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Here’s the entire text of the Q&A from InfoSpace's (ticker: INSP) Q3 2005 conference call. The prepared remarks are in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

[Operator]

And our first question will come from Mark May with Needham and Company.

[Mark May]

Hi, thanks a lot. Thanks for taking my questions. I would like to ask two at this point. As we are going through this, what we are calling cleanup process in the search and directory business, can you just give us a sense of what the baseline revenues for that business may be in 2006 and how long will that process last? And then secondly, in the mobile business, I think it is still relatively small, but can you give us a sense of how much of your revenues are coming from applications other than ring tone downloads? Thanks.

[David Rostov]

Sure, Mark. Thanks for the question. On the cleanup traffic side, which is your first question. We've focused and have been as proactive as possible in really addressing kind of what has become, what I would say a changing and evolving landscape both in terms of the advertising online market as well as, the relationships with partners. And so, it is a process that we talked about a quarter ago and it's something that we have embarked on and have been as proactive as we can be in that area. And so it is just hard for me to speculate on kind of the exact extent of that and when and what happens in that field other than to say that we're out there being very proactive about the quality of traffic and we will continue to be proactive there and I think, you should see our guidance for fourth quarter reflecting as we had indicated earlier, reflecting in part the impact of kind of this improvement on the traffic side. Switching to your second question on the mobile revenue applications, really I guess maybe I could sort of briefly explain kind of the key areas of revenue for us. One is the ring tones area, which has been kind of our biggest area of revenue and revenue growth. The other area is kind of graphics, or what some people call wallpaper. A third area, and not necessarily in any order other than top of mind here, is the games and the products sets we have in games. There is a whole other set of content hype that we introduced over the course of the last year plus, that are like voice ringers and other genres within those categories. And then obviously, another important area for us as a company is around the services and infrastructure we provide for key carriers such as, the Portal for Verizon as an example and portals or some people call those the WAP decks for other carriers as well like Cingular, and Key Mobile, etc.,

[Mark May]

Can you give us a sense of the breakdown now?

[David Rostov]

We haven't, It is not something that we have broken out separately. In part because, a lot of our work in that latter area that I just mentioned is reflective of our broader relationships and deeper relationships with carriers, so in many cases the importance to us of doing that revolves not just around a separate business opportunity, but more importantly a way to drive business for us as well as for the carriers.

[Mark May]

Thanks a lot, congratulations. Thank you.

[Operator]

Next we'll here from Sasha Zorovic with Oppenheimer and Company.

[Sasha Zorovic]

Indeed. Could you please tell us about on your for your ringtone sales, what would be the percentage of those that would be labeled tones or polyphonics and how that has evolved since the last quarter?

[David Rostov]

Hi, Sasha. On the ringtone side, we haven't broken out specifically for competitive reasons. And because each of our carriers have slightly different breakdowns in that area. What I can tell you and what we have talked about over the last few quarters is the label tone product that well I guess maybe taking a step back, the whole ringtone business is very, very new. For us at InfoSpace started in late 2003 through an acquisition. But really the whole industry started in the United States anyway, started in the 2003 time frame, late 2003. And in early 2004 label tones were launched by a few carriers. And some people call that label tones and some people call it true tones or something like that. And really that has been a much higher quality product, a much higher quality service. And not surprising we have seen significant growth on the label tone side fueled by new handset sales and fueled by the fact that it is a superior product. We continue to think the bulk of the growth, as we have seen and the bulk of the growth going forward, will come from the higher end products like label tones. And with that in mind that is one of the reasons we embarked on a much broader content strategy, which includes adding games, adding other kinds of content. I mentioned some of it earlier, things like comedy, things like movie type content, also graphics and wall paper, and other types of content that you will see over the course of the next few quarters and hopefully years.

[Sasha Zorovic]

Great. Now a question really specifically relating to the gains. I understand that you're on a break sort of specifically what the revenue is coming from those, but now that you have had, coming up just about a year, three acquisitions that you have made basically, what has been sort of your learning from having those and what do you think your string star with the games and what is your strategy particularly focusing for games going forward?

[David Rostov]

Sure. Well, I think kind of, the main thing we did just to remind everyone, is we purchased three relatively small and young companies over the course really of late 2004 and into really early part of 2005. So it has been a pretty recent entry for us into the games business. Also our acquisitions were relatively small and young companies, and what we focused on is primarily, to date, really getting the different groups better integrated with each other. So we are doing some sales here in the U.S. from games that were developed in Europe and then taking games that were developed here over to Europe, and so we have embarked on that. And really kind of the other major area of initiative for us and kind of it's consistent with some of the hiring that we just recently announced, in particular around the kind of content and media expertise is really around the licensing for games and so we are actively working as we speak on unique and interesting licenses that will add, I guess greater richness to our games catalog. And between that and kind of a continuing to enhance on the product set, that has been our main focus. And as we talked about one or two quarters ago that business has been in kind of been in the 5% to 10% range of our mobile revenues and continues to be the case. And we will continue to use the games and the games development as one of many content strategies that we have as we continue to grow the mobile business, and as we continue to work with carriers on a broader set of broader set of products to sell them. And to your question about what is our strength in that area, I think our biggest strength, or two biggest strengths, I would say are around really the ability to have strong and deeper relationships with multiple carriers across the world. We find that when we meet with content owners or games producers or others, our ability to potentially get them onto other carriers decks is very interesting to them. And then the second area is around core expertise on developing a product for a mobile environment. Those are pretty complex tasks and that is what we spend most of our time working on that.

[Sasha Zorovic]

Great. Thank you very much.

[David Rostov]

You're welcome, Sasha.

[Operator]

We'll now here from Stewart Barry with Thinkequity.

[Stewart Barry]

Hey, David, congratulations. Can you explain why or elaborate a little bit on why paid volume of paid searches was down sequentially from 214 to 182. And then also why you saw an increase in revenue per search from $0.18 to $0.20?

[David Rostov]

Sure. On your first question, about the paid volume decrease, remember our metric is a combination of both our search and our directory paid searches, but includes both search and directory. The loss of Verizon in Q3, which happened late in the Q2 time frame and we talked about last quarter, had a significant impact in that sequential comparison that you are look at relative to paid volumes. Obviously we are working hard to try and find other sources of traffic to replace that, but it happened late in the quarter and it takes time and we made some progress there with the addition of Yellow book, but more work to do that. And then similarly, the increase in the revenue per paid search is primarily driven by the fact that the mix of business on the search and directory is more heavily weighted now towards search than directory relative to second quarter. And that had an impact on the ratio or that number that you asked about.

[Stewart Barry]

And just one follow-up. You had mentioned the second quarter that you expected to spend $5 million on sales and marketing behind your wholly owned websites. It looks like you increased spending there $1.5 million. I guess what did you see in your sales and marketing efforts, and are you concerned that not spending there might hurt the long-term sort of awareness or demand for those sites?

[David Rostov]

I think a couple of things on that, Stewart. In terms of the spending, not all of that 1.5 was an increase in the search and directory site, but a big chunk of it was. And kind of, as we talked about last quarter, we had been experimenting and continued to experiment with marketing spend on our own sites trying to see kind of what works and how to most cost-effectively drive users to our site. And so in Q3 we did increase our spending as you noted and as we had planned. What we found was we had pretty good success at getting users or visitors to our web sites. We didn't have as good of success as we had hoped in terms of driving revenues from those searches and from those searchers. And so as a result, in Q4 we will go back to levels of spending that were closer related or more like what you had seen in past periods, past meaning, before Q3. In terms of the long term, we are working on plans for 2006. I think it would be probably too early to really comment on that and beyond. Obviously, we continue to work on different initiatives to improve on the products side and to continue to look for ways to enhance the value of those assets.

[Stewart Barry]

Thanks, David.

[David Rostov]

Sure.

[Operator]

Next we will hear from Gordon Hodge with Thomas Weisel Partners.

[Gordon Hodge]

Hi, good afternoon. A couple of questions. I think you mentioned a percentage of clicks that came from affiliates at 60%, but if I misheard, please correct me there. I didn't know what that 60% number as you mentioned. Also, curious if there had been any change in the TAC rate paid to your affiliates, any trend there that you can speak to? And then on the mobile side could you comment on the local search offering, have you launched it with any carriers yet? And then also, if you could talk about the pay-per-call deal that you have announced and the timing of how that might be integrated into your mobile offering? And then lastly, whether you have plans to launch a direct consumer site for games and mobile content?

[David Rostov]

I'll try and see if I can remember all those questions.

[Gordon Hodge]

Yeah, if you can.

[David Rostov]

On your first question the 60% is actually 60% of our search revenues that are from our distribution partners. The portion of our search and directory revenue, the search portion of that portion of revenue over 60% came from our affiliate. Which is consistent with past periods. Kind of following on that, if I remembered most of these questions right. On the tack rate, I would say no real change in terms of that.

[Gordon Hodge]

Okay. I didn't know if Microsoft in the mix made any change or…?

[David Rostov]

We haven't seen that yet. So no change there. On the mobile side, we just launched it. Actually at CTI, we featured our mobile local search product. I would say it is early and we’ve been pleased with the response we have gotten both from the industry and from potential customers. We are interactively working as we speak on trying to, to make some successful sales in that area and that is probably all I could say that the point. But again, It is early and you got to create the product before you can sell it in this part of the industry and that is what we are doing and we are working hard on selling it. We think it as great product.

[Gordon Hodge]

Okay.

[David Rostov]

Pay-per-call is again very early in the world of pay-per-call. It is an interesting model. We have talked about it before in the context of search. I know in the search world there is a number of companies out there working on pay per call and it is something we will continue to pursue as one of many potential vehicles for sales and growth. And then finally, direct to consumer, obviously it's I guess with regard to direct to consumer you are probably referring to the mobile side.

[Gordon Hodge]

Yes.

[David Rostov]

Mobile or and or games, I think it is fair to say that, as a company we need to continue to explore all possible avenues of the opportunity for our business, but other than that I can't really speculate any more on kind of which initiatives, we may pursue in the near term or over the course of '06 and beyond.

[Gordon Hodge]

Fair enough, thanks.

[David Rostov]

Thanks Gordon.

[Operator]

Next will come from Scott Sutherland with Wedbush Morgan.

[Scott Sutherland]

Thank you. Good afternoon, David.

[David Rostov]

Hi, Scott.

[Scott Sutherland]

On the mobile side first. Can you talk about the growth in mobile downloads whether you saw it from organic growth, from existing customers, or was it from some new carrier launches? And also, if you could talk about where you saw some stronger growth by content? With ringtones, games or graphics or can you give at least, where you saw bigger growth?

[David Rostov]

Sure, on your first question in terms of organic or new. Most if not all our growth came from our existing partners and our existing partner relationships. And as, Scott, we have relationships with most of the major carriers certainly in North America and then many outside North America and in particular in Europe. So, no real change there. And, it was a nice change for us from I guess a sequential standpoint to see the pickup in third quarter. On the second question about which type of content really, in the third quarter we saw a favorable pickup in a variety of our content sets but I would say to date the main demand for content is still around the music categories, so the ringtones being the main driver of customer usage.

[Scott Sutherland]

Okay. Have games increased as a percentage of the content revenue? I think you said about 5% last quarter, mobile? I said last quarter and I think even the prior quarter games has been about in the 5% to 10% percent range of our revenues and that continues to be the case this quarter as well. Okay. Remind us what the loss of Verizon impacted you this quarter maybe on a net basis? I know you got this other customer to monetize some of the traffic, kind of what you got back from that customer if that was anything this quarter so far?

[David Rostov]

We had said at end of second quarter that the lose of Verizon in second half of the year would have about a $9 million impact on the company in terms of that was quantifying the loss specifically there. I prefer not to disclose for obvious reasons the benefits we have gotten from other potential partners and so I kind of leave it at that. You can see that our decline in revenues quarter-over-quarter wasn't it was less than $4.5 million, so I think that will help you a little bit on that front.

[Scott Sutherland]

You seem to imply that there is still potential opportunities to monetize that traffic in other ways?

[David Rostov]

I think that's right. I guess I say that is always the case with all of our traffic, but yeah, absolutely.

[Scott Sutherland]

Okay. And just a couple last financial questions. Any ideas on the use of your cash balances and any 10% customers?

[David Rostov]

Well, on the 10% customer list, no change from prior quarter.

[Scott Sutherland]

Except for Verizon.

[David Rostov]

No, 10% customers, Verizon wasn't a 10% customer. They were an important customer, but not a 10% customer.

[Scott Sutherland]

The mobile still there, but the directory fell off?

[David Rostov]

That's correct.

[Scott Sutherland]

So the rest are ones are still there?

[David Rostov]

Correct.

[Scott Sutherland]

And the cash use?

[David Rostov]

I guess as you could see in the last quarter we were very active on the repurchase front and obviously, we continue to look at and explore potential ways to best use our balance sheet to enhance shareholder value. The main one being, possible acquisitions in our industry.

[Scott Sutherland]

Okay, great. Thanks, David.

[Operator]

We will now hear from Safa Rashtchy from Piper Jaffray.

[Safa Rashtchy]

Can you briefly comment on your relationship with Cingular? And also, on the balance sheet, can you comment on the increase in receivables sequentially?

[David Rostov]

Sure. I mean I'm not totally sure I know how to answer your question on Cingular if you have a specific question?

[Safa Rashtchy]

Just some color in terms of when we were at CTIA we saw a lot of companies trying to get placement in the Cingular stack and just relative are things going better or worse? Just a little bit color of what is your relationship with them?

[David Rostov]

Cingular continues to be a very important customer to InfoSpace and we work very hard [indiscernible] at all levels of the organization to meet or exceed their needs as a company. I would like to say I think we made great progress and we continue to make good progress, but really that might be a question best posed to Cingular. We certainly would, that's why we're here. To do a great job for our customers, and I would say that any of our customers whether it is Cingular or any other ones it is, it is an important part of the company's sort of focus is around keeping the customers happy and meeting their needs.

[Safa Rashtchy]

Great.

[David Rostov]

On the balance sheet front. On the receivables question. Really, you have to remember that as a company our top ten customers make up a significant amount of our revenues, so sometimes if those customers were to pay slightly faster or slightly slower that can have an effect on our receivables. Again it's really more a reflection of timing rather than anything more than that. And also, keep in mind that the types of customers we deal with, our top ten customers are all really most if not all of them are very bluechip companies. So it's not something that concerns us if we get paid a few days earlier or later. And again the receivables were up only slightly, relative to prior period.

[Safa Rashtchy]

Okay, thank you.

[David Rostov]

Thank you.

[Operator]

We'll now take a question from Jason Wylie with Morgan Cabot.

[Jason Wylie]

Good afternoon, David. Couple of questions. The first is, I was wondering if you would go through the kind of contracts from key customers that are up for renewal in 2006. And then also, any kind of guidance you could give on the individual expense lines for the fourth quarter?

[David Rostov]

Sure, why don't I start with the first one. Contract renewals and specific dates isn't something that I'm prepared to break out obviously for competitive reasons and for confidentiality reasons. From time to time we've disclosed what kind of customers and when the ending dates of those contracts are, but it is not something that I like to break out in detail here. Other than to say, as I said on the Cingular one as well, that our customers are very important to us and we work hard to try to meet or exceed their needs. When you only have a few major customers as we do, you try to get feedback from them day in and day whether than waiting for some arbitrary date when a contract ends, in terms of feedback. On the expense line, I think the main comment I would make, which is consistent with the comments I made on the call was we expect the margins to be similar to the range of guidance that we provided last quarter. That being 15% to 20% on the mobile side and 35% to 40% on the search and directory side. And I think that, that's probably the most helpful thing given the revenue guidance we gave and the other guidance for you to kind of work on your models.

[Jason Wylie]

Can you make any comments longer term about what you are kind of looking for in terms of segment margins?

[David Rostov]

Yeah, I think it would be premature to do that. We are actually, as we speak, we're working on our 2006 plan and kind of consistent with what we have done in past years I would expect that that plan and kind of our outlook for '06 or more detail in '06 will provide that at the next earnings call.

[Jason Wylie]

Thank you.

[David Rostov]

You're welcome, Jason.

[Nancy Bacchieri]

Operator, I think we have time for one more question.

[Operator]

And our last question today will come from Imran Khan with J.P. Morgan.

[Derek Newman]

Hi. This is Derek Newman calling in for Imran Khan. Two quick questions. The first. Can you give us an idea on how the traffic trends have done on your owned and operated sites? And then secondly, can you give us a sense of how much of your traffic distribution deals are coming up in '06?

[David Rostov]

Hi, Derek. That level of specificity isn't something we typically break out. The traffic trend our own sites have been, they performed I guess sort of in line with kind of what we had seen for the last few quarters. Obviously, as Q3 tends to be, and Q2 as well, tend to be some what seasonally weaker than other parts of the year. In terms of traffic and or partners, again for competitive reasons we don't break out specifics and when those deals are up for renewal.

[Derek Newman]

Okay, thank you.

[David Rostov]

You're welcome.

[Nancy Bacchieri, Vice President of Investor Relations]

With that I think we would like to thank everybody for joining us on the call today and please don't hesitate to call any of us with follow-up questions.

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