Leaf Group Ltd.
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Good afternoon. My name is Mariana, and I will be your conference operator today. At this time I would like to welcome everyone to the Demand Media Third Quarter Earnings Conference Call. With us today, we have CEO Sean Moriarty, CFO Rachel Glaser, and SVP Finance Jeff Misthal. Mr. Misthal you may begin your conference.

[Jeff Misthal:]

Good afternoon, everyone. On behalf of Demand Media, welcome to our Q3, 2016 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 third quarter financial performance and key operating metrics. Any metrics discussed on the call without reference to a specific 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.demandmedia.com. Following our corporate name change on November 9, our investor relations website will be 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 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 the 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 on 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 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 third quarter results, our plans for the upcoming quarter and also share our initial thoughts on 2017. Before I begin let me first comment on two announcements we made in today’s earnings release. First we have added two new Independent Directors to our board Jennifer Schulz and John Pleasants. Jennifer currently serves as Experian North America’s group President for vertical markets and previously held executive leadership roles at Visa. She brings over 20 years of e-commerce, marketing and strategy experience to our board. John is a veteran of the consumer technology industry and has held leadership positions at Ticketmaster, IAC, Electronic Arts, Disney Interactive Media Group and Samsung. John is currently CEO of Brava Home a domestic automation start-up. We are thrilled they have decided to join our board and we look forward to the guidance and strategic insights they will share with us in the future. The second announcement is our new corporate brand name Leaf Group. This name change acknowledges the positive transformation of our Company, most notably the rapid growth in our market place businesses, which now represent the majority of our revenue. Q3 marked a return to revenue growth up a solid 12% year-over-year on a pro forma basis. And the name Leaf Group represents freshness, growth and a bright future for our brands and businesses. While our corporate name is changing our mission is not. We build platforms to enable communities of creators to reach passionate audiences in large and growing lifestyle categories. While helping advertisers find innovative ways to engage with their customers. We are pleased with the progress made in Q3 to further this mission in both our market place and Content & Media businesses as we continue our transition to a company known for building great products and brands. Today I will focus my remarks in three areas. First a review of our Marketplace businesses, which demonstrated strong growth in both gross transaction value and revenue and continue to expand their products in services. Second an update on our content and media businesses highlighting an impressive quarter for LIVESTRONG and early positive signs from our new vertical content strategy at eHow. Finally I will reiterate our strategy for the Company and why we are increasingly confident about future growth. Rachel will follow with more details on our financials. Starting with our Marketplace businesses we had another great quarter. GTV grew 38% year-over-year and revenue grew 32% year-over-year to $16.7 million representing 59% of our total revenue. Let me break that down into the two separate market places we operate. Society6 revenue grew 31% year-over-year in Q3 a strong 700 basis point acceleration from Q2. And total transactions grew 39%. In Q3 traffic increased 15% and transactions from repeated customers grew 44% year-over-year. Society6 continued to build brand awareness and grow traffic through marketing efforts across multiple channels. Email traffic grew 200% year-over-year fueled by subscriber growth, optimized lifecycle, email campaigns, and curated trending products collections. Traffic from paid search grew 32% in the quarter, driving new customers to this site through targeted marketing efforts. Traffic from social sources also continued to increase and Society6 ended Q3 with over 1.1 million followers across social sources. The third quarter also benefited from Society6’s expanded back-to-school campaign, targeting college students looking to deck out their dorms, apartments and wardrobes. This was a highly integrated digital campaign expanding social, email display content influencer, press and search channels. As part of this campaign Society6 hosted its first satellite media tour by creating a dorm room onset from which our host lifestyle blogger Ashley Foltz conducted 20 interviews via satellite with TV and radio shows across the country. To-date the satellite media tour has generated more than 72 million impressions. Another key initiative for Society6 is expanding its partnerships with other home décor marketplaces. Sales on Amazon Marketplace are growing and in Q3 we launched our newest partnership with House a premier online destination for home renovation and design. Society6 is now part of an integrated shopping experience on house.com where customers can find inspiration and then buy products to decorate their home. In Q3 the home decor category represented over 70% of Society6’s total revenue. Society6 launched a new mobile web checkout funnel in Q3, it streamlined the checkout process and yielded positive results and conversion, driving mobile revenue growth up 46% year-over-year, and a 32% increase in mobile visits. During Q3 Society6 also introduced a significant improvement to its artist upload and publishing platform that we call the Artist's Studio. This new platform allows artists to upload a single image and easily scale and position it for use in multiple products and features free form tags for improved search and discoverability. While the development work on the Artist Studio during Q2 had a short term impact on the timing of new product launches we've resumed our launch cycle with metal prints going live in June 30 and iPhone 7 cases and extra large throw pillows launching in Q3. Going forward we can now quickly expand categories and release new products. At the end of Q3 Society6 had a total of 32 products over 225,000 artists and over 3.4 million designs available on the site. With increasing traffic and brand awareness, a loyal repeat customer base, a growing product assortment and an improved artist upload and publishing platform Society6 is well positioned to fully take advantage of the upcoming holiday season. Saatchi Art also saw a strong growth in Q3 with revenue up approximately 30% and GTV up 46% year-over-year. Traffic was up 19% year-over-year while transactions were up 44% evidence of increasing demand and much higher conversion rates partly due to the Q2 move to all inclusive pricing both new and repeat customers grew roughly 45% year-over-year in Q3 and traffic from social sources increased significantly. Saatchi Art ended the quarter with over 800,000 total followers across social media platforms. Saatchi Art continues to see significant growth in its art advisory business. A free service that provides collectors with personalized recommendations from our team of experts curators and a strong conversion and repeat buyer rates. Saatchi Art also continued to build brand awareness through influencer campaigns direct mail catalogs and inserts and by participating in the prestigious Art Southampton show. Additionally as discussed on our last call in early July we purchased The Other Art Fair U.K.'s leading Art Fair for discovering emerging artists. This acquisition unifies the two fastest growing sectors of the art market under the Leaf Group portfolio. Saatchi Art’s collaboration with The Other Art Fair officially launched in October with the participation in both the London and Sydney Fairs. Saatchi Art also launched the microsite highlighting The Other Art Fair and its artists, to improve visibility for the fairs and help drive pre and post fair sales for artists exhibiting at these events. Turning now to our Content and Media category, which includes LIVESTRONG , eHow and our Content Publishing Studio. Content and Media revenue was $11.4 million in Q3 down 9% year-over-year on a pro forma basis. Excluding the Cracked business and other non-strategic properties that we disposed off over the last year, but importantly up 5% quarter-over-quarter on a pro forma basis. Content and Media revenue represented 41% of our total revenue in Q3. LIVESTRONG had a tremendous Q3 and continues to gain momentum especially in Mobile. In fact this was the best Q3 LIVESTRONG has had in traffic ever. Traffic grew 25% year-over-year to 61 million average monthly visits based on our internal data. Revenue was up 31% year-over-year and 15% versus Q2 as we continue to build off a stronger base. Traffic growth was achieved in multiple channels, traffic from social sources grew 131% year-over-year. At the end of Q3 LIVESTRONG had over 450,000 Facebook followers and nearly 200,000 Pinterest followers. Direct and Email traffic also both grew significantly in Q3 up 22% and 89% respectively versus the prior year. And traffic from organic search was up almost 20%. In Q3 search traffic was 77% of total traffic versus 80% in the prior year. LIVESTRONG continued to develop high quality video content in Q3. To build on the success of its Simple Healthy Beauty and Simple Healthy Eats video series LIVESTRONG introduced Simple Healthy Fitness this quarter. Use and sharing of this video content is encouraging. LIVESTRONG’s No Crunches Required video had over 1.2 million video views since its posting two months ago. LIVESTRONG’s Cauliflower Pizza Crust video was shared on Facebook by HuffPost Lifestyle, Prevention and Runner's World magazines. In Q3 LIVESTRONG videos were viewed more than 14 million times up 60% versus prior year. LIVESTRONG also launched a nationwide Facebook influencer program shooting Facebook live videos in five cities today with some of the most popular names in healthy eating, wellness and fitness. These short videos help fuel growth in LIVESTRONG’s audience on social platforms while also increasing brand awareness and organic traffic growth. During the last two years, we made significant changes to the business model for both LIVESTRONG and eHow and dedicated ourselves to producing high quality content in improving the overall user experience. This quarter we made a strategic decision to shift away from the horizontal nature of eHow.com and create new vertical properties each with a narrower and deeper focus on a specific category with passionate audiences. Cuteness is a community for pet owners and animal lovers. Leaf.tv, has rich content in living, eating and fashion. Techwalla provides extensive reviews and information on tech products. And Sapling is a millennial source for information on personal finance. eHow.com will continue as a more concentrated site for do it yourself and home content. We collectively refer to eHow.com in the new verticals as the eHow sites. All of the new categories specific properties leverage the existing content from eHow.com and enhanced it with fresh new content in that vertical. Overall the legacy content drove increased traffic on the new sites. For example Cuteness reached over three million visitors in September and won an honorable mention for a webbie award in July. On an aggregate basis eHow sites had nearly 38 million average monthly visits in Q3 based on our internal data a drop of only 1% versus Q2. In October total visits to eHow sites increased approximately 10% versus September. While Organic search remains a significant percentage of total traffic for the eHow sites. We are continuing to diversify our traffic sources. Search traffic was 57% of total traffic in Q3 versus 71% in the prior year. Traffic from social sources represented 13% of the eHow’s sites total traffic during Q3, up approximately 129% from the prior year. At the end of Q3 eHow sites had nearly 1.2 million Facebook followers up 56% from the prior year and Facebook reach was 227 million during Q3, up from 14 million in the prior year. eHow delivered significant content wins on Facebook in Q3 including a video on how to make rainbow grilled cheese sandwiches. It was viewed 9.7 million times in less than a week all organically. Pinterest is another robust source of traffic for the eHow site's. Pinterest followers grew to nearly 500,000 by the end of Q3 up from about 25,000 a year earlier. Lastly on the Content and Media front we are pleased with the results from our content publishing studio in Q2 we reorganized our content studio formerly called studioD to more tightly integrate both the content production and sales teams into our broader media organization reducing the overall headcount by 35 people. There are three near-term goals for this business. First we have a very healthy high margin business we call content channels in which we create evergreen content for other publishers in sharing the revenue generated by the ad units on those pages. An example of a content channel is info.legalzoom.com or traveltips.usatoday.com. In Q3 content channels grew 13% year-over-year and should continue to grow as we focus on new business development with our partners and optimize performance in yield for this content. The second goal was to fulfill several dozen custom content orders for active contracts with third party brands that were signed prior to the reorganization. The majority of these agreements will be fulfilled by Q1 2017. The third goal is to renew these existing client relationships on terms that are more strategic and profitable for our company. This includes leveraging the large intent driven audiences we have on our owned and operated properties and adding media campaign elements to the deals. We've had some success on both fronts and the pipeline is building with economic terms that satisfy the goals of the client and our company. In Q3 our content publishing studio grew 15% year-over-year and was up 24% versus prior quarter. Overall we are confident in our ability to maintain the growth of LIVESTRONG, content channels, Society6, Saatchi Art and The Other Art Fair. And restore eHow to revenue growth under the site's model. We have significantly improved the content quality, product, and user experience across our media sites. We have restored LIVESTRONG to a healthy and growing lifestyle brand with increasing signs of business momentum and we are seeing early positive signs from our eHow vertical strategy. We also have a thriving art and design marketplace business that now generates over 59% of our total revenue. This company is significantly transformed and has returned to top line revenue growth on a pro forma basis. Our focus is on creating long-term shareholder value and we believe the efforts and investments we're making put us on the right path to achieve this goal. Before I conclude my remarks I'd like to discuss our new corporate brand name Leaf Group. Leaf Group symbolizes the organic transformation of the business and our continued focus on growth. We have taken the strongest roots of our past and evolved into something new while staying true to our mission of building high-quality creator driven brands that connect with passion and audiences. This is an exciting time for our company and this new name is a reflection of who we are today, our ambition and our future. I will now turn the call over to Rachel for prepared remarks regarding the financials.

[Rachel Glaser:]

Thank you, Sean. I'm pleased to take you through our third quarter results. I'll start with the headline financials. Before I dive in, let me clarify that all references to revenue in my prepared remarks, will be stated on a pro forma basis net of Cracked and other non-strategic properties that we have divested over the last year none of which contributed revenue in Q3 2016. A quarterly breakdown of our pro forma historical results is available in the supplemental financial data table posted to our Investor Relations site this afternoon. Our key operating metrics are also included in our supplemental financial data. Now onto our Q3 results. Total revenue in Q3 was $28.1 million up 12% year-over-year on a pro forma basis. Our marketplace businesses grew 32% year-over-year while Content and Media declined 9% year-over-year, it is up 5% versus prior quarter. Second adjusted EBITDA was negative $2.2 million in Q3 a 57% improvement versus prior year and versus prior quarter on a pro forma basis. Third free cash flow was negative $3.6 million for the quarter reflecting our Q3 EBITDA and normal capital expenditures in the quarter. Starting with revenue let me dive a little deeper into our financials. We are beginning to see the positive impact of our transformation efforts. Content and Media grew revenue quarter-over-quarter both on a pro forma basis up 5% and on an actual basis up 3%. Our Marketplace businesses continued to grow revenue 32% year-over-year to $16.7 million a 400 basis point acceleration from Q2. Overall for the Company revenue grew 12% year-over-year on a pro forma basis and was up 16% versus prior quarter. Drilling down on Marketplaces first, total gross transaction value was $20.9 million in Q3 up 38% year-over-year a significantly higher growth rate in the U.S. e-commerce industry. This GTV growth was driven by 36% year-over-year growth in Society6 and 46% growth in Saatchi Art. As Sean discussed we continue to make progress on key initiatives in our Society6 business including expanding our product assortment and investing in marketing and customer acquisitions. We are continuing to invest more in paid marketing channels for Society6, which is proving to be a good lever for driving new visitors to the site. Yield on this spend may lag the investment by one or two quarters and therefore have a short term negative impact on EBITDA. We expect that our incremental spend in Q2 and Q3 is enhancing brand awareness and will provide a lift in traffic growth heading into the key holiday season. In addition we are working on strategies to scale the Society6 business and improve margins. Society6’s internationalization efforts continue to gain traction and by the end of Q3 34% of total units sold to customers in Australia and New Zealand shipped directly from our Australian vendor. We expect to continue to improve margins as we introduce more vendors internationally and we are seeing early signs of improved Net Promoter Score ratings from our international customers. We have also consolidated our U.S. vendors leading to reduced costs and increased scale efficiencies. And margins should continue to improve as volume increases with our domestic fulfillment partners. It is important to note for the purpose of comparability we include artists royalty payments in our cost of goods sold, while other public companies in this space may account for these costs as sales and marketing expense or as an offset to revenue. The gross margin for Society6, which is revenue less product, artist, shipping and transaction costs was 38% in Q3 up from 37% in the prior year. Saatchi Art had another strong quarter with revenue up 30% and visits up 19% year-over-year in Q3. Higher conversion rates also led to significant year-over-year increases in gross transaction value defined as the total value of the art of prints sold up 46% and transactions up 44%. This is consistent with data, we have seen suggesting that the online art market is growing robustly along with continued growth in the offline world. Turning to a review of Content and Media average monthly visits to our media properties in Q3 were $217 million up 1% on a pro forma basis versus prior year and 9% versus prior quarter. Approximately 55% of visits come from Mobile with significant reach and content engagement occurring off our own domains. Beginning in Q3 we are also introducing video views and social followers as two key operating metrics to look at audience and engage them. In Q3 total video views for all of our Content and Media properties were 176 million up 4% versus prior quarter and up 45% versus prior year. At the end of Q3 we had over 5.3 million total followers across Facebook, Pinterest, Instagram and Twitter. Looking at performance by property LIVESTRONG had a very strong Q3. LIVESTRONG grew revenues 31% year-over-year and was up 15% versus Q2. Year-over-year LIVESTRONG visits were up 25% in Q3 with mobile growing 49% and desktop declining 11%. Since mobile eCPMs are roughly 25% to 30% lower than the desktop eCPMs. The strength of mobile traffic growth creates some headwind on revenue growth. The good news is that mobile eCPMs's are improving as a greater percentage of the inventory is filled in programmatic or direct channels. We see promising signs of growth with our new eHow vertical strategy. Traffic to the eHow sites was down only 1% versus prior quarter and down 25% versus prior year. Total visits across all of these properties in Q3 was 114 million. In general when we have moved eHow content to the new vertical sites we are seeing a two to three times traffic lift on the content. However the initial RPV on the new verticals is about 50% percent of the RPV on eHow.com. This is because the new sites have fewer ad units than the number that are on eHow.com and the vast majority of the inventory for the vertical site is currently flowing through the remnant exchange the lowest with CPM in the stack. We have started to move some inventory into programmatic sales and direct brand sales to increase our RPVs. We plan to launch at least one more vertical site in early 2017. Then we will focus on optimizing each site and we expect to yield to improve from where we are today. In Q3 eHow sites revenue was down 19% versus prior quarter and down 42% versus prior year. Revenue per visit for Content and Media was $17.51 for Q3 down 14% versus prior year and up 2% versus Q2. Revenue generated by our content publishing studio was up 24% versus Q2 and up 15% from the prior year. The majority of this revenue comes from our Content channels, which grew 13% in Q3 versus prior year and 18% versus Q2. Content channels page views grew 2% in Q3 while RPVs increased by 11%. Custom Content revenue also grew in Q3 up 22% versus prior year and 46% versus prior quarter. While we are encouraged by LIVESTRONG’s momentum and promising traffic trends related to the eHow content shifts we expect a lag in Content and Media revenue growth due to lower RPVs for the eHow vertical sites. As you think about trends going forward in your own models we expect Content and Media revenue in Q4 to conservatively be plus or minus 10% of Q3 levels consistent with the sequential quarterly trends versus Q2. We continue to expect strong revenue growth in our Marketplace businesses as we head into the peak holiday selling season. Before I move on to EBITDA let me take a moment to discuss a few points about our GAAP financial reporting. As described in detail in our 10-Q GAAP revenues are recorded as product revenue and service revenue. Product revenue includes all of the revenue from Society6 and revenue from the sale of prints on Saatchi Art. Service revenue includes all of the revenue from Content and Media as well as the commissions we receive from sales of a original art on the Saatchi Art marketplace. On the cost side product costs are primarily driven by outsource production costs for Society6 and artist royalty payments. Service costs include our data center and internet serving costs expenses related to content creation for certain content units and customer service costs. As we have discussed on prior calls. We have made significant strides in reducing our operating expenses by consolidating data centers and reorganizing our content publishing studio. These cost reductions are evident in the service cost line, which were 42% of service revenue in Q3 down from 57% in the same period last year. The change in the mix of our revenue drives changes in the cost structure and we wanted to call this to your attention as you think about the trajectory of our business going forward. Now turning to Q3 EBITDA, Q3 marked a 57% improvement versus prior year and versus prior quarter on the pro forma basis. We continue to optimize our cost base to align with the smaller size of our Content and Media business. The reorganization of our studioD business and the divestitures of Cracked and certain other non-core properties resulted in a headcount reduction of approximately 75 people year-over-year. Partially offsetting these optimization efforts we have continued to invest in Marketing, Content and talent all of which we expect to be ROI positive over the next 12-months. Net net non-GAAP Q3 expenses were down by approximately $3 million versus prior year. Overall our Q3 GAAP operating expenses were $36.4 million down 14% year-over-year and down 4% sequentially from Q2. Non-GAAP operating expenses, excluding product costs were $20.5 million in Q3 down $5.6 million or 21% versus prior year. As a reminder approximately 75% of our cost base directly supports business operations and roughly two thirds of that is a variable with revenue primarily product costs related to our Society6 business. The remaining 25% of our cost base is corporate overhead costs required to run this public portfolio company. We believe these overhead costs are relatively fixed in nature and that they will decline as a percentage of revenue as the company grows. We will continue to optimize our corporate overhead costs to expand margins as we grow. Our free cash flow was negative $3.6 million in Q3 down from a negative $3.1 million in the prior year. Free cash flow for Q3 2016 reflects approximately $3.2 million of cash used in operating activities and $1.2 million spent on capital expenditures adding [indiscernible] (0

[Operator:]

[Operator Instructions] Your first question comes from Darren Aftahi with ROTH. Your line is open.

[Darren Aftahi:]

Hey, guys. Thanks for taking my questions and congratulations on a nice quarter. Just a few question if I may. First, can you just talk a little bit more about what’s working with LIVESTRONG and secondarily on eHow you made some comments on the verticalization strategy about two to three times the traffic lift what do you think I guess normalization of sort of parity on monetization given your yields are lower. And the lastly, what is your sense on breakeven quarterly revenue level on an adjusted EBITDA basis. Thanks.

[Sean Moriarty:]

Thanks, Darren, it’s Sean. I’ll take the first two parts of the question. First with LIVESTRONG it is a lot of hard work over the course of the past 18 months to create a really high quality site. The content creation, the diversification of audience across platform the execution on social has been very, very good, but again it all comes down to the quality and the effort of the team in creating content that consumers care about. If you look almost on a per channel basis from a distribution perspective, the team has done a great job, building out the email channel again, building out social almost from the ground up. And then with the improvement in Content and Engagement also good solid behavior in the search channel as well. From an eHow perspective you called out as we've moved into the verticalization strategy we have seen nice growth in the newly launched vertical channels from an audience perspective. Rachel cited the reason certainly in the near-term for the monetization being lower it's really hard to call when we’ll see improvements in monetization, but we do know we have that same highly qualified intent driven audience go in to those new verticals. And as those brands become more prominent and continue to grow and really it starts to stand for something in the category we know that we can make great strides improving the monetization as well and I'll let Rachel take the last piece of the question.

[Rachel Glaser:]

Hi, Darren. Do you mind repeating that last piece of the question?

[Darren Aftahi:]

Sure. The question was, what your senses on a quarterly adjusted EBITDA breakeven level for revenue.

[Rachel Glaser:]

Okay. We're not giving guidance. So I don't want to be too specific here. I think we have said in the past when we are growing we would see flow-through to revenue in the 20% range or so. Right now we are looking at we believe that going forward we will be seeing year-over-year the EBITDA losses will continue to narrow, that's our projection at the moment. With the caveat that we are keeping ourselves as flexible as possible to make investments for growth. I think that is the best I can give you on that one.

[Darren Aftahi:]

Great. Thank you.

[Operator:]

Your next question comes from Brian Fitzgerald with Jefferies. Your line is open.

[Rachel Glaser:]

Brian?

[Brian Fitzgerald:]

Sorry. During the quarter you had a nice lift in revenue per visit sequentially is up 2.5%. Can you give us more color on the dynamics there? You highlighted mobile and programmatic giving a lift. Have you instituted bidding on your site and if so what kind of lift in eCPMs are you seeing from this?

[Rachel Glaser:]

Yes, we have header bidding on eHow desktop and mobile and LIVESTRONG desktop and mobile but not on our eHow new verticals yet which is why we talked about being able to optimize the yield on the verticals going forward. The verticals are just pretty basic right now. That is definitely one thing that's lifting. We see overall that the lift from header bidding is about 10% because our pages are not 100% and we have ad sense on there, as well which is hard coded into the pages, so we're not getting the same header bidding yield on the ad sense portion of each page. The other lift we are getting it from viewability so we started to do a lot of things we believe in Myntra for instance that we've increased viewability by about 28%. And so we will continue to work on that and then we've done things with incidents scrolls on the page and slideshow which is increasing page views a lot which is also helping us get some lift.

[Brian Fitzgerald:]

Great. Thanks guys.

[Rachel Glaser:]

Thank you.

[Operator:]

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

[Jason Kreyer:]

Hey guys, good afternoon and congrats on the fine results.

[Rachel Glaser:]

Thank you.

[Jason Kreyer:]

On the Content and Media side, the revenue per visit trends they were up sequentially, pretty nice move. Just wondering if you can give any detail, any factors in particular that are driving that.

[Rachel Glaser:]

So I think the last analyst asked a very similar question, so we were talking about some of the improvements we've gotten have come from our header bidding initiative. We’ve also gotten some improvements from viewability. So LIVESTRONG viewability we saw a 28% lift year-over-year. And I guess the third thing would be the efforts we have been making to I guess what we call move up the stack, so we have been increasing our sell though on branded sales with our team has had a growing pipeline building. And as the audience growth has continued to improve particularly on LIVESTRONG we’ve been able to get more attention from the branded advertisers and attracting them to our audiences.

[Jason Kreyer:]

Okay. Great, thanks. Switching to Society6, can you talk at all about like attachment rates or maybe the average number of items in shopping carts. Just curious how much you were seeing how many items people are purchasing. Are you seeing any interesting things in the trends there and then also if you could talk about any plans to increase the number of products that you're selling there in Society6 where you can potentially go.

[Sean Moriarty:]

This is Sean. Great question. Let me start with the second part of your question. What you have seen over the course of the past couple of years really is a rollout of new products carefully selected and curated to the tune of about two a quarter. We expect going into 2017 that that pace will continue possibly increase. What’s been key to us the success of the businesses were introducing high-quality products at competitive price points with really strong vendors from an execution perspective. We have been always very very mindful of being able to put the proper amount of marketing behind a new product release. Making it an event in and out of itself and have a high degree of confidence in the quality of that product as we introduce it to market. But we’ll continue to bring new product mark-to-market as I said at least consistent with our prior pace and potentially faster going into 2017.

[Rachel Glaser:]

So we have been talking about attachment rates an interesting metric to talk about. I think I can give you some other metrics that are showing sort of growth in customer activity as you will. We talked about on a number of calls that our repeat customers are a about one third to two thirds our repeat is about one third and new is about two thirds. And our repeat customers grew for both Society6 and Saatchi in the quarter Society6 was up 44% and Saatchi was up a similar amount I'm looking for the number while I'm talking to you. And so it is just one matter to consider and the other metric is that Saatchi Art – Saatchi Art specifically were seeing growth in our advisory channel. And we know that when people buy from an art advisor, the average order value could be as much as three times higher as those that are coming to the site organically. So that for us is a place where we think they can scale the Saatchi Art business by potentially adding more art advisory and increasing the awareness through how were people land on the side and promoting our advisory and cataloging other marketing devices to get more people coming in through that channel.

[Sean Moriarty:]

Last slide, with respect to Society6 there is a lot of opportunity for us and frankly we haven't really gotten started with upsell and cross sell and bundling. And as we have a very strong assortment there is natural opportunities for us to do much more there. And so I think it is something we will probably be talking about in future call but it is a real to drive leverage through that business.

[Jason Kreyer:]

Okay, thank you. Last one from me. Rachel you gave a lot of detail on the services and the products gross margin. Just wondering specifically on the service gross margin improvement in Q3, was there a single factor or a couple of things that specifically improved this quarter or anything one time in nature that we wouldn't expect to continue?

[Rachel Glaser:]

It’s good – it’s organically a good trend line to follow with no event or specific anomaly about the quarter and the reason I gave that color was so that you guys can model better understand, better what in service cost and service revenue and product cost versus product revenue. Because we talk a lot about marketplace versus content media and I wanted you to be able to map over to that. But there was no specific anomaly.

[Jason Kreyer:]

Great, thanks.

[Operator:]

Your next question comes from Sameet Sinha with B. Riley. Your line is open.

[Sameet Sinha:]

Yes, thank you very much. A couple question on market related coverage you sawnice acceleration in the number of transaction. The actual revenue for transaction was down, can you talk about was it a function of the product mix that’s with a acceleration this traffic is coming picking up lower ARPU call lower average order value products or is it something else there. Secondly – rate going forward, now there is increase marketing you obviously seeing the benefits of that – continuously the benefits do you have any sort of metrics and life time customer value that you can share with us, so that give us increase confidence in your increase marketing this will lead to continued growth over the next few quarters.

[Sean Moriarty:]

I think the first part of your question around the AOV in the quarter I think is primarily a mix issue all that Rachel will speak to that little more specificity. And I apologies I didn’t catch the second part of the question.

[Sameet Sinha:]

The second part was basically – yes.

[Sean Moriarty:]

Yes.

[Sameet Sinha:]

So you have the question.

[Rachel Glaser:]

Okay. Sorry, I think your second part of the question was talking about lifetime value and return on investments that you get confidence in marketing spent on the business. We haven't really gotten into – so I’ll take the second part first, we haven't really gotten into the detailed disclosing customer acquisition cost versus lifetime value in anywhere businesses I'm not going to do that here. I will say that we are looking very carefully at our customer buy cohort and we're looking to see the life that of course lifetime the number of purchases in a given lifetime of customer increase as well as the basket size increasing. And so we feel confident, so that’s one thing. The other thing is we’re fairly knew that the traffic acquisition game in our marketplace businesses. So there is some of that is a lot of testing, trial testing, trials that we throw away the bad spend and increase the good spend. So we're starting to see the yield improve on the dollars that we're spending. So I can say with some confidence that we're doing our marketing very scientifically and managing ourselves to a place where we feel that its ROI positive with a couple of quarters.

[Sean Moriarty:]

I think Sameet, it's important to point out I don’t see some ceiling to the opportunity continue to grow these businesses consistent with our historical growth rates and continuing to leverage the paid acquisition channels that get exist to us there is far moremany people are out there that haven't yet heard of society six then know about it who our potential customers for us and operate or those same channels that we're working every single day, so we've got an awful lot of headroom for continued to efficient acquisition to grow the business.

[Rachel Glaser:]

The first part of the question was on to the mix of our you said a revenue per transaction was coming down and the answer to that one is that we've got a higher percentage of the mix coming from the Society6, which is a lower average order value per customer...

[Sameet Sinha:]

Got it. Second question moving over to Content and Media, there is verticalization strategy that you've chosen – obviously I think that will be a good path to go down. How should we think about the amount of content that you currently have on, you have versus the new channels and how much of that can we portrait over into the new channels. I know it's not something that you probably had spent its own plus you have new content being added on an hourly basis, but do you have a sense of how much of that we moved over so we can get a potential how much of that traffic is associated, which is my opinion that’s a negative equity traffic associated, with eHow potentially grow revenue added moved over your view.

[Sean Moriarty:]

Yes. So we're probably not going to discuss that specifically for competitive reason to me at least right now as we're in process. Let me see if I can give you some color with respect to scope and scale and its topically the way that we think about it. Look drawing is a very good example of what a movement to quality actually in tales, we reduce that corpus of content from probably was nearly 400,000 articles to somewhere and I believe 60,000 or 70,000 range. So taking down nearly 70% of the content yet, you see traffic as we slow to at an all time high. One of the ways to think about eHow and our focus on verticialization is that eHow at one point span 24 everyday life categories. And one other things that we believe and we certainly seen evidence this is work, is it overtime search algorithms have grown to favor specific dedicated vertical sites to broad horizontal sites. And so you've seen the first way of verticalization from us as we said we probably have one more over the course of the next few months and as we go we're going to learn and we'll evolve this strategy on the basis of real world data. It's really not about, I don’t think there is any correlation – meaningful correlation at this point between number of titles and articles in the library and audience in subsequent monetization opportunity. And so what I think what you'll see from us is more conversation around visits and RPV against these verticals, because I think I've said earlier on the call at much rather create a great piece of a content, I think its viewed a million times than a million pieces of content that get viewed once a piece. So I really do want to get out of that on a tonnage highly correlated tonnage conversation, because I actually don’t think at, it helps us or helps you properly think about the business, but more to come on that.

[Sameet Sinha:]

Fair enough. Let me quick follow-up Rachel if you could talk about what you said about Content and Media revenue as we head into the fourth quarter, can you say plus or minus 10% in the fourth quarter and if yes then can you give us so why negative 10%.

[Rachel Glaser:]

Well. I think we're giving – we're not giving guidance and we're talking as of actually looking backward saying that’s what we've been seeing sequentially the last several quarters. We were seeing if you talked about last time that that were continued on predictability and some of our Content and Media business as well specifically eHow.com. And as we're shifting content to new domain we have really know trend to follow we're predicting the unknown. It feels like a prudent, we've got the – we’ve moved couple of sites over and now, we see what’s happening and we're getting good lift on the majority of them. But we don’t know when we move to the last one over what will happen and what happens to eHow.com legacy content. So we're just giving ourselves some more room based on historical trend line.

[Sameet Sinha:]

Got it. Thank you very much.

[Rachel Glaser:]

I've also one – Sameet if you are so on that, eHow itself has become an almost immaterial part of the company's total revenue, so even that plus or minus 10% should not make a material different and the company forward-looking performance.

[Sameet Sinha:]

All right, thank you.

[Rachel Glaser:]

Thank you.

[Operator:]

There are no further questions at this time. I'll turn the call back over to the presenters.

[Sean Moriarty:]

Thank you all for joining the call. We hope to see you again in Q4. Have a good afternoon.

[Operator:]

This concludes today's conference call. You may now disconnect.