Leaf Group Ltd.
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Thank you for standing by, and welcome to the Leaf Group’s Fourth Quarter 2020 Earnings Call. On the call with me today are Sean Moriarty, CEO; Brian Gephart, CFO; and Shawn Milne, Investor Relations. Mr. Milne, you may begin your conference.

[Shawn Milne:]

Good afternoon, everyone. On behalf of the Leaf Group, welcome to our conference call. I’m pleased to have Sean Moriarty, our Chief Executive Officer; and Brian Gephart, our Chief Financial Officer, on the call with me today. Following our Safe Harbor statement, Sean will update you on our business and Brian will provide more details on our quarterly financial performance. Any metrics discussed on the call without reference to a specific third-party source are based on our internal data. After the prepared remarks, we will open up the lines for Q&A. You will find a related release along with supplemental materials posted on the Investor Relations section of our corporate website located at ir.leafgroup.com. Before we get started, we need to make the following Safe Harbor statement.

[Sean Moriarty:]

Thank you, Shawn. Good afternoon and welcome to our Q4 2020 earnings call. Leaf Group delivered another excellent quarter of financial results, during which we furthered our mission of building online brands that consumers love and trust by connecting people to their passions and providing essential information to help them live richer and fuller lives. Before we jump into the Q4 highlights, I want to take a moment to thank our Leaf Group team for their tireless work this past year. This has been a challenging year for all of us and it is through their commitment, determination, and sacrifice that we continue to deliver strong performance despite the unprecedented volatility of 2020. Along with discussing our Q4 results, we will share some of the operating highlights and key initiatives that are fueling strong growth across Society6 Group and Saatchi Art Group as well as a strong operating contribution for our Media Group brands. Q4 revenue increased 44% year-over-year to $65 million, marking the highest quarterly revenue in seven years and continuing the strong momentum from the prior two quarters. Q4 revenue growth was driven by strong performance from Society6 Group and Saatchi Art Group. Both brands also delivered another record quarter of new customers in Q4. Society6 Group revenue increased 95% year-over-year, setting another revenue record for the brand.

[Brian Gephart:]

Thanks, Sean. Before we get into Q4 results, as a reminder, starting in Q3 we separated our historical marketplaces segment into two segments, Society6 Group and Saatchi Art Group, and aligned our reportable segments to reflect this change resulting in three reportable segments

[Operator:]

Certainly. Your first question comes from the line of Maria Ripps with Canaccord. Your line is open.

[Maria Ripps:]

Hello, everyone. Congrats on strong results, and thanks for the questions. So you mentioned the possibility of reinvestment back in the business. Sort of as you’re coming off a strong 2020, what are some areas where you see the need for more investment, whether it’s customer acquisition, brand, UI fulfillment? And sort of now with the higher revenue run rate, how are you thinking about the balance between investing and profitability here in the near-term?

[Sean Moriarty:]

Hello, Maria, it’s Sean. Thanks for the question. Great to hear your voice. We see significant opportunity to continue to invest in our businesses. I’ll hit the high points really for each segment. On the Society6 side, a lot more opportunity to invest in acquisition and retention. We also see opportunity to continue to expand our physical product selection. And then from a platform perspective, for both artists and consumers, there’s significant work we can do to improve that experience and really drive leverage through the business. And the artist side improved tools so that they can manage their business as they create art and they can become even much stronger marketers of the art that they create. And on the consumer side, a lot of mobile web and mobile app work, which we believe is a significant opportunity for us to continue to drive growth for the business. On the Saatchi Art side, really scaling out those virtual fairs with more immersive, richer technology as that really becomes both in real-life and in the virtual world a really, really strong offering for us, some more investment there. And then on the media side, the feel is that as the media segment recovers, doing more work on commerce-related initiatives like the Well+Good shop that we launched earlier this year. From the standpoint of balancing growth and profitability, where we have waited, we think about it is, even with these opportunities for investment, a very disciplined approach where we look at that, the target annual incremental flow-through in that 15% range is how we’re going to evaluate the level of investment. And so again, looking at it on an annual basis, delivering that consistent incremental flow-through to what we’ve achieved from 2016 to 2020 and also from 2019 to 2020 to help guide us as we go.

[Maria Ripps:]

That’s very helpful, Sean. And maybe related to that, now that you shared standalone financials with us for Society6 and Saatchi Art for a couple of quarters, can you maybe talk about what kind of margins do you expect to achieve for both brands sort of longer-term? And which one do you think can be more profitable sort of given different revenue models? And any color on what kind of revenue run rate is needed in order to sort of start generating meaningful operating leverage for those two brands?

[Sean Moriarty:]

Yes. Great question, Maria. As you know, the margin structures of the businesses are fundamentally different, principally because the Saatchi Art business is a pure marketplace not burdened at all by vendor products costs. And at the same time though, the Society6 business is very capital-efficient and enjoys, particularly as a home decor retailer, very, very healthy margins. And so we expect good solid flow-throughs for both of those businesses as they continue to scale. And so we don’t really compare them to one another as much as we think about their own independent opportunities. We’re still in investment mode with Saatchi Art. You can kind of see the incremental flow-through in that business over years as it approaches profitability. And I would say that from the historic flow-throughs we’ve seen for each of the respective businesses, you can expect to continue in the future on an annualized basis. And with further scale, there’s probably a real opportunity to improve those margins for each business as we go.

[Maria Ripps:]

Great. Thanks so much, Sean.

[Sean Moriarty:]

Thank you.

[Operator:]

Your next question comes from the line of Jason Kreyer with Craig-Hallum. Your line is open.

[Jason Kreyer:]

All right. Thanks, guys. Just wanted to talk a little bit about the leverage in the model. And I know you called out the potential for making some growth investments. If we look at this quarter, we kind of come up with a run rate of about $260 million in revenue and $7 million of EBITDA and absent some of those investments, I just wanted to see if you can give a little bit more detail on where you expect to see the leverage in the model. If we push that out a couple of years, how you kind of bridge the gap from a $7 million run rate today to the $20 million a couple of years out?

[Brian Gephart:]

Yes. I think we’ve demonstrated in our track record, Jason. We’ve clearly delivered 15% incremental flow-throughs from 2016 to 2020 and from 2019 to 2020. And we feel very comfortable in our ability to continue to deliver those. And also keep in mind, our media business had a challenging 2020. And if that business continues to recover in 2021 and delivers meaningful cash flow to our business, this is really important to us.

[Jason Kreyer:]

Got it. A couple of questions and I think these kind of go hand-in-hand. But wanted to get a little bit more detail on some of the product margin pressure you saw in the quarter. And then also wanted to ask about the investments that you made in customer acquisition and whatnot. And I think perhaps those two go together a little bit, but maybe you can unpack both of those, if you can, Brian.

[Brian Gephart:]

Yes. So certainly, so as we called out in the prepared remarks, we made $2 million in incremental reinvestment in the quarter in customer acquisition and retention, and that really is covered in three areas, both promoter – I should say, in each respectively through promotions, free shipping, and marketing spend. And those are dialogues that we monitor very closely and have channels and customers who respond favorably to each of those categories. And so as we move through the quarter and we see opportunities to acquire customers profitably, we will turn those dials to invest in the business. And so – and we will continue to do so.

[Jason Kreyer:]

Those marketing investments, are those – from an expense recognition standpoint, are those hitting cost of revenue? Or does any of that stuff flow into OpEx?

[Brian Gephart:]

The marketing spend is in OpEx.

[Jason Kreyer:]

It is. Okay, okay. Thank you. And then following these investments that you’ve made, right, I mean this is all in the name of customer retention and stuff like that. So maybe you can kind of compare and contrast the retention trends that you’ve seen over the last several months as growth has been accelerating, maybe compare that to the steady state retention trends that we saw across 2018 and 2019. Just trying to get a feel for how much that’s changed in these last few months.

[Brian Gephart:]

Well, that we’ve disclosed. So in both Q3 and Q4, we saw the Q2 cohort perform a 30% improvement year-over-year in their retention behavior for that Q2 cohort. And we’ve seen those retention efforts and trends continue into Q1 2021 as we’ve talked about. And so we’re seeing a significant improvement in that retention behavior throughout this year and into 2021.

[Jason Kreyer:]

Okay. I wanted to squeeze on in on media and then, again, you’re referencing kind of your confidence in returning that to growth. And obviously the trends that we’ve seen in RPV in the last couple of quarters are going to continue to help that. But maybe you can just unpack that confidence a little bit. I don’t know if there’s any color you can give on like a property-by-property basis. That helps us understand where we’ve gone through across 2020 and the confidence that those come back in 2021.

[Sean Moriarty:]

Sure. So, Jason, I think the first thing I’d point out is how kind of headline news dominant the year was. And so lifestyle publishers and lifestyle audiences definitely felt the impact of that. And if you look at our brands, they’re fashion brands. And in a cycle, which was dominated by incredibly newsworthy stuff in our world, highly contentious presidential election, social justice, social protest, and pandemic, you’re just not going to get the mind share of which you would get, I would say, in more temperate times. And so at the same time, the categories we’re in are absolutely huge categories where consumers increasingly are seeking information online, and we expect that that attention is going to come back. And then if you look at, I think, individual properties in a world locked down by pandemic, a property like OnlyInYourState, which has a fantastic future ahead of it, isn’t going to do too well in a world where people are locked down and not traveling, but we certainly expect to return to, I guess, new normalcy is the best way to say it. The other thing that gives us real comfort in the recovery of the business is we continue to do work with great high-quality advertisers in Q4, for example, Walmart, Scarborough, really, really strong brands. And so we just feel very good about where our media business is based on the caliber of leaders and managers we have within it, the categories that we’re in and the success we’re having in the branded sales side, and we know they are categories or categories growth.

[Jason Kreyer:]

Sorry to keep throwing more last questions at you. But on that last comment, over the last few quarters, we’ve talked about longer duration commitments on the media side with the new brands and whatnot. Is there any way to handicap where your media businesses sit today versus a year or two ago in terms of how much of this is more like a, I’d call, a spot market versus how much you have already committed?

[Sean Moriarty:]

Yes. I think we will continue to do, Jason, to get a sense for these brands, particularly a brand like Hunker that didn’t even exist three years ago. The more work we do with advertisers and the more we talk about the return of those marquee advertisers probably gives you the best indicator on the brand strength and how well we deliver as a publisher for those brands that we serve. So probably look for more going forward as we give color on those advertisers that have come back and the nature of the work that we’re doing with them. But we’re certainly heartened by the progress. For example, if you look at an advertiser like Walmart with Hunker, we feel like we’re clearly going in the right direction, doing an awful lot of good work for them and that they’re very happy with it.

[Jason Kreyer:]

Got it, all right. I’ll stop there. Thanks for the response guys. Appreciate it.

[Sean Moriarty:]

Thanks so much. Great to hear your voice.

[Operator:]

This concludes the Q&A session and the Leaf Group’s fourth quarter 2020 earnings call. We thank you all for your participation. You may now disconnect.