Leaf Group Ltd.
Q4 2019 Earnings Call Transcript

Published: 16 Mar 2020

[Operator:]

Good afternoon. My name is Chantal, and I will be your conference operator today. At this time, I would like to welcome everyone to Leaf Group's Fourth Quarter 2019 Earnings Call. On the call with me today is Sean Moriarty, CEO; Jantoon Reigersman, CFO; and Shawn Milne, Investor Relations.Shawn Milne, you may begin your conference.

[Shawn Milne:]

Good afternoon, everyone. On behalf of Leaf Group, welcome to our conference call. I'm pleased to have Sean Moriarty, our Chief Executive Officer and Jantoon Reigersman, our Chief Financial Officer on the call with me today.Any metrics discussed on the call without reference to a specific third-party source are based on our internal data. You'll find the letter to shareholders and 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. We would like to remind everyone that during today's conference call, management will make certain forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from our current expectations discussed in such forward-looking statements. In particular, comments about our anticipated future revenue, earnings, operating expenses, operating metrics and growth rates as well as statements regarding our business strategy and objectives, plans, intentions, operating outlook, planned investments and the impact of recent acquisitions are considered forward-looking statements. Factors that could cause actual results to differ materially from anticipated results are detailed in our letter to shareholders, earnings release and our SEC filings.I would like to point out that during the call, we will discuss certain non-GAAP financial measures while talking about the company's financial and operating performance, including adjusted EBITDA and free cash flow. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP measures can be found in the financial tables included at the end of our letter to shareholders and press release.Lastly, I would like to remind everyone that today's conference call is being recorded and that it is also available via webcast through the Investor Relations section of our corporate website. A replay will also be available on our website.With that, I'll now turn the call over to our CEO, Sean Moriarty.

[Sean Moriarty:]

Good afternoon, and welcome to our Q4 2019 earnings call. Before we jump into the Q&A I'll provide a brief update. First of all, we along with every other company in the world are now operating our business in a very difficult and highly uncertain environment, amidst conditions that we all should expect to persist in the coming weeks and months. We've taken every prudent step we can to manage our business through this challenging time.Through the first 10 weeks of Q1, our business has been very stable. Although we did see substantial softness on Friday, March 13, as the world woke up unmasked to the crisis we're all facing. The softness we saw on Friday improved somewhat over the weekend but we have little visibility into the weeks ahead. Nonetheless we'll continue to create content that educates, informs and inspires for the millions of people who visit our sites every day and to support our community of artists as they share their vision, imagination and work with the world.On Friday we made the decision to postpone the other art fairs Q1 and Q2 calendar of events, which includes two fairs in Q1 and five fairs in Q2. We expect several of these fairs to be rescheduled to a later date although we don't yet have specifics to share.Onto Q4 overall, Q4 revenue declined 1% year-over-year which was an improvement of two points from Q3. Overall, top line results remain constrained due to declines in Society6. However, we delivered solid 11% growth in media. We're seeing signs of progress at Society6 including return to gross profit growth, continued growth in the wall art category in Q4 and improved GTV trends in our US B2C business in Q1.We continue to see strength across our portfolio of businesses including the following key areas in Q4. Society6 group gross profit dollars increased 9% year-over-year. Saatchi Art group grew revenue 15% excluding a deferred revenue adjustment. The Other Art Fair grew revenue 11% in the same number of fairs. Media revenue grew 11%, Hunker revenue grew 115% year-over-year, e-commerce GTV for Hunker and Well+ Good combined increased 8X year-over-year. Only In Your State revenue in Q4 is up roughly 3X since the time of acquisition in February 2019. Overall Leaf Group's properties reached over 66 million monthly unique visitors in the US in December 2019.Lastly I want to remind everyone that the strategic alternative review that we announced on April 15, 2019 is still ongoing. We will not be making further announcements until the board has approved the course of action requiring disclosure.With that brief summary we're now ready to take your questions. Operator please open the line.

[Operator:]

[Operator instructions] Your first question comes from Jason Kreyer with Craig-Hallum. Your line is open.

[Jason Kreyer:]

Hi guys. Good afternoon. Sean I know we're not supposed to questions about the strategic review, but is there anything you can provide in terms of a timeline now that we're kind of getting close to 12 months under the SME. Can you give an expectation of when we should hear some type of a conclusion there?

[Sean Moriarty:]

I am sorry Jason but we can't.

[Jason Kreyer:]

Okay. A question on particularly on Society6 that it had a drag on revenue and a drag on the operating contribution and I'm just wondering if you can kind of rehash through kind of the strategy in that business just in terms of when we look at the operating contribution down $2 million or I guess a negative $2 million year-over-year and obviously there's been a lot of volatility there, but just a little bit more on the strategic processes to get that back into faster top line growth and closer to profitability.

[Sean Moriarty:]

Sure so as we've talked about it earlier Jason, there is several contributing factors to the underperformance at Society6. We've got the marketplace pullback which is now over a year ago, but which was a meaningful minor contributor to the business and we're anniversarying that getting behind us. We've got the international slowdown and we've done some work there but we're also in a world where there are real global challenges. So that's going to take a while particularly now.The B2B business which have been soft last year through the back half of last year really started to improve and get back to in the high teens, low 20s growth and it's a business that we expect to continue to perform well aside from obviously the situation we're all living now which is highly unpredictable. And then the US B2C business is the largest part of the business has been soft.We've been doing an awful lot of work there on managing margins, reevaluating the promotion strategy and we're starting to see some really strong results with more product specific marketing, lightening up on the promotional load and making significant improvements to the site from a UI/UX experience. So several different factors we're working through, but you can see that we're running a much more efficient business just for the gross profit dollars flow-through year-over-year and we're making good solid progress really figuring out marketing and promotions strategy for this business as well.

[Jason Kreyer:]

All right. Thanks Sean. A couple that I wanted to layer in together on direct sales. I guess first of all [indiscernible] over time as a component of the total media business. You called out in the shareholder letter up 34% for the year, but if I remember correctly that didn’t really get off the ground until spring summer last year. So just wondering if maybe you can provide like a Q4 growth rate that's probably more indicative of closer to maturity business.And then the last question is for me like is everything with that direct sales, is it a purely additive or are you kind of stepping away from programmatic advertising and implementing more of a direct and just kind of changing the mix to move up to higher CPM a little bit. So if you can address those three, that will be appreciated.

[Sean Moriarty:]

Yeah Jason I'll start with the -- so first of all, remember with the acquisition of Well+ Good we did conserve the effort to in addition to the strength of our programmatic desks to also go further into direct and so really the reflection in the letter is a reflection of our continued progress that we're making in that area and the strength of the individual brands right across Well+ Good, Hunker etcetera, we have real opportunity to push these brands much further into the direct brand of revenue space and we're doing a really good job at that number one.Number two, if you look at effectively year-over-year it goes all really healthy double-digit growth numbers that you can consider and if you look at it purely from a direct perspective and so it's not necessarily a shift away from programmatic, I think programmatic is a really healthy business for us, it continues to be so. It's just in addition really through the programmatic we're really running as a team currently.

[Jason Kreyer:]

Okay. That's helpful and then well on Livestrong that's been very volatile and Sean you talked a lot about those components of volatility. Has there been some external factors and I know you guys have done efforts to clean up the content that's on the site it sounds like that. So outside of the current macroenvironment we're in right now, are there any other surprises, any other changes in expectations in Livestrong, have you seen anything from third-party whether it be Google or other thing or are there any other steps you're doing internally to make changes there. Just trying to wondering or starting to enter into a period of stability in Livestrong that we hadn’t been in a while.

[Sean Moriarty:]

So we've done an awful lot of work Jason as you know to narrow Livestrong's focus which is really about promoting an active healthy lifestyle and we've moved away from a lot of that very hard-core syndrome and illness content, which has been a multiyear process for us and so absent the current environment which makes things very difficult to predict, we think that we have a much more stable, much more focused business that again absent this environment, we would expect to grow in 2020.Given where we are it's obviously hard to see, but certainly Livestrong is a stronger asset, much better suited to ride out the present environment that it was before.

[Jason Kreyer:]

Okay. Last one for me, I'll see the call, but Saatchi slowed a little bit in the quarter and I think Sean you referenced a deferred revenue change. So just maybe a little bit more on that, but it also look like just relative to the growth you put up in Q2, Q3, Q4 was a little bit forward. Just wondering if there's any factors that led to that.

[Sean Moriarty:]

I'll take that Jason. Saatchi grew at 15% excluding onetime adjustment on the [indiscernible] side and I'll give you a very high level update which is basically as part of it, so Saatchi's hospitality business has grown significantly since we effectively started that segment of the business in early 2018. As part of that obviously, the sales are a little bit more lumpy and as such we've at some point as that business grew and becomes more important, we've made a decision to actually adjust a little bit how we recognize that revenue and so we made that onetime adjustment as we went through our internal administration.So it's a onetime adjustment that we've done in reflection to that specific part of the business, but overall if you take that out, it's a 15% growth year-over-year which I think is a really good growth and obviously Saatchi is a lot of opportunity and the hospitality business overall is also growing really nicely. So I think it has plenty of opportunity. Also remember little bit part of your first question which is remember that Saatchi is still in investment mode. So we continue to invest in that business as it's effectively the leading platform for all in art right. So it's a really attractive platform that we have and a really good brand.

[Operator:]

Your next question comes from Maria Ripps with Canaccord. Your line is open.

[Maria Ripps:]

Good afternoon. Thanks for taking my question. Sean, you highlighted stable trends for the business on March 15. Can you talk about the virus -- the virus impact on your supply chain and can you talk about any recent changes in consumer activities across your key online properties?

[Sean Moriarty:]

So I would say few basically echoing my opening remarks our business has been very, very stable and we saw, we've seen softness. It's a little hard to tell how indicative it is on representing a new normal. So just again keep in mind obviously highly uncertain times, but up until very recently we had seen little to no softness overall across our businesses.From a standpoint of our marketplace businesses again, it's really early Maria and we've got good diversity in our vendor networks and good capacity and so from a raw materials perspective, we actually expect that we're going to be in very good shape, which we can, what we can't predict of course is what happens with respect to manufacturing capacity and workforce capacity in the weeks ahead and we're no different than anybody else in the world with respect to that.Beyond that, we think we actually have a pretty darn resilient business with production capacity from a raw materials standpoint but the prospective labor issues is something that any company that relies on manufactured and delivered product is going to have to work through in the coming weeks and how that goes at this point in time is anybody's guess.What I will tell you is our people are very well prepared to work extraordinarily hard, they're very, very committed and we're well-equipped to get our work done almost regardless of what's thrown at us in the coming weeks and months.

[Maria Ripps:]

That's very helpful and maybe can you share your thoughts around expenses and profitability for 2020 so nothing special given the current environment, so how much flexibility do you think you have in terms of scaling down expenses if needed and you highlighted more aggressive promotion peak marketing in 2020 just any color you could share with us on that?

[Sean Moriarty:]

Yeah so it's certainly in times like this you need to make sure you’ve done the hatches from an expense perspective and we're certainly we have been for several weeks now evaluating all of those levers and when to pull them and if so how hard. When it comes to marketing expense, one of the obviously the advantages that you have is you can look at all of your channels and as you watch consumer demand wax and wane, you look at those channels and you really look, you typically over-index in times like this on those channels that are over-performing obviously and returning very quickly.Those channels which well maybe profitable but over a very long time horizon, which are subject to potentially a change in model are areas where you tend to pull back and we're certainly equipped to and will be doing that appropriately. And so it's not one thing at a time like this Maria. It's everything and we're fully prepared to do everything we need to, to manage expenses accordingly.

[Maria Ripps:]

Got it. Thanks so much for the color.

[Sean Moriarty:]

Thank you, Maria. We appreciate it.

[Operator:]

There are no further questions at this time. This concludes today's conference call. You may now disconnect.