Q3 2020 Leaf Group Ltd Earnings Call
This time I would like to welcome everyone to the group's third quarter 2014 earnings call.
On the call with me today is Sean Moriarty, CEO, Brian Gephardt, yes, so enjoy milled investor relations.
You may begin your conference.
Good afternoon, everyone.
Half of leaf group welcome to our conference call in conjunction with today's call. We posted an earnings slide deck, which can be accessed on our investor Relations website.
I'm pleased to have Sean Moriarty, our Chief Executive Officer, and Brian Gephardt, Our Chief Financial Officer on the call with me today following our 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.
Resource are based on our internal data after.
After the prepared remarks, we will open up the lines for queuing day you.
You will find our related release, along with supplemental materials posted on the Investor Relations section of our corporate website located at <unk> Dot leaf group dotcom.
Before we get started we need to make the following safe Harbor statement we.
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, 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 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 Shawn good afternoon, and welcome to our Q3 2020 earnings call before we jump into the Q3 highlights I want to thank the team at leaf group for their resilience and hard work navigating these difficult times and performing at such a high level.
Leaf group delivered another excellent quarter of financial results in further our mission of building online brands that consumers love and trust by connecting people to their passions and providing a central information to help them live richer and Fuller lives.
Along with discussing our Q3 results, we will discuss some of the operating highlights and key initiatives to drive or expectations of sustainable growth across Societysix group and Saatchi Art group as well as the strong operating contribution in key areas of growth for our media group brands.
Q3 revenue increased 58% to 63.3 million, marking the highest quarterly revenue growth rates since the company's 2011, IPO and the highest quarterly revenue since 2013.
Q3 revenue growth was driven by Societysix group in Saatchi Art group, which both delivered another record quarter of new customers Societysix group revenue increased 127% year over year setting and other revenue record for the brand.
Saatchi art revenue increased 13% year over year as strong online growth was partly offset by the cancellation and postponement of the other art fair is live events.
Q3 media group revenue decreased 10% a significant improvement from the 26% decline in Q2 as direct sales improved throughout Q3.
Q3, adjusted EBITDA was $2.6 million, a 2.3 million dollar improvement year over year.
We ended Q3 with $33 million in cash too.
Q4 is off to a strong start with momentum continuing in October for Societysix and Saatchi art as our teams are prepared for an expected strong online holiday season in the coming weeks, we continue to see improving trends in direct sales for media.
We've delivered yet another quarter of record revenue growth driving improved operating margin and cash flow.
We are confident in our 2022 targets of greater than $250 million in revenue and $20 million and adjusted EBITDA we.
We have a highly profitable balance media portfolio, which generates a significant amount of cash.
Saatchi art is well on its way to brand leadership as it scales and 60 billion dollar plus art market that is rapidly transforming as consumers and collectors move online.
Societysix is an emerging winter in a permanently changed retail landscape with accelerating ecommerce penetration and strong positioning in the home category.
We couldn't be more excited about our current businesses and our opportunity to drive growth profitability and shareholder value as we build brands consumers Love and trust.
Q3 media group revenue decreased 10% a significant improvement from the 26% decline in Q2 as the U.S. advertising industry began to rebound from sharp cuts in spending in Q2.
Direct sales improved throughout Q3, and this improvement drove a 14% increase in RPV year over year, including new deals with Walmart late life V eight cotton and athletic.
Within our premium brands hunker and only in your state grew revenues on a year over year basis, we'll live strong and well and good declined but we do expect to return to revenue growth for all premium brands in 2021 media.
Media Group segment operating contribution was strong at $6.1 million or 40.9% of revenue a 28% increase over Q2.
We're in the right categories of home art and design in fitness and wellness to drive long term growth in media. We are focused on revenue diversification and media through recently launched digital events, it well and good and expanding our E commerce efforts at hunger.
Saatchi Art group delivered solid 13% revenue growth in the face of the cancellation of the other art fair as live events, which impacted revenue in Q3 by $1.5 million on a year over year basis.
As with other ecommerce categories. The online art market is seeing profound changes in consumer behavior as people are increasingly focused on the home. Additionally, the closing of local galleries worldwide is fueling accelerated spending in the category.
Saatchi Art online GTV increased 77% in Q3 with accelerating transaction growth and a slight decline in ASV as we introduce new customers to the brand.
In Q3, the team invested deeper and user experience, including the July launch of augmented reality viewing a room across mobile web. This new tool is showing strong early signs of driving customer purchase confidence as we are seeing four times higher conversion rates for those using the tool.
With the cancellation of live events worldwide. The other art fair team quickly pivoted to create its online studios digital fair program online.
Inline studios is delivering strong results with $1.8 million in GTV through the end of Q3 since launch we expect online studios to generate $2.5 million in GTV by the end of 2020.
Online studios is significant new growth opportunity for Saatchi art as it expands the audience of an offline fair considerably as we introduce fair artist not just the 12 to 15000 attendees in the physical world for a single fair, but virtual attendees from across the globe at the same time.
On line studios is paving the way for a significant new digital event strategy for 2021, peering virtual and offline programming that can touch a global audience.
Societysix group growth accelerated in Q3 with revenue up 127% driven by 155% growth in the U.S. and 60% growth internationally.
Q3 was another record quarter for new customer additions.
Societysix group GTV increased 121% and up 21% from Q2, driven by 149% growth in us direct to consumer year over year.
The brand saw a broad based strength with over 150% growth in home decor and over 500% growth in outdoor and lifestyle.
B to be delivered its strongest quarter ever with 48% year over year growth in GTB on the back of an especially strong drop ship retail channel highlighted by retail partnerships with Nordstrom and urban Outfitters and the recent launch of new marketplace Walmart plus.
Profound changes in consumer behavior that have resulted from the pandemic, including more nesting as a result of stay at home restrictions are pulling forward substantial ecommerce penetration gains.
As states and markets have reopened growth rates remained strong and customer satisfaction remains high suggesting consumer changes are here to stay.
Beyond line home goods category is a clear winner.
We believe the Societysix model is uniquely positioned to prosper in this rapidly changing retail landscape for those who are new to the leaf group story. It is worth taking a minute to underscore the key tenets of the Societysix model.
Personalize designed for shopping.
More than 70 premium made to order products available with 75% plus of GTV in the home decor and wall art category.
Two sided marketplace, a community of 400000 artists and a global customer base no.
No inventory risk a global fulfillment network.
Asset light negative working capital.
After the investments we made in 2019 and into early 2020 and on the heels of a record breaking Q2 and Q3. The overall societysix GTV flywheel is strengthening significantly setting the brand up for strong sustainable growth over the next several years.
In Q3, our artist community continued to expand at a strong pace with close to 400000 artists and the platform.
Driven by a 127% increase in society six group revenue and a 13% increase in Saatchi Art group revenue, partially offset by a 10% decrease in media revenue.
Society six group revenue increased 127% to 43.6 million Society six group G. T V increased 121% year over year, driven by 149% growth in U S direct to consumer and 56% and International Society, six B to B G T V.
Be increased 48% year over a year.
Despite the cancellation of all in person art fairs, which impacted Q3 revenue by 1.5 million a year over year basis, Saatchi Art group revenue increased 13% to 4.7 million driven by 68% revenue growth Versace, our online and recently launched the other art Fair online studios.
Saatchi Art online G. T V increased 77% year over year, driven by an increase in transactions, partially offset by a decrease in average order value.
In Q3 media revenue decreased 10% to 15 million as compared to 16.7 million for the same period. In 2019. This decrease was primarily attributable to a decrease in traffic partially offset by an increase in our P V and by revenue growth for only in your state and hunker.
As a reminder, as of April 25th 2020, we are no longer including visits to the sites migrated to Hurst as part of the hearse transaction, which was announced on April 28th 2020, and Q3 on a pro forma basis after giving effect to the Hearst transaction visits decreased by 22%.
461 million from 590 million in the same period in 2019, primarily driven by live strong as we shift our focus from broad based health information to fitness and nutrition. This editorial in brand shift set us up for a return to growth in 2021.
In Q3 R. P V on a pro forma basis increased by 14% to $32.41.
From $28.32 in the same period in 2019, driven by improving direct sales.
Starting in Q3 Twenty-twenty in connection with our segment change, we're providing segment operating contribution separately for both of our marketplace brands Q.
Q3, 20 twenties segment operating contribution for Society six group increased 2.7 million from Q3, 2019 to 3.8 million or 8.6% of revenue versus $1.1 million and the prior year period due to strong transaction growth.
Saatchi Art group segment operating contribution in Q3, Twenty-twenty improved point 2 million too negative point 1 million from negative point 3 million in the prior year period due to strong online transaction growth, partially offset by operating losses at the other art Fair as Society, six group and Saatchi Art Group <unk>.
10, you to scale, we expect incremental margin to be within the 15% to 20% range.
Media segment operating contribution for Q3, 2020 decreased 8% year over year to 6.1 million or 40.9% of media revenue driven by the decline in revenue.
This strong contribution margin demonstrates our media businesses resilient profitability against the headwinds generated by COVID-19, as we indicated in our longterm segment operating contribution margin side of our IR deck, we expect media margins to be in the 35% to 40% range going forward and we'll look to reinvest.
Margin upside into content and drive new revenue sources, including video in affiliate Commerce.
In Q3, Twenty-twenty strategic shared services in corporate overhead was 7.2 million, which includes point 5 million an activist related expenses, including fees of legal financial and other advisors, representing 11.4% of revenue down from 17.9% of revenue in Q3 2019.
Strategic shared services include services related to marketing business development product development created software engineering and information systems and are critical to driving growth and leverage in our brands, including our organically built hunker brand and only in your state, which was acquired in February 2019, which we rapidly scaled revenue.
[noise] threefold.
Our strategic shared services in corporate overhead categories are primarily fixed and we expect them to continue to decrease as a percentage of revenue.
Q3, 2020, adjusted EBITDA was 2.6 million, reflecting an improvement of 2.3 million year over year.
In Q3, 2020, we incurred cost related to the activist of point $5 million, including fees of legal financial and other advisors. As a reminder, in queue to Twenty-twenty, we had $1.5 million in cost savings implemented in April which include a temporary salary cuts of our executive team salary direct workforce and.
[noise] compensation cuts in deferrals of compensation for our independent directors.
All salary and compensation reductions were restored to prior levels in Lake you to an early Q3.
Q3, Twenty-twenty Cashflow is provided by operations was 2.9 million compared to $4.1 million and the prior year period.
The decrease in operating cash flow is primarily due to working capital timing, including the increase in accounts receivable tied you improvement in media direct sales throughout Q3 and deferred revenue attributable to our significant growth for society six group, partially offset by improved operating performance.
Q3, 2020th free cash flow was point 9 million or 1.4 million decrease compared to free cash flow of $2.3 million in Q3 2019.
On a nine month basis ended September 30th 2020, operating Cashflow improved 15.7 million and free cash flow improved 15.4 million on a year over year basis.
At the end of Q3, we had $33 million in cash with a that balance of 11.1 million with 4 million drawn on a revolving credit facility and 7.1 million related to the paycheck protection program alone.
R Q3 performance highlighted by strong top line growth and healthy flow throughs provides another step towards our previously established 20 twenty-two targets of more than $250 million in revenue and 20 million and adjusted EBITDA, We expect that selective strategic tuck in.
<unk> will be additive to these targets.
With that summary, we are now ready to take your questions. Operator, Please open the line.
As a reminder to ask the question Press Star one on your telephone with by your question.
<unk>.
Oh, Thank you my name Ross.
Our first question comes from.
Alright.
Your mind is open.
Great. Thanks for taking my question and I appreciate additional disclosures.
First I wanted to ask you is that you highlighted racket number of new customers boat and keeps you in Q3 and that as well as strong repatriate is there anything else in the customer purchasing behavior that you have seen that sort of indicate high L. T. B for this new a cohort.
And secondly have you seen any changes to a customer demographic profile since the pandemic started.
Hey, Maria Sean.
The question, Yeah, I think with that influx of new customers one of the things we've been very very hard hearted bye.
Really really high customer satisfaction scores as we called out.
That improvement and retention of 30% year over here, which is really a consequences product quality overall quality of the experience and da up as much as we are from a volume perspective speaks very well again to that service quality, we feel really really confident about being able to extend that overtime.
Got it and that I'm talking to you at the platform continues to grow nicely.
No I think increased take right, they're a little bit more than two years ago. How do you think about your setup take right now relative to the value of the platform.
The valid that department is providing especially compared to sort of what traditional galleries up doing out there and that sort of especially now given the lodge a customer base.
So when we watched that very closely Marie I should point out a couple of years back we actually increase to take right.
We've talked about before traditional galleries are typically 50, 50 split or sometimes later.
The gallerist so of artists have always been very very happy with the value that they get at Sochi are from that commission perspective, one of the things we always look at as we increase the value of providing to that community.
Does it take right reflect the values that we're creating in providing for them and it's something will review on an ongoing basis, but I think it does represent an opportunity as we provide more and more value for artists. We still have an awful lot of room to go.
Relative to what they would get from a traditional gallery number one number two that traditional gallery model.
Having a real challenge is not only the pandemic, but even prior to that.
Effectively with limited wall space in rising Reds, and so we think we're only going to expand on the differentiation, we provide and we'll certainly look at take right in the context of the overall value proposition is no.
Got it and that Sean you highlight it set off continued momentum for our societies takes them Star chart and I'm from immediate Trent here in the quota I know last quarter, you shared with US friends by month any numbers you can set up here with us around trying to find the quota.
We're we're.
We're not sharing any numbers, we did say no october's continues to be show the strong momentum that we've seen.
That's true on the marketplace in the media side I think that's probably about where we are right now with respect to what we're saying, but we're very very happy with the started before.
Ah got it thank you for the color.
Our next question comes from Jason Prior with your line is open.
Alright. Thank you have a good afternoon, good job on the corner guys.
<unk>, Sean you gave some some great incremental color on media that we don't normally hear from you. So naturally I'm forced to ask for more color. Just wanted to see if you can give any more detail on the cadence of what you're seeing on your media properties over the course of the last six months and what what.
I'm trying to triangulate is how much of the revenue drag that we've been see is related to the editorial changes you've made to live strong verses kind of what is the appropriate type of growth rates that you're seeing on the other businesses that are being influenced by those changes.
Yeah. So so substantially the media traffic has been impacted by that editorial shifted withdrawing as we've said we moved away from that broad based health primarily.
Illness related cause and really focused on fitness and nutrition, we do expect to return to growth in 2021, we actually expect that for all of the premium brands. We've had good healthy growth well and good and only in your state and the other thing I would point out it's not just the editorial ship but.
This has been a very noisy your overall for any publisher when you think about the news cycle. So.
The knock on effects of the financial markets, you have the protests and the social social justice movements and a highly charged political season, and all of those things off and on and pre dominated the news cycle and so for lifestyle publishers. There is no question from time to time audience.
Has been diverted and now we're in fantastic categories, and we know as this world simmers down a bit that we're in the right categories to really get back to sustainable growth and media overall, but it has been really noisy year in multiple places where that new cycle is tender.
To predominate and steal share from People's categories of passion on a sporadic basis.
Gotcha. Another one for me just on the mobile experienced and you cited this a little bit in the shareholder letter curious the progression over the years. We've seen you guys moved from a desktop environment to a mobile environment and then now I think we're in the midst of a little bit of.
Browser to mobile App type of environment. So wondering if you can kind of handicapped where we're at in that progression and if you see any differences in consumer behavior between consumers that come in on a browser vs on an app.
Yeah as you know we've got a cross the Rubicon north of 50% awhile back in terms of visits across leave group for mobile to desktop.
As purchasers follow.
Really Jason with the way, we look at it as we think about the nature of the particular experience, we're offering and then try to think through the best way to offer that almost regardless of channels. So we first develop view in the room. For example in Sochi are on the phone in the context of the App because frankly.
At the time, the only way to do it well.
The technology as the technology's evolved doing that with the mobile web experience, where generally speaking people are spending much more time, unless it's one of the utility apps makes perfect sense for us.
I'd say is again this year has been an unusual year to say the least even in terms of of customer behavior. Because broadly speaking people went from many people spending a lotta time.
In office or in transit so the whole so there's been a lot of changes to browsing experience just on the basis of the way People's lives have changed.
We're constantly looking though at how we as our products and services have also take the other art there for example.
Is that goes virtual what's the right way to provide for someone who maybe on the go to consume that experience is it mobile app or mobile web if someone's at home and they want the benefit being able to look at that will look at a large screen or even the television screen.
We need to be able to develop that experience. So we're thinking much more of the modem multimodal IPA everywhere, the customer is and giving them. The best experience relative to that channel than we are concentrating resources only against the channel where we see the largest consumption, although we certainly calibrate the effort and the <unk>.
Best Mint against the largest opportunities proportionate.
And can you can you talk in a little bit more detail on what you're doing right now on the <unk> side of the business. I mean, you mentioned, some big brands like Nordstrom and Walmart, but just wanted to know more on the product offering that you're working with those retailers huh.
Yes.
We've always had tremendous strength in being able to offer them access to on trend or trend forward design and.
In many cases on an exclusive basis, so the differentiation with respect to design and giving them a unique product and a dropship environment has been a huge huge advantage and unlocked for us and we expect those trends to continue fundamentally speaking all of traditional retail as being.
Disrupted before our very eyes, and the ability to provide custom just in time well differentiated inventory.
Two big traditional retailers is an area, where we can absolutely thrive because we have the community we've got the products and we can execute very.
Very very quickly to meet their needs and the landscape, it's changing very very quickly and beyond the pace that historically, they've been able to adapter.
Okay last one for me and I'll hop back in the queue, but wanted to get some perspective from you as you look forward into the holiday season in terms of your your marketplace business I mean, it seems like the expectations are that retail sales will be less black Friday, and cyber Monday centric.
So I wanted to get your opinion on that and then any expectations you have on what the promotional environment might look like.
Yeah, I think first and foremost that this has been going on.
Widely and broadly discussed.
People have started the promotions earlier in the category earlier in the year right earlier in the calendar year, So really queue for as early queue for the beginning of the holiday promotional season and much of that I think is driven by uncertainty, but also recognizing the consumers or online and responding inviting so.
I think it's going to be an elongated.
That said I still think those big moment. This days are going to continue to be there maybe slightly less concentrated one.
One of the things I feel good about even beyond the consumer attitude and resilience is the fact that the entire supply chain effectively has had six or seven months to prepare for Pete volumes and they have to start from really a cold start back in late March early April and so supply chain.
Resilience is actually something that I would continue to expect to see because the last six or seven months in many ways has been a training exercise for peak holiday season, and our vendor network has been very very resilient every step of the way.
Great appreciate it all the colors around thank you. Thanks.
Thanks, Jason Bridget.
There are no further questions at this time.
Thursday's Conference call you may now disconnect.
[music].
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