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Edited Transcript of LFGR earnings conference call or presentation 16-Mar-20 9:00pm GMT

Q4 2019 Leaf Group Ltd Earnings Call

SANTA MONICA Mar 19, 2020 (Thomson StreetEvents) — Edited Transcript of Leaf Group Ltd earnings conference call or presentation Monday, March 16, 2020 at 9:00:00pm 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

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Presentation

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Operator [1]

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Good afternoon. My name is Shantel, and I will be your conference operator today. At this time, I would like to welcome everyone to Leaf Group’s Fourth 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 your 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 will 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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Good afternoon, and welcome to our Q4 2019 earnings call. Before we jump into the Q&A, I’ll provide a brief update. First of all, we, along with every other company in the world, are now operating our business in a very difficult and highly uncertain environment amidst conditions that we all should expect to persist in the coming weeks and months. We’ve taken every prudent step we can to manage our business through this challenging time. Through the first 10 weeks of Q1, our business has been very stable. Although, we did see substantial softness on Friday, March 13, as the world woke up on mass to the crisis we’re all facing. The softness we saw on Friday improved somewhat over the weekend, but we have little visibility into the weeks ahead.

Nonetheless, we will continue to create content that educates, informs and inspires for the millions of people who visit our sites every day and to support our community of artists as they share their vision, imagination and work with the world.

On Friday, we made the decision to postpone The Other Art Fair’s Q1 and Q2 calendar of events, which includes 2 fairs in Q1 and 5 fairs in Q2. We expect several of these fares to be rescheduled to a later date, although we don’t yet have specifics to share.

On to Q4 overall. Q4 revenue declined 1% year-over-year, which was an improvement of 2 points from Q3. Overall, top line results remain constrained due to declines at Society6. However, we delivered solid 11% growth in Media. We are seeing signs of progress at Society6, including a return to gross profit growth, continued growth in the Wall Art category in Q4 and improved GTV trends in our U.S. B2C business in Q1.

We continue to see strength across our portfolio of businesses, including the following key areas in Q4: Society6 Group gross profit dollars increased 9% year-over-year; Saatchi Art Group grew revenue 15%, excluding a deferred revenue adjustment; The Other Art Fair grew revenue 11% on the same number of fares; Media revenue grew 11%; Hunker revenue grew 115% year-over-year; E-commerce GTV for Hunker and Well+ Good combined increased 8x year-over-year. Only in Your State revenue in Q4 is up roughly 3x since the time of acquisition in February 2019. Overall, Leaf Group’s properties reached over 66 million monthly unique visitors in the U.S. in December 2019.

Lastly, I want to remind everyone that the strategic alternative review that we announced on April 15, 2019, is still ongoing. We will not be making further announcements until the Board has approved the course of action requiring disclosure. 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 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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Sean, I know we’re not supposed to ask questions about the strategic review, but is there anything you can provide in terms of a time line now that we’re kind of getting close to 12 months into this, I mean, can you give an expectation of when we should hear some type of a conclusion there?

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

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I’m sorry, Jason, but we can’t.

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

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Okay. A question on — particularly on Society6, that it had a drag on revenue and a drag on the operating contribution. And I’m just wondering if you can kind of rehash through kind of the strategy in that business just in terms of, we look at the operating contribution down $2 million or, I guess, of negative $2 million year-over-year. And obviously, there’s been a lot of volatility there. But just a little bit more on the strategic processes to get that back into faster top line growth and then closer to profitability?

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

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Yes, sure. So as we’ve talked about earlier, Jason, there’s several contributing factors to the underperformance at Society6. We’ve got the marketplace pull back, which is now over a year ago, but which was a meaningful minor contributor to the business, and we’re anniversarying that getting it behind us. We’ve got the international slowdown and we’ve done some work there, but we’re also in a world where there are real global challenges so that’s going to take a while, particularly now. The B2B business, which had been soft last year, through the back half of last year, really started to improve and get back to in the kind of high teens, low 20s growth. And it’s a business that we expect to continue to perform well. Aside from, obviously, the situation we’re all living now, which is highly unpredictable. And then the U.S. B2C business, which is the largest part of the business, has been soft. We’ve been doing an awful lot of work there on managing margins, reevaluating the promotion strategy and we’re starting to see some really strong results with more product-specific marketing lightening up on the promotional load and making significant improvements to the site from a UI UX experience. So several different factors we’re working through, but you can see that we’re running a much more efficient business just with the gross profit dollars flow through year-over-year. And we’re making good, solid progress, really figuring out a marketing and promotions strategy for this business as well.

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

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All right. A couple that I wanted to layer in together on direct sales. I guess, first of all, where can that go over time as a component of the total media business. You called out in the shareholder letter, up 34% for the year. But if I remember correctly, that didn’t really get off the ground until spring/summer last year. So just wondering if maybe you can provide like a Q4 growth rate that’s probably more indicative of closer to maturity business. And then the last question is for me, like, is everything with that direct sales, is it purely additive or are you kind of stepping away from programmatic advertising and implementing more of a direct and just kind of changing the mix to move up to higher CPMs a little bit? So if you can address those 3, that’d be appreciated.

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Jantoon Reigersman, Leaf Group Ltd. – CFO [7]

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Yes. So Jason, I’ll start with the — so first of all, remember, with the acquisition of Well+ Good, we did a concerted effort to — in addition to the strength of our programmatic desks to also go further into direct. And so really, the reflection in the letter is a reflection of our continued progress that we’re making in that area. And the strength of the individual brands, right? So across Well+ Good, Hunker, et cetera, we have real opportunity to push these brands much more — much further into the direct branded revenue space. And we’re doing a really good job at that, number one. Number two, if you look at effectively year-over-year, those are all really healthy double-digit growth numbers that you can consider and if you look at it purely from a direct perspective. And so it’s not necessarily a shift away from programmatic. I think programmatic is a really healthy business for us. It continues to be so. It’s just in addition really to the programmatic we’re already running as a team currently.

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Jason Michael Kreyer, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [8]

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Okay, that’s helpful. And then while we’re on Media. I mean, on Livestrong, that’s been very volatile. And Sean, you talked a lot about those components of volatility. Has there been some external factors? And I know you guys have done efforts to kind of clean up the content that’s on the site and stuff like that. So outside of the current macro environment we’re going — we’re in right now, are there any other surprises, any other changes and expectations in Livestrong? Have you seen anything from third party, whether it’d be Google or other thing? Or are there any other steps you’re doing internally to make changes there? Just trying to wondering if we’re starting to enter into a period of stability in Livestrong that we haven’t been in, in a while.

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Sean P. Moriarty, Leaf Group Ltd. – CEO & Director [9]

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Yes. So we’ve done an awful lot of work, Jason, as you know, to narrow Livestrong’s focus, which is really about promoting an active healthy lifestyle and we’ve moved away from a lot of that very hard-core syndrome and illness content, which has been a multi-year process for us. And so absent the current environment, which makes things very difficult to predict, we think that we have a much more stable, much more focused business. But again, absent this environment, we would expect to grow in 2020. Given where we are, it’s obviously hard to see, but certainly, Livestrong is a stronger asset, much better suited to ride out the present environment than it was before.

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Jason Michael Kreyer, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst [10]

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Okay. Last one for me, I’ll seed the call, but Saatchi slowed a little bit in the quarter. And I think, Sean, you referenced the deferred revenue change. So just maybe a little bit more on that. But it also looked like just relative to the growth you put up in Q2, Q3, Q4 was a little bit slower. Just wondering if there’s any factors that led to that?

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Jantoon Reigersman, Leaf Group Ltd. – CFO [11]

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I’ll take that, Jason. So Saatchi grew at 15%, excluding onetime adjustment on the accounting side. So I’ll give you a very high-level date, which is basically as part of it. So Saatchi’s hospitality business has grown significantly since we effectively started that segment of the business in the early 2018. As part of that, obviously, the sales are a little bit more lumpy. And as such, we, at some point, as that business grew and becomes more important, we’ve made a decision to actually adjust a little bit how we recognize that revenue. And so we made that onetime adjustment as we went through our internal administration. So it’s a onetime adjustment that we’ve done in reflection to that specific part of the business. But overall, if you take that out, it’s a 15% growth year-over-year, which I think is a really good growth. And obviously, Saatchi is a global opportunity and the hospitality business overall is growing really nicely. So I think there’s plenty of opportunity. Also remember to — a little bit more to your first question, which is remember that Saatchi is still in investment mode. So we continue to invest in that business as it’s been effectively the leading platform for online art, right? So it’s a really attractive platform that we have and a really good brand.

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Operator [12]

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Your next question comes from Maria Ripps with Canaccord.

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

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Sean, you highlighted stable trends for the business prior to March 15, can you talk about the virus — sort of the virus impact on your supply chain? And can you talk about any recent changes in consumer activities across your key online properties?

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Sean P. Moriarty, Leaf Group Ltd. – CEO & Director [14]

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Yes. So I would say up until a few days ago, echoing my opening remarks, our business had been very, very stable. And we saw — we’ve seen softness. It’s a little hard to tell how indicative it is on representing a new normal. So just, again, keep in mind, obviously, highly uncertain times, but up until very recently, we had seen little to no softness overall across our businesses. From a standpoint of our marketplace businesses, again, it’s really early, Maria. And we’ve got good diversity in our vendor networks and good capacity. And so from a raw materials perspective, we actually expect that we’re going to be in very good shape, which we — what we can’t predict, of course, is what happens with respect to manufacturing capacity and workforce capacity in the weeks ahead. And we’re no different than anybody else in the world with respect to that. Beyond that, we think we actually have a pretty darn resilient business with production capacity from a raw material standpoint, but the prospective labor issues is something that any company that relies on manufactured and delivered product is going to have to work through in the coming weeks. And how that goes at this point in time is anybody’s guess. What I will tell you is our people are very well prepared. They’re working extraordinarily hard. They’re very, very committed, and we’re well equipped to get our work done, almost regardless of what’s thrown at us in the coming weeks and months.

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Maria Ripps, Canaccord Genuity Corp., Research Division – Analyst [15]

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That’s very helpful. And maybe can you share your thoughts around expenses on profitability for 2020, sort of especially given the current environment, sort of how much flexibility do you think you have in terms of scaling down expenses, if needed? And you highlighted more aggressive push on paid marketing in 2020. Just any color you could share with us on that.

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Sean P. Moriarty, Leaf Group Ltd. – CEO & Director [16]

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Yes. So certainly at times like this, you need to make sure you’ve battenn down the hatches from expense perspective and we’re certainly — and we have been for several weeks now evaluating all of those levers and when to pull them and if so, how hard. When it comes to marketing expense, one of the — obviously, the advantages that you have is you can look at all of your channels and as you watch consumer demand, wax and wane, you look at those channels and you really look — you typically over-index in times like this in those channels that are over performing, obviously, and returning very quickly. Those channels, which well may be profitable, but over a very long time horizon, which are subject to potentially a change in model are areas where you tend to pull back and we’re certainly equipped to and we’ll be doing that appropriately. And so it’s not one thing at a time like this, Maria, it’s everything. And we’re fully prepared to do everything we need to, to manage expenses accordingly.

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Operator [17]

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There are no further questions at this time. This concludes today’s conference call. You may now disconnect.

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