Q2 2020 Leaf Group Ltd Earnings Call
Good afternoon. My name is Mariama and I will be your conference operator today at this time I would like to welcome everyone to lease group's second quarter 2020 earnings call.
On the call with me today, as Sean Moriarty, CEO, Brian, Jeff Harte, interim CFO, and Chief Accounting Officer, and Shawn Milne Investor Relations Shawn Milne you may begin the conference.
Good afternoon, everyone on behalf of leaves group welcome to our conference call I'm pleased to have Sean Moriarty, Our Chief Executive Officer, and Brian Gephardt, Our Chief Accounting Officer, and interim Chief Financial Officer on the call with me today.
Following are safe Harbor statement, Sean will update you on our business and Brian will provide more details on our quarterly financial performance any metrics discussed on the call without reference to a specific third party source or based on our internal data.
After the prepared remarks, we will open up the lines for queuing day.
You will find a related release, along with supplemental materials posted on the Investor Relations section of our corporate website located at IR Dot leaf group dotcom.
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 press release furnished to the FCC I would like to point out that during the call. We will 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 financial measures to their most directly comparable GAAP measures can be found in the financial tables included at the end of our 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 Good afternoon, welcome to our Q2 2020 earnings call before we jump into the Q2 highlights I wanted to thank the team at least group for the resilience hard work and ability to adapt quickly to the dramatically changed environment during the cold in 19 pandemic.
Q2, 2020 revenue increased 42% to $51 million, our highest quarterly revenue since 2013, driven by the strongest year over year revenue growth rate since the first quarter of 2011.
Q2, adjusted EBITDA was 2.1 million, a 4 million dollar improvement year over year.
Due to free cash flow was 6.2 million, a 13.8 million improvement year over year, driven by significant growth at Societysix and it's efficient working capital model, we ended Q2 with $27.9 million and cash.
Q2 revenue growth was driven by our marketplace brand Societysix, and Saatchi art, which delivered 103% combined growth in GTV and a record number of new customers.
[noise] Societysix group delivered 134% growth in GTV, including growth of 172% in us direct to consumer GTV and the strong rebound in international GTV, which increased 81% year over year.
Societysix saw over 175% growth across the home decor category, including over 400% in outdoor and lifestyle.
Launched at the end of June face masks continue to be a top performing product in July.
Saatchi art on line GTV increased 50% year over year, which was offset by the cancellation and postponement of the other art fares live events.
We expected the structural improvements made it societysix and Saatchi art will continue to drive strong growth capitalizing on the upward trend the digital demand, which we believe reflects a fundamental shift in consumer behavior and ecommerce in our view. These behavioral changes are here to stay.
We continue to improve our platforms, including mobile capabilities at both brands. Some recent examples are the July releases of new mobile web augmented reality features for Saatchi art and improved mobile checkout for Societysix.
Heading into the back half of 2020, we're stepping up investments and customer retention after a record setting new customers for the quarter and are very encouraged by early results at Societysix from new email marketing paid social and direct mail campaigns.
Additionally, societysix will continue to expand product assortment and introduce new personalization and recommendation functionality ahead of the holiday season.
Saatchi art is increasing focus on digital events, given the strong start to the other art fares online studios, which hit the 1 million dollar GTV milestone in July since launch in early April.
We see a significant runway for growth for online studios given enthusiastic artist in consumer response to early efforts and our planning on further integration between physical fares and digital events later in the year as conditions permit.
Q2 media revenue decreased 26%, primarily due to the impact of the pandemic on overall industry ad pricing.
In response to this industry pullback our media sales teams developed its first data driven report the leaf group Kobin 19 study and utilize these findings to provide brands and advertisers with the answers to key questions around new consumer buying habits.
This strategy has resulted in more than 50 meetings with key brand marketers and led to deal with New Advertiser Campbell's brand V. Eight for custom campaign across Whelan, good and live strong.
We continue to focus on diversification in our media revenue through recently launched digital events at well and good and expanding our ecommerce efforts at hunger.
Q3 is off to a strong start with marketplaces momentum continuing in July in media trends are starting to show signs of improvement compared to Q2 and a year over year basis. We are seeing early signs of improvement in Q3 for direct media sales.
Our mission remains unchanged as our portfolio of brands as well positions to provide consumers and artists with products and services in key categories of home art and design and fitness and wellness.
These categories are massive in size fragmented and are becoming increasingly important in a world where consumers focus on creating beautiful spaces around them and living a healthy lifestyle.
We believe that these consumer behavioral shifts are here to stay and we expect them to drive sustainable growth across our properties going forward.
Our portfolio of digital first brands are in the right categories to deliver 15% plus annual long term growth and generate strong free cash flow.
Based on our increased confidence in growth outlook strong incremental margins in largely fixed corporate expenses, we are establishing 2022 targets of more than $250 million in revenue and 20 million in adjusted EBITDA as guidepost for investors to measure our progress over the next several quarters.
To that end, we have included or long term growth strategy in 2022 targets in our investor presentation, which is available on our website.
Well, we continue to run our business in an environment of tremendous uncertainty we're extremely proud of what our lease group team has delivered over the course of the past quarter.
Despite operating in a global pandemic in through a period of extreme volatility. We have worked hard sacrificed as a team to protect jobs and avoid layoffs and delivered outstanding quarterly results. Our team of people are committed capable and have proven themselves under the most adverse of circumstances.
The strength of our team quality of our brands and category positioning gives us the up most confidence that we can continue to deliver strong results and drive shareholder value.
I will now turn it over to Brian Gephardt to provide a more detailed review of our Q2 financials.
Thanks, Sean before we take a closer look at Q2 2020 financial results I wanted to take a minute to describe additional financial information, we are providing starting with Q2 results.
First we are providing revenue by Societysix group and Saatchi Art group to give investors incremental revenue detail for our marketplaces segment second we added an additional financial disclosure for corporate expenses with the breakout of strategic shared services and corporate overhead strategic shared services include.
Services, such as business intelligence financial systems business development, and information systems and provide support across our brands to drive growth as well as a platform to enhance growth through tuck in acquisitions.
Corporate overhead include services, such as accounting finance HR and legal.
Onto Q2, 2020 results Q2 revenue increased 42% year over year from 35.8 million to 51 million driven by a 101% increase in marketplaces revenue, partially offset by a 26% decrease in media revenue.
Societysix group revenue increased 128% to 34.7 million Societysix group GTV increased 134% year over year, driven by 172% growth in U.S. direct to consumer and 81% and International Society.
Six b to B, GTV increased 30% year over year.
Saatchi Art group revenue was flat year over year at 4 million as strength and Saatchi art online was offset by the cancellation or postponement of all the other are fair event for Q2, Saatchi art online GTV increased 50% year over year, driven by an increase in transactions per.
Actually offset by decrease in average order value.
On the segment operating contribution from Q2, 2020 marketplaces segment operating contribution increased 5.0 million year over year to 3.7 million or 9.5% of marketplaces revenue versus negative 1.3 million in the prior year period primary.
Early due to strong transaction volume for Societysix group, partially offset by operating losses for the other art fair due to the cancellation or postponement of all the other are fair events for Q2.
In Q2 media revenue decreased by $4.3 million or 26% to 12.3 million as compared to 16.6 million for the same period. In 2019. This decrease was primarily attributable to a decrease in RPV and visits partially offset by 37% increase.
In revenue for only in your state.
The decrease in RPV was primarily attributable to a pullback in AD spending as a result of the pandemic.
As of April 20, Fiveth 2020, we're no longer including visits to the sides migrated or to be migrated to Hearst as part of the Hearst transaction, which was announced on April 28 2020.
In Q2 on a pro forma basis, after giving effect to the hers transaction visits decreased by 9% to 539 million from 594 million in the same period in 2019.
In Q2, RPV on a pro forma basis decreased by 18% to $22.88 from $27. A 94 cents in the same period in 2019.
Media segment operating contribution for Q2, 2020 decreased 28% year over year to 4.8 million or 39% of media revenue from 6.6 million or 40% a year ago due to lower revenue.
Q2, 2020 strategic shared services and corporate overhead expenses of 6.3 million represented 12% of revenue.
Down from 7.2 million, which represented 20% of revenue in Q2 2019.
The decrease in Q2 2020 strategic shared services and corporate overhead expenses of 0.9 million year over year was primarily due to the impact of salary reductions which were effective on April onest 2020, and were sense restored as of June Thirtyth 2020.
We have added a new slide to our Investor relations deck, which outlines our expectations around segment operating contribution margin.
Media segment operating contribution margin was 38.7% in Q2, and we expect it to remain in the 35% to 40% range going forward.
Marketplaces segment operating contribution margin was 9.5% in Q2 and as revenue continues to grow we expect incremental segment operating contribution margin to be in a 15% to 20% range.
We also expect that strategic shared services and corporate overhead will decline as a percentage of revenue.
Q2, 2020, adjusted EBITDA was 2.1 million, reflecting an improvement of 4 million year over year.
In Q2, 2020, we incurred cost related to the activist and strategic review of 0.5 million, including fees of legal financial and other advisors.
Additionally, in Q2 2020, we had 1.5 million in cost savings implemented in April which included temporary salary cuts of our executive team and salary direct workforce.
These cost savings initiatives were restored in late Q2 in early Q3.
Q2, 2020 cash flow provided by operations was 7.9 million compared to negative 5.9 million in the prior year period, Q2, 2020 free cash flow was 6.2 million, a 13.8 million improvement compared to free cash flow of negative $7.6 million.
In Q2 2019.
At the end of Q2 2020, we had 27.9 million in cash with the debt balance of 4 million drawn on our revolving credit facility and 7.1 million related to the paycheck protection program loan with that 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 press the pound or how sticky please standby well, we compile the county roster.
Your first question comes from Jason Kreyer with Craig Hallum. Your line is open.
Hey, guys. Thanks for taking questions and congrats to the whole team over there on a really solid quarter and a nice snapped back.
Jason injury voice.
Thanks, Sean.
I appreciate you know the bold longer term objective you provided just wondering if you can you give a little bit more detail. There. If you have you know some segment or vertical targets that are rolling up into those 2022 objectives, you provided or perhaps you can just kind of parse out.
Specific components of that that gives you confidence that what you're seeing today is going to be relatively sustainable over the next couple of years.
Hi, Brian Thank you for question.
Our our mix currently includes marked the marketplaces segment at 75% of total revenue and growing.
Faster pace so.
I think Thats a fair statement on on the next question.
As we outlined in our opening remarks.
The July trends for the marketplaces that include continuing on.
Yeah.
And things improving.
Yes.
Okay, that's fair.
In Societysix did this strength that you've seen over the last 90 days or so can you call out, particularly categories. As the main drivers here has it been pretty broad based in terms of the growth that you're seeing and then if you can call out anything specifically on what you've seen in masks over there.
During the last month.
Sure. So the strength to actually Societysix is pretty broad very broad based actually Jason. So you know group GTV up 134%.
The U.S. D to C revenues up 172% International DTC up 81% the beaded the business, which is primarily drop ship in the quarter because the challenges with physical retailers was still up 30% in the quarter, So really really.
Strong broad based improvements.
In that business I should point out that the U.S. DTC growth actually started though early Q1, we returned to growth in February and that growth accelerated in March and so certainly there is.
But tailwinds.
We're operating in the work the team has done over the course of the past year has really transformed this business in a significant way and what we see by way of growth is truly across products category as well I spoke I think last quarter about the product marketing.
Focus against specific products and categories as opposed to that of the flash sale type discounting that have been done previously and we felt that was going to bear real fruit and it certainly has so not only our broad based by distribution channel region, but the strength we've seen in the business is across the product assortment.
And that team has done a dynamite job transforming the marketing and merchandising of Societysix.
Asks launched late so they had a minimal contribution GPV wise to Q2.
Our strong selling product for us.
Sean you touched on this a little bit but.
Yes, you've you've accumulated a much broader customer base, obviously over the course of course, the last 90 days initiatives across our marketplace businesses and I know, even talked a little bit last quarter about the longer term opportunity that that create just wondering if you'd be gone any specific kind of enhanced targeting.
Measures on that brought our cost debate customer base or where you see the improved long term value in going after those in turning those into repeat buyers.
No. It's a great question, Jason because that is the flywheel for the business.
Q2, new customer growth was very very strong the other thing that I point I've talked about this in the past.
When new customer growth is coupled with really high customer satisfaction that really sets into motion that conversion to a repeat customer customer for life and so not only did we have very very strong customer acquisition in the quarter.
We've had very high customer satisfaction and keep in mind, that's in a pandemic and we really high volumes.
So we're set up very very well really accelerate flywheel. The other thing we've done, though Jason which is very important news.
Completely removed on our lifecycle marketing approach and that is very real fruit. So we're very very confident.
In our ability to convert these new customers.
At a level beyond what we've been able to do before and.
Our customer acquisition strategy has also.
Evolves considerably in so not only do we expect to get the benefit.
Really strong retention improvements, but that new customer top of funnel I should be remained very strong for us as well.
A couple on the media side here.
Just on the on the direct sales teams. So if you can talk at all about the cadence of Q2 in any feedback you are hearing from direct sales I'm curious if if you add customers kind of at the beginning of the quarter that we're asking you to kind of pause relationships and pause a little bit of that execution.
And I'm wondering if that stuff has started to come back or any commentary on our new customer touch points and if those are starting to evolve after a little bit of a pause in the quarter.
Sure So as you might imagine with.
The global got Demick announcement in March that really rose a lot of that brand advertising activity.
And as you know that there's a sales cycle to that so pipeline, which can develop.
For several months or in some cases span quarters when when the world. It's the pause button that can be challenging for businesses.
When you win that brand advertising pipeline dries up whereas at least frozen.
Fortunately for us roughly.
Present.
Our business is still programmatic, but we have real upside as you know in building out the branded opportunity what we saw over the course of the quarter I would say was a pause so we remain constant communication with advertisers and agencies who.
A lot of money, we believe parked on the sidelines and they're looking for the time looking deployed in the progression we saw at least by way of attitude interest in activity from the beginning of Q2 to the yen.
Suggested that started to thought and we're seeing more early opportunity now than we have several months and you know and that's.
Part of the reason why the early signs for Q3 for US our strong is on the basis of that not only the conversations but the type of opportunities that we're seeing.
So on that thought on direct I mean, that's good color any color you can give on the programmatic side of the business and how the cadence if that cadence was any different.
Yes, I think I think we would answer that question the same way no need the early signs in July that are important part of the business are showing signs of improvement.
And as you know Jason in early Q2, you know those programmatic channels were very very choppy because many of your large buyers also happens to be it industries, which we're really really hit hard by the pandemic and programmatic is really that dynamic auction market and if long established.
Your players have been in pull out almost completely it has a real depressive effect on yields it. So over the course of quarter that started to show some signs of life as new entrants came into the channel and again.
Early in Q3.
Things seem to be improving.
Okay. Just the last one can you give a reminder that probably got this somewhere in the model, but can you give a reminder out how many are fair as you head in Q3 in Q4 last year I just wanted to make sure we model that out appropriately.
Jason will have to get back to you on that I don't have the exact numbers.
Yeah, and so the other thing is when we all we postponed or cancel the remainder of Q1 and all of Q2 fares and so we're actually in.
Rescheduling mode for back half a year so for Comping perspectives, that's also going to be somewhat ambiguous as we we work for the pandemic and its effects on the scheduling for those fares, although what I would say is we yet.
Artist and attend the demand when we return to a healthy world.
Should be very strong and I would also from a standpoint.
The fares themselves the team did an amazing job of effectively launch and we believe can be an entirely new franchise virtual fares.
And we've already eclipse the million dollars in GTV for those virtual fares, which really allow anybody in the world to experience at least partially.
The event of the fair that maybe happening in Santa Monica, or New York, or London, and I think when technology in time that franchise can really be expanded in Rome, because I think we've all.
Learned that the virtual experience is done right for stuff that you really care about can be strong transformative experiences, even if they're not real life.
Got it.
All right well thanks, a lot guys. Good work appreciate all the color.
Thank you Jason I appreciate it.
Your next question comes from Murray I wrap with Canaccord. Your line is open.
Thanks for taking my questions on that congrats restaurant without.
Just a follow up on the 20 to 22 targets.
What extent E that 250 million in revenue driven by M&A, which is there any drought.
And then sort of related to that now that use of shared with investors year on year financial goals.
A lot that they may be around providing some yet your expectations for guidance.
So on that 250 million 20.
The new target that is all organic growth.
Got it.
As far as quarterly guidance goes Maria.
We don't have any plans at this time to to change.
Our approach to guidance, particularly in a pandemic in a world like this one.
We will always consider when it's appropriate to provide incremental information to investors to help them understand where the company as but no plans at this time to to change from our quarterly guidance policy.
Got it.
And then maybe could you describe sort of a good candidates that would make sense for strategic acquisition.
With that largely be within your existing verticals or would you consider expanding into some adjacent verticals as well.
Yeah, no. So it's a great question I think the best.
You know.
Way to answer that as the blueprint of what we've done already.
Those four acquisitions, what we generally look for.
Our founder led bootstraps capital efficient businesses in categories that were in that expands our relevance and our strategic positioning.
We did that with the other aren't there for Saatchi art, taking Saatchi art in real life and Thats been a very powerful combination the marketing Hampton platform of Saatchi.
Coupled with that kind of rate in real life experience at the other art there has made that franchise even stronger.
You know the denied designs acquisition really expanded the product assortment, we can offer to customers and allowed us really to move societysix firmly in the home category and also put us in a position to build out a b to b and hospitality franchise.
Where we wouldn't have been able to do that before.
And then well in good next to live strong gives us not only real scale the audience, but we have the benefit of having a very strong finished in nutrition based information platform and the operational wellness brands as well and good which again.
Really strengthens our position in that category.
No the.
Only in your state acquisition, which we did a year and a half ago was one of those acquisitions, which you know.
We would love to be able to do regularly there's just not many of them really small team high fashion categories in the context, very very capital efficient and very well priced and so generally speaking we look founder led bootstrap.
The brands that will extend the strength of our category positioning.
And really advanced source and accelerate our strategy, but if we see great business that we think can be an even stronger business in centers group. It happens to be category adjacent we'll take a look at that as well.
Got it thank you for that and maybe one more question for me here. So we didn't marketplace businesses delivering this impressive runs out which is obviously great to see how sustainable do you think this trends are set up over the near term and Sean you mentioned that you've seen continued momentum in July or anything else you could add.
Yeah on the progression to the last month.
Yeah, So I'd say a couple of things Maria so.
I do believe that many of the behavioral changes that we've seen over the course of the pandemic with respect to share shift offline to online are going to stay with us. So there will be a benefit to E commerce brands that deliver for the customer that is going to.
Persist, even as the pandemic EPS, but when I look at Societysix. The single greatest advantage that we have now is on the basis of the work that's been done over the course of the past year by the leadership team Julie Metros, Alan Waldmann and team who have done an amazing job yet.
In the business back to growth the product and platform are stronger than they've ever been we've just acquired a huge number of new customers and we now have the marketing shops from both an acquisition and retention perspective in the product experience that really allows us to get that flywheel going.
So we feel very very good about driving growth for societysix.
Well out into the future on the basis of the flywheel itself. That's been created over the course of the past several years, but really scaled up in the past year and then the last thing I'd say is the societysix itself with design first shopping in a world more focus.
Now than ever on home, but also I would say that focus on the whole isn't something that is going to go away in a few months. It's good to elicit all sorts of behaviors and interests and Societysix is very well suited to deliver high quality on products at a reasonable price with.
Unparalleled designs. So the category positioning itself for a business that is healthy and growing right. Now just gives us tremendous confidence about what we can do with the business over the course of the next several years and what I'd add to that is the platform itself from a product that technology perspective is getting stronger.
Every day every week every month and so as this business grows it's going to grow on a platform of increasing strength.
Bye.
There are no further questions at this time. This concludes today's conference call. Thank you for participating you may now disconnect.
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