Leaf Group Ltd.
Q4 2015 Earnings Call Transcript

Published: 2 Mar 2016

[Operator:]

Good day and welcome to the Demand Media's Fourth Quarter and 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jeff Misthal. Please go ahead sir.

[Jeff Misthal:]

Good afternoon, everyone. On behalf of Demand Media, welcome to our fourth quarter and full year 2015 conference call. You can find our related release along with supplemental materials posted on the Investor Relations section of our corporate Web site located at ir.demandmedia.com. 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. After the prepared remarks, we will open up the lines for Q&A. 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'd 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. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the financial tables included at the end of our press release. Lastly, before we begin, I would like to remind everyone that today's conference call is being recorded and that it is also available via webcast on the Internet through the Investor Relations section of our corporate Web site. A replay will be available on our Web site. With that, I'll turn the call over to Sean Moriarty, our CEO.

[Sean Moriarty:]

Thank you, Jeff. Good afternoon and thank you for joining on our fourth quarter 2015 earnings call. We appreciate the opportunity to update you on the growth and direction of our businesses. Our enduring mission at Demand Media is to build platforms to enable communities of creators to reach passionate audiences in large and growing life style categories, while helping advertisers find innovative ways to engage with their customers. We have a diverse but a complementary portfolio of business with the unifying thread that runs through each of them building great products that consumers love, share, and visit often as an essential part of their lives. Our remarks today are organized in three sections after which I will turn the call over to Rachel for a review of our financial results. First, as I have discussed on prior calls, shortly after I joined Demand Media in August of 2014, we embarked on what we believed would be an eight quarter turnaround. As we close out 2015, I'll describe the substantial advances we've made. Second, I will discuss Q4 performance and highlights, and some of our significant accomplishments during the quarter. Third, I will discuss our 2016 strategic priorities and how we intend to grow audience, customers, revenue, and returning to profitability. Let's start with a review of last year. 2015 was a productive year for Demand with four quarters of hard work behind us. I'm very pleased with the progress we've made in stabilizing our content media businesses for growing our marketplace businesses. Starting with people, we integrated an almost entirely new management team, including a new Chief Technology and Operating Officer, a new Chief Financial Officer, and a new Head of Corporate Development. These skilled leaders have recruited seasoned talent in product, design, content, marketing, sales, and finance. The team is smart, experienced, energetic, and focused on growth. With leadership talent being our single greatest asset, I'm excited about the team we have in place. Second, we made strategic changes to eHow's business model including removing low quality and duplicative content and reducing the number of ads on each page. These two actions had a significant negative impact on revenue but established a foundation for future growth based on a model of compelling content, improved user experience, and products that command an engaged audience. I will speak more about eHow and our vision for this business in a bit. Third, we continued to penetrate two core segments of the art and design market with a broader mass market offering of Society6 and Saatchi Art's higher end the original fine art. Saatchi Art is differentiated by a superb curation and art advisory capability led by a world-class curator Rebecca Wilson. Saatchi Art now has more than 60,000 artists listing over 500,000 original works of art and design representing over $1.5 billion in total retail value based on list price. The number of transactions is climbing each month, and gross transaction value for 2015 was $12 million. Society6, our print on demand business grew rapidly in 2015 adding six new products and 570,000 new customers. Society6 generated approximately $50 million in total transaction value in 2015, up 38% versus 2014. Fourth, we realigned and rebuilt our media monetization team last year. Early in 2014, we shifted our ad sales to 100% programmatic and eliminated our branded sales team. However, we learned that there is still very strong demand for our inventory as our sites command intent driven audiences of approximately 50 million unique visitors per month with demographics that are highly attractive to brand advertisers. So we strategically reorganized the team by adding site dedicated sales talent and optimized our ad stack with direct branded sales at the top. Fifth, we rationalized our property portfolio by divesting our Pluck social media business and several smaller web properties which will allow us to focus on our core businesses and optimize resource management. In 2015, we also did some thorough house cleaning by closing two offices, consolidating multiple data centers, eliminating approximately 10% of our G&A headcount, and reducing overall G&A costs by $4 million year-over-year. After four quarters, we are a substantially different company that is poised to deliver on the next phase of our transformation growing audience, customers, and revenue, while returning to profitability. Now, I will turn to some Q4 highlights. Our Marketplace businesses had another strong quarter with Q4 revenue increasing 29% versus prior year. This strong growth contributed to our Marketplace businesses generating over half of the company's total revenue in Q4. Society6 had a tremendous quarter. Every metric in this business was up. Traffic grew 6%, revenue grew 29%, conversion rates increased 9%, and average order values increased 8%. The Society6 team led a very well executed holiday season including its largest ever cyber weekend with $123,000 worth of sales and a transaction every 1.5 seconds during its peak hour on cyber Monday. Society6 also successfully launched two new products in Q4, throw blankets and travel mugs both of which made great holiday gifts. Society6 now has 28 different physical products available and 2.7 million unique designs posted by artists, up 49% year-over-year. Saatchi Art also made good progress in Q4 with revenue up 23% sequentially versus Q3 and up 36% versus prior year. During Q4, Saatchi Art expanded its art advisory service, which provides individual collectors and trade professionals with access to a professional curator who will select works tailored to the customers needs space and style free of charge. Art advisory transactions have higher conversion rates and higher average order values, testimony to the value the customers place on this unique and differentiated experience. The number of transactions made through the art advisory service grew 67% in Q4. In October, Saatchi Art shipped its first direct mail catalog to over 100,000 targeted U.S. households. Offline marketing campaigns can be difficult to measure, but our analysis of this mailing indicate that catalog led to increased visitation to the site shortly after the mailing, higher demand for our art advisory service and an increase in gross transaction value. Many of the art works included in the catalog quickly sold along with other works by the featured artists. We believe that the catalog effort can scale considerably and be a very cost effective customer acquisition and brand building tool for us. On the content media side, studioD continued to demonstrate growth in the fourth quarter. studioD is comprised of two businesses, our content channels business which creates and hosts evergreen content for publishers and brands and shares in the revenue generated by ad units on those pages. The faster growing part of studioD is its content marketing service which develops overall content marketing strategies and custom content for advertisers. This business had its biggest quarter-to-date in Q4 with revenue up 162% year-over-year and 41% versus Q3, including deals with several new clients and renewal rates over 70%. In Q4, studioD also launched its largest influencer campaign to-date with 36 campaign bloggers and social influencers creating original content promoting the launch of the clients' line of new cell phone cases. The campaign received almost 900,000 impressions on Instagram in the first day, and it's still growing strong. Turning to Cracked. Our humor property posted revenue growth of 5% year-over-year in Q4. Cracked has been a leader in premium content creation at demand with an editorial team dedicated to producing superior content in all formats, particularly video. In December, Cracked videos were viewed over 20 million times across YouTube and Facebook. The subscriber base for Cracked's YouTube channel continues to grow and it currently has over 1 million subscribers, up approximately 50% year-over-year. The Cracked video team also had a huge week in January premiering its most watched video ever, if soda commercials were honest. The video hit over 800,000 views in just four days and help to propel the channel to one million views in a single day. Cracked's weekly podcast have also been very successful with listens up 26% year-over-year. The Cracked's podcast was voted one of the best podcast in 2015 by iTunes. Q4 marked the last quarter in which Cracked's ad inventory was repped by a third-party. During Q4, Cracked begin building a dedicated native sales team and growing a significant native pipeline including a native content deal with Lion Gates for the Dirty Grandpa film. After the rep deal terminated Cracked also implemented new page layout, which increased page speed by approximately 50% on mobile and 20% on desktop. We are excited about these growing businesses and we will continue to invest in them to unmark greater value and accelerate future growth. We are equally pleased with our efforts in Q4 to stabilize eHow and Livestrong. eHow had a good fourth quarter with domestic revenue up over 10% versus Q3 that's right, I said up. According to our internal data, eHow.com had an average of nearly 48 million monthly visits in the fourth quarter. eHow has also established a strategic partnership with Pinterest and traffic coming from Pinterest was up over 20% in Q4 versus Q3. This is a channel that we expect to continue to grow in the coming quarters. eHow released the series of high quality Halloween videos in Q4 that have generated over 224,000 views and 3300 likes and shares across Facebook and Pinterest. eHow also continue to push its product and user experience forward in Q4. eHow launched a responsive homepage and a site wide header to improve navigation as well as introducing public facing, contributor and user profiles to give visibility to the credentials of the contributors and facilitate engagement with the content. In addition, eHow added the ability for users to save articles and follow its contributors and we have seen a two-fold increase in site registrations following these changes. Livestrong underwent an organizational shift in Q4 resulting in a much tighter focus on user experience and design. The mobile page layout shifted to a single page within infinite scroll, it was optimized for revenue yield. Since this launch, we have seen increases of approximately 80% in unique page views and over 70% in session duration. Livestrong also launched a new homepage in early January that include persistent navigation significantly improves the ability to share content socially. The Livestrong team also continues to improve the quality of all their articles in Q4 with over 700 health and nutritional articles renovated with improved content, photos, animated gifts and videos. The last topic, I will cover today is the year ahead. Demand Media is a portfolio of businesses each of which is intensely focused on growth; growth in audience, growth in customers, growth in engagement and growth in revenue. With that said, our businesses are not all starting from the same place. For example, eHow is just beginning to round the corner, Cracked continues on an upward trajectory and our marketplace businesses are growing nicely. Our goal for all our businesses is to build products that we are proud of and the consumers love use regularly and share with others. There are few examples of what's to come in 2016. eHow is building a content strategy that is narrower and deeper with fewer categories and higher quality content in each category. Traffic for all eHow sites in Q4 was down less than 1% versus Q3 and traffic was up 13% for eHow sites in January 2016 versus December 2015. In Q4, eHow produced 100 pieces of content per month versus 50 in Q3. We are now analyzing data to help determine what content will be most relevant to the eHow audience and provide the highest yield. We have an editorial calendar that leverages seasonality, current events and trending topics. We have selectively recruited new contributors with large followings and category expertise. In 2016, eHow will focus on driving traffic from social media sites such as Pinterest and Facebook by creating video and editorial content targeted to topics that our audiences most interested in. For example, eHow created the What's for Dinner, Pinner? custom page, which leverages Pinterest's API to show Pinterest users recipes and foods, they might enjoy based on their pins. Organic search engine traffic have always been important source of audience for the eHow sites, while we are making strides in diversifying eHow's traffic with engaged audiences from Pinterest, Facebook and other social sources. Our media monetization team also has several exciting initiatives planned for 2016. One of its bigger initiatives is header bidding, which enables greater ad exchange, partner diversification and drives higher yields for every layer in the ad stack. We are currently testing a variety of header bidding partners and all initial indicators are positive. Another growing monetization opportunity is native advertising. Native advertising allows brands to connect with their desired audiences in a meaningful way that moves past the click. We are already seeing a trend where advertisers are seeking attention metrics over quick metrics. Demand has three strong media properties that lend themselves well to native advertising. A few examples. Cracked weekly podcast to feature General Electric has its sponsor, the entity has co-produced four episodes dub the message which successfully blended sci-fi with sci-real. eHow integrated Google's Nest Thermostat into its holiday gift guide. The guide provided home and tech enthusiast with a myriad of gadget ideas that could serve as excellent gifts for the holidays and the campaign performed exceedingly well. And Livestrong recently created a series of articles about eggs and healthy living with the American Egg Board as the sponsor. We are excited about these opportunities for advertisers to engage with our audiences in ways that resonate deeply end with authenticity. Turning to our marketplace businesses, both will focus on getting bigger, faster in 2016. This involves driving new and returning visitor growth by creating brand awareness, investing in ROI positive marketing techniques and significantly increasing registrations. Our marketplace businesses are also working to improve conversion rates by optimizing the mobile commerce experience and removing friction from payment flow on mobile. Society6 is also localizing the experience internationally, displaying local currency and identifying local print and demand partners for faster and less expensive shipping. We continue to invest in our marketplace businesses to grow and build customer loyalty, giving artists better tools to sell their art and improving customer interactions by streamlining check-out, just a few of the areas that we are targeting for upgrades throughout the year. We have successfully made a pivot from the Demand Media of the past. We're now proud to be a portfolio company of high quality brands with a strong commitment to producing content and products that consumers love, use and share and we are unified in our mission to provide a platform for original content creation and distribution in many forms. Art and design, consumer products, humor and essential life style news and information. I will now turn the call over to Rachel for prepared remarks regarding the financials.

[Rachel Glaser:]

Thank you, Sean. We continue to work hard on the transformation of our Content and Media businesses. And as I discuss the financials, it will be clear that we have stabilized these businesses and are on solid footing for future growth. We're also very pleased with the growth in our Marketplace businesses and their Q4 financial performance as a testament to there efficacy. Total revenue in Q4 was $34.5 million, down 20% year-over-year reflecting 29% growth in our Marketplace businesses and over 100% growth in our studioD content marketing business offset by a decline in Content and Media. Though Content and Media as a whole was down 44% year-over-year, it is worth noting that sequentially Content and Media revenue was up 2% in Q4 versus Q3, so the decline is leveling off and we remain cautiously optimistic about what is ahead. Adjusted EBITDA was still a negative territory in Q4 improved to negative $0.9 million reflecting the impact of revenue growth in our Marketplace businesses as well as growth in the higher margin studioD content channels business and are focused on cost management. Free cash flow was $0.7 million for the quarter. While it is very nice to see free cash flow in positive territory, it is important to note that many of our vendor and artist payments for Society6 shifted into the first quarter of 2016. With expected increased holiday seasonality sales in Marketplace businesses, the volume of transactions was very heavy in the second half of December. This created a favorable impact on Q4 free cash flow and will result in a corresponding decrease in Q1 2016 free cash flow. Let me dive a little deeper on our revenue focusing first on two of our growth areas. Marketplace businesses and studioD. For the first time, Marketplace businesses revenue made up over half of Demand Media's revenue. Marketplace's revenue in Q4 was up 29% year-over-year to $18.4 million and up 47% for the full-year 2015. As was the case in Q3 both Society6 and Saatchi Art increased traffic, improved conversion rates and grew average order value. Total transactions were approximately $355,000, a 16% increase year-over-year. Average revenue per transaction was $51.61 up 11% year-over-year primarily due to a shift to higher priced items on Society6. studioD generated approximately 10% of the company's revenue in Q4. As we have discussed, studioD is comprised of two offerings. Our content channel offering is a high-margin steady stream business with moderate growth. Our custom content offering in which we create campaign through brands using our content creation platform and our rich warehouse of data to target audiences grew 162% in Q4. As a whole, studioD revenue grew 12% year-over-year in Q4 and grew 24% on a full-year basis. Let me take a moment to discuss the revenue recognition treatment for both our Marketplace and studioD businesses. Our Marketplace businesses do not recognize revenue until the product has been delivered to the recipient. Since we ship products all over the world, this could create as much as a two-week delay between point-of-sale and revenue recognition. Society6 does over 35% of its business in the fourth quarter of the year and a meaningful portion of that in the month of December. This results in a significant amount of December revenue that will not be recognized until Q1 2016 with a business that is growing year-over-year, the revenue recognition impact on the fourth quarter increases. studioD's results are similarly impacted by revenue recognition policies. Revenue is recognized as content is approved by the brand advertiser. As you might expect as the volume of committed sales contract increases deferred revenue also decreases. Turning now to our three primary media businesses, eHow, Livestrong and Cracked; Q4 was a medley of positive and challenging performance results. I will start with the eHow. To the positives, eHow revenue increased by 10% on a sequential basis in Q4 versus Q3. Traffic for the eHow sites is nearly flat in Q4 versus Q3 down a mere 1% and evidence that our transformation strategy is working. To the negative, on a year-over-year basis both traffic and revenue were down significantly largely as a result of the deliberate actions we took to change the content quality and user experience on the site. These included the removal of 2.4 million duplicative or low quality articles and the elimination of four ad units on almost every page. Most of the substantive actions impacting eHow took place in Q4 2014 and continued until Q2 2015. So after Q2 2016, we will be comparing against new baseline numbers which we consider to be a more solid and fertile foundation. Livestrong as a health and wellness property is seasonally soft in the fourth quarter. In Q4, we removed approximately 22,000 pieces of low quality content which also impacted visits and page views in the quarter, but we believe this was an important step to improve the overall user experience and engagement for the longer term. Many of the products and content changes the Livestrong team implemented in Q4 are having a positive impact so far in Q1 as we will discuss with you on next quarter's call. Q4 revenue was up 14% on a sequential basis versus Q3 but down 19% year-over-year. Audience was essentially flat in Q4 versus Q3 down only 2% and down 6% on a year-over-year basis. Cracked revenue was up 5% in Q4 versus prior year and up 14% on a full-year basis. Cracked agreement with our exclusive third party sales rep terminated at the end of Q4 and we have hired new in-house salespeople with expertise in native advertising dedicated to selling Cracked inventory in the Cracked voice. Sales pipeline is strong and building and we see a valuable opportunity to directly manage this important revenue stream with bigger margins. Cracked reach is growing significantly with a large audience consuming Cracked content and mediums other than the cracked.com site. Video views particularly on YouTube are growing with increasing momentum. It's still early days in the signs of optimizing monetization in these growing channels, but we believe there is real and significant opportunity. Another positive note in Content and Media is the transition we have made in our media monetization and optimization grew under new leadership. We have added brand evangelist to each of our media properties improving the overall ECPM as a value of our audience in non-guaranteed channels has increased the value of our guaranteed offering. To that end direct CPM's have increased by approximately 13% quarter-over-quarter. Growth in our direct sales channel is not coming at the expense of our programmatic sales. Our programmatic team which we believe to be among the very best in the industry continues to create new and seamless transactional opportunities with cutting-edge advertisers. The total amount of inventory running through remnant ad exchange is beginning to decrease an impression volume is stabilizing as a result of our product and content improvement efforts. These are positive metrics that create an optimistic outlook for future quarter revenue. As our direct and programmatic selling efforts increase, the percentage of our total revenue coming from a single advertising partner has decreased from 50% in 2014 to 36% in 2015. Overall, Content and Media was helped by growth in both StudioD and Cracked and posted a 2% sequential increase in revenue in Q3 and was down 44% year-over-year to $16.1 million. Across all Content and Media sites in Q4 visits were approximately $753 million and revenue per thousand visits was $21.44. Turning now to consolidated operating expenses. Q4 GAAP operating expenses were $43.1 million down 28% year-over-year, excluding depreciation, amortization and stock-based compensation, total operating expenses were $35.7 million. Operating expenses excluding product costs for Society6 were down $3 million or 12% year-over-year as we've diligently focused on creating an efficient operating structure for sales, product development and G&A. At the end of 2015, we had 347 employees down 13% year-over-year. This takes us to Q4 cash flows. Free cash flow defined as GAAP cash flow from operations net of acquisition and realignment payments capital expenditures and investments in intangible assets was a positive $0.7 million in the quarter. As I mentioned earlier free cash flow in the quarter was helped by the timing of artist and vendor payments for Society6 approximately $3 million of which shifted out of Q4 into Q1 2016. Capital expenditures including investment in internally developed software were approximately $1.1 million in Q4. We are committed to maintaining an appropriate cash balance to invest in revitalizing our media properties and to fuel continued acceleration for our growth businesses. This will include judicious management of our resources. Continued rationalization of non-core assets and investment in ROI positive ventures that will drive positive cash flow in the future. Before turning to 2016 outlook, I want to take a moment to discuss our NOLs, which may be falling under the radar in some of the analyst models out there. At the end of 2015, we had federal net operating loss carryforwards of approximately $143 million, which expire between 2021 and 2035. In addition, as of December 31, 2015, we had state NOL carryforwards of approximately $73 million, which expire between 2016 and 2035. There are various ways to value the NOLs, but in any method the value is greater than zero. Before I close, let me add a few comments about what we expect for 2016. In Q4 2014 we embarked on substantive action to transform and stabilize eHow. Deliberate and hard-hitting actions resulted in approximately $40 million of annualized revenue decline in 2015. From a much more stable foundation, we have begun to see signs of growth in eHow as well as Livestrong. Those signs of growth coupled with demonstrated and significant growth in our Marketplace and studioD businesses make us cautiously optimistic that we will see both revenue and audience growth in the second half of 2016. As total revenue begins to grow, we anticipate flow-through of incremental revenue in the 20% to 30% range. In addition over the past four quarters we've taken roughly $10 million out of our cost structure or 8% margin improvement on an annualized run rate. The reduction in total operating expenses includes the closure of two remote offices, consolidation of several data centers, targeted reductions enforced in non-core areas of our infrastructure and the divestiture of ancillary properties all of which allowed us to streamline operations. Although we are still early in our 2016 operating plans, we believe that we are on a path to return to both profitability and positive cash flow as we exit the year. We look forward to continuing the discussion on our progress during the coming quarters. That concludes the financial summary. And we will now take your questions.

[Operator:]

Thank you. [Operator Instructions] And we will take our question from Brian Fitzgerald with Jefferies.

[Brian Fitzgerald:]

Thanks guys. One of the questions I had was, as your media business continues to evolve into higher quality content with a focus on video, are unique viewers still a good metric to look at in terms of growing engagement across the web? What other indicators are you studying in terms of trying to understand how engagement is growing and how to drive that going forward? Thanks.

[Sean Moriarty:]

That's a great question. There is no question that visits still matter. But as you point out, as video grows, what advertisers are looking at is your ability to reach qualified audiences for them, and how strong your overall reach is. So while we will still be talking about visits, you will hear us talking more about reach, more about video audience. And really, one of the things we do very, very well at Demand Media is building out qualified and highly coveted audiences. But, if you look at -- the past year has been really a conversation about moving beyond the click and talking more about reach and more about context, and I think we are very well-positioned for that.

[Brian Fitzgerald:]

Great, thanks guys.

[Operator:]

We will take our next question from Sameet Sinha from B. Riley.

[Sameet Sinha:]

Yes. Thank you very much. A couple of questions here. Rachel, cash OpEx was down like $2 million sequentially. And I know you listed out all the things that contributed to that. As you look into this year, you're talking about profitability by year end. How should we think about all the OpEx items, where will the investments be, where we could see more leverage. And is that a goal for you to get to profitability by year end? And my question would be, I mean do you think you let go of certain growth initiatives as you try to get to profitability or do you think it's -- you have enough investments in your plan that will drive the growth? That's one question and then I have some follow-ups.

[Rachel Glaser:]

So let me jump in and Sean may want to add. So we didn't give explicit guidance. We are focused on growth. We believe our operating plan has us positioned for growth. We were deliberately non-specific about when we see that coming. We would not want to forfeit top line growth to get to profitability in 2016. We think we are balancing between the two. But if investment opportunities came up that we believe might have return in a future quarter that are sensible and judicious for the company, we will make those investments which is why we don't give specific growth. I mean specific guidance. And so, we believe the plan where we took cost out of the business on an annualized basis a little bit more than $10 million per year, which we think is important, we want to dial-up investment in the right places in things that would increase top of mind awareness and audience growth in our Marketplace's businesses and we'll test our way to find the right level of spend there. And things have come up throughout the year that we want to be able to be nimble and react to. So that's why we are holding back from giving specific guidance, but we believe we have a plan that balances both of those goals.

[Sameet Sinha:]

Thank you. In terms of the revenue per visit, up 5% sequentially, I mean is there anything specific apart from easy comps or that contributed to that? And what I'm trying to get at is, how much of that was seasonality versus some sort of new product initiative that's direct sales or its native advertising that contributed to it. I'm just trying to figure out the sustainability there.

[Sean Moriarty:]

Yes. I think it's important to point out there is a confluence of factors that impact this, and actually it's a pretty darn good result, and we are very happy with it because it takes an awful lot of work to do. And the reason for that is as you all know, audiences are moving from desktop to mobile. And in the near-term, that really puts downward pressure on monetization. So for us to achieve growth, I think is really testament to the quality of the team, some of the things that you mentioned certainly pushing into native advertising, getting back to branded, and then a lot of the focus around just executing the experience flawlessly for advertisers. That's everything from UI/UX changes, ad units et cetera. So I don't think you can pin it on anyone thing, but against the backdrop of desktop to mobile, particularly with the monetization trends that you see in the past couple of years, it's a very good result. Now longer-term, we fundamentally believe that there is room for growth as advertisers and ad tech comes up to speed with an audience that is going to be in the next couple of years, not exclusively but overwhelmingly a mobile audience versus a desktop audience so to achieve this result in an interim period, I'm very, very happy.

[Sameet Sinha:]

Can you talk about monetization differential between mobile and PC traffic? Is it -- continues to be a widespread or do you see it narrowing?

[Rachel Glaser:]

I think we are consistent with the industry where CPMs are lower in mobile than they are in desktop, but as the ad tech improves, our CPMs will improve there. So we see both add tech improving and then different devices like skins and interstitials [ph] and native advertising coming into the mobile space as well. So it's a situation I think, all boats will rise, we have been a first-mover advantage in many of those kinds of things with native advertising programmatic and so on, and so I think we will be leading the pack there. We would expect to be able to ride that wave along with everybody else or ahead of everybody else.

[Sameet Sinha:]

Sure. Final question, in terms of service revenue gross margin saw that improve quite nicely, which is definitely a surprise. What do you think is contributing to it and if you can dovetail that with content removal, saw that there was some incremental removal at Livestrong. Just trying to get a handle on when can we expect content removals to go away or do think it's an ongoing initiative you will add more and remove some to improve the balance in the mix?

[Sean Moriarty:]

Sameet, we missed the first part of your question, which I think was the essential part of the question. I apologize but could you restate that for us please?

[Sameet Sinha:]

Sure. So the service revenue gross margins, saw that and go up nicely sequentially not year-over-year of course, but is that -- is that a function of the things you spoke about earlier just better sales execution, direct sales, native advertising all of those? And if you can also tie that with how you are thinking about content on your sites so that there was some more pieces of content about 22,000 were removed. Is that -- do you think that's going to be an ongoing affair or is that -- basically trying to get a sense of -- do think content is going to grow from here or come down ?

[Rachel Glaser:]

So, let me take the first part of that question and Sean will talk about the second. So, I think what you're seeing on the gross margin is the beginning of scale in our business, so you talked about that is taking cost out of the company and that hit every line. So, things like serving cost for instance, which happens when you consolidate data centers will impact the gross margins on service revenue. We are getting scale and so vendor selection and then logistics of getting product distributed. So that's what you are seeing and we would expect that to gradually increase as the scale of our business increases. So we feel pretty good and that's not by accident. Those are deliberate actions that we're taking.

[Sean Moriarty:]

On the second part which is really about content takedowns for media businesses particularly Livestrong. Livestrong is a much smaller corporate content than eHow is. That 22,000 my guess at the time probably reflected somewhere around 10% of the overall corporate size and the reason that that -- those were removed is because we did not believe they were high-quality that they were meaningful that they were content worthy of the Livestrong brand or the audiences that we have. And so, I think we can say that we are beyond the point where you should draw a direct correlation between financial performance and the number of articles in the corporate. And we will continue to take down articles that we believe are of low quality. Keep in mind that these sites went after a scaled content approach over nearly a decade. And so to remove the low quality stuff beyond algorithms with an editorial lends those take some time. But, I don't think it's going to be relevant on a go forward basis, i.e. when we take down articles, again, they shouldn't be viewed as a proxy for revenue. What really matters for us is not the raw tonnage of the content we produce, but the audience that we have and how will they engage with that content. Do they consume it, do they share it, do they come back much more frequently? And we can grow our audience meaningfully almost entirely independently and I would say in some ways inversely proportional to the corporate size or the raw number of articles on the site.

[Sameet Sinha:]

Great. Thank you very much.

[Rachel Glaser:]

Thank you .

[Operator:]

Thank you. That does conclude today's question-and-answer session. Mr. Misthal, I'd like to turn the call back to you for any additional or closing remarks.

[Jeff Misthal:]

Thank you all for joining. And we look forward to talking to again next quarter.

[Operator:]

That concludes today's conference and thank you so much for your participation.