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Subject: knot page 1 Date: 6/2/2009 4:04 PM
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Business:

The Knot was founded in May of 1996; it was later incorporated in the state of Delaware in December of 1999. Their business survived the crash of 2000 when many Internet websites closed down and not to be seen again. This is a testimony to their resiliency. In the years before the technology crash, many Internet companies depended solely on advertising, when advertising budgets were cut only the strongest survived. The Knot was one of the survivors.

They are far stronger company today. There has been a migration of advertising dollars from legacy media platforms to the Internet and although, advertising budgets are likely to be cut, there are more dollars devoted to web advertising and companies like the Knot are the recipient of those dollars. Today's internet companies are far stronger than the old Internet companies, such as Dr. Koop, were back in 2000. Most of them today do not solely depend on advertising dollars and are far better equipped to survive a downturn and advertising budget cuts.

About 2.2 million couples get married in the United States each year. The wedding market in the U.S generates over $70 billion in retail sales annually. The average cost of a wedding in 2008 was about $29,000.

Weddings can be complicated events to plan. This is more the case when wedding are held in states other than the one where the couple lives. Knot provides services to make it easier for couples to buy wedding gowns, rings, hire photographers, music, caterers, flowers, invitations, registry services and all the other items necessary to keep things running smoothly. They provide information on local wedding resources in the United States and throughout the world.

The Knot has 85 wedding websites focused on local markets such as http://louisville.weddings.com. It is their plan to have sites serving 200 different local markets. Besides weddings, they also have PromSpot.com and PartySpot.com to help families plan proms and large life event parties, such as Bar/Bat mitzvahs, anniversaries, engagement parties, and sweet sixteen parties. The Bump provides local baby services and community content.

The Knot also publishes a regional magazine, The Knot Local Wedding Magazine, semiannually in 17 markets in the United States. They also publish “The Knot Weddings” magazine which is a national magazine. They sell the publications in bookstores, newsstands and on their website. Besides magazines, they also have a series of books authored by their Chief Content Officer, Carley Roney and published by Random House and Chronicle Books.

In 2006, they launched “The Nest”, a lifestyle magazine. The magazine was designed to help recently married couples to buy a home, manage money, as well as provide relationship advice, decorating ideas, easy weekday dinner ideas and more.

Macy is an important customer that accounted for approximately 9% of The Knot revenues in 2008. The majority of this revenue came from their registry service agreement with WeddingChannel. If they chose not to use WeddingChannel’s registry services, it would hurt their business. However, Macy’s owns 11.4% of The Knot’s common stock, so that gives them good reason to use The Knot’s services. A clue to problems may come if they started to sell the stock.

Macy’s is WeddingChannel’s largest registry partner. Their business accounted for about 80% of their registry commission in 2008. Besides this, they spent over $900,000 in advertising, and have committed to more in 2009. So they are a very important customer.

Bridal magazine such as Bride’s and Modern Bride both published by Conde Nast compete with The Knot. Conde Nast’s Domino magazine focused on homes and home furnishing but has ceased publication due to weak macroeconomic conditions such as declining home values and the weak real estate market. The Knot’s Next magazine also focuses on homes and home furnishing.

The Knot’s business is reported in four segments - online sponsorship and advertising which provide the lion’s share of revenues, followed by Merchandise sales, Publishing and other, and then their registry services. The advertising segment provides over 52% of revenues and has very high gross margins.

February 13, 2007 4Q:2006 earnings’ highlights:
** 4Q revenues were $21.692 million up from $12.793 million
** Fiscal 2006 revenues were $72.679 million up from $51.408 million
** TTM revenues were $72.679 million or $2.22
** Diluted share count 32.759 million
** Cash $80.633 million
** Debt $106,000
** Fiscal 2006 Online sponsorship and advertising $36.577 million up from $25.844 million
** Fiscal 2006 Registry services $3.038 million up from $285,000
** Merchandising $15.004 million up from $12.306 million
** Publishing and other $18.060 million up from $12.973 million
** 4Q Online sponsorship and advertising $11.044 million
** 4Q Registry services $1.940 million
** 4Q Merchandising $2.838 million
** 4Q Publishing and other revenues $5.870 million
** 4q earnings $0.45 up from $0.06 (4Q:2006 earnings were $0.12 excluding onetime events)
** Fiscal 2006 earnings were $0.82 up from $0.16 ($0.45 without onetime events)
** Cash flow for the year $14.247 million or $0.44 per share
** Trading range between February 13, 2007 and May 9, 2007 was $19.95 to $26.60: (adjusted PE range was 44.33 to 59.11: PS ratio range was 8.99 to 11.98: Cash flow yield range 1.7% to 2.2%

May 9, 2007 1Q:2007 earnings’ highlights:
** Revenues were $21.029 million up from $14.751 million
** TTM revenues were $78.957 million or $2.41
** Diluted share count was 32.833 million
** Earnings per share was $0.05 down from $0.07
** TTM earnings were $0.43
** Cash flow for the quarter was $6.816 million up from $1.543 million
** TTM cash flow was $19.52 million or .59 per share
** Online sponsorship and advertising $10.777 million
** Registry services $1.76 million
** Merchandise $4.63 million
** Publishing and other $3.86 million
** Trading range between May 9, 2007 and August 8, 2007 was $16.81 to $21.06: (adjustedPE Ratio range was 39.09 to 48.98: PS ratio range was 6.98 to 8.74: Cash flow yield range was 2.2% to 3.5%.

August 8, 2007 2Q:2007 earnings’ highlights:
** Revenues were $22.835 million up from $13.671 million
** TTM revenues were $88.121 million or $2.69
** Earnings were $0.15 flat with last year
** Diluted share count 32.76 million
** TTM earnings $0.43
** Cash $95.594 million
** Debt 105,800
** Cash flow for six months $13.96 million up from $4.501 million
** Cash flow for the quarter was $7.144 million
** TTM cash flow was $21.71 million or $0.66
** 2Q Online sponsorship and advertising $12.5 million
** 2Q Registry services $3.357 million
** 2Q Merchandise $6.5 million
** 2Q Publishing and other $6.11 million
** Trading range between August 8, 2007 and November 8, 2007 was $17.50 to $23.31: (adjusted PE Ratio range was $40.69 to $54.21: PS ratio range was 6.51 to 8.67: Cash flow yield range was 2.8% to 3.8%

November 8, 2007 3Q:2007 earnings’ highlights:
** Revenues were $25.01 million up from $18.51 million
** TTM revenues were $94.62 million or $2.89
** Online sponsorship and advertising $12.39 million
** Registry services $3.67 million
** Merchandise $5.32 million
** Publishing and other $3.633
** Earnings were $0.09 down from $0.11
** TTM earnings $0.41
** Diluted share 32.767
** Cash $101.406 million
** Debt $106,000
** Cash flow for nine months $19.673 million down from $10.57 million
** TTM cash flow $30.81 million or $0.94 per share
** Cash flow for the quarter was $5.713 million
** Trading range between November 8, 2007 and February 13, 2008 was $12.50 to $16.93: PE range was 29.07 to 41.29: PS ratio range was 4.33 to 5.86: Cash flow yield range was 5.6% to 6.2%

February 13, 2008 4Q:2007 earnings’ highlights:
** 4Q revenues were $24.164 million up $21.692 million
** Fiscal 2007 $98.688 million up from $72.679 million
** TTM revenues $98.688 million or $3.02
**Diluted share count 32.706
** Earnings per share $0.08 down from $0.45
** Fiscal 2007 earnings were $0.36
** Cash flow for the year $23.302 or $0.71 per share
** Cash flow for the quarter was $3.629 million
** Cash $105.777 million
** Debt $55,170
** Trading range between February 13, 2008 and May 8, 2008 was $10.20 to $12.57: PE ratio range was 28.3 to 34.92: PS ratio range was 3.38 to 4.16: Cash flow yield 2.9% to 3.5%.

May 8, 2008 1Q:2008 earnings’ highlights:
** Revenues $23.801 million up from $21.029 million
** TTM revenues were $101.46 million or $3.11
** Diluted share count 32.613
** Earnings per share $0.02 down from $0.05
** TTM earnings $0.33
** Cash $107.070 million
** Debt $55,000
** Cash flow for the quarter $3.617 million down from $6.816 million
** TTM cash flow was $20.103 million or $0.62
** Trading range between May 8, 2008 and August 7, 2008 was $7.60 to $12.09: PE ratio range was 23.03 to 36.64: PS ratio range was 2.44 to 3.89: Cash flow yield was 5.1% to 8.1%

August 7, 2008 2Q:2008 earnings’ highlights:
** Revenues were $28.671 million up from $28.486 million
** TTM revenues were $101.645 million or $3.12
** Earnings $0.07 down from $0.15
** TTM earnings $0.25
** Diluted share count 32.592 million
** Cash flow for six months $10.068 million down from $13.959 million
** Cash flow for quarter $6.45 million
** TTM cash flow $19.411 million or $0.60 per share
** Cash $113.338 million
** Debt $55,000
** Trading range between August 7, 2008 and November 6, 2008 was $5.35 to $10.75: PE range 21.4 to 43: PS ratio range was 1.71 to 3.45: Cash flow yield was 5.6% to 11.2%

November 6, 2008 3Q:2008 earning’s highlights:
** Revenues were $26.983 million up from $25.009 million
** TTM revenues were $103.619 million or $3.17 per share
** Earnings per share $0.07 down from $0.09
** TTM earnings were $0.23
** Diluted share count 32.709 million
** Cash flow for nine months $13.401 million down from $19.67 million
** Cash flow for quarter $3.333 million
** TTM cash flow $17.033 million or $0.52 per share
** Cash $117.926 million
** Debt $55,000
** Trading range between November 6, 2008 and February 12, 2009 was $6.20 to $9.21: PE ratio range was 26.96 to 40.04: PS ratio range was 1.96 to 2.91: cash flow yield range was 5.6% to 8.4%

February 12, 2009 4Q:2008 earnings’ highlights:
**4Q Revenues were $24.442 million up from $24.164 million
** Fiscal 2008 revenues were $103.897 million up from $98.688 million
** TTM revenues were $103.897 million or $3.29
** Fiscal year online sponsorship and advertising $54.379 million
** Fiscal year national advertising $21.168 million up from $18.420 million
** Local advertising revenue $33.211 million up from $30.614 million
** Registry services $10.386 million
** Merchandise $20.547 million
** Publishing and other $18.585 million
** 4Q Online sponsorship and advertising $14.057 million
** 4Q Registry service $1.866 million
** 4Q Merchandise $3.068 million
** 4Q Publishing and other $5.451 million
** Diluted share count 31.621
** Earnings per share loss of (0.03) down from a gain of $0.08 (4q impacted by $0.07 on impairment charges)
** TTM earnings were $0.12
** Cash flow for fiscal 2008 was 15.056 million
** Cash flow for the quarter $1.655 million
** TTM cash flow $15.056 million or $0.48
** Cash $123.449 million
** Debt 0
** Trading range between February 12, 2009 and May 7, 2009 was $5.51 to $9.69: PE ratio range was 45.92 to 80.75: PS ratio range was 1.68 to 2.95: Cash flow yield 5% to 8.7%


May 7, 2009 1Q:2009 earnings’ highlights:
** Revenues were $23.717 million down from $23.801 million
** TTM revenues were $103.813 million or $3.26
** Diluted share count 31.878 million
** Earnings per share loss ($0.04) down from gain of $0.02
** TTM earnings $0.06
** Cash flow for the quarter $1.7 million down from $3.617 million
** TTM cash flow $13.139 million or $0.41 per share
** Cash $122.525 million
** Cash is $74.73 excluding Auction rated securities.
** Debt 0
** Stock based compensation $1 million
** Online sponsorship and advertising $12.823 million down from $12.91 million
** Registry services $1.718 million down from $1.778 million
** Merchandise $5.166 million up from $4.594 million
** Publishing and other $4.010 million down from $4.519 million
** Trading range between May 7, 2009 and the present May 31, 2009 was $7.28 to $8.96: PE ratio range Not useful: PS ratio range was 2.23 to 2.53: Cash flow yield 4.6% to 5.6%


4Q: 2008 and 1Q:2009 Notes:

The Company has 47.8 million in auction rated securities. This leaves them with $74.73 in liquid cash reserves.

Events:

The Company acquired WedSnap Inc on January 13, 2009. WedSnap has over 400,000 members that use the Weddingbook applications that communicate wedding details, share gift registry information, and introduce guests to one another over the Facebook social network. Knot paid $3.2 million for the company.

Total operating expenses increased 8.4% to $21.2 million

Gross margins were 79.5%. By segment:
Online sponsorship and advertising had 95.2% grow margins down from 96% last year.
Registry gross margins were 100% same as last year
Merchandise grow margins were 52.6% down from 54.2% last year
Publishing and other gross margins were 55.3% down from 59.2% last year

ThompsonFN estimates
2Q:2009 $0.03
3Q:2009 $0.02
Fiscal 2009 0
Fiscal 2010 $0.11


Seasonality:

The Company strongest quarters are its second and third quarters.
Macy’s invested in WeddingChannel ten years ago, and WeddingChannel built Macy’s online registry. Highend retailers have been affected worse in this economic downturn, The Knot believes it is important to aggressively diversify their registry offerings and bring in new registry customers. This desire to expand may negatively affect their relationship with Macy, so this is something to watch.

The average bride uses three different retailers for registry services. The Knot believes this represents significant growth potential for the company. Their registry and publishing business segments provide The Knot with revenues outside of advertising. Their registry services represent 100% gross margins. When a customer clicks on their affiliate registry links and makes a purchase, The Knot gets a commission. This is a high profit business for them, so it’s very important that they grow it.

Although national advertising is decreasing, local advertising has increased. In the fourth quarter and first quarter, national advertising was flat and down 9.3% respectively. But local advertising was up 9.1% and 4.2% respectively. As they create more local websites, this revenue growth should continue to outpace national advertising revenues.

Conclusion:

The present financial environment can be devastating to businesses such as The Knot. It is during these times that advertising budgets are slashed. And advertising is not only a major source of revenues but along with their registry services their most profitable source of income.

During the tech bubble many new Internet companies were started and flourished. They offered free content and collected what they called “eyeballs”, or people willing to sign in and view their webpages. As the number of people grew for the more popular sites, companies would allocate money to advertise on their website. This turned out to be a very lucrative and high margin business, until the economy died and advertising dried up, sending companies like Dr. Koop, tutornet.com and kibu.com, to the dot.com graveyard. Over 210 of these little companies closed their doors in 2000 alone and that more than doubled to 537 closed in 2001.

Yahoo the king of content saw their stock price drop from $108 in 2000 to less than $5.00 by 2002. At the same time the Knot saw their stock price drop from $15.60 in to $0.30 per share by 2001. Both companies were heavily dependent on advertising revenues. Yahoo frantically moved to find new ways to monetize their content. Both Yahoo and The Knot survived.

It is interesting to note that a $500 investment in The Knot when things looked the worse would have grown to over $50,000 six years later. In 2007, we watched the economy hit a rough patch, a deep recession and a stock market that crashed by the highest percentage since The Great Depression. The Knot survived their first big test, and they should have no problem surviving this one. As investors, we need to learn the lesson from their first big test and see if we can profit from it during this most recent test.

Back in 2000, The Knot business was in its very early stages of growth. Like so many dot.com companies they depended mostly on advertising and weren’t profitable as they invested so much in marketing to grab those very important “eyeballs”. They also were very small with only $24 million in sales. Today they are much larger and far better equipped to ride out a bad economy. The Knot is still very much dependent on advertising dollars, but internet advertising is far less risky for companies than it was in the past and the Internet has become a far more important advertising channel for companies today.

The Knot has $122 million in cash and no debt. Unfortunately, about $47.8 million is in auction rate securities. Nevertheless, this represents a very strong balance sheet. When investing in The Knot one has to accept the fact that their business is very dependent on a strong economy because in weak economies advertising budgets are cut, also people may postpone weddings. This creates volatility.

But volatility presents to the investor that continue to learn about his companies a good opportunity to profit from weakness. I want to buy companies when things look worse for them. This doesn’t mean picking up companies on the brink of bankruptcy. The Knot is the type of business I like to target and learn about and yes buy when things are tough.

I hear of people searching for that elusive ten-bagger, but The Knot gave investors a 100 bagger in just six years between 2001 and 2007. It didn’t look pretty at its lows. But once they reported their first quarter of positive cash flow investors had a chance to grab a high percentage of those gains. Today they may not go cash flow negative, so improvements in cash flow, and continued balance sheet improvements will be the first clues to an improving stock price.

The Knot isn’t likely to give us that much of a discount this time. Back in 2001, they weren’t cash flow positive. They had $6 million in cash but about $2 million in debt. They didn’t look too safe. Today, they have $122 million in cash, no debt and still produce excellent streams of cash flow. In this latest quarter, they produced $1.7 million in cash flow. Cash flow is declining but still strong.

Earnings have been plagued by impairment charges from the purchase of WeddingChannel, but cash flow is $0.41 per share, so they are trading for about 19.51 times cash flow. My goal is to keep a close eye on cash flow. As long as it is positive, there is little risk at these prices. If it goes negative, we may get a lower price to buy. If so, their strong balance sheet should reduce the downside and make it less risky to own.

They have excellent prospects as they grow their local websites from 85 to 200. Local advertising continues to grow, and increasing their local websites should help with that trend. Eventually, they will have to make a tough decision to expand their registry services to other retailers. If they can do that successfully, their growth potential accelerates, not just for revenues but net income as registry commission provide them 100% gross margins.

I like companies with light business models, strong balance sheets and that remain cash flow positive even in weak quarters. But they also have prospects. Advertising continues to migrate to the Internet. They have an opportunity to expand their highly profitable registry services and as they create more local websites, they may be able to keep the local advertising revenue increasing. If they can keep their business solid during tough times, investors should be well rewarded when the economy recovers and advertising budgets increase once again.

tom e
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