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Executives

Laura Cave – Corporate Communications Officer

David Liu – Chairman and Chief Executive Officer

Richard Szefc - Chief Financial Officer & Treasurer

Analysts

Jeetil Patel - Deutsche Bank Securities

Analyst for Barton Crockett – J.P. Morgan

Melinda Davies – Susquehanna

Meggan Friedman – William Blair & Company, L.L.C.

George Askew – Stifel Nicolaus & Company, Inc.

Richard Ingrassia – Roth Capital Partners, LLC

Brian Murphy – Sidoti & Co.

The Knot, Inc. (KNOT) Q2 2008 Earnings Call August 7, 2008 4:30 PM ET

Operator

Welcome to The Knot’s second quarter 2008 conference call. (Operator Instructions) At this time I would like to turn the conference over to Laura Cave.

Laura Cave

During the course of this conference call comments that we make regarding The Knot that are 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 to 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 upon which we based 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, our history of losses, significant fluctuations to which our quarterly revenues and operating results are subject, the seasonality of the wedding industry, the dependence of our registry services business on the continued use of the Wedding Channel website by our retail partners and other factors described in the documents that 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 www.TheKnot.com. We have allotted up to one hour for today’s conference call including the question-and-answer section that follows. Please take note that the company is operating under the SEC Regulation FD and encourages you to take full advantage of the Q&A section.

At this time I’d like to turn over the call to our Chief Executive Officer, David Liu.

David Liu

I’d like to take this opportunity to thank you all for joining today’s call and in a few minutes our CFO, Richard Szefc will take everyone through the second quarter results. Before he does I’d like to give you a brief status report on each of our businesses as well as an update on our progress with regards to the overhaul of our content management, local sales contract entry and art management systems.

During the second quarter online advertising grew about 8% over the second quarter of 2007. However factoring out a few short term national contracts on Wedding Channel last year as well as the legacy [Lope] Wedding Channel local lenders that we were actively phasing out over the course of last year, online advertising growth in the quarter was closer to 16%. While even this adjusted number is lower than we would have liked it is encouraging that our online advertising business continues to grow at a healthy clip in a time of economic uncertainty.

On the national advertising front I continue to be pleasantly surprised by the number of RFPs and meeting requests to which our sales and marketing teams continue to respond. Interest in targeting our highly qualified consumer audience has not diminished and our sales teams are aggressively pursuing bridal and [inaudible] categories. In fact we have a stronger marketing message in times of economic weakness as our audience represents a reliable high spend consumer that has become increasingly difficult for marketers to find.

Our studies show that the majority of brides are not pulling back on their wedding budgets nor are they putting off having a wedding because of weak economic conditions. However we are not immune to the uncertainty that surrounds the advertising industry and we have seen a few early cancellations of programs due to budget constraints. Therefore while we expect that advertisers will continue to recognize the value of reaching our highly targeted and uniquely qualified consumers if macro economic conditions worsen growth in our national advertising revenue would be at risk.

On the local side the second quarter of this year saw the completion of the renewals that included last year’s 30% rate hike. This past year we saw our attrition rate of local accounts jump from roughly 17% to just over 30%. While we have initiated programs designed to stem this slide I should point out to those of you who are not familiar with the dynamics that drive local media sales that even our lower retention rate today is the envy of many local media companies where 40% to 50% churn is more the norm. With that said during this past year time and attention of our account executives was diverted away from new vendor acquisition as a great deal of effort was required to explain and sell the renewals. With the anniversary of the rate hike behind us we are directing our local sales reps to focus again on new vendor growth. Meanwhile so long as the macro economic conditions do not interfere we expect our vendor attrition rate to decelerate between now and the end of the year.

Weddings are a recession proof business. However most of our local vendors have a significant portion of their business coming from non-bridal clients and events which are more heavily impacted by macro economic pressures and this may reduce the amount of marketing dollars available. Thus while there are several positive factors working in our favor we recognize that there is some amount of uncertainty about the online advertising portion of our business moving into the second half of this year. Publishing declined in the second quarter. A substantial portion of the year-over-year revenue variance in our publishing business was attributable to the shift and timing of the publication date of our Best of Weddings magazine from the second quarter last year to the first quarter of this year.

Our publishing business in general is experiencing a difficult cycle and it has entered a perfect storm. While our magazines represent a strong complement to our online marketing platforms and allows us to package true integrated cross platform working programs. We are seeing the convergence of three challenging factors which have impacted the first half of 2008. First, print advertising in our magazines represents the most expensive effective CPMs of our advertising inventory mix outside of our targeted emails and gateway ads.

Second, the print advertising industry as a whole is experiencing enormous pressure from more measurable advertising opportunities presented by the Internet. Finally, the macro economic conditions have had a negative impact on print advertising budgets as advertisers looking to trim budgets tend to cut commitments in independent magazine titles first. Given these trends we believe there will be continued weakness in publishing and we do not expect much improvement for the remainder of the year.

Registry revenue was a disappointment. While registry commissions are largely dependent on the health of the businesses of our retail partners and many are having a tough year we still should have been better prepared to market our multi-registry service as wedding season began. Most wedding gifts are purchased the week before or after the wedding so the peak season for this business starts in late April and runs through September. Several marketing programs designed to target wedding guests are still in development to be deployed in the third quarter which is later than we had planned. When launched these programs will focus on driving traffic to our multi-registry search application, personal wedding web pages and our charity programs.

In wedding supplies our 10% growth over second quarter 2007 was helped in part by the redesign of the Knot Shop home page which enables improved merchandising and promotions while also introducing the ability to search by color, style and price. We are continuing to reap the benefits of this new interface and will be implementing this design on the Wedding Channel Shop’s home page which is scheduled to launch in September.

On the technology side I’m pleased to report that we have completed the content management system conversion for our flagship website TheKnot.com. The entire site has been migrated over to the new publishing platform which allows a single editor to do in hours what used to take multiple people days to accomplish. This new publishing platform will save hundreds of man hours and will allow us to rapidly launch new sites and respond to consumer feedback. Subtle new features like the dynamic navigation has already contributed to a 9% increase in page use per visit and we are on track to finish the conversion of the WeddingChannel.com site before the end of the year.

Our progress for the development of a new contract entry system for local sales is on track and we anticipate having this new platform deployed towards sales force in the beginning of the fourth quarter of 2008 with the new art management system launching later that quarter. We recently rebranded The Nest Baby as The Bump and we have trained and deployed our sales force to sell local profiles in The Bump local city guides. Our goal is to launch the publication in five additional markets in the coming months for a total of 14 markets.

Moving forward our focus for the remainder of the year will be on marketing the value of our audiences to the national and local advertising communities and finishing the technology projects currently in development. We are on schedule and confident that we will meet our timetable. At that point in time we will intend to shift our investments or at least from investment mode back to growth mode. We are already gearing up with our marketing team on short and long term strategies for all categories of our business. Of course this is not going to happen overnight but with the investments we’ve made we believe we are much better positioned to capitalize on our dominant market position. Despite tough macro economic conditions and increased noise from our competition we continue t generate over 73% of all bridal immediate page views according to comScore and attract a vast majority of engaged couples with zero acquisition costs.

We are in the middle of a difficult transitional period. Growth has slowed, we believe temporarily. We have made and continue to make significant investments in our systems and operations which has hurt our margins and reduced our profitability, and all of this is happening during a time where great uncertainty looms over all of us due to the macro economic environment. Yet there has never been a time where I felt more confident and excited about the prospects of what we are building. These are certainly challenging times but these challenges do not compare to the obstacles we’ve overcome in the past 12 years.

Now many of you already know this but I feel compelled to reiterate some basic points. The core principles of our business are unique, extremely difficult to replicate and remain solid. We continue to attract the majority of engaged couples planning a wedding in the United States every year with absolutely no customer acquisition costs, we do not traffic arbitrage, our members are not accidental visitors, they are extraordinarily passionate about our brands and each other. They come back frequently and stay a long time when they’re on our sites. While it has been historically difficult to monetize sites that have such a social dimension without enormous scale we are an anomaly because we offer precision to our marketing partners. These couples will spend over $70 billion on their weddings and they depend on us for guidance to inform their purchase decisions and they will spend a multiple in their first year of marriage merging finances, buying cars, buying insurance, buying homes and furnishing those homes.

Advertisers have been slow to transition their brand marketing online but the secular trends are in our favor and we are patient. They’ve also been slow to embrace life stage marketing as opposed to traditional demographics and here, too, we are patient because the trends are in our favor and as we see more advertisers recognizing our ability to target purchase intention availing themselves to our highly targeted marketing opportunities. But I should caution you not to mistake our patience of inertia or inactivity. We are furiously building the products, service and platforms that will allow us to scale our growth as the industry shifts in our direction and advertisers are compelled to allocate more significant portions of their marketing budgets to us.

While our efforts to invest in the business have come at a time where our growth has decelerated we are committed to this now because we believe we have only scratched the surface of the opportunity. We envision a day when the majority of these local vendors in the bridal and prenatal industries will have a presence on our network of sites that they view as the never center for all their marketing efforts. We envision a day when national advertisers will not just run banners with us but engage in a conversation with our audience that will educate them about their products or service. And we envision a day when the effectiveness of marketing and advertising will not be measured by the number of clicks but by the level of engagement and education it activates and what we’re building today will enable that future.

None of this will be possible without really great people and I have an extraordinary management team and across our editorial, design, technology and sales staff we have the most talented individuals in the industry on staff. We have definitely had a tough quarter and challenges remain but I can say the future has never looked brighter.

I will now turn the call over to Rich Szefc who will review the details of our second quarter.

Richard Szefc

For the second quarter of 2008 we reported net revenues of $28.7 million which represented only a small increase over second quarter revenues of $28.5 million a year earlier. The second quarter of 2007 included over $600,000 of revenue from certain acquired Wedding Channel local accounts which were eliminated over the course of 2007 substantially in the second half of that year. In addition we published our Best of Weddings magazine in April of last year which contributed over $800,000 in revenue to the second quarter in 2007. We published this book in March of this year. Excluding the impact of these two items revenue growth for the second quarter of 2008 was 6% over the 2007 period. For the six months of 2008 total revenues grew to $52.5 million from $49.5 million a year ago or a similar gain of 6%. Adjusting for revenue contributed by the Wedding Channel legacy accounts in 2007, revenue growth for the six months was 9%.

Net income for the second quarter of 2007 was $2.3 million or $0.07 per basic and diluted share as compared to net income of $4.8 million or $0.15 per basic and diluted share in the second quarter of last year. For the six months of 2008 net income was $2.9 million or $0.09 per basic and diluted share as compared to $6.4 million or $0.21 per basic and $0.19 per diluted share in the corresponding periods for 2007. Revenue from online advertising programs for both national clients and local vendors increased by 8% to $13.5 million in the second quarter of 2008. Total online advertising for the first six months of 2008 was $26.4 million a 13% increase over the prior year. Excluding the Wedding Channel local legacy accounts revenue grew by 13% and 19% for the quarter and six months respectively. Local online advertising increased to $8 million in the second quarter of 2008 from $7.6 million last year. Again excluding the Wedding Channel contracts local revenue grew 15% driven primarily by price increases.

Our local vendor base decreased to 14,000 as of June 30th, 2008 as we completed the renewal cycle for vendors first being charged with the 30% price increase initiated in June of last year. The vendor count represents a decrease of a little over 1,000 vendors from June of 2007 or 7%. The focus of our local sales force has shifted heavily to new account acquisition which will be of increasing importance in driving revenue growth over the last half of the year as the impact of the 2007 price increase continues to diminish. Currently we are not planning further price increases in 2008. For the first six months of 2008 local online advertising revenue was $16.3 million which after the legacy accounts represented a 19% gain over 2007.

With respect to national accounts, online advertising grew to $5.4 million or by 11% compared to the second quarter in 2007 and represented quarterly sequential growth of $760,000 or 16% over the first quarter of this year. For the first six months of 2008 national online revenue was $10.1 million a gain of $1.7 million or 20% over the prior year. Merchandise revenue and the sale of wedding supplies at retail store members was $7.1 million in the second quarter of 08 a 10% increase over last year. Revenue through The Knot Shop grew approximately 22% on higher orders as we increased our conversion rate of our membership base to customers of the online store. As we noted on the last earnings call we had been focused on our merchandising strategies for our website stores and in the quarter launched a new home page for The Knot Shop with a new look and functionality. We intend to implement similar changes to the Wedding Channel store in September.

Revenue in the second quarter for the Wedding Channel store declined from the prior year and offset in part the gains achieved for The Knot Shop. For the first six months of 2008 merchandise revenue was $11.7 million a 5% increase over last year. Registry services revenue represents commissions earned from our retail partners and continue to remain relatively flat in the second quarter of 2008 totaling $3.3 million which as David indicated was a disappointment. The small increase in commission revenue earned through the Macy’s relationship was offset by small declines in revenue earned through other registry partners. For the six months ended June 30, 2008 registry services revenue was $5.1 million again comparable to the prior year revenue amount. Revenue earned through Macy’s was up 4%.

Publishing and other revenue for the second quarter of 2008 amounted to approximately $4.8 million representing a decrease of $1.3 million from the comparable period last year. As I noted earlier the decrease primarily resulted from the timing of publication of our annual Best of Weddings magazine featuring local vendors which was distributed in the first quarter of 2008 as compared to the second quarter in 2007 and which contributed over $800,000 in revenue last year. However we have also seen a weakening in print advertising pages sold in several local markets and local print revenue did decrease by roughly $200,000 or 4% in the second quarter of 2008 compared to 2007. For the first six months of 2008 publishing and other revenue was $9.3 million as compared to $10 million a year ago representing a 7% decrease. The decrease is due in part to a decline in designer ad pages sold in the February Knot Weddings magazine. In addition publishing and other revenue in the first six months of 2007 included revenues aggregating approximately $400,000 associated with a prior magazine publishing venture with the AmEx Travel & Leisure Group as well as special IT project revenue from retailers. Local print revenue was relatively flat for the first six months of 2008 compared to 2007 as a decline in revenue noted for the second quarter was offset by higher revenue contributed by magazines publishing in the first quarter of this year.

As indicated in our press release we have reduced our estimated percentage revenue growth for the full year 2008 from the mid-teens to a range of 9% to 11% or a drop in the range of roughly five percentage points. Approximately half of this full year difference is a result of the softness we have seen in print advertising which had some impact on our recent quarter. However the large majority of the expected print shortfall for the year relates to our August Knot Weddings magazine and our local magazines publishing in the last half of the year. The impact on the year-to-date comparisons to 2007 for the next six months will be offset though to a large extent by revenue from the newly acquired Bump guides. Roughly $1 million of the anticipated full year shortfall relates to registry commissions which as a result of a weak May and June for the Wedding Channel retailers and the timing of a launch of new business have remained relatively flat for the first six months of 2008 when compared to the prior year. The remaining variance relates to online advertising specifically local where we are taking a more conservative view with respect to vendor growth over the last half of the year.

With respect to margins our overall gross profit percentage remained at approximately 80% for each of the three and six months ended June 2008 and 2007. A slightly higher mix of online advertising and registry commission revenue generally offset lower publishing margins for the national and local magazines primarily driven by the lower revenue. Our total operating expenses before depreciation and amortization for the recent quarter were $17.9 million or approximately 62% of net revenues and represented a sequential quarterly increase of a little over $500,000 or 3%. We typically maintain a conservative forecast for operating expenses. In addition as we began to see revenue growth reduce in May and June we immediately began to slow the pace of spending in targeted areas in some cases representing permanent reductions for the year and in other cases timing items as we moved certain of the expenditures to the second half of 2008.

None of these savings have impacted or are expected to impact our progress to date on the completion of key systems infrastructure projects in the current year. The savings in product and content roughly in the $600,000 to $700,000 have come from the elimination of certain discretionary spending in our budget for other special projects, the timing and replacement for staff vacancies in IT and editorial and additional amounts of internal salary costs for software development that are being capitalized rather than expensed.

On the sales and marketing side where we had savings in the $800,000 to $900,000 range we have reduced certain of our overall planned marketing spending as we develop specific programs and continue to experiment to determine the most cost effective programs to further expand our brand recognition among the advertising trade national and local as well as to drive registry activity, improve conversion of more of our members to customers of our Wedding Shops. However certain of the reduction in spending for the second quarter is a result of timing and we expect marketing expenses to increase over the last half of 2008. One comment regarding general and administrative expenses, in May the class action suit against Macy’s, Wedding Channel and The Knot was dismissed. Prior to the dismissal we incurred approximately $365,000 in legal fees for the second quarter in connection with this action. These costs will obviously be eliminated going forward.

For the last half of the year we currently expect operating expenses before depreciation and amortization to increase to approximately $19 million in each of the third and fourth quarters as e replace staff or begin to invest further in marketing programs including promotional efforts for our newly acquired Bump media guides which will be published in the second half of this year. As we noted in the press release stock-based compensation was $1.1 million in the recent quarter compared to $577,000 in 2007 and was $1.9 million and $1.1 million for the six months ended June 30, 2008 and 2007 respectively. We currently estimate the stock-based compensation will range from $3.6 million to $3.8 million for all of 2008.

With respect to the provision for taxes our estimated effective tax rate for 2008 is now forecasted as approximately 39% reflecting a decrease from the first quarter of this year of two percentage points due to the increasing impact of tax exempt interest income from our auction rate securities. Cash generated through operations for the second quarter of 2008 was approximately $7.7 million and amounted $13.7 million year-to-date. Capital expenditures for the first six months of 2008 were $3.6 million. We currently estimate that capital expenditures will range from $5.6 million to $5.8 million for all of 2008 due to investments in capitalized software development including internal development costs and storage hardware to support the systems initiatives currently underway.

We are also in the process of moving certain of our New York staff to a second location in the City as a result of current space constraints and are incurring some cap ex costs with respect to the new space. As of June 30, 2008 our cash and cash equivalents are approximately $62.4 million. Also as of June we continue to classify our investment in auction rate securities of $54 million as long term assets and we recorded a temporary impairment charge of $3.1 million in stockholders’ equity with respect to these securities. This represents an additional charge of $1.3 million in the current quarter due to changes in the estimated coupon rate for these securities and an updated current cost of capital for similar new bond issuances used in updating our valuation model. These auction rate securities still consist of tax exempt triple A rated variable rate debt securities. The default reset interest rate from these securities currently range from a short term debt index plus 150 to 200 basis points.

The securities are collateralized by student loans of approximately 80% of such collateral in the aggregate guaranteed by the United States government. In June 2008 $5 million of these securities were redeemed at PAR, however we are currently unable to determine whether other issuers of our remaining portfolio of auction rate securities will attempt or be able to redeem securities. We currently have the intent and ability to hold the securities until a recovery in market value occurs. However if the issuers 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 if there are further reductions in fair value. We do not currently anticipate that any potential lack of the liquidity in these auction rate securities will affect our ability to execute our current business plan and that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future.

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

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

Can you just give a sense of attrition rate going from 17% to 30% on the local side? Can you give us a basis of when you were at 17% and how has the attrition trended so far in terms of the month of July? Is it getting better, getting worse? Second, if you look at the rough range of growth for the year of $9 million to $11 million now it basically assumes call it a 20% to 25% increase in the back half or maybe mid teens. Curious how much is the acquisition expected to incrementally contribute on a quarterly basis?

Richard Szefc

On the attrition for the local vendors we started to see that pick up as we got into the 30% price increase that we instituted in June of last year so over the course of the last half of 2007 the rate moved up to the little over 30%. It basically stayed there rather consistently through the end of June. So far in terms of July the attrition rate is still about the same although we have seen a lower amount of let’s say cancellations that’ll take place in August that’s in the Q right now so that’s at the least the first indication that we may see a little bit of lightening in the cancellation rate there but we are going to remain a little conservative in terms of our anticipation on that.

David Liu

If the 17% attrition rate had been pretty steady going into this last rate hike and despite the fact that in the prior years we had a 10% weighted average 20% rate hike the prior years we’ve always seen about 15% to 17% prior to this past year.

Richard Szefc

On the acquisition side for the Bump media guide we’re still looking at revenue approaching $1 million over the last half of the year, the majority of it in the fourth quarter.

Jeetil Patel - Deutsche Bank Securities

In terms of your investments that you’re making in the business is your plan to basically get a lot of these initiatives done by the end of this year, technology and marketing, to try to position for 09 or do you think this is going to be more like a 12 to 18 month investment process in terms of technology still getting finished up on the marketing front in particular?

David Liu

We’re going to be continuously developing but there is certainly a push to get a number of things accomplished. The seasonality of our business while weddings do occur mostly in the second and third quarters and then it’ll drive business for the registry and Wedding Shop the traffic patterns really surge in the first quarter. If you look at things we do for our site or functionality or things we’re trying to accomplish, if we don’t get it launched by the end of the year it knocks out of the box a few months. So there is certainly an urgency and push to accomplish and complete a number of projects before the end of the year in time for the 09 planning rush.

Operator

Your next question comes from Analyst for Barton Crockett – J.P. Morgan.

Analysts for Barton Crockett – J.P. Morgan

First, with regard to the revenue guidance which seems to imply 14% revenue growth or so over the back half, I was just wondering if you could give us some color about how we should think about that in terms of the segmental breakdown? In other words is the majority of the revenue growth coming from the online segment and should we continue to expect publishing to go down at 10% or so pace? Also wondering on the expenses, I wasn’t quite clear what you said about the $19 million, whether the $19 million is excluding stock comp or what part is the $21.3 million which you mentioned in the press release? And then just one quick follow up.

Richard Szefc

In terms of the revenue growth over the last half of the year, if you go based on current trends that we have a large majority of the growth would be expected to come from the online advertising side of the business. The registry side of the business has been fairly flat. Estimates right now for purposes of our thinking is that trend would continue. Wedding supplies actually increased by 10% in the second quarter and if you’ve added the trend that would be a trend that we’re looking at in terms of where we are for the second half of the year. The publishing side of the business after backing out the one time items that we had in the first half in terms of some of our other revenue, publishing is down a little bit, about 7% and overall about 3% was the publications themselves. Again we’re probably looking at a fairly flat outlook for the balance of 2008. From the standpoint of the Bump media though, the Bump media would add close to $1 million in terms of the publishing and other revenue contribution for the last six months of the year. The balance of the increase basically would come through the online advertising program.

In terms of the operating expenses the $19 million for each period includes stock-based compensation. The amounts that we included in the press release which was the $19 million was operating expenses before deprecation and amortization. The amounts that were in the press release included depreciation and amortization which brought the totals up to about $21.3 million for each period. So depreciation and amortization is going to be about $2.2 million to $2.3 million for each of the upcoming quarters.

Analyst for Barton Crockett – J.P. Morgan

One follow up, any increase in competition that you’ve been seeing in recent months given the ramp up from Martha Stewart in terms of building out their wedding portal as well as increased activity from Conde Nast and just wondering if you might have the membership and traffic numbers for the second quarter handy with you?

David Liu

I think there’s certainly a lot more attention given to the online wedding space and a lot more people looking to grow their business there. We don’t necessarily feel the impact of their online competition, we are still trying to capture market share from the offline ad spend. In some respects it’s almost the reverse. We’re still trying to get a larger share of the ad spend by the advertisers which is still flowing to the more incumbent and traditional publishers. But from an online standpoint traffic wise and membership wise, we are still holding pretty steady. Membership in the first half of this year combined with The Knot and Wedding Channel has been pretty flat to last year, so no growth and no deterioration. We continue to capture close to 80% of the people who are planning a wedding in the country today as our members.

Operator

Your next question comes from Melinda Davies – Susquehanna.

Melinda Davies – Susquehanna

First, I was hoping you could comment further on the development of the new strategy that David was talking about I think a couple weeks ago. How is it playing out in terms of page views and traffic? How is it working in terms of advertiser interest? If you could just explain a little bit more there. Also why do you think or do you think that you’re seeing more of a challenge in this macro backdrop compared to the last recessionary period back in 2001? Is it more competition? Is it more the nature of this slowdown or are there other factors?

David Liu

The biggest accomplishment that we had in the second quarter to affect our new site developments is really the transition of The Knot onto this new content management system. That data that sits in the tables that support The Knot as a website can now be very easily subdivided and cross pollinated across a number of new sites. The new sites that we’ve launched today which include Chinese Weddings by The Knot, Beach Weddings by The Knot and most recently last week we launched Gay Weddings by The Knot in partnership with Gay.com are still actually operating off our old publishing system. One thing that we’re very excited about is the ability now to leverage a new technology platform that will really allow us to rapidly grow these new destinations.

In terms of page view contribution we haven’t seen a major increase as of yet but the strategy behind this is really to extend out what we consider is the evolving long tail of this industry and it does run a counter to what a lot of people are out there talking. People are trying to still drive traffic and attract folks. We are doing a little bit of the opposite where we’re sort of extending our presence out into a wider network of destinations which we think will have two very strong benefits. One, it’ll have a powerful SCO impact where with people who are looking for very specific information will find it more easily through the search engines. And the second is, it really will create some pretty high switching costs for our advertisers. When you think about, for example, a local vendor who currently is advertising on The Knot and Wedding Channel they view their advertisement and their investment as exposure and promotion on two sites. At some point in the not too distant future, we should be running hopefully hundreds of these sites and their media and their promotions will now be pollinated throughout this full network getting the benefit of key word searches in the volume and in the precision that they couldn’t possibly afford on their own.

We’re very excited that this opportunity to really turn the content that we’ve already created for the mother ship can be so re-purposed and become a viable strategy going forward. That’s giving you the update on the new site.

Melinda Davies – Susquehanna

I was trying to ask about the challenge that you’re seeing in this macro backdrop compared to 2001.

David Liu

There is a pretty significant difference between this recession and the other one. This one is much more consumer driven and we had talked about this a little bit at the year end earnings call where we said we noticed that there was actually a slight bump up of credit card default we had transitioned a lot of our local sales and advertisers onto credit card payments that would become essentially monthly charges or kind of a subscription ad model and we did see a slight increase where people with credit had become maxed out and had to come up with a different form of payment. This speaks to I think a different kind of impact that we’re seeing right now where our vendors are essentially consumers and they have most probably seen a depreciation of their housing value, they’ve seen their fuel costs go up, the materials for their own businesses has also gone up. So there is additional pressure that I think these guys are feeling that we didn’t see in the 2001 cycle. In the 2001 cycle we actually benefited because so many people suddenly saw the corporate businesses operating that they were willing to and eager to invest in driving more of the consumer side of the business.

It’s a bit of a mixed bag, we actually think we are better positioned and have a better marketing message going into the back half of the year but we are being very cautious about making sure we don’t set expectations that are unrealistic if things continue to erode.

Operator

Your next question comes from Meggan Friedman – William Blair & Company, L.L.C.

Meggan Friedman – William Blair & Company, L.L.C.

Can you talk a little bit about the phasing of revenue over the quarter particularly in online sponsorship and advertising and in the publishing segments? Did they get weaker as the quarter wore on?

Richard Szefc

In terms of the online advertising on the local side we saw more of a drop in the vendor count as we get into the end of May and end of June, so I would say local became a little weaker in the second part of that quarter. In terms of the publishing program most of the local print publications that we did in the quarter which created some of the decrease was actually publications that were done in May and June. Again the phasing in in the quarter wasn’t really a factor from the local publications, they are published in May and June basically.

Meggan Friedman – William Blair & Company, L.L.C.

You shared a little bit in terms of your thoughts on the growth for merchandising and registry in the back half, but how should we be thinking about that if the economy continues to slide?

Richard Szefc

I think we’ve seen some of the impact already certainly on the registry side of the business which is why we’re looking at flat revenue growth, flat revenue comparisons to 2007 like we saw for the second half of the year as we saw for the first half. In terms of the wedding supplies business actually we were flat in the first quarter but with some of the merchandising strategy changes we made and the change in the site and the functionality we actually saw pretty decent growth in term of the Wedding Shop in that second quarter. I think if we make the same kind of changes to the Wedding Channel site that we did to The Knot Shop and offset some of the decreases we’ve seen on the Wedding Channel site on the Wedding Channel Store it’s our current feeling that we can certainly weather any economic impact on our wedding supply sales over the last half of the year and keep that kind of trend going that we saw in the second quarter.

Meggan Friedman – William Blair & Company, L.L.C.

Can you share your updated thoughts on the expense structure once you’re past the ramp up of investment near time in 2009 and then longer term 2010 and beyond?

Richard Szefc

I think our goal has always been and what we said is that we intend to basically leverage off of the increased operating base going forward so that we are not expected to make significant additional investments in when we utilize the resources we’ve built up this year to be working on different projects, revenue generating projects as opposed to infrastructure projects and basically as I said leverage this operating expense base against future revenue growth and reduce the level of our expenses against revenue.

Operator

Your next question comes from George Askew – Stifel Nicolaus & Company, Inc.

George Askew – Stifel Nicolaus & Company, Inc.

First question is on the attrition topic and I just wanted to give you a change to address a little confusion I think, on my part at least. Wedding spending is holding up and weddings are not being postponed so I would think that your local vendors would still see that as a nice opportunity. Now that you say that they’re consumers themselves and they’re feeling pressure so perhaps they’re just pulling back on their marketing budgets but still trying to get weddings. But is there something else going on there, is there any kind of a conversion issue that’s impacting local vendors with The Knot or is it strictly the economy and price increases, etc.?

David Liu

I think certainly the price increase in conjunction with headwinds presented by the macro economic conditions have created an additional challenge for our local sales force. If you look at traffic patterns in our site nearly 100% of our members actually go into the local areas and it is one of the most popular areas and one of the areas that actually most of our members spend most of their time in looking for information. When we do the analysis of outbound traffic the largest area that drives traffic away from our site is actually people on the local listings going over to people’s websites. We can see from our vendor tracking reports and from the traffic that we are sending to our local vendors that it is not as a result of lack of promotions, leads or business that people are cancelling. It think there is a component of it that was driven by sticker shock. You have to look back about three or four years and look at the trend where we did raise rates 10%, 10%, weighted average 20% and then followed it with a 30% rate hike and so I think there were a number of people who probably cancelled because of that aggressive trend. We are working to win them back and have put in programs to do so because at the end of the day we do believe and we think that the results prove them out that we are the most effective place for them place their marketing dollars.

You also have to keep in mind though that we have given the price structure of our media, remained an incremental spend for a lot of these local vendors so they’re not replacing another bit of advertising they’re doing. They may be adding us to the Yellow Pages commitment, to the other local wedding magazines they’re buying, local market, the newspapers and our local sales force will handle over 1,000 wedding shows that has vendors set up booth space and they pay for that for a weekend. The challenge becomes making sure that when their budgets are tightening because they’re losing either corporate business or their cost structures are increasing that you don’t become the one that’s left off the list and that’s really the challenge that we’re faced with as I think the economy has begun to hit some of these local vendors.

George Askew – Stifel Nicolaus & Company, Inc.

You touched on this before but can you share with us some of opportunities and changes that are going to come from the new contract management system that’s coming out later in the year? For example, what kind of things have you tested perhaps some sort of bidding functionality for local vendors or other things? You mentioned populating multiple websites on each website, that seems one opportunity, but what are some other things?

David Liu

We’ve certainly talked about turning on an ability for vendors to sell service, have access to admin tools to see tracking data. Where we have inventory that has scarcity we will be putting in a more dynamic price engine that is option based that will allow people to name the price they want to occupy premium inventory on our site. We also think that there is an opportunity using the technology to scale the growth rate of the business which is what the original contract entry system allowed us to do when we had first acquired Wedding Pages we were able to transform a 3,000 vendor base publication driven system into something that approached 14,000 on an online side. With 80% of the brides and less than 2% of the vendors, this is an area where we think making the investment to provide a platform for that level of growth is a strong strategy.

Operator

Your next question comes from Richard Ingrassia – Roth Capital Partners, LLC.

Richard Ingrassia – Roth Capital Partners, LLC

David, obviously overall volumes are trending down on national ads, but are you also seeing downward pressure on rates, CPMs?

David Liu

It’s not so much pricing, our growth over the years has always been about getting a larger share of that marketing budget and getting advertisers who had either tested with us or run a short term to run longer terms or to invest more. There’s always price pressure, everyone’s always trying to negotiate you down but that’s not really been the weakness. We saw a couple of contracts cancel in advance and that brought back bad memories of the 2001 time period for me so it makes us a little cautious but national actually is an area that has to a certain degree defied gravity and has continued to make good inroads as we break these new industries in the new accounts. So I’m cautiously optimistic about what’s going on with national advertising.

Richard Ingrassia – Roth Capital Partners, LLC

A loaded question here I guess but I’ll ask it anyway, why not would it make sense for you to have a discussion about a broader reaching advertising partnership with a large more traditional media company, if you will?

David Liu

We’ve always said that that would be a potential opportunity. When we launched the net magazine we certainly looked for partners to work with us on that. It’s something that we’re certainly open to. Right now we’re monetizing our online inventory at just North of $30 CPMs, there’s not a lot of people who are able to do that as effectively. With some of these larger organizations you’ve got to make sure that there’s no conflict of interest, you’ve got to make sure they don’t try to use your online inventory as merchandising to support their traditional media. There’s certainly a lot of complications but it’s not something that we are against and certainly anything that can provide my sales force a little added zing to their ad sales pitch, I totally welcome.

Richard Ingrassia – Roth Capital Partners, LLC

Would you agree to have any opportunities that could cross sell in different media channels greater volume would be of benefit to you certainly in this environment?

David Liu

Yes, absolutely. I mentioned a little bit on the call that the first thing that gets lopped off of these ad budgets are the independent dangling ad programs and as an independent publisher or independent website you are vulnerable to those decisions because a lot of these advertisers are getting volume discounts through corporate buys and if they try to cut back a little bit on those buys they wind up harming the discounted rate that they have achieved on a larger buy. So being part of a larger buy in this climate is clearly advantageous.

Richard Ingrassia – Roth Capital Partners, LLC

Rich, on the last call you gave some sequential guidance for operating expense growth. Do you have similar guidance for Q3?

Richard Szefc

Actually it’s a little more pinpointed. I said that we would have the operating expenses before depreciation and amortization, this includes stock-based compensation would be around $19 million for each of the third and the fourth quarters.

Operator

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

Brian Murphy – Sidoti & Co.

I just wanted to follow up on your local ad business and your ad revenue assumptions for the back half of the year. With the price increase falling off what does that imply for the local vendor count in the back half of the year? Can you guys really pick up an incremental 2,000 or so net local vendors in this environment?

Richard Szefc

Obviously vendor count is going to be very important to growth going forward. Of course the impact of the price increase will diminish each quarter and I think we had an aggressive goal to add vendors and that kind of range and amount over the course of the last six months.

Operator

At this time there are no further questions.

Laura Cave

We’d like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the Investor Relations section of our website. If you missed any part of today’s call you can access the replay of the entire conference call in the Investor Relation section of the company’s website at www.TheKnot.com. A telephone replay is available for the next two weeks at 1-800-642-1687 reference number 57168714. If you have any additional questions please don’t hesitate to contact us at IR@TheKnot.com.

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