TheStreet.com Q2 2008 Earnings Call Transcript

TheStreet.com (TSCM)

Q2 2008 Earnings Call

July 31, 2008 11:00 am ET

Executives

Becky Obdegrass - Investor Relations

Thomas Clarke - Chairman and Chief Executive Officer

Eric Ashman - Chief Financial Officer

Analysts

Richard Fetyko - MCF & Company

Colin Gillis - Canaccord

Mark May – Needham

Sameet Sinha – JMP

William Morrison - ThinkEquity

George Grose - American Capital Partners

Brian Murphy – Sidoti

Presentation

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2008 TheStreet.com earnings conference call. (Operator Instructions) I will now turn the presentation over to your host for today’s call, Ms. Becky [Obdegrass]. Please proceed, ma’am.

Becky Obdegrass

Thank you very much. Some of the statements made on this earnings call not related to historical facts may be deemed to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements, which may concern TheStreet.com’s financial performance, as well as its strategic and operational plans, are subject to risks and uncertainties that could cause actual results to differ. The company undertakes no duty to update any such statements.

The risks and uncertainties are described in the company’s SEC filings which are on file with the SEC and available at its website at www.SEC.gov. Additional information will also be set forth in TheStreet.com’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2008 which will be filed with the SEC in the near future.

I now turn the call over to Tom Clarke, TheStreet.com’s Chairman and Chief Executive Officer.

Thomas Clarke

Thanks, Becky. Good morning to everyone. Thank you for joining us today to review our second quarter 2008 financial results. I will review our progress on several strategic initiatives during the quarter and then turn the call over to our CFO Eric Ashman.

I'm pleased to report a quarter that saw overall revenue grow 32% and had contributions from many areas of the business. I believe this quarter's performance is a direct reflection of our strategic decision to position TheStreet.com network as a leading online destination for all things money.

Several data points lead me to that conclusion. The first is the year-over-year advertising revenue increase of 16%. The second comes from our decision to broaden our content, which has resulted in a 34% year-over-year increase in nonfinancial advertising.

Nonfinancial advertising revenue made up 45% of total advertising revenue in the quarter, up from 39% a year ago. Categories such as automobile, luxury goods, travel and technology continue to be strong performers for us.

The third is that we continue to monetize effectively, with record revenue per thousand views of $31, the highest in our history.

The continued broadening of our content has had positive effects in a number of areas. Traffic continues to improve with average monthly unique visitors hitting a record 7.2 million. It has also enabled us to broaden our distribution, as evidenced by our agreement with Internet Broadcasting Systems to provide articles and videos from our network of properties to the websites of local television stations, included in the IBS Network. This deal originated with content from Main Street, not TheStreet.com, and is a prime example of how we plan to utilize our network in creating new advertising and traffic opportunities in the future.

This continues to follow a trend we saw last quarter with AOL as more content from TheStreet.com network finds its way into these popular channels.

As mentioned in our press release, we've also expanded our relationship with Google with a content licensing agreement that created an ad supported TheStreet.com video channel within YouTube.

On the first quarter call, we had said that we expected the Promotions.com business to rebound once unburdened by the technology demands we put on their business to deliver our aggressive first quarter launch of TheStreet.com and Main Street. It did rebound and the group delivered revenue of $3 million, a 36% sequential increase. Clients for the quarter include Kraft, AARP, Diageo, Coldwater Creek and Shell. Promotions’ focus will continue to be on building relationships both inside and outside of our network, while we continue to innovate in the area of interactive ads and online promotions.

In looking at the paid services segment of our business, the current economic and market environment remains challenging. With the S&P showing a 3.2% decline in the quarter.

Our challenge remains on the acquisition side, as many potential subscribers are sitting on the investing sidelines.

The good news is that our renewal rates actually increased during the quarter for both our monthly is now 91% and annual subscriptions 64%, and we ended the quarter with 84% of our subscribers having an annual contract.

In our first quarter call we said that we would launch new subscription services. In the second quarter we delivered two new subscription products. Nails on the Numbers, a service launched in partnership with long time and popular columnist Lenny Nails Dykstra that focuses on undervalued option prices for large blue-chip companies.

The other product, Insider Insights, was launched with Jonathan Moreland and focuses on bullish and bearish stock recommendations based on insider buying and selling. We believe that these products will help with subscriber acquisition and we will continue to refine the segment and look for new opportunities.

With Main Street now five months old we are hard at work in implementing the feedback we have received from both our users and advertisers. We are also moving forward with an integration plan that will further incorporate content from Banking My Way, Geezeo and TheStreet.com to create a place where users can be educated, engaged and entertained.

Main Street 2.0 slated for launch before the end of the year will also include enhanced social networking capabilities, as well as new lead generating revenue models that will further expand our revenue opportunities within the network.

We also plan to utilize our growing and diverse content set in new distribution agreements and will utilize items such as the Banking My Way widget which can live on other sites but drive traffic back to us in revenue-sharing opportunities.

One of the more exciting developments that we have seen is the shift in video consumption patterns on the web. What had started as short form video viewing has morphed into a norm of full-length program consumption. This is evidenced by the race the hardware makers like Apple, Netflix and Panasonic are in to bring the Internet to the living room TVs.

As most of you are aware, TheStreet.com was an early adopter of online video production. With the shift in viewer consumption patterns the company will be accelerating its production of longer form programming during the second half of the year. TheStreet.com has a number of talented personalities such as Jim Cramer and James Altucher; the infrastructure including an in-house studio and a newsroom producing daily original content that will serve as the foundation for episodic programming on both an ad hoc and appointment viewing basis.

With our industry-leading position in financial video, longer form programming will allow us to meet viewer and advertiser demand. We're optimally positioned to leverage this shift and this will be an important initiative for us during the latter part of this year and beyond.

As we move into the second half of the year our primary focus is on integrating our offerings within TheStreet.com network as we consolidate around the category of money. We will continue to focus on acquisitions as a way to compliment our current offerings but we remain disciplined in our approach.

In these turbulent economic and market conditions, the financial commentary and analysis found only on TheStreet.com network will become increasingly vital and timely for a public concerned about their financial prosperity. I do believe that the keys to our success will be the conviction to follow the strategies we have developed that include a consolidation around the category of money. This conviction, aligned with a focused execution strategy, will position us to further growth, expansion, enabling us to continue to deliver shareholder value.

Now let me turn it over to Eric.

Eric Ashman

Thanks, Tom. We are pleased to report that our increasingly diversified business turned in a strong second quarter performance given the macro economic headwinds. Total revenue for the second quarter was $19.7 million, an increase of 32% over revenue of $14.9 million reported for the second quarter 2007.

Adjusted EBITDA, excluding stock compensation expense, was $4.6 million, an increase of 16% over adjusted EBITDA of $3.9 million for the second quarter of 2007. Our adjusted EBITDA margin was 23.2% as compared to 20.4% in the first quarter, delivering a sequential margin improvement we discussed in our last earnings call.

Net income attributable to common stockholders for the second quarter 2008 was $2.2 million or $0.07 per fully diluted share. Marketing services, which includes advertising and indirect marketing service business of Promotions.com totaled $9.4 million in the quarter, an increase of 71% over marketing services revenue of $5.5 million recorded for the same period last year.

We delivered advertising revenue totaling $6.4 million, an increase of 16% over the $5.5 million in the prior year. This performance was driven by strong growth in revenue from our nonfinancial advertisers which increased by 34% over the second quarter of last year representing 45% of total advertising revenue, up from 39% in the second quarter 2007.

TheStreet.com had 109 advertisers in the quarter, a year-over-year increase of 17% and a 5% sequential increase. That number includes a record 35 new advertisers, 19 of which were nonfinancial.

Reflecting the ongoing diversification of our advertising base and the shift to nonfinancial advertisers, our percentage of revenue from the top five advertisers decreased to 23%, down from 30% in Q2 2007 and 29% in the prior quarter. Two of our top five advertisers in the quarter were nonfinancial.

The performance of our advertising business and our expectations for the future are built upon a foundation of continued strong growth in our audience across our network. We had a record 7.2 million average monthly unique visitors in the second quarter, an increase of 33% over the prior year. We delivered 206 million page views in the second quarter.

Comparisons to prior years and even to the first quarter are not apples to apples because of the launch of the redesigned TheStreet.com in February of this year. Average monthly page views increased by 8.7% sequentially when comparing the second quarter with the first quarter page views subsequent to that launch.

More importantly, the monetization of those page views reached an all-time high as we delivered a record RPM in the second quarter of $31, an increase of 73% over the prior year. We will continue to focus our efforts on creating the proper balance between page views and monetization to continue to maximize the revenue opportunities on our web properties.

As Tom mentioned earlier, we were extremely pleased with the performance of Promotions.com in the second quarter. Interactive marketing services revenue for Promotions.com totaled $3 million, a sequential increase of 36%. In the current macroeconomic environment, the interactive capabilities that Promotions brings to our advertising offerings has been an important differentiator in an increasingly competitive advertising market. We continue to believe that the future of the high margin, high CPM online advertising business will be increasingly focused on these type of interactive campaigns that are tied in with contextually relevant content. While the increasing proliferation of vertical ad networks changes banner and display advertising to single-digit CPM's, we believe that high-quality content with custom interactive advertising campaigns from Promotions.com will be the key to competing at the high end of the online advertising marketplace.

Turning to paid services, which includes subscription, syndication, licensing and information services revenue, total paid services revenue was $10.3 million in the quarter, an increase of 9% over the second quarter of 2007.

Subscription revenue, excluding the impact of subscription revenue from TheStreet.com ratings print directory business which we outsourced in the second quarter of last year was $7.6 million, down 5% from the $8 million we delivered in the second quarter of last year. Subscription bookings for the TSC subscription business in the second quarter totaled $7.7 million, a decrease of 7% from the $8.2 million we booked in the second quarter of last year, and the number of subscribers decreased by 7% to approximately 80,400.

We had total deferred revenue of $17.2 million at the end of the quarter. Deferred revenue specifically related to TheStreet.com subscription products decreased 4% to $12.6 million from $13.2 million at the end of the second quarter last year.

As we've discussed on previous calls, when the market enters a prolonged downturn the acquisition of new subscribers becomes challenging as investors turned their attention away from a market that they believe is too difficult to invest.

As Tom mentioned previously, to counter the trends in the subscription business in this market we launched two new subscription products, Nails on the Numbers and Insider Insights in the second quarter. We expect to launch three additional new services by the end of the year.

Syndication, licensing and information services revenue, which includes revenues from the Rate Watch business acquired in Q4 of 2007, totaled $2.7 million for the current quarter an increase of 217% over the same period last year. Excluding the impact of the revenue from Rate Watch, which was acquired in November 2007, syndication and licensing revenue was $1 million, an increase of 18% over the prior year.

We continued to make progress with respect to the diversification of our revenue. Marketing services and paid services revenue in the second quarter of 2008 accounted for 48% and 52% respectively of total revenue, compared to 37% and 63% respectively in the second quarter of 2007.

Turning to our margins we said in our Q1 call that we would deliver sequential margin expansion on an adjusted basis throughout 2008 and excluding the impact of non-cash compensation we delivered on that objective in Q2. Our adjusted EBITDA margin was 23.2% as compared to 20.4% in the first quarter. Our net margin decreased from 23.8% in the second quarter of 2007 to 11.7% in 2008. Three line items in particular on our P&L had an impact on our net margin that I want to highlight.

Depreciation and amortization expense increased approximately $1.2 million from approximately $400,000 in the second quarter of 2007 to $1.6 million in the second quarter of 2008. There are two principal reasons for this increase. First, we recorded approximately $550,000 of amortization expense in the second quarter of 2008 related to the acquisition of Promotions.com and Bankers Financial Products Corp., both of which we acquired in the second half of 2007.

Additionally, depreciation expense now reflects the expense associated with the relaunch of TheStreet.com and the launch of MainStreet.com in the first quarter, both of which were significant internal capital development efforts in 2007. Now that we have past this period of significant investment we expect future growth from these investments to drive margin expansion.

Second, non-cash compensation expense increased by approximately $450,000 from $500,000 in the second quarter of 2007 to $950,000 in the second quarter of 2008. This increase in expense reflects options and issue grants made to executives and key employees throughout the firm to ensure our compensation plans remain competitive within the industry.

Finally, interest income declined by 34% year over year as a we moved our cash balances into government-backed securities with a focus towards asset protection rather than maximizing yields. Our average yield on our cash in the second quarter was 1.9% as compared to 5.2% in the second quarter of last year. To illustrate, if a comparable yield in the second quarter of 2008 had been available with a satisfactory risk profile, we would have generated additional interest income of approximately $670,000 which translates to $0.02 per diluted share.

We expect to continue with this investment approach for the foreseeable future until such time that we feel comfortable in moving back into assets that will generate a higher yield.

With respect to our cash balances, we generated $1 million in free cash flow in the quarter as compared to $2.3 million in free cash flow generated in the second quarter of 2007. Free cash flow was impacted by the growth of marketing services and the resulting shift in overall revenue mix, as well as by the decline in subscription bookings that we discussed earlier.

We had $81.1 million in cash, restricted cash and cash equivalents at the end of the quarter and no bank debt. We continue to carry significant tax net operating losses which totaled an estimated $128 million at the end of 2007. The tax expense we report each quarter reflects minimum tax rates as the NOLs continue to shelter our net income from taxation.

Finally, this quarter the company continued its third year of quarterly dividends of $0.025 cents per share.

With that we will open the call up to your questions.

Question-and-Answer Session

Operator

Your first question comes from Richard Fetyko - MCF & Company.

Richard Fetyko - MCF & Company

Curious on the ad sales portion, which was pretty solid year over year and sequentially up as well. We've seen a lot of evidence from other peers that the display advertising demand has deteriorated yet your numbers were pretty solid.

I'm curious what you guys are doing, how you are bucking the trend, what you are seeing from your advertisers in the nonfinancial category or the financial category? What allows you to post pretty solid ad sales numbers in the second quarter? What do you see for the rest of the year?

Thomas Clarke

Richard, I think what we said earlier in the quarter that we had not seen some of the weakness in some of the categories that the others had seen. I think it is the function of a couple of things. Number one, I do believe as I said in my prepared remarks that the diversification that we have really created around the category or certainly around the category of money is very important when advertisers are looking at it because we continue to find, especially the nonfinancial advertisers that really want to go against the demos of the kind of people that come to our site.

If you look at some of the attributes we have, we have some of the highest demos on the web in terms of income, education, people who buy online and things like that. That audience really wants to reach those people and we are very fortunate that our content attracts that kind of audience. I think that is one of the things we've seen.

I also want to give kudos to our advertising sales team. I think we have a sales team that is very focused on what they are doing and who present a great value proposition and the campaigns are working. I think as Eric said, the differentiator in some of these campaigns is the ability of Promotions to create an interactive element in it.

Having said that, as we look out into the third quarter, we still think that the nonfinancial category will be strong for us. We haven't seen any weakness. I think we're early into the quarter so it is hard to say how it is going to tail out. I think the fourth quarter will be a strong quarter. I think it is setting up strongly that way.

I think there is one overriding trend and you have heard me say this before, but I think print is in secular decline. I think now when you look at that even more so we saw announcements yesterday where people are closing some of the print publications. I think more and more the advertisers are still going to continue to migrate in and while we have not seen this tremendous shift in terms of budget, a couple of percentage points shift to the online world from the print world is going to be a significant increase for us.

I think we are positioning ourselves really strongly towards the end of year, beginning of next year. I think the third quarter will play itself out, depending on how the macro conditions really operate.

Richard Fetyko - MCF & Company

As a follow-up to that, a high-level discussion, do you get any sense that the advertiser budgets, that there is some sort of a backlog forming for the second half of this year, the fourth quarter, in particular? I have heard that the budgets haven't been really canceled or cut but really some of the advertisers are waiting out for slightly better economic backdrop for their advertising dollars or campaign.

Thomas Clarke

I think that is certainly we have not seen a lot of it, but we are seeing people who are certainly geared up for the fourth. I think it is more of a reallocation of the advertising budget than anything else. I think they are all looking at where they are getting the return on their investments and I think more and more of it they are seeing that the online world is providing that.

I think more than anything you will see a reallocation; it may come to pass in the fourth quarter but I think it is gearing itself up for the fourth quarter to be a strong quarter for everybody in the sector. There has been a lot of reallocation already so I think you'll see that.

Richard Fetyko - MCF & Company

A quick one for Eric, how many ad sales people do you have and do you expect margin expansion on a sequential basis for the rest of this year?

Eric Ashman

I think we closed the quarter out, the first quarter was somewhere in the 18 to 20 range. We've added a couple of salespeople in the quarter. We continue to do that opportunistically. We talked in the first quarter about opening up some new markets. And again, we continue to look for people opportunistically to add to the ad sales team to execute off in the back half of the year.

We do expect to do sequential margin expansion. That was our goal during the year and we expect to continue to do specifically as it relates to our adjusted EBITDA.

On the sales front as well, I think we mentioned this in the first quarter call, we also added salespeople to the Promotions business and I think we're starting to feel the impact of that decision as well.

Operator

Your next question comes from Colin Gillis – Canaccord.

Colin Gillis - Canaccord

Can you give us some color about campaign durations? Are we still seeing a tightening of campaign durations and are advertisers coming in and buying an adjusted time format?

Thomas Clarke

I can't tell you that we've seen it in either case. The length of the agreement, we had 35 new advertisers in the quarter and 17 were nonfinancial, some of those have come in because again, this is probably more related to Main Street and the fact that the personal finance focus is opening up a whole new world for us of advertisers that want to be in that content set.

In that case, we've seen campaigns that are shorter in duration as they are doing more testing as the site finds its own niche. But overall on TheStreet.com site I can’t tell you that we have seen a shortening of campaigns nor in the sheer size of it.

Colin Gillis - Canaccord

Just getting back to the site redesigns, are you also seeing a secular shift away from banner advertising compounding a weak display marketplace? That is, people not only having tighter budgets, but looking for more interaction?

Thomas Clarke

Yes, I think that is absolutely a trend that we've seen; we’ve seen it start already and I think we will continue to see that over the next few quarters

Colin Gillis - Canaccord

Are you seeing any increased competition or price pressure coming from Yahoo! as they struggle to hit their targets?

Thomas Clarke

We have not. But again, and this goes back more historically than not, at times -- and you know this because you have followed us for a while -- when they have had trouble in certain advertising segments like financial or auto we haven't seen the same kind of process.

I think it is because our audience is a little bit different that we may not follow the same trends as them. But we haven't seen anything where their pricing is really affecting what we do.

Colin Gillis - Canaccord

In terms of the cash on the balance sheet, what gets the deal engine fired up at a faster pace?

Thomas Clarke

Valuation. Right now, I think you can look at – look, we are part of it. I think you can make an argument that the public valuation is actually cheaper than the private valuation now and it is tending to lag a little bit.

We have things in our pipeline but haven't pulled the trigger on anything at this point because of some valuation concerns. But I have no doubt that we will find the right couple of properties to put into the network.

Operator

Your next question comes from Mark May – Needham.

Mark May – Needham

On the ad business, I am trying to get a handle on seasonality. When I look back a year ago, and it is probably not a good benchmark to look at because Q3 I think was unusual. I'm wondering what we should expect in terms of advertising seasonality for the second half of the year? Especially as I'm looking at last year and how it has trended, would I expect it to be down sequentially or down as much as it was a year ago?

Thomas Clarke

I think that the third quarter of last year was unusual. We had tremendous volatility in the market. So you had a lot of things that were happening that drove a lot of traffic pages and stuff like that and pushed the number up a little bit.

When we look at what we did last year, and where the business is trending this year we think we should do okay. I wouldn't say that we have blow-out scenarios, but I think it is trending to that, and again we're very early in the quarter. So you have the seasonal weakness in the third quarter anyhow, it is typically one of the weakest quarters of the year, but it is also leading into what I think is going to be a good fourth quarter for some of the reasons we talked about earlier on the call.

I think we are going to be in okay shape.

Mark May – Needham

I wanted to ask you about some of the costs. The video initiatives that you referred to in the prepared remarks, as well as another one that comes to mind is the relaunch if you will of Banking My Way in the second half and maybe some advertising promotion you do around that. Is this something that could cause uptick in costs that are visible? Are we going to see visible cost upticks because of those and maybe some other initiatives that you have?

Eric Ashman

No, it is not our expectation that you will see an uptick in costs. We already do things like online marketing related to current promotions, and it is very easy for us to shift that where the greatest opportunity is. So certainly around the launch or relaunch of the property that would not cause an issue for us.

Even on things like the video initiative that Tom was talking about, that is where we get our leverage and our scale. The fact is that we already have the people, the production facilities and the content generation here, so it doesn't cost us a lot incrementally to create new formats and take it to a different distribution vehicle.

The original discussion we had on the Q1 call still stands in that we are expecting to drive that adjusted EBITDA margin expansion throughout the rest of the year and certainly part of that is keeping costs in line with where we are now.

Thomas Clarke

Mark, just to expand upon that one minute, I think there is another point. I concur with what Eric said about the costs. Again, if you think about where our strength is and our strength is in the original content production so to the extent that we have all this content that right now we are doing, whether it is short form video, the idea of just expanding that into longer form video really doesn't carry with it additional costs other than talent spending more time maybe getting the length of video out there.

But for us it is a tremendous opportunity because we continue to talk with people certainly on the cable side that have an interest in financial content and are looking for someone to produce it. We're looking for avenues to get it out there. It is a natural segue to think that if you look at the view of consumption habits, because on the web right now people are watching these long form programs we can overweigh you and think you would naturally have to go and do it all on the web and I think that will be an advantage for us.

Mark May – Needham

In terms of video, and maybe this is just when I have visited the site and it is my own personal experience, but I've noticed that on the autostart video on the front page it seems like there are fewer videos now. Is that true? If so why have you decided to do that? Maybe that's not true.

Thomas Clarke

I would say that it's been pretty consistent. It's really not true. I mean the thing we did do is on the home page we have a video that could be autostarted. What you don't get is the sound during business hours, for obvious consumption habits, and after business hours the sound comes. I can tell you that that move alone has really helped with broadening our video consumption. Video still remains one of the fastest-growing areas of the site. We will incorporate those kinds of enhancements onto Main Street and doing the same thing there.

I think it is really getting where it has to be. I would say that we are producing actually more video than not. We may be limiting some on the home page of what you see but in general we have the same number of videos produced that we had before.

Mark May – Needham

I recall during the quarter coming across some in-text ads through a deal with Vibrant but recently I haven't seen them on the site. Is that a new relationship, are you testing it? Can you explain a little bit about it?

Thomas Clarke

We continue to want to be opportunistic in testing a lot of these things so yes we did test some of those behaviors with Vibrant to see how it worked. We will continue to do that if we think the ROI is there then that will be something that we continue to do. If there are other things that work better then we will do that.

I think with the redesign of the site and one of the benefits of having done that is testing a lot of different things on the site is much easier in the current environment than it was in our past environment. So some of the things you will see now are not the things that -- we would have done them in the old way, we just were not able to do them in a fast enough fashion to really do the testing that is required.

So yes, we are testing and we will continue to do so.

Operator

Your next question comes from Sameet Sinha – JMP.

Sameet Sinha – JMP

Can you detail for us your plans for Banking My Way? If you can put timelines around when you expect various initiatives to really hit the site?

Eric Ashman

With respect to Banking My Way, one of the things that you will recall that happened in the second quarter is we made an investment in a company called Geezeo. Geezeo really gave us the opportunity, and Tom mentioned this in his earlier remarks, to think about how Main Street becomes a platform that incorporates not just the display advertising we had before but the lead-gen and hyperlink opportunities that were already built into the infrastructure of Geezeo.

So it did allow us to take a step back and instead of building something from scratch on Banking My Way actually think about how we could leverage all of these things, some of which came from the Geezeo investment across the entire network.

So our expectation is that between now and the end of the year you will see a hyperlink model, the lead-gen model, those pieces come into play. They will come into play on Banking My Way, but you will also see them come into play in upcoming changes to Main Street.

It is really an opportunity for us in the second half of the year to start pulling the pieces that we have all together into one platform that I think will really start to visibly demonstrate the strategy that we had in mind when started down this path.

So certainly by the end of the year you'll start to see these pieces come into play.

Sameet Sinha – JMP

A second question, just picking up from where Mark was talking about. So the third quarter, I expect you to possibly due to seasonality, that could be down. How do you expect margins to continue expanding in that scenario, are you expecting any sort of costs to go away?

Eric Ashman

First of all, we do not give guidance on the revenue side. We will talk about whether we think revenue is going to go sequentially up or down but certainly we have an expectation, as Tom said earlier, that we feel pretty good about how the ad business is playing out. Promotions had a good second quarter, we expect them to continue to build upon the pipeline of business that they are building there. You still have businesses like Rate Watch that are certainly performing well and in line with where we thought they would be. We have new products that just came online with the subscription business as well.

On the cost side of the things, we expect to keep them pretty much in line. So we expect to drive that margin expansion by leveraging the cost base against a stronger top line.

Sameet Sinha – JMP

A final question. There was a change of leadership at Main Street, does that signify any change in your strategy or quality improvement? Can you talk about that?

Thomas Clarke

I think the only thing to be read into it is we think the opportunity that we see with Main Street and certainly as we incorporate some of the other elements of either Geezeo or Banking My Way into it, we feel more bullish about it today than we ever did. The change in leadership was really a reflection that the person did a wonderful, wonderful job in getting us out of the box, but where we decided to take it and the interests of the person just were not aligned.

We just needed a different skill set for the different phases of the business and this happens with all businesses at different levels of growth. I continue to believe that Main Street will be a very, very powerful platform. I think that is what you are seeing, if you can relate this to the ad business and why our results are a little bit different than what you've already seen in the sector. It is because I think it opens up opportunities for us that didn't exist just with TheStreet.com content.

That is really the point. We love the concept of Main Street. We think it is really a place where you can put so many things in. So if you're looking for entertainment you can go to Main Street, if you're looking for personal finance you can go to Main Street, if you're looking for any other things as we build this out we think Main Street is going to be the platform for it.

Sameet Sinha – JMP

Can you talk about some of the traffic numbers on Main Street as you've seen growth?

Thomas Clarke

Traffic numbers continue to increase at Main Street. We don't break it out but if you look in our monthly unique set of 7.2 million. I can tell you that part of that is coming from Main Street and a lot of it is coming from the redesign of TheStreet.com. So the things that we thought happened, even though it was readily apparent in the first quarter, are certainly starting to take hold in the second quarter even as Eric talked about just the overall page views and things like that.

We just really, if you think about it, we made a bold move to go from just stock commentary to one stop for money. If you think about where the shifts are happening even in the marketplace today, we think that is a very important place because people are worried about housing and credit and all of those things that we think Main Street is going to be a home for all of that.

We positioned ourselves nicely for the way things are developing.

Operator

Your next question comes from William Morrison – ThinkEquity.

William Morrison - ThinkEquity

Eric, I just want to push a little bit. I know that you don't give formal guidance but my sense was earlier in the Q&A you guys were kind of indicating that 3Q will be down from 2Q but the 4Q would be much stronger. Then I get the sense that from your last comments that 3Q might be up from 2Q but 4Q would be stronger.

Just for modeling purposes so we get our models accurate on the trends, can you comment a little bit more and give us a little bit more clarity on the trends through the year?

Secondly on Promotions, should we expect that business will grow sequentially from here? In other words, do have enough of a base that you can grow off of the good performance in the quarter?

Eric Ashman

In terms of the trends in general, the general comment is that we continue to expect to drive margin expansion, particularly on the adjusted EBITDA line. There are certainly different ways to get there; we're always looking at the cost side of things. We think there are certainly revenue growth opportunities in Q3.

We are pleased with the performance of the business on a number of different levels in the second quarter and at this point we're still pushing ahead on all facets in terms of various like promotions. We think Promotions can be sequentially higher; it can be. Will it be? We will see how the quarter plays out. Ultimately we're still managing the top and bottom lines very aggressively. We are pushing across all channels.

So I come back to what is still currently our fundamental premise, which is the adjusted EBITDA margin will continue to expand sequentially throughout the year.

Ultimately in this environment we do the best we can as it relates to top and bottom line growth but we will manage the business accordingly to make sure that we deliver on that.

William Morrison - ThinkEquity

On the RPMs, where do you guys see that going? Not in terms of guidance but just longer term. It was obviously a great performance in the quarter, do you see a lot of room for growth in RPMs?

Can you comment about roughly how many ad units on average you have across your network?

Eric Ashman

In terms of RPMs, ultimately we think the RPMs number will continue to go up and we think part of what drives that belief are the new revenue models that we have still to come. We talked a bit about the lead-gen models that are coming online, the hyperlink models. We that ultimately that can drive the overall network RPMs higher. It is our expectation that number can go up.

In terms of the ad units, maybe if you ask the question more specifically just so I make sure I answer the right question. What do you mean when you're asking about different types of ad units?

William Morrison - ThinkEquity

What are the average ad units per page across the network?

Eric Ashman

It really varies Bill. Every page has two to three primary IAB ad units. From there, the custom ad units can really change the look and feel of the page and the way that we monetize it. So remember we have not just the IAB units, but you have video ad units that can run on a particular page around the IAB inventory and the custom is really what makes it different for us. The custom ad units for us, they are cheap for us not just in terms of driving the RPM but frankly just in terms of our ability to grow the business and take business from others. This gets back to the custom ad unit being something that can be quite variable. You can have multiple of those on a page, but a fixed page has two to three IAB standard units and then we build from there.

Operator

Your next question comes from George Grose - American Capital Partners.

George Grose - American Capital Partners

If I look at your revenues from financial advertisers it looks like in Q2 it was maybe down slightly from Q1 but it was up from Q2 of last year. Can you give us a sense, have we seen the bottom then in your financial advertising?

Eric Ashman

I've learned never to call a top or a bottom. I am not going to make a prediction as to where financial goes from here. I think what we are really happy about is now we have a business that is well balanced. We are getting great growth from non-financial and that is what is driving ultimately the 16% ad revenue growth in the quarter.

We still feel very good about the financial advertiser on our site. We are a core place for them to go and we can count on them as a regular level of spend. We still expect very good things from that side of the business but I think what you're really seeing in this quarter is the diversification of the business and how it reacts in an economy like this. We expect that to continue to play out.

George Grose - American Capital Partners

Are you seeing them spend the same in dollar terms, like your financial advertisers?

Eric Ashman

Yes, in terms of average contract size, average length, things like that, the answer is yes.

George Grose - American Capital Partners

But I guess there could be some room for upside there assuming the market starts to pickup then.

Eric Ashman

I think that is certainly true and I think in general the important thing here is not just the performance in this particular quarter, but the leverage that we continue to build in this business. So that as the economy strengthens and the ad market accelerates we're even better positioned to drive that right to the bottom line. So I think as a general comment that is true.

Going back to the ad business, remember that the top five we have lowered the concentration risk in the business. The top five is 223% of ad revenue and two of those top five are nonfinancial. So again, I think we're really achieving a great balance on that side of the business.

George Grose - American Capital Partners

On the interactive marketing it looks like it is back on track. With the site launches behind you, is the sequential uptick due to the fact that you returned back to focus on external business or were there some other factors involved?

Thomas Clarke

Well mostly like we said earlier, unburdened by the demands they can now get back to doing what they did. I think one of the big things that we are seeing is, again, I think I mentioned this on the first quarter most of their business had been a reactive type of sale. We have added a couple sales people in it to make it a proactive sale. The pipeline that they are building certainly towards ‘09 is very strong and I think more and more companies as they become aware of the services that a company like Promotions can provide, I think that will play out really nicely for us.

I think a lot of it was just what we did and even when we say, refocused they have always been focused. The fact of the matter is they were focused on some projects that we had with our aggressive schedule in the first quarter. We're very pleased with where they've gone and we are very pleased with where they are going.

George Grose - American Capital Partners

In your overall marketing services, how many people do you have in total?

Eric Ashman

It is a broader question because marketing services isn't just ad sales. It's Promotions and there are a number of other groups that fall in there as well.

George Grose - American Capital Partners

But it sounds like you have done some hiring there.

Eric Ashman

What we've done is put people into the proactive external sales effort. Not just on the ad sales side with respect to ads sales within in the business but as we mentioned, we put two sales people with external focus directly into Promotions. So on the Promotions side you have two people now who are selling that business externally and taking on the growth and the interactive opportunity that they didn’t have before.

Thomas Clarke

George, one of the things I think you should look at and maybe we don't make a big enough deal about this, but obviously when we bought Promotions there had been a lot of questions about what the synergy was going to be, where it was going, why did you do it and things like that.

I think if you think about some of the questions that have been answered on the call as it relates to display advertising and where the pressure has been in the marketplace, I think that Promotions is that kind of gem that is out there because it really expands for us the interactive nature. It is a differentiator in the marketplace today when people are looking for interactive programs and stuff like that. It is very, very unique.

If you think about what is going to happen, I think their share of going and looking at the overall online business is going to continue to go up and I think they're actually coming into a period of time where the services that they provide, whether it be for McDonald's in the Monopoly game or Kraft or any of the other places, even if you look at a YouTube today for companies that are looking to do promotions there, this is the type of company Promotions that can really assist all of those companies in any of those venues.

So it is not just within our world that it is going to be very positive. It will be outside of our world also, which had always been our intention.

We always wanted to have that differentiator for us for TheStreet.com network but again, that business can really operate on its own and move forward. A lot of these advertisers are not economically sensitive to what is going on. I mean, Kraft is going to advertise, McDonald's is going to advertise and so we are not insensitive that there has been a theme on the financial advertisers. We feel very good about not only doing that acquisition, but also about where that business will be in the next couple of years.

Operator

Your next question comes from Brian Murphy – Sidoti.

Brian Murphy – Sidoti

Tom, could you give us some color on how the longer video production format might impact advertising in terms of length of the ads, placement, pricing etc.?

Thomas Clarke

I think if you think about it, an advertiser wants to get an audience and get their message out there as long as possible. That is what they really want to do and the longer format will give them many, many more places to do that. So whether it is in the beginning of the show, whether it is sponsored by them, whether they put a product enhancement throughout the show, there is just an open ended format to the way we can go and approach this.

I think more importantly, when you think about this we know that there is demand from and we know there is demand from viewers for longer programs, and they are willing to watch it. There was a survey yesterday that said that the viewers are willing to look at ads in-format to get stuff for free and they don't see that as a problem.

I think that from the audiences that are important to us, which is the viewing audience and the advertising audience since these are all ad-supported initiatives, we just think it is going to be good and obviously will have a higher price tag.

We could give free with ads or paid without ads. It really doesn't matter. It depends on the content we have. I think there are a lot of business models we can go after here and what will happen is we will probably test them all to see which one really gets currency.

Brian Murphy – Sidoti

Just to follow-up on the sales force, are you seeing the productivity benefits you were hoping for in terms of these guys being able to sell additional or complementary inventory from your new properties, or is that still going to take some time to manifest?

Thomas Clarke

Look, we do have network sales now. I think it will improve over time. I don't want to leave an impression that it is a big part of what we do today. It is not but each quarter it subsequently gets bigger within the properties. So as someone asked earlier about the transition with Banking My Way, I think with Main Street and the direction we're going now incorporating some of the social aspects of Geezeo into those products. I think that Stockpickr in particular, all of those will continue to give us more opportunities for an advertiser to come in and be within our network. I think that is going to be critical for us.

Look, it is all driven by traffic. With 7.2 million average unique visitors we're getting into a size where scale is important and it has always been our mantra to continue to drive and get that number up as high as we can so we feel pretty good that we will attract the right advertising base.

I think that's why you see such strength with the non-financial advertisers.

Brian Murphy – Sidoti

What percentage of traffic is coming from natural search now? Are you getting any kind of bump from the site redesign?

Eric Ashman

We started to see a small increase in it. Our expectation was it would play out through the year. I think we talked about it historically as being under 5%, more in that 3.5% to 4% range. We have crossed that threshold for the network. So we closed in on 6% for the second quarter, which is still incredibly small as it relates to what we ultimately think we can get to, but it was certainly a milestone for us. Our expectation is that will continue to pick up through the rest of the year.

As you know, our expectation is that ultimately we should be in double digits whether it is 15% or 20% of traffic from natural search, but we think it will take a couple more quarters for that play out. But we certainly think that the site so far has delivered in terms of moving us in that direction.

Operator

Your next question comes from Richard Fetyko - MCF & Company.

Richard Fetyko - MCF & Company

With respect to your record traffic in the second quarter, does that really help you in the second quarter or in the following quarters as you establish a history of your traffic and you sell against that in the future quarters, particularly in the fourth quarter? With the higher rankings in the financial category perhaps from comScore that could help as well in the future quarters.

Thomas Clarke

It really helps us in future quarters. We are always selling historically, we would like everyone to believe what we say but we know that the advertisers actually want to see empirical evidence that it is. So it is really we're selling for the future.

The real benefit for us in putting up numbers like that is going to help in the latter part of the third quarter and certainly going into the fourth quarter, because it changes the dynamics. So some campaigns that were looking for large scale where maybe we could not have made the cut earlier on, now we have the opportunity to get there and be competitive in that landscape. It really helps us in the future.

Richard Fetyko - MCF & Company

On that topic, as well as the topic of M&A, there has been a lot of interest and buzz -- and maybe it is just buzz -- to establishing and launching vertical ad networks. I was wondering if that is something that you guys are doing, working on, looking into, using TheStreet.com network properties as the anchor and then build around distribution or more of an ad network around the long tail of personal finance content where you would be selling? Plus you have a very strong sales force, and you can certainly help some of the small publishers sell their network, sell their advertising inventory into the market.

Thomas Clarke

It is certainly something in the front of our thought process. If you look at the site now you'll see that we do it with Dividend.com, we have done it with Bankaholic. So we are doing it very selectively. I don't think any of us are comfortable with it right now in doing it en masse and taking on 200 or 300 of these things and not really understanding what the content is and stuff like that.

TheStreet.com has a very strong reputation in producing high-end content and we just want to make sure that the people we deal with that become part of our network certainly fit the same criteria. We think that is critical for us and advertisers.

We have a couple more in the works currently, but I will tell you, you are not going to see us add 20 or 30 in any one quarter, it is not a path we are on right now. That may change in the future. We have a lot of different initiatives that we're working on and I think once we understand where the ROI is on some of those things that is what we are focused on.

But we hear you, we agree with you. It will happen over time.

Operator

Your final question is a follow-up question from Colin Gillis.

Colin Gillis - Canaccord

I can't let a call go by without raising the Cramer issue. You extended his contract for a year. Any color you want to provide on that?

Thomas Clarke

For us it has always been a nonevent. We put it out there because people are constantly bringing it up and questioning us. I've said this many times, Jim is a partner to us in the firm. He is a founder of the firm, he is a large shareholder. People always ask the question.

He's not going anywhere. To the extent that just confirms for people and give them more of a comfort, we put it out there. It has no effect on us. We knew all along that was going to be the case.

Operator

At this time, there are no further questions. I would like to turn the call back over to management for closing remarks.

Thomas Clarke

Thanks, everybody for joining us today. What can you say about the environment? Our mantra is we will do the best in finding opportunities that we can monetize in the environment and we hope that the environment obviously gets better for all of us.

Thank you very much.

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