Leaf Group Ltd.
Q1 2017 Earnings Call Transcript

Published: 4 May 2017

[Operator:]

Welcome to the Leaf Group First Quarter 2017 Earnings Call. On the call today we have Leaf Group's CEO, Sean Moriarty; the Company's CFO, Rachel Glaser; and Jeff Misthal, the SVP of Finance. I will now turn the call over to Jeff.

[Jeff Misthal:]

Good afternoon, everyone. On behalf of Leaf Group, welcome to our Q1 2017 conference call. I'm pleased to have Sean Moriarty, our Chief Executive Officer; and Rachel Glaser, our Chief Financial Officer, on the call with me today. Following the Safe Harbor statement that I will make, Sean will update you on our business, and then Rachel will provide details on our fourth quarter and full year financial performance and key operating metrics. Any metrics discussed on the call without a 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 our 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, and planned investments, are considered forward-looking statements. Factors that could cause actual results to differ materially from our anticipated results are detailed in our press release, furnished to the SEC. I would like to point out that during this 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. We will also state certain financial results on a pro forma basis, eliminating the impact of dispositions of our Cracked business and certain other non-strategic online properties. Reconciliations of these non-GAAP and pro forma financial measures to their most directly comparable GAAP measures can be found in the financial tables included at the end of our 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:]

Thank you, Jeff and thank you everyone for joining us this afternoon. We appreciate the opportunity to update you on our first quarter results and what is planned for the remainder of 2017. Q1 marks our third consecutive quarter of revenue growth up 9% year-over-year on a pro forma basis. Before discussing our Q1 results and strategic priorities, I wanted to revisit our announcement that Rachel Glaser will be leaving the Company later this month. I want to thank Rachel for her hard work in transforming Leaf Group into a Company that is returned to revenue growth on a year-over-year basis. Rachel has been a valuable asset to the Company during our transformation and will surely be missed. Importantly Rachel built a strong finance and accounting team that is more than ready to step up as we conduct a search for her replacement. With our transformation well underway, we continue to pursue our mission of building creator driven brands for passionate audiences in art design and lifestyle categories. We are pleased with the progress made in Q1 to further this mission in both our marketplace and Media businesses. As we continue growing our diverse portfolio of brands, each focused on building great products in creating engaging content. Today I will focus my remarks in three areas. First, I will discuss our 2017 initiatives and our confidence in future growth. Second, a review of our marketplace businesses which had another quarter of solid revenue growth and continue to expand the world-class products and services it offers. We're excited about the acquisition of Deny Designs announced today and I will provide some color on how this further strengthens our portfolio of art and design brands. Finally, I will provide an update on our Media businesses, highlighting another strong quarter of growth for LIVESTRONG, continued positive signs of growth in our new vertical category strategy with eHow, and solid high margin growth and content channels. Rachel will follow with more details on her financials. Our team is focused on a few key initiatives for the remainder of 2017 which should further build on our growth trajectory heading into 2018. First, we are implementing a common technology platform for our Media businesses. We expect this platform will enable rapid deployment of features and content and help us to optimize efficiency in our operations. This initiative is well underway and will be completed before the end of the year. Second, regarding eHow verticalization, we've launched five new verticals over the last three quarters including the recent successful launch of Hunker in the home category. All other properties have growing audience on the web and social platforms. We expect to complete this work before year-end and we'll have fresh vibrant and growing brands to sell directly to advertisers. Third, we're pushing deeper into the home décor category in our marketplace businesses. This is accomplished through extending product assortment at S6 and accelerated by our acquisition of Deny Designs. Moving to our marketplace businesses, Q1 revenue grew 18% year-over-year to $15.9 million representing 58% of our total revenue. Let me break that down into the two primary marketplaces that we operate. First, Society6 revenue grew 17% in Q1 driven by recent product expansion in our ongoing efforts to improve the buyer and seller experience. The total number of transactions for Society6 grew 18% year-over-year. In Q1 these efforts contributed to Society6 successfully growing new customers by 18%, a meaningful improvement over Q1 2016 when new customers grew 14% year-over-year. Repeat customers grew by 20% year-over-year helped in part by an email list that has grown by over 60% year-over-year. Because Society6 continues to see strong repeat customer rates, these newly acquired customers should yield returns in future periods and create significant long-term value. We plan to invest further in off-line channels in 2017 to complement our online efforts and build brand awareness for Society6. In Q1, Society6 added three new products and ended the quarter with 39 products, approximately 250,000 artists and 3.9 million designs available on the site with home decor products representing approximately 70% of total sales. Our Saatchi Art marketplace and a strong quarter with revenue up 29% year-over-year, transactions were up 22% as Saatchi Art experienced increasing demand and higher conversion rates. Both new and repeat customers grew roughly 30% year-over-year and traffic from referrals, social sources and email increases significantly. The Saatchi Art team implement a new checkout flow in Q1 optimizing the buyer experience and the team has begun to test presenting total price in the customers local currency which we expect will improve conversion for international customers. During Q1, Saatchi Art enhanced brand awareness through PR, events for trade, and direct mail catalogs and inserts. Saatchi Art is seeing strong traffic growth from efforts to further build out its email subscriber base which grew over 50% year-over-year and shipping at spring catalog to 250,000 households in March. As previously announced, we made an exciting new addition to our portfolio of marketplace brands. On May 1, we acquired Deny Designs, an artist driven home décor marketplace that is highly complementary to Society6, expanding the audience demographic to more affluent consumers and adding original product design and curatorial capabilities to the team. Deny Designs offers several important strategic benefits to our growing marketplace businesses. First, both Deny Designs and Society6 are more heavily weighted on home décor products, differentiating them from the other print on-demand marketplaces that focus on lower margin T-shirts and apparel. Second, Deny Designs brings manufacturing and wholesale capabilities that should improve margins for Society6 and help to expand its distribution. Conversely, Society6 has significant e-commerce capabilities that will benefit Deny Designs smaller and somewhat nascent online direct to consumer business. We are excited to add the business to our growing portfolio of marketplaces as we make further inroads into the $300 billion home goods market which is rapidly shifting online. Rachel will discuss the financial impact of the deal in her prepared remarks. Finally turning to our Media business, revenue was $11.4 million representing 42% of our total revenue for Q1. Media revenue was down 1% year-over-year on a pro forma basis and up 1% versus Q4. However, traffic grew in Q1 with visits up 7% quarter-over-quarter. Importantly, we are taking a closer look at our core Media business excluding the contribution from a small international sites and former custom content business revenue grew 7% on both a year-over-year and sequential basis. The changes in strategy we have made to our Media businesses over the last few quarters are producing positive momentum. In Q1 we continued our investment in creating original programming with a focus on highly engaging video content. As a result, we had over 200 million video views in Q1, up 31% year-over-year. This new content helps fuel growth in our newest media properties, as well as our foundational brands eHow and LIVESTRONG. LIVESTRONG maintain its upward trend for the fifth straight quarter with visits up 15% year-over-year and revenue growth accelerating for the third straight quarter up 45% year-over-year. Our focus on building relationships to the top names in wellness and fitness has yielded great content as evidenced by LIVESTRONG simple healthy eats series. LIVESTRONG also had successful outreach initiatives in Q1 including a strong South By Southwest. Additionally, LIVESTRONG is seeing strong growth in it MyPlate App which reached number four for the health and wellness category in the iTunes Store. MyPlate had 100% growth in downloads and over 0.5 million monthly active users up 46% year-over-year. In Q1 eHow sites demonstrated strong audience growth and video views across all social platforms growing 28% year-over-year. It's Facebook reach increased to over 300 million up almost 200% year-over-year. Total followers across social channels rose to 8.8 million, a 30% increase year-over-year. We continue to shift more categories of content of eHow.com and on to our new brands including the move of the key home category with a soft launch of Hunker in late February and full launch in April. So far the new brands are seeing significant improvements in traffic and exceeding our expectations. Cuteness demonstrated strong positive momentum in Q1 with multiple hit videos while simultaneously climbing to the number three spot on comScore's pet category among ad supported sites. Notably on an apples-to-apples basis traffic to eHow content and content move to new brands in Q1 had 8% net increase in visits quarter-over-quarter. We look forward to updating you on our business progress as the year continues. Overall we are truly excited to be telling you about growth in Q1 as we move past the transformation stage and focus on growing Leaf Group's portfolio of businesses from now solid foundation. I will now turn the call over to Rachel for her remarks regarding the financials and thank her for two years well spent she has been a great partner to me and we wish her all the best.

[Rachel Glaser:]

Thank you, Sean. I'm pleased to take you through our first quarter results. I'll start with the headline financials. Before I begin, let me clarify that all references to revenue in my prepared remarks, will be stated on a pro forma basis net of our dispositions of Cracked and certain other non-strategic properties during the course of 2016. A reconciliation of our pro forma revenue to GAAP revenue for relevant periods is available in our earnings release. Additional information on our key operating metrics is included in our earnings release. Now on to our Q1 results. First, total revenue in Q1 was $27.2 million up 9% year-over-year on a pro forma basis. Our marketplace businesses grew 18% year-over-year while the Media declined 1% year-over-year on pro forma and increased 1% quarter-over-quarter on a pro forma basis. Second, adjusted EBITDA was negative $4.4 million in Q1 versus negative $5.1 million in the prior year period. Third, free cash flow was negative $8.7 million for the quarter. Starting with revenue let me dive a little deeper into our financials. Drilling down on our Marketplace businesses first total revenue was $15.9 million in Q1 up 18% year-over-year a solid growth rate when compared to other companies in this sector. This revenue growth was driven by 17% year-over-year in Society6 and strong 29% growth for Saatchi Art. As Sean discussed we are making good strides on key initiatives in our Society6 business. Additionally our focus on expanding our product assortment, investing in marketing and customer acquisitions, improving the buyer and seller experience and the update of our shipping terms to move revenue recognition closer to the point shipment in line with industry standards all contributed to the 17% growth we saw in Q1. For Q1 average order value was up 2% year-over-year which reflects the introduction of new products in Q1 with higher price points offset by some continued promotional pricing during the quarter which observed and discussed on last call. Gross margin for Society6 was 30% in Q1 up 400 basis points from the prior quarter this is consistent with our previous discussion that the heavy promotional nature of the Q4 holiday season impact average order values and gross margins in Q4 and has now rebound and somewhat during Q1. We have a heightened focus on our promotion and pricing strategy and efforts in this area contributed to margin improvement in the quarter. Saatchi Art has also had another strong quarter with revenue and gross transaction value up 29% and 23% respectively year-over-year in Q1. Sustained year-over-year growth and conversion rates which helps by several key initiatives implemented in the first quarter including improvements to the platform which improved page load times and allows for faster deployment of new features on the site. Saatchi Art commission rate was increased by 500 basis points in April as we launched a suite of artist tools in Q1 including an artwork management tool and artist portal. Saatchi Art also optimize the checkout experience in late Q1 and of these initiatives should have positive impacts throughout 2017. We continue to improve conversion rates driven by strong growth in our art advisory business and leading to year-over-year increases in gross transaction value. Turning now to our Media business revenue was $11.4 million down 1% year-over-year on a pro forma basis and up 1% over Q4. Excluding our international sites and the former custom content business which we have wound down total revenue for the core Media business was $10.7 million up 7% year-over-year and 7% over Q4 on a pro forma basis. Average monthly visits to our Media properties as a whole in Q1 were $232 million down 12% versus prior year and up 7% versus prior quarter. Approximately 57% of these visits came from mobile with significant reach in content engagement occurring off our own properties. In Q3 2016 we introduced videos views and social followers as two key operating metrics to evaluate audience and engagement. In Q1 total video views for all of our Media properties were over $200 million up 31% versus prior year. At the end of Q1, our media properties had over 13 million total followers across Facebook and Pinterest, Instagram, YouTube and Twitter. This strong had a particularly strong quarter with year-on-year revenue growth for it’s the third straight quarter. LIVESTRONG grew revenue 45% year-over-year and was up 17% versus Q4. Year-over-year LIVESTRONG visits were up 15% in Q1 with mobile growing 29% and desktop declining 9%. Revenue per visit for our media properties were $16.34 for Q1 down 5% versus prior year and down 7% from Q4. In Q1 we continued migrating content from eHow.com to vertical properties. With each of these content moves we see an initial dip in traffic and in our RPV. We expect RPV for the new vertical sites to increase in future quarters as we optimize the yields on those pages and as the size of the audience on the vertical properties become more meaningful to direct brand advertisers. In addition Media experienced normal seasonal declines in CPMs in Q1 versus Q4. Our branded sales pipeline is strengthening and we continue to attract large Fortune 500 brands as advertisers on our Media properties. We repeat and recurring nature of these ad buy is testament to the quality of our intent driven audiences and the return on the spent. Revenue from our international Media sites as well as the studioD content business which we exited in Q2 2016 make up the balance of our Media revenue which was 0.7 million down 53% versus prior year and down 46% quarter-over-quarter. Now turning to Q1 adjusted EBITDA Q1 improved 12% year-on-year driven by revenue growth and cost saving initiatives offset by headcount additions and our Marketplace businesses and higher levels of marketing investment to expand brand awareness and paid customer acquisition at both Society6 and Saatchi Art. Overall our Q1 non-GAAP operating expenses calculated as GAAP operating expenses less stock-based compensation depreciation and amortization and excluding product costs which vary with revenue were $21.4 million down $2 million from the prior year. As a reminder approximately 75% of our cost base directly supports business operations and roughly two-thirds of that is variable with revenue primarily product costs related to our Society6 business. The remaining 25% of our cost base is relatively fixed, corporate overhead costs required to run this public portfolio company which we expect will decline as a percentage of revenue as topline revenue growth. We remain diligent in our efforts to optimize our corporate overhead costs and expand margins where possible and without comprising business unit growth. Our free cash flow was negative $8.7 million in Q1 versus negative $8 million in the prior year. Free cash flow for Q1 2017 reflects our EBITDA loss and our Q1 seasonal uses of cash including roughly $4.3 million in Society6 vendor payments related to Q4 of 2016 sales. Annual discretionary compensation payments tax withholding for employee stock vesting and normal capital expenditures. At the end of the first quarter we had $41.5 million of cash available while maintaining at zero debt balance. Before I conclude let me add a few guide post for continuing to think about our 2017 financials. With continued growth in our Marketplace businesses, strong progress in LIVESTRONG and renewed positive trajectory in our core Media properties we remain confident in revenue growth for the balance of 2017. On the operating expense side we will maintain our investment in marketing for our Marketplace businesses to build brand awareness and attract new and repeat customers. In addition we are investing in product and engineering talent to improve engagement and conversion most importantly grow revenue. Direct business unit cost may increase and impact EBITDA on the short term but we believe will fuel future growth. We expect to continue to optimize infrastructure and corporate overhead expenses and no should decrease as a percentage of revenue over the longer term helping to narrow our EBITDA losses year-over-year. Finally I want to touch on our recent acquisition. On May 1, we closed the acquisition of Deny Designs and its 30% team for a total consideration of $12 million. The purchase price consist of approximately $6.7 million in cash, lease group common stock of approximately $1.7 million and a third consideration of $3.6 payable annually in three equal installments on the anniversary date of the closing. The purchase price was an appropriate multiple of revenue at the low end of a standard range for similar companies. The majority of the Deny Designs revenue is generated through the wholesale channel with a smaller online direct-to-consumer business. Well, like Society6, we have the inverse. This creates potential synergies for both businesses. A significant opportunity to expand Deny Design consumer online business and an important opportunity to propel Society6 into new wholesale channels. Additionally, Deny Design manufactures in-house for certain key products such as furniture including credenzas and tables providing opportunity for stronger margins and potential leverage for Society6. Based on this young company’s growth cycle and our planned adding investment, we would expect the deal to be roughly breakeven to EBITDA in 2017 including one-time transaction cost. As a company, we are very ROI focused. We maintain our commitment to achieve operating profit in future quarters while balancing the near-term research and investment needs of our businesses with a continued focus on topline growth. It has been a very great honor to service the chief financial officer of this company for the past two years. I have had the pleasure of working with and learning from some of the brightest and most courageous technology and media executives in the industry. I want to especially thank my finance, accounting, and investor relations team for their expertise and their superb and unceasing support. I’ve been very blessed to have them on the team. This company is full of talent and innovation and I know that Leaf Group will continue to flourish in the months and years ahead. I will be sharing for them from the sidelines. That concludes the financial summary, and we will now turn the call back over to the operator to open the lines for your questions.

[Operator:]

[Operator Instructions] Your first question is from Jason Kreyer from Craig-Hallum.

[Jason Kreyer:]

Good afternoon. First, before I ask questions, just wanted to say thank you to Rachel and best of luck going forward. It's been a pleasure working with you.

[Rachel Glaser:]

Thanks so much Jason.

[Jason Kreyer:]

So maybe you can break down a little bit more thoughts on the promotional activity in Society6 in Q1. And maybe you can give quantitative details on how much that impacted revenue or order value. And then second, if you can maybe just talk a little bit about pricing trends in Society6. It looks like you’ve made some changes to some prices, and maybe a little bit more promotional activity in regards to price changes. And how we should think about that going forward?

[Sean Moriarty:]

Thanks, Jason. It's Sean. I’ll start and let Jeff and Rachel pick up with the specifics. The promotional activity we saw in Q4 and talked about last quarter definitely continued. It’s a pretty noisy environment out there and continued pretty strongly in January, something that we don't expect to abate any time soon. That said, we had a really, really strong quarter when it came down to acquiring new customers and the performance of our repeat customers was very good as well. On the pricing side, we've begun, and really for the first time in the company's history, become much more sophisticated with our pricing which should bear real fruit, and what we expect to be a fairly noisy online promotional environment. As long as we continue to attract and retain high quality customers and we become stronger and more sophisticated when it comes to pricing in the midst to promotion, I’m very confident in our ability to continue to grow this business very nicely.

[Jeff Misthal:]

Couple of things to add. We are working on promotional and pricing optimization in the quarter. The quarter started off a little slow, but it came back towards the end of the quarter but, as Sean alluded to, there’s still work to be done there. We have launched three new products in the quarter which should help AOV going forward, four pillows, pillow shams and skipping the last one. But basically, the site continues to see some improvements in terms of functionality which should help customers find exactly what they're looking for. We’ve done a lot of work on the search functionality in the quarter and that’s helped. And then touching upon customer growth. Our customer growth for the quarter grew 18% versus 14% last year. So we think a big help there. And then finally, AOV was up 2% quarter-over-quarter.

[Jason Kreyer:]

Okay, thanks for all the detail. Switching to media, LIVESTRONG has performed really well over the last several quarters. We're seeing revenue grow at a faster rate than visitors, meaning you’re monetizing visitors better. I just wanted see if you can provide more on what you're doing to increase yield there, and if you plan on really applying those same moves to some of the eHow vertical strategies to get pricing up on those sites, or yield up on the sites as well. Thank you.

[Sean Moriarty:]

Great question. That LIVESTRONG audience has grown very, very nicely over the course of the past couple years, and continues to grow. You’re now seeing the revenue follow. I always talk about how revenue lags audience growth with these media properties, and we demonstrated strengthen two areas with even more room to exploit that strength as we go. Having really strong partners we have a really good yield team. So when we execute from a programmatic perspective, we are very, very good at it. We pioneered from the major media sites to the category, just have got better as we’ve gone. As the sites get bigger and more advertisers want to participate, there’s more competition for the inventory we have. We’ve also seen nice benefit also from Google exchange bidding. We’ve built out a robust network of partners. And as you know, the one frontier for us to meaningfully crack, what we’ve made some inroads but we’re still early, is on premium branding. And we think we are building brand, not just LIVESTRONG, but the new brands we’ve launched over the course of the past year which are going to allow us to drive substantial branded revenue improvement as we go. So this is the beginning of what shaping up to be a very, very good business and story for us.

[Rachel Glaser:]

Let me just add one note, LIVESTRONG have had three sequential quarters of growth. Q1 is a seasonally strong quarter for LIVESTRONG because that’s the New Year resolution time period for LIVESTRONG. So we really like the growth that we got but that’s it. You’re seeing a seasonal high.

[Jason Kreyer:]

That's actually a good segue into my last question. So was there anything unique in media that wouldn't recur, that would prohibit you from growing off of these levels? And it sounds like maybe some seasonality in LIVESTRONG. But I don't know if you can comment if you expect to grow through that, or if there's any other thing you need to consider.

[Sean Moriarty:]

If the question is one-time events, I don't think so, although Rachel, correct me if I'm wrong. The seasonality for each of these sites is a bit different. As Rachel pointed out, you’ve a really strong Q1 season for LIVESTRONG just by virtue of the nature of its content as you start the New Year. One of the brands that we’re very excited about is Hunker which is still really early in its rollout phase. But the home category is a very large one, and Hunker is an absolutely beautiful property, and we think the brand has enormous potential. So when we look out over time, we think there's significant opportunity to drive both audience and monetization.

[Rachel Glaser:]

Let me piggyback on that real quick. So Hunker, we moved content over from eHow to soft launch of Hunker in February, and then we did the more - rest of the content went over in April. And as we've said, I think for the last three or four quarters, when we do these moves, you see an initial dip in traffic in revenue and then it grows from there. So there’s still - it was a pretty large content move. So it’s still on the future what that will actually do in terms of revenue and traffic uptime. And the other point, and that’s a little bit of an unknown to all of us, the other point is that we called out two pieces of business that are declining and that’s our old international sites and the former custom content business. And those things have had close to 50% decline, drove about 700,000 of revenue, but those things are declining. And so you should model that in going forward for the rest of the year.

[Jason Kreyer:]

Okay, perfect. Thank you very much.

[Operator:]

Your next question is from Brian Fitzgerald from Jefferies.

[Brian Fitzgerald:]

Thanks, guys. Rachel congrats also and best of luck going forward.

[Rachel Glaser:]

Thank you so much.

[Brian Fitzgerald:]

Thinking about Deny's, you mentioned some of the highlights in the proprietary product developed capabilities, maybe I’m going to drill down a little about the curation tools. Anything to highlight there? And then, second point, overlap between customer bases or customer profiles, it sounds very different, and so we like that. And then on the backend sort of unifying infrastructure around two names, how quickly can you do that, and how would you assess their aptitude being able to drive traffic and visibility, that's the hallmark of Leaf Group and so, maybe if you can comment there also.

[Sean Moriarty:]

Yes, so a few things. From a standpoint of product ideation and execution, the Deny Design team is fabulously strong. They pioneered new product types in the market while various types of wall art take on new custom designed furniture and that capacity itself is super exciting for us because we have two branded channels to deliver them through and it gives us even greater confidence that we can stay ahead of trend in delivering new exciting product to an audience that cares about that passionately. From a standpoint of acquired audience again as you pointed out Brian, we are really, really good at acquisition and retention online. You know we felt both our media and our commerce brands utilizing that skill set very, very nicely and very little of that work to date has been done on Deny, all of Deny's strength has come from the quality of its products not boosted by the deep strength and acquisition and retention and we think that's nothing but upside for us. And then from a commonality platform perspective, we think there's an awful lot there. You know when you run scaled commerce businesses, shipping fulfillment, payment processing, catalog management, seller tools all of those areas are opportunities to drive substantial scale and best practice and realistically the first thing you want to do an acquisition like this is – that's doing so well already is not screw it up but I would say when our first 90 days will develop – we’ve already indentified areas of opportunity but we’ll start to stack rank those opportunities and will start unlocking the value from a synergy perspective in the next couple of quarters. This is a really, really nice highly complementary business. You mentioned that the audiences are different, I would say there - this audience skews a bit older and more affluent which is a very nice thing to have that type of natural audience extension but they are people who are absolutely passionate about design particularly hard to find design and particularly things that are leading trends around the home. You know I really can't say too much about how excited we really are to have these businesses in Leaf Group Company.

[Brian Fitzgerald:]

Got it. Thanks guys.

[Operator:]

Your next question comes from Blake Harper from Loop Capital.

[Blake Harper:]

Hi thanks, just wanted to say good luck to you Rachel as well and was nice working with you.

[Rachel Glaser:]

Thank you so much, Blake.

[Blake Harper:]

So I had two questions, one about you talked in your prepared remark, Rachel I think about the brand, the pipeline of our ad sales there, could you just maybe update is where you as far as not a sales from there versus programmatic. And if you do get a lot of the pipeline that come through the way you want and the audience growth what do you think that could be by the end of the year?

[Rachel Glaser:]

That's a tough one, we haven’t been giving - disclosing sell through rates by channel and we definitely haven’t been giving guidance. We do see strong pipeline so more inbound, more - as a strong pipeline, higher win rate on the branded side. I think it's still lot where the company hopes it will be on a permanent run rate basis but its still pretty young. So Sean you may have something to add?

[Sean Moriarty:]

I think the one way to think about it in the world where we actually - today we haven’t given you too much workload but why we see a big opportunity is most of our sell is in the quarter to middle - at the modernization stack and if you think about where premium brand sits, you know your yield for premium branded is nearly double what it is in the middle of the monetization stack and we do, you know only a minority of our advertising revenues in that premium branded area. And so when you just think about the leverage when you start to move some of those impressions into premium, there is effectively a doubling of monetization and the challenge again is for us to build off what is right now a very small base. But with growing properties and brands with growing strength, whether it's LIVESTRONG the sites we've launched over the course of the past six months that are now cracking to top three, four, and five other categories. We should be able to drive substantially improved yields on the branded side but we’ll keep you posted as we go.

[Blake Harper:]

Okay. That's really helpful. And then just one follow-up if I could, you had talked in the remarks about some investment areas and some cost the main type on EBITDA in the near term. Just want to see if you may be give a little bit more color there of the extent and both the amount may be and the duration of the some of the costs that you will have and the impact on EBITDA over the rest of the year as well?

[Rachel Glaser:]

I think what we said we’re going to maintaining our marketing investments that’s one of the sort of larger increase that you look at GAAP P&L you’ll see almost every cost line decrease year-over-year with the expectation of sales and marketing and we’re planning to maintain it at work I would call it an experimentation we ramp some offline test in the first quarter with somewhat positive to evaluate the results and what we think about that going forward I think we may resume those offline marketing efforts in a period time when we know we have a lot more demand doing our back-to-school and holiday seasons. So and we’ve continued our normal level of spend on traffic acquisition, emarketing and so on and so forth. The other area would be investing in product and engineering talent in our marketplace businesses and of course with the acquisition of Deny Designs that bring some incremental revenue we said it would be breakeven this year so you’ll see some of the cost blindfold increase with the addition of that company as we integrate it.

[Operator:]

Your next question is from Darren Aftahi from ROTH Capital Partners.

[Unidentified Analyst:]

Hi guys, thanks for taking my call, this is [Dillon] in for Darren. Your mobile business the visits were down year-on-year but up quarterly sort of what's the strategy going forward to increase mobile conversions?

[Sean Moriarty:]

So if you’re talking about the marketplace businesses the trust of the question I think you faded out at the beginning of it?

[Unidentified Analyst:]

Yes the marketplace, I’m sorry.

[Sean Moriarty:]

So when you move from a desktop screen to mobile for all commerce players you see a drop-off in conversion we’ve talked about it on previous calls and there is a number of initiatives that are constantly underway really for all commerce players on the mobile side to improve the experience whether it's shortening the number of steps and check out, store billing, redesigning your screen real estate so it becomes much easier to drive a purchase decision. The way you would market and merchandise on device, we've consistently been able to improve mobile conversion rates from their base over time, but there's always that separation between desktop and mobile. But I think we're making good headway in that area and we will continue to for a couple of reasons form factor is getting more favorable with mobile devices, with a large screen forms, response design improvements, one click or one touch payment options all of those things reduce transaction friction. And lastly both our UI/UX in the checkout funnel is improving and will continue to improve over the course of the year. But Discovery is substantially improving on Society6 and Saatchi Art which matters an awful lot in a limited screen real estate world.

[Unidentified Analyst:]

Thank you. And one more if I may Instagram had a lot of visibility helping out different small business seller, how do you see this having an impact on Society6 and Saatchi Art?

[Sean Moriarty:]

Instagram is an absolutely - it's a phenomenal engaging service and it's only becoming increasingly more relevant. It is really valuable potentially for what we do. If you look at our brands Society6 or Saatchi Art, the other art fair, frankly all of media brands as well. When we post on Instagram, we get tremendous instantaneous response. And so we’re developing lots of followers and we see a lot of likes with all of our folks which makes sense because we’re enrich inspirational primarily visual mediums. What we're excited about on a go forward basis is as that platform evolves, it should be one step closer to commerce and making it easy for someone who is just liked or loved one of our post to become a buyer. I still think there's some work to do from a technology and integration perspective but if you look at the way Facebook evolves their platform to become increasingly more efficient and valuable for the brands on them, we think it certainly over the course of the next year Instagram is not only a strong growth channel for the brand awareness, but could become a very strong channel partner in driving our businesses.

[Unidentified Analyst:]

Thank you.

[Operator:]

That concludes the question-and-answer session. Thank you for joining. You may now disconnect.