Move Q2 2006 Earnings Conference Call Transcript (MOVE)

| About: Move, Inc. (MOVE)
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Q2 2006 Earnings Conference Call

August 3, 2006 5:00 pm ET


W. Michael Long - Chief Executive Officer, Director

Lewis R. Belote - Chief Financial Officer

Mollie O’Brien - Investor Relations


Mark May - Needham & Company

Stewart Barry - Think Equity

Mark Argento - Craig-Hallum

Jeetil Patel - Deutsche Bank Securities

Aaron Kessler - Piper Jaffray


Good day, ladies and gentlemen, and welcome to the second quarter 2006 Move Inc. earnings conference call. My name is Alicia and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to introduce Miss Mollie O'Brien. Please proceed, madam.

Mollie O’Brien

Thank you, Operator. Good afternoon, and welcome to our call today. On the call today are: Mike Long, our Chief Executive Officer; and Lew Belote, our Chief Financial Officer.

Today's call is being webcast from the investor relations section of our website,, and will be available for replay short after we conclude. A copy of our press release issued earlier this afternoon is also available on our website.

Please be advised that some of the comments that will be made today constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act that involve potential risks and uncertainties concerning Move's expected financial performance, as well as Move's strategic and operational plans.

These potential risks and uncertainties include, among others, decreases or delays in advertising spending and market acceptance of new products and services. Additional factors are discussed in the company's annual and quarterly reports, which are filed with the SEC and available on our website.

All information discussed on this call is as of August 3, 2006, and Move undertakes no duty to update this information.

Results projected on the call today may differ materially from actual results and should not be considered as a guarantee of future performance.

On this call, we will also be discussing some non-GAAP financial measures in talking about the company's performance. Reconciliations of those measures to GAAP measures can be found in the table attached to our press release.

I will now turn the call over to Mike Long.

W. Michael Long

Thank you, Mollie, and welcome, everyone, to our second quarter conference call. During the second quarter, we implemented essential components of our new corporate strategy that have been in development for almost two years.

We launched our new corporate brand and our comprehensive real estate search site,, which represents the integration and inflection point for all of our future products and services.

We also began to aggressively roll out a suite of new products and services in and around The flexibility of the new architecture underlying allows us to accelerate the pace of innovation throughout our network and markedly improve the consumer user experience.

As we have shared with you on previous calls, we are protecting our websites and technology infrastructure, rebranding our company, radically improving our business model for home builders and rental managers, and relocating our data center from California to Phoenix, represents a huge, multi-year investment in our future. We remain on schedule to complete this process by the end of the year.

The relocation of our data center warrants special consideration, since it represents the engine room for our web services. While the benefits of significantly improved computing capacity, enhanced reliability, disaster protection, and a much-improved consumer experience are enormous, the one-time costs are large and the actual move itself requires a blackout period of approximately two months, during which no new products and services can be placed in production.

The development and quality assurance of new products, and the associated expense, is continuing at a high level, but the next wave of new products and services will not be visible to consumers and customers until the data center move is completed early in the fourth quarter.

I am pleased that, in spite of these investments and planned operational disruptions, we were again able to maintain our momentum in both revenue growth and EBITDA.

Overall revenue for the quarter was $73.9 million, an increase of 17% over the second quarter of last year.

Revenue growth was driven by strong results from, Top Producer, and our retail advertising businesses, offset by the anticipated short-term decline in our new homes and rentals businesses, which are converting to a new business model.

EBITDA for the quarter was $4.7 million, compared to EBITDA in the second quarter of 2005 of $2.9 million, which included a $4.2 million in legal expense for former officers.

Excluding stock-based compensation expense, our net income was $4.3 million, compared to net income of $3.3 million last year.

Our improved financial results over the past couple of years have enabled us to maintain, and in some cases accelerate, our investment programs without compromising our improving financial results.

In spite of the investments and major changes in our business model, we remain comfortable with our overall financial guidance for the full year of revenue growth greater than 15%, and modest improvement over 2005's adjusted EBITDA margin of 8.3%.

Our market opportunity is large, and our commitment is resolute for Move to become the world's largest moving community -- an essential service for consumers to find the right community, the right home, and complete a successful move.

We remain on track and committed to reaching our long-term financial targets of consistent revenue growth greater than 20%, with EBITDA margins of 20% or greater.

I would now like to touch on several of the highlights and challenges for the quarter, before asking Lew to walk you through our results in more detail.

First, we launched a brand new real estate search engine on The launch of, which includes exclusive access to’s new home and rental listings, has positioned us as the most comprehensive source of resale, new home and rental listings available anywhere on the Internet.

We are now three months into the launch of, and the introduction has gone largely as expected.

We have dramatically increased our real estate listing content, and recently added self-service posting capabilities, which should further expand our selection of new homes and rentals.

We are also pleased with the consumer behavior on the new site, especially the increase in repeat visits. This speaks to our success in enhancing the consumer experience associated with providing substantially more listing content.

Traffic to the Move network of sites continues strong, allowing us to remain the clear leader within the real estate category.

During the quarter, we reached an all-time high number of customers. We continue to view a slowing real estate market as a potential catalyst for our business. The early indications suggest our thesis may be correct. generated more new individual agent customers than in any of the last 10 quarters. We are also experiencing acceleration in the number of brokers purchasing our company showcase solution, which enables brokers to purchase enhancements in advertising for all of their agents.

Through the first six months of 2006, we added more than 140 company showcase customers. This product now represents more than 100,000 agents.

We also launched Featured CMA on In May, we launched Featured CMA -- a Comparative Market Analysis solution -- which allows realtors to provide consumers with recent sale comparables and home valuation advice. This solution enables us to better leverage our traffic in addressing consumer questions and concerns about their largest asset -- their home -- by connecting them with real estate professionals.

This product, which is sold on a subscription basis, received a positive reaction from customers and we expect it to contribute to's revenue growth this year.

In July, we formally launched our new Welcome Wagon website, which features an innovative local business directory. The local business directory is the combination of a merchant directory with dynamic mapping and keyword search features, as well as special offers and coupons from local businesses.

The local business directory also incorporates user-generated content in the form of personal consumer reviews of local businesses. Businesses that advertise in the Welcome Wagon gift book, distributed to millions of movers in more than 2600 communities each year, receive premium placement in the new Welcome Wagon local business directory.

Finally, in the last few weeks, we kicked off our branding campaign to begin to establish Move as the iconic destination for all consumers in any part of the moving process.

We started the campaign in nine test markets with different combinations of offline advertising, including television, billboards and newspaper classifieds. We will be testing the efficacy of each media mix to determine the best ROI.

In this initial campaign, the messaging is simple -- Move has more: more listings, more photos, and more mapping than any other site.

The test campaign is running in Des Moines, Raleigh, Madison, San Diego, Austin, San Antonio, Jacksonville, Oklahoma City, and Portland.

Early reporting shows a demonstrable increase in site activity in the test markets, but it is too soon to reach conclusions regarding future marketing initiatives.

These are just a few of the many highlights for the quarter, and we are grateful to our employees and customers for making them possible.

However, we did not get everything done in the quarter that we wanted to. We now believe that Welcome Wagon will grow more slowly than we had hoped earlier this year. Although we expect to deliver double-digit revenue growth compared to last year's 6% revenue growth, we are unlikely to reach our previously stated objective of 20% revenue growth for Welcome Wagon this year.

We made a number of modifications to our national gift books, which delayed the distribution and reduced our circulation for the year. The national books will contribute to Welcome Wagon's growth, but at a lower level than previously expected.

From a product standpoint, we did not launch our community pages during the second quarter as we had anticipated. We view community and user-generated content as very important to our consumer content strategy. As we have said in prior calls, these community pages will be forums for exploring the qualities of a community, and will include interactive maps with data overlays of important resources, local history, detailed school and city reports, and local demographic data.

However, we were unable to finalize product development in time to meet the launch window in front of the data center move. As a result, the community pages will not launch until after the data center move is completed early in the fourth quarter.

Finally, on the profitability side, our investments in product development, sales and marketing, and the data center move continued to mask the profitability potential of our existing products.

For example, the data center move alone is generating over $6 million of non-recurring costs this year. We believe these investments will result in stronger product offerings and financial results in future periods.

In fact, once the data center relocation is complete, we expect a rapid introduction of new products and features, including: the community pages I mentioned a moment ago; an enhanced webcrawler to deepen our already industry-leading listing content; substantial improvements to the user experience for both and, incorporating better personalization, mapping and search interfaces; and a self-service application for our cost-per-click auction engine supporting our featured listings product.

We remain very optimistic about the market acceptance of our new products, the correctness of our strategy, and the future long-term benefit to our shareholders of current investments.

I will now turn the call over to Lew for a review of our financial results. Lew.

Lewis R. Belote

Thanks, Mike.

We had another solid quarter in both of our business segments. As we previously shared with you, given the nature and size of our investments and the rate of new product introductions, we do not believe current quarter-to-quarter financial comparisons are the only meaningful indicators of our progress.

The financial highlights of the second quarter are as follows:

  • Revenue was $73.9 million, which represents 17% growth over the second quarter of last year, and 7% from last quarter;
  • EBITDA, our income from operations excluding restructuring charges and certain other non-cash and non-recurring items, principally stock-based charges, depreciation and amortization, was $4.7 million. This also excludes a $1.2 million reduction in G&A expense related to the refunded premiums from our 2001 DNO insurance policies. This compares to EBITDA of $2.9 million in the second quarter of last year, which included $4.2 million in legal expense; and
  • GAAP net income was $1.7 million.

Excluding the effects of stock-based compensation charges, net income for the quarter would have been $4.3 million, compared to $3.3 million in the second quarter of 2005.

In reviewing our operating results by segment, the Real Estate Services segment reported revenue of $52.1 million, up 14% from the second quarter of last year.

The revenue increase was driven by and Top Producer, and offset by a decline in's new homes and rentals businesses.

The segment operating income was $11.4 million, or 22% operating margin, compared to 31% in the second quarter of last year.

Excluding $1.1 million in stock-based compensation expense, our operating margin for this segment would have been 24%.

The reduction in operating margin from last year is not indicative of future financial performance, because it is directly attributable to three factors:

  • The increased product development costs associated with the numerous initiatives we have under way; <.li>
  • The near-term decline in revenue from the new homes and rentals businesses; and
  • The fact that the second quarter of 2005 included the non-recurring [Simnet] revenue of $1.3 million. had a strong quarter, with revenue up 20% from the second quarter of last year, despite the fact that our large company showcase agreement with NRT began in April of 2005.

The second quarter of 2005 also included the non-recurring [Simnet] revenue of $1.3 million.

We saw healthy growth in our listing enhancement products, as well as the display ad products, and as Mike said earlier, added more new agent customers than in any of the last 10 quarters. is performing very well and we continue to expect this business to generate revenue growth above 20% for the year.

Top Producer, our CRM software for real estate agents, delivered revenue growth of 24% over the second quarter of last year. We continue to add valuable new features to Top Producer 7I.

For example, last month we launched a new feature which enables Top Producer agents to quickly and easily provide customers and prospects with detailed demographic, school, employment, housing, and crime information about thousands of communities across the United States.

Since March, we have been offering the Top Marketer pay-per-lead product to our Top Producer software customers. Incorporating the suggestions of our early subscribers, we have been working to create an even more valuable solution than what is currently in the marketplace, before more aggressively marketing the product to prospective customers.

We have developed a new feature that we believe significantly increases the value of the Top Marketer system, and began a test in Seattle and Orange County this week. The new feature presents consumers with a sophisticated market analysis only a realtor can provide. We believe this is an essential differentiator in the rapidly evolving real estate market.

We continue to expect Top Producer to generate revenue growth above 20% for the year.

Our new homes and rentals businesses are in the midst of a major product transition, which began on May 1st. As Mike stated earlier, the transition is going largely according to plan.

Prior to the launch of, our new home and rental content consisted of only paid listings, and our new home and rental revenue came primarily from subscriptions to our products.

With the launch of, we added free listings to our content, and we added a featured listing product that we sell on a cost-per-click basis. We expected the new site to result in a decline in subscription revenue that would be more than offset over time by growth in our new CPC revenue.

We anticipated some revenue declines during the transition phase, and we experienced an 8% decline in the second quarter. However, we are seeing strong demand for our CPC product, and we remain confident in our new product offerings and revenue model.

We are pleased with the overall consumer behavior on the new site, and are seeing an increase in repeat visits per user.

While traffic to the overall Move network of sites is strong, and we remain the clear leader in the real estate category, traffic to our new home and rental listings has been a little lower than expected. We believe this is partially due to lost priority of rankings in search engine algorithms, which are steadily improving.

We also experienced a temporary decline in traffic from one of our major online distribution partners when they redesigned their house and home channel. We are actively engaged with this partner to optimize the traffic from their site.

We expect there will continue to be transition issues through the third quarter. In fact, we expect third quarter revenue for new homes and rentals to be down even more than in the second quarter, with improving trends in the fourth quarter.

As we have said previously, we believe the real success of our strategy will be evident in how we exit the year. We are confident we are pursuing the right strategy for maximum long-term growth.

Our other business segment, Move Related Services, reported revenue growth of 24% over the second quarter of 2005. This growth was driven by retail advertising,, and Welcome Wagon, partially offset by continued weakness in the home plans business.

The Move Related Services segment delivered operating income of $323,000, including stock-based charges of $321,000, compared to a loss of $234,000 for the same period last year.

The increase in operating income is largely due to the strong performance of retail advertising and the addition of

Revenue from Welcome Wagon grew 11% over last year, representing a significant improvement, yet a slower growth rate than expected, due to the lower revenue from our national new mover gift books.

Based on customer feedback and analysis, we modified the national version of our gift book during the quarter. These changes to the book will add to the revenue in the second-half of the year, but not to the extent that we will be able to reach 20% revenue growth for the full year.

Our retail advertising business delivered a strong second quarter performance, with revenue growing 29% over the second quarter of 2005. This notable increase is due both to higher sell-through rates and higher average CPN’s.

With the launch of, the graphical ad inventory on the new homes and rentals search results pages were replaced with cost-per-click text links. The revenue for these text links appear in the real estate services segment, making the performance of our retail business this quarter even more impressive.

While we have good momentum with our ad sales, as we said before, due to the loss of inventory on the new homes and rental pages, we do not expect revenue in our retail advertising unit to sustain 20% revenue growth for the full year.

Our home plans business reported a decline in revenue of nearly 10% from the same period last year, mainly the result of softness in consumer demand for home plans, which has historically been a leading indicator of slowing housing demand in the economy.

Our unallocated, or corporate expense, for the second quarter was $11.3 million, which was similar to the second quarter of 2005. The second quarter of 2005 included $4.2 million in legal expenses for former officers. Excluding that effect, corporate expense increased substantially over last year.

This increase is mainly due to the cost associated with our data center move and marketing of the Move brand, as well as $1.2 million in stock-based compensation expense.

The cost in the second quarter for the data center move of $1.3 million, compared to $1.2 million in the first quarter of this year. We expect costs to total approximately $4 million over the next two quarters.

The data center move will be completed by the end of 2006, allowing us to eliminate these costs next year.

Looking at our consolidated results, our gross margin in the second quarter of 78% was slightly below the 79% gross margin in the same period a year ago, but consistent with our forecast for 2006.

Taking our expenses line by line, sales and marketing expense in the second quarter of $28.3 million, or 38% of revenue, was $5.6 million higher than the second quarter of 2005, or 36% of revenue. This reflects an increase in online marketing costs and personnel, as well as $371,000 in stock-based charges.

We expect sales and marketing expense as a percentage of revenue for the full year to be slightly below the level reported in the second quarter.

Product development expense during the second quarter of $8.8 million, or 12% of revenue, compares to $5.1 million in the second quarter of 2005, and is consistent with our expectations.

Due to the heavy schedule we have for new product launches this year, our product development expense will remain around 12% for the year. This is one area where we chose to spend more than initially planned to accelerate new product introductions.

General and administrative expense of $19.4 million for the second quarter, which included $1.6 million in stock-based charges, was consistent with the second quarter of last year.

Including the effect of stock-based charges, we expect G&A expense in the second half of the year to be approximately $45 million.

Taking into account both our recently disclosed and anticipated grants of stock options and restricted stock, we expect stock compensation expense to increase to $5 million to $5.5 million for each of the two remaining quarters this year.

Our cash and short-term investments, as of June 30th, were $144.8 million, an increase of $2.1 million over last quarter.

Deferred revenue, which usually peaks in the first quarter and declines throughout the year, actually increased in the second quarter of the year, due to the launch of the featured CMA product in

Our sources of cash during the quarter were $4.7 million in EBITDA, $2.4 million from the exercise of stock options, and $1.8 million in interest income. These were offset by $4.3 million in capital expenditures, $700,000 decrease in working capital, $900,000 in payment of restructuring charges, and $900,000 in payment on capital leases.

Our cap-ex for the full year will likely see $15 million, but we will lease many of these assets. Because of the lease financing, we expect our cash balance at year-end will be slightly higher than the balance at the end of last year, of $152 million.

Now, I will turn the call back over to Mike for concluding comments. Mike.

W. Michael Long

Thank you, Lew. 2006 is a typical year for our company. We will largely complete this year the investment program we committed to over two years ago.

We are very encouraged by the operating leverage we are experiencing in the businesses where the major investments have been completed. We look forward to the benefits of this operating leverage throughout the company.

We are very interested in your questions. Operator, please open the phone lines for questions.

Question-and-Answer Session


(Operator Instructions)

The first question comes from the line of Mark May with Needham and Company. Please proceed.

Mark May - Needham & Company

Thank you. I apologize, I missed some of the call earlier. The data center costs, which I believe that you are incurring over the last couple of quarters, and probably for the rest of the year, are those costs largely being expensed? Are those showing up on the P&L?

Lewis R. Belote

The costs we referred to are what is going through expense. Obviously we are buying a lot of new equipment to stock the data center, but yes, the approximate $6.5 million we refer to for the year is being expensed.

Mark May - Needham & Company

How much is left for the second-half of the year?

Lewis R. Belote

About $4 million.

Mark May - Needham & Company

I know that a lot of the third-party measurement services are not accurately reflecting the traffic at Move, or not reflecting it at all. Can you give us a sense, based on your own internal logs, what the traffic trend looks like? June, July, the most current -- what does the trend rate look like?

W. Michael Long

Our traffic on the Move site was essentially flat for its first three months. As we mentioned earlier in the call, which you may have missed, there are at least two factors there.

One is the search engines, it takes them a couple of months to catch up, because the links, particularly the search engines that are based on the popularity of links to your site, we basically changed all the links by essentially launching, by eliminating and our apartments business brand.

Second of all, we had one of our major distribution portal partners re-engineered, restructured their house and home channel, and that had unintentional effects of reducing traffic from that partner. We are now working closely with that partner to correct that.

From a business traffic perspective, in the new homes area, because new home construction and buyer interest has fallen quite dramatically, there was some marked reduction in consumer interest in new home searches. That was not evident in apartments and in, but we compare ourselves to other sites that have new homes search capability, and any traffic declines that we experienced were far less than what those sites experienced.

Mark May - Needham & Company

If I could ask one more question, I know you have had the data center costs and probably some other costs that you might characterize as being non-recurring. As we look into 2007, how should we be thinking about your cash operating expense growth, over the next year after we exit some of this major investment?

W. Michael Long

Mark, we are not at a point where we are ready to give any specific guidance on 2007, but as we have said all along, we are striving into the future for 20% revenue growth and 20% margins.

This year, our EBITDA margin is going to be approximately the same as last year, slight improvement, but we expect to see that improve as we move into next year. We will have more information on that in future calls.

There are at least three areas I would bring your attention to. One is that our higher product development costs, we had said earlier in the year that we were comfortable with running the business with about 10% revenue R&D investment and we are now running 12%, a couple of percentage points higher than our target. We think that makes good business sense in the short-term because we are getting a lot of new products introduced into the market this year.

The data center, we have already talked about. We are also incurring some higher sales and marketing costs, particularly in our new homes and apartments category because of the amount of time we are spending with existing customers, transitioning them from the subscription model to a cost-per-click model, and to preserve the existing revenue base. That is costing us sales and marketing expenses that we don’t think would be replicated next year.


Our next question comes from Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

I had a couple of questions. Can you give us a sense if this transition from a CPM to CPC model, when do you envision that transition? Do you think that it gets done by Q4 or do you think it continues into 2007?

Then a quick follow up on just the housing market obviously has shown some material weakness here. What are you hearing from some of your customers in areas like the new homes category or apartments category in terms of level of commitment to spending? Are they still trying to move inventory, have they thought about moving from new homes into rental? Just trying to get a gauge of what their advertising expenditure patterns look like or what their feeling is right now. Thanks.

W. Michael Long

I will take the second part of your question. We got a sense, I think long before the financial media and the popular media started focusing on the slowing housing market, that it in fact was slowing, because we saw the inventory increases on our websites, particularly in occurring months in advance of the market awareness. Our thesis all along has been that this tightening of the real estate markets forces the rationalization of what we think is a huge wasteful spend in the offline area to online, which is far more efficient.

That is in fact what we think is happening. What we are experiencing in for example, as we said earlier on the call, we reached this quarter, we had highest number of individual agent sales, and the highest number of broker sales in the last three years. I think that is a shift from offline to online phenomena that we are experiencing. So, we are quite comfortable that this in fact is a catalyst for our online media business model.

As to the CPC, CPM –

Lewis R. Belote

As far as transition, we will continue to offer subscription products. But we are also introducing the CPC as we discussed, and we expect that transition, when you say transition, the integration of the CPC into the product offering to be largely complete this year. We will get our customers up to speed with those. They will make choices as to what is better for them and we believe going into 2007 we will be in pretty good shape.

W. Michael Long

I think we been pretty consistent there starting at beginning of the year that we said the CPC conversion would be essentially complete by the fourth quarter and how we exit the year is a good point to judge the financial justification for that which we are pretty confident about right now.

Jeetil Patel - Deutsche Bank Securities

I guess just looking at in particular the new home builder category, are you seeing -- I know it is down 8% broadly in that category -- but are you seeing the dollars come in yet or are they still in re-evaluation mode of just moving down price on their homes at this of time to see if they can stimulate the demand? Or are they starting to say look. when need to get more aggressive in spending to actually try to move the inventory at the same time? Are you seeing that?

W. Michael Long

Well it is our dialogue with the new home builders is, as you know, the effect on that is we are changing things completely from a paid inclusion subscription model to a CPC model. Their reallocating that subscription model over two quarters into a CPC model.

We have a significant education challenge there that we identified at the end of last year and shared with our investors that we knew we were going to have to do that. That is going pretty well.

As far as the macro economic issues that we are seeing in the new homes category, they are experiencing a significant decline in buyers. Even though we might be experiencing some decline in the overall number of consumers interested in that category on our web site, the value of those consumers is greater because the qualifications of those consumers is greater. You may have fewer buyers but the demand for those buyers is higher. Which was different when all of their inventory was selling almost whether it was promoted or not.

I think we all be a lot smarter about this in another 90 days but we have not seen a softening in marketing spend by the home builders. It’s a matter of sorting out and understanding our new model, the effectiveness of that model because in most cases, it is completely new to them.

Jeetil Patel - Deutsche Bank Securities

Thank you.


Our next question comes from Mark Argento - Craig-Hallum Capital.

Mark Argento - Craig-Hallum Capital

Thank you good afternoon. Could you talk a bit about what it was with the Welcome Wagon book that you decided to modify, that pushback of the roll out of the book?

W. Michael Long

Well the book has been rolled out, we started shipping it late last year. We had, as we said earlier, we had a limited number of customers originally buying advertising and we work with those customers to determine how effective it was for them, what kind of response rate they getting. We tweaked that book a little bit both in how it is presented, in how the offerings are now linked to online offerings. It has taken us a couple of months to get feedback from both the existing customers such as Lowes and potential customers that were in the pipeline.

So during that phase, really most of the quarter, we shipped less books than we would normally. So obviously, we have less revenue. But we think we have got it right now and we have got a number of potential new customers who joined that book in the pipeline.

Lewis R. Belote

I would add to that an internal issue we also manage with that national book is that our cost of providing that book versus the number of advertisers we had in the book. So the profitability per book is something that we look at very closely and we are not just interested in generating top line revenue without the underlying profitability.

In mini markets we have not reached the critical mass of advertisers, that made that national book profitable. Pulling it from the market for a few months gave our sales force an opportunity to go out and sell more national advertisers, which right now, it looks very promising for the third quarter that they have accomplished their mission and then we can then increase distribution of that national book on a more profitable basis.

So I think there were market issues with our customers, the efficacy of the book that we wanted to improve since it was new, and second of all, the internal issues was the profitability of the book.

Mark Argento - Craig-Hallum Capital

Is your sales force when you guys are national advertisers, for the Welcome Wagon, are you guys are selling advertising, across all the different properties now? Is that integrated?

W. Michael Long

Yes, it’s the same integrated sales force across the entire network now for national advertisers, that’s correct.

Mark Argento - Craig-Hallum Capital

So if they are successful in selling national advertisers into Welcome Wagon book then potentially you could see a pickup in the retail advertisers in that you also said can be a little bit below the 20%?

Lewis R. Belote
That’s right. That’s exactly right.

Mark Argento - Craig-Hallum Capital

In regard to the R&D kick up in R&D investments from the 10% to 12% of revenue level, could you just quantify putting into buckets for us of that 12% how much is going to the REALTOR segment versus the newer segment, or the segment?

W. Michael Long

It has been primarily driven by the move .com segment because as you know with got a disproportionate share of our discretionary investment dollars two years ago and last year. This was the year we wanted to launch and the Move services and so its really been driven by Move investments. Even though we are continuing to invest in, on a percentage there is a bias towards Move. Which includes Welcome Wagon as well.

Lewis R. Belote

The Top Marketer product, the Top Producer which is a similar product of featured CMA, as well as Welcome Wagon online and the community pages that we did not get launched yet. So it is kind of across the board, and we have made a decision whereas in years past, we did targeting investment, we decided this year to address all of our businesses that needed it.

W. Michael Long

Community pages, Welcome Wagon products and services, the CPC auction engine, as well as there will be a 2.0 version of the Move site and the Move search engine in the fourth quarter, as well as a new version of So it is a lot at one time, but we had a lot of momentum there, the development team was optimized and we decided to press forward to get even more done on the R&D side than we had planned for 2006.

Mark Argento - Craig-Hallum Capital

Last question for you. In terms of the business, it looks like you are getting a little bit more momentum at the agency or enterprise level, signing up a lot more of those types of customers. Can I assume that that is a higher margin business for you, relative to the signing up individual brokers? Can you give me a little bit of an idea of the margin profile of the enterprise client, or we will call it a broker level client versus an individual agent?

W. Michael Long

It is a similar margin business. When we sign up a broker product versus signing up the individual agents, because as we’ve said before, we expect a lot of flow through from incremental revenues, given that we’ve got the infrastructure costs in place.

Mark Argento - Craig-Hallum Capital

Do you think the incremental margins on your REALTOR business, have those peaked or do you think there is continued opportunity to expand the margins in that business?

Lewis R. Belote

Potential opportunity to expand those going forward.

Mark Argento - Craig-Hallum Capital

Thanks, guys.


Our next question comes from Stewart Barry – ThinkEquity.

Stewart Barry – ThinkEquity

Could you share with us the organic traffic, how that’s trending on

W. Michael Long

Relative to the market it is trending fine, I go back to just in the last 90 days. The two issues I mentioned earlier, was affected by a major distribution portal partner re-designing their site.

That was the single biggest factor for why traffic did not grow as fast we would have expect it to. So it was essentially flat, but we have a disproportionate percentage of all of the real estate traffic already, but overall there were no issues of concern around organic traffic for us in

Stewart Barry – ThinkEquity

Are characterizing the real estate category on the whole as seeing some declining traffic, and that you are just maintaining your share?

W. Michael Long

I think the market experienced some decline in the new homes category, but in the resale category there is no indication of a decline. But there is – it is not growing as fast as it was this time last year. So there could be some indication, because of slowing demand, that traffic might have peaked. But again, the value in the real estate category – on the other hand, the value of that traffic goes up in value to the real estate practioners, because that creates more competition for less traffic.

Stewart Barry – ThinkEquity

Could you share with us some challenges that you are getting with advertiser adoption as you move to the CPC model, is it from smaller advertisers? Are you still hoping to move to auction formats or a bidding engine by the end of the year?

W. Michael Long

Yes we will have our CPC auction bidding engine. It will be in place as soon as the data center move is completed early in the fourth quarter. Actually, we see both our interest at both our large enterprise customers and our individual customers to take advantage of the self-service element of that, it is a cost-effective way for us to reach individual realtors, smaller home builders and smaller apartment owners.

But we see our large customers like the self-service aspects of it as well. Except for in some cases where we have large XML data feeds from large builders, for example, who have a lot of inventory.

So it is both, it appeals to both segments of the market equally.

Stewart Barry – ThinkEquity

Thank you very much.


The next question comes from the line of Aaron Kessler - Piper Jaffray. Please proceed.

Aaron Kessler - Piper Jaffray

A couple of questions. First are you seeing in the environment any migration from offline the newspaper players to the online? Which areas are taking share? It looks like the newspapers are still growing in the 20% range. A couple of follow up questions.

Lewis R. Belote

The newspaper share, it varies by market and it varies by newspaper, but I think the newspapers are driving price increases into the real estate category, because that is the only category that they have, historically in the last three years, any pricing power. Since they essentially experience huge declines in the automobile and job categories.

But we think that is a – forgive the description – but that is the last gasp of a model that is in decline. That pricing power is going away rapidly. I think that this decline, this softening of real estate markets is really forcing what we had anticipated, a rationalization of that marketing spend, that the motivation wasn’t there in a hot real estate market that we experienced up until a year ago.

So I think it is a bit of an illusion as far as the growth in real estate advertising in the newspapers right now.

W. Michael Long

We are seeing a pretty strong move by the brokers in the REALTOR business coming online. Last year, after the NRT deal was done in April, we didn’t have a big follow-on of brokers buying on behalf of all of their agents. As we’ve said, we are up to 140 brokers that have done that now. That is not incremental spend for these guys, especially with the market slowing a little bit, we think it is coming from some of their former offline spending.

Aaron Kessler - Piper Jaffray

Great. And then a couple of other questions. Can you give us a sense for how big the CMA or top marketer was in the quarter? If they are immaterial, would you expect them to get more material later this year?

Second, if we look at the earnings power in the quarter, can you give us a sense or strip out some of the near-term investments like the relocation of the data center, what could the earnings power have been in the quarter? Thank you.

Lewis R. Belote

We showed you the $1.3 million of data center expenses. We didn’t have to move that in this quarter, it could have fallen straight to the bottom line. Repeat your first part of the question again?

Aaron Kessler - Piper Jaffray

How material was the CMA and top marketer in the quarter?

Lewis R. Belote

Well you can see the impact in deferred revenue, because obviously we started selling that in late first quarter into second quarter so most of those are year contracts, they get spread out. The deferred revenue increase normally trends down in the second quarter. In the second quarter of this year it trended up/

So not a huge amount of revenue this quarter, but we will see it in the third and fourth.

Aaron Kessler - Piper Jaffray

thank you.

W. Michael Long

Thanks, Aaron.


At this time we have no additional questions in the queue.

W. Michael Long

Thank you folks, for participating in our second quarter call. We are very pleased with the progress we are making and we appreciate the dialog with you and your interest in our company. We look forward to talking with you again in 90 days. Thank you.


Thank you for joining today’s conference. This does conclude the presentation and you may now disconnect. Good day.

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