Leaf Group Ltd.
Q2 2014 Earnings Call Transcript

Published: 7 Aug 2014

[Operator:]

Good day, and welcome to the Demand Media Fiscal Second Quarter 2014 Earnings Conference Call. Today's conference call is being recorded. At this time, I'd like to turn the call over to Mr. David Glaubke. Please go ahead, sir.

[David Glaubke:]

Thank you, and good afternoon, everyone. On behalf of Demand Media, welcome to our second quarter 2014 conference call. You can find our related release, along with supplemental materials, posted on the Investor Relations section of our corporate website located at ir.demandmedia.com. On the call with me today are Shawn Colo, our Interim Chief Executive Officer; and Mel Tang, our Chief Financial Officer. Following the Safe Harbor statement that I will make, Shawn will update you on our business. Mel will then provide details on our second quarter financial performance and key operating metrics. Following 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'd 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, page view 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, during this call, we will discuss certain non-GAAP financial measures while talking about the company's financial and operating performance, including revenue, ex-TAC, adjusted EBITDA, adjusted EPS and certain free cash flow metrics. A reconciliation 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 press release. Lastly, before we begin, I'd 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 website. A replay will be available on our website. With that, I'll now turn the call over to Shawn Colo, our Interim CEO. Shawn?

[Shawn J. Colo:]

Thank you, everyone, for joining and welcome to our 2014 second quarter results call. It has been an incredibly active second quarter for Demand Media. This past Friday, we completed the spin-off of Rightside to Demand Media shareholders. The executive team spent a significant amount of time and energy to accomplish this goal, and we are confident that each company is poised to deliver value to our respective customers, partners and shareholders. I would like to say thank you to all of the people who have worked so hard over the years to build the domain name business. I have enjoyed working closely with Taryn and Tracy and the Rightside management team to position that company for continued success, and wish them the best of luck in their new life as a public company. I will not dig into the operating results for Rightside on this call, as they will be hosting their own earnings call today at 2

[Mel Tang:]

Thank you, Shawn. As Shawn mentioned, during the quarter, we saw signs that our focus on users and improvements to our content and products are beginning to yield positive results. Specifically, we saw positive data points on LIVESTRONG, where we have been investing and implementing changes over the past year. And while we still have important investments to make, our strong free cash flow and healthy balance sheet provide us the financial flexibility to continue to stabilize our businesses and reaccelerate growth. Let's discuss our consolidated second quarter results, inclusive of Rightside, in more detail. Revenue, excluding traffic acquisition costs, or TAC, was $87.1 million, down 10% year-over-year, driven by the cumulative impact of traffic declines to key properties, lower aftermarket domain sales and our shift away from direct display advertising. This was partially offset by Society6, Content Solutions and international revenue growth, as well as 13% year-over-year growth in Registrar revenue. Adjusted EBITDA was $10,700,000, reflecting the impact on higher-margin revenue from traffic declines and lower domain sales, as well as a mix shift to lower-margin commerce and Registrar revenue. If we exclude gTLD operating expenses of $2.3 million and associated revenues, adjusted EBITDA would have been $12.8 million. Free cash flow is $9.8 million. It increased both sequentially and over the prior year, reflecting lower fixed asset CapEx and purchases of intangibles and the timing of certain working capital payments, offset by lower adjusted EBITDA. Turning to our Owned & Operated business. Year-over-year, Q2 Content & Media revenue ex-TAC decreased 24% to $45.9 million. Owned & Operated revenue was $38.8 million comprised of Owned & Operated page views of 4.5 billion, up slightly, driven by mobile and international property page view growth, offset by desktop page view declines. Owned & Operated RPM was $8.64, reflecting a mix shift to mobile traffic and programmatic ad sales, as well as lower domain sales, offset partially by commerce revenue from Society6. Now on to network. Network revenue ex-TAC was $7.1 million, reflecting lower year-over-year revenue from our domain monetization and Pluck social tools businesses and our previously announced decision to sunset our IndieClick network, partially offset by growth in our Content Solutions business. With respect to network page views and RPM. Network page views are 1.4 billion and network RPM ex-TAC was $4.96, primarily related to the removal of lower monetizing network page views from our IndieClick network, offset by growth in Content Solutions revenue. On to our Registrar. On August 1, we announced the successful separation of Demand Media into 2 standalone entities. As Shawn mentioned, Rightside will be hosting their own earnings call today at 2

[Operator:]

[Operator Instructions] And the first question will come from Sameet Sinha with B. Riley.

[Sameet Sinha:]

Can you update us on your programmatic initiatives? You had indicated that, in the second half of the year, we should see some benefit. Any indications in July? Can you comment on kind of RPM increases from that, if any? Secondly, also just talking about the investment that you have spoken about, I guess, it involves just higher-quality content, more focused on music -- sorry, videos and photos. What sort of an impact? I think I missed that. Third is in terms of O&O, sequential decline in dollar value has slowed. Can you update on what Google as a percentage of revenue was and how we should think about that stream going forward?

[Shawn J. Colo:]

Hey, Sameet. So first of all, just talking about programmatic briefly. I think the team has been working really hard to get our infrastructure in place to really start growing that business. And I think we've seen some real traction in terms of onboarding clients. I think we tripled the number of live deals during the quarter, now we've got a couple hundred brands and agencies who are looking at our inventory. So that's kind of the first step is make awareness, let the customers know we're out there in market with product. And then starting to work closely with them to deliver the returns that they expect. So the focus is really kind of driving up that usage, and in fact, we're really not trying to push pricing right now beyond what the current trends have been. And Mel can add some more color on that, too. Mel, do you want to talk about that? We can go through them in sequence or do you want to...

[Mel Tang:]

Yes, I think just in terms of the CPMs we're seeing in our programmatic, they are stable, they're inching up slowly. Again, I think the focus, as Shawn mentioned, is really just opening the marketplace and ensuring that there's adequate liquidity on both sides, which will drive up pricing over time, in our view.

[Shawn J. Colo:]

And the market, from a product standpoint, continues to emerge and you're starting to see new formats evolve and grow, and ultimately, that's where the market needs to get to in order to start to get pricing going in the right direction. So we like the trends, we like the execution from the team so far. And so I think that's the programmatic update. From an investments going forward standpoint, I think what we talked about in our remarks was continuing to do some of the work that we've been doing in terms of improving content to our Owned & Operated sites. And that's going to take the form of article audits, where we're adding more photos, where we're adding more clarity, we're building product. That makes the creator aspect more social. And as I talked about with LIVESTRONG, we went through that -- we spent about 12 months going through that process, specifically. I mean, it wasn't just constant improvement that, I think, moved the needle for LIVESTRONG this quarter. It was content and product and user experience. And so going forward, we're going to continue to make content investments, not only for eHow, but also LIVESTRONG, too, in terms of being able to grow the business.

[Mel Tang:]

I think your last question on Google as a percentage of revenues, again, the percentage of eHow traffic were -- clearly, has the largest contributor. It's about 40%, which is roughly consistent with where it's been over the last few quarters. As a percentage of total revenues, it's about 1/3, just under 30%, actually. And then overall, if you just think about search, traffic coming from search engines as a percentage of 4 Owned & Operated sites, it's about 2/3.

[Operator:]

[Operator Instructions] The next question will come from Brian Fitzgerald with Jefferies.

[Brian Patrick Fitzgerald:]

You mentioned LIVESTRONG had strong mobile growth. Could you repeat that stat? I wasn't sure if it was traffic or revenue that now exceeded desktop. And then can you talk about maybe the monetization rate differential you're seeing between mobile and desktop? And then maybe one more on video. In terms of distribution, what portion of your video traffic, I guess, in across all brands and then maybe LIVESTRONG and CRACKED, particularly, is direct nav versus YouTube distribution?

[Shawn J. Colo:]

Okay. Let me try to answer the first question. On mobile, the stat we quoted was related to visits, and it's 55% of visits in the quarter to LIVESTRONG were mobile. And then I'm going to take them out of sequence. But I think on the video question, video is still predominantly off-network for the most part, and YouTube in particular. We do see some decent amount of video streams on our Owned & Operated properties. And for CRACKED, in particular, CRACKED is developing their own slate of premium scripted series, which is really where video is kind of headed on the web. So CRACKED is doing probably the best in terms of video execution from our Owned & Operated video standpoint.

[Mel Tang:]

Just returning to the mobile monetization question that you had. It's still holding around 50% of nonmobile -- of desktop in terms of CPM and revenue per visit.

[Operator:]

And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

[Shawn J. Colo:]

Okay. Thanks, everybody, for making time today. And look forward to keeping you updated on our progress in future quarters.

[Mel Tang:]

Thanks, everyone.

[Operator:]

Thank you. That does conclude today's conference. We do thank you for your participation today.