Q4 2019 Earnings Call

Good afternoon. My name is Chantal and I will be your conference operator today at this time I would like to welcome everyone to lease groups fourth quarter 2019 earnings call on the Cold with me today is showing that Moriarty CEO, John tune Reger minutes, CFO and Shawn Milne Investor Relations.

Sean you May begin your conference.

Good afternoon, everyone on behalf of lease group Welcome Tour Conference call I'm pleased to have Sean Moriarty, Our Chief Executive Officer, and Gen. Two reicher spend our chief financial officer on the call with me today.

Any metrics discussed on the call without reference to a specific third party sources or based on our internal data you will find a letter to shareholders and they relate it release, along with supplemental materials posted on the Investor Relations section of our corporate website located at I, Our dog leaf group Dot com.

Where 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 interest.

Pay that results are detailed in our letter to shareholders earnings release, and our FCC filings I would like to point out that during the call, we'll discuss certain non-GAAP financial measures will talking about the companys financial and operating performance, including adjusted EBITDA and free cash flow reconciliations of these non-GAAP.

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.

Good afternoon, and welcome to our Q4 2019 earnings call.

Before we jump into the culinary I'll provide a brief update.

First of all we along with every other company in the World are no operating our business in a very difficult in 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 13th as the World woke up on mass to the crisis, where all facing.

The softness we saw in Friday improve somewhat over the weekend, we have little visibility into the weeks ahead.

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

On Friday, we made the decision to postpone the other art fares Q1 in Q2 calendar of events, which includes two fares in Q1 in five fares in Q2, we expect several of these fears to be rescheduled to a later date, although we don't yet have specifics to share.

Onto Q4 overall Q4 revenue declined 1% year over year, which was an improvement of two points from Q3.

Overall topline results remain constrained due to declines at Societysix. However, we delivered solid 11% growth and media.

We are seeing signs of progress it societysix, including a return to gross profit growth continued growth in the wall art category in Q4, and improve GTV trends in our U.S. DTC business in Q1.

We continue to see strength across our portfolio of businesses, including the following key areas in Q4.

Societysix 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 affairs.

Media revenue grew 11%.

Hunker revenue grew 115% year over year.

Ecommerce GTV for hunker in well and good combined increased eight next year over year.

Only in your state revenue in Q4 is up roughly three X since the time of acquisition in February 2019.

Overall leaf groups properties reached over 66 million monthly unique visitors in the U.S. in December 29 team.

Lastly, I want to remind everyone that the strategic alternative review that we announced on April 15th 2019 is still ongoing we will not be making further announcements until the board has approved of course of action requiring disclosure.

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

As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. Please press the pound or Husky, please standby Willie compiled acuity roster.

Your first question comes from Jason Kreyer with Craig Hallum. Your line is open.

Hi, guys. Good afternoon, Sean I know, we're not supposed to ask questions about the strategic review, but it just is there anything you can provide in terms of a timeline.

Now that we're kind of getting close to 12 months ended. This I mean do you can you give an expectation of when we should hear some type of a conclusion there.

You know I'm, sorry, Jason, but we get.

Okay.

A question on on particularly on society, saying 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 this strategy in that business. Just in terms of Oh, we look at the operating contribution down $2 million or I guess.

Negative $2 million year over year in and obviously, there's been a lot of volatility there, but just.

Well, a little bit more on the strategic process. He is to get that back into you know.

Faster topline growth and closer to profitability.

Yes sure show the you know as we've talked about earlier, Jason you know, there's several contributing factors to the underperformance at Societysix. We've got the marketplace pulled back which is now over a year ago, but which was a meaningful minor contributor to the business and you don't worry.

Three not getting a behind us we've got the international or slow down and we've done some work there, but we're also in a world where where there are real global challenges. So that's going to take a while particularly now.

The beat if the business, which had been soffe last year through the back half of last year really started to improve and get back to.

You know the in that kind of high teens low twentys 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. a BDC business, which the largest part of the business. You know has been 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 you know lightening up on the promotional load.

In making significant improvements to the site for me you why you X experience. So several different factors were 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 you know, we're making good solid progress really.

Figuring out a marketing and promotions strategy for this business as well.

Alright, Thanks, Sean a couple that I wanted to layer in together on direct sales.

I guess first of all you know where where can that go overtime as a component of of you know 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.

And you could evolve on closer to maturity business and then.

The last question should be like it is everything with that direct sales is it a purely additive or are you kind of stepping away from programmatic advertising in implementing more of a direct and just kind of changing the mix to to move up to higher cpms a little bit. So you can address those three that'd be appreciate.

Yeah.

Yeah, So Jason I'll start with the so first of all remember with the acquisition of wedding. 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 letters of reflection of our continued progress we're making.

In that area and the strength of the individual Brent spreads overall swelling. Good hunker. It's a trial, we have real opportunity to Bush's brands much much further into the direct revenue space and we're doing a really good job number one number two if you look at effectively year over year. Those are all really healthy double digit growth.

Number since you can you can consider and if you look at it purely.

From a direct perspective.

So it's not necessarily shift away from programmatic I think programmatic is it really healthy business for us it continues to be tended to be so it. Just in addition really to the programmatic were already running as a as a team currently.

Okay. That's helpful and then Waller and media lids drugs, that's been very volatile in Sean you talked a lot about those components of volatility is there've been some external factors.

And I know you guys have done efforts to kind of clean up the the content that's on the site and stuff like that so.

Outside of the current macro environment were going up we're in right now are there any other surprises any other changes in expectations in Lindstrom have you seen anything from third party, whether it 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 peer.

Worried of stability and Lidstrom that we haven't been in awhile.

Yes, so we've done an awful lot of work Jason as you know to narrow live strong focus which is really about promoting and aktiv active.

Healthy lifestyle, and we've moved away from a lot of that very hard core syndrome in L. This 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 that again absent. This environment, we would expect to grow in 2020, given where we are you know, it's obviously hard to see but certainly live strong.

As a stronger asset much better suited to ride out the present environment than it was before.

Okay last one for me ill cede the call, but it's 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.

I'll take that just as such it grew 15% excluding onetime.

Adjustment on the golfing sites and I'll give you a very high level date, which is basically as part of that so saatchi's hospitality business has grown significantly since we effectively started that segment of the business in early June 29 2018.

As part of that always need a sales force a little bit more lumpy and as such we at some point as that business groups and becomes more important we've made a decision to actually.

Just a little bit how we recognized in revenue and so we made at one time adjustments 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 as a 15% growth year over year, which I think as a really good growth and I know recently, such as mobile opportunity in those without the business. Overall is also growing really nicely. So I think it does plenty of opportunity also remember too little bit bar to your first question would just remember that.

Got you stills and investment mode. So we continue to invest in that business as its effectively leading platform for.

Our rights odds are really attractive platform that we have an a really good Brad.

Okay. Thanks August.

Jason Thank you very much.

Your next question comes from Maria with Canaccord. Your line is open.

Good afternoon, Thanks for taking my questions.

Sean you highlighted stable trends for the business pretty much. The gene can you talk about the virus sort of the virus impact on your supply chain and can you talk about in your recent changes in consumer activities across your Q online properties.

Yes, so yes, I would say up into a few days ago echoing.

My opening remarks.

Our business had been very very stable than we saw we've seen softness that'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 seed little to no softness.

Overall across our businesses.

From a standpoint of.

Marketplace businesses again, it's really early Maria and we've got good diversity in our vendor networks and good capacity and so you know from a kind of raw materials perspective.

We actually expect that we're going to be in very good shape, which 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 in 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 whats thrown at us in the coming weeks and months.

That's very helpful.

And maybe can you share your thoughts around expenses and profitability before twentytwenty sort of especially given the current environment.

How much flexibility do you think you have in terms of scaling down expenses, if needed and you highlighted more aggressive pollution paid marketing in Twentytwenty, just any color you could share with us on that.

Yeah. So it's certainly at times like this you need to make sure you batten down the ashes from an expense perspective and were certainly we have been for several weeks now evaluating all of those levers and went to pull him 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 and those channels that are overperforming obvious.

Liam 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 our areas, where you tend to pull back and we're certainly we're certainly equipped to and we'll be doing that appropriately and so it's not one thing.

At times like this Maria it's everything and we're fully prepared to do everything we need to to manage expenses accordingly.

Got it thanks, so much for the color.

Thank you Maria we appreciate it.

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

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