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MIVA (MIVA)

Q405 Earnings Conference Call

March 13th 2006, 5:00 PM EST

Executives

Peter Weinberg - VP, IR

Craig Pisaris-Henderson - Chairman, CEO

Will Seippel - CFO

Chief Operating Officer, Peter Corrao

Analysts

Colin Gillis - Canaccord Adams

Eric Martinuzzi - Craig-Hallum

Youseff Squali - Jefferies & Co.

Christa Quarles - Thomas Weisel Partners

Michael Prospero - ThinkEquity Partners

Presentation

Operator

Mr. Weinberg, your line is open. Please go ahead.

Peter Weinberg

Thank you and good afternoon. Welcome to the MIVA's fourth quarter and full year 2005 financial results conference call. Joining me on the call today are Chairman and Chief Executive Officer, Craig Pisaris-Henderson; Chief Operating Officer, Peter Corrao; and Chief Financial Officer Will Seippel.

I would like to remind everyone today's comments include forward-looking statements. These statements are subject to risks and uncertainties and may cause actual results and events to differ materially. These risks and uncertainties will be outlined at the end of this conference call and are also detailed in MIVA's filings with the Securities and Exchange Commission.

To comply with the SEC's guidance on disclosure we have made this conference call publicly available via audio webcast at http://ir.miva.com/medialist.cfm and a replay of the conference call will be available at the same URL and on the Company website for 90 days after the call. I would like to turn the call over to our Chairman and CEO, Craig Pisaris-Henderson.

Craig Pisaris-Henderson

Thank you, Peter. Good afternoon and welcome to MIVA's fourth quarter and full year 2005 conference call. To begin, I am very pleased with our accomplishments over 2005 and I would like to thank our global team for their dedication and hard work. For us, 2005 was a year of transition, a period where we resolved issues and took proactive steps in an effort to help reestablish MIVA as an industry leader.

Among the major transitions for the year, we changed our name from findwhat.com to MIVA, reflecting the integration of our various global assets to a cohesive brand. We added experience to our management team by hiring a new CFO, COO and European Managing Director, and we engaged new auditors. Simultaneously we were investing in new growth opportunities and extending our product road map. The result was a significant product development effort in 2005 and continuing in 2006 that we expect will begin to bear fruit over the second half of 2006, which I will be talking about momentarily.

Change is never easy, but we believe we successfully managed through our fair share of challenges. We are battle-tested and committed to the work that still lies ahead. I believe we have the right people, solutions and strategy to realize new opportunities in the years to come. Our growth strategy is based on the premise that the technical requirements and product depth necessary to provide competitive performance marketing solutions will continue to increase over time as automated online and ad placement and monetization replaces traditional offline methods; and as Internet audience continues to fragment.

The key goal of our strategy over 2005 was to advance our publisher and advertiser solutions to ensure we are considered among the best available alternatives in the marketplace, through our product roadmap the required measured investment and focused execution.

In a logical and purposeful sequence, we introduced two major products, a noteworthy accomplishment during a challenging period. Equally important, we believe we have a progressive pipeline of product introductions planned for 2006.

Let me talk for a moment about a strategic investment that we made, that served as critical underpinning for some of the technologies we developed and deployed in 2005 as well as those planned for 2006. The investment I am referring to is in a perpetual license to fast, world-class base algorithmic technology. Upon securing this license, we established an office in Cambridge, Massachusetts and began developing our search and directory group. This group was established with a mandate to leverage our fast license by developing applications on top of the base technology; applications that create value for publishers and advertisers.

We launched algorithmic search in the European marketplace during June, 2005. In contrast to the one-size-fits-all approach of other search providers, our algorithmic search is configurable to our partners' audience requirements, helping our partners to serve the relevant content to their end users.

Algorithmic search also provides MIVA with an opportunity to back bill algorithmic results with our keyword ads, and alternatively, back bill keyword ad query results with algorithmic results, thus expanding the solutions we can provide to our partners.

Our second major product release, MIVA Match also leveraged that fast-based technology. MIVA Match is a search product we expect will provide our advertisers with a greater number of qualified leads by more broadly matching search terms with relevant keywords. MIVA Match also gives us the capability to assign contextual attributes to website content, a necessary requirement for a scalable contextual product. MIVA Match has had a positive effect on click volume, as there are now matches to queries, and as a result clicks, where previously there were none.

While we're proud of the work we accomplished around fast, these products represent a portion of what we accomplished in 2005. For the year, we introduced more products, tools and functionality for our publishers and advertisers than at any time in our history.

A brief review is in order. We:

  1. introduced two fully redesigned applications, Accounts Setup and the Ad Center for our U.S. advertisers;
  2. introduced an innovative custom toolbar solution for our publishers;
  3. introduced a new expandable paid listing banners product;
  4. launched the Company's MIVA Paper Call Ad Service in the U.K. marketplace; ;
  5. introduced MIVA Mail in Europe;
  6. launched a series of comprehensive campaign and management tools;
  7. launched Agency Ad Center 1.0 to streamline agency advertising management;
  8. launched enhanced API Access.

Again, as I mentioned at the outset, We continue on an aggressive product delivery path in 2006. On February 21st of this year, we announce the beta release of our third major fast-related initiative, an automated contextual solution. The automated contextual product is designed to deliver on our broader goal of providing solutions that address the needs of the publisher and advertiser communities. We expect this solution will help publishers to more effectively maximize ad inventory and provide competitive results for advertisers.

It is also an example of our goal of leveraging our technology investments, to meet the rapidly evolving needs of advertisers and publishers. We believe our contextual solution will provide publishers with significantly improved flexibility and control, enabling them to attract and retain advertisers and to more substantially monetize their own brands on the Web.

At the same time, by doing this, we believe we are helping advertisers achieve better results for their keyword campaigns to attract more qualified leads. Our advertisers have budgets to spend and are constantly seeking new inventory for those budgets. Adding new sources of high quality traffic is a priority, and will continue to be a priority over 2006. We believe innovative projects such as Auto Contextual will help us to attract new traffic partners and access new inventory for showing our ads.

Recently announced traffic partners include Mirror Group Newspapers which signed an exclusive pay-for-click content contract. Blinks, which signed a global distribution agreement for delivering contextually-targeted ads. Dennis Publishing, which publishes well-known brands such as Maxim, Auto Express and PC Pro. The Sun, a leading U.K. publication, which renewed its agreement with MIVA in January 2006. Conde Nast in the U.K., a leading media outlet with some of the world's most recognized publications such as Glamour and Conde Nast Traveler. Grupo Hachette, which publishes well-known online magazines in Spain such as Car and Driver.

Let me now detail our positioning strategy. Last quarter, we talked about the challenges publishers are facing as the search portals they have chosen to work with in the past have become the largest threat to the ongoing success of the very publishers they claim to serve. In short, we believe these search portals are aggregating publisher content in an effort to increase the value of their own search portal; in essence, cannibalizing the brand value of the publisher, while commoditizing the content.

Under this scenario, the publisher is bearing the cost of generating the content, without realizing the largest share of the benefit. In the case of traditional publishers that have historically relied on offline revenue streams, this problem is compounded in that their offline audience is increasingly moving online and these publishers are not increasing their market share commensurate with the offline to online shift.

An interesting statistic was recently released stating that for every offline subscriber lost, a publisher must secure 100 online relationships to replace the revenue generated by that one lost offline subscriber. This is yet another obstacle for publishers to overcome in monetizing their brands on the web. At this crossroads, publishers have a clear choice: continue to work with the search portals that could eventually put them out of business; or, seek an alternative.

We believe this dynamic has created a competitive advantage for MIVA. First we believe our growth strategy and our new product initiatives have improved our competitive position in key areas covering publisher and advertiser tools, solutions and functionality so we can now offer many of the same services as these search portals and aggregators.

Second, we are not primarily on aggregating audience and media spend for our own search portal. As a result, we believe we are positioned to help publishers to compete online without threatening them, the way search portals and aggregators do. Our objective is to capitalize on this opportunity by developing better publisher offerings, customized to their requirements and specific to their market segment.

2006 promises to be exciting. We believe we have assembled the critical pieces that will enable us to realize greater opportunities and deliver excellent solutions that will help us to support our overall growth initiative. To these ends, we are currently executing our plan to offer progressive new media platforms that incorporates keywords, automated contextual, manual contextual, behavioral and demographic attributes on top of the global infrastructure that optimizes relevant ad matching. This is an important part of MIVA's future strategy and a clear differentiator in comparing MIVA's integrated suite of products and services to others in the market, hopeful to take advantage of the trends and opportunities I have referenced.

As I mentioned, we have currently have keyword, manual contextual and beta for automated contextual available in the marketplace. The next piece planned for our attribute driven architecture is behavioral. A behavioral marketplace requires scale in order to be effective and must maintain a balanced approach to user rights and privacy. We believe our MIVA Direct Toolbar will provide the requisite desktop footprint, coupled with privacy control features to ensure personally identifiable information, or PII, remains secure on the user's behalf.

We have been aggressively developing our MIVA direct business over 2005 and we now have over 4.5 million active English-speaking toolbar users. Currently, our toolbar serves as a productive traffic source for keyword and contextual advertising. We believe MIVA Direct represents a compelling growth asset and a value driver and is a unique key to making behavioral a meaningful opportunity.

Based on a February 2006 study by Neilson Net Ratings, search comprised just under 5% of the total time spent online by U.S. Internet users during Q405. The majority of the user time is spent on commerce, content and communication. It's not just about search any more. Clearly fragmentation of content and audience is a reality and as a result, it has become increasingly difficult to characterize and monetize inventory.

We believe our multi attribute platform will enable Web sites and publishers to maximize their available inventory by matching the right combination of user and web page attributes with the right attributes for a given ad. We believe our positioning will enable our publishers to compete with search polls who are aggregating audience and media spend at a cost to the very partners they claim to serve. By being able to offer an alternative to the search portals and aggregators, we believe we can carve out a growth opportunity.

Over 2006, we will focus on building out a stronger global network of leading publisher brands the occupy much of the 95% of the time users are online rather than simply focusing on the 5% of the time users are conducting a search.

With that said, I will now turn the call over to Will who will be covering our financial and operational details. Will.

Will Seippel

Thank you, Craig. Before I begin my review, I would like to acknowledge that I am sensitive to those who would have preferred we reported our financial results earlier. I am personally accustomed to a timelier reporting cycle, and ideally I would have liked to have shared our results with you sooner. I can tell you we expect to be in a position to do so in the future. We took more time than typical, due to the multiple year end accounting challenges. Let me explain.

First, we had several material weaknesses from last year that required adequate review to ensure resolution. Second, we encountered several complex European business and income tax issues that related back to our merger with Espotting during 2004. Finally, we require the concurrence of our former auditors in our accounting for certain areas relating to the merger with Espotting. The origin for most of these challenges occurred prior to my joining MIVA, so as the new CFO, I really required adequate time to get up to speed.

I am pleased to say the complex European business tax issues are now behind us and all our material weaknesses disclosed through our 2004 Sarbanes-Oxley audit have been fully remediated as of December 31st, 2005. To that end, I would like to recognize the hard work and many hours our dedicated team put into solving these challenges.

While I am disappointed that two additional material weaknesses were brought to light during the 2005 audit, they are procedural in nature and will be remediated during 2006. The first is around our internal controls for wire transfers and we have remediated this weakness during Q1 of 2006. The second material weakness involves our over-reliance on spreadsheets in our tax accounting functions and the need to move to a commercially-supported software application. We expect this will be remediated after we implement our new accounting system which is scheduled for later this year.

It should not go unobserved that in 2005 we took significant steps to steady the business and I will note we made a lot of progress. On the operational front, we refocused our spending on R&D initiatives, made further progress on the integration of prior-period acquisitions, and redeployed team members in the critical areas of the business.

On the financial side, while we have more work to do, our cost structure is closer to where it needs to be. We are also continuing to execute against our product road map while we strive to complete our global systems integration. While I will be more specific on quarterly guidance later, we are maintaining our prior guidance on a quarter-to-quarter revenue growth in 2006 off our Q4 revenue run rate.

Before I detail our results, let's review how we measure our financial performance. In addition to the standard GAAP measurements, we utilized certain profitability-based metrics to evaluate our period-to-period and year-over-year performance. They are adjusted EBITDA and adjusted net income. Due to our adoption of FASB-123-R, effective January 1st, 2006 we have modified our definition of adjusted EBITDA and adjusted net income to exclude non-cash stock compensation expense. We define adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization plus non-cash compensation expense, and plus or minus certain identified revenues or expenses that are not expected to recur or be representative of future ongoing operation of the business in each case, including the tax effects of the adjustment.

With that said, let's discuss our results and expectations. In Q405 MIVA achieved revenues of $43 million compared to $44.7 million in Q305. After adjusting Q305 for approximately $1.5 million in revenue that the Company received for resolution of disputes with certain European distribution partners, revenue was essentially flat from Q3 to Q4 and inline with our guidance.

As we have previously indicated, it is our goal to provide additional insight into the business as we believe that it becomes meaningful to do so. Knowing that our previously announced traffic quality initiatives were fully reflected in our Q305 results, we believe now is an appropriate time to help investors understand our detailed click trends with a clean sequential comparison of Q3 to Q4.

We recorded 219 million total paid click-throughs in Q405 compared to 206 million in Q305. In the U.S. media network, excluding private label and B2B, paid click-throughs were up 11% sequentially from Q305; however, the increase in U.S. paid clicks was offset by a corresponding decrease in average revenue per click, or RPC. To some extent, we expected an RPC decrease given the initial launch of MIVA Match during Q4. MIVA Match has had a positive effect on click volume, but because there are clicks occurring in circumstances where they were not previously. The effect on RPC has been negative because the broader clicks carry lower RPC than exact match clicks. On balance, MIVA Match has thus far provided us with an incremental lift in revenue across those distribution partners where it has been implemented.

In the E.U. media network, paid clicks-throughs were down 2% sequentially from Q305. Within consolidated E.U., U.K. paid clicks were down 20% sequentially and the average RPC also decreased moderately over the same period. The reduction in paid click-throughs impacted the U.K.'s overall sequential contribution to Consolidated E.U. paid click-throughs, and because the U.K.'s RPC is considerably higher than the rest of other E.U. countries, the resulting mix shift has an exaggerated impact on the consolidated E.U. average RPC. The softness in the U.K. occurred largely in December, which ran contrary to the trends we recorded in our other E.U. countries, but seems to be consistent with the commentary we heard from the industry.

Based on our preliminary review of 2006, YTD consolidated revenue is up from December 2005 on a per-day basis due largely to unexpected seasonal rebound in the E.U. and the U.K. specifically. Directionally, RPC is down marginally from December 2005 to February 2006 in the E.U. and down slightly more in the U.S. compared to the E.U over the same period.

Overall the U.S., which includes the media network, private label, B&B, MIVA Small Business and MIVA Direct, reported $24.4 million in Q405, or 57% of total revenue, while the E.U. reported $18.6 million, or 43% of total revenue. The mix shift in contribution to consolidated revenue was the result of the previously mentioned Q4 decrease in the E.U. network revenues, magnified by the strong performance of MIVA Direct and to a lesser extent, B&B, over the same period

In the aggregate, B&B, MIVA Small Business and MIVA Direct recorded revenue of approximately $11 million in Q405, up 42% from the $7.8 million recorded in Q305. This compares to approximately $6.1 million recorded in Q404.

Before I continue, I want to highlight several exceptional items that occurred during Q4, in addition to the tax-related issues I mentioned at the onset. The Company recorded approximately $500,000 in expenses related to certain legal settlements and also recorded severance charges of approximately $200,000 in connection with this cost realignment. Severance charges will reoccur in Q1 and Q2 2006, as our cost realignment effort continues.

Operating expenses were $25.7 million in Q405. Normalized operating expenses excluding a $1.1 million non-cash stock compensation charge; $700,000 in legal settlement and severance charges; and $700,000 in European tax issues were $23.2 million in Q405 compared to $22 million in Q305.

Excluding the impairment charge and the one-time gain of approximately $600,000 related to the sale of the Espotting Scandinavian AB assets to Eniro AB. Amortization expense in Q405 was $2 million compared to $2.2 million for Q305. Amortization expense included $1.4 million for acquired intangible assets, and $600,000 for capitalized and purchased software. We recorded a GAAP net loss of $4.7 million, or $0.15 per diluted share in Q405.

This compares to GAAP net loss of $3.5 million or $0.11 per diluted share in Q305. We recorded a GAAP net loss of $130.2 million, or $4.23 per diluted share in fiscal 2005. For full year 2005, we had an income tax benefit of $600,000. This is a result of our ability to take credits for our tax losses on some countries, offset by tax expense in those countries that were profitable. Also, the non-cash impairment charge of $123.2 million was, for the most part, not a tax-deductible item.

We recorded adjusted EBITDA of $1.2 million in Q405 excluding the effect of the European tax issues. This compares to adjusted EBITDA of $1.9 million, excluding $4.3 million of non-cash impairment charge, $1.5 million for resolution of the disputes with certain European distribution partners, and a one-time gain of approximately $600,000 related to the sale of Espotting in Scandinavia.

We recorded an adjusted net loss of $0.02 in Q4, excluding European business tax issues and tax expenses related to the adjustment of net operating losses carried over from entities acquired in 2004. This compares to adjusted net income of $0.04 per diluted share, which excludes the non-cash impairment charge for Q305.

Now turning to our balance sheet review, our cash, cash equivalents and short-term investments at December 31st, 2005 total approximately $38.4 million, a decrease of $3.3 million from September 30th, 2005. The decrease is primarily due to $1.6 million in earn-out payments related to prior year acquisitions and approximately $1.7 million in capital expenditures.

On a year-over-year basis, cash, cash equivalents and short-term investments at December 31st, 2005 total approximately $38.4 million compared to $54.2 million at December 31st, 2004. The change in our cash balances during 2005 includes the impact of payments of $8 million for the patent settlement with Yahoo! and $4.1 million associated with litigation costs and earn-out payments of $7.2 million related to companies acquired in 2004.

Cash, excluding the previously mentioned factors, would have increased approximately $3.5 million year-over-year. The Company expects additional earn out payments to be paid in Q1 and Q2 2006 total approximately $2.8 million, but no earn out payments are owed thereafter.

At December 31st, 2005, the Company's balance sheet reflected an income tax receivable in the amount of $7.1 million compared to $1.6 million at December 31st, 2004. The Company anticipates receiving approximately $5.9 million in federal tax refunds during 2006 from operating losses generated in 2005 and carried back to prior years. This anticipated refund will cover the additional business taxes that are owed in Europe and the aforementioned earn-out payments.

In connection with our cost realignment efforts, the Company's employee count was reduced throughout Q405 and into 2006. As of December 31st, 2005, we had an active base of 483 full-time employees, down from 515 at September 30th, 2005. As of January 31st, 2006 we had an active base of 477.

In addition to reducing our employee count, we have undertaken a number of initiatives to reduce our expenses, including:

  1. the renegotiation of our New York City lease, resulting in a cash savings of over $900,000 over the original term of the lease;
  2. relocating our San Diego office;
  3. moving our tier 1 and tier 2 MIVA Small Business customer service functions to a lower cost area;
  4. Outsourcing certain software development projects for MIVA Media.

In terms of efficiency, on the system side we finished the implementation of SAP Business One in Europe during 2005 and we are now busy standardizing work flows among our E.U. countries. We expect to begin implementation of SAP Business One in the U.S. during Q206 and close fiscal year 2006 with one common system.

In January of 2006 we closed using our new global chart of accounts for the first time. The Company has an active global product development pipeline and plans to introduce additional publisher and advertising solutions throughout 2006.

In Q405 our product development expenses totaled 8% of revenue or $3.3 million. This compares to 7% of revenue, or $3 million for Q305 and 3% of revenue in Q404. We believe continued investment in R&D is critical to attaining our strategic objectives and expect 2006 product development expenses to continue in line with our 2005 spending.

Beginning in 2006, new accounting rules require us to expense the fair value of stock options. The Company's net income guidance includes the anticipated impact of this new stock compensation expense, which is estimated to be approximately $1.5 million in the first quarter of 2006.

Consistent with the presentation of Q4 and fiscal year 2005 results, the following Q1 2006 adjusted EBITDA and adjusted net income guidance excludes non-cash stock compensation expenses. As we indicated on our Q3 earnings call, we are expecting quarter-over-quarter sequential top line growth off our Q4 base in 2006.

Our Q106 expectations are for revenue, Q106 estimated revenue of $43 million to $45 million; GAAP EPS, Q106 estimated range of minus $0.10 to minus $0.07 on 31.2 million shares outstanding. Adjusted EBITDA, Q1 2006 estimated range, zero to $1 million. Adjusted EPS Q106 estimated range, negative $0.04 to negative $0.01 on 31.2 million shares outstanding.

In summary, after adjusting Q305 for non-recurring revenue, we delivered a sequentially flat Q4 consistent with our guidance. In addition, we are today providing Q106 guidance at an increase off of our Q4 run rate. Again, consistent with commentary provided on the prior conference call, we have achieved greater control for improved processes and this has enabled us to improve our analysis of business trends, better manage our cost structure and we believe, plan appropriately for growth opportunities in 2006.

We believe these are all indications that we are well along on our plan for turning around the business. Thank you, this concludes my review of our Q4 and full year 2005 financial results and our Q106 outlook. I will turn the call back over to Craig.

Craig Pisaris-Henderson

Thank you, Will. As you can see, we have made significant progress on multiple fronts to set a strong foundation for 2006. We have identified a definable and sustainable position in the marketplace, focusing on the needs of the publisher, the advertiser and the individual. Our publisher focus differs from that of our competitors and is something on which we intend to build. We expect our new products and sales effort around our new solutions will begin to bear fruit over the second half of 2006.

Our product roadmap also positions us to capture more share of the increasingly fragmented online advertising market, so that we can aggressively pursue inventory represented in the 95% of the time users spend online that is not search-related. By effectively leveraging technology investments like fast and focusing on delivering solutions to help publishers compete more effectively, we believe we have a strong foundation for driving growth.

Thank you all again for joining our Q4 and full year 2005 conference call. I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator instructions) We will go first to Colin Gillis with Canaccord Adams.

Colin Gillis - Canaccord Adams

Good afternoon, Craig. Good afternoon, Will.

Craig Pisaris-Henderson

Good afternoon, Colin.

Colin Gillis - Canaccord Adams

Craig, it seems like you are getting some good traction on the publishing side. Can you talk about what change is happening in that dynamic? Has it been a refocus on your sales effort? Or is it a little bit more of a resonance to publishers with your message?

Craig Pisaris-Henderson

I there are actually a few things. Number one was actually having the capability internally to offer them the right solution. I mean, historically we obviously provided keyword to keyword matching functionality, but really beyond that to provide automated contextual solutions and things that publishers that are creating a tremendous amount of content daily really need. It is just not something that was part of our suite of products and services. Obviously we have taken very proactive steps to invest, to provide that particular product that allows us to work more closely with publishers. That is one area.

Two, and this may be the larger trend that we're starting to see. There is a realization in the marketplace by content creators/publishers/companies that just have traffic in general, they need to figure out a strategic relationship with a partner that is not cannibalizing their content or quite frankly, directly competing with them for market share. You cannot do that unless you can show them some path towards monetizing at approximately the same level as their current relationships.

To uncomplicated that statement, the long and short is MIVA had to get itself in a position through technology that we could provide the products and services publishers need, but also show them a path to monetization that is equal to or potentially greater than those relationships they have today. That is an area that we are aggressively focusing on. Quite frankly, we go in the marketplace, we're seeing those publishers looking for an alternative and really, MIVA is one of the on companies that is positioned to have that integrated suite of products and services that can fill their needs.

That is the overall trends that we are seeing that is allowing us to be more successful in some of the relationships we've announced on this call.

Operator

We will take our next question from Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi - Craig-Hallum

Good afternoon, gentlemen. My question has to do with your announcement on January 10th. At that time, you announced that you were pursuing some strategic opportunities. I would like you to address (a) why you did it and (b) what sort of progress have you made?

Craig Pisaris-Henderson

Sure. The logic behind it, as the press release stated, was to take a look at a wide range of opportunities on behalf of the board, to see if there were strategic opportunities that we just hadn't quite captured internally. That was the statement we put down at that point in time, and that statement still holds true today. The progress -- there is really no progress report. In fact, during that release we made a statement we would update The Street if there was anything material to update. To date, there just isn't anything material other than I will tell you they continue to look at strategic opportunities for the Company, that cover anything from potentially making an acquisition to potentially being acquired. They are looking up all sorts of scenarios on behalf of the board.

Operator

We will take our next question from Youseff Squali - Jefferies & Co.

Youseff Squali - Jefferies & Co.

Thank you very much. Could you expand a little bit on what happened in the E.U., particularly in the U.K.? You saw a decrease of 20%. Is that related to further cleanup of traffic that you started several quarters ago? Is that related to a loss of account or accounts? I think you came back and talked about YTD consolidated revenues being up. Can you revisit those numbers again?

Craig Pisaris-Henderson

Actually, just to give you in general, click counts actually up quarter-over-quarter, RPC trending was down, as Will pointed out and he can follow up afterwards. Actually, it sounds as though it is in line with what others in the marketplace had saw as well in the European marketplace, an overall decrease in RPC in the U.K. marketplace specifically. Also as Will pointed out, that was running contrary to what we were seeing in the continental European portion of our business. Nevertheless, I hope that answers your question with more clarity.

Operator

We now, go to Christa Quarles - Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Hi. A couple of questions, first on TAC rates. Can you indicate whether or not they remained relatively stable? Second, I noticed you obviously had some severance charges in the quarter. Could you outline what one-time costs you expect in Q1 and when you believe your cost base will be a normalized rate that we can then factor in as we go forward? Thanks.

Craig Pisaris-Henderson

Looking at Q1 there certainly will be, and we are managing to move our head count down a little bit. I think it is appropriate that we just keep focusing and I believe this needs to be at every company; how do you do things more efficiently?

Clearly we are looking at some of the talent that we need going forward are different than the ones that were successful in getting us here in the past, and it is a constant change we must go through. I would imagine that over the next two quarters, these will be things that we really focus on and I would hope that by the end of Q2 we will pretty well have gone through that.

Will Seippel

Christa, to follow up with you on the TAC. Yes, I can confirm that TAC is relatively stable. That being said, we will not only repeat what we have been repeating out for years, and that is, we always anticipate to see TAC go up a little bit. I will say that a little forcefully on this call. We are aggressively pursuing relationships, literally as we speak, that we hope to announce in the near term with companies that could potentially have higher TACs associated with them. That is commensurate with the quality of traffic that our advertisers are looking to pay more for.

So the long and short is, TAC is relatively stable, but we always put the cautionary note out there, it could go up 100 to 200 basis points on any give quarter, and quite frankly we are going to be pursuing some rather aggressive deals that could take the TAC rate up by 100 to 200 basis points.

Operator

We will go now to Michael Prospero, ThinkEquity Partners.

Michael Prospero - ThinkEquity Partners

Good afternoon, guys. Forgive me if I missed it, but you talked about the breakdown between E.U. and the U.S., you gave specific numbers, could you go over those again and maybe discuss the weaknesses?

Peter Weinberg

The E.U., we were particularly light with the click rate that we had talked about in the U.K. specifically. MIVA directed very well in the fourth quarter and we covered that, that they had very good growth. I don't know if you want to add more.

Craig Pisaris-Henderson

Sure, we can talk a little bit more about the RPC. As noted, we did see a decline in RPC in the U.K. marketplace, specifically. I think you were looking at percentage of U.S. in E.U. revenue that was actually referenced a little bit earlier. To reiterate that, that was part of Will's prepared commentary. Basically we saw in Q405 57% of total revenue was in the U.S. marketplace; it was E.U. coming in at 43%. I believe that was the question you had asked. Like I said, we did see a decline in RPC commensurate with what others apparently saw as well over this past quarter.

Operator

(Operator instructions) We will take a follow-up question from Colin Gillis.

Colin Gillis - Canaccord Adams

What do you think we might see in the 10-K? Any comments about head count and if you feel we are right-sized yet? Anything along the cost structure lines.

Peter Weinberg

I think it is a constant challenge for companies in this day and age to go back and look at, are you doing things as efficiently as you can? Particularly in MIVA Small Business we had experimented with taking our tier 1 and tier 2 support on the help desk out and that certainly went well. We implemented I think last week, switched over the primary calls to the new provider.

I think it is a constant challenge for businesses today, how do you do more with less and SAP Business One will certainly give us the ability to scale quite a bit with getting common work flows and processes throughout every country in the world, and all of the different companies. I would hope that even as we grow we don't need more resources, particularly in the accounting area, that we are sized right.

These are things that are just a constant challenge. We are looking at different opportunities as we go and we will either adjust or grow accordingly.

Craig Pisaris-Henderson

What may be a good follow-up comment on that point is our focus has shifted a bit, might be a fair way to characterize it. As an example, at the beginning of the year we started focusing on resources for our Cambridge office, to build out our search and directory group, which previously we did not have.

That being said, we are obviously looking at the behavioral marketplace very closely, and aggressively pursuing our contextual/behavioral solution for publishers which would constitute new types of resources that we haven't had historically.

I think to a large degree we are seeing a shift in where we need to grow the Company from a head count going from roughly 515 to 470, or 480 as of just this past month, I think it shows a clear intent to make sure the Company has the necessary resources to continue to grow, but more importantly the right resources in the right area.

Operator

At this time, due to time constraints, we would like to conclude today's question and answer session. Mr. Weinberg, I would like to turn the call back to you or any additional or closing comments.

Peter Weinberg

Thank you. This conference call contains certain forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933, and Section 21-E of the Securities and Exchange Act of 1934. Words or expressions such as plan, intend, believe, or expect or variations of such words and similar expressions are intended to identify such forward-looking statements.

These statements are based on management's current expectations and are subject to uncertainties and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. Key risks are described in MIVA's report filed with the U.S. Securities and Exchange Commission including Form 10-KA for fiscal 2004 and its most recently filed quarterly report on Form 10-Q.

In addition past performance cannot be relied upon as a guide to future performance. The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements.

Potential that the information and estimates used to predict anticipated revenues and expenses were not accurate. The risks associated with the fact that we have material weaknesses in our internal control over financial reporting that may prevent us from being able to accurately report our financial results or prevent fraud.

The risks that we have in the past and may in the future incur goodwill impairment charges that materially adversely affect our earnings and our operating results. The potential that demand for our services will decrease. The risk that we will not be able to continue to enter into new online marketing relationships to drive qualified traffic to our advertisers. The risk that our distribution partners will use unacceptable means to obtain users. Risks associated with our ability to compete with competitors and increased competition from distribution partners. Political and global economic risks attendant to our business. Risks associated with legal and cultural pressures on certain of our advertisers service and/or product line.

Other economic, business and competitive factors generally affecting our business. The risk that operation of certain of our technology infringes upon intellectual property rights held by others. Our reliance on distribution partners for revenue-generating traffic. Risks associated with our expanding international presence. Difficulties executing integration strategies or achieving planned synergies with acquired businesses and private label initiatives. The risk that we will not be able to effectively manage our growth. The risk that new technologies could emerge which could limit the effectiveness of our products and services. Risks associated with the operation of our technical systems including system interruptions, security breaches and damage. Risks associated with Internet security, including security breaches which, if they were to occur, could damage our reputation and expose us to loss or litigation. Risks related to regulatory and legal uncertainties, both domestically and internationally.

That concludes our call for today, thank you for listening.

Operator

Thank you for your participation in today's conference. You may disconnect at this time.

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Source: MIVA Q4 2005 Earnings Conference Call Transcript (MIVA)
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