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Edited Transcript of LFGR earnings conference call or presentation 7-Nov-19 10:00pm GMT

Q3 2019 Leaf Group Ltd Earnings Call

SANTA MONICA Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Leaf Group Ltd earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jantoon Reigersman

Leaf Group Ltd. - CFO

* Sean P. Moriarty

Leaf Group Ltd. - CEO & Director

* Shawn Christopher Milne

Leaf Group Ltd. - IR Contact

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Conference Call Participants

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* Jason Michael Kreyer

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Maria Ripps

Canaccord Genuity Corp., Research Division - Analyst

* Maxwell Christian Spaeth

Cowen and Company, LLC, Research Division - Research Associate

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Presentation

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Operator [1]

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Good afternoon. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to Leaf Group's Third Quarter 2019 Earnings Call. On the call with me today is Sean Moriarty, CEO; Jantoon Reigersman, CFO; and Shawn Milne, Investor Relations. Shawn Milne, you may begin the conference.

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Shawn Christopher Milne, Leaf Group Ltd. - IR Contact [2]

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Good afternoon, everyone. On behalf of Leaf Group, welcome to our conference call. I'm pleased to have Sean Moriarty, our Chief Executive Officer; and Jantoon Reigersman, our Chief Financial Officer, on the call with me today.

Any metrics discussed on the call without reference to a specific third-party source are based on our internal data. You'll find the letter to shareholders and a related release, along with supplemental materials, posted on the Investor Relations section of our corporate website 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, planned investments and the impact of recent acquisitions are considered forward-looking statements. Factors that could cause actual results to differ materially from anticipated results are detailed in our letter to shareholders, earnings release and our SEC filings.

I would like to point out that during the 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. Reconciliations 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 letter to shareholders and 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 also be available on our website.

With that, I'll now turn the call over to our CEO, Sean Moriarty.

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Sean P. Moriarty, Leaf Group Ltd. - CEO & Director [3]

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Thank you, Shawn. Good afternoon, and welcome to our Q3 2019 earnings call. Before we jump into the Q&A, I'll provide a brief update. In Q3, while overall top line results declined by 3% primarily driven by revenue declines in Society6, we saw areas of strength across our portfolio of businesses, laying the groundwork for a return to growth and improved performance in 2020.

In Q3, we delivered adjusted EBITDA of $300,000, up from $100,000 in Q3 2018. Excluding legal, financial and other advisory fees attributable to the strategic review, our adjusted EBITDA was $600,000. We expect continued adjusted EBITDA profitability in Q4.

We ended Q3 with $11.8 million in cash, up from $9.9 million in cash at the end of Q2. We continue to strengthen relationships with some of the largest marketers in the world, including Walmart, Bacardi USA and Citibank, all of whom are responding favorably to our portfolio of brands. We're making significant progress in reaching our customers across new channels as consumers increasingly expect a 360-degree interaction with the brands they care about.

Key areas of strength in Q3 include: strong growth at Saatchi Art Group with revenue up 59%, driven by 15% GTV growth at Saatchi Art and 100%-plus growth at The Other Art Fair, which included the September Los Angeles Fair, the most successful fair in its history; Hunker revenue reached $2 million for Q3, up 123% year-over-year; improvement in Society6 gross margin, up 1.2 points year-over-year; e-commerce GTV for Hunker and Well+ Good combined increased 8x year-over-year; continued audience growth across our premium brands, Leaf Group's properties reached over 70 million monthly unique visitors in the U.S. in September 2019.

With that brief summary, we're now ready to take your questions. Operator, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jason Kreyer with Craig-Hallum.

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Jason Michael Kreyer, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I wanted to start out just focusing on the wholesaler B2B opportunity. It sounds like that's grown nicely, contributed like 20% GTV growth. So just wondering if you can give any color on maybe how big that is or what the long-term outlook is? And then it seems from kind of changes you've made in the structure of the sites and stuff like that, that maybe Deny Designs leads the charge a little bit on the B2B side. So just wondering if you kind of go to market B2B with that and S6 becomes more consumer-facing. So any more color will great.

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Sean P. Moriarty, Leaf Group Ltd. - CEO & Director [3]

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Thanks, Jason, this is Sean. So the B2B opportunity for us with Society6 and Deny Designs is enormous, it's an absolutely massive category. If you look at the partners we work with, these are huge, huge businesses. And so we've got an awful lot of room to grow and we're certainly happy with the momentum that we've seen over the course of the year, and we expect it to continue. And as you point out, yes, our focus with Deny Designs is to really make that the B2B wholesale brand for us going forward. That's really the roots of the brand. It's well known, it's well understood, and Society6 really is that consumer front door.

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Jason Michael Kreyer, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Okay. Switching gears to the Media a little bit. Visits continue to track nicely. We've talked a lot about some of the new brands you're engaging with. These are seemingly kind of longer-term types of engagements. So help me understand the change that we saw in RPV with that coming in a little bit, if there was a specific driver in that?

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Sean P. Moriarty, Leaf Group Ltd. - CEO & Director [5]

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Sure. So there's a couple of things, Jason, to keep in mind. One is mix. Our performance sites from a business perspective were really strong, including Only In Your State, but those RPVs are a bit lower. We did have some lumpiness in direct. Talked about this in the past. We've got a relatively new branded sales team in place. These sales with advertisers, the larger deals take some time. And so from quarter-to-quarter, it can be a little lumpy, but we expect growth over time. We've got a lot of room to improve RPV, and we're confident that we will.

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Jason Michael Kreyer, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay. Jumping around a little bit here. But on the paid acquisition, you had talked a little bit in the shareholder letter that you pulled that back. What does that mean for the Marketplace business? Were you able to find other sources? I mean did you kind of come short of any expectations with that pullback? Just wondering, any more puts and takes.

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Sean P. Moriarty, Leaf Group Ltd. - CEO & Director [7]

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Yes. As we're really focused on intelligently balancing growth and profitability, we're constantly looking at marketing efficiency. And as you know, customer acquisition and retention through paid channels is also a shifting landscape. So we did a lot of work to improve margin in the quarter, including restructuring a lot of paid search and social campaigns and really focused on margin and customer quality. So we think we can build off of a stable base.

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Operator [8]

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Your next question comes from the line of Maria Ripps with Canaccord.

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Maria Ripps, Canaccord Genuity Corp., Research Division - Analyst [9]

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Maybe just to follow up on the paid search. How are you thinking about it going into the holiday season? And I guess what was your rationale behind pulling back on the paid search overall in the quarter?

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Jantoon Reigersman, Leaf Group Ltd. - CFO [10]

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Maria, this is Jantoon. So the rationale is really, as Sean mentioned, the restructuring of some of the programs we were having and making them a little bit more focused and more targeted. I think as you've seen, we've obviously expanded our margins, and so we have also a little bit of headroom going into the holiday season with these programs and we'll adapt accordingly, obviously, looking at healthy returns in these programs but also be targeted to -- in line with our promotions that we're doing and in line with the audiences that we're trying to reach.

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Maria Ripps, Canaccord Genuity Corp., Research Division - Analyst [11]

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And so it sounds like you've been very focused on managing promotional activities pretty effectively over the past couple of quarters. Nice expansion to gross margin. Can you maybe talk about how you're thinking about it sort of, again, going into the holiday season? Are you doing anything differently this year? And what's your thinking around 3P partners heading into this holiday season?

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Jantoon Reigersman, Leaf Group Ltd. - CFO [12]

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Sure. So remember, I mean, yes, we've been very focused on the promotional dollars. So we've been focused on being more precise in our promotions. So doing a more targeted effort as opposed to do more whole site-wide. And so that has been banging well for us across the board. Obviously, free shipping is one of the tools that we have across that. So think of free shipping, think of certain discounts, think of combination of the some products, et cetera. And if you think of the third-party marketplaces, what we're really trying to do there is, obviously, as we said before, is we want to play in these third-party markets. And we're trying new merchandising in that area. We're focusing on what's working, what's not working and continuously adapting. But we feel we have good opportunities in both those areas as well as the effectiveness of our promotions going forward.

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Maria Ripps, Canaccord Genuity Corp., Research Division - Analyst [13]

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Got it. And maybe last one for me. Any update you can share with us on the sales tax impact, both for the remainder of this year and perhaps going into next year?

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Jantoon Reigersman, Leaf Group Ltd. - CFO [14]

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Sure. So in 2019, obviously, we adopted the sales tax. Remember, in '18, we only collected in California. By now, we've -- we are collecting in 46 states. And so we've done this effectively over the course of the last 3 quarters, right? So adding 25 in Q1, 7 in Q2 and 13 in Q3. So we've been progressively putting that through our site. And so, obviously, you can expect that we will move through this over the course of 2020.

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Operator [15]

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Your next question comes from the line of Tom Champion with Cowen.

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Maxwell Christian Spaeth, Cowen and Company, LLC, Research Division - Research Associate [16]

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This is Max on for Tom. Just wondering how we should be thinking about the EBITDA trajectory through the end of the year? You mentioned some gross margin expansion and just how are you thinking about reinvesting that to drive growth versus seeing that for the future. So how should we think about that through the end of the year? And then with [71 million] (corrected by company after the call) monthly users, just any puts and takes on further monetization on the nice Media business as that scales and maybe any color on ramping the sales teams, timing of that and what we can expect.

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Jantoon Reigersman, Leaf Group Ltd. - CFO [17]

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Sure. So let me start with the first piece on the EBITDA. So obviously, we ended the quarter with $11.8 million in cash. We expect to be adjusted EBITDA profitable for the fourth quarter, excluding any of the extraordinary expenses associated with the strategic review. I think it's important to also mention that, this morning, we entered into a credit line facility with SVB up to $10 million so that's also a good sign of the quality of our balance sheet that we have. So I think for the rest of the year, we're positive for adjusted EBITDA, and we feel confident in terms of investments that we would like to do in the future.

Remember that earlier in the year, we've already done quite some investments in both our content as well as our Marketplaces platforms, and we're expecting to, obviously, see fruits from those investments in the not-too-distant future. We'll continue to further invest going forward, obviously, so things like an artist studio that we're launching shortly has been an investment for us that we've made. Obviously, site speed, search and mobile, all things we continuously work on as well as future localization for the Society6 sites, content on the Media side is obviously important for us going forward and will continue to be so. And so that there are various areas of investments where we obviously continuously trade off investments and profitability as we've always done, and we'll continue to do so going forward. So that's only -- what was the -- can you repeat the second question you had?

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Maxwell Christian Spaeth, Cowen and Company, LLC, Research Division - Research Associate [18]

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Yes. Just any puts and takes on the monetization of the Media business. You've got a nice user base there and just kind of with that sales team ramping, how should we think about it sort of pacing the timing and puts and takes.

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Sean P. Moriarty, Leaf Group Ltd. - CEO & Director [19]

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Yes. I think when we look out, and again keeping in mind it's a relatively new branded sales team, and quarter-to-quarter, it's not -- wouldn't be surprising to see some lumpiness, but we've got a lot of room to move RPV up. We've got big audience. We've got strong growing brands. And so over time, this Media business should go from strength to strength. We're very, very comfortable with that. The mileage may vary from quarter-to-quarter for reasons that we've called out. But over time, the trend should be very strong.

The other thing that we should call out is these brands, with their audiences and with their engagement, also leads to revenue diversification. We've seen healthy blending of content and commerce. And what I mean by that is the opportunity to do lead-gen or transitional commerce through these media sites as well, which is appealing not only to us as a company but is certainly very appealing to advertisers, particularly product advertisers.

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Jantoon Reigersman, Leaf Group Ltd. - CFO [20]

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Yes. And maybe to put a final point on that, and Sean mentioned this earlier on the call as well, the e-commerce, GTV for Hunker and Well+ Good combined increased 8x year-over-year, so just give you some sense of the omnichannel approach that we have on various of these brands.

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Maxwell Christian Spaeth, Cowen and Company, LLC, Research Division - Research Associate [21]

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And I'm just wondering, if maybe I can ask one more quickly. Just wondering about the international localization, just any update there and how is it going?

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Sean P. Moriarty, Leaf Group Ltd. - CEO & Director [22]

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Sure. So in Society6, we see a real opportunity. We know we've historically been behind in offering the full-featured site and service that consumers would expect. We made some progress in 2019. In 2020, we will continue that localization push, which will include more POD vendors closer to customers, localization with respect to currency and language, and all of that should have a meaningful positive impact in the business. The way we think about the Society6 business overall is just working through those very clear areas of challenge for us. We made tremendous headway, for example, this year on the B2B side, taking what was a declining channel and getting it up over 20% growth. We're doing our work on international. We've substantially lapped the 3P downward pressure on the business. And we think, overall, with Society6, our recent challenges are mostly behind us, and we expect improved growth rates going forward.

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Operator [23]

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

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Shawn Christopher Milne, Leaf Group Ltd. - IR Contact [24]

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Thank you very much.

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Operator [25]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.