Leaf Group Ltd.
Q4 2014 Earnings Call Transcript

Published: 6 Mar 2015

[Operator:]

Good day and welcome to the Demand Media Fiscal Fourth Quarter 2014 Earnings Conference Call. Please note today's call is being recorded. At this time, I would like to turn the conference over to Mr. David Glaubke, Vice President of Corporate Communications. Please go ahead, sir.

[David Glaubke:]

Good afternoon, everyone. On behalf of Demand Media, welcome to our fourth quarter 2014 conference call. You can find our related release along with supplemental materials posted on our Investor Relations section of our corporate website located at ir.demandmedia.com. On the call with me today is Sean Moriarty, our Chief Executive Officer, and Peter Kim, our Interim Chief Accounting Officer. Following the safe harbor statement that I will make, Sean will update you on our business. And then, Peter will provide details on our fourth 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, 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, adjusted EPS, and free cash flow. A reconciliation of these non-GAAP financial measures to the most 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 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 will now turn the call over to Sean.

[Sean P. Moriarty:]

Thanks, David. Good afternoon and thank you for joining the call. Today, we'll update you on the CFO search, review the fourth quarter results and define our priorities as we transform our business. First, the search for our new chief financial officer. As you know, Mel Tang resigned last quarter and he continues to consult with us through the end of the month. We're pleased to announce the appointment of Rachel Glaser as Demand Media's Chief Financial Officer, effective April 13. Rachel brings almost 30 years of experience in e-commerce and media businesses, most recently at Move Inc., Realtor.com where she was Chief Financial Officer. She led the company's successful transformation, which culminated with the acquisition of Move by News Corp. late last year. She has also held senior finance and operating roles with Disney and Yahoo!. Aside from here experience, we find Rachel to be highly collaborative full of great ideas and a perfect cultural fit for the business. We can't wait for her to start. In the mean time, we have a solid finance team in place led by Peter Kim, our Senior Vice President of Accounting and Interim Chief Accounting Officer. Peter will take you through the financial results and will be available during the Q&A. A few more notes about personnel changes. Last month, we welcome Brian Regan to our board of directors. Currently, the CFO of Shutterfly, Brian's a seasoned executive with deep and diverse Internet experience. I couldn't be happier to have Brian on the board. I know he will provide invaluable insights and will be a strong voice representing shareholders. As made public in February, after eight years of Demand Media, Shawn Colo resigned from the company and from the board to pursue another opportunity. We thank Shawn for his many contributions to Demand Media during his tenure here. We have also accepted the resignations of board members Gaurav Bhandari and Josh James. Following these changes, we have a board of seven directors. In keeping with our message of focus and efficiency and the current size of our company, a smaller board makes sense to us at this time. Moving to our fourth quarter progress in each business line, this quarter, I'll lead off with one of the brightest spots in our Content & Media business. Our Content Solutions business provides rich text photography and video for brands and customers who are looking to build thought leadership through high quality content on their sites. Content Solutions, which accounted for 7% of revenue in 2014, had a very productive fourth quarter with new Fortune 500 clients coming on board and great traction with our current partners as clients renewed at a rate of more than 60% in the quarter. We started 2015 with a strong pipeline with clients responding to enhance text, video and visual capabilities and our ability to provide high-quality content at scale. Before I move on to the rest of the media business, I want to emphasize something I said on last quarter's call. Our studio's writers and photographers are capable of producing a very high quality product. In the years past, the company focused on volume often at the expense quality, but the studio currently works with outstanding writers, photographers and video producers. We're challenged to produce the high quality content required for the Content Solutions business as well as for the renovation projects on eHow and Livestrong. The platform and the many creators producing for it have proven to be a significantly valuable and scalable asset. Over time, we expect to unlock the value of the studio asset by leveraging the platform for Content Solutions, eHow, Livestrong and other properties, which will benefit from high volume, high quality content creation. Moving on to eHow. This is our largest single business and it accounted for 42% of 2014 revenue. We have been working to improve this property over the last several months. Our most recent step in improving user experience included the removal of $1.9 million low performing in duplicate articles, as well as reducing the ad to content ratio by removing three ad units from each article. We also launched a new and improved site design that is easier to read and better reflects the do-it-yourself spirit of our brand. However, we continue to see a negative effect from algorithm changes across the major search engines. We believe we can transform eHow through the product experience and we're working towards that goal every day. Our Livestrong property took on a similar renovation effort, which began in earnest about 18 months ago with major content upgrades and the removal of 75% of articles, which we determined redundant or low quality. These changes improve the user experience and yielded nearly 80% year-over-year growth in Q4 traffic. Livestrong accounted for approximately 9% of our revenue last year. In the fourth quarter, this property saw user registrations almost doubled year-over-year with key upgrades to the MyPlate calorie tracker app, as well as the launch of a new start strong challenge and preparation for the spike in January seasonal traffic. Our Cracked business, which represented 6% of 2014 revenue, continues to produce high quality content originating from its deep pool of contributing forum members, writers, editors, actors and producers. As for the rest of our business, we're seeing this audience shift to mobile with over 50% of Cracked visits now originating from mobile devices. Our earlier stage marketplace businesses, which accounted for approximately 21% of revenue in 2014 with strong performance in our portfolio. These platforms are leaders in the growing online art and design space. In the fourth quarter, both Society6 and Saatchi Art benefited from strong holiday sales. Society6 had a record fourth quarter and now has more than two million unique designs available uploaded by more than 130,000 global artists. The team made great progress this quarter including the launch of collections, which is essentially a curation tool allowing members to share their favorite Society6 products and enabling artist to merchandise more effectively. Saatchi Art launched its mobile app in the fourth quarter and has seen positive feedback from both artists and collectors. The app allows artist to manage their portfolios and connect with the global community of art lovers. For collectors, the app transforms the experience of buying art online with a view in a room feature that makes it easy to imagine what a work will look like on your own wall. With the app, as well as newly SEO optimized browsing on the site, Saatchi Art's organic traffic and conversion rates have increased over the last several months. Across our properties, mobile continues to be central to our product development strategy and will continue to be a priority throughout the year. In 2014, the team spent a considerable amount of energy on app launches, app improvements or optimizing pages for mobile, which has provided a significantly better user experience. We have to acknowledge the speed of change in our industry and Demand's current position behind the curve as search engine algorithm updates, the shift in traffic from desktop to mobile, and an underinvested product have all put pressure on the business model in the last several years. Despite these challenges, I'm optimistic about our ability to build a great business. We have a smart, experienced and enthusiastic team leading the transformation and we have over 65 million audience members who visit our sites every month. We have the capacity to create high quality products to drive more efficient growth long term. At this point, we're slightly more than a quarter in to a six-quarter to eight-quarter transformation of Demand media. Going forward, our operating philosophy remains unchanged. We run businesses in high passion categories like home improvement, health, comedy and art and design. We're bringing audiences to creators enabling bloggers, writers, photographers, artists and designers to make a name for themselves, even make a living doing what they love to do. We have energized the executive team with talented new leaders and we're on our way to making the business more dynamic, adaptable and efficient with both growth and cost savings initiatives. Over the course of 2015, we expect to maintain a cash balance at or above $40 million as we execute on this transformation. We're committed to disciplined and judicious fiscal management along the way. I am well aware of the challenges ahead in 2015 and I couldn't be happier to tackle them with the team we have. I look forward to sharing our progress with you as we execute on our plan and mission. With that, I'll turn it over to Peter for the financial portion of the call.

[Peter Kim:]

Thank you, Sean. As Sean mentioned, we are taking the necessary steps to transform our business. As we expected, the Content & Media business continued to experience declines and ad monetization yields in particular on eHow, which is undergoing big renovation we discussed on last quarter's call. These declines were partially offset by a solid quarter for the marketplaces business as Society6 achieved record sales. High level results for the fourth quarter were as follows

[Operator:]

Thank you, sir. And we'll take our first question from Sameet Sinha with B. Riley & Company.

[Richard Magnusen:]

Thank you for taking my question. This is Richard Magnusen in for Sameet Sinha. My first question is comp scores indicating that traffic has flattened out in the fourth quarter and could actually be increasing sequentially in Q1. Is that what you're seeing and what can you attribute this to?

[Sean P. Moriarty:]

Can you repeat the question again?

[Richard Magnusen:]

Okay. Comp score is indicating that traffic has flattened out in Q4 and could actually be increasing sequentially in Q1. Is that what you're seeing and what can you attribute it to?

[Sean P. Moriarty:]

Yeah. Richard, could you put a little a more specifics on that? Are you speaking to U.S. desktop number or are you speaking to desktop plus mobile, or are you speaking to global? I want to make sure we're talking about the same numbers that you're looking at.

[Richard Magnusen:]

Okay. I don't actually have the specifics. So if you give us maybe some type of relevant compare or maybe if you could break some of those (17

[Peter Kim:]

I think, generally – this is Peter, Richard. I think, desktop is pretty about 9% down year-over-year on a year-over-year basis. For mobile visits, they were up 63% for all our properties. So I think generally that we've seen lot of acceleration in the mobile growth.

[Richard Magnusen:]

Mobile is up 63% and it's accelerating?

[Peter Kim:]

And it's accelerating, correct. It's 38% for the annual period 2014 versus 2013.

[Richard Magnusen:]

Okay. Thank you.

[Operator:]

And our next question comes from Brian Fitzgerald with Jefferies.

[Brian P. Fitzgerald:]

Thanks, guys. Maybe a broader question. When you think about the future of the company, where do you see the largest opportunity for growth. Would it be – would you say it's around the Content & Media side or the Marketplace side? Obviously, we saw some good growth in the Marketplace side. How much of that was sequential heavy holiday season, maybe some color around that. And then one follow up on eHow. How have the removals been going so far? Did it take off (18

[Sean P. Moriarty:]

Sure. Brian, its Sean. So with respect to just general operating philosophy, we are focused on growth for every business that we have. So you don't play favorites with your children so to speak. Marketplaces are growing very nicely. We want to continue to maintain that growth and expand it. We've seen meaningful audience growth as you guys have seen on the call with Livestrong and eHow is going to require sustained work over a meaningful period of time to get back on a growth path and we're investing in that as well, but I really want to underscore the fact that we are operating our businesses to grow them and in the event where we have a business with a challenge on its hands in the case of eHow, we're going to find a path to growth for that business and we're going to be very upfront with you with the progress we make along the way.

[Brian P. Fitzgerald:]

And then...

[Peter Kim:]

As for (18

[Brian P. Fitzgerald:]

(19

[Sean P. Moriarty:]

Sure. So we took down those 1.9 million articles starting I believe in early November and that work the profounder of it spans probably a four-week to six-week period, the duping effort takes longer and is an ongoing process, but from a pure article count perspective, the majority of that work is actually complete.

[Peter Kim:]

Great. If you want to further numbers I think generally the 1.9 million articles in fiscal 2014, I think we've done a little bit of work in the prior year before that, I think the total takedown of 2.35 million article about 67% their article base. And on Livestrong, it was, which we have done in the last year, it was 400,000 articles, which is about 75% of that.

[Brian P. Fitzgerald:]

Okay. And then if you had to think about kind of the fixing of the content strategy around Livestrong, around eHow, is that the bulk of it now and we're kind of in the seventh, eighth inning and it's just going to be kind of tearing back or trimming now. How should we think about how much of work you did and how much is just kind of refining or shaping now?

[Sean P. Moriarty:]

Yeah, right, great question. So from a standpoint of corpus size we've done kind of the most. We're going to do from a standpoint of article reduction. That's only one part of the puzzle, right. Because what really matters is the quality of the user experience and it's not just content quality, is it content that is shareable, is it a content that's truly differentiated or is it pedestrian reference content. So that work is going to span the next several quarters in terms of product quality, overall quality of user experience, because as we know and we've certainly painfully learned that the business is not just a function of the number of articles you have on site and in fact too many articles is problematic. What people really care about is great content and experiences they can't get anywhere else and that's what we need to provide.

[Brian P. Fitzgerald:]

Great. Thanks, Sean. Thanks, Peter.

[Operator:]

Thank you. Our next question comes from Doug Arthur with Evercore ISI.

[Douglas Middleton Arthur:]

Yeah. Just a quick follow-up on – I wanted to get a better sense of some of the movement in the operating expenses. Product costs, is that mostly a function of the stronger than expected number in Marketplaces? And then the amortization of intangible figure is pretty high. Is that also driven by the removal of the articles? What exactly is behind that? Thanks.

[Peter Kim:]

Hey, Doug. Yeah. So from the product cost perspective, yes, that is a variable expense driven specifically from S6 and so as the revenue grows for that business the variable cost for the product costs will flow through there.

[Douglas Middleton Arthur:]

Okay.

[Peter Kim:]

And then on the amortization, that is lot of the additional amortization we had in the quarter was related to the takedown in articles for eHow. So that's where you'll see the acceleration for those articles flush through.

[Douglas Middleton Arthur:]

And does that correlate to the – I think in terms of adjusted EPS, it was a 7.2% hit to content intangible asset, so that's correlated?

[Peter Kim:]

Yes. That's correct.

[Douglas Middleton Arthur:]

Okay. Great. Thank you.

[Operator:]

Thank you. And at this time, I would like to turn the conference back over to management for any additional or closing remarks.

[Sean P. Moriarty:]

Thanks, everyone. We look forward to updating you in the next several weeks with our Q1 results.

[Operator:]

Thank you. And, this will conclude today's conference. We thank you for your participation.