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Audible Inc. (ADBL)

Q4 2005 Earnings Conference Call

February 16th 2006, 5:00 PM.

Executives:

Donald Katz, Chief Executive Officer

Andrew Kaplan, Chief Financial Officer

Analysts:

Barton Crockett, JP Morgan

Mark Mahaney, CitiGroup

Gene Munster, Piper Jaffray

Steven Frankel, Adams Harkness

Chris Rowen, dumscherd Robinson Humphrie

Sameet Sinha, Kaufman Brothers

Scott Kessler, Standard & Poor's

Mark Argento, Craig-Hallum Capital

Operator

Good day, and welcome to the Audible’s Fourth Quarter Earnings Conference Call. As a reminder today’s call is being recorded. For opening remarks and introductions I would like to turn the conference over to Mr. Donald Katz, Chief Executive Officer and Chairman of Audible. Please go ahead sir.

Donald Katz, Chief Executive Officer, Chairman

Thanks, and welcome everyone to today’s conference call. I hope that most of our investors have pretty good idea about the fourth quarter of 2005 went for Audile. If you didn’t hear the webcast from the January 10th Citibank media and teleconference, where we presented the preannounced ranges for key metrics on the quarter, that audio was accessible on our IR site. As most of you already know Q4 was in top rank, a completely new website and new plans we launch in December were important operational milestone. The completed year packed full with the innovative working, tremendous progress and considerable growth.

For the rough transitions of the new site indeed they could tell on the on numbers, as its some higher than expected expenses, but we are now in a far better position to grow in profit and the ever emerging opportunities wait before us. As we think some of the early 2006 metrics we'll demonstrate. And I believe we will be far more successful company in the coming years because of the investments and progress we made in 2005.

I will now turn to report on some specific metrics and operational initiatives in 2005. Andy will then fill in some key numbers for the fourth quarter and for 2005, and then I will return with a look into 2006. We also have some other corporate news to share at that time. First I am going to draw your attention to the fact that the loss for 2005 before stock and tax expenses, it's actually $357,000 and not $1 to $1.5 million loss we expected in early January.

More positively 2005, as you can see was a strong year for growth. Our new customers count totaled 330,000 of its 237,000 were AudibleListeners reflecting growth of 104%. We ended this year with 248,000 total AudibleListener members of 56%. Note that this is the first time we reported net sales. We will continue to do this in the future. As you also noticed the difference in growth between new AudibleListeners and ending AudibleListeners members is almost 50%, which reflects the increased average churn we saw during the year.

Importantly however showing decline dramatically in Q4 when it dropped by more than 1 percentage point to 4.6%. We would expect to generalize with the success of our pretrial acquisition programs during the first half of 2005, but a midcourse adjustment to that program stabilized the number and reversed the churn, with the most ratio in the turnaround 33% of new AudibleListeners in Q4 came from pretrial conversion as compared to 60% in the third quarter. Fewer pre-trials meant for some of listener account, with the lifetime value of the customers we acquired one up.

Still after a new website begin to stabilize, we had a twice as many new AudibleListeners in December as we did in November, and in January 2006 we required over 32,000 new AudibleListeners inside the churn turn, it was a flat to slightly down. With this plus the stabilized marketing spend the trend lines looks very positive.

Looking at revenue for 2005, we ended the year at $63 million reflecting the third straight year of accelerating revenue growth of 83%. As I mentioned we lost just over $250,000 net of stock-based compensation taxes in 2006, and a large number in dollar terms and one-half of 1% of revenue, but its definitely worth noting that the business generated its loss in Europe when we added talent to our team and launched four significant new strategic initiatives, and we invested $8.3 million in capital expenditures both focus on a web hardware and software infrastructure upgrades that will serve our customers for many years to come, and we still generated over $3 million of free cash flow. We believe the metrics indicate in the strong business model at system side and extremely dynamic growth environment.

It’s a brand new industry being defined by Audible and other companies focused on digital distribution and experience a personalized listening too, as was too during the early days of other platform technology driven changes to the media economy in the culture we work to be efficient as we create enough individual awareness to need to the behavior change that then turns into a recurrent revenue stream for Audible. We successfully created this chain of events with our AudibleListeners in 2005 at a cost represents 31.5% of our revenue in 2005.

Our friends in college are in the Satellite Radio industry that been at this longer and Audible has converged to understand and do less in the new AudibleListener and that they usually spend much more to get a customer. There would be many inflection points in the coming years and we expect to see a lot of positive leverage from a lower cost to convert those customers as we do from the lowered relative fixed cost of planning a digital supply chain. Environmentally, growth also gets easier and more efficient too, as the penetration of digital audio devices escalates as wireless delivery becomes ubiquitous and makes sound words really simple. And as the concept of using the times you can’t read or look at the screens to experience superior entertainment and information goes mainstream.

In 2005, we worked to make the customer experience easier and more accessible at a time when the market seems poised to take off. We also have changed our programs in response to our customers alone and we’ve extended our technology platform in global footprint that Audible would be present with new message of listening and markets continued to rise.

Now let’s take a moment to briefly review some of the key highlights of the year. We launched Audible UK in June and the site now has 40,000 hours of premium listening for sale, including our recently launched Audio edition in the London Times. The net cost of the UK launch in 2005 was $1.5 million, which worth noting that the English language content required there has become a strong asset, we monetize outside the UK, notably on our US site. We continued to expect the UK to become cash flow positive in 2006.

Also on the International firm Audible.de, a German operation co-owned with Bertelsmann and Holtzbrinck has an amazing year. Germany was rocking, précising very strong growth, a great management team and a customer satisfaction level that indicates that 88% of German AudibleListeners intend to recommend the service to others. Audible.de is dealt with the fact they are not alone. During the middle of the year we counted a dozen competitors including one bagpipe, major general media company partnered with the a global technology company. By the end of the year, it was clear that a very large majority of the market share is owned by Audible and it’s some of the units growth is clearly been created by general awareness worked by the competition.

We also launched Audible Education in September, which has built content and distribution relations as a Pearson Higher Ed, SparkNotes, Galactic and several others. We will know a great deal of more about the Higher Ed focus of our strategy after back to school days later in 2006, when our Pearson Audible created study guides hit the market. We’re also enthusiastic about the research we are doing in lower Ed in classrooms where we expect to see validation at the learning value of our service among developing readers.

We also continued to add power for new content, a new source of audio during the year. There are over 90,000 hours at audible.com was compared to 70,000 since the beginning of 2005. There are close to 300 content partners, where they were 200 at the beginning of 2005, over 60% of exclusive arrangement, that’s 73% of the Q4 content deals were referred to. And we got some exciting new audio programs coming up shortly. Close to 200 different digital audio devices in the market are Audible ready now, up from 120 at the beginning of 2005, and many more are on the way. And during 2005, we also developed two significant expansions of the Audible Audio Technology Platform and successfully launched them during the year.

Audible Air debut in September, and was met by a very positive review in The New York Times. The service is now available on Windows Mobile, Palm and Symbian platforms and will soon be on Sony Ericsson’s UIQ3.0 platform, for the first few Audible-ready phones from Sony Ericsson is coming out in Q2. The diverse in the CBomber of Microsoft bullish comments about Smartphones in recently, that have projections from Nokia. You know that the future expectations for wireless delivery are massive or limited to Audible’s revenue in 2006 in advance of the coming generation of memory rich phones.

We also launched Audible Wordcast in November with the Portable Media & Podcasting Expo in LA, a much span for our media coverage. We have since then focused on further building office podcasting measurement platform in signing up partners, we’ll be announcing some of the early customers in due course. But in light the advertising communities demand for the kind of measurable relevance our application provides, we are pretty excited about the prospects for Wordcast.

Another focus of investment during the year was customer service. And, the customer service team is overwhelmed in the fourth quarter during our new site data. The switchover to the new data site created a tremendous need for service and our quality of service representatives on the frontline did a tremendous job, but we hope to never again make people wait for services they did in December. In fact, last week we got a customer service milestone of zero backlog that means not one phone caller on-hold and no e-mails from customers in the queue.

Last but not least, among key initiatives in 2005, was our undertaking at the massive redesign and overhaul of our website and core membership plans. The objective of new site is simple to create a more flexible, convenient and valuable way for all of our customers to enjoy our concept.

Since the launch, we worked out bugs and further improved the sites design and functionality. The upgrade to a new hardware infrastructure the other day has increased the capacity of the site 8 to 12 times. In February, the speed of access to our website pages according to our own measurement increased 20% and the speed of download within 30% over January. I also want to take a moment to talk about distribution expansion during 2006. At this point consumers with frequent iTunes and Amazon and Dell.com, which gigantic book clubs and book stand, Xm, satellites website, cbs.com, theoneinfound.com, and other sites as well as gift card buyers at Wal-Mart, Target and Bestbuy, and all access Audible products.

We expect new distribution partnerships and tell you about it shortly. Now to Andy for some more numbers.

Andrew Kaplan, Chief Financial Officer

Thanks Don and hello everybody. Total revenue in Q4 was $18 million, up 76% year-over-year. As we’ve mentioned revenue growth was less than planned due to the top transition to our new website and new AudibleListener plans. Despite the record traffic we saw during the quarter. However, revenues and sales of Audible content as the Apple iTunes music store was strong at $3.3 million, up 163% year-over-year and 38% sequentially.

For the full year Apple revenue was up 157% to $9.5 million. Turning to operating expenses, costs of consumer content revenue in the fourth quarter was $6.7 million or 38.1% of consumer content revenue versus 35.9% in the prior quarter. This increase is primarily the result of two factors, Apple increasing as a percentage of our revenue and product mix.

Customer acquisition costs were shot through higher in Q4. The cost increase was due to several factors. First, we recruited a higher mix of committed AudibleListeners there we see either a $100 rebate on the cost of their mp3 player or a free i-Pod shuffle. The mix of new AudibleListeners with the commitment increased 30% in Q4, and 24% in Q3. In addition, we spend heavily on online media during Q4, especially with our don’t read campaign. Although this online media spends help drive record traffic to Audible.com our new site startup issues prevented us more efficiently converting the traffic into new AudibleListeners.

In Q4, we also rolled out direct mail and telephone programs, designed to inform an exercise our customer base, about the coming changes to our AudibleListener programs. Finally, we charged the marketing expense in Q4, the cost of printing marketing materials that are numerous device and i-Pod peripheral partners would be inserting in their boxes. Although the vast majority of this expense will result in new AudibleListeners in 2006, we do expect the printing cost at time of printing, which is generally several months before customer's approaches the device open the box, and actually respond to these marketing offers. Our customer acquisition cost inQ4 factoring out certain expenses including the advance printing cost and inform and excite cost were $68 compared to $43 in the third quarter.

With our site launch problems behind us, we except our customer acquisition cost declines shortly in Q1 of 2006. In Q4, interest income increased to $624,000 reflecting earnings on our $67.2 million in cash and cash equivalents. We also once again in 2005, we are able to sell a portion of our New Jersey state tax laws carry forwards generating $740,000, and with that our net loss for the quarter was $2 million 99 thousand or $0.09 per share.

Moving to the balance sheet, in Q4 our capital expenditures were $5.5 million, $2.4 million of our CapEx was spend on website hardware and $3.1 million were spend primarily on development a software required to operate on new website. For 2006, we expect CapEx spending to be at about the same level as 2005. Importantly, we also saw a significant increase in the deferred revenue balance on our balance sheet. The increase in Q4 was driven primarily by holiday sales and by many AudibleListeners to signing up for our new annual programs. These new annuals listening programs are priced either at 149.95 or 229.95 and the customers pays us the full amount upfront. As Don will talked about now, our new AudibleListener programs, which allow customers the flexibility of carrying over audio credits to use in the future months will continue to fuel growth in deferred revenue. And with that, I'll turn the call back over to Don.

Donald Katz, Chief Executive Officer

Thanks Andy. So, I wanted to talk about accounting and guidance for a moment. As some of you may realize, we have consistently broken new ground as we’ve connected older to newly invented ways of doing business and an effort to confirm to the needs of our customers, and to the business opportunities afforded by new media oriented technology. In the past, many of you have been challenged by the way we borrowed subscription and we current revenue models from print subscription business, book clubs cell phones business, medium cable subscription businesses and moldered them with lead sales single unit purchase opportunities in a way that allowed people to buy outside our subscription plans or by over their plans in different ways, or even allowed people to churn out as subscribers only to become all our card customers again.

We have continued to innovative those to forge a successful business that confirms to new digital consumption pattern. And the new membership programs we launched in December are even more challenging to the accounting traditions and GAAP principles by which investor measure corporate progress. We will have increasingly greater deferred revenues more and more listeners join our new plan. But we have also broadened annual plans and rollover credits, and new rights to membership benefits like free subscription. And we have done it in ways that have set our accounting experts and our auditing experts into a uncharted world of technical, accounting and progressive mind. If any of you have ever tried to deal with the around the book called multiple revenue element recognition, you will know it approaches Metaphysics. So there were technical accounting reasons that make it difficult to discern the effect of new accounting on revenue for the bottomline because of the measurements dependent on individual consumer behavior and one most specific behavior as that in specific windows of time. The swing created of a lack of clarity we think could have an effect approaching 5% to 10% of revenue on an apples-to-apples basis and with profit too in 2006.

While the accounting for our new plans clearly normalizes and becomes predictable after one full year because annual plans begin to turnover and take great patterns emerge. A second dynamics further obscures the look of revenue our profit according to GAAP. We will continually have new AudibleListeners, AudibleListeners on legacy programs and the rate of their migration I supposed to new customers who only come in on the newer plan. We will create another accounting unknown and that’s another impediment to providing guidance. So, while we do not doubt the fundamental direction of those business, we will not guide beyond the direction of information we’ve offered here, except to say that we excepted to see a loss in the first quarter and there was smaller loss in Q4 and then consistently improvement from there. We also expected to see very strong cash dynamics as our experience in 2005 indicate. Please realize we are not anti-guidance from any ideological sense and as soon as we can understand the accounting ramifications of our new plan we will offer longer-term guidance.

Alongside this as we see a lot of growth ahead. We firmly believe that it is unwise to do anything other than consistently weigh the longer-term value of the pace of margin expansion against growth and investment opportunities. The dip in sales of resetting of expectations for the short return and a broader depreciation of the mid and longer term potential for Audible and this is what we firmly believe is the right perspective for a company dedicated to serving our customers and to bring the long-term growth and profitability of our business.

Now, on some other news. At our board meeting last week, our Directors unanimously approved a share buyback program of up to $25 million growth of Audible stock. The Directors believe our shares are extremely under value and if there's no better use of our cash at present than to buy Audible shares. Also as many of you know, Andy Kaplan, our Chief Financial Officer is the Audible Executive behind nearly all of our international business. We continued to believe that our significant part of our future lies outside the United States. So, I’ll ask Andy to move into position that he would devote his considerable energy to enhancing Audible's growth outside North America. The search is underway for a new Chief Financial Officer, we have hired Coking company to help us out. Andy will remain the CFO, until the replacement is found in onboard. Then Andy will return to Transit International. As I noted in this afternoon's press release, few people have made us profound the contribution to Audible during the past 6 exciting, sometimes harrowing and ultimately very successful years of business building over these years outside the Andy. And I want to publicly thank him for his intelligence, constant service, and presumption.

In closing, I want to set back for a minute. As many of you know, Audible's found that on the premise with people, mainstream consumer will prefer a higher level of experience, when they can't otherwise read or look at a screen, better more customizing information, better teaching, better storytelling, better jokes. Some subset of nearly a 100 million Americans are drive towards alone everyday to discover Audible and make it a part of their life.

We still believed that, I mean believe we are proving the propositions to be true each and everyday. Some of the impediments to having millions of people listening to our powerful audio everyday and the company has created still remain. They include first the existence of an effective digital delivery systems, the devices, and computers and wireless delivery and automotive connectivity. Second is, ease-of-use of delivery systems so as to lower the barrier to the behavioral change required. Third, the consistent flow of high quality audio and the proceeds understanding the value of the content. Fourth, the ability to cost effectively communicate the value of this new experience to millions of people, and finally to some extent, finding the right price.

We consistently measure our tactics and strategies against these parameters as we move towards the ever-wider adoption of the Audible experience. And we have seen significant improvements across all five gaining factors over the years. And the first point, we have seen the significant growth at the digital delivery system as bandwidth escalates and digital device sales continue to experience hyper growth. The amazing iPod is significantly began to impact peoples lives, they are making Digital Content more prevalent and easier to people who experience. Wireless delivery is sure to help move personalized audio closer to true ease of use. But overall the system for digital delivery continues to be clunkier than it will be overtime, or simply an enigma for many peoples still struggling with new technologies. The technology in the use of delivery still needs to improve for the digital spoken very experience to become more mainstream. Today, we believe the industry for Digital Content is at an inflection point, hosted between in early stage of development and the seamless technology delivery structures to come, in between an often perceive niche and a wider adoption of our service by a lot of consumers. If you map our initiatives in focused investments in 2005 to the various to mass adoption, you will see that they are barrier-lowering efforts. As we invested and innovated and grew in 2005, we also showed them 8 and one half million digital audio files domestically, a decent number, but in our view, it's just a beginning.

With that, we'll turn it over to some questions. I also want to note that Dave Joseph is here, many of you already know Dave well , and Dave will help us out in the Q&A.

Question-and-Answer Session

Operator

Thank you. A question and answer session will be conducted electronically. To signal for a question, please press "*" "1" on your telephone keypad, again the "*" "1" to signal for question. We will remind you if you are using a speakerphone to please make sure your mute function is turned off to allow your signal to reach out equipment. We will pause for just a moment to submit the roster. And I'll take our first question of the day from Barton Crockett with JP Morgan.

Q - Barton Crockett

Hello, thank you very much. I understand that your, at a flex for you, Don, you gave very specific guidance focused on the rational, so I wondered if you could give us a little bit of in that context directional, is that where you see some of the key metrics going that we workout. For instance, do you see churn, stable or trending down or up over the balance of this year, I know you talk a little bit about the first quarter, which was encouraging? And then secondly, in terms of cost of Subscriber Acquisition and revenue per AudibleListener and the mix between a la carte and kind of recurring the some of the subscription some of the pricing plan changes. Can you give us a sense of what you see happening in those measures over the balance of the year in terms of how stock weighs down to some color that will be helpful? Thank you.

A - Donald Katz

But I think churn will definitely stabilize and trend down now I think as I have said in the past, for some reason opportunities which may easily come up to have millions of people get highly lower cost if not free access to free month of Audible, we are going to go ahead and do that because, you know which will cause some churn wise because it will be found the pattern of people putting case 1 between month 1 and month 2, but other than that the normalized state will be the churn will stabilize and we can pick that out over the course of the year. In the cost to customers obviously generally expected to go down and some of the revenue per AOL we were really excited by what we are seeing in the early days of the characteristic patterns of the customers within the new programs but as once you have noted its too early to say specifically, clearly there will be some change the characteristics of our pool and we will consistently keep offering as much insight into that as we can.

Q - Barton Crockett

Okay, and then I can ask follow-up, because as you have said in the past you look for kind of doubling AudibleListeners I think this year over’05. In terms of AudibleListeners never added, is this still the sense at this point, is there any sense of how many new AudibleListners you look to add this year?

A - Donald Katz

Barton, this is Andy. We certainly expect to grow AudibleListeners in 2006, significantly above the number that we’ve got in 2005, but we are not providing a specific number.

Q - Barton Crockett

Okay so the previous guidance is no longer in affect at this point on that?

A - Donald Katz

Correct that was in guidance I mean if you look back certainly an aspiration and also it was based on far more aggressive use of the free trail program.

A - Andrew Kaplan

Barton, actually just one last point there, just remember that the things have changed a little bit with the launch of the new site and the new plan as well, so that number is really was a number that was probably more appropriate for the old one versus the new and we just are not choosing to update that now.

Q - Barton Crockett

Okay, that’s all fine, I guess the question I would ask on top on that is, is the implication that it would be greater or less than that or just no comment, period?

A - Donald Katz

So we have provide you a little bit of January number to work with. When we mentioned that we achieved over 32,000 ALs in January alone. I think that can give you a little bit of indication for helping how it has been going so far, and I think that’s really where we going leave at this point.

Q - Barton Crockett

Okay alright, I’ll let other people ask. Thank you very much.

Operator

Okay your next question from Mark Mahaney with CitiGroup.

Q - Mark Mahaney

Great thank you. I want to ask one product question and one financial question, on the product question in terms of the site that the site redesign the site re-launched, are there particular features that you have found now in the last two months plus that you get new users have particularly appreciated or like and some that they may have not liked? That’s first and then the second question on the financial question. I think you have said you expected losses in the March quarter to be lower than in the December quarter give me the operating losses and is it reasonable to assume then that I think you said it would improve after that, is there any expectation when that be turned to breakeven or just simply that trends will improve from March? Thank you.

A - Andrew Kaplan

First one, obviously the site is a much richer experience and it allows us a lot of latitude and how we merchandize and how we approach different kinds of people with different need. I wanted to particularly strong is that the Audible selects program and we find that’s we have amazing array of powerful content that you would necessarily discover because, then there’s so track with the near times but follow us in the wake, and we are being much more editorially driven and actually finding the audio, people want to hear which is very important early in the customer lifecycle. We find that that spot is a high velocity spot and user strongly and then we are consistently improving search which is, as with any content oriented environment is a very powerful one, method of finding contend, second part.

A - Donald Katz

In terms of the loss of the Q1, as John talk about, we expect to see improvement each quarter thereafter as we continue throughout the year.

Q - Mark Mahaney

Perhaps you mean operating loss

A - Donald Katz

Yes.

Q - Mark Mahaney

Thank you very much.

A - Donald Katz

Thanks Mark.

Operator

We will take our next question from Gene Munster of Piper Jaffray

Q - Gene Munster

Hi, I’m sorry about the background noise. You are talking about I guess resetting the bar for next year and, can you elaborate on what kind of resetting expectations really means?

A - Donald Katz

Yeah Gene, clearly that we just see that the growth opportunity there’s such but we want to able to meet the right decisions going forward and I think what I mention was that there is consistent opportunities for margin expansion, which we want to way off against the significant growth opportunities, clearly the purpose of the business is to be, they are going to be very, very profitable, but for right now the market dynamism is such that it seems like a great time to be relatively opportunistic, having said that we are talking about the consistent margin improvement over the course of this year, and we generally pretty excited, so I guess there is a reset, it might have to do with external expectations of how would you rush the margin expansion.

Q - Gene Munster

Okay, but obviously because of this metaphysical accounting was going on, its impossible to really give any form of guidance, and I realize this because you guys don’t want to give a guidance but just generically can you talk about big picture growth expectations for the business maybe over one and two-year timeframe and I realize a lot of moving parts in someway, so you want to hold you too with this so you can conceptually think about how to conceptualize the model?

A - Donald Katz

Yeah I know I just think its what I was talking about, I mean all the barriers to hyper growth are pretty much, in the process of remuneration whether it is, as you know lot of numbers of devices, the ease of use of those devices, the character of the connectivity people use, and others just the add mixture of the awareness factor which we try to be rational about in light of the size of the market, we can address as a digital distribution as adopted and have it. So the moving part for all going in the right direction is just what kind of all long and I just think, I think probably happen over that, as fewer is that some of the sophisticated ways if you look at where others i-pods go. There is a reasonably aggressive March to high customer usage of penetration, but it definitely doesn’t track close to the 97 million people getting up in the morning driving to work alone so as those numbers do get closer together, and these other things happens as in 2007 when wireless begins to write-in has a very significant change when the devices we call media players or phones or the things we call phones or media players beginning such to pretty change aggressively.

Q - Gene Munster

Let me ask just in terms of giving the mile to accelerate. You think it’s going to more dependent upon doing what you continue to do? Second is the mobile side the wireless side as you say, and third I guess something else that you might be kind of brewing in and potential working on it?

A - Donald Katz

I think all three of those things will entwine to create a growth trajectory so the only thing we do know is that the quantity of memory rich phones in our phones just having either a slighter memory doesn’t seen to be getting really significant until 2007.

Q - Gene Munster

Okay great thank you

Operator

We take our next question from Steven Frankel with Adams Harkness.

Q - Steven Frankel

Let me try to get a little more granular on the cost per customer, obviously it spiked in Q4 when you talk about it coming down, does it come down from the levels we saw in Q1 through three this year as we get into next year, or you are just saying we are going to get back to that high 40s level?

A - Donald Katz

Well Steve we're not giving specific numbers, but you can expect to see a decline sharply in Q1 of 2006 and then continue to see a decline throughout the year.

Q - Steven Frankel

Okay. And what about operating expenses, are they going to grow inline with revenue or are you going to try that to whole bind, sounds like this is another year of investment so expenses are going to grow up pretty much inline if not faster than revenue?

A - Donald Katz

Well if you look at our P&L you should expect content cost to grow inline with revenue because that’s a pretty variable expense. But then if you go below that line and you look at technology and development that should lag revenue growth. G&A should certainly lag revenue growth, or in marketing will probably lag revenue growth somewhat, but not to the same extent as those more fixed expense like technology and development and G&A. So I wouldn’t categorize 2006 as an investment year.

Q - Steven Frankel

And with the shift to more deferred revenue, does that mean on a reported basis iTunes is going to, it continue to grow as a percentage of revenue?

A - Donald Katz

Well certainly the fact that we’re deferring consumer content revenue that in the old world would be on the P&L a lot sooner we’ll change that mix, in fact a bit artificially, but if you keep an eye on the deferred revenue you will be able to normalize it.

Q - Steven Frankel

Okay, great, thank you.

A - Donald Katz

Yeah.

Operator

I’ll take our next question from Chris Rowen with SunTrust Robinson Humphrey.

Q - Chris Rowen

Hi, if you guys do turn profitable at some point this year, can you give us an idea what you think the tax rate might be?

A – Andrew Kaplan

Yeah, this is Andy, our tax rate is going to be kind of low on this year I would expect would be in the 8% range, so not real high.

Q - Chris Rowen

Okay, and you care to comment on the Wall street Journal article that was out today about Amazon to go into online music with their own devices, which would kind of make you thing that they were looking at audio books as well?

A - Donald Katz

No, didn’t made me think that, but I think it’s great that there are getting into digital, I mean we’ve been working with them for ages and hoping that it would happen, and if, the rumors are true with all good for the category, all that awareness and device visitors usually compatible with us or I’ll say broader.

Q - Chris Rowen

Okay, great thanks.

Operator

And I’ll take our next question from Sameet Sinha with Kaufman Brothers

Q - Sameet Sinha

Hi good evening gentlemen. I have a couple of quick questions, first, could you comment on the fact that AudibleListeners as you’ve reported in your release was somewhat different from what you had given at that time of release of archive releases?

A - Donald Katz

So, Sameet I believe its actually exact same numbers should have been 65,000 and 65,000 were preliminary results that we put out in the period of January.

Q - Sameet Sinha

I am sorry for the previous quarters for example, second quarter of '05, third quarter and even for some of the quarter in '04?

A - Donald Katz

So there might be some definitional stuff going in the supplemental operational data that we put out but, as those are the numbers are very pretty confident and if there is any changes I don’t think that they are not material.

Q - Sameet Sinha

Okay and now you…

A - Donald Katz

Sameet, actually, you jump them up are they material?

Q - Sameet Sinha

I have to look at them again but couple of thousand hidden there.

A - Donald Katz

Yeah I am not really thought, I would check that slides because it’s really not very material.

Q - Sameet Sinha

Okay, can you talk about the update of 995 plan and 4Q and much as you seen on the first quarter?

A - Donald Katz

Say that again Sameet?

Q - Sameet Sinha

As a plan rate, it is a 995 new plan that you’ve introduced?

A - Donald Katz

Yeah.

Q - Sameet Sinha

Could you talk about the uptake how many subscribers, AudibleListeners did you get in that plan?

A - Donald Katz

We are not going to break out the mix versus all the other plans that people are exposed to but we are actually ahead of our expectations in terms of things like the usage that clearly in the 995 plan the take rates, are going to be key which is something that were obviously going to be see is the normalize that at but, it’s looking really good in the beginning so, things worth looking, now that the site stabilize, and I thought sure you be the first to talk, congratulate with some of the speed upfront, Sameet..

Q - Sameet Sinha

Definitely, definitely.

A - Donald Katz

Sameet, one thing I would just say to 995 is to keep in mind, that we did lower the barrier but the more active resource, those what we call Passport Customer conform were more profitable they are as well, so when you modeling just keep that in mind.

Q - Sameet Sinha

Sure. My final question Q4 '04 and first quarter of '05 were very strong quarter for AudibleListeners, and the recent one year anniversary can you comment on the churn rate that you are seeing since how they just come off there one-year contracts?

A - Donald Katz

We don’t talk about in that granularity Sammet, in fact people come up one-year contracts every single month during the year because I go on to those contracts every single month during the year, but we don’t comment on the granularity within the AudibleListener programs

Q - Sameet Sinha

Okay, okay thank you very much

A - Donald Katz

Thank you Sameet

Operator

And due to time constraints we will take our last question from Scott Kessler of Standard & Poor's

Q - Scott Kessler

Thanks a lot a couple of question first thanks to the additional granularity in term of some of the metrics you provided in the releases. My first question involves I know that obviously you guys are turning guidance this point, due to some changes relative to accounting I am wondering when you guys, are going to kind of reserves how you going to account for some of these issues going forward , I mean when we should expect those numbers and related guidance

A - Andrew Kaplan

Yes Scott this is Andy as Don mentioned in his commentary, the accounting for these programs actually based upon individual customers behavior that is when they take a book by using an audio credit versus when they buy book for cash and I suspect that in the first 6 months of 2006. We are going to learn a lot more about customer behavior in these new programs and so I would say that after 6 months we will have a better read and after 9 months it will be much stronger than that as to the predictable nature of customer behavior and its impact on the revenue stream

Q - Scott Kessler

So Andy is that implies that essential you guys wouldn't be providing guidance and so may be one year report , in august

A - Andrew Kaplan

Well we hope to do is to provide guidance as soon as we can but I can't give you a date

Q - Scott Kessler

Okay and I guess on a related node how long do you expect to main functioning at CFO at this point?

A - Andrew Kaplan

Well on fully in the settle right now and I'll be fully in the settle until replacement is located higher and fully functional

Q - Scott Kessler

So do you think that, there's going to be a new CFO before after you start providing guidance? Right you had two moving variables, yes I guess there is a lot of question here so that why I am asking?

A - Andrew Kaplan

Scott that's they really not related in this case, we are just trying to provide clarity as we get, there is some accounting new ones associated with our new site in AudibleListener plan, but we still need to get our arms around that’s the real issue here.

Q - Scott Kessler

Okay fair enough, I think its pretty evident that in terms of our models and obviously a lot of people ask questions relative to how we go out forecast in things like revenues and EPS for the year, the Street is that $0.18 for the year. Do you have any comments on that relative to what we should be expecting?

A - Donald Katz

No.

Q - Scott Kessler

Okay.

A - Donald Katz

This was fast, I mean there’s really not I mean what we just there to really recap I mean the best we can say is on fundamental basis we're very positive about what the size we have been seeing to date, we expect revenue growth and hopefully we'll be may be a slight profitability I mean slight but we can’t really say that in a permanent way until we get our hands around the probably new onsets of the new in AudibleListeners plan.

Q - Scott Kessler

Okay and you are saying for the full year days or you are saying that relative to the full year and my last question I guess involves the direction that we should look for operating margins to go in 2006, I think Don you made a comment about the fact that you are going to continue to invest and you are seizing upon opportunities that you see before variety of different areas, many of which were announced and executed upon the some extent last year so I was wondering can you gives us a sense at least directionally as to where operating they are going to go in 2006?

A - Donald Katz

I think that I said was that we will continue to analyze on a consistent basis, the long-term objective and I mean the mid-term objective of how high profitability and the consistent margin expansion with other opportunities that might arise to grow the business and increase the long-term profitability I don’t think as that we were kind of to surely invest but I think that's the directional, in fact and, the idea just to be, figure in more profitable overtime as opposed to smaller in profits.

Q: Scott Kessler

Okay so, does that mean that, we should, I mean, I guess I’m just to trying to get a sense as to how we should go about modeling and I understand that revenues are going to be a challenge for everyone involved, but what about, operating margins for example?

A: Andrew Kaplan

Yeah, Scott, this is Andy, I kind of refer back to what I walked to Steve Frankel to about 10 minutes ago, regarding the dynamics of the different line items on our P&L, I think those are the trends you could expect to see at Audible in 2006.

Q: Scott Kessler

Okay, so then based on, that sounds like you are saying operating margins are going to be widen in 2006?

A: - Andrew Kaplan

That’s correct, that’s exactly what I laid out would lead to.

Q: Scott Kessler

Okay, fair enough, thank you.

A: Andrew Kaplan

Scott, I just missed, one more time on that, you just have the tamper that, we are still getting our arms around the accounting so just take I would have finished it all.

Q: Scott Kessler

Now I understand that.

A: Andrew Kaplan

Alright, thank you.

A: Donald Katz

Operator, we have one more call, and then we’ll we have time to take one more call.

Operator

Thank you and now I’ll come from Mark Argento with Craig-Hallum Capital

Q - Mark Argento

Thanks for taking my call, just a couple of quick questions and some of these new business opportunities, in particular, I know that you guys have launched the XM boutique to me it seems like a massive opportunity due some more of these boutiques going forward, is it something that is a priority for you guys, that would be question number 1. And then number 2, just wanted to drove down a little bit on the education product, I know that here we try once creating the materiality in terms of numbers from that product at least in so Q3, but is the sales force of Pearson, are they all actually marketing this product right now and at the post secondary level and could you give us a little bit of feedback if any that you’ve been getting out of the field at the Alpha banks?

A: - Donald Katz

Well, Mark, I’ll take boutiques. Boutiques are an important part of our distribution strategy because, it don’t require a high upfront cost and the marketing expenses I guess them are the rush here that would pay to the partner, and the partner loves that because its another revenue stream for the partner. So it’s an important part of our strategy and going to the future beyond the boutique we setup in bookstand and other places you should expect to see more.

A: Andrew Kaplan

And the higher outside though, the kick-off has commenced with Pearson I guess that its not a big secret that since, they were such a gigantic sales force and company, it’s one of their noted key initiatives in strategic initiatives such as their partnership this year and the higher end front and for those of you might not know it, Mark, I’m talking where, this is a since to deal with the peers and the largest education company to create some pretty innovative audio study guides that are sold through the traditional channel and students are asked our to, that various junctures at the end of chapters and the permits them in the final will download to this audio study guides, and i-Pods, and it’s a pretty, pretty amazing product you can actually find some of them up on the side as we speak and it’s a elegant interesting way of using a power of audio in terms of with it’s retention values as well as its interactive value with the tax so, this is a great combination of older and powerful distribution network with new technologies and we’re pretty excited about over the course of the time between now and the realizing season as we get closer to the summer and the decision making before schools starts , mark we are just going to be making a lot more than this and again service to the top book.

Q: Mark Argento

I know that Apple had set a, has been out doing some more of in the education here but, it sounds like a little bit more in terms of offering a kind of a customized enterprise for the schools in terms of enable to store content maybe some, content that comes out of the classroom in the version of what have you, any chance of working with Apple and building that upgrade out?

A: Donald Katz

Well it’s a fact in that we are simply because what happens is that’s what was Apples doing as offering a better upload capacity for universities that internally want to allow students and sometimes of lungs that access to some of the lectures, and courses, so they are uploading the content in the clear and using I think is the as the delivery mechanism and of course I think as access to Audible’s rapid tour, so wherever is represented as of happened with the tremendous traffic to the broadcasting side so we benefit and we can see some of that May apple numbers

Q: Mark Argento

thank you

A - Donald Katz

Thanks Mark

Now I thanks everybody this would closed up and we look forward to keeping you updated and thanks for joining

Operator

Again that does conclude today's Audible Fourth quarter Earnings Conference thanks for joining us.

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Source: Audible Inc. Q4 2005 Earnings Conference Call Transcript (ADBL)
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