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| KNOT > SEC Filings for KNOT > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report.
Overview
The Knot is a leading lifestage media company targeting couples planning their future lives together. We offer multiplatform media services to the wedding, newlywed, and pregnancy markets. We operate a network of websites under several different brands, most notably TheKnot.com, focused on wedding content, products and services, WeddingChannel.com, focused on registry services, TheNest.com, focused on newlywed content and services, and TheBump.com, focused on pre-natal and pregnancy content, products and services. Extensions of our brand include The Knot's national and local magazines, The Knot books and television programming bearing The Knot name. Also under our umbrella are WeddingTracker.com, GiftRegistryLocator.com, party-planning site PartySpot.com, teen-oriented PromSpot.com, Breastfeeding.com, local baby services and community site LilaGuide.com, and WedSnap, the developer of the Weddingbook and Mommyhood applications on Facebook.
In order to sustain growth within the customer group we serve, we focus on our key growth strategy, which is to expand our position as a leading lifestage media company providing comprehensive information, services and products to couples from engagement through pregnancy on multiple platforms that keep in step with the changing media landscape. To that end we are focused on the following objectives:
- Upgrade our technology to increase our operational efficiency so that we can access a greater market share of advertising dollars and commerce revenue in the weddings portion of our business. We developed a new content management system that allows us to more efficiently maintain and organize information on our websites. Our new local contract entry system and surrounding support applications under development will allow greater pricing flexibility, which we believe will allow us to expand our local vendor base, as well as achieve operational efficiencies, providing additional time for our local sales force to pursue new accounts. In addition to the new contract entry system, we are in the process of converting our existing local art management application off of our legacy AS/400 system. We currently believe that these local systems projects will be completed and rolled out across the local markets we serve through the end of 2009. We then expect to proceed with further projects involving a self-service platform that will allow local vendors to automatically select their advertising programs and an auction-based platform for selling featured vendor positions in the local areas on our websites. We are working to enhance the functionality of our patented wedding gift registry application to encompass a wide selection of items and retailers improving the ability of our users to seamlessly add items from multiple retailers to their wish list and complete transactions. We expect that these new programs will allow us to more effectively scale our local and registry business and drive further growth for local online and registry revenue.
- Expand our brands into the newlywed and first pregnancy lifestages. Our acquisition of The Bump Media in February 2008 and Breastfeeding.com in December 2008 are designed to reduce our reliance on bridal endemic advertising, which is an important part of our strategy for increasing national online advertising revenue. To that end, we have increased our investments in editorial and creative staff to increase our content offerings for these additional lifestages.
- Increase awareness of our brands and products. We believe that we have generally excelled at marketing to our consumers with compelling brands, engaging content and products and a highly successful consumer public relations program, but we have not aggressively marketed our media offerings to advertisers. Accordingly, in 2008, we established a new marketing team to develop trade marketing programs and supporting research aimed at the local vendor community and national advertising marketplace as a foundation to drive further national and local advertising revenue growth. This team will also be involved in launching programs to increase registry searches and transactions from which we would derive commission revenue, as well as to increase revenue of our wedding supplies business through opportunistic acquisitions and improved conversion of our members to customers of our online stores.
- Expand our brands internationally. We are focused on identifying opportunities in large international markets where we can use our brand recognition and editorial authority on the key lifestages of engagement, newlywed and first-time pregnancy to drive further growth.
We believe the growth strategies outlined above will allow us to continue to increase consumer market share and deliver strong returns on our investments.
Third Quarter 2009
The highlights and key metrics of the third quarter 2009 compared to the third quarter 2008 were:
· Total net revenues increased 4.4% to $28.2 million.
· Local online advertising revenue increased 4.1% to $8.7 million.
· Merchandise revenue increased 29.7% to $7.5 million primarily due to an acquisition of an e-commerce company in May 2009.
· Registry services revenue was flat.
· National online advertising revenue and publishing and other revenue declined by 3.1% and 17.9% to $5.4 million and $3.1 million, respectively.
· Total operating expenses increased by $1.3 million to $20.4 million.
· Interest income declined by $733,000 this quarter from the third quarter of 2008 due to lower interest rates earned on our cash and investments.
· Net income for the third quarter was $771,000 or $0.02 per basic and diluted share, compared to net income of $2.2 million, or $0.07 per basic and diluted share in the third quarter of 2008.
· At September 30, 2009 we had total cash, cash equivalents, and investments of $128.9 million. Cash and cash equivalents were $82.9 million and investments were $46.0 million. All our investments are short-term and consisted entirely of auction rate securities.
· At September 30, 2009 we had no debt.
Results of Operations
Three Months Ended September 30, 2009 Compared to Three Months Ended September
30, 2008
The following table summarizes results of operations for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008:
Three Months Ended September 30,
2009 2008
% of Net % of Net
Amount Revenue Amount Revenue
(in thousands, except for per share data)
Net revenues $ 28,173 100.0 % $ 26,983 100.0 %
Cost of revenues 6,179 21.9 5,092 18.9
Gross profit 21,994 78.1 21,891 81.1
Operating expenses 20,401 72.4 19,148 71.0
Income from operations 1,593 5.7 2,743 10.1
Loss in equity interest (19 ) (0.1 ) - -
Interest and other income, net 93 0.3 826 3.1
Income before income taxes 1,667 5.9 3,569 13.2
Provision for income taxes 896 3.2 1,329 5.0
Net income $ 771 2.7 % $ 2,240 8.2 %
Net earnings per share:
Basic $ 0.02 $ 0.07
Diluted $ 0.02 $ 0.07
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Net Revenues
Net revenues increased to $28.2 million for the three months ended September 30,
2009, from $27.0 million for the three months ended September 30, 2008. The
following table sets forth revenues by category for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008, the
percentage increase or decrease between those periods, and the percentage of
total net revenue that each category represented for those periods:
Three Months Ended September 30,
Percentage of
Net Revenue Total Net Revenue
Percentage
Increase/
2009 2008 (Decrease) 2009 2008
(in thousands)
National online sponsorship and advertising $ 5,436 $ 5,608 (3.1 ) % 19.3 % 20.8 %
Local online sponsorship and advertising 8,686 8,341 4.1 30.8 30.9
Total online sponsorship and advertising 14,122 13,949 1.2 50.1 51.7
Registry services 3,445 3,453 (0.2 ) 12.2 12.8
Merchandise 7,462 5,751 29.7 26.5 21.3
Publishing and other 3,144 3,830 (17.9 ) 11.2 14.2
Total net revenues $ 28,173 $ 26,983 4.4 % 100.0 % 100.0 %
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Online sponsorship and advertising - Net revenues increased 1.2% driven by increased local online advertising partially offset by a decline in national online advertising. Local online sponsorship and advertising revenue increased 4.1%, driven by an increased number of local vendor clients. As of September 30, 2009 we had over 16,000 local vendors who display over 19,000 profiles compared to over 13,000 vendors who displayed over 15,000 profiles as of September 30, 2008. The average annual local revenue per vendor has decreased 13.5% from September 30, 2008 to September 30, 2009 due to an increase in the number of vendors that advertise at a lower price point. National online sponsorship and advertising revenue decreased 3.1% driven by lower advertiser spending by national advertisers at The Nest, The Knot and WeddingChannel websites. This decrease was partially offset by increased advertising spend for The Bump website.
Registry services - Net revenues were flat compared to the prior year quarter.
Merchandise - Net revenues increased 29.7%, driven by revenues from an e-commerce company that we acquired on May 1, 2009, which contributed $2.0 million of net revenue during the quarter.
Publishing and other - Net revenues decreased 17.9% driven by declines in advertising revenue related to both our national and regional magazines.
Gross Margin
The following table presents the components of gross profit and gross margin for
the three months ended September 30, 2009 compared to the three months ended
September 30, 2008:
Three Months Ended September 30,
2009 2008 Increase/(Decrease)
Gross Gross Gross Gross Gross Gross
Profit Margin % Profit Margin % Profit Margin %
(in thousands)
Online sponsorship
and advertising
(national & local) $ 13,278 94.0 % $ 13,348 95.7 % $ (70 ) (1.7 ) %
Registry 3,445 100.0 3,453 100.0 (8 ) -
Merchandise 3,400 45.6 2,805 48.8 595 (3.2 )
Publishing and other 1,871 59.5 2,285 59.7 (414 ) (0.2 )
Total gross profit $ 21,994 78.1 % $ 21,891 81.1 % $ 103 (3.0 ) %
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The decrease in gross margin was driven by lower gross margins in merchandise, online sponsorship and advertising and publishing and other. The decrease in merchandise gross margin was due to lower product margins from certain promotions conducted in 2009. We had various promotions to help drive sales and an event that provided customers with free shipping. We also had increased shipping costs primarily due to expediting backordered items. The decrease in online sponsorship and advertising gross margin was due to increased headcount in our online media advertising group partially offset by slightly lower revenues year over year. The decrease in publishing and other gross margin was driven by lower advertising sold in our publications.
Operating Expenses
Operating expenses increased 6.5% to $20.4 million, compared to $19.1 million in 2008, driven by increased stock-based compensation cost related to restricted stock awards granted over the past twelve months, increased legal fees in connection with our acquisition and equity interest activities, increased bad debt expense, accelerated amortization of the Macy's relationship intangible asset and incremental operating expenses associated with our acquisitions completed since the fourth quarter of 2008. These increases were offset by lower recruiting and outside consultant costs. As a percentage of net revenue, operating expenses were 72.4% and 71.0% during the three months ended September 30, 2009 and 2008, respectively.
The following table presents the components of operating expenses and the percentage of revenue that each component represented for the three months ended September 30, 2009 compared to the three months ended September 30, 2008:
Three Months Ended September 30,
Percentage of
Operating Expenses Total Net Revenue
Percentage
Increase/
2009 2008 (Decrease) 2009 2008
(in thousands)
Product and content development $ 5,010 $ 5,296 (5.4 ) % 17.8 % 19.6 %
Sales and marketing 8,116 7,826 3.7 28.8 29.0
General and administrative 4,786 4,005 19.5 17.0 14.8
Depreciation and amortization 2,489 2,021 23.2 8.8 7.6
Total operating expenses $ 20,401 $ 19,148 6.5 % 72.4 % 71.0 %
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Product and Content Development - The decrease in these expenses was due to lower consultant cost due to fewer information technology projects year over year. We had lower production costs due to timing of The Knot TV and Nest TV programs. Additionally, we had recruiting cost resulting from information technology and editorial recruiting in 2008 that did not recur in 2009. These decreases were offset by incremental operational expenses related to our acquisitions completed since the fourth quarter of 2008 and increased stock-based compensation cost related to restricted stock awards granted over the past twelve months.
Sales and Marketing - The increase in these expenses was primarily due to increased stock-based compensation cost related to restricted stock awards granted over the past twelve months and incremental operational expenses related to our acquisitions completed since the fourth quarter of 2008. These increases were partially offset by lower research costs and lower fulfillment cost on our national publications.
General and Administrative - The increase in these expenses was primarily due to legal fees in connection with our acquisition and equity interest activities. We also had increased bad debt expense related to increased reserves given the current state of the economy. Additionally, we had increased employee related costs to support our overall growth.
Depreciation and Amortization -The increase in expense was primarily due to a reduction in the estimated useful life of our Macy's customer relationship intangible assets resulting in increased amortization and incremental amortization from intangible assets acquired from acquisitions completed since the fourth quarter of 2008.
Loss in Equity Interest
Loss in equity interest was $19,000 for the three months ended September 30, 2009. The entity in which we have an equity interest was formed in July 2009. Therefore, there was no equity income or loss for the three months ended September 30, 2008.
Interest and Other Income
Interest and other income, net was $93,000 for the three months ended September 30, 2009 as compared to $826,000 for three months ended September 30, 2008. The decrease was due to the impact of lower interest rates on our entire portfolio of cash, commercial paper, treasuries and auction rate securities.
Provision for Taxes on Income
The effective tax rate for the three months ended September 30, 2009, was 53.7% as compared to 37.2% for the three months ended September 30, 2008. The increase is due to two factors. First, the declining interest rate environment has limited our tax-exempt interest income, which raises the proportion of our pre-tax income that is subject to taxes. Second, certain state income tax expenses are computed on an unconsolidated basis; therefore, we generate income tax expenses even in years that our consolidated pre-tax income is lower, which raises the effective income tax rate percentage on a GAAP basis.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
The following table summarizes results of operations for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008:
Nine Months Ended September 30,
2009 2008
% of Net % of Net
Amount Revenue Amount Revenue
(in thousands, except for per share data)
Net revenues $ 81,361 100.0 % $ 79,455 100.0 %
Cost of revenues 17,313 21.3 15,327 19.3
Gross profit 64,048 78.7 64,128 80.7
Operating expenses 61,697 75.8 58,794 74.0
Income from operations 2,351 2.9 5,334 6.7
Loss in equity interest (19 ) - - -
Interest and other income, net 613 0.8 2,908 3.7
Income before income taxes 2,945 3.7 8,242 10.4
Provision for income taxes 1,771 2.3 3,132 3.9
Net income $ 1,174 1.4 % $ 5,110 6.5 %
Net earnings per share:
Basic $ 0.04 $ 0.16
Diluted $ 0.04 $ 0.16
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Net Revenues
Net revenues increased to $81.4 million for the nine months ended September 30,
2009, from $79.5 million for the nine months ended September 30, 2008. The
following table sets forth revenues by category for the nine months ended
September 30, 2009 compared to the nine months ended September 30, 2008, the
percentage increase or decrease between those periods, and the percentage of
total net revenue that each category represented for those periods:
Nine Months Ended September 30,
Percentage of
Net Revenue Total Net Revenue
Percentage
Increase/
2009 2008 (Decrease) 2009 2008
(in thousands)
National online sponsorship and advertising $ 15,250 $ 15,699 (2.9 ) % 18.7 % 19.8 %
Local online sponsorship and advertising 25,912 24,624 5.2 31.8 31.0
Total online sponsorship and advertising 41,162 40,323 2.1 50.5 50.8
Registry services 8,144 8,520 (4.4 ) 10.0 10.7
Merchandise 20,737 17,478 18.6 25.5 22.0
Publishing and other 11,318 13,134 (13.8 ) 14.0 16.5
Total net revenues $ 81,361 $ 79,455 2.4 % 100.0 % 100.0 %
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Online sponsorship and advertising - Net revenues increased 2.1% driven by increased local vendor online advertising programs partially offset by decreased revenue from national advertising programs. Local online sponsorship and advertising revenue increased 5.2%, driven by an increased number of local vendor clients. As of September 30, 2009 we had over 16,000 local vendors who display over 19,000 profiles compared to over 13,000 vendors who displayed over 15,000 profiles as of September 30, 2008. The average local revenue per vendor has decreased 13.5% from September 30, 2008 to September 30, 2009 due to an increase in the number of vendors that advertise at a lower price point. National online sponsorship and advertising revenue decreased 2.9%, driven by lower advertiser spending by national advertisers at WeddingChannel and The Knot websites. This decrease was partially offset by increased advertising spend for The Bump website.
Registry services - Net revenues decreased 4.4%, driven by a net decrease in sales year-to-date by our retail registry partners resulting in lower commissions earned.
Merchandise - Net revenues increased 18.6%, driven by revenues from an e-commerce company that we acquired on May 1, 2009, which contributed $3.1 million of net revenue.
Publishing and other - Net revenues decreased 13.8% driven by declines in advertising revenue in our regional and national magazines. These decreases were partially offset by advertising revenues from The Bump magazines. We acquired The Bump Media in February 2008 and did not have any publications during the first half of 2008.
Gross Margin
The following table presents the components of gross profit and gross margin for
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008:
Nine Months Ended September 30,
2009 2008 Increase/(Decrease)
Gross Gross Gross Gross Gross Gross
Profit Margin % Profit Margin % Profit Margin %
(in thousands)
Online sponsorship
and advertising
(national & local) $ 39,087 95.0 % $ 38,740 96.1 % $ 347 (1.1 ) %
Registry 8,144 100.0 8,520 100.0 (376 ) -
Merchandise 10,099 48.7 9,003 51.5 1,096 (2.8 )
Publishing and other 6,718 59.4 7,865 59.9 (1,147 ) (0.5 )
Total gross profit $ 64,048 78.7 % $ 64,128 80.7 % $ (80 ) (2.0 ) %
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The decrease in gross margin was driven by lower gross margins in merchandise, online sponsorship and advertising and publishing and other. The decrease in merchandise gross margin was due to lower product margins from certain promotions conducted in 2009. We had various promotions to help drive sales and an event that provided customers with free shipping. We also had increased shipping costs primarily due to expediting backordered items. The decrease in online sponsorship and advertising gross margin was due to increased headcount in our online media advertising group partially offset by slightly lower revenues year over year. The decrease in publishing and other gross margin was driven by lower advertising sold in our publications.
Operating Expenses
Operating expenses increased 4.9% to $61.7 million, compared to $58.8 million in 2008, driven by increased bad debt expense, accelerated amortization of the Macy's relationship intangible assets, increased stock-based compensation cost related to restricted stock awards granted over the past twelve months, increased legal fees in connection with our acquisition and equity interest activities, increased compensation due to increased employee headcount and incremental operating expenses associated with our acquisitions completed since the fourth quarter of 2008 and our software development center in China. These increases were partially offset by declines in travel and entertainment and recruiting expense. As a percentage of net revenue, operating expenses were 75.8% and 74.0% during the nine months ended September 30, 2009 and 2008, respectively.
The following table presents the components of operating expenses and the percentage of revenue that each component represented for 2009 compared to 2008:
Nine Months Ended September 30,
Percentage of
. . .
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