Marin Software Incorporated
Q3 2015 Earnings Call Transcript

Published: 8 Nov 2015

[Operator:]

Good afternoon and welcome to the Marin Software Third Quarter 2015 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time I would like to turn the conference over to your host, Jason Starr, Investor Relations for Marin Software. Please go ahead.

[Jason Starr:]

Thank you. Good afternoon everyone and welcome to Marin Software's third quarter 2015 earnings conference call. Joining me today are David Yovanno, Marin's Chief Executive Officer, and Catriona Fallon, Marin's Executive Vice President and Chief Financial Officer. By now you should have received a copy of our earnings release, which crossed the wires a short time ago. If you need a copy of the release, please go to investor.marinsoftware.com to find an electronic version. Call participants are advised that the audio of this conference call is being recorded for playback purposes and that a recording of this call will be made available on the Investor Relations section of our website within a few hours. Before we begin, I'd like to note that our discussion today will include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include statements about our business outlook and strategy and statements about historical results that may suggest trends for our business. We make these statements as of November 4, 2015 and disclaim any duty to update them. For more information regarding these and other risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as the risks relating to our business in general, we refer you to the sections entitled Risk Factors on our most recent report on Form 10-K and our other filings with the SEC. This presentation contains certain financial performance measures that are different from the financial measures calculated in accordance with GAAP and may be different from calculations or measures made by other companies. A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our third quarter 2015 earnings press release. With that, let me turn the call over to Dave.

[David Yovanno:]

Thank you. Good afternoon everyone and welcome to today's call. I'm pleased to report that Marin delivered solid financial results in the third quarter, with revenues increasing approximately 6% on a constant currency basis and coming in just above the high end of our expectations. We had notable multi-product wins in the quarter with brands such as Rogers Communications [ph], Sotheby's and Dual Leaf [ph] choosing Marin Software and demonstrating that our SaaS-based, cross-channel approach to digital advertising is resonating with leading brands and their agencies. We released several enhancements to our product suite, as outlined in today's release. And our efforts to re-platform and significantly scale our core infrastructure are progressing well. Our adjusted EBITDA came in stronger than expected and benefited from the implementation of several initiatives to reduce operational costs and shift resources to higher areas of growth in order to streamline our business. Catriona will provide greater detail on our progress in this area during her review of our financial results, and I'm pleased to report that these undertakings are going as planned and have us well-positioned to deliver on our committed goal of achieving adjusted EBITDA breakeven in the fourth quarter of this year. I'd like to now provide a quick update on some of the wins we had in the quarter and our progress across our three channels of search, social and display. I'll then provide an update on our re-platform progress in support of our broader ad cloud vision. We continue to see increasing interest from leading advertisers and agencies in our cross-channel capabilities, and we remain on track for non-search revenue to represent approximately 10% of total revenue in the fourth quarter. We've also seen a significant increase in total mobile advertising spend managed on the Marin platform today across our three channels. In fact, mobile now represents more than 40% of total ad spend, has increased 60% in the past year. We are also encouraged by some of the recent wins we had with our new social offering. I'd like to share a recent case study we developed with Facebook to highlight one of these in Europe. Deezer, a popular music streaming service with more than 35 million tracks and 16 million members worldwide uses Marin Social to promote a series of Facebook carousel ads to encourage people to install their mobile app. Ads were created and optimized with Marin's bulk creator and mass editor. To improve ad delivery, the team used AB testing and automatically optimized ads based on best-performing images. Finally, the team measured the campaign results using Facebook's measurement tools, which showed a 50% reduction in account sign-up costs and a 60% reduction in app install costs. We've also seen several examples where the synergies between our social, search and display channels have proven quite compelling to our customers' advertising ROI and underpin the unique advantages of our cross-channel platform. One example I'd like to share is Smava, Germany's largest online comparison site for professional loans. Smava was looking to reduce customer acquisition costs by leveraging the high volumes of search traffic from a TV branding campaign, utilizing Marin's audience marketing suite and its smart search intent re-targeting feature, combined with the ability to exclude known audience segments, potential prospects were precisely targeted with social ads on Facebook. Smava was able to improve audience segmentation and reduce their cost per acquisition by approximately 50%. This is a great example of the advantages brands have when they consolidate that management of multiple advertising channels on Marin's platform. Smava was able to use their valuable intent-based search data to target people uniquely and therefore drive higher performance in their paid social advertising. We also won an important cross-channel deal with Sotheby's, a global luxury brand, that is now expanding its digital presence by leveraging Marin's platform. Sotheby's saw benefits stemming from operational efficiency and total cost of ownership by consolidating all three channels onto one platform as opposed to deploying multiple-point solutions. Audience definition via display, cross-channel re-targeting and geo-centricity are important in capturing and monetizing Sotheby's highly-coveted target audience. Marin's flexible and unbiased cross-publisher support and global footprint enables Sotheby's to have access to the ad inventory they needed, combined with the transparency and control they required to optimize overall digital advertising program performance. While still early, these examples are all-important proof points of our success in building out our ad cloud, with its integrated approach to search, social and display advertising on the world's largest publishers. It's exciting to hear from our clients that we are on the right track by supporting new publishers such as Facebook, Twitter, Yahoo! Gemini and new display ad exchanges. While I was visiting key clients in London a few weeks ago, one of our largest search travel clients commented that it took Marin's platform to get their search and social buying teams together in the same room. They believe combining audience data and measurement on the same platform is the future of their company's marketing strategy, which is in direct alignment with Marin's vision. That kind of customer validation is extremely exciting for us and we believe that this integration is the future of marketing

[Catriona Fallon:]

Thanks, Dave. We're pleased with the performance we saw in the third quarter, with revenues of $26.3 million, exceeding the high end of our guidance, and adjusted EBITDA improving to 49% year over year. Revenue growth was approximately 3% year over year or 6% when adjusting for the effects of currency. The $300,000 revenue over-performance versus the high end of our guidance was driven by a return to more normalized customer spending in September, and this is carrying over into the fourth quarter, typically our strongest revenue quarter due to increased seasonal advertising spend. From a geographic perspective, 69% of revenues were from the U.S. and 31% was international. The stronger growth in U.S. revenues was driven by an uptick in spend on some of our largest publishers. The revenue mix was 55% direct and 45% through agencies. The shifts towards direct on a year-over-year basis includes the impact of the transition of a few clients from agency relations to direct contracts with Marin. We served 827 active advertisers in the third quarter, up from 825 in Q3 last year, and down from 853 in Q2. While this metric is lower sequentially, it's important to remember that a significant amount of sales activity this year has been focused on selling our new social and display products into the existing search client base. This figure was also reduced by the fact that a few dozen advertisers that remained on the Marin platform have reverted back below the $2,000 active advertiser threshold compared to the prior quarter. And we also continued to prioritize service levels for higher-spending customers, which led to some churn at the low end. Since our IPO, we've come to view this metric on a quarter-to-quarter basis as less indicative of the direction of our overall business given the opportunity that we now have to cross-sell more into our existing customer base. Revenue retention on a constant currency basis for the third quarter was in the mid-80s, down from approximately 90% last quarter, primarily driven by moderation of same-store sales growth within our existing search client base. As a reminder, revenue retention tracks revenue growth from advertisers in the prior-year period that remained advertisers in the current period net of churn. Churn remains stable year over year. Moving on to the operating results. Our detailed financials as well as the reconciliation of our GAAP to non-GAAP financials could be found in our press release. My comments going forward will focus primarily on known GAAP results. As we discussed on last quarter's call, we implemented several actions to improve the efficiency and effectiveness across the business in the third quarter. We conducted an organizational restructuring effort, managed travel and entertainment expenses, and were more measured on our marketing investments. These efforts, and increased operating discipline, contributed to the improvement in our financial results in Q3 and are expected to support continued progress towards profitability in the quarters ahead. For the third quarter, non-GAAP gross margin were 66%, up from 65% in the second quarter. This increase was due to efficiencies from the onboarding and services side of our business. We expect gross margins to continue to improve as we scale revenue across all three channels and deliver further efficiencies. Non-GAAP operating losses came in at $4.3 million for the quarter, an improvement of $2 million year over year. Adjusted EBITDA was a loss of $2.5 million in the quarter, an improvement of $2.4 million, compared to a loss of $4.9 million in Q3 of last year, reflecting the cost savings I mentioned earlier. Non-GAAP net loss for the third quarter was $4.9 million, compared to a loss of $6.4 million in Q3 a year ago. Based on a weighted average share count of 37 million shares, this produced a non-GAAP net loss per share of $0.13, $0.03 above the high end of our guidance of a loss of $0.18 to $0.16 and an improvement from a net loss of $0.18 per share in the third quarter of last year. We ended the quarter with $33.3 million in cash and cash equivalents, compared to $41.5 million at the end of Q2. Contributing to this sequential decline was the timing of certain payments, including severance associated with our restructuring plan, a delay in our refund payment for leasehold improvement and an increase in accounts receivable. As we look to Q4, we expect our cash balance to stabilize given the reduced operational spend in our plan and the leasehold improvement reimbursement which we received in October. We continue to believe we have sufficient cash on hand to fund our operations through cash flow breakeven in 2016. I'll now provide an update to our outlook for the full year of 2015, as well as the detailed expectations for the fourth quarter. As a reminder, Q4 is typically our strongest performing quarter due to the seasonal increase in advertising spend. For the full year we are increasing our revenue expectations to a range of $106.6 to $107.1 million. At the midpoint, this represents an increase of $1.1 million over the previous range provided on our last earnings call, and translates to more than 11% growth in constant currency over our 2014 results. Non-GAAP loss from operations is now expected to be in the range of $18.4 million to $17.9 million for the year. Full year non-GAAP net loss per share is now expected to be in the range of $0.54 to $0.52, based upon our weighted average share count of 36.6 million shares. For the fourth quarter, we expect revenues to be in the range of $27.1 million to $27.6 million. Non-GAAP loss from operations is expected to be in the range of $1.8 million to $1.3 million, and non-GAAP net loss per share is expected to be in the range of $0.06 to $0.04, based upon a weighted average share count of $37.2 million. In addition, we expect to exceed our goal for adjusted EBITDA breakeven and could generate as much as half-a-million dollars in positive adjusted EBITDA for the quarter. Given our increased outlook for the fourth quarter, I wanted to take a moment to share our initial views on 2016 for modeling purposes. As Dave indicated, we're making progress on reengineering the core elements of the Marin platform, with this functionality being delivered by the end of Q2 2016. This effort is expected to support our ability to embrace some of the faster-growing segments within search, improve revenue retention, and increase our customers' overall ad spending on the Marin platform. As we look to 2016, we believe that our annual growth rates will remain in the low single digits for the first half of the year, with an improvement to the high single digits in the second half of the year as our reengineered platform drives initial benefits towards to our top line performance. With this outlook as a baseline, until we have a clear path towards higher revenue growth rates, I'd like to underscore our commitment to manage our operating costs in a disciplined fashion, targeting positive free cash flow in the second half of the year and positive adjusted EBITDA for the full year, with a sharp focus on preserving cash. We will provide more detail on our 2016 outlook during the fourth quarter earnings call in February. With that, I want to thank you for your time, and I'll turn it back over to the operator to open it up for questions.

[Operator:]

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Tom Roderick with Stifel. Please proceed with your question.

[Parker Lane:]

Hi. It's actually Parker Lane in for Tom Roderick. Wondering if you could provide an update on the number -- or the percentage of multi-product deals during the quarter and whether or not you're seeing display or social service more of a prominent driver of new business?

[David Yovanno:]

Yeah. Thanks, Parker. We, you know, I've shared some detail in the past, we don't want to get in the habit of providing updates each quarter on specific metrics like that with bookings. What I can tell you is that each quarter this year, the number of multi-product deals has continued to increase, the number of opportunities in the sales pipeline continued to increase each quarter. So, sales activity is up. And so we're seeing good evidence of our strategy working to that end. We do, however, see, typically with social and display deals, it does -- those deals typically start out a little lower in terms of revenue compared to search. It takes a while to ramp those. But the multi-product deals are up.

[Parker Lane:]

All right. And then as you look beyond the search, display, social channels you got now, do you foresee any additional acquisitions in the future to kind of broaden your technology base and getting to these new channels?

[David Yovanno:]

Yeah. I mean, we're -- the ad ecosystem is quite diverse. I could point to one channel that we'll either build or buy our way into at some point, that being video. We already support video units within our Facebook advertising, including Instagram, and we're seeing a good advertiser response to those units. We'd like to do more in that channel, perhaps into 2016. We're in the process of kind of finalizing our product roadmap for the full year next year. It's too early to say. We're not in the position for much M&A, I would say over the next year. But that's one area I'd point you to.

[Parker Lane:]

All right. Thank you for taking my question.

[Operator:]

There are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.