Filed
by New Motion, Inc.
Pursuant
to Rule 425 under the
Securities
Act of 1933 and Deemed
Filed
pursuant to 14a-12 of
the
Securities Exchange Act of 1934
Subject
Company: Traffix, Inc.
Commission
File No.: 000-27046
Attached is a transcript of a conference call held by Traffix, Inc. that occurred on October 15, 2007.
This communication is being made in respect of the proposed business combination involving New Motion Inc. and Traffix Inc. In connection with the proposed transaction, New Motion Inc. plans to file with the SEC a registration statement on Form S-4 containing a joint proxy statement/ prospectus, and each of New Motion and Traffix's plan to file with the SEC other documents regarding the proposed transaction.
The definitive joint proxy statement/ prospectus will be mailed to stockholders of New Motion and Traffix. Investors and security holders of New Motion Inc. and Traffix Inc. are urged to read the joint proxy statement/prospectus and other documents filed with the SEC carefully in their entirety when they become available, because they will contain important information about the proposed transaction.
Investors and security holders will be able to obtain free copies of the registration statement and the joint proxy statement/prospectus when available, and other documents filed with the SEC by New Motion and Traffix through the Web site maintained by the SEC at www.SEC.gov. Free copies of the registration statement and the joint proxy statement/ prospectus when available, and other documents filed with the SEC can also be obtained by directing a request to Ray Musci, President of New Motion Inc. at 949-777-3700 extension 221, or by directing a request to Todd Framer, 212-682-6300 extension 215, or Beth Moore, 212-682-6300 extension 224 of KCSA investor relations for Traffix Inc.
New Motion, Traffix and their respective directors and executive officers and other persons may be deemed to be participants in the solicitation of proxies in respect to the proposed transaction. Information regarding the identity of the persons who may, under SEC rules, be deemed to be participants in the solicitation of proxies and a description of their direct and indirect interests in the solicitation by security holdings or otherwise will be contained in the joint proxy statement/ prospectus and any other relevant materials to be filed with the SEC when they become available.
Traffix,
Incorporated
Moderator:
David Burke
October
15, 2007
10:00
a.m. EST
OPERATOR:
Good morning. My name is Barbara, and I will be your conference facilitator
today. At this time, I would like to welcome everyone to the Traffix Inc.
conference call. All lines have been place on mute to prevent any background
noise. After the speakers’ remarks, there will be a question-and-answer session.
If you would like to pose a question during this time, please press star then
the number one on your telephone keypad. If you would like to withdraw your
question, press the pound key. Thank you.
It’s
now
my pleasure to turn the floor over to your host, Mr. David Burke. Sir, you
may
begin your conference.
DAVID
BURKE: Thank you Barbara, and thank you everyone for joining us for the Traffix
2007 third quarter earnings conference call. I would like to just provide some
cautionary language before I turn the call over to Jeffrey
Schwartz.
Before
we
begin, I would like to mention that this call contains certain forward-looking
statements and information relating to Traffix that is based on the beliefs
of
Traffix’s management as well as the assumptions made by and information
currently available to the company. Such statements reflect the current views
of
the company with respect to future events, including estimates and projections
about Traffix’s business based on certain assumptions of Traffix management,
including those described on this conference call. These statements are not
guarantees of future performance and involve risks and uncertainties that are
difficult to predict, including changes in demand for the company’s services and
products, changes in technology and the regulatory environment affecting the
company’s business and difficulties encountering the integration of acquired
businesses. Should one or more of these underlying assumptions prove incorrect,
actual results may vary materially from those described herein, as anticipated,
believed, estimated or expected. The company does not intend to update these
forward-looking statements.
With
nothing further, I would like to now turn the call over to Mr. Jeffrey Schwartz,
Chairman and Chief Executive Officer of Traffix Incorporated. Jeff, the floor
is
yours.
JEFFREY
SCHWARTZ, CHAIRMAN & CEO, TRAFFIX: Thank you David.
Good
morning. With me today is Andrew Stollman our President and Dan Harvey our
CFO.
Dan Harvey, as always, will start the call with a comparable and sequential
basis overview of the financial results for our third quarter of fiscal year
2007.
Following
the overview, I will then discuss several factors that influenced our third
quarter and the prospects for the remainder of the fiscal year.
DAN
HARVEY, CHIEF FINANCIAL OFFICER, TRAFFIX: Good morning ladies and gentlemen.
Our
quarterly financial results were as follows.
Consolidated
revenue for the third fiscal quarter, which ended August 31st, 2007, was 25.7
million, an increase of 30 percent from 19.7 million for the third fiscal
quarter of 2006.
Gross
margin, in terms of absolute dollars generated, decreased by approximately
200,000. The corresponding contribution margin decreased to 26.9 percent from
36.2 percent when comparing the third quarters of fiscal 2007 and 2006. This
is
the result of shifts within our revenue generating activities where increases
in
revenue have come from lower margin generating business. This is summarized
in
greater detail in the MD&A section of our 10-Q that will be filed this
afternoon.
Income
from operations for the third fiscal quarter was 1.63 million, a decrease of
two
percent from income from operations of 1.67 million in the third fiscal quarter
of 2006. Adjusted EBITDA recognized a similar decrease of approximately three
percent, comparing EBITDA of 2.26 million in the third quarter - excuse me
- in
the third quarter of fiscal 2007 with EBITDA of 2.34 million in the third
quarter of fiscal 2006. Both income from operations and EBITDA were negatively
impacted in the recent quarter from over $300,000 in professional fees and
other
related expenses, primarily arising from our proposed merger
activity.
Net
income for the third quarter was $847,000 and is compared to net income of
842,000 as reported in the third fiscal quarter of 2006. Net income and EPS,
as
described below, were negatively impacted by a current quarter permanent
difference arising out of the tax treatment of expenses directly related to
our
proposed merger activity. This is a major factor contributing to our 10 percent
effective rate increase in the third quarter when comparing an effective tax
rate of 56 percent with fiscal 2006’s effective tax rate of 46 percent. Diluted
earnings per share were six cents in the third quarters of both fiscal 2007
and
2006.
On
a
sequential basis, net revenue increased in the third quarter by 5.9 million
or
30 percent from 19.8 million in the second fiscal quarter of 2007. Revenue
generated from our marketing relationship - excuse me - with New Motion Inc.,
our proposed merger partner, contributed approximately 5.5 million to third
quarter revenue compare to approximately one million in the second quarter.
In
our first quarter of 2007 and prior, our revenues from New Motion were
insignificant.
Sequentially,
gross margin, in terms of absolute dollars generated, increased approximately
690,000. The corresponding contribution margin decreased to 26.9 percent from
31.5 percent when comparing the sequential fiscal 2007 periods. The decline,
as
noted above, was the result of shifts within our revenue generating activities
where recent increases in revenue came from lower margin generating activities.
This was attributable to both our internal decision to forgo certain levels
of
margin so that we could increase our volume as well as organic growth of other
lower margin revenue mix components.
The
company’s income from operations increased sequentially by 48 percent to 1.63
million in the third quarter, from 1.1 million in the second quarter. As
mentioned in the comparative period discussion, the third quarter was encumbered
by over 300,000 in expenses, with the majority associated with the merger that
were not specific to operating efficiencies.
Adjusted
EBITDA increased sequentially by 34 percent to 2.3 million in the third quarter
from 1.7 million in the second fiscal quarter. The company’s diluted earnings
per share were six cents in the third fiscal quarter 2007 and five cents in
the
second fiscal quarter of 2007.
I
now
turn the chair back to our CEO Mr. Schwartz.
JEFFREY
SCHWARTZ: Thank you Dan. This is a particularly exhilarating call for us, first,
we are pleased to announce a very good quarter, building upon what is already
a
very positive year for Traffix. Second, we recently announced our planned merger
with New Motion Inc. I will talk about this later in the call.
Previously,
I had reported on our commitment to and enthusiasm for the potential and growth
in the mobile entertainment marketing space. I stated then and I believe that
Traffix’s unique portfolio of corporate assets placed us squarely at the
forefront of this rapidly evolving space.
I
believe
this quarter’s results demonstrated the accuracy of those predictions. This
quarter’s results were greatly impacted by this trend. Revenues from our
marketing of mobile entertainment products and services accounted for over
32
percent of our revenue this quarter, compared to 12 percent in the second
quarter and 19 percent of revenues in fiscal 2006’s third quarter.
Our
client list in the mobile space numbered over 14 during the quarter.
New
Motion, our merger partner, made up a significant percentage of there mobile
revenues, comprising approximately 65 percent of our mobile business as well
as
21 percent of our consolidated revenues.
We
are
confident that this not only bodes well as a harbinger of our future success
but
speaks volumes as to the objective appeal of their programs to the Internet
community.
Last
quarter, we reported on the launch of GatorArcade. This site and service was
built in partnership with New Motion. To date, we have recorded over one million
in revenue from Gator and have a current active subscriber base in excess of
90,000, which we expect to continue to grow.
All
of
the Traffix units contributed in a meaningful way to this quarter’s growth. Hot
Rocket, our affiliate marketing company, delivered approximately 11.7 million
in
revenue for the quarter prior to inter-company eliminations, compared to six
million in fiscal 2006’s third quarter. On a comparable basis, this represented
a 95 percent increase.
Hot
Rocket’s role in the proposed new merger entity looks to be even more
pronounced. Having exclusive access to the mobile programs that are developed
in
the future, we believe, will help us to continue to attract more publishers
and
advertisers. We are confident that this area of our business will be ripe for
expansion both organically and through acquisition.
Unfortunately,
along with their increased contribution to revenue growth and total reported
revenues comes the corresponding compression of margins at the consolidated
level. Hot Rocket has historically recognized gross margins in the 20 percent
range.
In
June
2004, we acquired a small search engine marketing company named Sendtraffic.
At
the time we acquired the company, their revenues were less than four and a
half
million annually. This quarter, their revenues were over eight and a half
million, 108 percent increase over the comparable period in 2006. The team
has
done a superb job in growing the business and servicing their clients. We see
no
reason why they should not be able to continue to grow. Search engine marketing
and search engine optimization are core competencies for any company that hopes
to succeed on the Internet today.
We
plan
on making Sendtraffic a key player in the proposed new merged entity. We
believe, using our proprietary technology, experience and skill, will enable
us
to grow our future mobile subscription base efficiently and with a focused
minute-to-minute eye on the P&L.
Our
core
proprietary Web content business continues to enjoy steady growth as well.
This
does not come without its day-to-day challenges. The value of the content we
own
or have licensed, such as our music library, continues to grow in value. I
can’t
imagine a higher barrier to entry than owning content. Moreover, there are
few
companies on the Web that can offer as large a quantity of free music and games
to the online audience as Traffix.
During
prior calls, I referred to the success we have had with our organic search
initiatives. Quarter-over-quarter, we have seen sustained growth. Mastery of
organic search is difficult at best, yet we believe that having good content
makes it sustainable and an area that we can grow for many years to
come.
Assuming
the consummation of our proposed merger, we plan on building more lifestyle
targeted content sites that can be attractive as acquisition engines for
acquiring new subscribers to our mobile entertainment network. The areas we
pursue can be as niche as new mothers or as broad as music downloads. Cost
of
the existing scale we have in the current New Motion subscriber base, we believe
we have the latitude to build smaller, more loyal, premium build, mobile
communities.
We
at
Traffix are thrilled and excited by our proposed merger with New Motion. We
have
worked for them for nearly a year now, and the chemistry between the groups
has
been excellent. We all share the same drive and vision to become the leader
in
mobile entertainment. Our products are unique and exciting, and we plan on
introducing more of them in the future.
As
a
consequence of the proposed merger, I would be stepping down as CEO. The plan
calls for me to stay on for the next two years as a consultant to the company
and to the new CEO, Burton Katz. I am passing the baton to one of the most
energetic, hardworking people I have ever had the pleasure of working
with.
Burton
Katz has the commitment and drive that only an up and coming 35-year-old
executive can have. He has already earned the respect and admiration of my
team.
I am sure he will earn the respect and favor of the investing public,
particularly our shareholders.
In
our
earnings release, we announced the issuance of a quarterly dividend of eight
cents per share, payable November 10th, 2007, for holders of record as of
November 1st, 2007. Subsequent to the above referenced dividend, the company’s
board has agreed not to consider the grant of any dividends between now and
the
potential date of the closing of the merger transaction upon the receipt of
shareholder approval.
In
all
probability, this will be the last time I deliver a report on the results of
Traffix. It has been a lot of hard work, which I embraced with 100 percent
commitment and focus. There have been many people at Traffix who have
contributed to our success. They have been my coworkers and friends and have
supported all of our efforts. I want to thank you all for getting us to this
point and helping me to achieve many of my personal career goals. I hope I
have
helped you to achieve yours.
Traffix
has never been better positioned to become an industry leader. Hopefully the
success we have had this quarter and throughout the year validates that for
you.
It is my personal belief and hope that our new entity will greatly increase
shareholder value and confirm for you that this is just one of those rare
opportunities that you have to be part of.
Thank
you. We’ll now open up the call for questions.
OPERATOR:
Thank you. At this time, I would like to remind everyone, if you would like
to
pose a question, press star then the number one on your telephone keypad. We’ll
pause for just a moment to compile the Q&A roster. And our first question
comes from Ali Mogharabi from B. Riley and Company.
ALI
MOGHARABI, B. RILEY AND COMPANY: Hey Jeff …
JEFFREY
SCHWARTZ: Hi Ali…
OPERATOR:
OK, our first question …
ALI
MOGHARABI: … looking at the numbers here.
OPERATOR:
Our first question is coming from …
ALI
MOGHARABI: Yes, can you hear me?
OPERATOR:
… is coming from Ali Mogharabi from B. Riley and Company.
ALI
MOGHARABI: Yes, can you guys hear me?
JEFFREY
SCHWARTZ: Yes, we can hear you.
ALI
MOGHARABI: All right. Yes, I was actually looking at the numbers, you know,
look
at the balance sheet. You’ve got, what, 30 million in cash. I looked at the
guidance that you guys gave last, I think it was basically on the New Motion
call saying you guys can generate, what, around 145, 160 million in revenues,
so, you know, let’s say 80, 85 million of that is coming from you guys, I guess
what I’m trying to get at is at 6.30 a share, and I think that’s where it’s
trading at right now, it’s basically trading about half of sales. So, I mean
correct me if I’m wrong Jeff, but it’s pretty cheap here.
JEFFREY
SCHWARTZ: Well Ali, you’re certainly preaching to the converted. We think it’s
very cheap here, and we’re optimistic that the value is going to start to be
realized and recognized and we plan on visiting with lots of the appropriate
people in the near future to get the story out, but I’m very excited because,
you know, I think now with this quarter and when New Motion reports, I think
the
street will really see the value and the potential in this story.
ALI
MOGHARABI: Yes, and I guess, I agree with you Jeff. I guess my question also
would be, you know, do you, I’m expecting that you guys do exceed comparable top
line growth going forward, especially combining with New Motion. Am I, am I
thinking the right way I guess.
JEFFREY
SCHWARTZ: I’m not sure I understand the question Ali.
ALI
MOGHARABI: Well I mean I’m looking at basically revenue growth this quarter. It
was, what, over 30 percent? You know, this can’t go on forever, but I’m assuming
that you guys do expect pretty strong double digit top line growth going
forward.
JEFFREY
SCHWARTZ: Well look Ali, without getting too granular, obviously we expect
growth going forward. We expect the synergies to add quite a bit of value and
to
increase our ability to grow, and that was part of the excitement for us in
contemplating this merger. As this space continues to evolve, the mobile space,
the opportunities are just getting bigger and bigger and bigger. And we have
lots of plans, obviously, post merger, to grow both businesses.
ALI
MOGHARABI: Yes, I mean with all of that said, I mean that’s certainly another
reason why it looks so cheap here.
One
last
question Jeff, you know, we do know that you have the option to sell I think
it
was over a million shares. I mean, you know, I wouldn’t sell it at this level,
just telling you. I mean with so much upside, so hoping you’re assuming the same
thing.
JEFFREY
SCHWARTZ: Ali, I can’t comment, but I can read the tea leaves.
OPERATOR:
Once again, that is star one to pose a question. Thank you. Our next question
is
coming from Phil Higgins, private investor.
PHIL
HIGGINS, PRIVATE INVESTOR: Jeff, how are you today?
JEFFREY
SCHWARTZ: Good morning Phil.
PHIL
HIGGINS: Nice quarter, especially on the revenue side, and as the previous
quarter, caller stated, you guys obviously had nice sequential EBITDA growth.
And I wanted to ask a similar question, obviously you’re not comfortable talking
about your personal sales, where and what levels you’ll be selling
them.
My
question to you, more importantly, is what was your thinking behind - if, it
seems to me you clearly personally were looking for a liquidity event, and
if
that’s the case, if I were looking for a liquidity event, I would be merging,
selling, et cetera to a company that was liquid. Clearly New Motion is illiquid
and, you know, yes we can just, we can all smile and say, hey what a great
company we’ve got and how cheap the company is and the stock is here, but what
was your thinking about selling to an illiquid company and how do you plan
to
actually sell your stock and extract value, and is this going to take a lot
longer than you personally had anticipated? And then just as a follow up, were
there any other bids that you guys considered, any other companies you
considered merging with? Are there any other bids on the table, and would you
consider another company at this time? Thank you.
JEFFREY
SCHWARTZ: OK. First of all, my personal preferences unfortunately, were not
as
relevant as one might think. When a company like Traffix entertains a strategic
option, the necessity is to immediately form a special committee, which we
did.
And once that special committee is formed, any decision to take any action
rests
with the special committee, not the CEO. And we had other opportunities that
the
special committee evaluated, and after much deliberation, which, much meaning
months, of looking at other options, the special committee, in line with
management, unanimously agreed that the New Motion opportunity was the best
opportunity for the shareholders.
What
was
best for Jeff Schwartz was not in the, in the cards, and that was not one of
the
considerations. How and when I come to a liquidity event, we’ll see what goes on
in the future, but like the rest of the shareholders, I’m sitting here hoping
and expecting the stock to appreciate dramatically with this
combination.
PHIL
HIGGINS: And is there any sort of public filing you can make or statement -
maybe not at this time - that a certain level that you won’t be selling the
stock at?
JEFFREY
SCHWARTZ: No, I don’t think that’s a, you know, I don’t think that’s appropriate
or legal. But it’s obvious I haven’t sold any.
OPERATOR:
Thank you. Our next question is coming from Andy Horovitz from Old School
Partners.
AVA
HOROVITZ, OLD SCHOOL PARTNERS: Hi Jeff, this is Ava Horovitz …
JEFFREY
SCHWARTZ: Hey Ava, how are you?
AVA
HOROVITZ: Good, good. Congratulations on the deal.
JEFFREY
SCHWARTZ: Thank you.
ANDY
HOROVITZ: As someone who knows Burt, I understand why you did the deal. I guess
my only question I’m hoping you gave me an answer to is, when do you think the
earliest this deal could actually close if you’re, if at this point you guys are
comfortable giving out that info?
JEFFREY
SCHWARTZ: Yes, I mean I’m comfortable telling you what I know. I can’t tell you
what I don’t know, but I think if everything went well with the SEC, I guess it
could close in mid-December. Realistically, I think it’s going to be somewhere
between December 15th and January 14th.
AVA
HOROVITZ: OK. Well what do you need to do right now? What are the roadblocks
to
get it closed?
JEFFREY
SCHWARTZ: No roadblocks, procedure. I mean I guess I could let Dan amplify
on
the answer, but the attorneys are feverishly preparing the S4 which has to
get
filed with the SEC. The SEC reviews the S4. Once you’re done with that process,
which could take more than one submit, I think we file the proxy for shareholder
vote.
AVA
HOROVITZ: OK, and I guess on the S4 we’ll get a better sense of the combination
of the two companies, what your expectations are?
JEFFREY
SCHWARTZ: I think so. I mean this, the S4 makes a prospectus look like child’s
play. I mean there’s just so much information in it.
AVA
HOROVITZ: OK. Can we assume streamlining, cost-cutting in Traffix over the
next
couple of months?
JEFFREY
SCHWARTZ: I think there’s going to be some economies that are realized between
the combination, you know, some of them are very obvious, others are not so
obvious, but we’re looking at this more to leverage the human talent and
resources that the two entities have than eliminating because we’re looking at
growing a business, you know, not - we’re not looking as our first objective to
improve margin, not that that’s not on the agenda, but the real objective is to
grow the top line and grow absolute margin.
AVA
HOROVITZ: OK. Congratulations and …
JEFFREY
SCHWARTZ: Thank you Ava.
ANDY
HOROVITZ: … take care, bye.
JEFFREY
SCHWARTZ: Bye.
OPERATOR:
Thank you. We do have a follow up question from Phil Higgins.
PHIL
HIGGINS: Jeff, one last question. Did you consider, did you consider or receive
any cash offers from any public or private companies?
JEFFREY
SCHWARTZ: Dan, how do we …
DAN
HARVEY, CHIEF FINANCIAL OFFICER, TRAFFIX: This will be taken up in detail in
the
background of the merger that will be a product of the S4. I think we, I think
we’ll leave it at that for the time being.
PHIL
HIGGINS: And how quickly can we expect for that to be made public and for us
to
be able to read that?
DAN
HARVEY: You know, depending on the progress of the document through the SEC
review, it would have to be available at least 20 days before any proposed
meeting. So if, just to stick to Jeff’s timeframe of a January 14th date, that
should be available for public review sometime in mid-December.
PHIL
HIGGINS: OK, but considering where the original offer price was, or theoretical
offer price of, you know, 10.59 and considering where the stock is now, don’t
you think it would be more than appropriate for you to get that out far sooner
than 20 days previous to a meeting? I think the shareholders are entitled to
know what you considered, what you received and what you possibly turned down
prior to 20 days prior to a meeting.
DAN
HARVEY: I’ll take that, I’ll take that under recommendation and take it up with
council.
PHIL
HIGGINS: I appreciate that. Thank you.
JEFFREY
SCHWARTZ: Great, very good.
OPERATOR:
Thank you. At this time, I would like to turn the floor back over to Jeff
Schwartz.
JEFFREY
SCHWARTZ: OK, thank you. If there are no further questions, I think we’ll wrap
this call up. And if there are any specific questions going forward, Dan and
I
will make ourselves available. Thank you.
OPERATOR:
Thank you. This concludes today’s conference call. You may now
disconnect.
END