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Knot Inc. (KNOT)

Q4 2005 Earnings Conference Call

February 9th 2006, 2:30 PM.

Executives:

Melissa Bauer, Investor Relations

David Liu, Chairman, Chief Executive Officer and President

Richard Szefc, Chief Financial Officer

Analysts:

Parham Ghorban, Roth Capital Partners

Steve Sullivan, Horizon Financial Group

Trina Choudhury, JMP Securities

James Lee, Americas Growth Capital

Richard Fetyko, MCF

Operator

Good afternoon. My name Lori and I will be your conference facilitator. At this time, I would like to welcome everyone to The Knot’s Fourth Quarter 2005 Conference Call. During the presentation, all of the participants will be in a listen-only mode. After the speaker’s remarks, you will be invited to participate in a question and answer session. As a reminder ladies and gentlemen this conference is being recorded. At this time I would like to turn the conference over to Ms. Melissa Bauer.

Melissa Bauer, Investor Relations

Thank you. Good afternoon and welcome to The Knot’s fourth quarter and yearend 2005 earnings conference call and webcast. During the course of this conference call, comments that we make regarding The Knot that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements. Any such forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words like “may”, “should”, “expect”, “plan”, “intend” and other similar terms. You are cautioned that these forward-looking statements speak only as of today’s date. Our internal projections and beliefs upon which we base our expectations may change but we will not necessarily inform you if they do. The Knot’s policy is to provide expectations only once per quarter and not to update this information until next quarter. The important factors that could cause actual results to differ materially from any forward-looking statements mentioned today include but are not limited to our unproven business model and limited operating history, our history of losses, significant fluctuations to our, which, our quarterly revenues and operating results are subject to risks and related costs associated with ongoing litigation, the seasonality of the wedding industry and other factors described in documents that we have filed with the Securities and Exchange Commission.

Additionally, if you have not received a copy of today’s press release, the release is now posted on the Investor Relations section of the company’s website www.theknot.com. We’ve allotted up to 1 hour for today’s conference call including the question and answer session that follows. Please take note that the company is operating under the SEC Regulation FD and encourages you to take full advantage of the Q&A section.

At this time, I would like to turn over the call to our Chief Executive Officer, David Liu.

David Liu, Chairman, Chief Executive Officer and President

Thank you Melissa and good afternoon. I am very pleased to welcome everyone to today’s earnings call. As this morning’s news release indicates, the fourth quarter ended last year on a very positive note. The threefold gain in net income for 2005 on a 24% revenue increase, demonstrates the leverage we have with our business model as we’ve reached critical math.

At this point, we’re able to drive a substantial portion of our incremental revenue to the bottom-line. We are particularly encouraged by the growth of our online advertising revenue. As a result of this strong growth, ad revenue has increased as a percentage of the mix of our total revenue which has in turn had a positive impact on our overall margin. There are several factors driving the growth and the number of advertisers and their average spend. And many of you have asked questions about how our programs work? So I think this is a good opportunity to go over the specific review before our CFO, Richard Szefc discusses our financial results.

Growing our online revenue for the very traditional wedding market, with an optimal battle in the early years of the internet. We continue to invest a great deal of time and effort in the education process. As many of the endemic national advertisers are still more comfortable making ad buys in traditional media.

Our mission has two goals. Our first goal is to identify the needs of our members and provide them access to the widest selection of products and services. And second, it is to provide, our marketing partners access to our audience at the precise moment our members are looking for related products and services.

In addition to being the unique resource for reaching a replenishing audience base, our on and offline programs offer advertisers a unique media package for reaching the target customers in all forms of media. In fact, we offer the most comprehensive and cost effective media package available to advertisers seeking to reach brides to be and newly wed including couples planning for parenthood.

We’re also building relationships with our advertisers. In the industry, The Knot is gaining recognition as the partner with unique and creative marketing programs that are able to produce dramatic results. We develop programs that meet our advertisers need and still allow us to be true to the promise with our web members. And then doing so, we maintain our loyal audience.

Special K and Kohl’s are two examples of how we work. We developed The Knot’s editorial content on our site, where members can click on agenda and search message boards sponsored exclusively by Special K, that’s highly traffic area provides the tools and support of other knotties to help bride to meet their fitness goal for their wedding day and then honeymoon.

Special K is able to build strong brand awareness through the integration of the online sponsorship and the ads in our magazines. Another major promotion is the game we created for Kohl’s called Virtual Bridal Bingo. In the last few years Bridal Bingo has become a popular game played at Bridal Showers across the country. The Knot has brought this contest online in the form of an adjective of interactive game for Kohl’s Bridal Aisle Gift Registry.

Kohl’s has several goals. First, to showcase the variety of higher end product to carry, second to have a platform where brides to be could interactively view their brand several times for optimal exposure in branding, and finally pick out their needs in a unique way for future communication.

The Kohl’s Bridal Bingo accomplishes all the above. The game lasts for one month and runs twice a year. As part of the integrated marketing plans, The Knot also assisted Kohl’s in a PR initiative through satellite media tours and media interviews on television. The appeal of The Knot and The Nest advertisers is very similar. First and foremost, our size and the only media vehicle that have developed intense relationships with its highly desirable audience at a critical life stage. Each year a little over one million new members are known for free on theknot.com. We have the largest database of engaged couples with contact information is captured months before the actual wedding day. When the wedding and honeymoon days are passed our Knot members are automatically transfer to the Nest.

Online advertisers can buy space on our sites both as banners and as exclusive sponsorships of our editorial content. The same holds true for their print advertising and our bridal magazines which offer a cleanly designed and well organized vehicle for displaying products and services along the side of useful editorial content and directory.

Advertisers can extend their on and offline spending with us by participating in a media tour or buying a special promotion or an email program. Special promos and email may sound routine but the results they produce certainly resonate with advertisers who want a direct response. For those advertisers who want strong results but are also interested in communicating a strong brand image and message, we provide an unparallel marketing platform in The Knot TV. Since launching The Knot TV, our 24x7 streaming broadband channel that appears on our message board, we are able to produce special features for MAC Cosmetics and Zale Corporation. Currently, we are working on a series of shows for the Four Seasons resorts. These five to ten minute segments are sponsored and are watched by significant audience on our site.

Our local advertising continues its steady growth largely due to the fact that we do deliver measurable results to give our advertisers immediate payback from their investment on The Knot. A basic local listing on The Knot site goes for about $1000; still a bargain compared to the cost of the plan Vanilla yellow pages of advertising and in listing. The average spend by our local advertiser is approximately 1400 as many local advertisers take advantage of the extras we offer above the basic listing. These include a premier listing on a category page like photography or banner on the front first stage of their online city guides, say for example, Atlanta. They can also purchase a listing on our international magazine or a local publication. Each of these generates more exposure for the vendor and additional revenues for us. An incremental cost can still be below that of the yellow pages or their local newspaper.

Last April, we’ve raised our local rates by 10%, and planned a similar increase this April. Given our strong local revenue growth through 2005, our rate increases have in no way affected our customers’ appetite for advertising with us. Whether they are local or national, our customers benefit from our own brand building strategy, which requires no outside advertising spending on our part.

A case in point, its last week and this morning appearances during TV suites by Carley Roney, on Regis & Kelly. Carley’s TV appearances are Real Weddings from the Knot programs on The Oxygen cable network, our seven book our syndicated newspaper column and our on-demand video programs available for Comcast, all creates strong brand recognition without expensive advertising. We are taking a similar multi-faceted approach to building brand recognition for The Nest. We launched local advertising on The Nest in the fourth quarter and are now in ten of the 69 local Knot markets. Since advertisers seeking to reach newlyweds have far greater ad budget in many categories like automotive, financial services and real estate related advertisers are already spending a growing proportion of their budgets online. We see our newlywed brand appealing to advertisers and we believe there is an enormous growth, potential to grow.

Another element of our brand building strategy has been developing strategic partnership alliances. In 2005, we handled a number of well-known partners including Target and Zale. We are also leveraging the value of our brand in new arenas. We announced the strategic partnership with American Express in December with a launch of 2 new co-brands, no annual fee consumer credit cards. The Knot Credit Card from American Express developed for couples planning their wedding, and The Nest Credit Card from American Express designed specifically for newlyweds. We are one and only a small handful of companies with whom American Express has created co-branded Credit Cards. The Knot Credit Card from the American Express is an important tool for brides and grooms, help couples organize and mange their wedding plans, each new card member receives the Knot Wedding Planning Kit, including the Knot Wedding Binder, which is comparable to organizer that cost $50 and more as well as exclusive offers from The Knot American Express vacations and other partners.

Similarly, New Nest Credit Card members received The Nest planning kit. The custom-created binder filled with tools to organize every aspect of the couple’s life from budget and finances to insurance and home decor. In addition to the benefit including discounts and home-related offers from participating partners and special travel offers from American Express Vacations. So in addition to receiving the balance sheet from American Express for the new cardholders, we are offering our advertisers a unique media vehicle for reaching financially qualified consumers. For the continuing success for our media packages for advertisers, expansion of our business beyond our core wedding market and our new strategic partnerships, we believe we are embarked on the next important growth stage for our company.

And now, I will turn the call over to our CFO, Richard Szefc, who will give you the detail behind our results. Rich?

Richard Szefc, Chief Financial Officer

Thank you, David and good afternoon. For the fourth quarter of 2005 we report a net revenue of 12.8 million which represents a 27% increase from fourth quarter revenue of 10.1 million a year ago. It also reported net income for the fourth quarter of 1.5 million or $0.06 per basic and diluted share which compares to net income of $185,000 or $0.01 per basic and diluted share in the fourth quarter of last year. For all of 2005 net revenue has increased to 51.4 million from 41.4 million in 2004, representing an increase of 24%. Net income was 4 million for 2005 or $0.17 per basic and $0.16 per diluted share, as compared to 1.3 million, or $0.06 per basic and $0.05 per diluted share for the calendar year ’04.

Revenue from our online advertising program, the national clients and local vendors increased by 46% to 7.3 million in the fourth quarter from 5 million a year earlier. National and local advertising programs contribute approximately 950,000 and 1.4 million respectively to this increase with national growing over 60% and local by 40%.

For the full year, online advertising grew to 25.8 million, 8.2 million higher than 2004 or 47%. The corresponding percentage increases for national and local were 40% and 50% respectively. The growth in both the quarter and the year continues to be driven by increases in the average spending by our national clients’ outstanding programs and increases on the number of an average spending by local vendors. Local vendor base expanded to approximately 13,300 active clients at the end of 2005 compared to roughly 97,100 as of December ’04, our year-over-year increase of 37%.

Also the growth in our average spending continues to exceed 10%, clearly driven by the impact of price increases in the purchasing and additional premium programs. The impact of our most recent local price increase to 10% in April ’05 will continue to be reflected gradually in revenue as contracts that we moved to the first quarter of 2006. As David mentioned, we currently expect to initiate comparable price increases in this upcoming April.

Merchandise revenues primarily represents the sale of wedding supplies at retail to our members; who did about 90% on this revenue stream. Merchandise revenues also include smaller components for wholesale, supply sale which the specialty shops and department stores as well as registry product sales and commission. Total merchandise revenues were 1.8 million in the fourth quarter of ’05 as compared to 2.1 million in the prior year. Roughly, two thirds of this decrease relates to the down pricing of our wholesale supply business which we had discussed on previous calls and freezing out of our registry product sales. Our new registrants now register for products solely from our partners, Target Club Wedd and Michael C. Fina, we’ve received a percentage commission from our partners on the actual sales after these established registries.

Retail sales and supplies to our members were down slightly in this past quarter by $100,000 or 6% as compared to the prior year. Again, we hope to begin tune the benefit of the various measures we’ve undertaken in 2005 as we move into calendar ’06. These measures include the launch of new e-Commence platform as well as the recent launch of service agreement, through BabyCenter owned by Johnson & Johnson, the AmericanBaby owned by Meredith Corp. to market personalized baby products.

For the 12 months ended December ’05, merchandise revenue were 12.6 million as compared to 13.1 million in the prior year, down by about 4%. The house of wedding supplies at retail from the 12 months were up approximately $0.5 million or 5%, which is offset by a decrease in revenue for wholesale supplies and registry products.

Publishing and other revenue for the fourth quarter amounted to approximately 3.7 million, representing a 25% increase over the 2.9 million reported in the comparable period last year. Most of the revenue in the quarter was derived from our local print publications, for which revenue increased by 32% over the prior year due to increased advertising pages and a small increase in rates. A growth of all our publishing is offset slightly by the discontinuance of our destination wedding brochure, which contributed about $135,000 to revenue in the fourth quarter of ’04.

For the full year 2005, publishing and other revenues amounted to 13 million, representing a 21% increase over 2004 revenue of 10.7 million. Revenue from our National Magazine which publishes in the first and third quarter grew by 22% driven primarily by a combination of growth in the number of designer advertisers, rate increases for designer and national advertisers as well as the small increase in circulation revenue, due to an expansion in distribution from 255,000 copies per issue in ’04 to 330,000 copies last year. Local print revenue grew by 22% for similar reasons mentioned for the quarter. It should be noted that 12 months in 2004, includes additional local print revenue of approximately 200,000 due to the timing of one publication, on a comparable market basis local print revenue increased by 25% for the year.

With respect to margins, our gross profit percentage increased from 79% in the fourth quarter of ’04 to 82% in the most recent quarter. The improvement was due to a higher mix of online advertising revenue and the increase in our merchandise margin resulting from higher pricing including fees for shipping and handling and personalization services, a higher mix of retail sales and more across the product source offset in part by the impact of increased promotions over the last half of the year.

Margins for the full year 2005, generally reflects similar trends and range from 62% for merchandise to 67% for publishing and 97% for online advertising. Our total operating expenses before depreciation and amortization for the recent quarter were 8.8 million compared to 7.6 million on the comparable quarter last year or an increase of 1.2 million. For the 12 months, operating expenses increased to 35.6 million from 28.3 million in 2004. After adjusting for non-cash gain of 1.2 million, due to the favorable settlement of liability from distribution partner, which was recorded as a reduction of sales and marketing expense in the third quarter of ’04, operating expenses increased by 6.1 million for the 12 months.

Legal fees were generally flat for the recent fourth quarter compared to the prior year. However, for the 12 months we incurred incremental professional fees of approximately 1.7 million, related to our litigation with WeddingChannel. As you may note 3 weeks ago as David entered in connection with this litigation, for a period of not less than 60 days upon the joint request of the party.

Apart from litigation and other significant components of the increase in operating expenses in ’05 for both the fourth quarter and the full year were the additional investments we continue to make in editorial, creative, IT and administrative personal as well as sales and sales forecast. These additional investments aggregated approximately $630,000 and $2.1 million for the 3 and 12 months to support our expanding business, concluding new service initiatives. Variable commission expenses and the increase online in print revenue were higher by 50,000 for the recent quarter and 700,000 for the all of ’05.

In addition in’05, operating expenses also include additional expenses related to one addition to Allen & Co for financial advisory services is for our NASDAQ re-listing and service and other cost incurred in the first quarter in connection with the relocation of our IT functions in Texas . These costs aggregated approximately $100,000 and $800,000 for the 3 to 12 months period respectively.

Our sales and marketing expenses have risen in 2005 as a result of increase in sales and sales forecast, the higher variable commission expenses and the favorable liability settlement we recorded last year. These increases that impartially offset for the 12 months by reduced operating cost of 1 million associated with our warehouse and fulfillment center in Redding, California. The savings were achieved despite only a small decline in merchandize revenue in ’05 from various cost savings initiatives begun in the second half of ’04 including the scaling back of our wholesale operations.

One final word on operating expenses. In 2006 we will begin recording stock-based compensations with respect to our invested outstanding stock options and in connection with the purchases of shares and common stock by employees under our employee stock purchase plan. We currently anticipate that compensation expense associated with these options is in shares, past three shifts of stock ramps as well as recent and anticipated research in stock ramps. In the current year for employees and non-employees directors, to range from 1.5 million to 1.9 million for ’06 compared to $60,000 recorded in 2005.

As of December ’05, cash, cash equivalents and short-term investments were approximately 29.2 million; this represents an increase of about 2 million from the end of the third quarter and an increase of a little over 6 million compared to December ’04. The cash is generally driven by the income for the period as well as proceeds from the exercise of stock options or sale of the stock from the company stock purchase plans which aggregated about 1.4 million for the year.

Also, I will note that in ’05, our capital expenditures approximated 1.6 million. We currently expect our 2006 capital expenditures to range from 2.5 million to 3 million, the increase resulting primarily from planned expenditures for computer hardware and software to establish secondary backup systems in connection with the development of a formal disaster recovery plan for the company.

That’s the financial review for ’05 and now we’ll open the call to questions.

Questions-and-Answer Sesssion

Operator

We will now begin the question and answer session. If you have a question, you will need to press “*” “1” on your touchtone phone. If your question has been answered and you wish to be removed from the queue, you may press “*” “2”. Your questions will be queued in order they are received. If you are using a speaker phone, please pickup your handset before pressing the numbers. Once again, if there are any questions, please press “*” “1”. And we will pause briefly as questions queue up.

Your first question comes from the line of Parham Ghorban of Roth Capital Partners.

Q - Parham Ghorban

Thank you, good afternoon everyone. Just wanted to touch on The Nest, it looks like you guys have signed 232 local advertisers, I think in the 10 markets. I just wanted to get an idea of the rollout plan and the pricing model?

A - David Liu

We have just begun to begin the ongoing process throughout all the markets with all of our reps up in - we started in November only with the initial 10 markets, the primary now its focusing on key categories related to home and home purchasing, real-estate brokers, the mortgage vendors and then people like that. It will probably as we see that build moving to the other categories.

Q - Parham Ghorban

Okay and then based on what you’re seeing here in the last couple of months, do you expect that a type of model as you ramp through ’06 and you’ve signed 232 so far. How should we model that going forward?

A - David Liu

But we don’t again comment on that.

Q - Parham Ghorban

Okay, and what does the pricing model looks like, growth is to what you’re charging in The Knot?

A - David Liu

Basically right now we’re charging an incremental amount for the combination purchases on The Nest and on The Knot for a separate kind of pricing structures that are similar what we have for The Knot. We always offer some discounts on the matrimony opening up new market during these product lines, so some of that will be ineffective.

Q - Parham Ghorban

Okay. And then on The Nest magazine, any update on that?

A - Richard E. Szefc

We will be publishing on later in the year.

Q - Parham Ghorban

Second half of the year?

A - David Liu

Yeah.

A - Richard E. Szefc

Yes.

Q - Parham Ghorban

Okay. And then is there any opportunity to give more aggressive with theknot.com in terms of price increases or we are going to stay around 10%?

A - David Liu

Well right now, our first plan is to continue what we’ve done, we were looking at 9% to 10% in the April of ’05. We indicated, we’ll probably have a comparable kind of price increase in April of this year, we’ll probably become a little more aggressive in terms of trying to increase the spend by our advertisers by moving an additional combination packages where they, we will be selling them both on The Knot and The Nest or even Party Spot for that matter which is Prom Spot, Party Spot, which is our other site which we’re beginning to similar sort of additional local sales.

Q - Parham Ghorban

Okay and then last question with the American Express deal, BabyCenter and AmericanBaby, any color there on how those partnerships are going?

A - Richard E. Szefc

We can’t really provide any more detailed information, its pretty much proprietary information of our partners, I can just say that the BabyCenter and AmericanBaby deals been leveraged the asset that we have with personalization and also our sourcing capabilities that the actual marketing and promotions that are really is relying on how much exposure and how much more can they do on their side, so we think it’s an attractive opportunity to really grow off of our existing skill set in asset, but the actual driver of the growth where it comes from how aggressive they’ve become in promoting our products.

Q - Parham Ghorban

Okay thank you.

Operator

Your next question comes from the line of Steve Sullivan of Horizon Financial Group.

Q - Steve Sullivan

Yes. I might have missed this, did you mention what your legal expenses were this quarter?

A - David Liu

The legal expenses were about 1.1 million which is fairly comparable to what we incurred last year in the fourth quarter which was about 1.2 million.

Q - Steve Sullivan

Can you give me an idea of how much, since that legal expenses occurred this quarter Dave, against consumption?

A - David Liu

Expense is actually we spent a little over $8 million.

Q - Steve Sullivan

8 million?

A - David Liu

About 4.8 this year and 3.1 last year and a smaller amount, a smaller amount in ’03.

Q - Steve Sullivan

Second question, can you give me some color on discussions with beverages and how things are going there?

A - David Liu

They’ve been pretty much preliminary, I think beverages giving a lot of information with regards to the investing media plans that we had in place with the May Department Stores, so the discussions are ongoing in terms of modifying the media that they currently have and making it work for, make a concluding deals as they’ve in the transition on the store brands on the May Department Stores to make deals.

Q - Steve Sullivan

And last question, could you refresh my memory, when is the 60 days, I know it can go beyond that but I just want to know when is the 60 day mark?

A - Richard E. Szefc

It will be in mid March, I think it’s around March 20th.

Q - Steve Sullivan

Great. Thank you and good luck.

A - David Liu

Thank you.

Operator

Your next question comes from the line of James Lee of Americas Growth Capital.

Q - James Lee

Good afternoon, congratulations on a very good quarter.

A - David Liu

Thanks James.

Q - James Lee

Maybe Rich or David, can you guys sort of comment on the economics of The Knot TV, so that, or maybe you guys can talk about how much of cost or could you say a particular TV program and how quickly you guys can recover that cost using the advertising sponsorship model?

A - David Liu

Well, there is, it’s a little more complicated than simply the production cost versus the sponsored dollars, there are a number of ways that we are monetizing the content and there is a number of ways that we’re able to churn in revenue off of Knot TV. I’ll give you some background, we entered into the broadband space a few years ago, or we see online, it’s a video space through Oxygen and then through Comcast and so we’ve really viewed The Knot TV as an additional expansion of our video content, some of which we are being produced by Oxygen at no cost to us and some of which that we are producing ourselves from analogous fashion shows. The Knot TV represents their own distribution where we actually at the sale of not only the advertising that, is to booking the programs that you see, but then also reading custom content for some of our sponsors. Comcast is the Video on Demand service where we actually can sell the advertising that is the past digital set-top box signal that comes to when you demand one of our programs through Comcast. And Oxygen is revenue really with Oxygen sounds and maybe they take on their own. But online, it depends we can do very simple CPM impression date purchases of The Knot TV where your ads for example, I think this past quarter we had Pride and Prejudice from their preview of their movie on our site and message straight CPM deal or we can get more complicated where we actually developed 5 to 10 minute real programs around people products and services like MAC Cosmetics, Zale or Four Season.

Q - James Lee

Great. Maybe on, could you guys can talk about on The Nest, maybe comment about your advertising sales progress, are you with the inventory level looks like right now, just like it sounds how you guys are doing there?

A - Richard E. Szefc

Well local is just beginning and as I said we’re now opening up the opportunities to sell The Nest categories throughout all of our local sales force. On the national level, we continue to be pleased with the progress we’re continuing to attract advertisers both from categories who historically have not participated in bridal, people like Dodge or Accenture 21, Capital One and then the traditional bridal advertisers, May is actually jumped on board because they believe that there is an extended opportunity to continue the relationship with our consumers, people like Kauai Visitors Bureau to make a tourist board, Starwood Hawaii and things like that. So, it’s, we’re pleased with the progress.

Q - James Lee

Okay, and lastly on the e-Commerce, maybe David you can talk about, in anyway you can give us some timeframe where the registry revenues from Target and Michael Fina and your alliances with, on the baby product side. When do you sort of expect that revenue start ramping up? Are we looking at second half of the year or this is possibly more in 2007 story?

A - David Liu

Yeah we really can’t provide guidance related to that, the registry process online usually happen 7 to 9 months before the wedding day with the majority wedding gifts purchase around the wedding day. So there’s only the lag time between registrations and actually purchasing. So I think you really have to, some factor in when you try to anticipate how the revenue flows in that.

Q - James Lee

Okay great thanks.

Operator

Your next question comes from the line of Bill Morrison of JMP Securities.

Q - Trina Choudhury

Hi guys this is Trina Choudhury for Bill Morrison. I had a couple of questions, first of all, could you give us some CapEx guidance for ’06. And secondly if you could give some color on your merchandising business and it seems to struggling and if you could, let us know, if we should be expecting further declines, and what’s going on there? Thank you.

A - David Liu

Well, on the first part of that, as I mentioned on the call, we indicated that our CapEx for next year would probably range in 2.5 million to 3 million range, that’s closer to 1.6 million that we incurred this year, with most of that were been initial investment and additional computer hardware and software related to the development of the secondary site, as part of our disaster recovery program. With regards to merchandise, the focus of launching our commerce platform was to really revive the retail segment of our merchandise revenue of the declines that are happening both in wholesale and in registry are not only anticipated that we’re planned for as we shifted business models in our registry and have been getting rid of low-performing or unprofitable headcounts in the wholesale side. Within the retail segment and, if you look at the margins that we are able to generate in the payments, savings we’ve made in the instruction of our warehouse, we have actually grown the revenue in retail and we are far more profitable in the merchandised products. So I don’t, I wouldn’t represent this as necessarily in turnaround mode, I think we’re actually out of it.

A - Richard E. Szefc

Just a follow-up on the point, as I mentioned in my section, even though there was a, just only a small decline in revenue and actually reduce our operating expenses, out at the warehouse for about a $1 million and on top of that margins have improved by about 5, only 5 percentage points in our total merchandising revenue stream which equates to another $600,000 to $700,000 of improved profitability.

Q - Trina Choudhury

Great, and one more quick question, can you give us a little color on the impact of the American Express deal and how we should think about this in the context of ’06 and ’07.

A - David Liu

We think again it’s the financial guidance; the structure of the relationship is that we get paid a guarantee on every card that is approved and issued.

Q - Trina Choudhury

Great. All right, thanks for your time.

A - David Liu

Thank you.

Operator

Your next question comes from the line of Richard Fetyko of MCF.

Q - Richard Fetyko

Thanks guys, congrats on the quarter.

A - David Liu

Thank you.

Q - Richard Fetyko

The sales of The Nest.com site…

A - David Liu

You’re breaking up, Richard.

Q - Richard Fetyko

Is that better?

A - David Liu

Yeah, that’s better.

Q - Richard Fetyko

Just wondering on the sales of The Nest, Nest.com site that you begin to rollout in the local side, these sales people now turned both The Nest and The Knot primarily focusing on selling The Nest to the existing Knot subscribers or customers or going outside of the customer base as well and do you see a problem there?

A - Richard E. Szefc

Yeah there is a very, very small group of our sales force that is fully dedicated in that and everyone else have goals, and all of our sales rep have very specific target goal for both,

The Nest sales as well as The Knot sales and are compensated and incentivized accordingly.

Q - Richard Fetyko

Okay, so you have separate sales group for The Nest?

A - David Liu

Like a small group dedicated solely to The Nest, but then…

Q - Richard Fetyko

And the rest of the guys sell both?

A - David Liu

And then everybody else sells both, everything affected with the few more sales people selling in The Nest and they are at The Knot at the moment.

Q - Richard Fetyko

Okay, did the existing guys who sell both have permits to sell both, I guess?

A - David Liu

Pardon?

Q - Richard Fetyko

The existing guys that sell The Knot.com, did they have the bandwidth that as well as selling The Nest as well doesn’t make a sense or would you, want to expand the dedicated Nest group overtime?

A - Richard E. Szefc

We’ll see how it goes overtime but right now, we think they have a bandwidth at end of both.

Q - Richard Fetyko

Okay.

A - David Liu

And certainly we already have demonstrated that historically and obviously driven a large increase in our revenue, but have maintained a very steady kind of group of sales reps.

Q - Richard Fetyko

And remind me how many market were you in in the fourth quarter and how may markets, had with Nest and into in the first quarter?

A - David Liu

We have 57, with 57 markets in total online and I believe we’ve got 10 markets…

A - Richard E. Szefc

We launched at the end of the fourth quarter.

A - David Liu

Fourth quarter.

Q - Richard Fetyko

And you expect, in terms of, expense wise, the other 67.

A - Richard E. Szefc

Yeah it was, in The Nest global is going to be organized a little differently and we will be selling in the co-brand the 67 markets of The Knot, but they will be, I think that some of these markets will be consolidated, obviously as we are growing this market, we can’t really have unless you have a density for critical math of vendors, it doesn’t make a lot of sense to separated out of this going separate markets. So, the total number of markets that you will see on The Knot will be a smaller number, even though it covers the same geographic area as the 67 markets of The Knot.

Q - Richard Fetyko

Okay. And then anything on the baby space, you’re looking into launching or acquire something, are you still intending to, launch the next phase that’s for life stage in the baby, I guess, the baby stage?

A - David Liu

Yeah we still plan to enter into the baby stage, but we believe there’ll be something we build or through an acquisition.

Q - Richard Fetyko

Okay very good, thanks.

A - Richard E. Szefc

Thank you.

A - David Liu

Thank you.

Operator

Once again, to ask a question please press “*” “1”. You have a follow-up question from the line of Parham Ghorban of Roth Capital Partners.

Q - Parham Ghorban

Hi guys, quick follow-up. Just looking at the local advertising grows 13,300 and obviously it was boosted in Q4 of ’04 because of the finance series, if you normalize that quarter-over-quarter from Q3 ’04 to Q4 ’04, assuming 3%, and put it in around 9700 and if you will get a 13,300 and 9700 still about a 37% growth rate?

A - David Liu

37%, yeah, 37%.

Q - Parham Ghorban

Yeah, so that’s a normalized growth rate is somewhat around 37 and now looks at 21?

A - David Liu

That’s correct; we’ve planned in terms of the actual vendors themselves.

Q - Parham Ghorban

Yeah, that growth on a relative vendor base.

A - David Liu

Parham, if you were back in and obviously we accelerated on the email marketing that we did in the fourth quarter of last year.

Q - Parham Ghorban

Yeah.

A - David Liu

If you normalize as we said that flip out and that is obviously part in growth factor, the growth for the fourth quarter which probably been crossing 50% instead of the 40%.

Q - Parham Ghorban

Okay. Alright thank you.

Operator

At this time there are no further questions, are there any closing remarks.

Melissa Bauer, Investor Relations

We would like to thank you again for joining us this afternoon. If you had missed any part of today’s call, you can access the replay of the entire conference call on the Investor Relations section of the company’s website at www.theknot.com. A telephone replay is available for the next 2 weeks at 1800-642-1687, reference number 4399782. If you have any additional questions, please don’t hesitate to contact us at IR at theknot.com. We are also looking forward to seeing some of you at the Deutsche Bank conference on February 17, the Roth Capital Partners conference on February 21, and the JMP Securities conference on March 09. Details on these conferences and available webcast are posted on the Investor Relations section of theknot.com. Thank you and good bye.

Operator

Thank you. This concludes The Knot’s fourth quarter 2005 conference call. You may now disconnect.

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Source: Knot Inc. Q4 2005 Earnings Conference Call Transcript (KNOT)
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