Leaf Group Ltd.
Q4 2018 Earnings Call Transcript

Published: 5 Mar 2019

[Operator:]

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to Leaf Group's Fourth Quarter 2018 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 the conference.

[Shawn Milne:]

Good afternoon, everyone. On behalf of Leaf Group, welcome to our conference call. I am pleased to have Sean Moriarty, our Chief Executive Officer; and Jantoon Reigersman, our Chief Financial Officer on the call with me today. Following the Safe Harbor statement that I will make, we will open up the lines for questions and answers. 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, operator, can you please open the line for our first question?

[Operator:]

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

[Jason Kreyer:]

Thanks for all the detail provided in the shareholder letter. I appreciate the new concepts [technical difficulty]. Diving into first question, just on the marketplace business. So, wondering if you can give a little bit of detail on how things progress across the quarter and a couple of the topics you talked about in the past. So, this summer, I know you did the removal of some of the third-party links into Society6. So, just wondering how that progressed kind of in Q4 and the back half of the year. And then, also, you give some updates on international last quarter, just if you can comment on how international progressed in Q4 and then expectations for 2019?

[Sean Moriarty:]

Hey, Jason, this is Sean. Thanks for the question. The marketplace performance early in the quarter was really strong, particularly in November, as we called out in the shareholder letter and with some soft thing in December, this was a trend, I think that was broadly observed in e-commerce land. I would say, from a third-party marketplace perspective, I think we originally called that out midyear. We've been doing a lot of experimentation. The softness in third-party marketplaces we had spoken earlier in the year did persist through the quarter. And international itself, in Q4 and also consistent I think with what a lot of other people saw, was a bit slow as well, although again, up through late November, we're off to a really good start before we saw that pull back. And we're not actually sure if that was effectively a pull forward, really a change in consumer behavior with lots of advanced promotion across industry or a pullback caused by macro issues.

[Jantoon Reigersman:]

Yes. And maybe to give you just a little bit of color on data, some data points. So, on our Q3 call, we indicated that international accounts for 20% of our GTV, despite virtually no investments. So, that international GTV declined 12% year-over-year in Q4, which was an acceleration from Q3, but remember that we have effectively no infrastructure build up outside of the U.S. So, as you can imagine, these are people that are buying despite having to pay taxes and currency exchanges, et cetera. So, obviously, what we already mentioned in the past that something we're going to look for doing in ‘19 is really focus on the European expansion S6. If you think of third-party marketplaces, I think in Q2, if I remember correctly, we indicated that it was a high-single-digit percentage of total transactions. In Q4, we drove that effectively to low-single-digits. And so as a result, third-party GMV declined 64% year-over-year in Q4. And we're going to be much more delivered in ‘19 around the merchandising plan with our third-party marketplaces.

[Jason Kreyer:]

Got it. Thanks for the detail there. On the advertising business. So, you made one good acquisition midyear. And I know part of the focus there is integrating that sales team and really accelerating that effort to move up the ad stack with more direct advertising campaign. Can you give an update on where you are exiting 2018 and then how much more room there is to grow as we move out to 2019?

[Sean Moriarty:]

We're really, really excited about that combination of Well+Good and Livestrong. I did point out unifying, having a very, very strong premium branded sales team, not only for those brands but across our portfolio of brands is tremendous, tremendous opportunity for us that we're just now exploring. Having that broad-based reference audience of Livestrong and premium wellness audience on Well+Good really we think makes for a dynamic must buy combination. And we saw some great signs in Q4 of what that can yield. We saw, for example, our Citibank deal for Well+Good was both a digital ad by and included experiential marketing around wellness trends, showing how strong a Well+Good brand is to be able to be really multi-channel buy and it's a testament to have an advertiser that caliber, looking for us to develop multi-channel programs for them. And we also saw notably in the quarter, Microsoft has been a very strong programmatic partner, buying across all of our media brands. So, as that portfolio diversifies, being able to even better provide for an advertiser of Microsoft scope and scale, gives us tremendous leverage and opportunity. And then lastly, that combination of Well+Good and Livestrong has let us step up their by in Q4 to buy across both brands. And again, having these brands under one roof, gives us tremendous scale and strategic advantage, because we quite simply can offer much more to the same advertiser, as not only that portfolio of brands expands and grows but as we develop that unified view of that customer, which is now over 50 million monthly uniques.

[Jason Kreyer:]

Okay. So, last quarter, we talked about the Google algorithm change that was put in place in August. I know you had already had some efforts underway to stabilize and grow visitors from that standpoint. And from some of the metrics that we get, albeit, imperfect, [ph] it didn't seem to accelerate in the back half a year as much as maybe we would have expected. So, I just wondered if you could give a little bit of color and your thoughts what us know, if you expect the kind of bonus out of that early in 2019, or if there's more effect here?

[Sean Moriarty:]

I think, given certainly our experience with managing large, highly sought after content libraries online, one of the things that we know is that when you -- if you have lost audience post algorithm update in any significant level, it can take some time to come back. The other thing though we’ve learned consistently, if you invest in high-quality content, and you stay the course, you are real well-rewarded for it. And so, it's always a bit tough to call from a timing perspective Jason, but over the next few quarters, we should see some strong signs of audience return, provided we continue to execute well. It's not just scale of audience though, I should point out. One of the things we look at early is engagement, right, which is the content we're producing, resonating with the audience that it has? Are they spending a lot of time on site? Are they going to multiple articles? Is the scroll depth there? Are they sharing content? And so, we’ll have pretty good insights around the quality of the content that we're putting forth in the market. And again, it's taken us, in some cases, 4 to 5 quarters to substantially regain audience; and in some cases, it's happened faster than that. But, we know this audience pretty darn well and we know where we need to get better.

[Jason Kreyer:]

Okay. Last one for me, and I'll leave the floor. So, on the Hunker side, I mean, the current approach there has been very impressive. It seems like you are now hitting a critical mass. I know, we've talked about that 10 million number being a very important threshold and you're kind of right on the cusp of that type of a number. So, if you can give any details as far as I know what your growth pathways are for 2019, there was some hints to something from the shareholder letter. So, maybe if you could expand upon that. And I noticed recently you launched Hunker House, so just wondering how that folds into 2019 plans.

[Sean Moriarty:]

Sure. Yes. So, Hunker, we launched I think two years ago, March that audience growth was 100% year-over-year; it's now the number two in the home category, which is extraordinary for a site less than two years that we built from the ground up. We're super excited about what that business can become. That Hunker House is really born of our conviction that this is a really high fashion, lifestyle brand that’s resonating with audiences. But not only is it resonating with audiences, high-quality brands are interested in working with us because they want to be in front of that passionate, young, design-ford audience as well. And we thought there was no better manifestation for the brands that they actually have physical space where we could work with partners and advertisers and influencers to further burnish that brand and broadness its appeal. Again, this isn’t an absolutely massive category, it's a super young brand. But, I think about what we've been able to accomplish in the last two years, now starting on a base of 10 million monthly leads in a category like this, we're going to be able to do tremendous things, not just from a content and advertising perspective but ultimately we think the commerce opportunity is massive.

[Operator:]

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

[Maria Ripps:]

Great. Thank you for taking my questions. Sean, it appears that one of your key shareholders has suggested sale of the company. Any background or perhaps insights that you would be able to share with us about the topic?

[Sean Moriarty:]

We just received that letter, Maria, so it’d be bit premature to comment. We’ll certainly take a very close look at it and will certainly speak to that once we've digested it and understand it.

[Maria Ripps:]

Got it. And Jantoon, maybe one question for you. Can you can you talk about the timing of spending through the year and when do you anticipate international revenue to perhaps stabilize or return to growth?

[Jantoon Reigersman:]

Sure. So, you're talking about basically ‘19, right, looking forward, I assume?

[Maria Ripps:]

Yes.

[Jantoon Reigersman:]

Yes. So, remember, we've articulated that we're going to go international or put our toes in the water internationally in the end of Q1. And I think overall, if you think of ‘19, you can expect that we're going to be somewhat more heavier weighted, doing some investments in the early parts of ‘19 in the first half. And this is going to be effectively international-driven. So, us going out and focus really on building local sites, local currency and offering buyers the opportunity to effective and more localized experience. Remember though that this is a very occupied business model. So, that shouldn't come with too much investment but still we'll have some effect in the initial margins. And we're focusing on obviously some of the mobile and the size we experienced as well. So we're doing some further investments on that -- in that on the marketplace aside. Something to note on the media side also is that we see wrapping up our direct sales team as well as doing renovations in the content side. So, if you think of 2019, we will do some further investments in the first half but we're also expecting to see benefits from all of this in the second half. So, if you're really looking at second half -- like if you're looking at international revenue really coming back, and I would argue that’s mostly second half ‘19...

[Maria Ripps:]

And maybe one last question for me. What are some operational milestones you need to achieve in order to double Society6 international GTV over the next three years?

[Sean Moriarty:]

There is a few key areas for us, because we know that that Europe opportunity is very, very large one. The fact that it has been very little of our investment, yet it’s still 20% of the business, I think it is testament to the opportunity that's there for us. But, it's essential again, localization, when we think about our international priorities for 2019, making sure that we have local language support, we got local currency support that we really are optimized for high-performance, particularly mobile UIs, UX and side screen perspective. And then, also really strong performance market and capacity and know-how, specific to the larger local markets we're in. And if we do those things well, the opportunity to double that business over the timeframe you suggested, should be well enhanced for us. The other thing we will continue to do is to build out that vendor partner network closer and closer to our customers, because not only does it give you a better ability on your delivery times but you can really manage for high-quality merchandise, again sourced very, very close to customer. And again, we've done a lot of work already on that, we're starting to ramp now, and we know it’s going to pay big dividends for us.

[Operator:]

Your next question is from Tom Champion with Cowen. Your line is open.

[Tom Champion:]

Hey, guys. Good afternoon. You made the ongoing decision to pullback from 3P, but the Letter sort of alludes to a merchandising plan that you expect to roll out in the second half of ‘19. How should we think about maybe the 3P opportunity longer term, and what place does it have in the business? Just any comment on that would be helpful.

[Sean Moriarty:]

Sure. I think, we've spoken about this in the past as well. I think you -- there are two elements that I think are important to understand. One is, you never want to be held hostage in a 3P world. And so, you want to make sure you're very deliberate on how you direct. Remember that Society6 is a very particular shopping experience. So, you want to make sure you can drive as many people as you can to Society6 directly. So, that's number. Number two, at the same time, obviously the 3P places are good from a branding element and a brand awareness element. So, you definitely want to play a role there. The question is just what type of a role and how effective you want to be. So, we've developed a more elaborate merchandising plan to effectively achieve a greater brand awareness but still really focus and emphasize or driving traffic directly to the Society6 site for that unique shopping experience.

[Tom Champion:]

Okay, great. On the promotional activity on Society6, it looked like that had kind of a margin impact. Can you just talk about what you learned from those experiments? Maybe what is your take-away from those tests that you ran?

[Sean Moriarty:]

So, the ongoing promotional strategy is one that just here is constant iteration. Right? We know that it's a very noisy channel with promotions about across e-com -- digital commerce. And so, that's just an ongoing optimization on our part. From a standpoint of expedited delivery, we know that's going to be a very important offering for us. We were able to partially roll it out very late in Q4, but we learned it awful lot, the vast majority of which was positive and should be significant for the business going forward. So, I think, you'll continue to see us make meaningful advances in those expedited delivery options, which gives consumers more choice and should ultimately drive greater yield and higher customer satisfaction for us. And then, we're going to continue to optimize the promotions. We know that in today's world it’s unrealistic to expect that that by signal to go away completely; it’s now just kind of inherent in expectation of consumers. But we think we can get better and better at pricing and yield optimization in conjunction with increasingly more granular and targeted promotion based on who you are, where you are, what products you're shopping. And that's all going to get woven into the fabric of the platform in the coming years, and we'll make a lot of progress on it in 2019. It starts to having a deep understanding of the customer and then really knowing how to merchandise the right product at the right time to that customer, which really mitigates using the promotion as a hook to drive conversion.

[Tom Champion:]

Okay. That's helpful. Guys, maybe just on the international rollout, is there anything that you foresee to be different about how the business is going to operate in Europe as you go through this localization process? Are there any incremental costs that might be different from the profile of the business here in the U.S.?

[Sean Moriarty:]

So, I think, there are two things -- well, there three things. One is, you're going to have to make some initial investments around the localization efforts while you do that trial as it works. At some point in time you're going to have to deploy some more performance marketing, the alerts you're going to -- for your localizing efforts as well. And then in the longer term, we probably are going to establish some sort of a presence there, because you cannot expand in Europe without boots on the ground at some point in time in the long run, but this well after we've done initial trials. That's number one. Number two is remember that the business model itself doesn't really change. The vendors are known to us. We have good relationships there already. So it's really about setting up the local efforts. Now, do remember that there is some nuances that are different between locally and here, like for example, margins are slightly different between there and here yet shipping goals are also slightly different. And so, there will be some nuances and some mixes that you'll see probably shift over time, but that's very country specific. And so, what we see [technical difficulty] is in Germany and then in some other countries afterwards. So, we will keep you guys posted as we work through this, and you see any of these mixes shift over time.

[Tom Champion:]

Okay, great. Maybe last one for me. Just on the media side, can you provide any context around video as a portion of your ad business and opportunity, and just any additional comments on MyPlate?

[Sean Moriarty:]

So, I think, first of all, MyPlate continues to perform well. So, if you take for example, total subscribers or total revenue, these are high 30 percentage numbers year-over-year and continue to perform as we expect. So, as an app, we’re very happy with that. And by the way, I think it's also a testament to the platform approach that we have. So, given the audience that we serve, there will be always craze for additional tools to use and MyPlate is a good example of that. If you think of video, video still remains an important element for us on the media side. It's a good value driver, and we expect to be the case in near term. I'm not sure whether there are any particular things you're looking for there, but it’ll always be a good pillar for us, and we've been able to monetize it well.

[Tom Champion:]

Okay, great.

[Operator:]

That concludes the Q4 2018 Leaf Group earnings call. Thank you for joining.