Knot Q4 Earnings Call Transcript

123jump.com Staff
22 Feb, 2010
New York City

The lifestage media company targeting couples planning their weddings reported net quarterly revenue rose 3% to $25.1 million. Net quarterly loss widened 511.6% to $6.0 million. The company lost 19 cents a share compared to a loss of 3 cents a year-ago quarter.

The Knot, Inc. ((KNOT))
Q4 2009 Earnings Call Transcript
February 18, 2010 4:30 p.m. ET

Executives

Laura Cave – Corporate Communications Manager
David Liu – Chairman, President and Chief Executive Officer
John P. Mueller – Chief Financial Officer

Analysts

Jeetil Patel - Deutsche Bank
Richard Fetyko - Merriman Curhan Ford
Meggan Friedman - William Blair & Company
Randy Katz - JMP Securities
George Askew - Stifel Nicolaus
Jennifer Benz (ph) – Oppenheimer
Aaron Kessler - Kaufman Bros.
Mark Romer (ph) – Private Investor

Presentation

Operator

At this time, I would like to welcome everyone to the Knot''s Fourth Quarter and Year End 2009 Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers'' remarks, you will be invited to participate in a question-and-answer session. As a reminder, ladies and gentlemen, this conference is being recorded. At this time, I would like to turn the conference over to Ms. Laura Cave.

Laura Cave

Thank you. Good afternoon and welcome to The Knot''s fourth quarter and year end 2009 conference call and webcast. During the course of this conference call, comments that we make regarding The Knot that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements. Any such forward-looking statements are made pursuit to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements can be identified by the use of words like may, should, expect, plan, intend and other similar terms. You are cautioned about that these forward-looking statements speak only as of today''s date. Our internal projections and beliefs upon which we base our expectations may change, but we will not necessarily inform you if they do. The Knot''s policy is to provide expectations only once per quarter and not to update that information until the next quarter.

The important factors that could cause actual results to differ materially from any forward-looking statements mentioned today include but are not limited to the potential failure of the The Knot''s online wedding-related and other websites to generate sufficient revenue to survive over the long-term, our history of losses, the significant fluctuation which our quarterly revenues and operating results are subject, the seasonality of the wedding industry, our dependence on a limited number of customers and in particular Macy''s for a significant portion of the revenues, the dependence of our registry service business on the continued use of Wedding Channel website by our retail partners, the potential for losses on our investments and auction rate securities or our inability to liquidate those investments at desired times and in desired amounts and other factors described in the documents that we have filed with the Securities and Exchange Commission.

Additionally, if you have not received a copy of today''s press release, the release is now posted on the Investor Relations section of the company''s website at www.theknot.com. We have allotted up to one hour for today''s conference call, including the question-and-answer session that follows. Please take note that the company is operating under the SEC regulation FD and encourages you to take full advantage of the Q&A session.

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

David Liu

Thank you, Laura. Good afternoon and thank you all for joining us today. Entering into 2009, we expected that advertising both the online and in print would be under severe pressure. Print advertising began to decline in 2008 and continued to be weak throughout 2009. Our national advertising experienced significant cancellations and struggled in the fourth quarter of 2008 and the first quarter of 2009, but we actually saw improvement with a strong second half and we were pleasantly surprised to close the year down only 1%.

Our local online business, which had a record fourth quarter in 2008 maintained it''s sales momentum growing every quarter in 2009 both sequentially and over prior year quarters. And John will review the quarter and year-end performance of each revenue stream in detail with you later on the call.

In general, the wedding industry proved to be recession resistant and during the course of 2009, over 1.9 million members enrolled on The Knot and Wedding Channel just as they did in 2008. One thing to note about our membership total is that although total combined membership on The Knot and Wedding Channel remained consistent in 2009, the mix between the two sites shifted slightly as more members enrolled on The Knot and fewer enrolled on Wedding Channel. Our eCommerce revenue is highly sensitive to trends and membership, so even thought total membership was flat, The Knot Shop saw modest gains in revenue, which were offset by declines and revenue at the Wedding Channel Store.

However, merchandise revenue overall grew 20% for the year largely because of the revenue from the eCommerce acquisition we made in May. Registry Services exhibited weakness in the first half of the year as some consumers shopped outside our network of high-end retail partners, but in the second half of the year, we started to see positive signs as revenue from our non-Macy''s retail partners improved.

For the year, revenue from our non-Macy''s retail partners grew 21% versus 2008. Since the end of 2008, we completed a number of acquisitions with the acquisition of WedSnub, we brought in Facebook and mobile development expertise, eWish.com and Felicite.com added a local registry business and patent portfolio. We completed the acquisition of a wedding supply eCommerce business that was accretive to our financial results and breastfeeding.com gave us an organic flow of first-time parents to bolster the Bump brand and traffic.

These are strategic add-ons but they are all relatively small and none besides the eCommerce company contributed meaningfully to our top line this year. They did, however, impact our bottom line, adding an incremental $2.3 million in operating expense.

We believe these businesses are key catalysts that support our strategy to extend the brands onto social and mobile platforms, to create a truly universal registry service and to expand our ability to identify first-time parents who are not yet members of our core branded sites.

We continue to search for additional acquisitions to augment our strategies and we''re in a unique and enviable position. We expect the balance of our auction rate securities to be liquid at the end of June this year. We grew topline only 2% this year, we generated over $12 million in operating cash flow. We have no debt and we ended 2009 with cash and short-term investments totaling $131.5 million, so we will be looking to put our cash to work this year.

Now, this brings me to our outlook for 2010. With the progress we made in 2009, we have much to be optimistic about. For example, our new content management system enabled one editor with the assistance of a small team of interns to launch over 275 niche sites last year.

In December 2009, this network of niche wedding sites added 34% more visits to our local media on theknot.com. Our ability to innovate has allowed us to maintain our market dominance and in 2010, we should begin to see the benefits of the investments we have made over the last 18 months.

We also believe that the weakened state of our competitors, many who have experienced double-digit declines in 2009 along with what looks to be a longer road to recovery for the broader economy, has created a unique opportunity for us to invest more aggressively in our growth this year. However, I cannot talk about our growth strategies for 2010 without first addressing the impact of the early termination of the old Macy''s registry contract and making sure you all understand the potential impact this has on our financials this year.

Macy''s registry commissions were about $7.4 million in 2009. Now, while we''re not going lose 100% of those commissions because Macy''s has signed a new three-year link-out affiliate agreement, similar to the agreements we have with our other retailers like Crate and Barrel and Williams Sonoma.

We do believe a substantial percentage of those 2009 registry commissions from Macy''s are at risk. A more precise percentage is difficult to predict because the new agreement has only been in effect for about three weeks. We won''t have a definitive idea of the impact of the new agreement until we see more traffic data and commission payments that reflect the impact of Macy''s new registry platform and marketing programs.

We expect we will see the brunt of the impact in the second and third quarters of 2010, which are seasonally the larger quarters for the registry services business. As part of the new registry agreement with Macy''s, we received an early-termination fee and a one-time guarantee of a multimillion dollar national advertising campaign to help offset the impact of the lost registry commissions. It is important to note that while Macy''s has been a major advertiser the past several years, we have no guaranteed advertising commitment from Macy''s beyond this provision after 2010.

We certainly hope we will resign Macy''s for national advertising in 2011 and beyond, but we would do so under a program to be negotiated in the future. There were other indirect benefits of the old Macy''s relationship that we no longer have going forward. Wedding Channel received a significant amount of traffic from Macy''s, as all traffic through the registry link on Macy''s homepage was redirected to Wedding Channel. Therefore, a percentage of Wedding Channel membership and by extension, eCommerce in the Wedding Channel Shop, originated from Macy''s.

So, besides the anticipated loss of registry commissions, we also expect declines in Wedding Channel membership and wedding supply sales through the Wedding Channel Shop. Early data, since the Macy''s registry platform launched in the last three weeks, confirms this expectation on a preliminary basis. Again, we expect that the overall impact of Macy''s early termination would be most acute in the second and third quarter, as the bulk of our registry commissions and wedding supply sales are earned in the high wedding months between May and October.

We have not been idle in anticipation of this transition. Over the past year, we have been building out our new Gift Registry 360 Platform. We successfully soft launched the platform on our Facebook Application, Weddingbook, in the late summer of 2009 and our plan is to launch a Beta version online on the Internet at least in the summer and if at all possible earlier. Gift Registry 360 will offer universal gift registry management and shipping that is completely synchronized through the retailer partner''s systems. No matter where a bride creates her registry and no matter where a guest shops, the universal registry will be updated in real time by data feeds from our participating retail partners.

We don''t believe any other universal registry is able to do this and we see this as a major differentiator. Couples will also have enhanced tools to allow them to register for virtually any product on the web.

Thanks to the acquisition of the patented Group Gifting Technology from Felicite in 2009, we will be able to offer guests the ability to make partial payments toward the big ticket group gifts like a honeymoon or a home entertainment system.

If a bride is limited today by the time it takes to manage multiple registries in the future she will be able to register with any number of retailers without inconveniencing her guests. Our ad from anywhere functionality will allow brides to register for virtually any product sold on the web. The entire Internet becomes a product catalog. While we still think it will be difficult to overcome the decline in revenue from our changing relationship with Macy''s this year, we are excited about the long-term potential of Gift Registry 360 as a one-of-a-kind gift registry solution.

Now, as far as 2010 prospects for our advertising business, the outlook is mixed. We entered 2010 with descent momentum in both national and local. We continue to see a healthy pipeline of RPs on the national front, but visibility remains limited as I believe the new normal is shorter planning cycles for most brand advertisers.

On the local front, our sales force continue to do an extraordinary job closing new business. We continue to watch our churn rate closely and in the first half of 2009, overall churn was temporarily depressed while our new $50 vendors were in their preliminary six-month commitment. But, even if you factor out this group of vendors, churn for our standard vendors also steadily declined.

We saw those trends as quite positive and an indication of the value of our media. Towards the end of last year; however, both core and $50 vendor churn began to tick up again. This is something we''re carefully tracking and we have launched a number of initiatives to combat this trend.

The Vendor Dashboard which, launched last fall, has been universally well-received by our local advertiser community and Self-Service went live quietly a month ago. With no marketing or promotion, the Vendor Dashboard and Self Service have showed early signs of promise. We spent many months working to upgrade our infrastructure so we could innovate in the local business.

With the vast majority of our platform fixes behind us, it is exciting to see these products launch as we continue to shift tech resources away from completed maintenance projects and back to building on our upgraded platform. Over the coming months, we have a number of product launches that we expect to transform our service offerings to our local vendors. Many of our competitors have been chasing us by incrementally improving on our baseline services.

Our next evolutionary step will set a new level of service that we believe very few, if any, of our competitors will be able to match. Due to competitive reasons, I can''t go into more details here on the call, but I ask all of you to stay tuned for some exciting developments.

An area of focus for us that may seem a bit counterintuitive is our investment in publishing this year. As many or most publishers are buckling under their cost structures and closing magazines, we believe there is an important opportunity to serve advertisers who remain committed to spending money in the print medium as well as to promote our brand via newsstands across the country.

With the closure of three major titles in our space, advertisers are looking to advertise with trusted bridal media brands. As a result of our announcement that we will increase the frequency of our national magazine from two times to four times in 2010, we have seen healthy demand and in fact, much of the premium inventory in our new issues is already sold out.

Finally, a significant 2010 initiative we have begun to invest in is the launch of our business in China. On the last call, I mentioned we created an offshore software development center in China during 2009 and that center has not only improved the productivity of our software development efforts, the experienced team there has provided us a useful launching pad for our media business in China. For some time, we have been interested in opportunities to increase our brand and services to international markets with scalable market opportunities.

Due to recent changes in consumer interest and demographic composition, it has become apparent that China is an ideal place to start. Because of the one child rule, Chinese families place a tremendous amount of resources behind their only son''s and daughter''s wedding celebrations.

China has over 10 million couples getting married every year, where roughly $57 billion is spent on weddings each year. And most importantly, however, is the cultural change that is influencing this young generation of engaged Chinese couples. 80% of Chinese couples today incorporate western wedding traditions into their wedding and there are over 200,000 wedding planning companies with over 2 million employees to help these couples pull off the wedding of a lifetime.

As a recognized authority on weddings in the United States, we believe The Knot is perfectly positioned to provide advice and services to help the Chinese bride plan a western-style wedding. Our newly-formed software development center in Guanghou (ph) will provide development and technology support for the new operation based in Beijing. We are forming a local Chinese corporation and are currently setting up the Beijing office.

In total, we anticipate spending approximately $2 million to $4 million in China in 2010. We are in an exciting inflection point for the business, with major infrastructure investments behind us, we are working on exciting opportunities to radically transform our services for brides and advertisers a like.

From local advertising, to registry, to China, we are surrounded by massive market opportunities and we have the cash and the consumer audience to pursue them. There are execution risks ahead and from where we stand now, our expectations for near-term results remain modest, but our financial position is strong, our competitors have weakened and now is the time to push forward.

I hope this helps provide you with an understanding of how we or how our long-term vision is evolving. We look forward to updating you on our progress throughout the exciting year ahead and with that, I will turn the call over now to John for the financial review.

John P. Mueller

Thanks, David. I would like to go over the results reported today in our press release, add a little bit of detail and then afterwards we can take your questions.

For the fourth quarter of ‘09, we reported net revenue of $25.1 million, which represented a 3% increase over the fourth quarter of ‘08. Excluding revenue from our eCommerce acquisition, net revenue declined 2% compared to the fourth quarter of 2008. Our national and local online advertising business had combined growth of 4% over the prior year''s quarter.

The eCommerce business that we acquired in the second quarter drove 28% growth over the fourth quarter of 2008 in our Wedding Supply business. These gains offset a 14% decline in publishing and other revenue. Our registry services business in the fourth quarter increased 1% compared to the fourth quarter of 2008.

For the year, revenue increased by 2% to $106.4 million compared to 2008. Excluding the eCommerce acquisition, our year-to-date revenue declined 2%. Overall our diversified business model provides stability to our revenue for the year, online advertising and merchandising businesses offset declines in publishing and other revenue.

Operating income prior to impairment charges for the first quarter of 2009 was $1.7 million compared to operating income before impairment charges of $719,000 for the fourth quarter of 2008, an increase of about $1 million. Growth in revenue and lower operating expenses primarily related to the recovery of certain bad debts during the fourth quarter of ‘09 drove the increase.

For the year, income from operations prior to impairment charges was $4.1 million, compared to $6.1 million in 2008. The $2 million decline in operating income was primarily due to increased expenses related to the full-year effect of investments in information technology infrastructure, marketing and national sales support staff that occurred in mid-2008, stock-based compensation, expenses related to acquisitions, increased bad debt expense and accelerated amortization of the Macy''s intangible assets.

I want to point out that we did have an operating and net loss for the quarter and year-ended December 31, ‘09, primarily because of the pre-tax impairment charges of $10.7 million related to our 2006 acquisition of WeddingChannel.com. The impairment charges reduced the carrying value of intangible assets associated with the WeddingChannel.com trade name, technology and Macy''s relationship.

The impairment charges accounted for approximately $0.33 per share pre-tax on both a basic and fully diluted basis for both the fourth quarter and year-ended December 31, 2009. As David mentioned earlier, one of the most significant recent events for this company is the change in our Macy''s relationship. This change led to an accounting analysis which resulted in the impairments I just mentioned.

I would like to provide you a little more detail about that analysis. Prior to the impairment, we had intangible assets on our balance sheet, net of amortization of approximately $22 million at the end of the third quarter. $19.5 million of that amount relates to our acquisition of WeddingChannel.com in 2006 and it consists of our patented registry tool, contractual advertising relationships and the Wedding Channel trade name.

On an annual basis, we perform a computation of the value of the intangibles based upon long-term revenue projections, assumptions based on the potential licensing value of comparable trade names and technologies and the present value of cash flows from customer relationships. We use this analysis to determine whether the values recorded on the balance sheet for the intangibles are fair.

The current economic environment has been particularly difficult for both the advertising and retail industries and the outlook remains uncertain. The decline and the projected growth rates of these industries requires that we reassess and reduce the long-term growth rates we had been using in our valuation model for the Wedding Channel intangibles. The new relationship with Macy''s began this month and replaced a previous agreement that had been scheduled to expire in 2011.

As David mentioned, the new agreement will be similar to our other WeddingChannel.com retail partnerships, whereby the company will only receive a commission for registry purchases originating from its websites. The reduced growth rates and revenue assumptions in our valuation model indicated a need to write-down the carrying value for the trade name, technology and relationship intangibles in question.

I would like to emphasize though that we continue to pursue new initiatives to leverage the patented technologies acquired in the acquisition across the significant registry retail market opportunity, including the Gift Registry 360 application that we''re rolling out on the web this year.

Now, I would like to give you a little more color on each of our respective business areas in more detail. First, National Online Advertising increased $310,000 or 6% from the prior year''s quarter and National Online revenue for the year was $21 million, a decline of 1% compared to 2008.

For the year, the decline in National Online was mainly due to cancellations and lower renewals, primarily in bridal travel categories. And as David stated, advertisers continue to plan for short campaigns, which limits the visibility into our pipeline.

The fourth quarter benefited from several last-minute campaigns that drove revenue higher; however, we can''t be certain that headwinds in this market have turned. The share of non-bridal and bridal advertising revenue shifted slightly for the quarter to approximately 26% non-bridal and 74% bridal, from about 32% non-bridal and 68% bridal at the end of the third quarter.

Local Online Advertising revenue continued to grow, increasing by $202,000 or 2% for the fourth quarter of 2009, compared to the same period in 2008. Year-to-date Local Online Advertising revenue was $34.7 million or up 4% from 2008, which more than offset declines in the National Online business.

As of December 31, ‘09, we had over 19,900 profiles, an increase of 17% from the approximately 17,000 profiles at December 31, 2008. The vendor growth rate is significantly higher than the revenue growth rate, due to the fact that the average revenue per vendor is now $2,100, compared to $2,400 at the same time last year, a decline of about 13%.

The decline in average revenue per vendor is largely due to the increase in the $50 profile vendors. The churn rate increased to 33.3% from 31.5% at the end of the third quarter. We attribute the increase in churn rate to higher churn among our $50 profiles, which tend to be smaller customers that have more volatility in their businesses. It is possible that the churn rate could remain the same or increase slightly in the coming months. On a sequential basis, compared to the third quarter ended September 30, Local Online revenue increased by 1%.

Our profile count increased by 2.4% and our annual revenue preventer has remained constant at $2,100. As we continue to roll out variable pricing, we will be updating you on these metrics so that you can see the impact our pricing changes are having on total Local Online revenue.

Let me turn to the eCommerce parts of our business, registry and wedding supplies. Registry services revenue increased by 1%, compared to the prior-year quarter and declined by 3.5% for the year ended December 31, ‘09, compared to ‘08. The poor economic environment is disproportionately impacting our higher-end retailers but certain new registry partners are helping to stabilize the business.

As we discussed previously, our new contract with Macy''s will reduce revenue in this business in 2010 because the company will no longer host and receive commissions on all of Macy''s registry transactions. The new relationship with Macy''s began this month and is similar to our other retail partners, whereby the company receives a commission for registry purchases originating from its website.

Our wedding supplies business grew by $869,000 or 28% over the prior year fourth quarter, primarily as a result of the second quarter acquisition of another eCommerce wedding supplies retailer. Excluding the revenues from this eCommerce acquisition, the wedding supplies business declined 7% over the prior-year fourth quarter.

For the year, our wedding supplies business grew by 20% compared to 2008. Excluding the effects of this acquisition, our Wedding Supplies business was flat compared to full year 2008. The impact of the eCommerce acquisition on our financial results is as follows, for the fourth quarter, it added approximately $1.1 million of incremental revenue at a 46% gross margin, operating expenses were $453,000 and operating income was $46,000. For the year, this acquisition added $4.2 million of incremental revenue at a 48% gross margin, operating expenses were $1.6 million and operating income was $407,000.

Publishing and other revenue declined by $776,000 or 14% to approximately $4.7 million for the fourth quarter of ‘09 compared to $5.5 million for the same period in ‘08. For the year, publishing and other are down 14% or $2.6 million to $16 million.

Publishing remains a positive contributor to our business though and with the demise of some competitor magazines, our increase in the frequency of The Knot national magazine from two times to four times and slightly better market environment, we expect this business to improve on a sequential basis.

For the fourth quarter, our operating expenses, excluding impairment charges, declined by $506,000 to $19 million compared to operating expenses, excluding impairment in the fourth quarter of 2008, which were $19.5 million. The decline is primarily related to the collection of previously reserved bad debts, lower consulting and lower depreciation and amortization.

These declines were partially offset by higher stock-based compensation, operating expenses of $668,000 at our acquisitions that occurred throughout the year and the newly-formed software development center in China. For the year, operating expenses, excluding impairment charges, increased by about $2.4 million, the increase in operating expenses on a year-over-year bases is primarily related to the following, employee compensation associated with the full-year effect of head count increases in ‘08, stock-based compensation, operating cost of $2.3 million related to our acquisitions which were not part of our operations in ‘08, transaction costs associated with these acquisitions, bad debt expenses, the newly-formed software development center in China and higher depreciation and amortization.

These items were partially offset by lower travel and entertainment expenses, lower recruiting expenses and lower consulting expenses. On a sequential basis, our total operating expenses, excluding impairment charges, declined $1.4 million in the fourth quarter, compared to the third quarter of 2009.

The decline is due to the reversal of bad debt reserves previously discussed and lower rent largely due to a one-time charge in the third quarter for a facility that we closed related to our eCommerce acquisition. Interest earned on the company''s cash and investments declined by $586,000 and $2.9 million for the fourth quarter and year ended December 31, ‘09, respectively compared to the same period in ‘08.

The significant decline in interest income was due to lower interest rates during 2009. Our effective tax rate for ‘09 is approximately 19% compared to 26% for ‘08. The decline on the tax rate is due to the increase of the impairment charge.

Cash flow from operations for the fourth quarter of ‘09 was approximately $475,000 and approximately $12.3 million for the year ended December 31, ‘09. Capital expenditures for the year ended December 31, 2009, were $2.4 million which was half of our total for 2008.

The company''s balance sheet reflects cash and cash equivalents of $95 million and short-term investments of $36.5 million, consisting entirely of auction rate securities. The auction rate securities balance declined to $36.5 million at December 31, ‘09, from $52 million at December 31, ‘08, primarily due to $15.6 million of issuer redemptions at par value throughout 2009.

The company retains and plans to exercise its right to put its auction rate securities at par to UBS beginning June 30, 2010. The company has no debt. These investments were previously classified as long-term investments but have been reclassified to short-term investments as we plan to exercise our right to receive par value for these investments on June 30, 2010, less than five months from now.

The auction rate securities are debt securities, collateralized by student loans and the Federal Government guarantees a substantial majority of these loans. I hope this commentary has helped everyone understand our results for the fourth quarter and full-year ‘09 as well as some of the key items on our balance sheet. This concludes our prepared remarks and I will now open the call to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. If you have a question, you will need to press star one on your touchtone phone. If your question has been answered and you wished to be removed from the queue, you may press the pound key on your touchtone phone. Your questions will be answered in a queue in order they are received. If you are using a speakerphone, please pick up your handset before pressing the numbers. Your first question comes from the line of Jeetil Patel of Deutsche Bank.

Jeetil Patel - Deutsche Bank

Hi guys. A couple of questions. I guess, first of all, can you talk about, 60% of the historical WeddingChannel revenue came from registry and merchandise. Is it safe to assume that most of this is going to be out of the P&L given the new deal and the impairment you took on the acquisition and the intangibles? Second, I guess when you look broadly across the different business lines, I guess, which ones would you expect to show growth in 2010? It looks like advertising probably could and maybe even publishing if you are increasing the number of national mags, could you elaborate on that? And then I have a quick followup.

David Liu

We''ll answer in reverse and I will take the end and you can take the front, John. I would say we expect to be able to grow all of our businesses except for registry. We think that that if the recovery doesn''t lose steam, advertising should at least stay status quo and is being continued as they are. We have been able to show descent progress on both the national and local side. We wouldn''t be investing in the publishing side of our business if we didn''t think there was a growth opportunity there. And eCommerce, with the acquisition and with the productivity we have seen on The Knot Shop, we''re pretty -- I think we think that we should be able to grow that business as well. Registry clearly is the one that we''re going to be starting a year off with in a pretty significant hole.

John P. Mueller

Jeetil, I am not sure I quite understood your question, but let me take a stab at it and you can come back at me if this is not right but the WeddingChannel website is going have a decline in traffic. It is coming in right now at what we thought it would be, but it''s too early after only 18 days in this relationship to make any final judgments on it and I wouldn''t want to announce anything to anyone on the call today for fear of making a -- I''m giving you information that would later prove to be incorrect this early stage in the relationship.

It''s no longer a separate P&L, it''s all consolidated. But the WeddingChannel Store is a separate store, a separate website that obviously gets all of its traffic for the Wedding Supplies business from the WeddingChannel. So if you''re going to see a decline in traffic at the WeddingChannel website, you are going to have two impacts. You''re going to have one impact on the registry revenues, which are going to go down because of the fact that Macy''s is now link out and we are only earning commissions on guests that are referred by us from that website to Macy''s to make a purchase at Macy''s, rather than before that -- before this new deal, we hosted Macy''s entire registry and whether a guest came to the website directly or came to our website through the Macy''s registry portal, we earned a commission.

So, commissions from Macy''s are going down and as a result in the decline of traffic, the revenue for the WeddingChannel Shop will go down as well. By how much at this point, we are not willing to speculate other than you have to make your best estimate based upon your knowledge of -- Macy''s made up about 80% of our registry commissions in 2009 as David described and make your best estimates to what you think is going to happen right now and you will obviously see quarter-over-quarter comparisons in Q1 and Q2. As David mentioned, Q2 and Q3 are the big registry quarters. So, that is where you are probably we''re all going to get actually the best visibility on what that impact is going to be.

Jeetil Patel - Deutsche Bank

Got it. And a quick follow-up, in China, I guess, can you discuss for this year, what kind of incremental expense that you take out to ramp up in that region? And second, I guess, when do you start to see the revenue impact start to flow into the P&L?

David Liu

We don''t think there is much revenue this first year. And if you look at the operations that we set up there and we are looking to build, we''re estimating anywhere from $2 million to $4 million of additional expenses will be incurred this year in our efforts in China.

Jeetil Patel - Deutsche Bank

Okay.

Operator

Your next question comes from the line of Richard Fetyko of Merriman and Company.

Richard Fetyko - Merriman Curhan Ford

Good evening guys. Just a follow-up to the prior question on China, $2 million to $4 million investment, is that OpEx or some CapEx out of that?

David Liu

It''s all OpEx.

Richard Fetyko - Merriman Curhan Ford

It''s all OpEx. Okay. And the Macy''s advertising agreement, you mentioned multimillion dollar agreement. Could you tell us what Macy''s ad spend was in 2009 and the timing of the new ad budget from Macy''s is it -- will it start in the first quarter or second quarter, sort of the elevated level of ad spend from Macy''s anticipated?

John P. Mueller

In prior calls, I think it was safe to say that we benefited from $1 million and change of spending by Macy''s and by multimillion, obviously it means more than one. But, I wouldn''t want to disclose what they''re spending. Other than to say that, if you''re launching a new registry portal like they''re doing, they''re obviously going ramp it up from what they were spending historically if they want to drive the success of that new launch.

So we will get benefit from it. I don''t have the specific media plan laid out for all four quarters of the year, but for purposes of modeling, if you just assume a quarter of whatever incremental amount you''re going to assume every quarter, it''s straight line across the year and that should be pretty accurate. The only thing is their fiscal year ends, I think, on January 31. So some of that incremental spend may end up hitting us in 2011, but it shouldn''t have a very big impact because most of it, I think will still hit in 2010.

Richard Fetyko - Merriman Curhan Ford

I would have thought with the second and third quarters being sort of heavier wedding season periods that perhaps they would comment more of their ad spend, incremental ad spend in those quarters.

David Liu

The media spend is really to drive registry creation and for a bride, they create their registries months in advance of the wedding.

Richard Fetyko - Merriman Curhan Ford

Okay.

David Liu

Commissions are generated when the weddings occur because it generally gets procrastinated and they don''t buy the wedding gift until the week before the wedding and that why you see the clustering of commissions being in the second and third quarters.

Richard Fetyko - Merriman Curhan Ford

Okay. That makes sense. John, you can give us the segment gross margins if you have it handy?

John P. Mueller

Certainly, Q4 was 95.4% for online advertising, 47% for eCommerce, obviously 100% for registry and 65.6% for publishing and other. On a combined basis, that was 82.8%.

Richard Fetyko - Merriman Curhan Ford

Got you and then lastly, if I may, how much did you benefit in the quarter from the bad debt credits or reversals or collections, I guess?

John P. Mueller

$0.5 million.

Richard Fetyko - Merriman Curhan Ford

$0.5 million?

John P. Mueller

Yes.

Richard Fetyko - Merriman Curhan Ford

Got it. Thanks, guys.

Operator

Your next question comes from the line of Meggan Friedman of William Blair & Company.

Meggan Friedman - William Blair & Company

Hi. Thanks, just a few questions here. On registry, you gave a pretty good number for the growth from the non-Macy''s retail partners. Is that the same-store number or what would that look like if you backed out some of the newer editions over the course of the year?

John P. Mueller

It''s not a same-store number. That is an absolute growth from the non-Macy''s. I don''t have that handy. I can get that and email it back to you.

Meggan Friedman - William Blair & Company

That would be great. In terms of the additions over the course of the year, is it fair to say they were more back half weighted then on the registry side?

David Liu

Yeah. I think if they were the newer retailers, there were a handful that were probably added towards the back half of the year.

John P. Mueller

Yes and certainly became operational or -- you got the benefit of it in the second half of the year.

Meggan Friedman - William Blair & Company

Okay. Great. To follow up on some of the initiatives that you guys are working so hard to roll out, can you provide an update on the variable pricing initiatives, any metrics you can share from the original test market and then on the niche site, any guidance or thoughts on how many you expect to roll out in 2010? And I know it''s early days, but can you talk about the feedback to date or share any usage metrics on the Self Service platform? Thank you.

David Liu

Sure. Variable pricing now is in all markets. That was rolled out at the end of the fourth quarter, so the vast majority of the markets were rolled out in the fourth quarter. So the full effect of how this is going to impact pricing and the price per vendors is yet to be determined, even though it did stabilize between the third and fourth quarters, we didn''t see a decline in the dollar value per vendor. On the niche site, it really is as many ways as we can slice and dice our content will be how many sites we can launch. We could easily double this output based on the types of categorization of content that we have and our goal is to continue to push the envelope.

If you look at a lot of the trends in online media, the dynamic creation of destinations in content, the way to get STO benefit and to drive traffic is really something everyone is really pursuing and we think we have a bit of head start in our category, certainly. So, we''re going to continue to push that in and as you can see from the early results we have gotten from the STO benefit and remember, we''re not promoting these niche sites at all. We are not buying any key words to support it. All the traffic gains we received from the network and is entirely organic from STO and so we''re pretty pleased with the results that this has been delivering for us.

Also keep in mind one of the things that we will be looking at this year is actually creating premium inventory on the niche sites that we can now monetize. Because right now, they not being monetized at all. Self Service, about a quarter to a third of the vendors who have received access to their Self Service environment have been using it and that is a very positive sign. With our vendor base, it''s always hard to predict whether or not they will be technologically savvy to use the tools that we have built for them, so that has been very positive. Over 5,000 have access now and the rest will be getting it within the next month or so as we iron out some of the remaining back-end issues that we''re discovering as more and more people have access to it. And Self Service, which we launched 30 days ago, at some point in January and we did it very quietly.

We essentially just linked it from the advertisement uplink on the main screen and on the corporate site and has actually been doing quite well. If Self Service were an individual salesperson, they would be my top salesperson right now. So we''re pretty pleased with the traction that we''re getting and we hope to certainly drive more growth as we begin to promote it.

Meggan Friedman - William Blair & Company

Great. Thank you.

Operator

Your next question comes from the line of Sameet Sinha from JMP Securities.

Randy Katz - JMP Securities

Hi. This is Randy Katz on the line for Sameet. A couple of questions, the first pertains to the China expense, $2 million to $4 million this year. Is any of that one-time or should we expect that all be ongoing as well?

David Liu

We will have to come back to on you that. I think, you can assume, we have half of it would be ongoing right now and then the other half may be one time but there are a lot of different things, a lot of different balls in the air right now and we''ll update you as we progress throughout the year.

Randy Katz - JMP Securities

Okay. Great. On the Macy''s side, of the $7 million plus on the registry revenue, you''re not clear as to what is going to happen there. I guess there are some variables in terms of how they were marketing their site, driving traffic, whether it was directly through the WeddingChannel or done themselves. Can you at least provide us a sense of how much of the traffic that you were fulfilling was from proprietary sites versus the Macy''s site and at least leave us the work to do to make the assumptions on what that could mean to lost revenue?

David Liu

Well, let me clarify one point. Any marketing that Macy''s was doing for their registry was essentially marketing WeddingChannel. The actual URL for Macy''s registry was Macy''s.WeddingChannel.com and they were spending a descent amount of SEM, which I actually can''t even tell you the amount they did spend to support the registry business, which was essentially supporting the WeddingChannel site. We can''t right now disclose the actual traffic contribution that Macy''s was providing in the past year.

Randy Katz - JMP Securities

Okay. Just one last one on the eCommerce acquisition, can you at least give us a sense now of percentage of transactions, revenue that is fulfilled now by the The Knot as opposed to it''s previous arrangement and what kind of impact that is having on the gross margin in the second? Thanks.

John P. Mueller

On the eCommerce acquisition in terms of what it''s contributing in 2009?

Randy Katz - JMP Securities

Right. My understanding is with the shop (Multiple Speaker) most of the orders yourself, which should drive some improvement to your gross margin. I was wondering where you are there?

John P. Mueller

We''re 100% in house now.

Randy Katz - JMP Securities

100% in house. Thank you.

John P. Mueller

If we are, it''s less than 5% right now.

Operator

Your next question comes from the line of George Askew of Stifel Nicolaus.

George Askew - Stifel Nicolaus

Yes. Hi. Good evening. What were the amount of costs spent by The Knot to support the Macy''s relationship in 2009?

John P. Mueller

We really haven''t disclosed that information. I don''t think in the past, so I think you have on make your best estimate on that but if you''re trying to assume what we get in cost savings right now. We don''t think that there will be a significant cost savings because what we think what we''re going to do is transition a lot of the expenses associated with Registry to our Gift Registry 360 business.

George Askew - Stifel Nicolaus

Okay. On churn, the local vendor churn, remind us please, how you calculate that given that you, you have kind of morphed from unique accounts or vendors to a profile strategy? Is it churn of profiles or actual customers?

John P. Mueller

Vendors.

George Askew - Stifel Nicolaus

Vendors. It''s still vendors?

John P. Mueller

Yeah.

George Askew - Stifel Nicolaus

Okay.

John P. Mueller

A vendor can have more than one profile.

George Askew - Stifel Nicolaus

Right.

John P. Mueller

So and we are just dealing with the loss of customers on that. So the calculation is, the numerator is cancellations and the denominator is -- you take your vendors at the end of the period and you add cancellations that have occurred throughout the period to that number and that is simple, cancels in the numerator, vendors at the end of the period plus cancels that have happened.

George Askew - Stifel Nicolaus

Did you see any local vendors with many profiles churn away, for example?

John P. Mueller

We have had that. Every once in a while, you will get a vendor that represents a lot of other smaller businesses and those are obviously accounts that we put -- our sales force puts a lot of time and effort to make sure that we keep them happy. Yes, but we have had throughout the year of ’09. We have had a few losses. We have also had a few good wins, too and that is part of the ongoing competitive nature of that business.

George Askew - Stifel Nicolaus

Okay. And then one last one, my math suggests the Macy''s advertising revenue was $1.5 million in 2009 and kind of following up to a question before is this multimillion advertising contract for Macy''s in 2010 on top of what they have -- their normal spend has been based on ’09 or are you kind of rolling that in to the new contract?

David Liu

It''s inclusive, essentially a new advertising deal. They have been advertising on an annual basis, so it''s a new advertising deal that is multimillion.

George Askew - Stifel Nicolaus

If my assumption of $1.5 million is correct and it''s based on numbers you guys have provided for 2009, what has their annual spend been say the last three or four years for advertising? Around that number or lower, higher?

David Liu

It''s been lower.

George Askew - Stifel Nicolaus

Okay. Thank you. All right. Thank you very much.

David Liu

Sure.

Operator

Your next question comes from the line of Jennifer Benz (ph) of Oppenheimer.

Jennifer Benz - Oppenheimer

Hi, a few questions on advertising. On the National side, you had one-off kind of last minute spend in 4Q?

John P. Mueller

Right.

Jennifer Benz - Oppenheimer

Can you guys quantify that? Should we expect to see similar growth in 2010 or does the Macy''s offset that one-off spending?

John P. Mueller

This is something that happens every fourth quarter and if the economy is in descent shape, you will see a flurry of activity where people are trying to send their marketing budgets before they and if they don''t spend they lose it. So, it''s not something that you can either predict or model. We will try to be poised to take advantage of the opportunities that arise and then basically the goal is to try and build on that and ideally renew the business when the term comes up.

David Liu

And then going forward…

Jennifer Benz - Oppenheimer

Instead of the 6% growth rate, how much of that growth is attributed to that business?

John P. Mueller

Minor.

Jennifer Benz - Oppenheimer

Okay. And on local side, sequentially your year-over-year growth has gone down. I''m assuming it is because of the annual spend that keeps getting lower. Do you expect that trend to continue too or is that difficult to compare?

John P. Mueller

It''s a little bit difficult to predict right now because we''re now finally fully operational on variable pricing on every market that we are in. It did stabilize a little bit from Q3 to Q4, we did not see much of a change, but the mix of advertisers will vary from quarter-to-quarter, so I think you will see quarter-to-quarter fluctuations and we''ll give keep giving you that stat every quarter so you know we can track it.

Jennifer Benz - Oppenheimer

Okay. Great. Thanks.

John P. Mueller

Sure.

Operator

Your next question comes from the line of Aaron Kessler of Kaufman.

Aaron Kessler - Kaufman Bros.

Hi. Just a couple of questions. First, on the local advertisers, did you give a number for that? I know you don''t give profiles. Do you have an update on the advertiser number? And also on the local growth as we look out over the next couple of years, what have you made a couple of key drivers for that? Is it going to be the self-service platform, the niche site or the -- how do you address bigger hundred thousand potential advertiser opportunity? How do you expand your awareness to drive that advertiser account? Thank you.

David Liu

The actual total number of vendors we had as of the end of the year was 16,800. And the target goal I have given my local sales force is to cross the psychological threshold of 100,000 vendors. And so we''re really getting everyone to laser focus on what it means for the organization to be able to sustain and to grow the business and reach 100,000 vendors. I think for those who haven''t been with us for a while, that seems like a very large income. For those who have seen how we have been able to transform the old wedding pages acquisition and the local advertising base that we have there, it''s a growth rate that we have been able to accomplish in the past and that is something we think with the investments we made, not only with the Vendor Dashboard, with the Self Service and with some of the other services that we''ll be rolling out will enable us to achieve those numbers.

Keep in mind, we reach 80% of the brides who are planning a wedding in the United States. We are currently servicing less than 3% of the vendors and so one of the ways that we believe we can actually begin drive toward the number is really utilizing our community and the social dimension of our site to bring the other vendors in. 100,000 should be doable when you have 80% of the consumer base. They are 800,000 vendors who service weddings in the country, so it just puts things into perspective a bit.

Aaron Kessler - Kaufman Bros.

All right. Thank you.

Operator

Your next question comes from the line of Mark Romer (ph), private investor.

Mark Romer - Private Investor

Hi, David, this is Mark.

David Liu

Hi, Mark.

Mark Romer - Private Investor

Hi. First let me start by saying I have been a longtime Knot investor, probably the better part of the last decade. So, I have kind of gone on this ride with you and let me first say….

David Liu

You''re very well-known in our offices, Mark.

Mark Romer - Private Investor

Are you kidding?

David Liu

No. We have enjoyed reading your posts.

Mark Romer - Private Investor

Okay. Well, super then and you can tell by my posts. I have been a longtime supporter of The Knot. I think you have neat little franchise there, but the first thing I wanted to say is David I think you have done a heck of a job over the, basically 10 years that Knot has been around. Second thing I wanted to say, a little bit of a critique. I wanted to start with that, but there is an expression in journalism burying the lead. If I am wrong, didn''t you guys make money this quarter?

David Liu

That would be…

Mark Romer - Private Investor

If you pull out the impairment, I think that was a profitable quarter and you never would find that in the press release. Just -- this is some input for you, as I was reading the press release, I was a little disappointed with how you guys presented it. It seemed like the whole lead was the impairment, which I don''t know why you guys would really want to emphasize that.

David Liu

You are right in pointing that out. We had some debates as to how we wanted to position the tonality of the release. I think one of the things that honestly for me was a concern that people were not properly understanding the impact of this transition with Macy''s. And so I am a huge believer in many of the things we have done and I think the opportunity for us to build on what we have created is enormous. But I do think that we''re going to be running into a couple of quarters this year where the impact of the Macy''s relationship is going to have a pretty negative impact on our financials. And I just want to make sure that everyone who has been shareholders and is following the stock is aware of what is going to happen the next six months.

Mark Romer - Private Investor

Got you and I can certainly see that in the press release. I will definitely concede that. I guess the last thing as a question. Love to see the Australia expansion and now the China thing sounds great too. Can you talk a little bit about how Australia''s going and an update on that?

David Liu

Yeah. In Australia, we essentially licensed the brand to a media company there and they have been a wonderful partner. We will be able to participate on the upside. They are still in start-up mode and building the business, but the traffic traction has been good. They have been getting great press and PR. So we''re looking at ways that we can continue to help support them because it is -- they have been a great execution partner in terms of how they have implemented the band. China is just simply an unbelievable market right now and what is happening there is really outpacing in many respects some of the things that we do in the states and so it''s exciting to have an opportunity to pursue that market.

We would not have gone into it if the goal was to build the business to help a Chinese bride plan a Chinese wedding. We don''t have that authority, nor would be have the hubris to think that a U.S. company could do that. But, it is really the social trend where this young generation is looking for western traditions and puts us in a very unique position, unlike other U.S. Internet businesses who have entered the Chinese market. We actually come in with the credibility of being the only group who can truly provide comprehensive coverage of western traditions for the domestic market there. So we''re pretty excited about the investment we are making there.

Mark Romer - Private Investor

Great. And that one will remain a Knot operation as opposed to being licensed out?

David Liu

Yeah. That would be a Knot operation.

Mark Romer - Private Investor

Super. Okay. Well again, David, thank you very much and thank you for your comments.

David Liu

Thanks, Mark.

Operator

Your next question comes from the line of Richard Fetyko of Merriman and Company.

Richard Fetyko - Merriman Curhan Ford

Yeah. Just a couple of more questions on the China investment. Regarding the timing of the $2 million to $4 million investment, how will it sort of ramp up throughout the year perhaps if you could give us an idea? And then just wondering about the strategy in China, it sounds like it will be a Knot operation, it''s not a licensing deal. Are you thinking about launching your own sites or perhaps do some acquisitions and will you launch bridal magazines a little bit more or as much as you can or have figured out in terms of the strategy in China?

David Liu

Yeah. It''s a little bit of all of the above there, Richard? China is a very difficult market to be operating in when you are in the Internet media space, first. So, just as a clarification, to the extent that there is ownership that is allowed by a foreign entity to run an Internet business, we will be at least controlling that entity. The technical definition of ownership is probably something we can''t say. We are looking at a cross platform media strategy as we have executed in the United States which only further complicates the licensing and legal issues, magazine licensing numbers are very hard to come by in China. It requires partnerships.

So, we''re in discussions with the number of publishers there right now and we are looking at a television opportunity as well. So, some -- the reason why there is a range in what we think will be the investment is the money we spend is when the opportunities arise. So we''re not hell bent to spend the amount we that we have articulated, but when the opportunities come up and we can execute against those opportunities, we will do so.

Richard Fetyko - Merriman Curhan Ford

Got you. And then on the niche site, the 275 or so that you have launched so far, you mentioned they''re not being monetized. I’m curious what kind of premium ad inventory are you thinking about introducing in 2010? What sort of ad units are you thinking about? Are these local listings or display ad units for national campaigns?

David Liu

These will be locally focused. So we currently cover about 68 local city guides where they can be a featured vendor in that city guide in your category. We have created additional badges and new inventory within those areas. Currently, in the niche sites, we don''t have the same premium inventory. It kind of punches through to the directories we offer The Knot, but because we''re covering so many more locations, for example in North Carolina, a very strong site for us is the Outer Banks. There is an opportunity to sort of slice off a premium slot for all 30 categories within the Outer Banks and give vendors the opportunity to compete for those positions. So, the content management system was -- infrastructure that was launched prior to the all the back-end fixes for our locals, so we were really not able to implement the premium inventory, self-service and sort of infrastructure required to have premium inventory available on the niche sites. Having most of that stuff done now will enable us to focus on building our components and creating inventory that we can now sell to local vendors on the niche sites.

Richard Fetyko - Merriman Curhan Ford

Okay. That is all I have, thanks.

Operator

We have reached our allotted time for questions. Are there any closing remarks?

Laura Cave

Yes. We would like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the Investor Relations section of our website. If you missed any part of today''s call, you can access the replay of the entire conference call in the Investor Relations section of the company''s website at theknot.com. A telephone replay is available for the next week at 1-800-642-1687, reference number 56807112. If you have any additional questions, please don''t hesitate to contact us at irs@theknot.com.

Operator

Thank you. This concludes today''s conference call. You may now disconnect.