Tucows Inc.
Q4 2008 Earnings Call Transcript

Published: 18 Mar 2009

[Operator:]

Welcome to Tucows Inc. fourth quarter and year end 2008 conference call. I would like to advise everyone that this conference call is being recorded. I will now turn the call over to James McNally [ph]. Please go ahead, James.

[James McNally:]

Thank you, operator. Good afternoon. Thank you for joining us today. With me is Elliot Noss, our President and Chief Executive Officer and Michael Cooperman our Chief Financial Officer. Earlier this afternoon Tucows issued a news release reporting our results for the fourth quarter of fiscal 2008. News release and financial statements are available on our Web site. Please visit tucowsinc.com and click on Investors. Before we begin today I would like to point out that the matters we will be discussing are forward-looking statements as such are subject to risks and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in our documents filed with the SEC specifically the most recent reports on Form 10-K and 10-Q. We urge you to read our securities filings for a full description of the risk factors applicable to our business. I would now like to turn the call over to Elliot. Elliot?

[Elliot Noss:]

Thank you, James. Good afternoon, and thanks for joining us today. On today's call I'll begin with some of the highlights for the fourth quarter and for the year. Mike will then provide a detailed review of our financial results, and I'll close the call with our thoughts for the future. Revenue for the final quarter of 2008 was $19.2 million, an increase of 5% compared to the fourth quarter of 2007. That growth in revenue was in line with our overall growth for the year of 5.1%, which resulted in revenue of $78.5 million. Net income for the quarter was just over $1 million bringing the total for the year to $2.1 million. As discussed on the last conference call in November, we have sold our equity stake in Afilias. As a reminder we received $3.2 million in cash in the fourth quarter and are conditionally due the remaining $4.2 million in two installments later this year. For 2008 we generated cash flow from operations of $2.4 million. I will note that cash flow from operations for the fourth quarter was negatively impacted by two factors that were specific to the period. First, the timing of payables resulted in a typically high cash out flow and second, we incurred one-time severance and related costs associated with the reduction in headcount. Let's look at each of our businesses individually. The main registration within our OpenSRS Wholesale business is showing strong momentum. In the fourth quarter, both new and renewal transactions grew compared to the previous year with new registrations up 9% and renewals up 15%. We are seeing these trends accelerate in the early part of this year. The main names under management increased by 18% from a year earlier to $7.7 million. We note that a portion of that growth would be accounted for by our IYD acquisition. Importantly, domains that are registered through Tucows have above average usage within the industry. Few are sitting inactive and parked relative to our competitors. Real people are using them to do real things which of course means there is a much better probability of those domains being renewed. Competitively, we are doing well. We are hearing it from the registries and we are seeing it in key customer wins. In fact, we were recently recognized by one of the registries as the top registrar in first-time renewals, total new registrations and net growth in names under management with them. The good news especially in the current economic environment, is not only that our domain registration business represents the largest component of our gross margin, but also that it is a recurring revenue stream that is generated by large volumes of low-cost transactions. It is a milk-and-eggs type of business, one that involves the type of buying decision that shouldn't be significantly impacted by the economy. In fact some in the industry believe that the large number of layoffs we are seeing in more traditional businesses could even lead to an increase in demand registration as smaller businesses move online. With the pull back in our email business that I discussed last quarter, our historical domain registration business has become an even more important part of OpenSRS. Thinking of email, while OpenSRS email is aimed at the same target market of web hosts and ISPs as our domain registration service, the decision to keep email in-house versus moving it to OpenSRS is a very different one. With domains, the decision for our customer is about who to spend their money with, with email it is about deciding to take on an additional expense when making the decision to outsource. Therefore, it's not surprising that we are experiencing some business impact from the current economic uncertainty as customers postpone or reconsider outsourcing email. By the way, we are experiencing much more postpone than reconsider. We continue to see significant long-term opportunity to grow this business. More and more service providers are realizing they simply cannot provide a competitive service doing it in-house and a few suppliers really pay attention to our segment. In the short-term we are focused on service quality and operating efficiency. Now I'd like to turn to YummyNames, our newly branded domain portfolio business. As I've discussed previously, our goal with the YummyNames brand is to target marketers and brand experts who recognize the value of quality domain names but may not be familiar with the world of domaining or the availability of names from Tucows domain portfolio. As we focus on marketing our high end brandable names to marketers, we are also continuing to pursue bulk sales of Direct Navigation names. After the quarter’s end, today in fact, we completed the sale of slightly over 2500 names for $1 million. As anyone who have listened to these calls know, we view bulk sale of Direct Navigation names as tactical not strategical and we have attempted to create more regularity in this revenue stream. Therefore, in addition to the $1 million sale, we've made an arrangement which provide some regularity for both us and the buyer over the next 14 to 18 months. Ad revenue related to parked pages with our portfolio was relatively stable with no real erosion in the fourth quarter, which is somewhat surprising given the economic climate. In our retail business, we continue the consolidation of three legacy brands into one entirely new service called Hover. Hover was launched in Q4 and we have now completed two of the three customer transitions to this new platform. Final stage moving NetIdentity customers to Hover should be completed this quarter. Tucows is all about making the Internet easier to use and we believe Hover is now the easiest way to buy and use domains. We are pleased to now be able to start marketing this service in earnest. I would like to briefly touch on Butterscotch, a recently launched online video network that offers educational and user friendly content designed to de-mystify technology for the average user. Butterscotch is off to a great start. To date we have produced more than 400 videos and we are thrilled with the content as well as the public's reaction. Our long-term goal is to migrate traffic from our existing Tucows.com software download site to Butterscotch thereby creating a single property that is a definitive site for understanding and using the Internet. While we are excited about this opportunity, we are being conservative in our expectations given that as an ad supportive business, Butterscotch is the part of the business most likely to be impacted by economic conditions. In summary, of course 2008 was an interesting year for everyone. When looking back at Tucows in 2008 we are clearly not happy with our cash generation. The big reasons cash generation was less than we expected were domain portfolio sales of at least 1 million and perhaps as much as 3 million less than we anticipated, retail sales of $1 million to $2 million less than expected due to selling two Web hosting customer basis and the slowing down of marketing as we move to a new platform. And email sales of $1 million to $2 million less than planned for due to slower adoption, the loss of customers to Google and the impact of the economy delaying perspective customers outsourcing decision. Looking at 2009, we have taken steps on both sides of the ledger to improve cash generation. We have reduced cash operating expenses through our email migration, reducing headcount, and having the benefit of a lower Canadian dollar. We also expect growth this year in OpenSRS domains, Hover, Butterscotch and YummyNames. For the longer term, even in these tough times, the growth of the Internet and the clear steps that we have taken to benefit from the huge rise in the personal Internet as evidenced by things like FaceBook and Twitter have put us in a strong place for years to come. I would now like to turn the call over to Mike to review our financial results in greater detail. Mike?

[Mike Cooperman:]

Thanks, Elliot. Net revenue for the fourth quarter of fiscal 2008 was $19.2 million, up 5% from $18.2 million for the fourth quarter of fiscal 2007. The increase was primarily the result of higher revenues from traditional domain name registration services, which as Elliott discussed earlier, experienced strong growth in both new and renewal transactions compared to the corresponding quarter a year earlier. Cost of revenues before network costs for the fourth quarter increased by 15% or $1.7 million, $12.7 million from $11 million, primarily the result of the higher domain registration volumes we have been experiencing and the impact of the 7% increase in registration fees levied by our main domain name supplies in October of 2007. It should also be noted that the same registries also increased their registration fees by an additional 7% in October this year. These increases were partially offset by a decrease in network costs of $1.4 million, primarily the result of the lower bandwidth, (inaudible) contract and people costs we achieved with the closure and relocation of certain of our call location facilities following the successful completion of the email migration that we have spoken about in previous conference calls as well as the lower depreciation we are now incurring as a result of the retirement of the Oda Hardware that we were deploying at the closed call location facility. Gross margin for the fourth quarter was 25%, compared to 23% for the same quarter last year. This increase is primarily attributable to the reduction in network costs of $1.4 million that I mentioned a moment ago which was partially offset by lower contributions to gross margin from our traditional domain name, email and retail service category. Looking at the gross margin contribution by service category, gross margin from the traditional domain name registration services decreased to $2.7 million from $2.9 million for the same quarter in fiscal 2007. While the intense competitive pressure that we were feeling on domain pricing a few years ago has abated somewhat, competitive nature of the domain name market continues to require us to regularly review and assess our pricing. Net result is that while domain name transaction volumes for the quarter were up on a year-over-year basis, the impact of pricing adjustments to maintain our competitive standing continues to dampen the effect of our increased volumes and gross margin. As Elliott discussed, one of our focuses for domain registration services in 2009 broke gross margin through the implementation of new systems for our low volume customers. Gross margin from domain portfolio services increased to $680,000, $159,000 for the fourth quarter of fiscal 2007, and as a percentage of net sales was essentially unchanged from the same quarter last year at 80%. Gross margin for email services decreased to $1 million from $1.5 million for the fourth quarter of fiscal 2007. As we've discussed in previous conference calls, the decrease was primarily the result of the loss of several enterprise customers that we acquired. Part of the Critical Path asset acquisition we have since moved on to suppliers that are probably more appropriate for their needs. Gross margin percentage for the quarter however increased to 92% from 87%, the result of the improved cost structure we have with our new email platform. Gross margin from retail services decreased to 866,000 from 1 million for the fourth quarter of fiscal 2007. Decrease is primarily the result of our having exited the retail shared hosted services market. Gross margin from other services was relatively unchanged from the fourth quarter of fiscal 2007 at $1.2 million. Gross margin for the quarter was dampened somewhat by the impact the current economic environment is having on advertising through our Web site and the yields on our syndicated fees. Total operating expenses for the fourth quarter increased by $2 million to 42%, $6.9 million, or 36% of net revenues, and $4.9 million, or 27% of net revenue for the fourth quarter of fiscal 2007. The increase in operating cost was primarily the result of the impact of foreign exchange, which as I've discussed in the past, classify under other operating cost – for operating cost. I would also like to remind you that a substantial portion of our fixed expenses are incurred in Canadian dollars and our policy is to attempt to mitigate the exchange rate risk by buying foreign exchange contracts. Due to the significant weakening of the Canadian dollar that occurred during the fourth quarter of fiscal 2008, we incurred a loss on foreign exchange of $2.2 million inclusive of a mark-to-market loss of $1.4 million in the fourth quarter of 2008 compared to a gain on foreign exchange of $106,000 inclusive of a mark-to-market loss of $667,000 in the fourth quarter of 2007. In addition to the $2.2 million loss on foreign exchange transactions that I have just mentioned, at year end we were carrying a $2 million derivative instrument liability on our balance sheet resulting from the contracts we bought to cover our 2009 Canadian dollar exposure that will reverse as these contracts mature. In total, other operating expenses increased by $2.5 million to $3 million, or 15% of net revenue from $525,000 or 3% of net revenue for the fourth quarter of 2007 primarily due to the impact of the foreign exchange loss I've just discussed and the $251,000 in severance costs we incurred as a result of a reduction in headcount we announced in November. This headcount reduction will result in ongoing savings going forward. The increases in other operating costs were partially offset by transitional costs related to the IYD acquisition of $105,000 that we incurred in the fourth quarter of 2007 and that were not incurred in the fourth quarter of 2008. For operating expenses which has other expenses that relate to ongoing sales, marketing, development and administrative costs, decreased compared to the fourth quarter of fiscal 2007 on an absolute dollar basis, $4 million from $4.3 million for the fourth quarter of fiscal 2007, and as a percentage of revenue to 21% from 24%. Net income for the fourth quarter of fiscal 2008 was $1 million or $0.01 per share compared to a net loss of $935,000 or $0.01 per share for the fourth quarter of fiscal 2007. I will note that net income for the fourth quarter of fiscal 2008 was positively impacted by the contribution of $3.1 million from the sale of our equity stake in Afilias. This benefit was partially offset by a loss in foreign exchange $2.2 million that I discussed earlier. Moving on to the balance sheet. Cash at the end of the fourth quarter was $5.4 million, a decrease of $2.7 million from $8.1 million at the end of the fourth quarter of fiscal 2007 and an increase of $2.7 million from $2.7 million for the third quarter of fiscal 2008. The increase compared to the third quarter of fiscal 2008 primarily the results of the proceeds of $3.2 [ph] million from the sale of Afilias was partially offset by our using cash in operations of $229,000. The repayment of $479,000 on our bank loan, investment of $191,000 in property and equipment and the repurchase of shares valued at $272,000. In assessing our cash flow for 2009, I would remind you that under the terms of the sale of our equity stake in Afilias and subject to them having sufficient distributable reserves in June and December that we will receive an additional $4.2 million in two additional installments of $2.1 million each from them. Deferred Revenue at the end of the fourth quarter was $54.2 million, up 7% from $50.6 million at the end of the fourth quarter of fiscal 2007, down slightly from $54.4 million at the end of the third quarter of fiscal 2008. The decrease compared to the third quarter of fiscal 2008 was primarily due to the impact of the sale of our retail hosting assets earlier in the year. To conclude, we believe that the ability of our business to generate cash flow remains strong. During 2008 we took numerous steps to simplify and strengthen our operations including the completion of the migration to our new email platform, launching of our new retail service Hover, and the sale of our non-core retail hosting assets. We've been able to further boost our balance sheet with the sale of our stake in Afilias and the repayment of $8.9 million in debt. We believe that all of this positions us well to meet the challenges presented by the current macroeconomic environment and will support our share repurchase programs allowing us to realize value for our shareholders. I would now like to turn the call back to Elliot.

[Elliot Noss:]

Thanks, Mike. We all know how tough it is to be a publicly traded company in these turbulent times. Capital markets are in flux. The venture capital system is broken with virtually no opportunities for exit. Hedge funds are focused on redemptions not making new investments. Furthermore, every small public company not just Tucows faces a similar situation. Traditional investor relations or additional analyst coverage can't help much when you are one of a thousand companies with the same message, your valuation is low. What then is a company with $50 million to $200 million in revenue and $5 million to $20 million in cash flow supposed to do? When you step back and look at the public markets, there are three things that public companies do very well. Firstly, they provide a mechanism by which to reward good people. Finding and keeping the best people is the most important factor in any Company's success. Secondly, they provide investors with liquidity and the ability to move in and out of investment much more easily than with private companies. And thirdly, public markets are efficient at returning capital to shareholders either through buyback when the share price is inexpensive or through dividends. We estimate that we pay a premium of between $250,000 and $500,000 a year to be a public company. When you start to consider the benefits I've just described; attraction and retention of top talent, liquidity for investors and the ability to efficiently return capital it starts to seem like a reasonable expense. All of this of course is predicated on consistently generating cash which we have done in the past, we'll continue to do so in the future. Tucows is fundamentally sound. We have growth opportunities across our business and are predominately high volume low cost transaction models with a high recurring revenue component positions us favorably in this challenging environment. We will be aggressive in returning value to shareholders and to this end this morning we announced the initiation of a modified Dutch auction tender offer to repurchase 4 million of our shares. Shareholders are invited to tender some or all of their shares at a price from $0.32 per share to $0.45 per share representing a fairly significant premium to the market at the opening of today at the close of business on March 9. Based on the number of shares tendered and the prices at which those shares are tendered we will determine the lowest price within the $0.32 to $0.45 per share range that will enable us to purchase up to 4 million shares. In addition, we have the option of purchasing up to 1.5 million more if the number of properly tendered shares are higher and we choose to exercise this option. This is a time for efficient operations, prudent capital markets choices, and a clear sense of direction. We believe we deliver all of these things. I would now like to open the call for questions. Operator?

[Operator:]

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator instructions). Your first question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead.

[Thanos Moschopoulos:]

Hi, good afternoon.

[Elliot Noss:]

Hi, Thanos.

[Thanos Moschopoulos:]

Hi Elliot.

[Elliot Noss:]

Hi mate.

[Thanos Moschopoulos:]

Elliot, you mentioned in your prepared remarks that you struck an arrangement with the domain buyer to provide some regularity to your domain sales. Can you elaborate a bit there?

[Elliot Noss:]

Sure. Just a little bit. What we are doing there is as expiring names are flowing through, we've got kind of a set range within which they can buy them or we can put the names to them which gives them a little bit of certainty of supply and gives us a little bit of certainty of demand.

[Thanos Moschopoulos:]

Okay. But I guess it's kind of hard to say what type of quantities, revenues (inaudible).

[Elliot Noss:]

Because it very much is going to be a function of what flows through the system.

[Thanos Moschopoulos:]

Right.

[Elliot Noss:]

And it's one where people have rights but not obligations as well.

[Thanos Moschopoulos:]

Okay.

[Elliot Noss:]

Again you and I have talked a lot about this over the last couple of years. I've really been trying to make this a little bit more predictable and a little bit more regular as opposed to spotty as it has been. And this is something that we've been kind of hammering at for a long, long time now. And you can imagine how complicated it is to try and do something in this crazy environment. So we are pretty pleased that we kind of got to the finish line on this.

[Thanos Moschopoulos:]

And it would be fair to characterize this is a financial buyer of some sort?

[Elliot Noss:]

Yes.

[Thanos Moschopoulos:]

Okay. Regarding the registration business, you mentioned that your business has a higher usage of names than what is typical for other registrars. Do you have any metrics around that out of curiosity?

[Elliot Noss:]

We actually get that information from the registries who track those things. So it would be – the short answer is, yes. The longer answer is I'll take it offline with you for specifics because it's fairly arcane.

[Thanos Moschopoulos:]

Okay. And regarding the email business, I believe your comments were that this would be one of the more economically sensitive businesses. Is that correct?

[Elliot Noss:]

Well, really, what I am trying to get at there is it's people having to make decisions around $5,000 or $10,000 a month, as opposed to kind of with domains it's really a question of who am I giving my money to. Is it you or somebody else there is not much variability around the economics. When they are making that initial outsourcing decision, it's always the case that businesses, ours is no exception, we find it very, very difficult to cost what it is that is costing us to do something ourselves versus outsource.

[Thanos Moschopoulos:]

Okay. So I guess that would create some uncertainty around the 4 million number for '09 and throughout last quarter?

[Elliot Noss:]

We feel pretty good about that number.

[Thanos Moschopoulos:]

Okay.

[Elliot Noss:]

What we are seeing is a different than them. There's an equal amount of positive and negative that's out there. I think the economic situation globally is probably even a little worse than most would have expected three months ago, but kind of inside the industry in the business there are some positives. So we are kind of right around the same place.

[Thanos Moschopoulos:]

Okay. You mentioned that the core domain business has been holding up well throughout these times. Has there been much change let's say over the past month as I guess the climate deteriorates and the situation evolves or has it been pretty consistent to what we saw towards the end of last quarter?

[Elliot Noss:]

We actually at a business level, at Tucows’ level, January, the beginning of this year, I think I indicated that in the call looked even better.

[Thanos Moschopoulos:]

Okay.

[Elliot Noss:]

And last week I had the opportunity, there was an industry event, and I had the opportunity to speak with a number of our customers from around the world, get a little bit of a more granular view, and I think it's different in different places. The UK in particular seems to be quite negatively affected, whereas the US has been okay, really it is the absence of growth and some of the kind of other international markets, they are seeing things hold up reasonably well. All in whether it's a combination of these markets as sort of less sensitive to bad economic times, or it's a function of the fact that at a competitive level we are doing pretty well, our numbers seem to be holding up quite well.

[Thanos Moschopoulos:]

Okay. And at this point given I guess the uncertainty of the climate you are not throwing out any guidance for '09. Correct?

[Elliot Noss:]

No, I don't think – it makes no sense to do that. It's a crazy world out there. I think as you and I have talked both on the call and just conversationally, we are hoping for the best and preparing for the worst. We're pretty conservative guys. We have been through a nuclear winter before having lived through the dotcom boom and bust, and then the kind of the echo boom and bust in domain registration so we have a pretty good sense of what to do in tough times. We are being pretty conservative.

[Thanos Moschopoulos:]

Okay, great. Thanks.

[Elliot Noss:]

Thanks Thanos.

[Operator:]

Your next question comes from Alex Grassino from Laurentian Bank Securities. Please go ahead.

[Alex Grassino:]

Good afternoon, gentlemen.

[Elliot Noss:]

Hi, Alex.

[Alex Grassino:]

Hi Elliot, just a couple of fast questions. With regards to your retail division, just to verify the sequential drop off was a result of asset sales, right?

[Elliot Noss:]

Certainly to some extent that's right. That's a big chunk of it. And you are talking about sequential Q1 versus Q1?

[Alex Grassino:]

No. I am talking about sort of Q3 '08 to Q4 '08.

[Elliot Noss:]

You'll see some of that from Q3 '08 to Q4. There was another asset base that moved right in that period. And it's also the case that we weren't going hard at the marketing through that period.

[Alex Grassino:]

Fair enough. Can you give us a little bit of sort of insight as to what you expect going forward for that division anyway or for that segment?

[Elliot Noss:]

I think we've taken, I don't know if you've had a chance to look at Hover, but we have taken a little bit of a different approach to buying and using domain names. We think that and the feedback is spot on that it really is an approach that fits with the way that people are using the Internet today, and we are now getting at the marketing. I think we are very encouraged by what I call product feedback and the buzz we are getting, and now it's just kind of hard work and hammering at it.

[Alex Grassino:]

Fair enough.

[Elliot Noss:]

I'm happy to again kind of at a product level walk you through some of what's really getting us excited there.

[Alex Grassino:]

Okay. Great. I'll do that at a later point. In terms of CapEx going forward, what do you see the numbers for 2009 because I noticed again on a sequential basis you normally come in at 300K and you were a little below 2 on the quarter. Just going forward into '09, can you give us some sort of idea what to expect?

[Elliot Noss:]

I think I talked last quarter about '09 being in the $1.5 million to $2 million range, which is kind of down year-on-year and down pretty significantly from '07.

[Alex Grassino:]

Sure.

[Elliot Noss:]

And we are still right around that view. We think that we are, you know, if there's a positive to these economic times, anybody who is buying anything these days can really go upstream and beat people up really hard. And we are pretty shameless.

[Alex Grassino:]

Great. And in terms of previous quarters being an issue with pricing pressure from Google your advertising revenue seems to have held in pretty well there, do you have any sort of additional insight into that or recent developments on that side?

[Elliot Noss:]

I think that there's a bit of a – so one of the things that underpins a lot of what Google has been doing upstream is trying to in essence clean up their house and for the benefit of the larger advertisers, maybe get some cleaner results, get rid of some negative stuff that might have been in the base and some of that played through and we do believe that long term that helps us because we've got a pretty clean shop in that regard. And the other thing is that where you have a general kind of headwind around advertising at the same time we are sharpening our pencil and we are refining what we are doing at a kind of a name by name level so we are able to generate some improvements there. And I think you kind of see a little bit of that headwind a little bit of the tailwind netting out to where we've been able to hold our own and hang in.

[Alex Grassino:]

Great. Thanks. That's all I have for now.

[Elliot Noss:]

Thanks.

[Operator:]

Your next question comes from Aram Fuchs from Fertilemind Capital. Please go ahead.

[Aram Fuchs:]

Yes it is Aram Fuchs for Fertilemind Capital.

[Elliot Noss:]

Hi Aram.

[Aram Fuchs:]

Hi. I was wondering if you can just talk to Tucows reputation since its start has really been with the technically-savvy consumer. And Hover you mentioned is an attempt to simplify the process of domain sale and use. So I was wondering how are you going to get those people who want limited uses of domains to Hover.com cost effectively given the fact that PPC advertising is so expensive.

[Elliot Noss:]

I think that my answer here by the way would in some respect apply to Butterscotch as well. I think that simplicity another facet of it is elegance or ease of use. And what I would really kind of put in your mind would be Apple. And one of the things that has always fascinated me about Apple or sort of stood out to me in a way that I would love to capture is that it tends to appeal equally to the very unsophisticated and the extremely text savvy. And you really see people at both ends of the spectrum who for very different reasons appreciate that elegance. And I think to apply that to Hover – one of the places where we are seeing some of the greatest benefits around simple use of domain and remember what domain names are for is finding things on the Internet and what we think we have done in Hover better than anyone else has done is make the ability to create and share addresses. And so, Aram, you are text savvy enough to know the place where that is going on the most today is inside of Twitter and to a lesser extent inside of FaceBook. So there you are seeing this fantastic ability to create and share being of most benefit to hard core Internet users. And at the same time to really kind of help much less sophisticated Internet users also get value. To me those things are not in what I would call historically classic customer segmentation way, those things are not in any way mutually exclusive. Does that make sense?

[Aram Fuchs:]

Yes, to a point, I'm just sort of confused, you mentioned that you are going to start marketing Hover, how are you going to market it?

[Elliot Noss:]

I think you are going to see us come out at both by and through influences and by more traditional marketing means. Buying ad in different places than we've bought them before and frankly than where we think that most people who are marketing domain names have tried to market to before so more traditional online methods like that. And then we have a couple of tricks up our sleeves too.

[Aram Fuchs:]

And then I was thinking that when you launched Hover you would have easy access to the YummyNames portfolio given that the people might be interested in those either on the non sophisticated, and certainly if they are sophisticated, can you just talk about why you didn't integrate some sort of easy up sale?

[Elliot Noss:]

Yes. I think that is something that will come with time. I don't want to speak for the fellow who is running Hover's roadmap but the focus right now is really on kind of that first generation – I think one of the things that you do see really, really well integrated in there is personal names. And in terms of kind of day one value, we think that that's sort of the lowest hanging fruit, sort of integrating with other stuff in the business. We really believe that with a lot of things that are going on in what I call the personal Internet, that personal name portfolio is just a huge hidden jewel that will start to kind of get some added benefit from.

[Aram Fuchs:]

And Google surprised the industry by launching or rolling out Google AdSense for domains.

[Elliot Noss:]

Yes.

[Aram Fuchs:]

I was wondering if you could talk about that impact on your parking relationships and on the business overall.

[Elliot Noss:]

It has no direct impact on our parking relationships. Our syndication partner happens to use Yahoo and not Google. But it certainly was the case at an industry event I guess about two weeks ago now. Google was there, Yahoo was there as well, but Google came out and certainly for all of us who were listening, we heard them sort of acknowledge and accept that this segment existed, was around and that they would continue to support it. And I think that just on a, kind of an industry level that is a real positive.

[Aram Fuchs:]

And Butterscotch just out there, it's not really helping you sell domain, it's not working on the original business with the shareware so I was wondering how can you get that to fit more closely into the intent of the overall business?

[Elliot Noss:]

I think that if you go back up to the highest level where you've heard me talk about making the Internet easier and more effective, for me there is nothing better than video to do that. And in fact I'll give you – well, maybe offline I'll give you a little sneak preview of some stuff that starts to bring those two things together. Aram, we have the largest distribution channel of service providers in the world who are engaged every day in making those core Internet services, domain registration, email hosting easier for people to use. There's probably not a better place to do two things, one, to help them do their job with video, and two, to have an unbelievable supply of what the greatest problems for people out on the Internet to figure out what to create video against. So we think that you are really going to start to see some benefits, and I mean literally in the next month, two months, three months.

[Aram Fuchs:]

Great. Thanks for your time.

[Elliot Noss:]

Thanks Aram.

[Operator:]

(Operator instructions). Mr. Noss, there are no further questions at this time. Please continue.

[Elliot Noss:]

Great. Thank you for joining us and I look forward to seeing you all next quarter. Thank you. Operator?

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.