Q4 2020 Leaf Group Ltd Earnings Call
Good afternoon, everyone on behalf of leaf group welcome to our conference call I am 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 source are based on our internal data.
After the prepared remarks, we will open up the lines for Q&A you.
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 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 and 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 SEC 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 and the financial tables included at the end of our press release.
Lastly, I would like to remind everyone that todays 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, and welcome to our Q4 2020 earnings call.
Leaf group delivered another excellent quarter of financial results during which we further our mission of building the online brands that consumers love and trust by connecting people to their passions and providing essential information to help them live richer and Fuller lives.
Before we jump into the Q4 highlights I want to take a moment to thank our leaf group team for their tireless work. This past year. This has been a challenging year for all of us and it is through their commitment determination and sacrifice. The we continue to deliver strong performance. Despite the unprecedented volatility of 2020.
Along with discussing our Q4 results, we will share some of the operating highlights of key initiatives that are fueling strong growth across the <unk> group and Saatchi Art group as well as the strong operating contribution for our media group brands.
Q4 revenue increased 44% year over year to $65 million, marking the highest quarterly revenue and seven years and continuing the strong momentum from the prior two quarters.
Q4 revenue growth was driven by strong performance from Society, six group and Saatchi Art group. Both brands also delivered another record quarter of new customers and Q4.
<unk> group revenue increased 95% year over year setting another revenue record for the brands.
Saatchi Art group revenue increased 48% year over year, driven by strong online growth and strength and hospitality, which more than offset the cancellation and postponement of the other art fairs and live events and Q4.
Q4 media group revenue decreased 17%, partially due to election related softness and the overall impact of of volatile macro news cycle and our lifestyle brands.
The media group segment contribution margin remained strong at 44% underscoring the resilience of our media portfolio.
Q4, adjusted EBITDA was $1 $7 million of $1 9 million improvement year over year.
Over the past four years, we have dramatically transformed the company from of primarily content light high volume digital publisher to a diverse portfolio of high quality brands and key lifestyle categories.
Since 2016, we nearly doubled revenue from $113 million to $212 million and 2020, all while significantly improving the bottom line from an adjusted EBITDA loss of $15 million and 2016 to positive adjusted EBITDA of $1 million and 2020.
Over the past four years side. The six group has delivered significant growth increasing revenue from roughly $60 million and 2000 $16 million to $138 million and 2020, our strategy of deepening the brand's catalog of home decor products differentiated it from many of its competitors, while positioning society of <unk>.
And in emerging marketplace leader and online home decor.
Society six has grown its product assortment from 12 products at the time of acquisition to more than 75 premium products and 2020.
Recent improvements and the user experience combined with the brands high quality made to order products featuring of original unique designs have resonated with consumers.
The society six has significantly expanded its global community of independent artists nearly doubling from 218000 artists and 2016 to more than 400000 artists at the end of 2020.
With the acquisition of deny designs and 2017 the society six brands has quickly grown its BBB channel developing deep relationships with retailers, such as Nordstrom way fair target and Walmart and hospitality brands, such as Springhill suites by Marriott.
Saatchi Art was founded on a vision of democratizing the art World for both artist and art buyers alike by providing transparency around pricing and an online platform, where emerging artists and showcase their work.
Saatchi Art group has delivered impressive growth expanding from 74000 artists and 2016 to more than 115000 artists and 2020 and growing revenue from $6 $3 million and 2016 to $17 $1 million and 2020.
Saatchi Art group delivered $39 million and GTA V and 2020.
And 2016, we acquired the other art fair merging of real world's fair business with Saatchi Art's Global online marketplace now with the art world experiencing significant disruption following the closure of brick and mortar galleries and an accelerated shift online we are well positioned to capitalize on this increased demand for online art sales.
And 2018, Saatchi art launched its hospitality trade business, creating and new and fast growing sales channel that has quickly established relationships with some of the world's most recognized hospitality brands, including the four seasons and the dream of hotels.
Our digital media business has undergone a similar transformation over the course of the past for years, our efforts have focused on acquiring and growing brands and key high passion categories, and we've worked tirelessly to expand and raise the profile of each of our premium media properties.
And 2017, we launched hunker to fill a void and online home design that at the time, mainly focused on ultra affluent or low budget DIY.
<unk> fresh and approachable perspective, and interior design quickly connected with audiences and has now visited by millions of consumers every month.
And 2018, we acquired well and good significantly deepening our position and the fitness and wellness category, while also expanding our direct sales capabilities.
This past month, well and good launched the dedicated e-commerce shop, where consumers can purchase the beauty and wellness products loved by our editors.
Waiting of new revenue stream for the brand.
We have long believed and the significant opportunity presented by the marriage of content and Commerce and we are excited by this new well and good adventure.
In February 2019, we acquired only and your state and of quickly scale. The business further demonstrating the leverage and scalability of our proprietary media technology platform.
Alongside organically growing and acquiring new brands to expand the portfolio. We have also strategically divested non core assets, including the $39 million sale of cracked and 2016 and the sale of of content library to publishing partner Hurst for $9 $5 million. This past spring.
On top of the strong financial results. We delivered in Q4, our teams made significant platform improvements introduced new products and established exciting new partnerships to expand our brand awareness throughout 2020.
Within our home Art and design category Society, six launched 12, new products and 2020, including a refresh of our tech suite.
Society, six made significant improvements to the platform, including enhancements the checkout mobile optimization, which helped fuel improvements and conversion rates of alongside robust consumer demand.
Saatchi art celebrated its 10th anniversary in 2020 remaining true to the brands roots as the market innovator Saatchi art launched a new augmented reality tool across mobile web and focused on multi layered marketing campaigns to drive brand awareness.
Despite the challenging year for digital publishers Hunker delivered stable revenue and 2020 and expanded its relationship with Blue chip advertisers such as Walmart.
Within our fitness and wellness category, well and good as focused on growing audience, and diversifying traffic and revenue and 2020 and expanding its commerce offerings and.
In Q for Livestrong Dot com largely completed its multi year editorial transformation trimming the site from 94000 articles and 2018 to 34000 high quality articles with the deeper focus on fitness.
Only in your state increased traffic by over 20% year over year and 2020, despite of disruptive year for travel and tourism by December 2020, only and your state reached approximately $9 5 million unique monthly visitors ranking as the third largest travel and information site. According to Comscore.
As the world emerges from the pandemic the online home goods category as a clear winner, we operate and a 50 billion dollar online market and have room for significant growth.
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Thank you for calling me I have the name on the conference call in July.
Yes, Ma'am, hi, I'm here for the leaf group earnings call.
Thank you and May I have your first and last name's Lee.
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Yes first name is Bianca Lee I a N C a.
The last name S S for Sierra a Y O N November.
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On a financial result.
Thank you.
Resolve Q4 revenue increased.
<unk> spent year over year.
Yeah.
<unk> dollars 1 million to $65 million driven by a 95% increase in society six group revenue and a 48% increase in Saatchi Art group revenue, partially offset by a 17% decrease in media group revenue.
Society, six group revenue increased 95% year over year to $43 7 million.
Society six group G TV increased 103% year over year, driven by 124% growth in U S direct to consumer G television and 50% in international.
Society, six b to B G. T V increased 44% year over year as Shawn previously mentioned, we acquired record new customers in Q4 with new D to see customer growth of 14% from the previous record in Q3 2020, partially driven by.
<unk> and customer acquisition and retention during the 'twenty 'twenty holiday season.
Saatchi Art group revenue increased 48% year over year to $5 7 million driven by 123% growth in Saatchi art online revenue, including an increase of $1 1 million year over year for the hospitality channel offset by the cancellation or postponement of all.
The other art fair live fares scheduled in Q4 due to the pandemic, which negatively impacted revenue by $1 3 million.
Saatchi Art online G television, including the recently launched the other art Fair online studios increased 50% year over year, driven by a 62% increase in the number of transactions, partially offset by an 8% decrease in average order value.
In Q4 media group revenue decreased 17% year over year to $15 6 million and increased 4% from Q3 2020.
As a reminder, as of April 25th Twenty-twenty, we are no longer including visits to the sites migrated to Hurst as part of the hearse transaction, which was announced on April 28 2020.
In Q4 on a pro forma basis, after giving effect to the Hearst transaction visits decreased by 23% to $410 million from $530 million in the same period in 2019 as traffic to our media group lifestyle brands were adversely affected by election related softness in the <unk>.
Overall impact of a volatile macro news cycle.
In Q4, our P V on a pro forma basis increased by 7% to $38.02 from $35.55 in the same period in 2019, driven by a higher mix of revenue from premium sites, such as hunker and well and good.
In Q4, 2020 strategic shared services and corporate overhead was $6 2 million, which includes 0.4 million an activist related expenses, including fees of legal and other advisors, representing 9.5% of revenue down from 17% of revenue in Q4 'twenty.
<unk> 19 for the full year strategic shared services and corporate overhead was $27 1 million, which includes 2.0 million an activist and strategic review related expenses, including fees of legal financial and other advisors, representing 12, 8% of revenue down from 19.
0.4% of revenue in 2019.
Our strategic shared services and corporate overhead categories are primarily fixed and we expect them to continue to decrease as a percentage of revenue.
Q4, 2000, Twenty's segment operating contribution for Society six group improved 0.5 million from Q4, 2019 to zero point $9 million or 2% of society six group revenue versus 0.4 million in the prior year period due to strong transaction growth.
Partially offset by approximately 2 million in incremental reinvestments in customer acquisition and retention in Q4, including promotions free shipping and peg marketing spend through an early and extended holiday shopping season.
We are seeing these investments pay off already in Q1, 2021 with.
With strong repeat customer growth and a return of gross margin to historical levels in 'twenty 'twenty Society six group delivered incremental segment operating margins of 12, 2% versus our annual target range of 15% to 20% due to the previously mentioned investment in new customer acquisition and retention in Q.
For which we believe will provide for stronger growth heading into 2021.
As we indicated in our recent January G. T V release Society, six momentum continued with 125% G. TV growth in January driven by strong new and repeat customer growth.
Saatchi Art group segment operating contribution in Q4, 2020 improved $1 million to point 2 million from negative 0.8 million in the prior year period due to strong online transaction growth, partially offset by operating losses at the other art fair.
Media Group segment operating contribution for Q4, 'twenty 'twenty decreased 12% year over year to $6 9 million or 44.1% of media group revenue driven by the decline in revenue.
This strong contribution margin demonstrates our media businesses resilience in light of the headwinds generated by election related softness and the impact of a volatile macro news cycle.
Q4, 2020, adjusted EBITDA was 1.7 million, reflecting an improvement of $1 9 million year over year.
For the full year, adjusted EBITDA was 1.0 million and $8 5 million improvement year over year, resulting in an overall, 15% incremental flow through rate.
In Q4, 'twenty 'twenty, we incurred cost related to the activist campaign of 0.4 million, including fees of legal and other advisors and costs related to the activist and strategic review of $2 million on a full year basis.
Q4, 'twenty 'twenty cash flow was provided by operations was $4 4 million compared to $4 5 million in the prior year period, Q4, 'twenty 'twenty free cash flow was $2 3 million compared to free cash flow of $2 6 million in Q4 2019 for the full year operating cash flow in.
<unk> $15.6 million and free cash flow improved $15 million on a year over year basis.
As Sean described earlier, we have delivered on our mission of building high performing digital first brands over the last four years.
In that time, we increased our revenue close to $100 million almost doubling the business and delivered incremental flow throughs of $16 million or 16% of incremental revenue.
We finished the year with a strong balance sheet with $67 1 million in cash and a debt balance of $11.4 million with 4 million drawn on our revolving credit facility and a 7.1 million Paycheck protection program loan.
We continue to execute on our mission of building digital first brands in high passion categories and have delivered three consecutive quarters of strong operating results.
Based on the combination of growth catalysts across our portfolio and attractive unit economics, we are confident in our ability to drive continued strong performance.
With respect to our 'twenty 'twenty two targets. We are pacing ahead of our 250 million revenue target.
We are confident we will exceed our revenue target or lack of near term visibility as we begin to emerge from the pandemic limits our ability to provide more specific detail at this time.
We are also confident that our business has the ability to generate $20 million in 'twenty 'twenty two adjusted EBITDA on.
Although given how much our world has changed and how much opportunity, we see to accelerate growth by investing further in our business. We may elect to reinvest more aggressively in the business as our near term visibility improves.
Seven weeks into Q1, 2021.
Our business continues to perform well overall in February today Society. Six group has continued on a similar growth trajectory as indicated in our January Society six G. T V Press release Saatchi Art group continues to deliver strong year over year growth, we are seeing signs of.
<unk> and our media business, so far in Q1, and we expect media to return to year over year growth in 2021.
With that summary, we're now ready to take your questions. Operator, Please open the line.
Certainly your first question comes from the line of Maria <unk> with Canaccord. Your line is open.
Hello, everyone. Congrats on strong results on that thanks for the question.
So you mentioned the possibility of that.
Isn't it.
And you're coming off a strong <unk>.
What are some areas, where you see the need for more investment.
Acquisition brand.
Hi.
And that now with a higher revenue run rate how are you thinking about the balance between investing in.
Uhm.
Hey, rich thanks for the question Great to hear your voice.
We see significant opportunity to continue to invest in our businesses why don't I I'll hit the high points really for each segment on the society six side, a lot more opportunity to invest in acquisition and retention.
Also seen opportunity to continue to expand our physical product selection and then from a platform perspective for both artists and consumers. There is significant work, we can do to improve that experience and really drive less.
Average through the business on the artist side improved tools.
So that they can manage their business as they create art and they can become even much stronger marketers.
The art to day create and on the consumer side, a lot of mobile web and mobile App work, which we believe has significant opportunity for us to continue to drive growth for the business.
On the Saatchi art side really scaling out of those virtual fairs with more immersive Richard technology.
That really becomes both in real life and in the virtual world really really strong offering for us So more investment there and then on the media side is that as the media segment recovers doing more work on commerce related initiatives like the well at good shop that we launched earlier.
For this year from a standpoint of balancing growth and profitability. We are at the way that we think about it is.
Even with these opportunities for investment in a very disciplined approach, where we look at that that target annual incremental.
Flow through in that 15% range is how we're going to evaluate the level of investment and so again looking at it on an annual basis delivering that consistent incremental flow through to what we have achieved from 2016 to 2020 and also from 2019 to 2020 to help guide us as we go.
That's very helpful, Sean and maybe related to that now that you shared standalone financials without for society makes sense are charged for a couple of quarters can you maybe talk about what kind of margins do you expect to achieve for both brands set up longer term and which one do you think can be more per.
<unk> sort of given different revenue models and.
Any color on what kind of revenue run rate is needed in order to set up start generating meaningful operating leverage for those two brands.
Yes, great Great question Maria as you know the margin structures of the bid.
<unk> are fundamentally different principally because the Saatchi art business is a pure marketplace not burdened at all by vendor products cost.
And at the same time, though.
The society six business is very capital efficient and enjoys particularly as a home decor retailer very very healthy margins and so we expect good solid flow throughs for both of those businesses on as they continue to scale and.
And so we don't really compare them to one another as much as we think about their own independent opportunities.
We're still in investment mode with with Saatchi Art, you can kind of see the incremental flow through on that business over years as it approaches profitability and I would say look at the historic flow throughs, we've seen for each of the respective businesses. You can expect to continue in the future on an annualized basis and with further.
Scale, there's probably a real opportunity to improve those margins for each business as we go.
Great. Thanks, so much on.
Thank you.
Your next question comes from the line of Jason <unk> with Craig Hallum. Your line is open.
Alright, Thanks, guys just wanted to talk a little bit about the leverage in the model and I know you called out the potential for making some growth investments if we look at this quarter.
We kind of come up with a run rate of about $2 60 in revenue and 7 million of EBITDA on an absent some of those investments just wanted to see if you can give a little bit more detail on where you expect to see the leverage in the model. If we push that out a couple of years, how you kind of bridge the gap from a $7 million run rate to date on the $20 million a couple.
Years out.
Yeah, I think leaf as demonstrated in our track record Jason.
Clearly delivered 15% incremental flow throughs from.
2016 to 2020 and from 2019 between 'twenty and we feel very comfortable in our ability.
To continue to deliver those and also keep in mind, our media business.
On a challenging 22020 and in that business continues to.
Recovery in 2021.
And delivers meaningful cash flow to our business mix is really important to us.
Got it.
Couple couple of questions and I think these kind of go hand in hand, but.
Wanted to get a little bit more detail on some of the product margin pressure you saw on the quarter and then also wanted to ask about the investments that you made in customer acquisition and whatnot and I think perhaps that was to go go together a little bit but.
Maybe you can unpack both of those if you Ken Bryan.
Yeah. So certainly so as we called out in the prepared remarks, we made $2 million incremental reinvestment in the quarter on customer acquisition acquisition and retention and that really is covered in three areas, both promoter or I should say in each respectively.
Through promotions free shipping.
And marketing spend and those are dials that we monitor very closely and have channels and customers who respond favorably.
To each of those categories and so as we move through a quarter and we see opportunities to acquire customers profitably, we will turn those dials do invest in them.
And so and we will continue to do so.
Those marketing investments are those from an expense recognition standpoint are those hitting cost of revenue or does any of that stuff flow into opex.
The marketing spend is on Opex.
It is okay. Okay. Thank you and then.
Yes.
Following these investments that you've made right I mean this is all in the name of customer retention and stuff like that so maybe you can kind of compare and contrast, the retention trends that you've seen over the last several months as growth has been accelerating maybe compare that to the steady state.
Retention trends that we saw.
Across 2018 in 2019, I'm trying to get a feel for how much that's changed in these last few months.
As we've disclosed though in both Q3 and Q4, we saw the Q2 cohort perform.
30, a 30% improvement year over year in that retention behavior for that Q2 cohort and we've seen those retention efforts on trends continue into Q1 2021.
As we've talked about and so we're seeing a significant improvement in net retention behavior throughout this year and into 2021.
Okay.
Wanted to squeeze one in on media and again, you're referencing kind of your confidence in returning that to growth and obviously the trends that we've seen in our PV in the last couple of quarters are going to continue to help that but maybe you can just unpack that confidence a little bit I don't know if theres any color you can give on like a property by property basis debt.
<unk> US understand you know, where we've gone through across 2020, and the confidence that those come back in 'twenty one.
So Jason I think the first thing I'd point out is how we got to.
Headline news dominant of.
The year wasn't so lifestyle publishers on lifestyle audience as well.
Definitely felt the impact.
Of that and if you look at our brands their passion brands and in a cycle, which was dominated by incredibly newsworthy stuff in our world highly contentious presidential election on social Justice social protest in a pandemic, you're just not going to get the mind share of which you would get kind of I would say and more.
Temporary at times and so at the same time the categories. We're in are absolutely huge categories, where consumers increasingly are seeking information online and we expect that that attention.
To come back.
And then if you look at individual properties in a world locked down by pandemic a property like only in your state, which has a fantastic future ahead of it isn't going to do well in a world where people are are locked down and not traveling but we certainly expect to return to I guess, new normalcy is the best way to say it.
The other thing that gives us real comfort and recovery of the business as we continue to do work with great high quality advertisers in Q4 for example, Walmart Scotts Bose really really strong brands and so we just feel very good about where our media businesses based on the caliber of leaders and managers we have within it.
The categories that we're in and the success, we're having on the.
The branded sales side, and we know that our categories our categories growth.
Sorry to keep throwing more last questions at you but on there.
That last comment over the last few quarters, we've talked about longer duration commitments on the media side with new brands and whatnot.
Is there any way to handicap, where your media businesses sit today versus a year or two ago in terms of how much of this is more like a I would call a spot market versus how much you have already committed.
Yes.
<unk>.
We'll continue to do Jason So you can get a sense for these brands, particularly a brand like hunker that didnt even exist three years ago. The more work, we do with advertisers and the more we talk about the return of those marquee advertisers probably gives you the best indicator on the brand strength and how well we deliver as a publisher.
Sure.
For those brands that we serve.
I would probably look for more going forward as we give color on those advertisers that have come back on the nature of the work that we're doing with them, but we're certainly heartened by the progress.
If you look at an advertiser like Walmart with hunger, we feel like we're clearly going in the right direction and doing an awful lot of good work for them and that they're very happy with it.
Got it alright, I'll stop there. Thanks for the response guys I appreciate it. Thanks, so much great to hear your voice.
This concludes the Q&A session in the leaf group's fourth quarter 2020 earnings call. We thank you all for your participation you may now disconnect.
Yeah.