Rightside Group's (NAME) CEO Taryn Naidu on Q4 2015 Results - Earnings Call Transcript

| About: Rightside Group, (NAME)

Rightside Group, Ltd. (NASDAQ:NAME)

Q4 2015 Earnings Conference Call

February 16, 2016, 4:30 pm ET

Executives

Brinlea Johnson - IR, The Blueshirt Group

Taryn Naidu - CEO

Tracy Knox - CFO

Analysts

Deepak Mathivanan - Deutsche Bank

Sameet Sinha - B. Riley

Operator

Good day, ladies and gentlemen, and welcome to the Rightside Fourth Quarter and Full-Year 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded.

I'd now like to turn the conference over to Brinlea Johnson from The Blueshirt Group. Please begin.

Brinlea Johnson

Before we begin, during the course of today's conference call, management will make forward-looking statements regarding Rightside financial performance and future events, including beliefs about the growth and expansion of the domain name services industry and gTLDs in particular, future revenue and margins and the company's ability to successfully market and sell its new gTLD.

We caution you to consider the important Risk Factors that could cause the company's actual results to differ materially from those listed in the forward-looking statements made in that press release and on this conference call. These Risk Factors are described in our press release, and are more fully detailed under the caption Risk Factors in Rightside's most recently filing quarterly report on Form 10-Q and its other filings with the SEC.

In addition, please note that the date of this conference call is February 16, 2016, and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.

With that, I'd like to turn the call over to Taryn Naidu, CEO of Rightside.

Taryn Naidu

Thanks, Brinlea. Welcome to our shareholders, other investors, and analysts joining our call today. In Q4 and for the full-year of 2015, Rightside delivered improving financial results, as we continue to execute on our mission of advancing the way businesses and consumers define and present themselves online.

In the quarter, Rightside launched .LIVE and .STUDIO two well received new gTLD while delivering record revenue and expanding margins. The success of our strategy to focus on the opportunity provided by new generic top level domains is delivering positive results today and positioning us well for the future. Completing our first full calendar year as an independent public company, I'm extremely proud of the performance of our team.

As I've done on each quarterly call, I'll start by giving you an update on the progress of the industry's new gTLD initiative. The acquisition and launch phase of the new gTLD program after two years of focus, is winding down, and the industry's attention is turned towards sales and marketing efforts.

To-date nearly 630 new gTLDs have launched and registry rights for all the 24 of the applied 4 new gTLDs have been resolved. The industry's appetite in acquiring new gTLDs remains high, as the recent ICANN options to award registry rights for dotShop resulted in a record $41.5 million sales. Clearly there is confidence in the value of owning and operating these powerful new digital branding tools and we're pleased to own and operate one of the most attractive portfolios.

The new gTLDs have become a global phenomenon with distribution through 250 registrars reaching buyers in 230 countries, with China producing the highest number of registrations. Globally there are now over 12 million domain names registered in the new gTLD program, up over 50% from Q3 2015. We estimate that new names were responsible for about 50% of the unit growth in 2015.

At Rightside, we have worked through a similar dynamic. We've acquired and launched an outstanding portfolio of 39 new gTLD that map to extremely large addressable market and a culturally transformative activities that have shaped the world's use of the internet. We currently have approximately 440,000 registrations under management in our new gTLDs by early adopters, and have created one of the healthiest namespaces in the new gTLD program.

Average sales prices are over $20 which compares favorably to every other large new gTLD registry portfolio. Our first year renewal rates are north of 60% which we believe is amongst the best for first year renewals and well ahead of legacy gTLDs like dotcom and dotnet.

We have over 100 registrar distribution partners with a global footprint that is producing a balanced customer base, without dependent upon any one country or economic region for success.

We are proving to be very effective at connecting customers with premium domain names that command high values including some of the highest sales prices in the industry. And customers are putting their names to use a new and creative way, yielding usage rates that we believe are amongst the best in the industry.

Even well broad awareness of new gTLDs are still low, we have already built a multi-million dollar book of new gTLD subscription revenue in both our registry and registrar businesses. Our strategy of focusing on the new opportunity with vertical integration has been proven out delivering 8% top-line revenue growth in Q4, and 11% annually on a year-over-year basis. Importantly, it also led to direct profit margin expansion of 300 basis points year-over-year for the quarter.

In turn this top-line revenue growth and our expanding margins led to full-year of positive adjusted EBITDA of $4.8 million exceeding the high-end of our guidance. All of this is a good start for the industry and for Rightside, and now we are focused on sales and marketing execution that ramps further growth in the registry business by realizing the full potential of our portfolio to change behavior and extend the universal domain name buyers.

We are demonstrating the reality of this behavior change on a daily basis. For example, in Q4, we launched .LIVE to great success in adoption by a growing tide of live streaming media broadcasters who now use their name.LIVE to connect our audience to their streaming channel on platforms like Periscope, Ustream, Twitch, and Blab. On the registrar and aftermarket sides of the business, we are leveraging these great assets to strategically drive our registry business focusing on adjusted EBITDA creation by a responsible growth in expense management.

In Q4, our registrar revenue grew 6% year-over-year inclusive of over 25% growth by our flagship retail registrar Name.com. Importantly, about half of that growth came from higher margin new gTLD. Name.com continues to tap into new gTLDs as a source of new customer growth, revenue growth, and margin expansion. Here our investments in domain discovery and merchandising engines are producing what we think is the best user experience and new gTLDs sell-through rates in the business.

Still looking across our registrar business, renewals rates in the quarter were very healthy at 75%, up from 73% on a year-over-year basis, and our average revenue per domain was over 3% on a year-over-year basis reflecting the increasing contribution of new gTLDs to our registrar business.

Looking now at our aftermarket business. We turned in a very positive quarter growing revenues by 8% year-over-year in a business where we had expected no growth. We also saw excellent results from NINJA, our joint venture with Web.com. NINJA has become a leading player in China creating a vibrant marketplace for names that are particularly sought after in that market, while we are pleased with the execution of our aftermarket team, we expect to see continued pressure on the advertising driven part of the business in 2016.

Now let's shift the road ahead and the plan for 2016 in which we have a maniacal focus on driving increased profitability through margin expansion in all areas of our business. Our strategy is to capitalize on the market opportunity for new gTLDs is working due to their ability to propel revenue growth and margin expansion. This is particularly true in our retail registrar and the emergent registry business. We are investing in these areas with an eye on pursuing profitable growth in both the short and long-term.

In our slower growing wholesale registrar and aftermarket businesses, we have kicked off a series of activities that are increasing contribution margins. For example, in January, we restructured these areas of the business for the immediate cost savings from reduction of approximately 7% of our total employee base. We're also driving initiatives in the area of price optimization and operating cost reduction programs. In contrast to previous years, the investments required to prepare our wholesale registrar to participate fully in the new gTLD opportunity are now behind us.

We have benefited from those investments as our eNom business has accounted for 18% of our registry's unit volume and 20% of the cash revenue associated with the premium name sales. But our go-forward focus here is maximizing profitability.

In 2016, Rightside's strategic initiatives and primary investments are in the following areas. Number one, growing awareness and demand for new gTLDs; two, expanding distribution and sell-through rate for our registry; and three, growing revenue for our retail registrar.

Now let me explain these areas of investment in more detail. Growing awareness and demand for our new gTLDs is a continuing investment and registry marketing effort. The focus is on creating increased market awareness and preference with key audiences. In 2015, we began to get traction reaching marketers and other key influencers with specific messages about the utility of these new domain not as replacements for existing sites but as complementary domains that could be used to drive memorable specific and short calls to action around campaigns, content, and commerce. Our portfolio of new gTLDs is well positioned to benefit from adoption of complementary domains by these marketers, content providers, and commerce platforms and we will drive marketing programs directly and with our channel partners that target this new behavior by this audience.

Our second strategic area of focus is growing distribution for our new gTLDs with registrar partners and resellers. One promising distribution opportunity is in China where we began to develop several important channel relationships in the second half of 2015. In 2016, we plan to add new registrar partners as we become fully certified by the Chinese government to do business in country. While our efforts here are still early, we're encouraged by our ability to develop cooperative marketing programs in the Chinese market that drive awareness and adoption, while maintaining price points that demonstrate the value of our new gTLDs. Outside of China where we have hundreds of registrar and reseller partners, there is a critical mass of distribution but sell-through rates are still low.

Our focus here is on driving activity with our top-tier partners. We will do this through innovative channel marketing programs driving premium name sales throughout the channel and getting our industry partners to speak with one voice about the opportunity for complementary domain names.

In this last regard, we are excited to see GoDaddy move this message frontend center on their website in their recent television advertisements and in their product flows.

The third area of strategic focus is the retail side of our owned and operated registrar business where we've been achieving high growth rates and expanding our margins. Here we are making big strides through the improvements in domain discovery, merchandizing, and direct sales efforts. We are doubling down on these areas in 2016, so that we can keep learning how to best approach customers with new gTLDs and then continuously share our playbook with our distribution partners.

In summary, in 2016, we will continue to sharpen our focus investing in our strategic growth opportunities while expanding direct margins in each area of our business.

Let me turn it over to Tracy to run through our financial results and full-year guidance for 2016. Tracy?

Tracy Knox

Thanks, Taryn. I will begin today by providing an overview of our financial results for the fourth quarter and full-year ended December 31, 2015, followed by the key metrics. Starting with revenue, total revenue in the fourth quarter was up 8% over the prior year period to $55.7 million.

Total revenue for the year increased 11% over the prior year to $212.5 million. Our registrar services revenue which is our traditional domain name services revenue increased 6% in the fourth quarter to $44.7 million inclusive of over 25% growth at Name.com. Almost half of the total registrar services growth was driven by new gTLD registrations which have an average selling price approximately three times that of legacy gTLDs. For the full-year, registrar services revenue increased 9% over the prior year period to $174 million compared to $160.2 million.

Overall, we are pleased with our retail registrar growth and traction in distributing new gTLD. However, as previously discussed, wholesale growth is challenging due to a combination of slower growth in a very large base of registration, consolidation in the industry which impacts our base of wholesale customers and are focused on lot of profitable revenue opportunities.

Looking ahead, we expect the registrar services revenue to grow around 5% as we plan to keep our registration growth in line with the industry.

Our registry services revenue in the fourth quarter grew to $2.5 million, up from $1.1 million as we recognized revenue on a growing base of domains registered on our owned and operated gTLDs, and began to layer in our second quarter of renewals which have trended above the overall industry.

Registry services revenue for the full-year increased to $8.4 million compared to $1.9 million in 2014. We continue to see steady progress in our registry services business and expect to deliver $12 million to $15 million of GAAP revenue in 2016 which has a mid-point of 60% revenue growth.

Aftermarket and other revenue increased 8% to $9.3 million in the fourth quarter, our seasonally strongest quarter as compared to $8.6 million.

This was due to better than expected performance in our domain monetization business and increased domain sales in China. Aftermarket and other revenue for the full-year was $32.7 million compared to $30.2 million in 2014.

For the fourth quarter of 2015, cost of revenue, which primarily consists of registration fees paid to registries and ICANN and revenue shares, paid to advertising partners increased 3.4% to $41.6 million. However, as a percentage of revenue cost of revenues decreased from 78% of revenues to 75%, primarily due to the increasing mix of higher margin registry services revenue and an increased revenue from marketing spend.

For the full-year, cost of revenue increased to $162.5 million, up 8.5%. While as a percentage of revenue, cost of revenue declined from 78% in 2014 to 76% in 2015. We expect improvements in 2016 as we continue driving an increasing mix of the higher margin registry services revenue and focused on our pricing optimization efforts.

Sales and marketing expenses increased 29% in the fourth quarter to $2.9 million. The increase was primarily the result of previously planned increases in headcount and marketing efforts to drive awareness in education about new gTLDs. Sales and marketing expense will continue to grow in 2016 as we further ramp our new gTLD program marketing expenses.

Technology and development expenses in the fourth quarter increased to $5.3 million compared to $5 million. This was primarily driven by a $200,000 year-to-date reclass of stock compensation expense from cost of revenue to tech and development. Additionally a $300,000 increase in personnel related in stock-based compensation expense was partially offset by a $100,000 decrease in consulting cost.

General and administrative expenses in the fourth quarter were flat at $5 million.

In the fourth quarter, we reported a net loss of $4.1 million or $0.22 per share. This compares to net income of $1.5 million or $0.08 per share in the prior year period. The increase in net loss was driven by a lower gain on other asset mix. This quarter, we recorded a gain associated with the withdrawal of certain gTLD applications of $721,000 compared to a gain of $7.8 million in the fourth quarter of 2014.

Going forward, net income may be impacted by whether or not we realize additional gains as we resolve the remaining gTLD contention sets. We have an interest in 13 additional applications yet to be awarded to the ultimate operator. Most of these applications continue to work through the ICANN process, but we expect two to three to move into a resolution process in the next few months.

We recorded an income tax benefit of $2.3 million for 2015. For the full year, net loss increased to $11.3 million compared to $1.9 million in 2014. These numbers include gain on other assets net of $9.4 million and $22.1 million for 2015 and 2014 respectively due to payments received and exchange further withdrawals our interest in certain gTLD applications.

Adjusted EBITDA for the fourth quarter was a positive $2.6 million compared to adjusted EBITDA in the prior year period of $556,000 as we continue to grow our mix of higher margin registry services revenue and increased revenue from marketing spend. Additionally, in Q4, we had a one-time benefit of $750,000 from reducing our personnel related expenses. Adjusted EBITDA for 2015 was $4.8 million compared to negative adjusted EBITDA of $3.1 million in 2014.

Now I will move on to our key metrics. End of period registry domains totaled approximately 401,000, up 14% over the third quarter. End of period registrar domains increased 2% year-over-year to $16.3 million. Average registrar services revenue per domain increased to $11, compared to $10.66, primarily due to an increasing mix of new gTLD domain registrations, which have a higher average selling price.

Finally, the registrar renewal rates for the fourth quarter was 75%, compared to 73% in the prior year due to improved performance by our largest resellers as well as our own retail channels.

On to liquidity and capital resources, as of December 31, 2015, our cash and cash equivalents were approximately $45.1 million compared to $45.9 million as of September 30, 2015. At the end of the quarter, we have letters of credit totaling $11 million outstanding with approximately $19 million of available borrowing capacity under our revolving credit facility.

Now for our annual guidance for 2016, we currently expect the following: continued growth in our registry business with GAAP registry revenue of $12 million to $15 million and total revenue of $218 million to $228 million. Adjusted EBITDA of $8 million to $11 million which at the mid-point is nearly 100% growth driven by the cost savings and pricing initiatives that Taryn noted earlier. This near doubling of EBITDA is occurring while we continue to invest in growing our registry business, including an approximately $2 million incremental discretionary marketing spend for the year. Adjusted EBITDA growth paired with the projected ramp in cash registry revenue will position us to start generating meaningful cash from operations in 2016.

That concludes my prepared remarks and I will now turn the call back to Taryn for some closing comments.

Taryn Naidu

Thanks, Tracy. It has certainly been an exciting couple of years for Rightside and the domain industry. What we are doing is unique, innovative, and most importantly, we are poised for increasingly profitable growth because it is working.

I would like to close with a few comments about our business. We have built one of the strongest and most unique portfolio of gTLDs in the industry that not only has domain registration demand in the existing market but also was strategically built to map the macro digital marketing trends. Our vision is that the world will realize the simple but powerful branding benefits of a descriptive and memorable domain name.

We are seeing early adopters organically use the domain names in line with our thesis which gives us tremendous confidence in our business plan. These behavior changes will take time to develop but the addressable markets here are massive which is why we are focused on advancing this industry. We're also driving strong growth through the retail registrar business focused on establishing best practices of merchandizing and driving direct sales of our new gTLD premium domain. We're actively leveraging our success in learning to help drive and accelerate our channel partner's growth.

And finally, while our wholesale business is slower growing, it remains important to our new gTLD strategy and is a significant driver of our registration volume in premium sales performance. We have a strong focus on driving a more profitable business with price optimizations and infrastructure efficiency.

Personally, I'm grateful for the opportunity to work for the many investors I've met over the past year who share our vision, appreciate our hard thoughtful results, and are energized by the same opportunity that drives us every day.

I will now turn it over to the operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And the first question is from Deepak Mathivanan of Deutsche Bank. Your line is open.

Deepak Mathivanan

Great, thanks guys. So first to start off, on the registry business seems like the quarter-over-quarter increase was a little bit slower than prior quarters. Can you elaborate on whether there was anything specific in 4Q or was it just season? And then, can we expect any type of a step-up in run rate going into FY '16 due to the addition of new gTLDs or could be due to new geographies, say China?

Taryn Naidu

Sure. So for the first question I think what happened in Q4 is we were largely out of the launch phase. We had some pretty large and successful launches with our legal TLDs, attorney and lawyer in the prior year. And so this is more of the -- we saw a pretty big increase on the run rate of the business when you back out some of the launches. Can you repeat the second question?

Deepak Mathivanan

I was asking whether we could expect some form of like a step-up increase in FY '16. I know you guys guided $12 million to $15 million. But I was trying to get a sense whether it could be due to some of the launches with respect to new geographies like China through your partnerships with the registrars there or any new gTLDs that can launch which could potentially create like a step-up in the run rate for the registry business revenues?

Taryn Naidu

Yes, so I think year-over-year in Q4, we doubled the size of the registry side and the mid-point of our 2016 guidance would be up 60%. We think that there is a big opportunity in China. We've launched there in the back half of 2015, signed up with a handful of partners and are continuing to grow that footprint. As of today, we became officially licensed in China and are working through the implementation phase there. We've been excited about the normal registration volume we've been growing there. We’re seeing an increased number of registrars in China sign up to selling our premium names and there is a big opportunity there. I think we stated on the call given our NameJet brand has been doing pretty well in China.

Tracy Knox

And then the only thing that I would add is that we recently launched .LIVE and .STUDIO in the fourth quarter, so that will -- that changed the trajectory of already than over 25,000 registrations between those two TLDs and then .FAMILY just launched in January.

Taryn Naidu

Yes, and I will talk a little bit about .LIVE. I think .LIVE has been pretty exciting for us. We talk a lot about the existing channel in the registration volume. One of the interesting things we've seen with .LIVE is we built this portfolio to a maximum bunch of macro digital trends for having it online. In the live streaming universe it has really started to embrace .LIVE as an awesome TLD and a way to marry their live streaming persona online to a domain name.

And so we've even seen organically, Joe Rogan, the former host of Fear Factor and a well known MMA analyst launched joerogan.live and he did that while leveraging the YouTube live broadcasting system. So he is pointing joerogan.live to his YouTube live broadcasting channel. And he did this organically and it's just kind of a sign of what's starting to happen in that universe and we feel that our portfolio maps really well to other online trends .VIDEO is great, .LIVE obviously, .FAMILY is one of the most evergreen trends therein.

Deepak Mathivanan

Got it. Okay. That's helpful. And are there any difference in economics with respect to the Chinese registrars for these new gTLDs or is the price that you guys charge for nTLD portfolio still priced similarly to the other markets?

Taryn Naidu

Yes, for us we’ve been working on incentive programs to help work with our partners in China. We're maintaining decent price points in the more retail perspective of 50% discount. I mean, we're working with a large number of registrar partners driving registrations in market. But we've also been driving increase in number of premium sales there and those are at our standard prices.

Deepak Mathivanan

Got it. And can you elaborate a little bit on the aftermarket performance, you called out China as one of the incremental demand perhaps quantify that a little bit or is that just a trend that you've been seeing in the last couple of quarters given the demand from China has been strong over the last couple of quarters and what are some of your expectations for that into the next year?

Taryn Naidu

Yes, I think our aftermarket team did a outstanding job of executing in Q4 and the increase in sales in China was very helpful and I think they did a great job in the advertising side of the business. In 2016, we anticipate there is going to be some downward pressure on the advertising side of the business but we're going to continue to drive high quality premium sales.

Deepak Mathivanan

Got it. Okay, one final question from me and then I'll turn it over. You guys mentioned about the $2 million incremental discretionary marketing spend in '16 and I think it's largely targeted towards the new gTLDs. Can you elaborate a little bit more on what type of a channels that you're looking at, is it going to be towards any specific on new gTLDs or is it going to be much broader to create a brand awareness for the gTLDs?

Taryn Naidu

Yes, what we love about being vertically integrated is we have the opportunity to really learn what works with consumers. And so we've been leveraging a lot of the learning that we've proven out on our retail brand and trying to replicate those marketing initiatives to our channel partners. And so a lot of the activity we're going to keep focused on our channel partners. But as I mentioned we've had a lot of success in the live streaming universe in areas where we think off channel that there is positive momentum, we're going to increase our activities.

So recently, with .LIVE they entered a large conference known as summit, and it brings together a lot of the large live streaming influencers. We've been sponsoring that event and actually the event rebranded themselves to summit.live. So we will continue to drive forward off channel where we see opportunities but a lot of the initiatives are really trying to enhance the proven ROI we're talking from a retail business and really grow the channel adoption.

Operator

Thank you. [Operator Instructions].

And the next question is from Sameet Sinha of B. Riley. Your line is open.

Sameet Sinha

Yes, thank you very much. Couple of questions, can you elaborate on the restructuring that you undertook in the wholesale business. And so exactly how you prepare -- how you're preparing the business to focus on gTLDs because of that. Secondly in terms of China, in terms of China and your guidance how much -- what sort of assumptions are you making FY 2016 guidance revenues coming from China? And if you can probably delve into deeper talking about the benefits from aftermarket as well as incremental sale of new gTLD based domain? Then I have a couple of follow-up questions.

Taryn Naidu

Sure. So in the restructuring I think we mentioned on the call that we restructured the organization they're to move about 7% of our overall headcount. The restructuring was taken place due to the fact that those businesses are slower growing. But we believe there is a really -- there is opportunity for us to really drive a lot more price optimizations and cost efficiencies through the infrastructure there over the course of 2016 and we continue to leverage those business to really drive our registry growth.

Our wholesale business has driven a large number of our premium registrations as well as the industries and so we see that as being continued success path for us there.

Tracy Knox

China.

Taryn Naidu

And then, sorry on the China front, so we started really growing there in the back half of 2015 and more specifically the latter half of Q4. We continue to increase partners and see good distribution from those partners. And again we're not driving the registrations at the sub $1 rate that we are seeing in the marketplace. We're holding price points more in the realm of $5 and really working towards driving more of the premium sales there.

And we continue to have success there. The partners there have been great and we're continuing to get into normal registration flows as well as trying to get around the emerging premium market. The assumptions we've made in that business is continued healthy growth kind of similar to what we've been seeing in the back half of Q4 and we're pretty optimistic that being fully licensed there is going to lead to more opportunities for us.

Sameet Sinha

Okay. Just one follow-up question, so I mean looking at your guidance, I mean, you're kind of implying basically mid-point of next year's guidance will be half of what you grew in '15. So what do you think is causing that slowdown, I mean obviously seeing the registrar, the wholesale business is slowing down, registry is at least below our expectations, anything, any specific trend that you wanted to call out or anything that we should be cognizant of?

Taryn Naidu

Well, we're going to continue to drive and invest in our strategic initiatives. I think the retail and registry business continue to grow for us and we're happy with that. We're going to drive double EBITDA at the mid-point of the guidance. And, yes, the wholesale business and the wholesale industry as a whole has been challenged on the growth perspective which is why we are going to go to the price optimizations and the cost efficiency there.

Tracy Knox

And I would just add the incremental discretionary marketing spend is going to be an EBITDA shift in 2016. We likely won't see the benefit of that EBITDA investment until exiting this year and going into 2017 just because the cash revenue would come in before the GAAP revenue.

Operator

Thank you. There are no further questions in queue. I'll turn the call back over to management for closing remarks.

Taryn Naidu

Well thank you everyone for your time today and we look forward to keeping you updated on our progress.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.

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