a couple of months at a time, so there are fewer costs associated with them when they do not call at all and you do not have monthly credit card to toss.

Perhaps the benefit is more of a state-of-mind benefit that the customers you are dealing with are recurring customers that come back to you regularly as opposed to some that come in the store on a monthly basis and some that come in the store once a year, or once every six months.

Operator

Unfortunately, due to time constraints, that is all the time we have for questions. Gentlemen, I will turn it back over to you for any closing remarks.

Donald R. Katz

Thanks for joining, everybody. Keep an eye on us. We are pretty excited about 2007, and I think you will see that we are worth watching. Take care.

Operator

That does conclude today’s conference. We do thank you for your participation.


TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are copyright 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: Audible Q4 2006 Earnings Call Transcript
This Transcript
All Transcripts