The Knot, Inc. Q1 2008 Earnings Call Transcript

| About: XO Group (XOXO)

The Knot, Inc. (KNOT) Q1 2008 Earnings Call May 8, 2008 4:30 PM ET


Melissa Bauer – Investor Relations

David Liu – President, Chief Executive Officer

Richard Szefc – Chief Financial Officer, Treasurer, Secretary


Barton Crockett – JP Morgan

Jeetil Patel – Deutsche Bank Securities

George Askew – Stifel, Nicolaus & Co.

Brian Murphy – Sidoti & Co.

Jason Helfstein – Oppenheimer & Co.

Clayton Moran – Stanford Group Co.


Welcome to The Knot, Inc.’s first quarter 2008 earnings conference call. (Operator instructions) At this time I would like to turn the conference over to Melissa Bauer.

Melissa Bauer

Welcome to The Knot’s first quarter 2008 conference call and web cast. During the course of this conference call, comments that we made regarding The Knot that is not historical facts are forward looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements.

Any such forward-looking statements are made pursuant 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 that these forward looking statements speak only as of today’s date. 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 We have allotted up to one hour for today’s conference call including the question and answer session that follows. Please take note that the Company’s operating under the SEC 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

I want to thank you all for participating in today’s call. For the first quarter of 2008 revenue from online advertising programs increased by 20% over the prior year’s first quarter while publishing and other revenues reported a 17% gain. eCommerce revenue representing merchandise revenue from the sales of wedding supplies and registry service commissions was $6.4 million and was relatively flat compared to 2007.

Overall, net revenues rose 13% to $23.8 million from $21 million in the first quarter of 2007. We expect to achieve total revenue growth in the mid-teens for all of 2008 which is consistent with the guidance we provided on the last earnings call. Our CFO, Richard Szefc, will cover the details of our financial results later in this call but before he does so I want to provide you with a report on the state of the business and address some of the factors that are affecting the company.

In 2008 the company is focused on three areas that we believe will be the foundation of the future growth of our organization. First, we are in the process of upgrading Legacy technology platforms to more flexible and scalable systems. Second, we continue to expand our brand into the newly wedded/first pregnancy life stages. Lastly, we are expanding our senior management team.

Before I update you on our progress I want to address some concerns that have been expressed with regard to the impact of the increased competition on our traffic and overall business. Over the past year and a half we have seen many of our competitors increase their investment in online media.

We have also seen an explosion of new competitors both online and in print. In fact, over the last five years the number of independent wedding magazines has nearly doubled. Yet with the acquisition of Wedding Channel we were able to establish the largest media platform by far to reach the engaged couple.

Since the beginning of last year we have been marketing to national and local advertisers a comprehensive package of wedding media exposure inclusive of both The Knot and Wedding Channel brands. For the first quarter 2008 we have seen a 5.5% year-over-year increase in page views across this network despite a small 2.5% decline in membership.

So despite our competitor’s best efforts we have maintained our dominant consumer market share and our members are more engaged than ever. While the increased competition for online traffic has our attention, we are far more focused on better monetizing our dominant position within this valuable consumer group. To accomplish this we need to focus on two things.

We need to increase our market share in our existing revenue streams and we need to extend the lifetime value of our audience through brands that meet the information needs of our members as they move into the newlywed and first pregnancy life stages. The upgrades and expansion of our technology, brands and management teams are designed to help us accomplish these goals in very specific ways.

On this call I’d like to help you understand how these projects are connected to our overall direction. I’ll start with an update on the progress of our technology and platform investments. The majority of our technology upgrades are aimed at increasing our operational efficiencies so that we can go after a greater market share of ad dollars commerce revenue in the wedding portion of our business. A state-of-the-art content management system will allow us to more efficiently maintain our flagship sites, freeing up important resources to aggressively grow the natural long tail of our business.

We began launching an e-site last year and we plan to accelerate those efforts when the content management system is in place later this year. We are making good progress on this front. The nest has been converted to the new platform and we plan to have both Wedding Channel and The Knot websites converted before the end of the year.

Eight years ago when we acquired Wedding Pages Magazine we took on the challenging integration of a company that published 52 regional magazines and sold advertising to over 3,000 local wedding vendors. The thought of growing the vendor base by 500% while increasing the regional coverage threefold seemed impossible. Doing all this while reducing sales would have head counting like lunacy. But this is what we did.

We recognized then, as we do today, that our industry is in the process of a dramatic transition. Back then we implemented the first version of our online local sales contact entry system which allowed us to dramatically increase the efficiency of our sales force as we eliminated their paper-driven systems. The transition we recognized and embarked on eight years ago was that the modernizing of our sales organization and the infrastructure supporting them.

Today we are anticipating a transition within the local vendor base itself as they adopt new technologies to support their marketing efforts. The lion’s share of our local vendors’ marketing budget continues to be invested in traditional marketing platforms like the yellow pages, local newspapers, other local magazines and local bridal events. Currently the Internet and The Knot are still in the periphery of these marketing considerations and are treated as incremental investments.

We envision a day where our local vendors utilize their presence on our network of sites as the central hub of all their marketing efforts, both online and off. That is why we have decided to revamp the local contact entry system and the surrounding support applications now in anticipation of this transition. This new system will allow greater pricing flexibility and operational efficiency which will free up sales rep time to pursue new accounts.

We have been forced to set aside a number of additional projects that will drive local sales growth so as not to further complicate an already complicated re-engineering project. When the new contact entry system is operational we will be able to begin development of these additional projects. We anticipate that the new local contact entry system will be completed this summer.

While this new system will help streamline our local sales operations and allow us to launch some incremental sales programs in the short-term, there are a few additional local back-end projects that must be completed before we can begin the development of larger projects like self-service and the auction-based platforms.

First will be the conversion of our management application of our legacy AS400 system followed by the redesign of the local profile templates themselves. We have made good progress on these local sales back-end projects and expect to have them completed before the end of the year.

We are anxiously anticipating the completion of these platform upgrades as they are critical for our future operations and as over 25% of our project management resources as well as three outside consulting firms are engaged in these projects. As these projects are completed these resources will be deployed to complete a long list of new products, product enhancements and new features that are designed to drive further growth in all our revenue streams.

In the meantime, our efforts to expand our brands into the life stages beyond engagement are showing strong progress. The Nest is growing nicely. In the first quarter unique visitors rose 47% over last year. If you factor in The Nest’s traffic that we separated as a distinct domain last April, traffic increased 104%. This traffic growth and correlating brand acceptance is having a positive effect in our advertising sales results.

Revenue from non-weddings endemic advertisers in the first quarter rose from 12% in 2007 to 22% in this past quarter. Reducing our reliance on bridal endemic advertising is an important part of our strategy for driving national sales growth. Our newest brands have allowed us to pursue larger industry advertisers who have larger media budgets.

Our recent acquisition of The Bump will give our local sales force a jump start in selling local prenatal advertisers in both the magazine as well as online. We are very excited to have the management and staff of The Bump onboard and are bullish on the growth of this business. The new design of the magazine looks great and over time we plan to merge The Nest baby brand and website into The Bump.

Lila Guide has recently launched the long anticipated group functionality that allows us the power, communication and scheduling needs of local mommy groups around the country. We are excited about the opportunities presented by the combination of our baby brands and have high expectations for this segment of our business.

The third and final focus of the company this year is the continued investment and expansion of our executive management team. Our new Executive Vice President and Managing Director of Technology, Nic Dilorio, has already made positive changes in the organization of our technology and project management groups resulting in better communication and increased efficiency. The majority of projects currently scheduled for completion this year are on track and we believe we made the necessary hires so that our tech teams are fully staffed.

Our President and Chief Marketing Officer, Janice Scardino, has assembled her marketing team and is busy building new programs to support the company’s efforts marketing to the national and local advertising community. The Knot has always excelled at marketing to our consumers through compelling brands, engaging content and products and a highly successful consumer PR program. We have not aggressively marketed our media to advertisers. Through Janet’s team we will focus on trade marketing, research and membership marketing to drive national and local ad sales growth.

She is also actively involved in launching programs to increase registry searches and transactions as well as to improve conversion of more of our members to customers in our eCommerce shop. Our efforts to expand our management bandwidth will continue with anticipated additions in the finance, operations and marketing departments in the coming months. We expect these additions to complete the team as we move forward into 2009 with strong support in place for each department.

Though this is a challenging, transitional year for our company I am excited by the opportunities that lay ahead. Our core business remains strong and I look forward to updating you over the next few quarters on the completion of these projects and the return on these investments.

I will now turn the call over to our CFO, Richard Szefc, who will review the financial results.

Richard Szefc

For the first quarter of 2008, as David mentioned, we reported net revenues of $23.8 million which represented a 13% increase from first quarter revenues of $21 million the year earlier. Net income for the first quarter was $579,000 or $0.02 per basic and diluted share which compares to net income of $1.6 million or $0.05 per basic and diluted share in the first quarter of last year.

Revenue from online advertising programs for both national clients and local vendors increased by 20% to $12.9 million in the first quarter of 2008 from $10.8 million in 2007. There was a reduction of approximately $550,000 from prior year’s first quarter in revenue from Wedding Channel legacy accounts. We reported the contribution from these legacy accounts during our 2000 earnings calls and revenue from these local accounts began to decline over the last half of 2007. After adjusting for the impact of these accounts total online revenue grew 26% for the quarter.

Local online advertising excluding the legacy accounts grew by $1.5 million or 24% driven primarily by an increase in the average spend by local vendors. This was due to the 30% weighted average local price increase put into effect in June 2007. Local vendor count approximated 14,500 as of March 31, 2008, similar to our base at December 31, 2007. As we noted on the last earnings call there had been a declining trend in vendor count over the fourth quarter of 2007. The current vendor count is down, however, from the number as of March 31, 2007 of 15,200 or roughly 4%.

The renewal cycle for the last price increase will end this month and the focus of our local sales force will shift heavily to new account acquisition over the last half of the year. Currently we are not planning further price increases in 2008.

With respect to national accounts, online advertising grew to $4.7 million in the recent quarter compared to $3.5 million in the first quarter of 2007 or 33%. This increase generally resulted from a higher average spend within the account base. The revenue approximated fourth quarter 2007 online advertising revenue from national accounts exclusive of the few short-term contracts for that period aggregating $800,000 in revenue which we noted in the prior earnings call.

Merchandise revenue from the sale of wedding supplies at retail to our members was $4.6 million in the first quarter of 2008 which approximated merchandise revenue recorded in the first quarter of 2007. Demand did increase at the end of the recent quarter and we closed the period with an incremental backlog of about $200,000 which is higher than average and which we worked down in April. These incremental orders would have resulted in a revenue increase of 4% if the orders had shipped by March 31.

Revenue through The Knot shop did increase over the quarter by about 8% despite the order backlog, generally due to increased orders but this growth was offset by a similar decrease in revenue through the Wedding Channel store.

In 2008 we have been focused on our merchandising strategies for our website stores and earlier this week we launched a new home page for The Knot shop with a new look and new functionality which we believe will help drive sales growth going forward as we move into our seasonally stronger period for merchandise sales. Our goal is to implement similar changes to the Wedding Channel store by the end of the second quarter.

Registry services revenuer represents commissions earned from our retail partners substantially through the Wedding Channel operations. For the first quarter 2008 total commissions amounted to $1.8 million, a similar amount compared to the first quarter of 2007. Commission revenue earned through the Macy’s relationship did increase by 9% over the prior year’s quarter although this increase was offset by declines in revenue from non-Macy’s retailers on the Wedding Channel site and revenue earned through The Knot partnership with The first quarter is also a seasonally weaker quarter for registry activity.

Publishing and other revenue for the first quarter amounted to approximately $4.5 million representing a gain of $658,000 over the comparable period last year. The increase primarily resulted from the timing and publication of our annual Best Weddings magazine featuring local vendors which was distributed in the first quarter of 2008 as compared to the second quarter in 2007.

Other local print revenue increased by approximately 11% in the first quarter of 2008 over the comparable period in 2007 due in part to our new Chicago regional magazine which launched last July and is published in January and July of each year. These increases in local print advertising were offset in part by a decline in national print advertising revenue of approximately $200,000 due to a decline in designer advertising pages in The Knot weddings magazines.

With respect to margins, our gross profit percentage remained at around 81% consistent with the prior year’s quarter. Small margin improvement in 2008 for merchandise revenue was offset by a lower margin for publishing and other revenue as the result of a relatively lower margin for the newer Best of Weddings magazine and due to the declining revenue for The Knot weddings magazine.

Total operating expenses before depreciation and amortization for the recent quarter was $17.3 million which is $4.2 million higher than the first quarter of 2007 and represented a sequential increase over the fourth quarter of 2007 of $2.5 million or 16.5%. The first quarter of 2008 included additional legal fees of $380,000 due substantially to a class action complaint in which the Wedding Channel and The Knot were added as defendants in late February of this year and which is discussed in our SEC filings. These legal fees also accounted for a significant portion of the increase in G&A expenses as compared to the first and fourth quarters of 2007.

We also incurred approximately $220,000 of operating expenses associated with The Bump media subsequent to our acquisition of that company on February 11, 2008. We did not publish any of The Bump’s local guides in February or March and accordingly we did not recognize additional revenue from The Bump in the recent quarter.

Apart from the expenses noted above, the remaining operating expenses increased by $3.5 million and $1.9 million respectively over the comparable 2007 first and fourth quarter amounts. The adjusted sequential quarterly increase in expenses for the recent quarter was 13%.

This increase in operating expenses reflects the higher level of spending for both product and content in both sales and marketing which we had discussed during the recent earnings call. The increases are specifically for IT and product management to accelerate the completion of several important projects, as David mentioned, which are expected to lay the foundation for allowing us to more effectively support and scale the business as we move through 2008 and into 2009.

We have also added editorial and creative staff to support expanded content associated with the extension of our brands. As David noted, we have been in the process of expanding our senior management team particularly in the areas of marketing and sales with a similar objective of supporting business scale.

We have increased our marketing staff and are currently beginning to increase other marketing expenditures over the balance of 2008 to support research programs, analytics and other efforts to raise awareness of our brands and products within the local vendor community and the national advertising marketplace.

We completed a substantial portion of new hiring process over the course of the first quarter of 2008. Going forward exclusive of legal costs associated with the class action complaint, we believe operating expenses before depreciation and amortization in the aggregate will increase sequentially by up to another 12% to 13% in the second quarter of 2008. This reflects the full quarterly salary impact of our first quarter 2008 hiring’s, additional spending for The Bump medium as well as incremental spending on new marketing programs as noted previously.

We currently expect operating expenses, again exclusive of possible legal costs, to flatten out over the last few quarters of 2008. These estimates include operating expenses of approximately $1 million associated with The Bump media over the last nine months of this year. It should be noted that revenue anticipated from The Bump in 2008 is included in the revenue forecast David indicated and is currently expected to be a little over $1 million, all of which will be recorded in the second half of this year.

As we noted in the press release, stock based compensation expense was $747,000 in the recent quarter compared to $472,000 in the first quarter of 2007. We currently estimate that stock based compensation will range from $3.5 to $3.7 million for all of 2008. With respect to the provision for taxes our current estimated effective tax rate for 2008 is approximately 42%.

As of March 31, 2008, our cash and cash equivalents aggregated just under $15 million. Also as of March 31, 2008 we have reclassified our investments in auction rate securities of $59 million as long-term assets and incurred a temporary impairment charge of $1.8 million net of tax and other comprehensive loss in stockholders equity with respect to the securities due to their current lack of liquidity. These auction rate securities consist of tax exempt AAA rated variable rate debt securities as interest rates reset every 35 days.

The default reset interest rates on the auction rate securities currently held by us range from a short-term debt index of 150 to 250 basis points and as high as 14%. These securities are collateralized by existing loans of approximately 92% of such collateral in the aggregate guaranteed by the United States government. We currently have the intent and ability of holding the auction rate securities until a recovery in market value occurs.

However, if the issue of these securities continue to be unable to successfully close future auctions and their credit ratings deteriorate we may be required to record additional temporary or other than temporary impairment charges that are further reductions to fair value in future periods.

We do not currently anticipate that any potential lack of liquidity in auction rate securities will affect our ability to execute our current business plan and that our current liquid cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future.

Cash generated from operations for the first quarter of 2008 was approximately $6 million. Capital expenditures in the first quarter were $2.4 million. This included additional investments in storage hardware of approximately $1.3 million to support the systems expansion currently underway. We currently estimate that capital expenditures will approximate just under $5 million for all of 2008.

That is the financial review for The Knot for the recent quarter. We will now open the call to questions.

Question-and-Answer Session


(Operator Instructions)Your first question comes from Barton Crockett – JP Morgan.

Barton Crockett – JP Morgan

The outlook actually for the online advertising growth, you saw the 20% growth combined here in the first quarter and what are you seeing here in the second quarter? Is there any improvement? Any deceleration or any sign of any impact in terms of the macroeconomic effect or some of the competitive things you were talking about earlier?

David Liu

We certainly haven’t gotten any pressure from the competitive framework. Part of that is due to the fact that our competitors don’t generate a ton of online traffic so they are not actually generating enough inventory to put a dent in the programs that we are fishing. The macroeconomic conditions we have been somewhat shielded from.

Again we are talking about a consumer group we are reaching that has a high attention to purchase on a lot of these key categories so we are very targeted. We are cautious because there are elements of weakness coming from our local sales group that we believe are tied to the macroeconomic conditions.

Out of 14,500 some odd local advertisers we have many of them are mom-n-pop and our consumers and you are seeing this tentativeness coming from some of these local vendors because housing market values have dropped or they are facing a credit crunch. So that is something we are keeping an eye on. We have always said we are somewhat immune to it although not entirely.

Richard Szefc

We also have a little bump up in the bad debt ratio in terms of some of the accounts that have dropped off to the tune of probably an additional 1% in terms of total accounts, probably a 3% change in the mix of our cancellations. So that is another factor that could impact that trend.

David Liu

National advertising we are probably seeing tentativeness in the retail sector and maybe some travel but so far none that has impacted our growth rate so far.

Barton Crockett – JP Morgan

So the national ad growth in the second quarter, no reason to think it would be that different than what we saw here in the first quarter at this point? On local though it seems as though maybe it may be a little bit lighter?

Richard Szefc

I think that in terms of the local side of the business based on the trends that we have seen in the economy that could be a fair assessment for local.

Barton Crockett – JP Morgan

Switching gears a little bit on the expense side here. Just to be clear these auction rate securities temporary impairment charge, did that show up in the income statement here or just on the balance sheet?

Richard Szefc

Because we consider it temporary what we did is we recorded the reserve against the investments and the impact of that net of tax is actually reflected directly in stockholders equity. So if you look at our balance sheet you’ll see a new caption called “accumulated other comprehensive loss” which is about $1.1 million and that is effectively the reserve $1.8 million on our auction rate securities less a tax effect of that of 40%.

Barton Crockett – JP Morgan

It looks like you took up your outlook for stock compensation expense and CapEx from what you were saying at the last earnings call in February.

Richard Szefc

We said both ranges up a couple hundred thousand on both sides based on the hiring we did in terms of the first quarter and some of the senior hires we made. So that took the range up a bit.

In terms of CapEx we had a range around the 4.5 to 4.6 level last time. We did spend some additional money on some of the hardware equipment I mentioned in terms of storage hardware the first quarter. We also will probably be spending a couple of hundred thousand in costs that will wind up in capitalized software so between the two of those that brought it up to the $400-500,000 for the year.


The next question comes from Jeetil Patel – Deutsche Bank Securities.

Jeetil Patel – Deutsche Bank Securities

Could you talk about the local advertiser turn rates in what you are seeing today and if you could talk a little bit about how the tech investments you have been making over the past several quarters have been progressing?

David Liu

The local advertiser turn rates have been semi-consistent with what we saw over the last half of last year. Probably in the neighborhood of about 30%. So that hasn’t changed significantly. I did mention on the call that we are coming through the final two months of the rate increase we put into play in June of last year and our goal going forward is to obviously begin building the vendor count as we get into the second half of 2008.

Richard Szefc

As far as the tech projects we did touch on this. We are on track to deliver the majority of the projects by the end of the year. We view the summer as being when we’ll be able to complete the local contact entry system which really is in some respects the choke point for a lot of the projects that stem off of the local sales operation. So the team has really rallied around Nic, the new Director of Technology, and we are really pleased with the progress we’re making there.

Jeetil Patel – Deutsche Bank Securities

When should we see some of these costs level off a little bit? Seeing the fruit from this investment you are making out there?

Richard Szefc

In terms of the cost again it is exclusive of the possible legal costs on that class action suit as I mentioned. We would still have growth in those costs as we go out into the second quarter as the result of the impact of the first quarter hiring we did.

Also some of the additional marketing expenditures from the new marketing group would kick in the beginning of the second quarter so as I mentioned we will probably see a 12% to 13% sequential increase in operating expenses in the second quarter and then begin to see a leveling off as we go into the last half of the year.

David Liu

In terms of return on investment I think as we begin to complete a lot of these projects a lot of the resources get freed up to begin to develop things that have been put at bay so far. There are a number of programs and projects that we were unable to launch on behalf of our local sales force simply because the contact entry system would have had to have bee modified to accommodate the tracking of these new sales programs.

As we are in the process of writing that entire program we did not want to further complicate that around that process. So as that begins to complete we will be able to add a bunch of these additional up-sell opportunities and new programs and some variable pricing strategies. That should be able to drive some additional growth.


The next question comes from George Askew – Stifel, Nicolaus & Co.

George Askew – Stifel, Nicolaus & Co.

I wonder on the macro level could you give us a sense if you are seeing the average cost of a wedding decline with the economic weakness. Can you give us some data points around that?

David Liu

No we have not. I think a recent survey showed that it has actually crept up a bit this year. We have been tracking obviously the consumer sentiment around this to see if there would be additional fallout within our advertiser community but there really hasn’t’ been. Brides are not looking to cut back on their weddings. There is a certain element of cost consciousness that I think exists with the consumers but that has always been the case.

If you look at our editorial positioning and the advice we give our brides they are interested in managing their budgets and reducing costs the quickest and easiest way is to reduce your headcount on your guest list. While that may save you some pretty significant dollars on your catering bill it doesn’t impact the spend on the jewelry, the apparel, the honeymoon, the registry process or other costs around the event itself. So, so far we are not seeing much of a macroeconomic impact on the purchase patterns of the brides.

George Askew – Stifel, Nicolaus & Co.

You mentioned the local contract entry system will be in place over the summer and then you also touched on some of the pricing variability. Will the auction pricing functionality be in place this summer or third quarter?

David Liu

It certainly won’t be by the summer and as we are putting the new local platform together the auction portion will be rolled out very specifically in key markets we will be testing. We don’t want to create some undesired impact with this application. We will be testing it in large markets in specific categories to see how it gets adopted. It is going to be a pretty steep learning curve for our local vendors too so in the beginning there will probably be a great deal of hand-holding by our sales force.

So I certainly wouldn’t be expecting any significant revenue contribution from the auction platform although it is an anchor to our future strategy of getting out of the rate hike business and allowing the market to begin to dictate more the value of the media and making it more competitive.

George Askew – Stifel, Nicolaus & Co.

Lastly, you mentioned some of your new executives are developing plans to move members to customers in some of your online retail properties. What are you going to be doing new there that you haven’t been doing up until now?

David Liu

A lot of it is being better targeted. If you look actually the new front screen of The Knot wedding shop is a good example of how we’re getting people much closer and quicker access to the product they may be looking for. Use this as a side-by-side comparison where I think currently the Wedding Channel main screen may not have been updated yet.

So you will see what we have and what we have transitioned towards. All incremental steps we implemented technology provided by [inaudible] in the first quarter. That also provides greater access and greater promotion for our related projects. There are a lot of things that we have really not pursued on that level to maximize conversion and that is a lot of what the focus is on this year.


The next question comes from Brian Murphy – Sidoti & Co.

Brian Murphy – Sidoti & Co.

David you mentioned that non-endemic advertising was 22% of national advertising. That seems pretty high. Is that just quarterly lumpiness or do you see that growing? Can that get to like 50% looking out a couple of year’s maybe?

David Liu

I think the issue is we are rapidly evolving and at some point I’m really not going to be able to use the comparison of non-endemic and endemic anymore because as we become more of a multi-lifestage media platform virtually all advertising will technically be endemic. Right now there is definitely a polar difference between our bridal advertisers and our non-bridal and so we call our non-bridal the non-endemic. But we do think that the non-endemic opportunity is large, if not as large, as the bridal side.

This first quarter we saw a number of folks come in who you won’t find in Brides magazine. People like Huggies or Dodge or State Farm and I think it has been making inroads and breaking these new ad categories is core to the national advertising growth strategy because those are really the advertisers in the advertising category that have the deeper and larger media budgets.

Brian Murphy – Sidoti & Co.

On the local side, I know you have some marketing expenditures that are set to hit in the second quarter but just speaking specifically about your branding and awareness initiatives from local vendors is the bulk of that going to hit after the technology platform is in place?

David Liu

There will be a bit of synchronizing of a lot of the marketing efforts around some new programs we are going to launch. We are still pretty frugal and conservative in terms of how we approach a lot of these marketing efforts. A lot of the ramp up and cost is really personnel to come in and handle some of these efforts. You’re not going to see us start running Superbowl ads or the traditional forms of marketing.

In fact, I think my marketing staff thinks I’m a little bit crazy but I want them to be in as many ways as possible driving direct revenue opportunities even through their efforts in research or in the efforts of marketing our services. So the goal is really to become more focused on the fact that a certain level of education and communication needs to be done proactively by us to the vendor base and to the advertiser community which is something that we just have not done in past years.

Brian Murphy – Sidoti & Co.

In the past you have talked about the potential of maybe getting to 100,000 vendors from the current level of 15,000. Is it fair to say that scaling the vendor base would depend almost as much on the success of your branding and awareness initiatives as it does on the new technology platform?

David Liu

Absolutely, I think that is why you are seeing the level of investment we are making on both those fronts this year.


The next question comes from Jason Helfstein – Oppenheimer & Co.

Jason Helfstein – Oppenheimer & Co.

On national advertising, if I recall last year one of the things that happened was due to the integration of Wedding Channel kind of some IT difficulty and some frustration that some of the national advertisers had with Wedding Channel contracts you lost some national advertisers a year ago.

Are you getting some of those advertisers back as we enter the 2008 cycle? And are you benefiting as well from solving some of those technology issues or is that still dependent on all of the IT things you have talked about?

David Liu

I think the integration issues we had with regards to national advertising needs a little clarification. Last year basically what happened was we inherited the many annual contracts the Wedding Channel had signed prior to the acquisition in the end of 2006 that were year-long contracts that committed to impression guarantees that far exceeded what the Wedding Channel traffic could bear.

If you plot the traffic patterns of The Knot or the Wedding Channel, the wedding sites in general basically peak in the first quarter. They will descend throughout the year. Wedding Channel holds their traffic probably better in the second and third quarter because there are so many people going and buying gifts for weddings.

But it all pretty much falls off a cliff in the fourth quarter. If you remember we closed the acquisition in the end of September and basically inherited the short-fall in the fourth quarter ad impression guarantees. That is what we had to cycle through in the first quarter and for the first half of 2007.

It wasn’t a technology issue it was really just an expectation then and we had either you made goods or renegotiated pricing and basically work out a number of contracts with large advertisers. What you are seeing this year is really the fruits of the combination of the inventory of The Knot and Wedding Channel packaged as a platform and as a network.

We are not encouraging; in fact do not want people to be cherry picking or buying one brand over the other. We’re trying to integrate as much of the exposure across both brands as possible so that you are reaching the largest possible audience of women who are planning a wedding. I think that has been able to stabilize a lot. We have been able to get some of these advertisers back.

Jason Helfstein – Oppenheimer & Co.

What is your average contact length of a local advertiser? Then the last question is obviously within your technology and within the overall costs which like you said are going to go up another 12% to 13% in the second quarter, how much of that is consultant and fee-based and one-time costs as opposed to permanent employees that will go away once you finish this technology upgrade?

Richard Szefc

The large majority of the costs will be internal so that cost base will be some that goes away as you get out later in the year. But for the most part the group that we have in place now will be moving on to other projects within the company as David mentioned.

The average length of the contracts, local, on the profile side are typically 12 months. On the premium side where they are doing featured vendor slots that is usually a shorter period of four to five months. Then of course they could do emails which would go out whenever they go out.


The next question comes from Clayton Moran – Stanford Group Co.

Clayton Moran – Stanford Group Co.

Can you give us the membership at quarter end a year ago and at this quarter end? The second question, in past years you have pretty consistently raised the advertising rates. Can you just explain the reasoning behind why you don’t plan to do that this year?

Richard Szefc

In terms of the advertising rates we have increased on a combined basis and this is in local, we have increased those rates on a combined basis in excess of 50% compounded with a 20% increase two years ago and a 30% increase last year. Prior to that we had 10% increases where we were concentrating on building up the local vendor base. After this 30% rate increase cycles through our focus is on increasing that vendor count.

Our local reps are being incentivized on that basis in terms of bringing in new accounts over the course of this year particularly in the second half. We are really looking to support that program even further by keeping the level of pricing where it is for the moment and we’ll see how we do in terms of building up that vendor base and getting the growth in revenue through that aspect of the business rather than the price…at least for the near term.

David Liu

The membership totals, we have the difference at least on The Knot side was about 22,000 increase and there was a slight drop off on the Wedding Channel side.

Clayton Moran – Stanford Group Co.

Can you give us the total numbers?

David Liu

I don’t actually have them totaled up. I have them broken out monthly.

Richard Szefc

Typically the first quarter is going to run in the 300,000+ range because of the increased membership that tends to sign up at the first of the year after the holidays. In the Valentines Day timeframe. So typically you are dealing with 300+ in the first quarter and then 200 to 300 in each of the three remaining quarters and typically in terms of The Knot side we are typically around 1 million to 1.1 million in terms of the membership. So it is just a caution in terms of what we show for our first quarter membership because that does tend to peak a bit for the year in that quarter.


At this time there are no further questions.

Patricia Morris

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