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Audible, Inc. (ADBL)

Q2 2007 Earnings Call

August 2, 2007 5:00 pm ET

Executives

Donald R. Katz - Chairman of the Board, Chief Executive Officer

William H. Mitchell - Chief Financial Officer

Analysts

Mark Mahaney - Citigroup

Barton Crockett - JP Morgan

Ross MacMillan - Jefferies and Company

Mike Olsen - Piper Jaffray

Scott Kessler - Standard & Poor's Equity

Presentation

Operator

Good day, everyone and welcome to the Audible Incorporated second quarter 2007 earnings conference call. With us today from Audible are Donald 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 here a replay of this and future earnings announcements, you can go to the investor relations section of our website and click on 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 tables of today’s second quarter results press release.

The statements made in the course of this call which are not historical fact may be deemed to contain certain forward-looking statements. Actual results may differ materially from those anticipated and any forward-looking statement, such as a result of certain risks and uncertainties, including without limitation Audible's operation 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.

Once again, as a reminder, ladies and gentlemen, this conference is being recorded.

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

Donald R. Katz

Thank you, Operator and thanks for joining us today to all of those listening in. I am going to open the call with a few highlights and Bill will join in with other key financial and operational metrics for the second quarter.

Q2 was clearly a quarter in which the numbers tell the story. Our adjusted EBITDA for the quarter grew close to 17-fold over Q2 2006, from $113,000 to $2.1 million, and EBITDA doubled over Q1 of this year.

Revenue increased to $25.9 million, up 36% over the $19.1 million reported in the second quarter of 2006 and, unlike Q2 last year when a broad, seasonal softening was discerned across the burgeoning digital media e-commerce sector, this year our revenue was up on a quarter-over-quarter basis against a seasonally strong Q1.

We added 56,000 new AudibleListener members during the quarter, ending with 431,000 AudibleListeners. It is very important to note that 96% of these new additions were recurrent revenue-generating gold or platinum AudibleListener members, versus 47% of new additions being gold and platinum members in Q2 2006. There was an exponential, in fact, five-fold difference in the annual revenue generation of these gold and platinum members versus the value listeners we focused on last year.

And our success at targeted acquisition of these high-value members is indicated by a churn rate that actually declined to 2.8% from 3%, alongside rising revenue per user during the quarter.

The extent of the shift to more valuable members is also illustrated by the fact that on a net basis, we actually lost several thousand of these gold and platinum members during the first half of last year. We will shortly have acquired as many new gold and platinum AudibleListeners in 2007 as we did during all of 2006.

One very positive corporate milestone during the quarter that I want to mention up front was the addition of a very highly regarded operating executive to our Board of Directors. Jim Bankoff was until recently EVP of AOL Programming and Products, and responsible for many of AOL’s key products and service innovations over his 11 years with the company. He built dozens of now-famous web destinations and consumer services, such as Movie Phone, AOL Music, TMZ, and AOL News. We are thrilled to have Jim on board to help us guide Audible to the next level.

There are many other progress points within the second quarter of which we are proud. For instance, our U.K. operation doubled revenue year over year and hit full profitability, excluding additive iTunes U.K. revenue, after just two years of operation. Our decision to invest in the U.K. and work towards a fast and profitable return, along with the related investments begun two years ago in technology infrastructure, data and analysis generation systems, and elevated customer service levels has clearly combined with consistently improved execution levels to empower the successful quarter.

I will return in a minute to describe a few operational details about the quarter but first, here’s Bill Mitchell with the numbers.

William H. Mitchell

Thanks, Don and good afternoon, everyone. As Don mentioned, total revenue in Q2 was $25.9 million, up more than 36% year over year and 3% sequentially. It is worthwhile noting that our year-over-year growth actually accelerated from 28% to 36% between the first and second quarters.

Don also talked about the profound change in our new member mix, and it is clear that in the second quarter, we have started to see the positive results of a tactical focus on the acquisition of monthly gold and platinum members versus the value members we were focusing on last year.

We have acknowledged that our monthly gold and platinum member revenue streams, which usually begin with a $7.49 per month promotional discount for three months or a free trial period, suffer a revenue generation lag versus the up-front revenues we receive from a value member, who pays an annual $10 membership fee in addition to the discounted cost of their first download.

However, the lifetime and annual revenue profile of these new gold and platinum members is vastly more productive than their value counterparts. Value members generate close to $50 per year as members and occasional listeners. The value program also has become a solid alternative for members looking to reduce their monthly consumption rates, but make no mistake about it -- our recurrent monthly gold and platinum members generate an average of over $240 in revenue annually. You don’t need a whiteboard to understand the positive effect of the net addition of approximately 43,000 of these members during the first two quarters of the year.

And beyond this, our customer surveys reveal that the more our members use our service, the more they like it. The surveys also document the fact that recurrent monthly members are two to three times more likely to promote our service as opposed to our non-monthly subs.

As Don noted, churn was actually down 20 basis points in Q2 compared to Q1 to a very manageable 2.8%. We work hard to keep our members and are elated when this statistic trends downward. We are concerned, however, that this statistic may increase in the future, most likely due to cost pressures from the new gold and platinum members. But we have not seen upward pressure as yet.

While we have not added as many new gross members as in prior quarters, the ones we have added, as Don noted, are more than five times more valuable annually than the ones we were adding last year. Add to that the fact that we have not seen an increase in churn, nor have we seen a marked increase in subscriber acquisition costs, or SAC, and you can tell why we are encouraged by the connection between the growth of these members and the potential for revenue growth.

All in all, after six months of putting monthly membership out front as our lead offer, our shift to recurrent monthly membership looks like a hands down winner.

Our optimism about this trend, if you will grant me a few moments to comment, is ultimately because our members love and promote our service, since we have a superior product delivered by outstanding employees who believe in the benefits that Audible service delivers to individuals, and even to our culture and society as a whole -- sorry, Don, I know I’m not supposed to encroach on editorial comment, being a CFO and all.

Donald R. Katz

Okay, Bill, but our listeners should know that when you are not crafting editorial asides worthy of our most literary Audible downloads, you spend a significant portion of your time on expense analyses and other budgets. But the fact is, I stand by every element of the qualitative drivers you describe as very much --

William H. Mitchell

All right, sorry. I promise not to require any more interventions.

Two other noteworthy items deserve comment in revenue. Apple iTunes revenue is up 82% year over year but slightly down quarter over quarter and down as a percentage of total revenue during the quarter, from 31% of revenue to 29%. This revenue stream should not be underestimated, since we have launched a number of tactics to build this new revenue pipeline.

Don mentioned the strong growth and achievement of standalone profitability in our U.K. operation. As a side note, we completed the development of the engineering that enabled us to start charging all our members from the European Union countries who buy audio at our U.S. site VAT tax during the quarter. This has further increased profitability without any noticeable reduction in revenue.

Expenses were down appreciably from last quarter. Year over year, our adjusted EBITDA was up nearly $2 million for the quarter and a remarkable $4.4 million for the six-month period. We use the adjusted EBITDA metric which, as Don noted, was $2.1 million in Q2, as our lead profitability metric, as we believe it best reflects our near-term operational profitability. We have provided a reconciliation of this metric to GAAP metrics in our press release.

We continue to believe that there are still opportunities to reduce expenses in our business and improve our EBITDA margin above the effective 8% of revenues we experienced this quarter through further rationalization of expenses, in addition to our drive towards margin expansion that will be delivered by revenue and ARPU growth.

Three specific items to touch on for expenses, so you can understand more fully some of our success -- content costs, contract labor, and marketing.

Content costs as a percentage of revenue were effectively down this quarter. Part of this was due to the reduced mix of Apple revenue. Additionally, it is important to note that we are focused on more efficient marketing, merchandising of lower cost products. We will continue to use this merchandising tactic to influence this cost impact lower in the future for the Audible revenue stream.

We said last quarter we had some short-term opportunities to reduce contract labor and we realized them in Q2. Operations, technology and G&A all experienced some positive improvements in costs, as well as performance from settling into our new Newark headquarters, with its now stable operating environment.

Marketing costs were up a touch in the quarter and, because of the decline in total new additions as we transitioned to acquiring the higher value gold and platinum members, SAC rose a little from $41 to a still relatively modest $49. We continue using the Internet to successfully target, attract, and convert new members in cost-efficient manners.

Going forward, we will continue to focus on driving down cost in areas that are fixed and ensure that our variable expense arrangements are positively scalable.

We have an 8% adjusted EBITDA margin this quarter, but we are clearly far from where we intend to be. Every employee in this company is a shareholder and we are all motivated to drive profitability together. All of our shareholder employees are annually incented to drive profitability and therefore, we are pretty focused on delivering higher adjusted EBITDA.

Now a word on net income. By the accounting standards of 2005, we would be reporting earnings per share of nearly $0.06 today instead of $125,000 GAAP loss on our P&L. FAS-123R on stock-based compensation is behind this change.

As a percentage of our revenues, our stock-based comp charges are consistent with their level in 2005, and I believe they will begin to shrink prospectively. We believe these charges, some of which are for stock options priced at $30, will eventually be lauded as a way we engaged our workforce to collaborate with our shareholders to drive profitability.

We issue equity to employees carefully and sensibly in accordance with our stated mission to deliver an outstanding product for our members in a manner that generates long-term rewards for our investors.

Our international JV investments in Germany and France continue to grow. We have agreed with our talented partners in Germany to provide $1 million of additional financial support to that entity over the next year. That market is proving to be a wonderful testing ground for new ideas, particularly in the area of original production of exclusive serialized audio titles that we believe will have some successful application in the United States.

We finished the quarter with over $67 million in cash, cash equivalents and short-term investments, and those balances are off about $1 million from 12-31. We still have some capital requirements in Newark related to our recent move here, particularly the completion of our audio studios, which should come online in Q3. But we will forecast that our cash will start increasing unless we utilize it to repurchase stock or other strategic investments.

We had indicated that we would not be repurchasing any stock, which has been authorized by our board, while we were investing in our Newark facility, but that period is nearly over. We will weigh that potential use of cash against other strategic opportunities we see during the coming months.

Finally, a word about guidance. Audible suspended providing 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, as well as the reduction in contract labor that we have made during the first half of the year.

We are happy with the results of our $7.49 acquisition model for new customers, but have been supplementing it with targeted free trail offers. And while the results of these programs look good, they are still shaking out.

So as we head into the third quarter, we continue to work at building our business with monthly members. We are focused on improving our profitability by constantly evaluating our performance metrics at the operational level and are optimistic that our ability to build new customer segments via new product developments, new Audible ready device innovations, and our international expansion will help accelerate our natural growth patterns in the coming months.

Now, I’ll turn it back to Don.

Donald R. Katz

Thanks, Bill. As Bill quantitatively and, for a moment there, qualitatively described our business is indeed propelled by a superior listening experience and by stellar employees working to improve our service by the day. Clearly a huge part of the story beneath a good quarter like Q2 are the specific elements of execution, particularly smart customer acquisition programs, productive and focused merchantry, and consistent and measurable service levels.

We’ve become a far more data-driven organization, and far more responsive to ever more sophisticated multi-variance testing paradigms, as we find and convert qualified new members. We have also become consistently better at monetizing our customer base via personalized and inspired product communications that are measured down to the ROI on each e-mail and each call to action embedded within a piece of selling collateral.

We have a company culture based on consistent improvement and we believe we have a long way to go in the area of reaping further benefits from improvements in quantified refinements alone.

These improvements range across our interactive paid media-based customer acquisition efforts, and we have seen consistent improvement in our paid search, affiliate marketing, and anonymous traffic conversion efforts.

The results all exceeded our targets, despite the higher prices and higher levels of commitment entailed in our gold and platinum entry plans. During the quarter, we also launched some traditional media efforts, including a high profile New York City subway advertising campaign and print efforts in Wired Magazine and other publications. And we are excited about our sponsorship work with various podcasts in the quarter.

Merchandising efforts via e-mail saw marked improvements as we stepped up personalization and the creative quality of editorial communications. Part of our ARPU expansion is driven by a significant in cash-based ALOP sales. This refers to AudibleListener Over Plan revenue, our measure of a la carte buying over monthly plan fees for our members, which has risen to an historically high average level.

Our merchandising teams have also been successful in increasing sales to the non-member a la carte customer base, and many of our best customer promotions are conceived with our now more than 470 audio providers.

We also co-invested in advertising with our close partners at iTunes at the end of the quarter and this, coupled with the launch of the iPhone and the fruits of our other day-to-day work with iTunes on the merchandising front, cause me to doubt that the quarter’s down trend in Apple’s percentage of total revenue, as Bill described, will continue.

Though some of our investors questioned our investment in better customer service two years ago when we also announced our intentions to launch our U.K. operation, it is clear that the elevated quality of our customer service has had a very positive effect on our viral, customer tells customer growth, as well as on our churn and our ARPU results.

We cut call abandonment rates in half during Q2 versus Q1, and reduced average speed to answer metrics to well under a minute. Response times to our customers e-mail queries also halved, even as we eliminated a layer of customer service outside expense.

Customer satisfaction ratings among those customers who need our help have risen to all-time highs. We could not be more proud of our customer service teams. Our members and other listeners adopt a habit that becomes an integrated part of their daily lives. We stand behind that proposition and our customer happiness measures and financial results are indications of a very positive return on our investment in great people and great service.

Audible.com now makes available 140,000 hours of programming, composed of over 40,000 audio titles, drawn from, as I noted, 470 different content providers. We added 47 new content providers in the second quarter of 2007. A very notable content event in recent weeks is the renewal and expansion of our deal with the BBC. The extension includes the addition of great new audio titles from BBC America to add to a very large U.K.-based BBC library.

In the U.K., we are also powering a new BBC website called BBC Audio Zone, that features BBC-derived audio products for download and our BBC partners intend to drive traffic from their vast print and online products to this new outlook.

I think we have noted in the past that our global sales from the now 46 British-based content resources are very strong and additive to the internal financial success of -- beyond the internal financial success of the U.K. operation.

We also renewed our relationship with Harlequin during the quarter. This is one of our core original production partnerships dedicated to producing a consistent flow of audio romances for digital only distribution, via Harlequin’s direct marketing channels and Audible's own distribution network.

Another important launch during the quarter was an original weekly comedy series produced in association with the Laugh Factory Comedy Club. There are now 21 hour-long shows that feature extremely funny stand-up and behind-the-scenes interviews with famous comedians like Dane Cook, Jon Lovitz and many others. The deal is exclusive and will run for several years.

Audible also produced four exclusive audiobooks from award-winning thriller author, Chris [Gordenstein]. And because of the quality of the books and our increased ability to merchandise and promote in a targeted way, we drove 5X sales increases via single e-mail efforts.

Q2 has for several years been a comparatively weak time for new titles, so we are pleased with our unit sales and ALOP patterns.

Coming up in Q3, we are looking forward to sales results from such anticipated new audiobooks as works by Bill Clinton, Joseph Fender, William Gibson, Dennis Johnson, Alan Greenspan, and many others. And watch for some innovative serialized products featuring very high-profile authors coming up in the fall.

We continue to be excited about our progress and focus on developing a kids audio and reading acceleration platform for kids and parents. I talked about this on the last call and we are looking forward to keeping you posted as we continue to develop this promising category and product extension.

Around two dozen new Audible ready devices entered the market during the second quarter, including that amazing Apple iPhone, which shipped fully Audible ready and thus connects with and plays back our audio content from both iTunes and our Audible.com outlets in the U.S. and abroad.

Exciting new Creative Labs devices, the Stone and the Stone Plus, have both appeared with our playback standard setting SDK on board, as well as with marketing collateral in the boxes and set up. The same was true of the new RCA JetStream and Opal models, the iRiver Clix Generation 2, and we continue to work with Best Buy on their Insignia digital audio player line.

One trend worth noting is the quantity of customers we are gaining from Audible ready GPS players, such as the Garmin Nuvi and the Tom Tom. These devices are clearly focused on drive time and they have excellent awareness generation and [inaudible].

Besides the iPhone, we worked with Sony Ericsson to enable full over the air and tethered download Audible compatibility with two new Walkman phones. I just got back from a few days of PR in London and I used one of the Sony phones there, which drew comments from the journalists and radio presenters I met, even in that very advanced wireless device environment.

Some of those interviews were focused on the success of our U.K. operation, while others were about the coming 10th anniversary of our launch of Audible.com and the pioneering Audible mobile player digital audio device.

The anniversary in the fall does offer a brief pause to consider how far we’ve come, particularly as we talk about a quarter that includes very much improved bottom line results, accelerated growth rates, rising ARPU, lower churn, and with a broad variety of promising potential growth accelerators on the content, device and expanded distribution horizons still to come.

With that, Bill and I would be happy to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) We go first to Mark Mahaney with Citigroup.

Mark Mahaney - Citigroup

Thank you very much. Three quick questions, please. First, just again on the share buy-backs, I think your cash now is over 25% of your market cap. That’s an unusually high level. Why shouldn’t that be put very quickly to work buying back stock?

Secondly, you have an education initiative that you announced a year ago. We may see signs of traction for that in the September quarter. Could you give us any sort of update and maybe any sort of expectations you want to set about how material that could be?

Finally, in terms of bringing in this pretty healthy level of gold and platinum customers, you talked about a couple of different marketing steps that you’ve done. Could you just single out one or two that you thought were most successful in bringing in that kind of premium customer? Thank you very much.

Donald R. Katz

It’s Don and I’ll particularly help you on the first two. On the buy-back, we have a charge to do it. We have some parameters that we are looking at and we are just going to go forward looking at different ways to use the cash, which would be strategic, which include share buy-backs. We’ll obviously keep you posted.

William H. Mitchell

As you know, our stock is not very thickly traded. It is widely held by institutions, so there is not a lot of trading that goes on with our stock and we do have to be careful about how much we might buy during the short period of time that, the 45 days that we are in a period where we can buy stock.

Donald R. Katz

On the education front, we continue to produce these extremely powerful Vango notes audio study guides for the higher ed market. We work with Pearson on a regular basis. There will be 188 titles ready for the fall back-to-school season. The sales reps at Pearson will be continuing to make professors aware of the product, which is designed to be downloaded by students and used interactively as they go through work against their top text books. The text books themselves will be stickered going forward with calls to action, and there is various retail value packs to promote it and we continue to sell it through our channels.

On the kids front, I think I’ve telegraphed what’s going on but as we get a little bit close to product, we are not going to talk much more about it until we hopefully have a gala launch of what that product will be.

On an aggregate basis and a P&L basis, I still think it is too early to start to break out relative economics on education, but I will say that as we ready proactive and more programmatic things around education, everything we make starts to sell and continues to sell, so as we build up more focused educational products, we just continue to make money off anything we do.

And the third thing, I guess I will talk a little bit about the fact that our paid search and our natural search has just become a very powerful way to draw customers. There are indications on a consistent basis that Audible has begun to mean things in environments that, using more sophisticated methods on the web to find behaviorally relevant users of other services that we’ve been able to get a lot of customers on a very low cost per order and it has consistently been a strength that we’ve worked on. We’ve also done better exposing our natural search, our content through natural search as well as our product in natural search, so that’s another thing.

I will say that the subway campaign was a very powerful way of just taking a particular place and a particular population, I think it was every sixth car had calls to action, an interesting collateral about Audible. The buzz was consistent, it was only in New York City, and it was I think very positive. We got a lot of traffic.

So all of that is very positive and it just indicates that both the concept of downloading, the concept of Audible being clearly the leader in the field is a more powerful way for us to go forward.

Mark Mahaney - Citigroup

Thank you.

Operator

We will hear next from Barton Crockett with JP Morgan.

Barton Crockett - JP Morgan

Thanks for taking the question. I wanted to ask you a question -- first of all, the one thing you said in the script about the churn was obviously good in this quarter, but there is potential for that to go up because of cost pressures, I think you said. I just wanted to make sure I understood what you mean by that. Is that some delayed impact of people realizing that they are spending more, as I guess, as the promotion period goes away? That would be the first question.

The second thing is, I was wondering if you could explain what the rights situation is for the Potter books and you guys, for the whole series and also the most recent one that was released for the audiobooks. Thank you.

Donald R. Katz

On the first one, I think Bill was referring to the fact that there is a cumulative cost to being our customer and over time, people who take it on and become habituated to it just find that the costs cause them to churn out. They often don’t churn out in the sense of not becoming listeners anymore. They just go down to a lower paying plan or they often become a la carte buyers, which would show up in churn.

The other thing I’ll mention is that we’ve become far more targeted in using a mixture of free trials to gain new members, and when you use free trials, there occasionally is, at least metrically, an up-surge in churn. I mean, for you people who remember going back two years ago when many of the recurrent businesses on the web saw radically rising churn because of the so-called incentive based programs on the web, which were affiliate networks that were actually allowing customers to get something, you know, a TV or something if they did five of six sign-ups for different services. So that -- we washed that out and that’s not part of our world anymore.

But still, when you are using free trials, you do get people who occasionally bail after the credit card hit and that doesn’t mean it’s not a very profitable thing to do but churn numbers can go up. So we are just being cautious and we are watching it, but clearly there is significant headroom between sub recurs and churn in a bottle like ours, and a point where it is a matter for concern.

William H. Mitchell

Harry Potter.

Donald R. Katz

Sorry, on the -- do you want to follow up on that?

Barton Crockett - JP Morgan

No, that was good. Thank you.

Donald R. Katz

The Harry Potter, we are not going to make any comment except that it is a very special product and probably separate from anything related to the book industry in reality, and the economics of the value chain, the character of the sale -- everything about it is different, so at this point, as you know from books one through six, they did end up in iTunes and we were participating in that transactionally and the like, so we will just have to watch this space on that.

Barton Crockett - JP Morgan

Okay, but today, is there a download for the Harry Potter, the most recent one?

Donald R. Katz

No, there is not and I will say it is one of those products that unlike just about every single other audio book, has a lot of value to people as a physical, very expensive physical package, because it can be wrapped up as a present and it is one of the things that is kept in children’s bookshelves for a lifetime.

We acknowledge that tapes and CDs have their place in people’s lives at times, but then that is one of them because it has recurrent play value and it is a very expensive item that people tend to buy. So I think that might have something to do with the desires of various people to play it out in physical first.

Barton Crockett - JP Morgan

Okay, and if I could ask another question on something you mentioned in the script, you mentioned England becoming profitable. Can you give us any sense of the sizing there of England in terms of -- I assume it is all 75% revenue, 75% AudibleListener additions, but I was just wondering if you could confirm that and tell us --

William H. Mitchell

We break out U.K. revenue in the 10-K, Barton, so I think that will be a pretty good place to get some sense of the size. Their rates are generally a little higher than ours.

Barton Crockett - JP Morgan

Okay.

William H. Mitchell

Domestically. That’s all.

Barton Crockett - JP Morgan

All right, and in terms of the AudibleListener additions, are they -- is that -- you know --

William H. Mitchell

We haven’t historically broken that out and we are going to stick to that today.

Barton Crockett - JP Morgan

Okay. All right, I’ll leave it there. Thanks a lot.

Operator

We go next to Ross MacMillan with Jefferies.

Ross MacMillan - Jefferies and Company

Thanks. So the first question would just be on the subscriber base that exists now, I think you mentioned last quarter you had 146,000 value subscribers. That is the $10 subscribers. Do you have an update on that number?

William H. Mitchell

Actually, it is very consistent. I know we didn’t mention it on the call but I believe that’s because it changed by about 1,000 during the course of the quarter.

Ross MacMillan - Jefferies and Company

So it hasn’t really changed that much sequentially?

William H. Mitchell

That’s correct.

Ross MacMillan - Jefferies and Company

Okay, so should I imply from that that it’s not that you are turning off the value guys on to subscription plans, it’s more that most of really what is happening is the net new, the brand new are coming on the subscriber plans?

William H. Mitchell

That’s right. The new people are generally coming on the subscriber plans and we are not losing as many value customers as we might have thought we were going to lose when their annual renewal comes up, and we are saving some people who are calling in to cancel their service, we are saving them into the value plan, or when they try to cancel online they are given an offer to take the value plan because they don’t lose their credits when they do that. So the value plan is becoming an attractive soft landing for people.

It’s actually become a nice product to have in that respect.

Ross MacMillan - Jefferies and Company

And on the net new, if I do the total growth in the base, that number this quarter, obviously this is a seasonally weak quarter. I know you are not giving guidance but would you expect to do a little better than that net new addition number as we go through over the next couple of quarters?

Donald R. Katz

Yes, I think we do. If you look over a period of the last four years, the acquisition numbers have gone down fairly precipitously from Q1 to Q2. It is just the way it is played out going back to 2004. But it you take the gold and platinums, it is down about 5,000 on a net basis which, coming off of Q4 and Q1, is really not bad. The reality is that we have seasonality that we’ve talked about is driven by the huge number of devices that go into the marketplace in Q4 and Q1 and the concentration of powerful titles at the end and the beginning of the year, and it has just been part of our world. So I guess the answer is yes, we do expect it to be better but still, it is an impressive performance on Q2 if you look at it last year.

Ross MacMillan - Jefferies and Company

Is that 5K down compared to other years in the gold and platinum subscribers? That’s a pretty good compare.

Donald R. Katz

-- in terms of the net additions over, for Q1 on that class of customers.

Ross MacMillan - Jefferies and Company

Yes, so that’s a good number relative to it has been historically in terms of that seasonal change.

Donald R. Katz

Yes, and Q1 to Q2 in 2006, it went from 79,000 new adds to 65,000 new adds, so it gives you a sizing.

Ross MacMillan - Jefferies and Company

Thank you.

Operator

We go next to Mike Olsen with Piper Jaffray.

Mike Olsen - Piper Jaffray

Thanks. I don’t know if you said it but what was the Apple revenue in the quarter?

William H. Mitchell

It was -- we didn’t give you the number but we did give you the percent. We said it is 29% of total revenue.

Mike Olsen - Piper Jaffray

Of total consumer content revenue?

William H. Mitchell

I believe it is of total revenue.

Mike Olsen - Piper Jaffray

Okay, and what percent of new AudibleListeners were gold and platinum last quarter? It sounds like you said it was 96% or something like that this quarter.

William H. Mitchell

I think it was closer to 99% this quarter, but last quarter it was about 11,000 values were added in that number, and this quarter it is about 2,000.

Mike Olsen - Piper Jaffray

Okay, and do you think it is going to be possible to keep that percentage as high as far as the gold and platinum, 95% or higher?

William H. Mitchell

In the near-term, that is our orientation. We are focusing our marketing dollars. We are not trying to build too many products here. We are trying to focus on the one that really brings home some money for us, which is that gold and platinum product.

Mike Olsen - Piper Jaffray

That makes sense. And then just lastly, regarding the iPhone, where do you see the impact from the iPhone promotional materials, basically those coupons that go into iPhone packaging? Is this the type of marketing just for an Audible awareness push, or is it the objective to get a direct response? Obviously the objective is to get a direct response but what are you seeing as it relates to iPhone customers? Do you get a direct response from putting those types of materials in packaging?

William H. Mitchell

Well, whatever you do, don’t tell the Apple guys we got the promotional material in those boxes because they think they’re pretty clean.

Donald R. Katz

We’ve often said that one of the interesting disparities in our world is that most of us that are not iPods ship with significant awareness generation inside the box or the set-up experience or in the playback experience. We get a lot of customers that way and the iPod has always been pretty much denuded of other products, including actually mostly iTunes. But the iPhone is a very positive thing but it largely drives our revenue at iTunes, partially because of the novel sense that people are actually lighting up the service at iTunes with those phones, which is a very novel thing. Most usually call the carrier or you do it at the store, so it will definitely be helpful and whether or not the revenue comes from iTunes or people discover Audible through it, it is all good for us.

Mike Olsen - Piper Jaffray

Thank you.

Operator

(Operator Instructions) We go to Scott Kessler with Standard & Poor's Equity.

Scott Kessler - Standard & Poor's Equity

Thanks a lot. I had a follow-on question regarding Audible education. I was wondering if you could talk a little bit more, Don, I think you started to talk about the promotional efforts that you’ve undertaken. If you could perhaps go into a little bit more detail, that would be helpful.

The related question on education I also have is to what extent are you aggressively pursuing other kind of cornerstone partners, like a Pearson?

My other question centers on Audible Air. Can you just provide an update on that business as well? Thanks a lot.

Donald R. Katz

There is not that much more to say. The Pearson relationship really is a lot of our higher ed focus. We have smart notes products, we have a lot of different lectures -- in fact, the lectures are probably an under-appreciated at Audible because there are some fantastic lectures by famous Oxford and Cambridge and the like from the Modern Scholars program and the like. We’ve continued to develop the kids. We’ve talked about our work in schools and our testing out of the reading acceleration elements of listening for young kids and just the love of reading in general but also going to address the struggling readers.

All that stuff is coming up. We look at it as developmental. It is a great awareness generator. Pearson is an incredible partner because as you know, we have a deep partnership with Penguin and some of our kids focus is particularly with Penguin, which is also a Pearson company, as well as the higher ed group.

But other than that, I think that Vango notes speaks for itself. People should check it out. It’s a very novel and I think progressive multimedia and multi-platform way of using iPods interactively with text to create a learning experience, so I think it’s a portent of things to come.

The other question was about Audible Air. Audible Air is still in beta but we are getting evermore excited about the numbers and the quality and the sexiness of the phones that are compliant with Audible Air, and I think you will see us push forward with more of a product focus. We probably have 15,000 to 20,000 people who are using it everyday. It’s a great application but I’m not so sure I would describe it as an element of business. It’s an element of a consumer access to content that drives our normal business.

So the vectors of the curve and the Pearl from RIMM, the BlackBerries are Audible ready in beta, and I think that we will probably make more people aware of that going forward. I think that’s an opportunity.

Scott Kessler - Standard & Poor's Equity

If I could follow-up, is there any thought to potentially doing marketing specifically focused on Audible Education of Audible Air? One of the things I find as I navigate your website is that, as you know, it is organized based on category, not on broader concept of education or Audible Air, but also there are those dedicated websites. I’m wondering to what extent you are potentially contemplating at least promoting those offerings on your homepage or in different context?

Donald R. Katz

I think you should wait a little bit and you will see a particular instrumentation of that in the education space and from what you are saying, you will definitely be pleased.

The wireless space, I think it is just a question of whether or not this is another way to acquire customers through yet another, you know, of the hundreds and hundreds Audible ready devices, or is the wireless customer a discrete user based on that usage paradigm. We will test that out and if as you kind of imply, that’s the way to go, that wireless people see themselves as wireless people rather than another type of mobile content consumer, we’ll definitely go in that direction.

Scott Kessler - Standard & Poor's Equity

Thanks a lot.

Operator

Next to Maurice McKenzie with Signal Hill. Mr. McKenzie, your line is open.

William H. Mitchell

Well, we can try Maurice tomorrow.

Donald R. Katz

All right, thanks, Operator. Let’s close it up.

Operator

And we’ll turn the call back to you, gentlemen, for closing remarks.

Donald R. Katz

Thanks for joining, everybody. We are particularly proud of this quarter and we look forward to more of the same going forward.

William H. Mitchell

-- follow-up with any other questions that you have that I can answer under equity regulations. Thanks and have a great night.

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Source: Audible Q2 2007 Earnings Call Transcript
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