Q1 2020 Earnings Call

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Good afternoon, My name is Shentel and I'll be your conference operator today at this time I would like to welcome everyone to the least groups first quarter 2020 earnings call.

On the call with me today, it's Sean Moriarty CEO Jan two rigorous minute CFO and Shawn Milne the investor relation Sean Ma'am you may begin your conference.

Good afternoon, everyone on behalf of leaf Group Welcome Tour Conference call I'm pleased to have Sean Moriarty, or Chief Executive Officer and Gen. Two Roger Smith, our Chief Financial Officer on the call with me today.

Any metrics discussed on the call without reference to a specific third party source or based on our internal data you will find a letter to shareholders and they related release, along with supplemental materials posted on the Investor Relations section of our corporate website located at IR does leave group Dot 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 for.

Stated 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 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.

Thank you Sean given all that has changed since we last spoke to on March 16th we thought it fitting to kick off today's call for me to share with you. The intro to our Q1 2020 shareholder letter and provide some context about what's happened over the past eight weeks and where we're headed following that gen. Two will provide further detail on the financials in recent perform.

Since and we will then move to Q anyway.

The most appropriate theme for Q1 2020 shareholder letter is adapting to crisis in the most critical point for us to make is how well our team of people have answered the call in risen to the occasion in the early days of a world forever changed by a global pandemic.

For mid February through early March we watch with growing concern the news of the novel Corona virus spreading across the globe as we continue to operate our business until mid March our revenue growth trend for Q1 was positive year over year in particular Societysix returned to growth in its us direct to consumer business in February.

On March 11th the WH owed declared a global pandemic in the very next day leaf group commenced work from home for the vast majority of our employees and home is where the majority of us remain living and working some eight weeks later.

By March 13th we began to see the effects of the pandemic in the ensuing market volatility on our businesses with traffic in revenues dropping as people across the globe turn their attention to the growing crisis.

Our media and marketplace businesses saw immediate audience in revenue declines in we rescheduled or canceled eight the other art fair events for 2020.

The precipitous decline in our business in last two weeks of March was met with Swifton pragmatic decision, making to protect us from the storm reducing costs aggressively freezing hiring and asking our entire team to share in the sacrifice of significant salary reductions for all employees in an effort to avoid layoffs and protect our employees to the very best.

Of our abilities, which so far we've been able to do.

We have also taken steps to strengthen our balance sheet, which gives us substantially more capacity to navigate through the present crisis.

Since then our people have rallied in a moment of crisis and across our businesses. One can see very clear evidence of their resilience imagination and creativity.

Saatchi art and the other art fair launched virtual versions of its postpones global fares that were planned in several cities, including London, Sydney, Brooklyn, Los Angeles, Chicago in Dallas.

Well, we don't expect the other art fair online studios to generate revenue at the same level as the in person fares. The online studios as helps fill the void in the schedules of hundreds of independent artists from across the globe.

Thus far the support from the artist community has been tremendous with 94% of artists scheduled to show to spring fair participating in this new digital offering.

With this online studio we can now bring people from across the world to fair in a particular city and the physical and virtual worlds can come together to provide even more opportunity for artists and collectors.

Cytotoxics has enabled many of the millions of people now working from or can finds a home to beautify their living space and immerse themselves in the art and design of hundreds of thousands of artists across the globe. The Societysix platform is also enabling one hundreds of thousands of independent artists to earn income in a highly restricted stay at home environment and.

We saw a record number of art workup loads in April.

Anchor has provided information and inspiration on home and design to millions of consumers and we are sure lifted many low spirits on difficult days as people contemplate home improvement ideas and projects.

Well in good and live strong have focused their editorial efforts on content relevant to these trying times how to stay healthy with diet and exercise home workouts in keys to emotional wellbeing.

Only in your state has focused on preparing its audience for a world slowly returning to a new normal with rich content that is aimed at helping people to explore the world outside with purpose in meaning and most likely in even longer bucket list of must see attractions often off the beaten path. The challenges. We saw in mid March continued through early April but.

We ended the first week of April we also began to see signs of measured but steady improvements across our brands with a healthy rebound of traffic for our media businesses stabilization of our pvs in the programmatic channels and very healthy traffic in new customer metrics for Societysix and Saatchi art.

Those trends largely goal today in Q2 is off to a far stronger start overall than we would have expected based on performance in late March with strong media traffic recovery in April despite lower RPV healthy traffic in transaction growth at Saatchi art, Despite lower ASV and record growth in new artists in new and repeat.

Customers at Societysix.

Of course, we don't know nor can anyone know in times like these what will happen in the coming weeks and months, while we do not give guidance. We will in these unprecedented times provide more specific color on Q2 later in our letter.

When the world changed in mid March we saw profound shifts in consumer buying behavior, driven by global stay at home orders retail store closures in the desire to improves one living space in this environment.

This shift is driving a significant acceleration in ecommerce penetration rates globally as well as in the 300 billion dollar us home goods market benefiting both our marketplace brands.

In early April Societysix growth accelerated alongside this macro shift and for the month of April Societysix group GTV increased 101% year over year Saatchi Art online transaction growth was up 46% year over year, and Saatchi art, new customers was up 67% year over year.

Sure.

Well the shift in consumer behavior on line has created a significant tailwind for societysix the ability of the brand to drive rapid growth and capture market share underscores the significant platform work done by the team and the caliber the leadership team we've put in place over the course of the past year.

We believe that consumer purchasing behavior has been changed forever. In this change will benefit those online businesses, who moved quickly to take advantage of this shift.

We are grateful that at its core leaf group is a portfolio of businesses that help people live healthier and more fulfilling lives and provide them with opportunities to explore their passions, we believe that Saatchi art and societysix are becoming invaluable platforms for hundreds of thousands of artists to make a living through their creative talent.

Live strong and well in good provide essential information and insight into living healthier and more rewarding lives and our brand hallmarks across leaf group, our passion accessibility affordability and trust.

We believe our world is forever changed but exactly how we will all learned in the months in years ahead.

As we acknowledge the terrible tragedy in human cost of this pandemic and the uncertainty that lies ahead. We also believe that the shock to our system and way life will accelerate changes, we've already observed and moving to an increasingly digital world.

We believe we are in the right categories to win home art and design fitness and wellness with young online businesses that have the opportunity to capture consumer adoption now that may have taken years pre pandemic and we're very excited about what we can achieve in this new world.

We believe we have the people the persistence of vision the platform the audience in the market potential for us to create tremendous value in the years ahead for our shareholders and stakeholders.

Whatever the future brings we will be ready for it.

I'll now turn it over to Gen. Soon to review our financials.

Thank you Sean before we jump into the queue Nay I will provide an update on our business for the first quarter of the year growth trends in April and address our overall liquidity position. We believe our portfolio of digital brands is proving its resilience and underscoring value to both consumer and artist in key categories of art and design and fitness and wellness.

These categories are massive in size fragmented and are becoming increasingly important in the world where consumers focus on healthy living and having a healthy space around them.

In Q1 leaf group revenue decreased 3% year over year from 34 million to 32.9 million due to a 10% decrease in marketplace revenue, partially offset by 7% increase in media revenue.

Q1, 2020, adjusted EBITDA was negative $5.4 million for the quarter, reflecting an increase of 300000 year over year as margins in our society six business continued to improve with Societysix gross profit up 12% year over year.

Additionally, in Q1, we incurred corporate and legal expenses over <unk> point $7 million associated with strategic review cost, including fees of legal financial and other advisors.

As Sean mentioned, our revenue growth trend was positive year over year prior to the Gulf of 19 pandemic since February societysix during the corner to positive year over year GDV growth and its us direct to consumer segment, driven by structural improvements implemented by the team over the course of the past several quarters.

As the pandemic unfolded, leading to increasing macro uncertainty, we took quick and decisive action, including steps to protect the safety and while being over our employees contain costs further support our alone communities, including several hundred thousand artist around the globe.

First our teams first response was to focus on the health and safety of our employees as we rapidly shifting to work from home and March 16.

Given the digital nature of our business and the great effort from all our resilient employees. This transition has been smooth across all our offices.

Second on April 1st we took strong measures to contain cost, including significant salary or compensation reductions for executives and employees suspended compensation for our board of directors and deferred bonus payments for the executive team.

Third, we reduce spending across fixed and variable cost, including go into the marketing given the continued macro uncertainties, we aggressively continue such cost containment to date.

In the midst of implementing these measures we still profound changes across our businesses, most notably in accelerated consumer demand at Societysix.

In order to provide further visibility in this ever changing world. We wanted to include several terminations and growth trends for the month of April.

Our marketplace brands, so very strong levels of consumer demand with April GTV, increasing 81% year over year.

Societysix group GTV increased 101% year over year fueled by 135% U.S direct to consumer GTV growth and strong 63% International GDV growth.

Societysix group do TV for the month of April was an all time monthly record for the brand.

This growth is driven by a micro shift to E. Commerce as consumers are self isolated in brick and mortar retailers close their doors, a strong value proposition of high quality made to order home decor products at affordable prices.

And the many initiatives. This has had a 16 has implemented over the past quarters.

These initiatives included restructuring paid marketing and promotional strategy, new homepage and product detail pages, better mobile usability and a significantly improved international customer experience.

In many ways Societysix has enhanced its merchandising approach thinking much more like a retailer around strategic season on departmental skills and much less like a flash goods side.

As a result, the brand is experiencing significant growth in new customer and customer satisfaction has an all time high.

In April Saatchi art online, so strong consumer trends with transactions up significant year over year and with the new customer growth setting a monthly record.

Sachi art online GTV was up 4% in April reflecting lower average order value, partly due to a higher mix of new customers spending less on averaged in the repeat buyer. This is a trade over happy to take into near term as the marketplace rapidly expense with new art buyers.

Saatchi Art group overall growth is constrained by the first two quarters of 2020 by the previously announced transformational through fares and postponement of five ferrous for the other Archer. Nonetheless, we saw early positive early results from our recently introduced deal the art Fair online studios, which not only represents impossible.

Additional growth opportunity for the Saatchi brand in the future, but most importantly also helps further engage our artist community.

For April media revenue was down 26% year over year boast Gove at 19 and into late March we sold traffic decline as consumers during two financial and pandemic related news.

Beginning in April we sold traffic beginning to improve as consumers actively engaged with content in our key categories, such as healthy living home decor and DIY projects.

Traffic ended up higher year over year by the end of April Conversely, as advertisers pullback in response of the crisis, our AD rates or revenue per visit declined in late March and into early April and stabilized by the middle of the month.

Based on our cost containment efforts in the media business, we expect to maintain healthy segment operating contribution margin.

Leave group ended March 2020, with 11.6 million in cash and 4 million in debt on our receivables facility.

On April 20, we entered into a loan agreement for 7.1 million pursuant to the Paycheck protection program under the contract.

On April 24 leaf group transferred ownership of a library of content currently displayed on selective Hearst websites to Hurst in exchange for 9.5 million of which 4 million was paid at signing and an additional 5.5 will be based upon completion of the Golden migration, which is expected to be finalized in the third quarter of two.

20.

To Hearst deal underscores the underlying value for content Library and media business. As a result, we're now confident in our capital position against a broad range of overall economic recovery scenarios.

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

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

As a reminder, Jeff a question, we'll need to press star one anew telephone.

A question press the pound hash key my first question comes from Jason.

Hello Your line is open.

Hey, guys. Thank you just wanted to say congrats on the strength you're seeing in April obviously, it's been a pretty volatile ride recently, but nice to see the good traction there.

Thank you Jason.

I on that note you know can you just talk about where this strength is coming from in that six or are you seeing specific pockets of strength and certain product categories generating consumer interest or are you pretty much seeing everything broad based.

Yes, great question.

It's broad based Jason it's us in international and across categories. We've seen very very strong performance and I do certainly want to acknowledge that over the course of the past eight months or so our team has done a tremendous job putting us in a position to capture so.

Some of the benefits that were seeing.

In the age of a pandemic where people are spending considerable time at all.

Really metros Alan Walnut Oliver fully in the team have worked incredibly hard to make changes to you I you acts paid marketing campaigns, improving the customer experience completely revamping the merchandising strategy. So all of that is bearing fruit and certainly were we are benefiting.

In an otherwise very unfortunate circumstance from that trend of offline to online, but it really does reflect the work that the team has done it's broad based in its significant and we're certainly very happy to see it.

Keep in mind also Jason that we started seeing recovery in the us.

To see business as early as February and then again through March.

And we've been working very closely on this business to get it back to growth and if you recall going back a year ago.

I said it was going to take some time, but we felt that this was a business that should get back to historical growth rates and then.

Okay.

Thats helpful. Jan you gave some.

Nice detailed remarks on kind of the capital position just wondering if you could sum that up or you know as I commented do that quick math here I'm coming up with kind of ballpark.

Cash of 20 to 25 million right now with ill about 6 million in liquidity beyond that on the revolver. So I don't know can you help me and my in the right ballpark there can you correctly needle figures.

Sure. So we ended the quarter at 11.6, we obviously have 4 million already drawn to the facility and then we added 7.1 as part of the BPP program. We added another four upfront payments from first and what we're expecting another five and a half that migration is done.

As expected in Q3 of this year. We've also also as part of the uncertainty macro uncertainty we're fairly aggressive in our working capital management. So overall, we are confident in our current cash position.

Okay. Thank you.

On the media segment, we've been talking a lot over the last year about working with specific advertisers striking these longer term engagements that just create a more sticky relationship with those advertisers. So wondering if theres any call outs in terms of.

Incremental successes there over the last 90 days and then are you seeing that pay off in Neil more attractive CP ends.

This environment versus maybe what what leaf would've seen before those agreements were in place.

So Jason I think it's a really good point.

It's hard to measure exactly from a financial perspective, right now, but I do think what what these type of markets reenter raises the strength of the relationship into creativity with which the sales team work with their clients. So right. If you can move you think for example, the other part fairing you move from a physical fair doing.

Aligned fair water all the things you can do there with advertisers or for example, if you think will hunger and you think will be relationship that hunker has with Walmart and you think will really people thinking through in a more levered way how to design and decorate their houses. So there are many different ways, we're engaging in the strength of this release.

And just origins, especially this time, where you need more creativity and so I think it will translate into long term in the near term and mid term, obviously direct sales is a little bit more volatile.

Sure early because obviously deployment of capital for a lot of these advertisers is somewhat more uncertain, but we're very confident at the relationships. We have in the long term nature of these relationships and Jason I'd like to call out to what we're seeing.

In our advertisers, who really look to us as long term partners, which is key and coming to us for creative ideas. How in these times, we can help them stay in front of the audiences that they want to be in front of and we continue to work very very closely with with Walmart on hunker.

On Monday Sapphires as you know very important partner of ours, and we've taken that in real life experience. It actually moved it virtual through social media and so to Gen tunes point in the near term.

The revenue picture is obviously going to be somewhat murky, but what we're really heartened by a strong brands, who we know value our audiences, reaching out to us to do more in very very difficult times, and the which speaks to the strength of the relationships we've already built in.

Certainly gives us confidence that we've got a tremendous future and working with them going forward, yes, maybe won't be as to add there's also the theyre running direct business was good for Q1. So it's also a good base as you're going to a greater uncertainty go forward.

Okay last one for me Sean.

No we've experienced a lot of volatility in the last year or two and in that environment. We've seen on kind of changeover aware media has been a bigger driver for the business while marketplace has been somewhat of a laggard and then now over the course of the last four to six weeks here that's turned itself around a little.

And I mean tough to make longer term decision in the six week weird period, but it just kind of wondering how does this create any changes to your view of your portfolio business or any changes do you know what segments of the business year, making investments.

Yep.

Great question, I think really would end points to Jason is the strength and diversity and resilience in the business. Overall, if you look if there was a time a few years ago. When our media business was struggling and it took US a couple of years to get that business right Bill that back to a position of strength and despite the pro.

Resin circumstance, we have tremendous long term conviction about the media business that we've built and when the world gets back to a new normal we think we're going to be in a very good position with those mediabrands and as you know when the media businesses were struggling a couple of years back and we had tremendous conviction around what we could build.

Our marketplace businesses in particular, Societysix, we're very very strong.

So there are puts and takes particularly if you go back to 2015.

This was a turnaround business that had multiple years of real problems and out of that we've built a really well diversified and we believe a very resilient business and it's taken some time and certainly there been growing pains in some uncertainty along the way, but we couldn't be.

More confident about the quality of the brands that we have today their future potential and the strength of the categories that were in.

We are digital first businesses in home art design, and fitness and wellness with real audiences and increasingly strong brands to deliver on the expectation of those audiences. So we absolutely believe in a diversity and resilience of this portfolio in the future opportunity.

These that it presents for us.

All right I appreciate the color. Thank you guys.

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

Sure.

It's really great Assistarm trends play a marketplaces in the month of April how you're thinking about leveraging the strength and building on that wants to pandemic passes and that can you talk about your supply chain capabilities.

Phil dates heightened demand in the near term.

Sure. Thank you for your question.

So first of all you know we as I said, we've done an awful lot of work over the course of the past year.

We both Societysix, and Saatchi art, and improving product quality and service quality and continuing to innovate and so a lot of those gains are being made manifest in the results right. Now one thing that we're very much heartened by is the strength of the new customers that we're bringing on platform right. So new.

Customer numbers are way up in April customer satisfaction as Jan to pointed out is very high and so we feel very very good about our ability to take these new customers and turn them into customers for life.

We also have a lot of excitement around the things that we havent done yet so many of the changes. We've made for example, with Societysix and Saatchi art and improving the platforms in the user experience have helped us, but we look out over the course of the next six to 12 months that product roadmap.

It's just full of innovation, which will deliver more and more value to customers.

Great and the on supply chain.

Oh sure sorry about that so.

So so far we have been very fortunate our vendors are truly partners of ours and well depending on where you are low there's been I think anybody in a business like ours, which was subject to the realities of what goes on in the last mile or moving up.

Cross borders, but overall the supply chain has been extremely resilient and very very stable for us.

And if the last eight weeks.

As an indicator on what the future looks like we feel pretty good about the strength and resiliency of that global supply chain, it's held up very very well and that in memory I want to add one thing maybe we just.

Also we stated we so if you think of that continued growth in April obviously, 135% was used US did you see but it was also 63% international as we outlined before International's a very big theme for us going forward. Obviously has tremendous opportunities also the customers were gaining internationally will.

Right and really good base for us to continue growth there long term. So I think overall this is a really good opportunity for societysix and its growth prospects.

Got it and that can you talk about marketing strategies are there any changes incomes that will be messaging in light of the pandemic and that how are you thinking about balancing cost controls with possibly being more aggressive with marketing spend given low let me get quest Ki bin yet Jim.

Yes, so really good question Maria I would say, it's highly specific to the to the business and certainly to the category.

The marketing and merchant merchandising approach on society six for example.

It's very much now category specific so our marketing efforts are around categories in themes and certainly much less about deep discounting.

And then it at a time when people are spending a whole heck of a lot more time in their homes and probably staring at blank walls are walls. They don't like so much anymore. We have an awful lot to offer them and so we're very much leaning into that giving people the ability to affordably.

Beautify the space they live in every day and fee magically that also runs through all of our social media our performance marketing in our email campaigns.

And so we think were the right place in the right time to market that.

No. It so I think in terms of the cost side of things articles containment side of things I think what's important to remember as we are we are portfolio and these are moments where portfolio brands really comes to its strengths rights our ability to Donald.

Savings as well as divestments.

Somewhat down at the moment, you and there's still a lot of opportunities within median within the different marketplaces due to focus a. Good example is for example, you have the art fares that are low being held physically but then we can actually deploy a little of capital to actually deploy against the online studios and really make that initiative a big initiatives. So the indepth.

Visit the Alif overall in its investments in capital expenditure has been really great. While maintaining also real cost focus so containment of cost in times of great uncertainty.

The other thing to point out Murray on this notice. So if you look at you know the media business itself, we're very very confident certainly.

With our top brands, hunker, and well and good and only in your state.

And live strong bad.

As that because we're engaging these audiences so deeply with such intent driven traffic.

When the advertising market comes back and it's in the processes reconstituting itself right now with all sorts of puts and takes we think that our audiences will become increasingly valuable and we also know that there are many advertisers representing very healthy companies that have effectively park their spend on the side.

Hi lines and while we don't know how long it is going to take as the world's comes back for sure those advertisers will be looking to get in front of the exact right audience at the right time, and we're certainly going to be ready for that.

Great. Thank you so much for the color and good luck with the rise of Q2.

Thank you Maria we appreciate it take care.

Ladies and gentlemen, we have reached the end of the allotted time for the question and answer session. This concludes today's conference call you may now disconnect.

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