New York-based iTurf (Nasdaq: TURF), a spinoff of teen-tailer Delia's (Nasdaq: DLIA), operates a network of community and e-commerce websites aimed at "Generation Y," including the gURL.com teenage community and droog.com, an e-commerce site geared toward teenage boys. On Tuesday, the company announced the acquisition of OnTap.com, a portal site for college students. iTurf went public in April, selling 4.2 million shares for $22 each.
TMF: First of all, I had to reorder my questions today because of your announcement. Can you talk a little bit about the OnTap.com acquisition and what you're trying to do there?
Kahn: Sure. We think this is a great deal for us for a variety of reasons. First off, the acquisition significantly enhances iTurf network's community and content offerings and that's obviously important for us. Second, OnTap's focus on college and university students, both boys and girls aged 18 to 25, enables iTurf to extend the life of our core high school customers. The third thing about the deal is that because of its college focus, nearly all of OnTap's customers, we believe, will represent incremental traffic for the iTurf network and we were looking to build a dominant franchise. And finally, the acquisition dramatically accelerates the evolution of iTurf's advertising model.
TMF: Intuitively, I would think that the college audience would be pretty fragmented. Do you believe it can be addressed by one voice?
Kahn: Currently what they've got is a global site -- we have a number of different channels focused on gaming, entertainment, lifestyle and campus news, sports and other services, like a career center.
"We believe that from a page view perspective, the network will pass other demographic portals like iVillage in the upcoming quarter."
Perhaps more interestingly, they're now in the process of launching local college sites -- sort of unofficial editorial voices that will be run by local students on each one of their college campuses. And that's a great way, obviously, to push down localized news and interests.
TMF: Is expansion through acquisition the way you think you're going to be able to expand your network primarily, or are you going to try to develop more sites as well?
Kahn: Most of the content that we have on the site now is proprietary and has come from internal growth. But we're obviously looking to grow the network as fast as possible and acquisitions will be a part of that model going forward. We think OnTap is a great example of the kind of deal that really enhances the overall... network of sites.
TMF: For some time your stock price has been significantly below the IPO price and I'm wondering how -- or if at all -- that's affected your acquisition plans?
Kahn: Obviously, third parties have to make a determination about where they're going to get access to capital in order to build their own sites. I think that we're a very attractive alternative for them. The fact that the stock price has decreased in value obviously affects our ability to cut deals, but frankly... [it] has really not dramatically affected our ability to execute any of the deals.
TMF: Well, let's go ahead and talk about your advertising model.
Kahn: One of the things to understand about [the OnTap] deal is that OnTap was an affiliate of MarketSource, which is the leading college and high school marketing services company in the country; and MarketSource has tremendous access to Fortune 500 companies that are already doing offline advertising on college and high school campuses.
As part of this deal, MarketSource has agreed to purchase a minimum of $6 million worth of advertising and promotion inventory on the iTurf network of sites. Over the next two and half years, that's obviously a very powerful jump for us into the advertising model.
In conjunction with MarketSource, we'll be building an internal sales force. You'll begin to see us take ad serving in-house so we can serve up more page views across the network. But the long-term goal for the site has always been a sponsorship model as opposed to simply banner views.
TMF: What sort of advertising/commerce breakdown should we be looking for as you build out the company?
Kahn: About 85% of our model over the next two years is commerce based as opposed to advertising based. Obviously that's going to be impacted as a result of [the OnTap.com] deal. We would like very much to see the percentage of advertising or non-commerce related revenues increase dramatically. The advertising model obviously carries a much, much higher margin.
TMF: Could you give us a run-through of your site network?
Kahn: We own the gURL community -- gURL.com. And the gURL community is the largest, fastest growing community focused on teen-age girls. There is an email service, a home page service, an area where girls can access chat rooms and post to bulletin boards. And of course there is gURL.com, which is the 'zine section which includes an area called "mouth piece" which is entirely user-generated content.
We have hundreds of thousands of members of the gURL community. Over 1,000 girls are setting up homepages every day. We have about 700,000 gURL-mail address -- and of course this is just on the gURL side. Companywide we have well over a million email addresses.
TMF: Through purchases and things like that?
Kahn: Yeah, and also because we have access to an 11-million name database of consumers in this age group, 6 million direct buyers that we get from our affiliation with Delia's.
The gURL traffic is exceptionally sticky. As girls move through the magazine section, they spend on average 23 minutes per session, which is very heavy usage. Our girls are seven times more active on their homepages and twice as active on their email as the users of other demographic portals like iVillage (Nadsaq: IVIL).
In the commerce area we have seven different online shops servicing this group and selling products ranging from athletic gear to apparel to street wear to shoes to home furnishings and perhaps the best known site is Delia's.com. But there are a number of other sites.
"You will see announcements coming from us about other significant deals that we're doing that we think will enhance our ability to build our brands."
TMF: I'm actually on your TSI mailing list.
Kahn: OK, good. TSI Soccer is the largest specialty retailer of soccer goods in the country and TSISoccer.com is a site that's contributing about 10% of commerce sales now.
We also have a discount channel which is a subscription-based service called Discount Domain where kids sign up. They pay five dollars a month and we give them access to their favorite brands at a deep discount, and it's an interesting service.
Other sites on the network right now include droog.com which is I think a very interesting lifestyle brand for us online focused on teenage boys.... It's a really cool site. It's got different Web-cam links that are of interest and it's got all of the brands that guys want.
TMF: Could you talk a little bit about your promotional efforts and how you gauge the effectiveness of your spending in that area?
Kahn: Yeah, absolutely. I think it's important to understand that we've had extremely dramatic growth on the network today. We started the year out at about 30 million page views in January. That traffic leapt to 50 million after the first quarter and we saw an enormous leap in the second quarter, which we'll talk about on our second quarter conference call on August 25th. We believe that from a page view perspective, the network will pass other demographic portals like iVillage in the upcoming quarter. So that's very heavy traffic growth.
Almost all of that growth has come internally. It's been organic growth on, if you will, a viral basis. We really have just begun to put some of the marketing dollars to work that we raised in the IPO. We're extremely well capitalized now with over $80 million in cash. What we are looking to do is to use that cash to build a dominant franchise, to really sprint and build the iTurf network brand.
And that means that we've begun to do some deals that we think will continue to accelerate the growth that I just talked about. The AOL (NYSE: AOL) deal's a good example. We've made sure that we got key anchor tenancies for all of our major properties on the network, including the gURL community. We think that gives us an important beach-head in what is right now an important part of online kids' lives, which is America Online. But you will see announcements coming from us about other significant deals that we're doing that we think will enhance our ability to build our brands.
The real push for us will come in the fourth quarter when we launch iTurf.com. When you go to the site right now you'll see in essence it's really just an investor site. The idea is to launch iTurf.com as the personal homepage for the entire network with a whole set of functionality and communication utilities that tie all the sites together.
As part of that, we're downloading the 11 million name database into an Oracle warehouse where we can really capture and understand more information and attributes that are critical in marketing effectively to this group.
TMF: Well this probably a good time to wrap it up. Is there anything I didn't ask that you'd like to tack on there?
Kahn: I feel like I can talk for ages about it.... Increasingly we think that users are going to be seeking affinity networks where they can interact with people like themselves and we have an opportunity, we think, to really build the dominant franchise for these kids and we're having a lot of fun doing it.
TMF: Thanks a lot. I really appreciate the time.
Kahn: Any other questions you have, feel free to ask.
TMF: Thank you.
Kahn: Bye bye.