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Edited Transcript of TST earnings conference call or presentation 14-Nov-18 1:30pm GMT

Q3 2018 TheStreet Inc Earnings Call

NEW YORK Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of TheStreet Inc earnings conference call or presentation Wednesday, November 14, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Callaway

TheStreet, Inc. - President, CEO & Director

* Eric F. Lundberg

TheStreet, Inc. - CFO

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Conference Call Participants

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* John David Godin

Lake Street Capital Markets, LLC, Research Division - Research Analyst

* Kara Lyn Anderson

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* Michael John Grondahl

Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst

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Presentation

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Operator [1]

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Everyone, we now have our parties in conference. And I would like to now turn the conference over to Eric Lundberg. Sir, please begin.

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Eric F. Lundberg, TheStreet, Inc. - CFO [2]

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Good morning, and thank you. Thank you for joining us to discuss TheStreet's financial and operating results for the third quarter of 2018. Joining me on the call today is David Callaway, TheStreet's President and Chief Executive Officer.

I am in New York City headquarters, while Dave is out of the office traveling on a family matter. Before we begin, I'd like to remind you that management will make forward-looking statements during the course of this call and our actual results could differ materially. Some of the risks and uncertainties that could impact our business are included in our 10-K. In addition, our presentation will include non-GAAP financial measures and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website.

First I'd like to remind you that due to the sale of our RateWatch business on June 20 of this year, the year-to-date 2018 operating results and Q3 results exclude RateWatch, as it's now reflected as discontinued operations. Secondly, last quarter, I started off by saying that despite the lack of revenue reported, the underlying metrics and trends we saw from our consumer business supported a positive outlook.

I am happy to report that as promised, we had our first year-over-year earned subscription revenue growth in over 3 years in the final month of the third quarter.

Along with our strong B2B business, which continues to impress, we expect to generate a steady flow of revenue, both deferred and earned, going forward, and Dave and I looking forward to provide you with more detail and color on both our consumer and institutional businesses.

Total revenues for Q3 were $13 million, down $300,000 or 2% from Q3 of last year. Net loss from continuing operations was $1.1 million for Q3 compared to a net loss of $700,000 from the prior year. Adjusted EBITDA for the third quarter of this year was $100,000 compared to $1.1 million from the prior year period. I know I've stated this each quarter, but the reported declines are the result of $670,000 decline in our advertising revenue due to the strategic shift we made to focus more on our subscription-based consumer business model and less focus on marginally profitable advertising.

I am pleased to report that as a result of our efforts the total company deferred revenue grew to $22.6 million for the third quarter, up $2.4 million or 12% compared to Q3 last year and up $3 million or 15% from December 2017. The $2.4 million increase quarter-over-quarter is essentially half B2B and half B2C.

Business-to-Consumer revenue totaled $6.7 million for the third quarter of this year, down $650,000 or 9% compared to the third quarter of last year due to the decline in advertising revenue, as I mentioned, which was down $670,000. B2C subscription revenue for the third quarter of this year was $4.9 million, which was flat with the third quarter of last year. B2C premium deferred subscription revenue grew almost $1.2 million or 12% as compared to Q3 last year. That's now year-over-year increases for 3 consecutive quarters and we have begun to see that translate into earned revenue in our financials as September was the first month with earned year-over-year subscription revenue increase in more than 3 years. As I just mentioned, deferred subscription revenue is up $1.2 million or 12%, September '18 versus September '17.

Looking back further and comparing September '17 to December '16, deferred revenue was down $900,000, that's a swing of more than $2 million in deferred revenue over the last 2 years.

As we told you last quarter, we have significantly upgraded our technology capabilities, which has, among other things, improved our sales and marketing efforts and we have already seen the positive results. For example, new total orders and bookings from marketing are up 55% year-over-year due to these new technologies, which are helping us to be smarter, more targeted and more dynamic. If we take a look even closer, we see new orders from our website are up 34% year-over-year and website conversion rate is up 179%. New orders from the e-mail channel are up almost 100% year-over-year, and new orders from external channel are up 19%.

Total paid count is up year-over-year for the first time since 2015, and it's the seventh consecutive month of month-over-month growth in total paid amount in our premium business. Both total gross orders and bookings, new and renewals, for Q3 of this year versus Q3 of last year are up 8%. And despite a 14% decrease in the renewal pool, total gross renewal orders are up 7% year-over-year. Conversion rates are now over 60% compared to 45% in the prior year and renewal rates are over 70% through September compared to mid-60s last year. Along with the increase in average revenue recognized per sub, average churn improved to 3.94% for the third quarter of this year from 4.2% for the third quarter of last year.

The result of this strong performance of these underlying metrics is why the deferred revenue, as I mentioned earlier, is up, and I'm happy to say that we're just beginning to see the deferred revenue becoming earned revenue. That is not just a turnaround, but the way a successful subscription business works.

On the event side of our consumer business, we generated $125,000 in the quarter, up $113,000 from 2017. We already have substantial revenue committed for consumer events in Q4, proving once again that this is a reliable and growing source of revenue for us going forward. B2C advertising revenue continues to decline, down $700,000 to $1.5 million for the quarter, but this is not the primary driver of our business anymore and the success of our more stable subscription business model is proving it's worth the effort for the long term.

Turning to our B2B business. B2B revenue, which include subscription, information services and events for our B2B products totaled $6.3 million for the third quarter, up $300,000 or 5% as compared to the third quarter of last year. Year-to-date GAAP revenue is up 8.3%. B2B deferred revenue at the end of the third quarter of this year increased $1.2 million or 12% from the third quarter of last year.

Looking at the products individually. BoardEx, in Q3 BoardEx had overall revenue growth of 10% with subscriptions growing almost 11% year-over-year. Renewal rates continue to impress at approximately 96% through September. The success of BoardEx has allowed us to invest in technology and bring on key employees like our new Head of Sales, Mark Hevey, who came to us from Thomson-Dow Jones. And we continue to sign up major financial and legal institutions. In fact, new subscription sales are expected to surpass prior year levels.

The Deal. The Deal continues to show a positive trajectory with Q3 revenue up 1%. Just like BoardEx, customers are sticking around as the Deal's net renewal rate was approximately 96% also through September. We want to reward our customers for their loyalty and provide them with the tools and analysis they need to improve their business. For example, we recently relaunched and expanded our private equity coverage, which so far has been very well received. The Deal continues to put on must attend events, this time expanding geographically to Chicago, where we held our first ever Deal Economy event other than in New York in this third quarter. We had a packed house, and we're able to generate almost $150,000 in revenue from this inaugural event.

Just a few weeks prior to that, we held our first ever Deal Awards event in London, and we also have our Deal Economy event coming up later this year in New York City. These events have generated revenues of approximately $400,000 to date as we continue to establish, grow and provide relevant and engaging premier events for the financial community.

Turning to operating expenses for Q3, operating expenses for the quarter were $14.9 million as compared to $13.8 million for the third quarter of last year, an increase of $1.1 million between the 2 periods. $400,000 of the increase was a noncash comp due to the issuance of RSUs for key employee retention efforts. The remaining operating expense increase for the quarter was the result of an increase in bonus and commissions from stronger performance over the prior year as well as annual merit increases. Remember, we are almost 82% subscription revenue and deferred subscription revenue is up 12% at the end of Q3. We pay commissions based off sales, not earned revenue. In addition, higher year-over-year costs were incurred related to increased sales and marketing efforts, which as I mentioned earlier, has paid off with increased new orders from many of our channels. The company also incurred higher year-over-year professional advisory fees related to its strategic planning efforts as we continue to focus on increasing shareholder value. These increased costs were partially offset by planned reductions in traffic acquisition costs related to our advertising, lower freelance costs and favorable exchange rates.

Turning to the balance sheet. The company ended the third quarter of this year with cash and cash equivalents, restricted cash and marketable securities of $43.2 million, up $29.3 million as compared to $13.9 million at year-end 2017. While the lion's share of this increase was the $28.2 million in net proceeds from the sale of RateWatch, we also continued to generate cash from our operations, which equal $5.1 million year-to-date. As I mentioned last quarter, we are in an extraordinary position of flexibility as our board considers all strategic initiatives for appropriate allocation of resources to drive our growth strategy and provide increased value to our shareholders.

With that, I'd like to turn the call over to our CEO, Dave Callaway.

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [3]

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Thank you, Eric, and good morning, folks. On the last quarter's conference call, we provided a rare bit of guidance. We said that after more than 3 years of declining subscribers in our premium consumer business, we expected subscriber trends to turn positive by the last month of the third quarter. Indeed, as Eric mentioned, they have and then some.

Thanks to the remarkable work of our marketing, editorial, tech and sales teams, under Consumer President, Margaret de Luna, we've booked year-over-year subscription revenue growth for the first time in more than 3 years. Quarterly churn on subscriptions is under 4% for the first time since I've been here at the company, and deferred revenue growth of 12% from the consumer is on pace with that of our healthy institutional business.

New subscription product like our retirement column, better performance by our newsroom in driving readers from headlines to our products like Jim Cramer's Action Alerts PLUS and new external marketing features around social videos on Facebook have all helped widen our funnel and improve the number of leads, trials and new orders.

Also moving RealMoney and RealMoney Pro to a new content management system, has dramatically improved our look and feel as well as speed of delivery, and the implementation of Salesforce, late in the quarter and new credit card processing procedures through our Zuora subscription service have played a critical role in reducing churn. These gains do not come without pain, as you can see in the results, our strategic shift to focus on subscription revenue of our programmatic advertising continues to dog us in the short term, but as I said, after the second quarter, the decline in advertising has leveled off to a rate from which we can rebuild through new revenue streams tied to events, for example. Last month, we held our second investing boot camp this year for subscribers. An all-day event featuring stock tips from Jim Cramer, panels on tech stocks, and cannabis stocks and keynote interviews. More than 200 paying customers packed a midtown events room here in Manhattan on a Saturday morning to hear our experts. We had a group of sponsors new to TheStreet and at least 1 big one has followed up with an advertising campaign, which has been great. We sold our first sponsor partnership on voice content, our analysis on products like Alexa, and we've seen early success on our content on Apple news' stock app, with traffic more than doubling last month and more than tripling since launch in June. That traffic continues to grow. There's still much to do, but Q4 is typically stronger than Q3 on advertising for us and we believe we bottomed out as far as the levels of declines are concerned.

Turning to institutional, I'm happy to report that through great editorial performance and a mix of new business and new events, The Deal had a positive quarter, including year-over-year subscription revenue growth for the first time since early 2016. Remember, when we announced our strategic shift at the beginning of the year, our 2 primary goals were to turn the premium subscription business and The Deal into positive contributors on the consumer and institutional side, we have now done that. Those are 2 major milestones in our turnaround in 2018.

The new event Deal Economy in Chicago, which Eric mentioned, contributed to the quarter, combined with the awards breakfast in New York in June and an awards breakfast in London just last week, will push almost $400,000 to our top line for The Deal this year. In 2 weeks, we have our signature Deal Economy New York event, which is as big as all 3 combined.

A healthy Deal business with subscription revenues pacing above 96% up from 93% and 92% over the last few years makes our BoardEx business even better, and that operation continued its strong growth last year. It is also pacing above 96% in renewals, and as of this week, new subscription sales have surpassed all of last year's levels. This was the first quarter for us without RateWatch, and we miss our former colleagues, but hear they're doing great at S&P Global. Still we had to book some costs related to that transaction, as Eric mentioned, which added up along with costs from annual raises and bonus and costs related to the payout tied to the BoardEx acquisition years ago. So costs are higher, but we continue to grow cash with more than $43 million in the bank. Our board is actively discussing how best to make use of this windfall, and I can promise you, once we decide, you'll be the first to know.

Now I'd like to open up the discussion to analyst questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kara Anderson of FBR B. Riley.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [2]

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I'm sorry, but I missed it, could you talk about subscription at The Deal? I think you commented that it was up? If possible, could you provide a little bit more color how that relates to the overall, I think, 1% increase that we saw?

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Eric F. Lundberg, TheStreet, Inc. - CFO [3]

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Sure.

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [4]

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Yes, Eric, you would -- you got the numbers there?

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Eric F. Lundberg, TheStreet, Inc. - CFO [5]

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Yes. Sure. What we had experienced in the last several years was the declining Deal subscription revenue before Jeff Davis got here. The business wasn't focused on new orders and new sales. And it was really focused on renewals only, and through a lot of hard work and dedication on the editorial side and refocus on bankruptcy and activism and private equity, we have seen new sales grow and we've even seen our retention renewal rates climb from, as Dave said, 92%, 93% to 96%, matching the renewal rate at BoardEx. As a result, the earned revenue now is growing.

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [6]

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Yes, Kara, this is Dave. This is one thing that I'm really proud of because we've had -- that we had -- over the last few years, every quarter BoardEx had great numbers, and The Deal was always just under breakeven in terms of total productivity. And to get into this that we're actually contributing, growing and it's on the back of new subscribers and new business even as we add events with extra revenue like we did this year. Really shows that the entire institutional business is now running great.

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Eric F. Lundberg, TheStreet, Inc. - CFO [7]

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And Kara, the deferred revenue for The Deal, last quarter was the first time in years where the deferred revenue grew year-over-year. Now at Q3, the deferred revenue for The Deal is up about $250,000. When I resay that only as it relates to subscription revenue, not their events revenue.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [8]

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Got it. All of that's very helpful. And then on BoardEx, I guess, if I break it out, it was a little lighter than we would have expected. And relative to Q2, is there anything in the call out there that didn't meet expectations in the quarter?

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Eric F. Lundberg, TheStreet, Inc. - CFO [9]

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No, I don't think there's anything that -- we continue to see new sales growing. We continue to see average price going up. I mean, year-to-date, we're still up about 8.5% and deferred revenue is up 12%. I think that is a very healthy, strong business.

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [10]

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I think, Kara, we also had a strong -- unusually strong third quarter in BoardEx last year, I think. And so this is more of a normal level, but fourth quarter is always a big quarter for us in terms of renewals, end of year renewals. So I think you'll see that come back to where you expected.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [11]

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Got it. That's really helpful. And then, CapEx in the quarter was up a bit year-over-year. And sequentially, can you talk about what drove that?

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Eric F. Lundberg, TheStreet, Inc. - CFO [12]

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So last year, our CapEx was abnormally low, full year CapEx last year was less than $3 million. I think full year last year was like $2.6 million, $2.7 million, and we made a conscious decision, management and the board, this year to focus more on technology build-out. So for example, the user interface at BoardEx, The Deal management system at The Deal, moving real money off [Truple] and getting it on to the content management system, the rest of the platform is on. So we've tried to do things that also have a positive effect on sales, which I think we're seeing as it relates to deferred revenue.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [13]

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Got it. And then I guess when I think... I'm sorry, go ahead.

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Eric F. Lundberg, TheStreet, Inc. - CFO [14]

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We're basically on target for CapEx. We had expected to, obviously, spend more than last year's number, and we are still on target to spend what we hoped and anticipated to spend.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [15]

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Okay, great. And then last one for me, on the sort of operating expenses. Is there any discipline needed to maintain the bottom line? Or is this just a matter of the revenue sort of catching up to where your operating structure is that's really designed to support growth right now?

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Eric F. Lundberg, TheStreet, Inc. - CFO [16]

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Our costs are up about $1 million in the quarter. $400,000 of it is noncash comp, based off the issuance of RSUs for key employees. Another piece of it's bonus, where last year at this time we had reversed some bonus in the third quarter. This year we have not reversed any bonus yet. We are -- we were looking at the deferred revenue growth kind of as our barometer, not necessarily the earned revenue. Last year at this time, the deferred revenue was nowhere near as high as it is. And lastly, we have incremental professional related to the strategic initiatives that we have. So if you were to take out the noncash comp, increment to bonus and that, our total costs are relatively flat even given that we have raises in there at 3% and some of the other cost-of-living raises or cost-of-living expenses.

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Operator [17]

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Our next question comes from Mike Grondahl of Northland Securities.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [18]

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On the premium subscription growth, you talk a fair bit about the marketing and the sales kind of progress and developments that you've made. Could you address the product side in a little bit more depth? You sort of mentioned the retirement daily and the newsroom, but just anything else you want to call out on the product side that you think is helping drive the business?

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [19]

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Sure. Mike, how you doing? Look, the retirement product, as you know, was our first product in more than 10 years, we introduced it this spring. We're still working on a tech product coming up and a cannabis product. We kind of shifted some of the cannabis stuff to events to take advantage of the excitement around cannabis for the last couple of months, that the event we had with Jim in October featured 2 of the largest cannabis companies' CEOs, as keynote speakers. And so we're making headway in launching that as a product. The marketing stuff you know well and the team has really worked hard to improve the technology they're using, the vendors they're using. But note what Eric said in his call about the website conversions and driving the subscriptions being up dramatically. So that is a focus of the newsroom, really concentrating more on taking our core audience, remember audiences down, because they're programmatic. Core audience and getting more out of them into this subscription business. That's the key to this premium subscription turnaround. So as we develop that, we can begin to look at what that core audience is willing to pay for. A lot of it has been improvement in Jim's Action Alerts PLUS product. His team is really strong, we're bring them into things like video and they're doing analysis which helps us in the daily newsroom, drive stuff to subscriptions. But in terms of new products coming, it still, I think, probably the technology product might be the neck-to-next onboard. Cannabis is still in the works. And we've launched a couple of deals with other newsletter writers, Jon Markman, who writes a very highly popular tech column and tech newsletter, is now writing for us, and we're helping distribute subscribers to him for a revenue cut and we're looking at doing a few more of those deals. So there's a lot of product stuff in the mix. Some of it is kind of under the radar right now but there -- and some of it is starting to percolate up to the top and we also have a couple more ideas for new stuff. I can't overemphasize the importance of the events, Mike, on these consumer events. The teach-in was a huge success. We did 1 last year, we did 2 this year, we plan on doing 4 next year. We're doing more and more panels. One of the subscribers for the -- the sponsors of the teach-in is going to sponsor a big webinar panel for us. So all that money, it really goes to the whole consumer team, but it's based on a lot of the product and talent on the premium side.

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Eric F. Lundberg, TheStreet, Inc. - CFO [20]

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Dave, I know you meant -- Dave, Mike -- Dave, I know you meant to mention this, but we've added the cannabis and energy coverage in RealMoney. I think you mentioned that, but we also added the stock of the day in RealMoney. We also added the daily rundown in AAP.

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [21]

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Right. So that stock of the day is the key thing that Jim works on in the morning with our London office, and then the subscription team really promotes it all day long. The coverage of cannabis and tech in RealMoney is stronger as we lead towards individual product for that. But right now they're helping just drive the RealMoney subscriptions, which is half of the consumer -- of the premium revenue.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [22]

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Sounds really good. Great progress. The -- your outlook on events is still very positive. Anything to add there overall?

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [23]

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Just as we think, when Eric and I came in, we targeted events as a good source of revenue, and after a kind of a bumpy start in mid-2016, as we got our footing, everything we've done has been a success, on The Deal side, these awards breakfasts that we've had, we had 1 in June in New York and 1 just 2 weeks ago in London, have been kind of great drivers of revenue, great drivers of loyalty among our Deal readers, and we can just, we can continue to build those out. The Chicago event was so successful that we're now looking at doing more events like in places like Miami, Toronto, perhaps the West Coast, I think we mentioned before. And then on the consumer side, like I just said, the teach-ins with Jim are popular, but also the webinars that the newsroom is doing, without Jim, are driving a lot of revenue as well. So we think we can continue to scale those events, Mike, so that they will continue to drive more and more revenue on both sides.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [24]

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Okay. And lastly, would you describe the acquisition pipeline is building, robust? How engaged are you there over the fall?

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [25]

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The board is very engaged in looking at all possible opportunities to boost shareholder value, Mike. That obviously, is one of those opportunities, premiums are at a high, and so we're being very careful about what we're looking at and what we've been looking at. And I think as we -- like I said, that's one channel of opportunities, there's others. And I think the board will make its decision in due course, which way to go, and then we'll let you guys know.

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Michael John Grondahl, Northland Capital Markets, Research Division - Head of Equity Research & Senior Research Analyst [26]

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Okay. You did not buy back any stock during the quarter, is that correct?

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Eric F. Lundberg, TheStreet, Inc. - CFO [27]

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Correct.

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Operator [28]

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Our next question comes from Mark Argento of Lake Street Capital Markets.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Research Analyst [29]

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This is John on for Mark. I guess, first, if you could just kind of drill into where you're seeing success in driving new subscribers, The Deal versus current subscribers? And then, #2, just an update on the progress of the integration of the data within BoardEx?

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David A. Callaway, TheStreet, Inc. - President, CEO & Director [30]

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I'll take the first one, Eric. The -- John, The Deal, we made a decision last year around the time of our strategic shift that -- to get The Deal into that positive territory that we've now achieved. We need to focus on 4 areas of editorial coverage that our readers have said they want to see more of. M&A, which is always been our bread-and-butter, bankruptcy, restructuring, private equity and corporate activism, and those last 2 have been areas where The Deal has been historically light. So we threw some resources into corporate activism and really saw almost an immediate upturn in new business. There's a lot of the corporate activists that we've been writing about started subscribing so they could read about what was going on with their competitors. And then we started, as Eric mentioned, in this quarter we really put some emphasis behind private equity, and that has had some immediate results too. So this is one of those classic cases where if you actually invest in the editorial product and in the news and in the content that you're doing, the new subscribers will come. And as you can see, it's actually also benefited the current subscribers because they're even more likely now to renewal -- to renew at 96% rates versus 93%. And then, Eric, was going to grab the BoardEx data.

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Eric F. Lundberg, TheStreet, Inc. - CFO [31]

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Well, I think you sort of answered it. I mean, we -- in a year or so ago, we integrated a lot of the M&A data that we had from The Deal into the BoardEx platform, but we're still working on The Deal management system, which will allow the -- all the data from The Deal to be much more flexible and dynamic. But the real increase is due to what you already mentioned, Dave.

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Operator [32]

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At this time, we have no further questions in queue.

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Eric F. Lundberg, TheStreet, Inc. - CFO [33]

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Thank you very much.

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Operator [34]

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Okay. Thanks, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.