The Knot, Inc. Q4 2007 Earnings Call Transcript

Feb.13.08 | About: XO Group (XOXO)

The Knot, Inc. (KNOT) Q4 2007 Earnings Call February 13, 2008 4:30 PM ET

Executives

David Liu – Co-Founder, Executive Chairman, Chief Executive Officer

Richard E. Szefc – Chief Financial Officer, Principal Accounting Officer, Secretary and Treasurer

Melissa Bauer – Senior PR Manager

Analysts

Jeetil Patel – Deutsche Bank

George Askew – Stifel Nicolaus & Company, Inc.

Barton Crockett – J. P. Morgan

Jason Helfstein - Oppenheimer & Company

Richard Ingrassia – Roth Capital Partners LLC

Brian Murphy– Sidoti & Company

Operator

Good afternoon, at this time I would like to welcome everyone to the Knot’s fourth quarter and year-end 2007 conference call. (Operator Instructions) At this time I would like to the conference over to Miss Melissa Bauer please go ahead.

Melissa Bauer

Thank you. Good afternoon and welcome to The Knot’s fourth quarter and year end 2007 conference call and webcast. During the course of this conference call, comments that we made regarding The Knot that is not historical facts are forward looking statements that 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 of The Safe Harbor Provisions 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 at these forward looking statements speak only as of today’s day. Our internal projections and beliefs on 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 that information until the 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, risks related to our acquisition of Wedding Channel, significant fluctuation to which our quarterly revenues and operating results are subject, the seasonality of the wedding industry and other factors described in the documents 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 at theknot.com. We have allotted up to one hour for today’s conference call including the questions and answer session that follows. Please take note that the Company’s operating under the FCC Regulation FD and encourage 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

Thank You Lois and good afternoon everyone. I want to thank you all for listen in on today’s call. I would like to use this time to review the Company’s progress in 2007 and lay out our vision for the year ahead.

In 2007, we embark on an ambitious plan designed to transform the Company in three key areas. First, we began expansion of our content, products and services to address the next deadline bound life stage beyond weddings, first pregnancy. Second, we started a process of moving off our legacy technology platforms onto more flexible scalable system. Finally, we are expanding our Senior Management to include executives who will be crucial to the future growth of our Company.

While we have made good progress in all three initiatives, we are far from finished. As you know, from much of 2007 our progress and our platform overall was hampered by competitive market for technology talent. In recent months, we have begun to make some key advances in all three fronts and therefore my goal today is to help you all understand why these transitions are so important to our business, where we are in the process and what we hope to accomplish in 2008.

The first transition is not news to many of you who follow the Company and that is our transition from a primarily wedding centric business to a life stage media Company serving engaged couples both before and after their wedding day as they build their homes and plan for pregnancy.

By capturing the wedding date of over a million and a half brides each year, we are able to provide our member with the advice and tools that help inform their purchase decisions leading to their big day. Our members plan for an even greater set of purchase decisions after their wedding day than before. In many ways, their post wedding needs are just as predictable.

The Nest Magazine and The Nest dot com expand our service into many more content categories making us relevant to a greatly expanded number of advertisers and allowing us to compete for dollars outside the bridal advertising budget.

With over 65% of our members having babies within three years of the wedding, it should come to no surprise that the fastest growing newly wed community on our site has revolved around the topics of conception and pregnancy.

We launch the Nest Baby dot com and Lila Guy dot com to meet the needs of this group by expanding our content, products and services to address the needs of our replenishing audience of first time pregnancy, we are servicing a consumer who’s purchase behavior resemble that of an engaged couple. They are actively seeking information to help them establish grand relationships and make large purchase decisions that are both time sensitive and last a lifetime. The unique benefit we offer our marketing partners is the ability to reach a self-renewing highly targeted consumer in the precise moments they are making those decisions.

In addition to the launch of our prenatal site thenestbaby.com and our postnatal local resources site lilaguy.com, we also redesigned The Nest and re-launched the site with expanded content and services. This life stage media strategy is allowing us to become less dependent on bridal advertising. In the last year, we’ve seen a decided shift in the composition of our national advertising revenue as we’ve broken into several none endemic categories.

The second major transition in 2007 was a much needed move off of many of our legacy technology platforms including our contract entry systems, content manager system and our ad servers. I am pleased to report that the transition of our ad server was completed in the fourth quarter with virtually zero disruption to our sites or any ad campaign’s running at the time.

The new system affords better reporting, allows for more efficient handling of rich media campaigns and provides more accurate forecasting and optimization of our ad inventory. The Content Management System has been successfully implemented and is currently running thenest.com. Work is now focused on transitioning The Knot and Wedding Channel sites to the new Content Management System.

The effort to modernize our local sales contract entry system and art management system this past year was hampered by resource constraints. We therefore engage in outside technology firm to help in the completion of these projects.

As many of you know, these two upgrades are crucial to our ability to scale our local sales efforts. Once these two systems are in place, we plan to launch self-service and auction based platforms for specific components of our local advertising inventory. The new Project Entry System, Art Management and Content Manager Systems are intended to be completed on a rolling basis in the third and fourth quarters of 2008.

The third and final transition we undertook in 2007 was the addition of several Senior Executives to support our continued growth. Janice Scardino our new President and Chief Marketing Officer brings a dept of experience in marketing consumer media brands. While we have excelled in attracting the lions share of the consumer audience in engagement life stage with no customer acquisition costs, our advertising revenue growth will be driven by the awareness we are able to build with vendors, advertisers and agencies on both the national and local level for the bridal, newly wed and baby verticals. Janet is continuing to expand our marketing team and we look forward to the work they will commence in 2008 to raise awareness of our brands and products within the local vendor community and national advertising industry.

Our primary focus in this area is on expanding our research analytics and promotional efforts to drive brand awareness with local vendors in our 67 local markets. As you reach the anniversary of that year’s price increase in July, the marketing department’s priority will be supporting our local sales teams and acquiring new vendors to grow the vendor base.

I am happy to report that Denise Fabruel, our new Senior Vice President and Publisher has brought with her a wealth of relationships and we have been able to fully staff our Sales Department including several senior sales people with strong agency and client relationships.

Last week we announced the addition of Nic Dilorio as Executive Vice President and Managing Director, Technology Group. Nick brings to the organization his considerable experience managing the Technology Services for one of the world’s largest conglomerate ad agencies.

When you look at the Operational and Technical Services we have developed to support our role as a marketing partner for thousands of advertisers on both local and national level, you will understand how Nick’s professional experience is invaluable to us as we scale up our business. His experience recruiting and managing global teams in multiple locations will allow him to manage and grow our technology team, which is distributed across multiple offices in the United States.

Looking ahead into 2008 these three transitions will continue and as they come to completion, we expect investments we have made will provide a new level of profitability for 2009 and beyond. We plan to continue recruiting senior executives particularly in finance and operations. We intend to complete the technical and platform transitions that are currently absorbing the majority of our technology resources before the end of the year. As these projects launch, these engineering resources will be redeployed to support our growth efforts.

We plan an aggressive brand launch and distribution effort in 2008, which is a new strategy for the Company. The online media landscape is rapidly fraternizing before our eyes and rather than trying to protect our major site from traffic erosion to an ever-expanding universe of new upstart websites, our strategy in 2008 will be to expand our network reach by leveraging our deep content and dominant audience market share. We plan to create hyper-targeted niche sites and to aggressively distribute our brands and content with established larger online media partners. We believe by launching our new wholly owned niche sites and broadly distributing our content, we will reinforce our brands of the omnipresent resource for life stage information and services. We believe the necessary investments we are making in our infrastructure and our marketing operations will now begin to impact our revenue streams in a more significant way in 2009.

Despite the increase in investments we are making, our business model remains sound and profitable. Economists are increasingly concerned about the prospect for a recession. No matter the state of the economy each year there are about the same number of wedding, the same number of newly weds needing to set up joint households and the same number of first time parents. So, in the event of a recession while we believe we are more insulated than most meet me companies, we are not immune. We have seen an increase in local vendor cancellations in 2007 and while we expected some increase in vendor cancellations with the implementation of a 30% price increase, this may have been heightened as a result of increased concern over the economy.

On the national side, we have not seen a pull back from our national advertisers. However, with the growing percentage of our national advertising revenue coming from non-endemic advertiser categories, we are seeing a continuation of more short term advertising commitments which has resulted in greater volatility quarter to quarter in our national advertising revenue stream. The ongoing investment in our platform upgrades to our local advertising operations, the content manager transition and the development and introduction of new marketing initiatives will take a number of months to bear fruit. In addition, there’s uncertainty with regard to the effects of a weakening economy in our local vendors and advertising partners. As a result, we are cautious with regards to our outlook for 2008.

Top line revenue in 2007 was up over 30% compared to 2006. However, looking at the fourth quarter comparisons with a full Wedding Channel contribution in each of 2007 and 2006, revenue grew 11%. There were some factors that impacted that comparison in particular strong revenue from Wedding Channels, national advertising programs in the fourth quarter and a reduction in local revenue from Wedding Channel’s legacy accounts.

As we are continuing our investments, we believe revenue growth in 2008 may be closer to the mid teens; however, as our revenue mix continues to shift to online advertising our overall gross margins will continue to rise. We believe once the technology upgrades are behind us, we will be able to scale our business, leverage the increased operating expense base and drive accelerated growth in the years to come.

Now I would like to turn the call over to our CFO, Rich Szefc who will review the financial results in detail.

Rich Szefc

Thank you David and good afternoon. For the fourth of 2007 we reported net revenues of 24.2 million which represented an 11% increase from fourth quarter revenues of 21.7 million a year earlier. For the full year of ‘07, total revenues grew to 98.7 million from 72.7 million in ‘06. Obviously, the full year comparisons have been impacted by the acquisition of Wedding Channel in September of ‘06.

Income before income taxes was 4.6 million and 20.7 million for the three and twelve month ended December 31, 2007 respectively as compared to 4.9 million and 14.1 million for the corresponding periods a year ago.

In the fourth quarter of ‘06 we reported a gain of 1.2 million resulting from a settlement of a legal action and for the full year of 2007 we recorded additional appreciation and amortization of approximately 4.6 million compared to ’06. Primarily related to intangibles recorded in connection with the acquisition of Wedding Channel.

Also, our provision for income taxes was 2.0 million in the fourth quarter of 2007 and 8.8 million for the full year. By contrast, in 2006, we reported a non-cash income tax credit of approximately 9.4 million related to The Knot’s remaining net operating loss carry forwards as of that date.

Accordingly, net income for the fourth quarter of ’07 was 2.6 million or $0.08 per basic and diluted share compared to net income of 14.6 million or $0.48 per basic and $0.45 per diluted share in the fourth quarter last year. For all of ‘07 net income was 11.9 million or $0.38 per basic and $0.36 for diluted share as compared to 23.4 million or $0.90 per basic and $0.82 per diluted share in 2006.

Revenue, from online advertising programs for both our national clients and local vendors, increased by 21% to 13.3 million in the fourth quarter of ’07 from 11 million last year. Local online advertising revenue grew to 7.9 million in the recent quarter from 6.7 million in the comparable period last year or by 17%. However, excluding revenue derived from remaining local Wedding Channel legacy contracts which decreased in the latest quarter by $440,000 from the fourth quarter of ‘06 as most programs were completed, local online revenue grew 27%.

The Knot’s local vendor base did decline to around to 14,500 as of December 31, 2007. This was a result of an increase in cancellations over the last several months generally driven by the price increase in June ‘07 and as David mentioned coupled recently at the same time with a growing concerns surrounding the economy. Our local sales forces in the last half of ’07 has been heavily focused on renewals but their efforts will increasingly shift to new account acquisitions as we complete the current renewal cycle involving the latest price increase over the first five months of 2008.

As a result of the recent trend, the revenue increase in the fourth quarter generally came from a higher average spend by local vendors which was driven by both the 20% weighted average local increase put into effect in July ‘06 and the developing impact of the 30% average price increase initiated in June of ’07.

For full year ’07, the local online advertising revenue was 30.6 million representing a 33% gain over the 23 million recorded on ‘06. Again, excluding Wedding Channel legacy accounts, revenue grew 26%. With respect to national accounts, online advertising grew by 1.1 million compared to the fourth quarter of 2006 to 5.5 million in the recent quarter or by 26%.

As we noted in our last earnings call over the last half of 2007, the focus of our national sales force has been to secure long-term advertising commitments for 2008. However, they did aggressively pursue shorter term opportunities for the end of 2007 and we did sign two contracts for the fourth quarter of ‘07 which contributed approximately $800,000 in revenue. For all of 2007, national online revenue was 18.4 million a gain of 4.8 million or 34% over the prior year.

Merchandise revenue, which is derived from the sale of wedding supplies that retail to our members, was 2.9 million in the fourth quarter of ‘07 representing a small increase over the 2.8 million recorded in the fourth quarter of 2006. Exclusive of the decline in revenue from wholesale accounts, revenue through The Knot Shop and the Wedding Channel Store grew approximately 4% in the fourth quarter primarily due to an increase in average order size. For all of 2007, merchandise revenue was 19.3 million a 29% increase over the 15 million recorded last year. The majority of this increase was derived from the full year impact of the addition of the Wedding Channel Store with The Knot Shop contributing revenue growth of about 5%.

Registry services revenue representing commissions earned from our retail partners substantially through the Wedding Channel operations amounted to 2.1 million in the fourth quarter of 2007 as compared to 1.9 million in the fourth quarter of ‘06 or an increase of 7%. Registry commission revenue earned through the Wedding Channel retailers increased in the fourth quarter of 2007 by approximately 11% driven primarily through the Macy’s relationship.

As noted in the last earnings call, the net addition of former May Company Stores acquired by Macy’s began to impact the level of commission revenue in the third quarter of 2006.

Other registry revenue in the recent quarter declined by $76,000 compared to 2006 due to the continuance of separate not partnerships with Target and Michael C. Fina. For all of 2007, registry services revenue was approximately 10.9 million.

Publishing and other revenue for the fourth quarter of ’07 amounted to approximately 5.9 million and was relatively flat as compared to the comparable period last year. Slight increases in print advertising for our local print publications and The Nest Holiday Magazine were generally offset by a decrease in revenue of approximately $150, 000 for the October Wedding Channel Couture Show compared to the 2006 show. The full year ’07 publishing and other revenue was 19.5 million a 1.4 million or 8% increase over ’06.

Revenue increases for the recent year were driven by the inauguration issue of our annual Best Of Wedding Magazine which we published in April. Growth in local print advertising revenue of roughly 5%, primarily in the first half of the year, and the first time inclusion of $390,000 in revenue from the April 2007 Wedding Channel Couture Show. These increases were offset in part by small declines in aggregate revenue from our two national magazines and the October Wedding Channel Couture Show as previously noted.

With respect to margins, our overall gross profit percentage increased from 81% in the fourth quarter of ’06 to 83.5% in the recent quarter. The margin improvement in 2007 resulted primarily from a higher mix of higher margin online advertising revenue.

For all of 2007, overall gross profit margins improved from 79% in 2006 to 82%. Principal driver for the full year improvement was the inclusion of Wedding Channel Registry commissions for all of 2007.

In addition, margins for merchandise revenue also improved by 2 percentage points and publishing and other margins remain consistent with 2006 as production savings for The Knot Magazine and improved margins for local publications generally offset higher investments for production costs for The Nest Magazine, which launched in the third quarter of 2006. We published four issues of The Nest in 2007 compared to two issues in 2006.

Our total operating expenses before depreciation and amortization for the fourth quarter of ’07 were 14.9 million representing a 2.1 million increase over 2006. The 2007 fourth quarter expense comparisons to the prior year were favorable impacted by subsequent operating expense savings of 1.2 million at Wedding Channel as a result of the full impact of head count and other cost reductions initiated subsequent to the merger and generally completed by the beginning of 2007. For all of 2007, operating expenses were 55.8 million or 57% of total net revenues and represented a 12.8 million increase over the prior year. Approximately 4.5 million of this increase arose from the full year impact of cost associated with the Wedding Channel operation.

As we noted in the last earnings call, we have increased the level of spending for both the product, content and sales in marketing areas. These increases are specifically for IT Project Managers, Software Engineers, and Product Managers to accelerate the completion of several important projects, which are expected to lay the foundation for allowing us to more effectively support and scale the business as we move further into 2008 and beyond.

As we have also previously noted, we have been in the process of deepening our Senior Management Team with a similar objective of supporting business scale. The pace of hiring picked up in the fourth quarter, our operating expenses grew sequentially by 5% in the recent quarter compared to the third quarter of 2007, which was less than the 10% growth anticipated. In addition to the pace of hiring, certain additional costs have also been capitalized as in process software and not recorded as operating expense.

Overall based on our current status regarding hiring and the planned flow of projects over 2008, we believe the level of our operating expenses before depreciation and amortization in the aggregate could increase sequentially by roughly 15% in the first quarter of 2008 compared to the fourth quarter of 2007.

As you’ve noted in the press release stock base compensation was 707,000 in the fourth quarter of ’07 compared to 467,000 in the comparable period for ’06. Stock based compensation was 2.4 million and 1.5 million for all of 2007 and 2006, respectively. We currently estimate stock based compensation to range from 3.2 million to 3.5 million for all of 2008.

Depreciation and amortization for the three months ended December 31, 2007 approximated the amount for the corresponding period in’06. For the full year, depreciation and amortization increased by 4.6 million compared to ’06 generally due to amortization of intangibles reported in connection with the acquisition of Wedding Channel in the third quarter of 2006 and additional depreciation for Wedding Channel property and equipment.

With respect to the provision for taxes, our effective tax rate for all of 2007 approximated 42.6%. As of December 31, 2007, our cash, cash equivalents and short-term investments were approximately 106 million. Cash generated through operations for all of 2007 approximated 27.4 million. Also for all of 2007, capital expenditures were 3.9 million and we currently estimate the capital expenditures could range from 4.0 million to 4.3 million in 2008.

That is the financial review for The Knot for the fourth quarter, year ended December 31, 2007, and we will now open the calls to questions.

Question-and-Answer Session

Operator

Thank you, we will now begin the question and answer session. (Operator Instructions)

Your first question is from the line of Jeetil Patel with Deutsche Bank.

Jeetil Patel – Deutsche Bank

Thanks, a couple of questions here. Sounds like the self service in the bit management system that you plan to roll out in the first half shifting out to the second half, is that more so due to the technology implementation or is it the seasonal strength that you typically see in Q1 and Q2 that is pushing out the time line for the launch on this front. Then a couple of quick follow ups.

Rich Szefc

It is more related to the resources constraints that we were experiencing. Right now, both projects are well under way and we’re projecting third and fourth quarter to roll out for the completion of the Content Management System as well as the Contract Entry System on applications.

Jeetil Patel – Deutsche Bank

And also you might, if you had been staffing up on the advertising sales funds from a headcount stand point for a couple of quarters now, can you talk about when do you start to see the impact of these folks that have come out of the print advertising world having a positive impact on the business. Because it seems like it’s been a bit slow going and it’s trying to better understand when do you think their book or their ability to sell the integrated platform that you have will start to impact the numbers. Then on the local side you’re seeing some incremental cancellations, do you think that you’ve bottomed at this point with the 30% fee increase that you pushed through or do you think that there’s still additional pain as we progress through 2008 and given the economic situation?

Rich Szefc

On the national front, we’re already beginning to reap the reward of the recomposed national sales force. Certainly in the last quarter, we’ve been receiving and responding to more RFPs than we have historically ever have in the time period. We are seeing also the mix shift move away from the endemic ad categories so we’re seeing a decent growth in non-endemic commitments from advertisers we normally would not be participating in the bridal side. What this does do is it introduces a certain element of volatility to the national advertising revenue stream. As I said on the call where we are going to see a little lumpiness in probably a lot more large dollar value but short term contracts coming and going as people are now beginning to support The Nest end as well as the pregnancy and baby categories.

On the local side, we still have a few more months before the anniversary of the rate hike goes through so I think the sales force is still challenged with a lot of renewals and trying to get people on board with the combo Wedding Channel not local package. I think once we are through the month of June, we will have at least the impact of the rate hike behind us.

Operator

Your next question is from the line of Barton Crockett with J.P. Morgan.

Barton Crockett – J. P. Morgan

Okay great, thanks a lot. I wanted to quiz you a little bit on the guidance you talk about a mid-teenth kind of revenue growth rate. I was wondering within that assumption would you give us a little bit of a break down of the growth rates between the online advertising category local and national and other things like publishing and registry.

Rich Szefc

Well I think basically if you looked at the fourth quarter where we had an 11% increase and some of that 11% was a bit depressed because of some of the revenue we had in the fourth quarter of ’06. I think you just want to take a look at where the relative growth rates have been for our various revenue streams in the recent quarter or last six months and probably use that as some guidance in terms of applying that overall growth rate of the mid teens to the various revenue streams for 2008. It’s probably the best indication we have at the moment.

Barton Crockett – J. P. Morgan

Okay and then another thing I was wondering about was when the expense growth you guys talked about at 15% Q1 growth over the Q4. But Q4 was a little bit light at only 5% kind of sequential growth and I think before you were talking about kind of a 10% growth in Q1 over Q4. Why is that stepping up and I think you talked about it a bit generally complex software but I assume that would be recurring and hiring you made some hires, you’ve got some more to come. Why the kind of change in the ramp at the expense of how should we see the expenses trending from that first quarter to the balance for the year?

Rich Szefc

Some of it in the fourth quarter again was again related to the capitalized software where but again some of it was the pace of hiring; it isn’t particularly in the product and content side. The pace picks up obviously as we get through this hiring process you will have the full quarterly impact of the additional hires in the fourth quarter and the expected new hires in the first quarter.

In addition the other areas which David had mentioned which we will be investing in more is in the marketing area and a lot of those expenditures under the control of our new Chief Marketing Officer are really programs that will be launching at the beginning of 2008 or starting now and carrying on. That’s the other element of our cost that we’ll be increasing more dramatically as we get into 2008 versus what you saw over the last half of 2007.

Barton Crockett – J. P. Morgan

Let it be clear is these the expenses sequentially growth from the first quarter or do they kind of lump off in there?

Rich Szefc

I would say with some of the hiring you’ll still see, you won’t see 15% growth, you’ll see something less than that in the second quarter and then I suspect they’ll be leveling off after that.

Barton Crockett – J. P. Morgan

Okay and then I guess a final thing and then maybe I’ll get back in the Q is do you have any sense of the magnitude of revenues you talking about getting this ad auction system running in the back half of the year in self-entry I guess is what you’re saying. Any sense of the magnitude of revenues that could come from that and would that be like national revenues or local revenues. What are we looking at there in terms of revenue opportunity?

Rich Szefc

The investment in the platform is really to enable us to scale the local business as a whole. If you dial back historically when we first acquired Wedding Pages in 2000, this was a paper driven business with about 3,000 local vendors and something like 50 some odd local sales people.

By converting it into an online contract entry system using credit cards as increasing and growing form of payment we’re able to make that system in operations much more efficient and really leveraging almost a similar base of ad reps we were able to support a growth of vendors from 3500 to close to 15,000. For us to take that next step function up, we always believed that out of a universe of 800,000 local wedding vendors we should be in the 100 if not 200,000 range given the consumer penetration we have. Our existing systems simply cannot sustain that level of growth or volume without hiring an army of people. Having self-service module that allows vendors to come in and in a Google ad sense add words like way upload their own profiles and purchase promotional spots on The Knot and Wedding Channel to create certain pieces of inventory that will be auctioned off and that allows the pricing to be set by the marketplace. It literally takes yield higher results and ideally takes us out of the price hike business, which again will make it a lot more efficient for us on the revenue side. The investment in the platform is really enabling us to scale that business and maintaining the cost while we believe we should be able to grow the revenue side of it substantially.

Barton Crockett – J. P. Morgan

You can’t give us some sense of the magnitude of revenue contribution we could see this year from that?

Rich Szefc

In 2008 it’s unlikely we’d see very much contribution. These are tools and systems that are ultimately complex and as we launch them we’ll probably be testing in a couple markets just to make sure there aren’t any untended consequences to some of the things we launch. We will probably roll that out as these applications get done so there really won’t be any appreciable contribution from a revenue stand point until about 2009.

Barton Crockett – J. P. Morgan

I guess you’re not ready to kind of size it for ’09 whether it’s a big or small opportunity there?

Rich Szefc

No, once we run those tests, we will be able to have a better idea.

Barton Crockett – J. P. Morgan

Okay great, thanks a lot.

Operator

Your next question is from the line of Rich Ingrassia with Roth Capital Partners.

Rich Ingrassia – Roth Capital Partners

Thanks afternoon everybody. David, you mentioned a cost point of view with the state of the economy in ’08 but aren’t there ways a recession could actually help you especially on the local side as vendors seek to promote their business to weddings versus corporate contracts that might be eroding or going away?

David Liu

Absolutely, historically our business has done well during times of economic down turns. If you look back at post 9/11 and the recession in 2001, we did see a number of advertisers both on the national and local levels turn to weddings. We were the more predictable reliable source of business and where they may have been under invested in the marketing side of this category they sort of ramped up with some spend. We are cautious though because we seem to be entering is something somewhat different from what we experienced in the past. These local vendors are ultimately also consumers and they are impacted by the various slow downs as well and we don’t want to take it for granted that we will be able to seize the opportunity of this. As we said, we believe we are better insulated than most media companies.

Rich Ingrassia – Roth Capital Partners

Is it safe to assume that there will be no price increase in local this year. Some of the pay for performance models you’re building will take the place of that impact you had the last two years?

David Liu

I would say we are going to be very cautious in terms of pricing, prices increases this year. We haven’t made any final decisions yet. We will obviously go through the next five months of renewals on the 30% price increase see how the trends wind up at that point and make a final decision probably mid part of the year.

Rich Ingrassia – Roth Capital Partners

But do you still think you’ve got enough of ROI business case to make to some of the more loyal vendors but possibly get 10, 15% increase?

David Liu

The reality is if you look at the spectrum of vendors, there are some vendors who will net out tens of thousand of dollars from a single wedding that they are able to get from our site. Depending on the category, depending on the territory there is still a lot of room. One of the exercises we are going into is how do we become a little more refined in our pricing strategy as a whole.

Rich Ingrassia – Roth Capital Partners

The last question, it’s been more than a year now since you inherited Wedding Channels nationally contracts, do you feel like you’ve lapse the issue you encountered there?

David Liu

Yes, absolutely.

Rich Ingrassia – Roth Capital Partners

Okay, thanks.

Operator

Your next question is from the line of George Askew with Stifel Nicolaus.

George Askew – Stifel Nicolaus

Good afternoon, the shorter-term national advertising opportunities that you mentioned in the fourth quarter, could you characterize those two contracts for us for the year-end budget push situations or particular sponsorship opportunities in the quarter and is that the kind of thing that we could see repeat in the first quarter here?

Rich Szefc

What we see is these non-endemic advertising, financial services or automotive, they’ll run campaigns around seasonal offers or around product launches and so the two in particular that hit the fourth quarter one was Pontiac and the other was American Express. Those are generally not contracts that are bought on an annual basis; they come in and run for a month or two and then kind of reload with a different campaign later in the year. As we see more support coming from these non-endemic categories, we will see a little bit more votary and predictability. The trade off is that the dollar volume on these contracts are substantially higher than what we see in the endemic bridal categories. It is something that we are sort of happy for.

George Askew – Stifel Nicolaus

Okay and two other quick questions. The IT resources say you need to hit your second half implementation turntable. Are they all in place? I thought I heard the term expected hires at one point.

Rich Szefc

There are still some hires we are looking to bring in and one of the benefits I think that Nick’s addition to the Company is really a network of engineers and resources that he has worked with historically that would be brought in to help us to complete some of the projects we have on tap.

George Askew – Stifel Nicolaus

Lastly, can you give us any specifics regarding the strategy of licensing content to some the large or online media players? Anything you can announce?

Rich Szefc

Nothing specific, if you look at the strategy for the not historically we built our business and a lot of our online traffic through these online distribution points. For example, we are the wedding content provider for MSN. We are the wedding content partner for I Village even places like weather.com where they see a lot of wedding related traffic use our content.

As we see the internet space explode with just a proliferation of blogs and self-published sites and these very niche interested and focused sites, one of our strengths is not only the traffic we currently drive but also the deep content we have. The goal is to begin to aggressively move beyond just the boundaries of our two flagship sites but really provide a platform that allows us to monetize traffic across the internet wherever there may be people looking for wedding content.

George Askew – Stifel Nicolaus

Great, thank you.

Operator

As a reminder in order to ask a question please press star one on your touchtone phone. Your next question is from the line of Jason Helfstein of Oppenheimer & Co.

Jason Helfstein – Oppenheimer & Co.

Hey guys, how are you?

Two questions first on the revenue guide of 15%. If you did see weakness to that number, where do you think it would come from. Recently it’s been registry and merchandise, it’s been weaker than expected, where should we be careful going to next year when we think about it. Is it are you concerned more about national, local? Then I have a follow up on the expense side.

Rich Szefc

I think in terms of the mid teens which is actually what we said, you need to be looking at the trends that I mentioned to Barton about the trends that we’ve seen the last six months in terms of where we expect to see the growth rates to fall looking at 2008 in the mix. We’re probably a little more cautious certainly in the area of the print side of the business more cautious that on the e-commerce side of the business. Clearly in looking at local, we’re obviously with the cancellation and the economy, we’ve become probably a little more cautious on that line as well.

Jason Helfstein – Oppenheimer & Co.

Okay, when we think about costs when I just looked at the increase in product, content and telemarketing and together those are about 900,000 or like you said about 15% or 5% right and you have budgeted 10 and now you now think 15%. We think about the seasonality of how margins are going to go and clearly there is going to be less or probably called negative or less operating leverage in the half of the year. Do you as you’re looking at this expect positive operating leverage in the back half of the year or do you think it is too early to know right now?

Rich Szefc

I think it’s a little too early to know right now. We do expect as I mentioned before we’ll probably see those expenses obviously evening off toward that period but again in terms of driving that additional revenue, we are pretty cautious about the last half of 2008. As David mentioned, we are really looking for a lot of this payback to start happening in 2009.

Jason Helfstein – Oppenheimer & Co.

Okay, so the way we should think about it is you’ll spend the money and then the margin upside needs to come from higher revenues.

Rich Szefc

That is correct.

Jason Helfstein – Oppenheimer & Co.

Okay, thank you.

Operator

Your next question is from the line of Brian Murphy with Sidoti & Co.

Brian Murphy – Sidoti & Co.

Hi, thanks for taking my question.

Could you just give us a sense for what kind of success you’re having or what kind of progress you’re making in transitioning the non-membership base to The Nest?

Rich Szefc

Sure, in fact in the background what happens when you sign up as a member to the node you are actually immediately given a membership on The Nest. The idea is that the transitioning is something that’s relatively seamless and then since we actually do capture wedding days and have these cookies of when the brides do come back after their honeymoons to do things like clean up their guest lists, manage their thank you notes, deal with things like gown preservation and name changes. We actually sort of highjack you, bring you to The Nest, and introduce you to what we call your new home online. We are seeing a decent amount of exposure of The Nest brands to the consumers. We also do send The Nest Magazine to 400,000 of our members who are newly weds as well.

The traffic is steadily growing. The season when you look at some of the third party reports is the fact that we probably have cannibalized The Nest traffic quicker and sooner that we had anticipated with the community growing so quickly around the conception and pregnancy areas of the site. The launch of Nest Baby and really the promotions of Lila Guy are redirecting a lot of the traffic that had been part of The Nest onto a whole third website.

Brian Murphy – Sidoti & Co.

Thanks, is there sort of a target level that you think you can achieve in terms of a capture rate there?

Rich Szefc

Not really, if you look at the wedding category there is a lot of traffic we receive from the periphery of the engaged couple, mothers of the bride, bridesmaid, groomsmen, family members, friends and people looking for gifts. People who participate also come. With only 2.2, 2.3 million marriage licenses issued every year, we estimate about 1.8 million couples actually throw a wedding. There is a rational why we would have millions more unique visitors per month.

In the Newly Wed category your mother in law is not really going to come to The Nest and your friends and family don’t really want or are not really participating in that. It’s going to become a far more focused group of people will never see the same type of traffic patterns and unique visitor traffic that we have seen on both The Knot and the Wedding Channel. The offset is that this is a highly targeted and highly sought after consumer. The decisions that they’re making and the purchases they’re making is very much tied to a specific timeline and so we think that there’s an opportunity to monetize a smaller group of people albeit but over a much larger group of advertisers at a much higher rate.

Brian Murphy – Sidoti & Co.

Thanks, very much.

Operator

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

Melissa Bauer

Yes, we would like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the Investor Relations section of our website. If you have missed any part of today’s call, you can access a replay of the entire conference call in Investor Relations section of the Company’s website at theknot.com. A telephone replay is available for the next two weeks at 1-800-642-1687 reference number 30519381. If you have any further questions, please don’t hesitate to contact us at ir@theknot.com.

Operator

Thank you this concludes today’s conference call. You may now disconnect.

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