Marin Software Inc (MRIN) 2013 Q4 法說會逐字稿

Greetings, and welcome to the Marin Software fourth-quarter 2013 financial results conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Greg Kleiner, Investor Relations for Marin Software. Thank you. You may now begin.

Thank you. Good afternoon, everyone, and welcome to Marin Software's 2013 fourth-quarter and year-end earnings conference call. Joining me today are Chris Lien, Marin's founder and CEO, and John Kaelle, Marin's EVP and Chief Financial Officer.

By now you should have received a copy of our earnings release, which crossed the wire approximately one hour ago. If you need a copy of the release, please go to Investor.MarinSoftware.com to find an electronic version. All participants are advised that the audio of this conference call is being recorded for playback purposes, and that a recording of this call will be made available on the Investor Relations section of our website within a few hours.

Before we begin, I'd like to note that our discussions today will include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include statements about our business outlook and strategy, and statements about our historical results that may suggest trends for our business.

We make these statements as of February 11th, 2014 and disclaim any duty to update them. For more information regarding these and other risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as the risks relating to our business in general, we refer you to the section entitled Risk Factors in our more recent report on Form 10-Q and our other filings with the SEC.

This presentation contains certain financial performance measures that are different from the financial measures calculated in accordance with GAAP and may be different from calculations or measures made by other companies. A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our fourth-quarter 2013 earnings press release. With that, let me turn the call over to Chris.

Thank you. Good afternoon and welcome to everyone on the call today.

We closed out 2013 on a high note, posting record results that were above our guidance on both the top and bottom line, as we have done consistently since our IPO in March of last year. Revenue for the quarter came in at $21.8 million, up 28% year over year.

We served 673 active advertisers globally, up from 531 in the fourth quarter of last year and 610 in the third quarter of this year. I also am pleased to announce as of year-end 2013, our customers used our platform to manage $6 billion of annualized ad spend worldwide, another first in our category, and reinforcing Marin's leading position as the most widely used, independent, revenue acquisition management platform worldwide.

As digital advertising grows increasingly fragmented and complicated, leading advertisers continue to look for platform providers such as Marin to increase the effectiveness of their advertising dollars. The ability to seamlessly measure, manage, and optimize digital advertising spend and scale, across a wide variety of channels, publishers, and devices, is one of our primary differentiators. This quarter's performance was further evidence of why leading advertisers continue to turn to Marin to help them manage their digital advertising programs.

We also saw the continuation of several of the trends we spoke about last quarter in mobile and social, along with the retail vertical. Spending targeted at the mobile channel continues to grow, now accounting for a percentage of spend through our platform of over 25%.

As you will recall, at the end of July 2013, Google debuted its enhanced campaign functionality, which enabled advertisers to set separate bids for desktop and mobile ad placements. Marin's platform has been in the forefront of supporting this advanced functionality, to enable our customers to drive a maximum advertising impact from their campaigns.

Social continues to increase share as well within our platform. Spend through Facebook is the primary driver of this, and our efforts to provide functionality in newsfeed ads, mobile, ad rotation, and customer audience targeting have helped to drive our success in this emerging area.

While still small as an overall percentage of the mix, total Facebook spend managed on our platform in Q4 grew at a high rate, up 51% from Q3. Support for Twitter remains on track for launch in the first half of the year, and we expect will drive further growth in the future.

And I should mention in Q4, which is the strongest quarter for retailers, Marin furthered our capabilities supporting shopping apps by equipping retailers with tools that combine scale, transparency, and automation. From January through December 2013, retail advertisers increased spend on product listing ads, or PLAs, by nearly 300%. By December 2013, on average, retailers were allocating 23% of their paid search budget towards PLAs, a 92% increase over January 2013.

Marin provides a comprehensive Google PLA and Bing product ad solution that enables marketers to efficiently create and edit campaigns, generate reports that deliver valuable insight into shopping ad performance, and optimize product target bids to maximize revenue. Through our direct sales force and agency partners, we added a number of top global brands to our customer roster during the quarter.

Let me also walk through a few highlighted wins. We were proud to add Major League Baseball Advanced Media, the internet and interactive branch of Major League Baseball, to our customer roster during the quarter. Responding to our platform's ability for easy customization of reports, and our simple workflow for managing campaigns at scale, MLB Advanced Media chose Marin for our automation advantage and ability to manage massive campaigns. Our platform's simple integration with the sports league's broader digital strategy was also a key factor, as they are counting on Marin for driving more time savings and superior ROI across a wide range of their marketing efforts.

The second win I'd like to highlight is with a leading global investment bank. The bank and their agency selected Marin for many reasons, with the primary attraction being our platform's open architecture and unique ability to easily integrate data from disparate sources.

By combining the data from other publishers, channels and their analytics platform, the bank is able to connect reporting and insights across media. And as an international advertiser, the team was also drawn to Marin's ability to track, measure, and report on international brand campaigns and brand terms across countries.

We also added Waste Management, the largest environmental solutions provider in North America, to our customer ranks in the fourth quarter. Waste Management selected Marin to gain more visibility and control over their advertising data and decision-making.

For example, a majority of Waste Management conversions takes place offline. Marin's proven integration with third-party revenue capture systems, like hall tracking, enables Waste Management to more accurately identify and optimize the factors driving their business. Marin's path-to-conversion reporting and click attribution help Waste Management understand all clicks leading to a purchase, thereby helping them shape their attribution modeling and ad spend for better ROI.

We also remain pleased with the growth of our international business. As a highlight in the quarter, we added the Admiral Group, one of the largest car insurance providers in the UK. Marin's open stack position was a key driver in the Admiral Group selection.

Our multi-channel open platform approach enables them to build a large scale digital marketing program with Marin as the center piece. Now with an enhanced capacity to combine online and offline conversion data with the rich data found in their CRM system, the Admiral Group can fulfill the promise of analytics to action, with Marin as their primary platform.

We also saw several key product launches during the quarter. On last quarter's call, I discussed one of the foundational layers of our product platform, Marin Connect, the data onramp layer that enables our customers to easily incorporate a wide variety of their own sources of data into the Marin platform, to drive better performance from their advertising programs. In the third quarter we extended this into Channel Connect, which, as a reminder, allows digital marketers to gain visibility into their programs across a broad spectrum of marketing channels and non-traditional publisher networks.

In the fourth quarter, we announced two new extensions, Audience Connect and Revenue Connect. Audience Connect brings -- excuse me, audience-based buying to digital marketing campaigns, enabling advertisers to incorporate and bid on search according to audience segments.

This new and highly differentiated offering allows advertisers to create or augment custom audience profiles, based on intent data and search activity, and then applies the profiles to all marketing efforts, including display, video, mobile, and social. By unifying what companies have learned in search with their core customer data, marketers are able to create more cohesive messaging across all of their channels and drive higher returns on their advertising dollars.

For example, going back to my discussion of social a moment ago, using Audience Connect and Marin's Facebook bid optimization tool, marketers are able to incorporate more-refined and relevant targeting information into their Facebook ad campaigns. As part of Audience Connect, we also announced a partnership with BlueKai, an independent fast solution for data management, analysis and activation in marketing, to help further extend the audience data available for this process.

Revenue Connect gives advertisers the power to use business analytics to optimize their digital marketing campaigns and better drive revenue results by providing visibility into offline and online behavior. By combining the full spectrum of customer activity, marketers can gain a better understanding of the true customer lifetime value and invest accordingly. We are working with LiveRamp, a leading data processing and transformation company, to help provide additional offline revenue tracking capabilities in an effort to expand the reach of our platform.

Overall, we had another record year. We increased the amount of spend (technical difficulty) significantly, to over $6 billion on an annualized basis and the diversity of the spend increased as well. We grew our revenue by 30%.

We entered the public markets. We extended the functionality of our platform with 11 releases and added a large number of leading logos to our customer roster. All of this has helped us extend our leadership position in the revenue-aquisition management space, and we have just begun to penetrate this large opportunity.

Digital advertising continues to gain share within the overall advertising budget, as consumers spend more time online and marketers seek to reach them. As we have shared before, the digital advertising market has been, and will remain, highly dynamic.

Global advertisers are looking to trusted partners to help them to best leverage all of the opportunities that digital advertising enables, while helping them to deal with the associated challenges of complexity, fragmentation and scale. Point products focused at individual silos of information and single channels, while still useful in some cases, will begin to lose relevance as platform providers such as Marin are able to combine data from multiple online and offline sources to better create a true picture of customer lifetime value.

Armed with this improved intelligence, Marin's ability to turn the mountain of big data generated by online marketing into actionable business information, marketers can then further optimize how they engage with consumers across a wide variety of channels, devices and publishers.

As the leading independent open enterprise-fast platform for digital marketers, Marin helps turn this dynamic online advertising market to their advantage, driving superior revenue outcomes, time savings and better business insights. We will continue to invest to advance our revenue acquisition management platform to meet the needs of digital marketers worldwide.

So with that, let me turn the call over to John to discuss the financials in more detail.

Thanks, Chris.

As Chris mentioned earlier, revenue for the quarter came in at $21.8 million, up 9% sequentially and 28% year over year. This compares to our guidance of $21.0 million to $21.4 million, with the upside coming from stronger-than-expected ad spend across our platform. We saw a solid performance from both our direct and agency clients once again, with the revenue mix this quarter coming in at 51% from our direct clients and 49% from our agency clients, respectively.

For the full year, the direct-versus-agency revenue mix was 52% and 48%, respectably. Our mix of domestic versus international business was consistent with last quarter, coming in at 67% domestic and 33% international during the quarter. For the full year, it was 68% domestic and 32% international.

In the fourth quarter, we served 673 active advertisers, up 63 sequentially from the third quarter, and 142, or 27%, from the fourth quarter of 2012. As is typical in the fourth quarter, the increase in this metric was also aided by a number of advertisers moving above the $2,000 revenue threshold inherent in our active advertiser definition.

Please keep in mind that as we head into the first quarter, seasonal spending patterns will likely result in a segment of our advertisers moving below this $2,000 revenue level, similar to what we experienced in the first quarter of last year. As we've discussed in the past, there will always be a certain amount of variability from quarter to quarter, caused by advertisers that are still active but moving above and below the $2,000 mark. As a result, the long-term trend in this metric is a better indicator of the growth in our business and customer base.

We saw further progress in extending contract lengths in the fourth quarter. Average contract length for all active enterprise contracts now averages approximately 14 months in duration, versus just over 13 months at the end of Q3, as new and existing customers continue to make longer-term commitments to our platform, based on the significant business value they are receiving.

For 2013, our revenue retention metric came in at 97%. As a reminder, revenue retention tracks revenue from all advertisers in the corresponding prior year period that remain advertisers in the current period and includes growth and spend from retained advertisers, net of turn.

Before moving on to the profit and loss items, I'd like to point out that I will be discussing non-GAAP results going forward unless otherwise stated, which for the fourth quarter of 2013 exclude the total of $1.3 million in stock-based compensation, $53,000 of non-cash expenses from the issuance of warrants, and $370,000 of amortization of capitalized research and development costs, while adding back $650,000 of capitalized R&D costs. A detailed reconciliation of our GAAP results to the non-GAAP results can be found in our earnings release.

In the fourth quarter, gross margins increased to 66%, up from 61% in the fourth quarter of last year, and 63% in the third quarter. This has been an area of focus in our cost model, and we continue to see leverage from our earlier investments in global services, infrastructure, and international expansion. For the year, we reported 62%, up from 60% in 2012.

While we do not plan to provide specific quarterly guidance for our gross profit margins, we do expect gross margins to tick down in the first half of 2014 to the 63% to 64% range, based on some planned hiring. We would expect to show continued annual improvement in this metric once again, with the full-year 2014 gross profit margins in the 65% to 66% range.

Sales and marketing expenses were $11.4 million in Q4, up from $8.8 million in the year-ago period. As we discussed on the last call, the sequential increase here was expected, and driven by some accelerated hiring and expenditures in both the sales and marketing areas.

Research and development expenses came in at $6.0 million in the quarter, compared to $4.6 million in Q4 of last year. We plan to continue investing aggressively in R&D going forward, to further extend the capabilities of our platform. G&A expenses were $3.9 million in Q4, compared to $3.2 million for the year-ago period, with the year-over-year cost increase being driven by public company costs and our continued global expansion.

Operating losses came in at $6.9 million, compared to a loss of $6.4 million in the year-ago period. This was better than our guidance of a loss of $7.4 million to $7.0 million. We will continue to invest in growth in what we believe to be a large and growing market.

Net loss for the quarter was $7.0 million, compared to a loss of $6.6 million in Q4 of last year. Based on a weighted average share count of 32.8 million, this produced a net loss per share of $0.21, compared to our guidance of $0.24 to $0.22. This compares to a loss per share of $0.28 in Q4 of last year, though last year was based on a weighted average share count of 23.3 million.

Our adjusted EBITDA for Q4 was a loss of $5.6 million, compared to $5.5 million in the year-ago period. We ended the year with $104.4 million in cash and cash equivalents, down from $111.7 million at the end of the previous quarter.

Our deferred revenue balance at the end of the quarter was $2.6 million, compared to $2.9 million at the end of the previous quarter. Going forward, as a majority of our customers still pay us one month in arrears, based on their spend on our platform, this figure will be volatile on a quarterly basis, and not indicative of the overall health of our business in any given period.

Now, moving on to guidance, we are initiating guidance for both the first quarter and the full year 2014. For the 2014 calendar year, we expect revenues to range from $95.0 million to $96.6 million, and non-GAAP loss from operations to range from a loss of $30.5 million to a loss of $28.9 million. This should lead to a non-GAAP net loss per share in the range of $0.94 to $0.90, based upon a weighted average share count of 33.4 million.

For the quarter ending March 31, we expect revenues to range from $21.4 million to $21.8 million, as the seasonal decline in spending from our retail clients should lead to revenue being flat to down slightly on a sequential basis in the quarter. We expect non-GAAP loss from operations to range from a loss of $8.9 million to a loss of $8.5 million. This should lead to a non-GAAP net loss per share in the range of $0.28 to $0.26, based upon a weighted average share count of 33.0 million.

So in summary, we were pleased with our results in the fourth quarter, as we again posted results above our guidance. The revenue acquisition management market remains a large and growing opportunity, and which we have just begun to penetrate.

Our investment priorities remain consistent with prior commentary, as we will continue to invest aggressively in growth going forward to capitalize on the growing needs of digital advertisers worldwide. With that I want to thank you for your time, and I'll turn it back over to the Operator to open it up for questions.

Thank you. We'll now be conducting a question-and-answer session.

(Operator Instructions)

Our first question comes from Greg Dunham from Goldman Sachs.

Hi this is Jamison calling for Greg. Congratulations on the quarter. I wondered if you could talk a bit more about how the shift to PLEs will affect your business going forward.

Yes, it's Chris here, and thanks very much. PLEs is consistent with advertisers shifting more ad spend online, PLAs is a new ad format -- image driven advertising on Google and Bing, for those listening in on the call. I would say it's an example of the rise of a sub-channel within paid search and customers, as they have to date, are looking to Marin to manage all of these channels, so search, display, social and mobile, in a single interface so that they can drive better return on their ad spend. So we are taking a leadership position in product listing ads and will continue to invest to support those ads as they grow and become more popular with advertisers, and we've shared that they've already garnered a reasonable penetration of the overall online ad budget, even in their brief history. We see a bright future for PLA advertising.

Okay. Great. Thank you.

Thank you. Our next question comes from Nandan Amladi from Deutsche Bank.

Hi, good afternoon. Thanks for taking my question. So you've launched a bunch of new products in the third and the fourth quarters. How should we judge the contribution from these new product launches as we go through FY14?

Yes, Nandan, it's Chris here. I would say at this point, these are all promising initiatives that we've birthed. We obviously have shared the guidance for the first quarter and for the full year, and that's what we're comfortable committing to at this point. I think you will hear from us as we do the quarterly updates, and as we present at different investor conferences, periodic anecdotal updates on how these new initiatives are trending. Once they reach a certain critical mass we'll begin to break them out, but again, all of them, at this point, are at a level where we're just going to comment on them anecdotally in each of the quarters.

Thank you. And a quick follow-up if I might. Where is your investment emphasis for this year? How much goes to sales versus R&D? Clearly you've launched a bunch of new products in the second half of this past year. Is that product innovation going to be continuing to be a big focus in this year as well?

Sure. So I would say there continue to be two key areas of ongoing investment focus for us. One is in product and product innovation as you highlight, and the other is in an ongoing investment in quota capacity and in investment in the sales team and in what we call the customer success or account management function. So two key areas of investment in product and then in quota capacity.

And a rough split between the two, very similar to last year? A little different?

Nandan, I wouldn't -- it's John. We're not going to give specific guidance on that. I think Chris gives you good context, just in terms of the areas and the continued investment head count. We're going to add quota capacity in the beginning of the year, continue to add there for sales and marketing. With we are, in terms of just leveraging the model, we were pleased with the fourth quarter. Progress was made in the gross profit margin and that's going to be a continued area of focus in 2014, and then we're starting to see leverage in G&A. You saw that number tick down sequentially in the fourth quarter. So I wouldn't want to comment further, just on the split on R&D versus sales and marketing, other than to say that we remain in investment mode in those two areas.

Okay. Thank you.

Thank you. Our next question comes from Brent Thill from UBS.

Good afternoon. Chris, the customer number was in process sequentially in year-over-year. I was curious if you could just share a little more color about where you saw the strength among the enterprise accounts, and also if you could just give us an update on your emerging mid-market group and how that contribution is adding to that number as well?

Yes, Brent, why don't I take a stab at it and then Chris can fill in there. We were pleased with the number this quarter. I think you saw the growth here, like you saw in the fourth quarter of last year. Some of that is certainly fueled by some of those smaller advertisers that crest over that $2,000 mark that's in our definition, and we tried to call some color at it. And what we saw in Q1 of last year is that some of these went back then down underneath that $2,000 mark. But we were very pleased. We saw a good set of ads. And then on the pro, or the mid-market product, we did see an increase in contributions from those advertisers as well. Chris, I don't know if you want to add color to that.

Yes, I think, consistent with our investment in quota capacity, that you would see in the coming quarters ongoing healthy ads and active advertisers, although I do want to reinforce John's comment that we expect to see the same seasonal activity from Q4 to Q1, where the seasonal retail spend down-shifts and then in the first quarter they drop below that $2,000 level. And so those advertisers, although still on the platform, will fall out of that metric.

Okay. And just a quick follow up on some of the contract duration and commitment of the size that you're seeing. I know it's a little hard given the revenue model, but can you just give us a sense of what you're -- what you saw in duration this year versus last year in, effectively, some of the larger contracts? Are you seeing customers step up with bigger up front minimums or is there really no change there?

Yes, I'd say a couple of comments. We -- earlier in the history of the Company, we had biased to shorter-term contracts, and as the Company has matured, we've move to extend contract terms. It hasn't been that in the past we had tried to get longer contracts and advertisers didn't want to do that. In fact, earlier in the life of the Company, advertisers wanted longer contracts than we were willing to commit to. So I would say we're reaching a good rhythm right now with both our new accounts and our renewals, where we're able to achieve contract length extensions, or durations, over a year, and in many cases two years.

And then the other comment on the contract minimums, generally we've targeted having a minimum at about 50% of the underlying expected monthly recurring revenue. I would say in general that those minimums are kicking up more into the 50% to 70% monthly revenue coverage level, and that has to do primarily when we're doing renewals, where we have a pattern of activity with that advertiser and therefore the advertiser is comfortable making a greater commitment for the minimum.

Great. Thanks.

(Operator Instructions)

Our next question comes from Tom Roderick from Stifel.

Hi gentlemen, good afternoon. So wanted to dive in a little bit more on the AUM figure. The $6 billion number was -- it seemed like quite a nice surprise, particularly given that you were at $5 billion just entering September. So it really does set a point to the seasonality you've been talking to. Can you walk us through some of the dynamics that you saw within that Q4 seasonality from a spending pattern standpoint? And then, how you think about the seasonality going into Q1, Q2 and basically the linearity that we should think about modeling our own revenue stream for 2014. Thanks.

Sure, Tom. Let me make some comments and then I'll turn it over to John. I would say, consistent with prior years, retail is our largest vertical but it's at the, call it 21%, 20%, 21% level. It does peak in the fourth quarter, and what we see, and you can see it in the guidance that we gave, the first quarter is generally then expected to be in line or slightly down in terms of our sequential progression. At the same time, that retail is our largest vertical and peaks in the fourth quarter, there are other verticals, be it travel, or financial services, or automotive, or continuing education that peak or have their high season at other points in the year. But certainly, to the extent there's seasonality in our business, it is focused in that fourth quarter, due to the meaningful spike that one sees in retail spending, as we all know, around the holiday season.

Chris, were you surprised at all to the extent that the AUM jumped in the fourth quarter?

I wouldn't say we were surprised. I would say that we were pleased. I mean, we have signed a number of large retailers, so prior to 2013 we had Macy's as retailer. We added in the past year L.L. Bean, REI and others, so we continue to gain share in the retail segments. But I wouldn't term it as surprise. I would say that, as expected, retailers spent the majority of their advertising in that fourth quarter to drive those holiday sales and clearly the platform was a beneficiary of that increase in ad spend.

Great. Last question from me. You've set the profitability targets this year to slightly lower loss than what we saw this year. Too early to suggest to us when you might think about turning the corner to a profitable model? Is 2015 a possibility, or is it not on the horizon yet?

Tom, we've talked about 2015 in the back half of the year in terms of an adjusted EBITDA profitability point that we're aiming towards. We've been talking about that for a couple of quarters. That still remains a goal with the model.

That's great. Thank you guys. Nice job.

Thanks.

Thank you. At this time I will turn the call back over to Chris Lien for closing comments.

Okay. I'd like to thank everyone for listening to our call today. We appreciate your support and look forward to seeing you out at the investor conferences we'll be attending in the coming weeks. Thank you.

Thank you. This does conclude today's teleconference, you may disconnect your lines at this time. Thank you for your participation.