Marin Software Inc (MRIN) 2014 Q2 法說會逐字稿

Greetings, and welcome to the second-quarter 2014 financial results conference call.

(Operator Instructions)

As reminder, this conference is being recorded.

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

Thank you.

Good afternoon, everyone, and welcome to Marin Software's second-quarter 2014 earnings conference call. Joining me today are David Yovanno, Marin's Chief Executive Officer; John Kaelle, Marin's EVP and Chief Financial Officer; and Chris Lien, Marin's Founder and Executive Chairman.

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. Call 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 discussion today will include forward-looking statements within the meanings 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 historical results that may suggest trends for our business.

We make these statements as of August 6, 2014, and disclaim any duty to update them. For more information regarding these and other risks or uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as risks relating to our business in general, we refer you to the sections entitled Risk Factors in our most recent report on Form 10-QK, 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 second-quarter 2014 earnings press release.

With that, let me turn the call over to Dave.

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

Since I've now had the role of CEO for a full quarter, I wanted to start today's discussion regarding my plans for the organization, specifically sales, and how we see the Perfect Audience acquisition having a positive impact on our business and strategy moving forward. Starting with the organization, a few weeks ago we announced that Peter Wooster, the former Chief Revenue Officer of Marin, had decided to leave the Company after years of service. Peter had done a good job helping us scale the Company to this point, so we all thank him for his service.

As we look to scale our revenues by meeting more of the digital advertising needs of our prospects and customers, now is also the right time to make a few changes in our sales organization. At a high level, we'll be working to improve both the efficiency and effectiveness of our sales efforts.

We saw some weakness in both our strategic account and agency bookings in the past quarter. In particular, we saw some sales cycles extend and some deals slip out of the quarter as a result. We also encountered some issues with the productivity ramp of some of our recent hires.

As the organization gets larger, we need to improve our ability to both hire and ramp new sales executives effectively. We believe that these issues are self-inflicted and not an indication of the market opportunity we are pursuing, our products or the competitive landscape. We will be working on both the sales and operational processes required to improve our execution and better scale the business in the months ahead.

To ensure our success with these initiatives, I'll be taking a hands-on approach with our go-to-market efforts, and I will also help drive the emerging display part of our business that I will outline in a moment. As part of these changes, I have also promoted Russell Wirth, our Marin Vice President and veteran sales executive, to Senior Vice President of Sales for Americas. He, along with heads of both EMEA and APAC, will report directly to me. We have a strong leadership team in place, and I feel very good about the current team.

The second major initiative underway is our push into the display market with the acquisition we announced in early June of Perfect Audience, of the leading vendor in the display and social retargeting market. For those of you unfamiliar with the term retargeting, it refers to efforts to recapture the traffic driven to website that does not convert during initial visits.

Visual marketers spend significant amounts of money and efforts to bring potential customers to their websites, but typically less than 5% of those prospects convert to actual customers. Display retargeting refers to the efforts to place additional ads in front of those prospects in an effort to pull them back to the advertiser's website and convert them to customers. To that end, search marketing and display retargeting go hand in hand for performance marketers.

Founded in 2012, Perfect Audience was created to help digital marketers solve these problems across both display and social channels. We believe that the combination of our companies is incredibly powerful for a couple of reasons. First, using search-based intent data to power the retargeting engine of these products is a significant differentiator for our combined offerings.

Marin is the leading independent vendor in enterprise search, and we utilize this data at the core of our efforts on the search side of our business. We are now in a position to leverage this same data set to build lists and targetable segments that can be applied to display and social campaigns. Combining these efforts will drive improvements in the effectiveness of these campaigns, along with additional value to customers, by enabling them to run campaigns across these channels in one platform.

Secondly we believe that we are bringing a disruptive new model into the display and social retargeting space. The majority of other established players in the retargeting arena operate a managed service that is essentially a black box that, while effective in delivering performance, lacks the transparency, control, insights and price effectiveness that brands and agencies demand today.

Brands are taking more control of their data, and the supply is rapidly moving to programmatic display, putting pressure on the legacy models to justify the high margins they charge for their managed service. By putting these retargeting tools directly in the hands of marketers and their agencies, we believe that we can remove some of the friction in this market and improve the effectiveness and return on investment for everyone involved.

Reception so far has been quite strong for both customers and prospects. We continue to sign new customers for the Perfect Audience product post-acquisition, and believe that the future is bright for this new product line. We'll be looking to bring this functionality to our existing customer base, as well as -- over the coming quarters. John will discuss the financial impacts to our business shortly.

Let me transition back to some of the highlights for the quarter. Revenue for the second quarter was $23.9 million, up 31% year over year. Absent a contribution of over $300,000 for Perfect Audience, the base business grew 29% year over year. Griffin mobile continues to be a driver for the business, now accounting for just over 30% of the spend through our system, and up from the mid- to high-20%s in Q1.

I'm pleased with the progress we're making in social, though it was a very modest contributor to revenue in Q2. I've had time to assess our product and strategy in this category, and will be dedicating additional resources here to ensure we accelerate our share of social spend in the coming quarters.

On the new business front, we won some outstanding deals with leading brands, but as mentioned earlier, we did not perform as I would've hoped on the new booking side. Through our agency, customer and our public group, we added Morgan Stanley to the Marin platform last quarter.

The flexibility of our architecture allowed Morgan Stanley to easily carry out a complex integration with double-click for advertisers that would have otherwise proven quite challenging for our competitors. Similarly, our ability to capture and track results according to multiple conversion types, such as contact-me-for-infos, appointment requests and site visits, gave Morgan Stanley more accurate and actual insights into the effectiveness of their campaigns.

We were pleased to have been selected by New York Life Insurance after participating in a rigorous selection process. In the end, the strength of our tool set and value-added Marin platform shown through. In particular, our in-depth reporting capabilities and automated bidding features, combined with our easy-to-use interface, drew New York Life to adopt our platform.

We also added Splunk as a new Marin customer. Aside from our queue of bidding tools, Splunk was impressed with our reporting capabilities and the flexibility it gives their team to analyze specific campaigns. In particular, Marin Dimensions allows them to segment and analyze campaign data beyond the constraints of publisher-defined metrics. This allows Splunk to get a clear view of the effectiveness of their campaigns according to their unique business model and needs, as opposed to a one-size-fits-all approach.

In the UK, we added luxury menswear retailer MR PORTER and it's women fashion counterpart, THE OUTNET. The high-end fashion retailer has chosen Marin because of our open architecture. MR PORTER and THE OUTNET plan to build an innovative new marketing technology stack centered on the Marin platform.

They plan to measure, analyze and optimize the profitability of their global search, social and display campaigns, using Marin as their foundation. The flexibility of our platform enables them to use their existing systems to accomplish their goals, as opposed to being forced to change to other tools to satisfy the closed architecture of some of our competitors.

On the product front, a team released a number of important enhancements to our platform during the quarter to help marketers make better use of their data, improve their targeting and do more in less time. We continue to release enhancements beyond the functionality found in the publisher platforms, and deliver value for customers.

We're the first independent digital marketing platform to announce support for Google Remarketing Lists for Search Ads, or RLSA. By combining Marin-enabled first-party audience data with Google RLSA, we can better segment and target customers for the resulting retargeting campaigns. This functionality will also enhance our efforts with Perfect Audience.

We also announced support for Google Shopping Campaigns, the next version of the Google Product Listing Ads, or PLAs. We have driven significant success with PLAs for our customers in the past, and believe the automation and management features we release around shopping campaigns will extend that track record. We can also use the purchase intent data from Shopping Campaigns to help power our new retargeting products.

In social, we added support for management, tracking and bidding on new Facebook ad types, including Shop Now, Learn More, Sign Up, Book Now, and Download. These new ad types often generate higher conversion rates for advertisers.

We also announced a partnership with Channel Factory, a leading video distribution and data platform. As result of this relationship, you will be able to leverage the data from Channel Factory's video advertising efforts in our search and social campaigns, and vice versa. The resulting combination will allow both Firms to optimize campaign performance across a broader set of channels. This integration came out of a Marin Labs effort, a multi-disciplinary team of experts focused on tackling leading-edge issues in digital marketing that we've launched two quarters ago.

In addition, we launched a new relationship with Productsup, a leading provider of cloud-based product data management technology, to help retailers better manage their marketing campaigns based on product feeds and inventory levels. Retailers often struggle dealing with changing inventory and product attributes across thousands, if not millions of products. Through our dynamic campaigns product and the integration of Productsup, marketers can manage and optimize their campaigns as inventory levels fluctuate or new products are introduced.

Overall, we have made some changes to further improve our sales execution, but we continue to make progress against our overall set of strategic initiatives. The acquisition of Perfect Audience has expanded both our product footprint and our market opportunity, as well.

The market is increasingly looking for one platform to serve their needs across multiple channels, publishers and devices. We believe that we have the people, products, partners and customers in place at Marin to create a much larger Company. I will be working to help scale the business and improve our sales execution to best capture the tremendous opportunity in front of us.

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

Thanks, Dave, and good afternoon, everyone.

As Dave mentioned, our Q2 revenue came in at $23.9 million, up 31% year over year, and 5% sequentially. Absent the contribution from Perfect Audience, we produced revenue of $23.5 million, up 29% year over year, and 3% sequentially. This is above our prior guidance of $22.9 million to $23.3 million.

Similar to the last quarter, we saw a balanced performance from both our direct and agency customers, with the mix this quarter coming in at 52% from our direct clients and 48% from our agency clients, respectively. We also saw a small uptick in our effective take rate once again in the second quarter. Our geographic mix of revenue in the quarter was 66% domestic and 34% international.

We served 776 total active advertisers in Q2, with 13 coming from the Perfect Audience acquisition. This was up 72 sequentially from the first quarter of 2014, and 192 or 33% from the second quarter of 2013.

In addition to the contribution from Perfect Audience, the increase in this metric was also helped slightly by a number of advertisers moving above the $2,000 revenue threshold, inherent in our active advertiser metric definition. 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 of our business and customer base.

Contract linked in the quarter for all active enterprise contracts was over 14 months in duration, up slightly from Q1. For the quarter, our revenue retention metric remained above 100%, driven by the strength and spend in related revenues from our advertisers. As a reminder, revenue retention tracks revenue from all advertisers in the corresponding prior-year period that remained advertisers in the current period, and includes growth in spend from retained advertisers net of churn.

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. A detailed reconciliation of our GAAP results to the non-GAAP results can be found in our earnings release.

Gross margins for the second quarter were 66%, consistent with Q1 of this year, and up from 61% in Q2 of last year, as we are seeing continued leverage from our prior investments in the service and support infrastructure. Sales and marketing expenses were $11.5 million for Q2, up from $10 million in the year-ago period. The year-over-year increase was driven largely by higher investments in sales capacity and customer success.

Research and development expenses were $6.7 million for the quarter, compared to $5.5 million in Q2 of last year. This increased spending was driven by our continued efforts to expand the functionality of our platform. G&A expenses were $4.5 million for the quarter, compared to $3.6 million for the year-ago period.

Operating losses came in at $6.8 million for the second quarter, compared to a loss of $8.1 million in Q2 of last year. This was better than our guidance of a loss of $8.7 million to $8.3 million, due to slightly higher revenue and gross margins, along with continued cost optimization efforts across all lines. The acquisition of Perfect Audience had a negligible effect on our operating profitability in the quarter.

Net loss for the quarter was $7.3 million, compared to a loss of $8.4 million in the year-ago period. Based on a weighted average share count of $33.8 million, this produced a net loss per share of $0.22, exceeding our guidance of a loss per share of $0.28 to $0.26. This compares to a loss per share of $0.26 in the second quarter of last year, based on a weighted average share count of 32.2 million.

I would note that we did issue roughly 1.7 million shares in conjunction with the acquisition of Perfect Audience. And the weighted average share count for Q2 included roughly 400,000 additional shares related to the acquisition.

For the quarter, our adjusted EBITDA was a loss of $5.5 million, compared to a loss of $7 million in Q2 of last year. We continue to target breakeven adjusted EBITDA in the second half of 2015.

On the balance sheet, we ended the second quarter with $83.9 million in cash and cash equivalents, compared to $96.1 million at the end of the first quarter. In addition to the cash used for operations during the current quarter, we also spent a total of $4.2 million net for the Perfect Audience acquisition. As we have indicated in the past, we believe we have more than enough cash on the balance sheet to fund us through the second half of 2015 breakeven goal.

Before I move onto guidance, I wanted to discuss expectations for Perfect Audience for the balance of the year. As mentioned earlier, Perfect Audience contributed over $300,000 of revenue, and was roughly breakeven from a non-GAAP operating income point of view for the period in which we owned the company in Q2.

For the second half of the year, we expect Perfect Audience to contribute approximately $2 million to the top line, and have a similar, negligible impact at the operating line. Given the relative size of the Perfect Audience contribution to the total Marin business, we do not plan to break out the financial contributions individually going forward. But we'll continue to report on the progress of our new retargeting display offering.

We are initiating guidance for the third quarter and updating our annual guidance for the full-year 2014, which now includes Perfect Audience. For the quarter ending September 30, we expect revenues to range from $25 million to $25.4 million, and non-GAAP loss from operations is expected to range from a loss of $8.4 million to a loss of $8 million. This should lead to a non-GAAP net loss per share in the range of $0.25 to $0.23, based upon a weighted average share count of 34.9 million.

For the 2014 calendar year, we expect revenues to now range from $98.2 million to $99 million. And non-GAAP loss from operations is expected to range from a loss of $28.8 million to a loss of $28 million. This should lead to a non-GAAP net loss per share in the range of $0.87 to $0.85, based upon a weighted average share count of 34.2 million.

To provide further context on our updated guidance, excluding the contribution from Perfect Audience, we are lowering our expectation for the base business by approximately $1.5 million for the second half of the year to reflect the sales execution issues that Dave discussed earlier. We are assuming that it will take a few quarters to realize the benefits from the initiatives we currently have underway.

That being said, the base business is still growing nicely. Further, we believe the opportunity in the cross-channel ad management market remains significant, and we are very well-positioned to take advantage of it. And the addition of the Perfect Audience team and display and social retargeting offering should only help to improve the integrated cross-channel value we can deliver to marketers 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 will now be conducting a live question-and-answer session.

(Operator Instructions)

Greg Dunham with Goldman Sachs.

Hi, guys, thanks for taking my questions. You have Frank Robinson on for Greg Dunham. To start, David, you listed a number of things that you marked for change, this being 90 days, and from -- they are pushing the display with Perfect Audience, the sales force changes, dedicating more resources to social. How should we think about your prioritizing that going forward? And also, what are some things that have impressed you so far?

Yes, I think the immediate opportunities that I'm focused on -- I have a lot of experience in building and scaling sales organizations. So very much looking forward to digging in day to day in a hands-on approach.

So I've been spending some quality time doing that, especially over the last month or so. And having a lot of fun with that, actually. It's an amazing product, and have had some great client engagements. So I'm bullish on what we can do there.

I think when you combine that with basically a brand-new product that's been brought into the mix, giving us a whole new addressable market to go after, again, in an area that I have a lot of experience in display. And this is all new and innovative. We're using search data to drive better performance in both display and social.

And what has impressed me most is the tremendous opportunity that we've got. I think it's a matter of just ensuring that we've got the right people in place -- I believe we've got the right plan a place already. And it's about heading down execution.

All right. And then looking at the weak new business or bookings in the quarter, were there any consistent things that played out that caused that? And are there any specific steps that you took to address them?

And then secondly, even excluding the new advertisers from Perfect Audience, the 59 new additions, what looks like from my count the second best quarter in history, based on the data I have. So is there any way to give us some indication of whether most of that was just coming from people going back above the [thousand] threshold? Or how do we reconcile that with the comment that new bookings wasn't as you planned?

This is Dave. I can comment on the new bookings trend, and then have John comment on the other metrics. Honestly, I think it's just a matter of there's a number of changes that went on in the organization in Q2.

You've got a new CEO. You've got a change in head of sales, who happens to be the same guy. You've got the integration of the new acquisition.

I think it's a matter of us taking our eye off the ball a little bit in terms of -- the end of quarter is always an important time in terms of closing deals. And it's a matter of just getting back on track in terms of consistency -- monthly deal flow. And just getting the sales management and operations dialed in with some of the reorganization that we've put in place. John, do you want to (multiple speakers) --?

Yes, and Frank, on your question about the ads -- you're correct. If you take out the 13 ads that we talked about from Perfect Audience, it still was a really good and healthy quarter for us in terms of customer ads. I did mention in the script that those advertisers going over the $2,000 threshold -- there was a net add in this quarter.

But I would say it was consistent with what we've seen in past quarters. It wasn't -- it didn't materially adjust the number. So I would just point to it was a good quarter for us for the gross ads.

Thanks, guys.

Nandan Amladi with Deutsche Bank.

I had a bookings question a little bit more. We had another company say similar things, like customers taking a longer time to make decisions. Are you seeing any of that, or what you saw in your quarter was totally all Company-related?

There was -- some cycles were extended. However, our feeling is that it was more self-inflicted, if you will, than anything else. These are deals that are still live in the pipeline that we do expect to close.

But the cycles were extended. We see it as more self-inflicted than a larger market trend for us.

All right, thank you.

Karen Riccio with Wells Fargo Securities.

Hi, thanks a lot. I just wanted to follow up a little bit on some of the sales and marketing changes, and just distribution in general as we go into the back half of the year, and as advertising gets more important towards the end. Is some of the execution -- is this going to result in some additional turnover, where you're going to need to try and find more people to fill up that distribution that you were planning on adding for the rest of the year?

I think we're already through that, frankly. I think that we have been busy filling open headcount. We still have a couple more to go. I think the other factor in the quarter has been just how quickly new individuals that we've added have ramped.

For some of the reasons I was explaining earlier, it did take us a little bit longer to ramp the [quota] capacity-carrying [reps], as opposed to -- point to another factor, that would be it. So I think we're across the heavy lifting in terms of staffing. And it's now about accelerating the ramping of individuals.

I'm less concerned about heading into Q4. I think we've made some really important product enhancements and new releases, specifically around global shopping, for example.

Retail is, I think, our largest vertical of client base; we continue to win business in that category. And I think that's going to help keep us on track for the remainder part of the year in terms of new bookings.

That's great. Just following up on that, you look at some of these new products that you have, and the Facebook mobile app, for example, and with the Perfect Audience. How do you guys feel your market position is on some of the social advertising versus where you were a year ago?

Well, for social specifically, Marin has had a beta product out for some time, and I have a lot of experience in this area with my time at Gigya. I've had an opportunity to dig in and assess the product, the strategy.

We're making some small tweaks to it, allocating some additional resources. I don't think that we've had enough behind it, to be honest.

And so we're making some of those changes organizationally, and we'll have that re-accelerating in terms of our growth, specific in social. Was that where your question was pointed, was just on social?

Yes, that's great. Thank you.

Yes.

(Operator Instructions)

Brent Thill with UBS.

Hi, this is John [Bian] for Brent Thill. Just had two topics to ask about. One, again on the new business activity, that was soft. Could you get into a little bit more detail as to whether that lasted through the quarter, was it more towards the end? And any specific areas, whether it's by geo or customer size, or was it just brought up close?

You know, most of our deal activity does happen towards end-of-quarter. We had thought things were on track throughout the quarter, but you don't realize that really until towards the end-of-quarter. So I would say that our signed deals are pretty persistent toward the quarter, but if anything, they weighed a little bit towards the end.

That's probably the best feedback I can give you on that. There's nothing that stood out that would cause me to think anything about that trend that was happening that would be an indicator.

Okay. And on the Perfect Audience acquisition, in terms of what's potentially within the core Marin base, would all of them be prospects? Or are they already using some other competing solution? Could we just talk a little bit about that?

Yes, so the Marin client base is 770? John gave the specific metric, but we've got close to 800 clients on the Marin application currently. A lot of it is used for search management.

We just -- we're at the early stages of how these two products come together. What I can tell you is that our initial client and prospect engagements have been extremely encouraging to us about how these products can come together and add more value.

The idea of having one platform to manage multiple channels is extremely exciting for our clients and prospects. And the reason is that Marin has always had this open, this transparent this very controlled, this very pricing-efficient sort of model that doesn't quite exist broadly in the display market.

So when we're introducing that sort of approach to display to an existing Marin client who's using search, and we can talk about bundled pricing and things like that, and show him reporting and bid optimization, using search-based intent data through their search programs. And using that to create targetable segments and to drive optimization in display -- it's kind of a no-brainer. So the initial reaction from clients that we've spoken with, there's a lot of excitement about it.

There's some R&D that's happening, underway. I think within a month we're going to have at least reporting integrated in the Marin application. And then somewhere around midpoint next year we're planning to have the product more fully integrated. But yes, it's very encouraging in terms of our initial engagements.

Okay, thank you.

Thank you. And there are no other questions in the queue at this time. Would you like to proceed with any closing comments?

I would just like to thank you for listening in. We're extremely proud of our results in Q2. Although we brought our guidance down a little bit for the second half of the year, we remain committed to the opportunity that Marin has got in front of it, in terms of providing this cross-channel ad management platform, being that integrated stack to help our clients manage and optimize and measure their spend in social and search and in display. And we're excited to come back in future quarters and talk about our progress to that end.

This does conclude today's teleconference. You may disconnect your lines at this time, and we thank you all for your participation.