Marin Software Inc (MRIN) 2014 Q3 法說會逐字稿

Greetings and welcome to the Marin Software third quarter 2014 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Greg Kleiner, Investor Relations for Marin Software. Please go ahead, sir.

Thank you. Good afternoon, everyone, and welcome to Marin Software's third 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 www.investor.marinsoftware.com to find an electronic version. Call participants are advised that the audio of this conference call is being recorded for play back 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 historic results that may suggest trends for our business. We make these statements as of November 5, 2014, 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 risks relating to our business in general, we refer you to the sections entitled risk factors in our most recent report on Form 10-Q and on 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 maybe different from calculations or made by other companies. A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our third 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. In the third quarter, the Company produced financial results above our guidance on both the top and bottom line. In addition we made further progress towards our long-term vision of the advertising cloud, which is combining search, display and social through our unique audience data to help advertisers and their agencies drive both revenue and efficiencies through their digital marketing efforts.

I touched on a few items in our last call that I'd like to provide an update on today. Our push to provide a broader set of solutions for digital advertisers worldwide along with the improvements we are making in our go to market efforts. Let me start off with an update on our recent entry into the display market and our progress to date.

I've mentioned in the past the advantages we bring to the table in display, namely an open technology platform approach in a differentiated search based intent data resident in our systems. This combination served us well on the quarter and we were pleased with the results from this segment. While our display and social business combined is still less than 10% of our overall revenue, I'm confident we will continue to grow this contribution going forward as we're seeing increased interest in the full suite of our offerings.

Our early success in the display segment is only part of our broader plans in this market. Within the overall marketing cloud space sits the advertising cloud or ad cloud. This market we believe will drive $125 billion of advertising spend in 2014, growing to over $200 billion by 2018. This ad cloud segment encompasses the search, display and social channels, including mobile and video ad formats.

Today this market is mostly served through vendors addressing each component largely as a stand alone business process with a point solution and often with a closed arbitrage-driven managed serves business model. For the technology veterans out there, I'm sure you've seen the scenario play out before. When an attractive market first materializes, the vendors that first emerge are focused on smaller portions of the overall opportunity, whether through operational focus or concentration of investment dollars.

Marin was no different when it was started as Company focused on search given the size of the advertising spend and the immediate need by advertisers and agencies across the globe. However as markets mature and the needs of buyers become more sophisticated, these individual silos eventually combine into broader solutions or platforms. We are proud to be leading the charge in providing a solution encompassing all three segments of the ad cloud market.

This leads me to the next subject I'd like to discuss, the changes we are making internally in order to better capitalize on this opportunity. Last quarter I talked about improving the efficiency and effectiveness of our sales and account management efforts, and we implemented several changes on this front. Our efforts here are focused on improving our go to market efforts, along with being more strategic about how we manage the customer life cycle. In particular, we've added a more methodical approach to how we onboard and grow customers over time.

In addition, we've begun to reposition our marketing message and sales approach to better match the larger multi-channel opportunity I mentioned earlier reflecting the reality that we are evolving beyond a one product Company. Our teams have been engaged in an intensative multi-product training program and we are adding more people to the teem with extensive display and social experience.

These efforts will be largely complete by end of year and we currently anticipate that both sales and marketing will be fully aligned behind this new positioning as we enter 2015. Overall the early results from these enhancements in our go to market model have been positive. We have more work to do to get the sales engine back to where I'd like it to be.

So let me transition to a couple of our customer wins during the quarter. In particular, I wanted to discuss what I believe is the start of a growing trend at Marin, deals where our broader suite and ad cloud vision were key determining factors in the win. But a handful of deals like this in the quarter and one example with our win with American Eagle. Primary reason for American Eagle selecting Marin was our recently released audience marketing suite, which allows advertisers to identify and target their most profitable customer segments across search, social and display channels.

American Eagle has numerous product lines, each with different seasonality trends. So for them the ability to segment and control key word bids for each product line through our platform is critical. Likewise Marin's commitment to customer service resonated well with them especially as we head into the holiday shopping season. This opportunity interestingly enough started with display, then added social and then finally led to the addition of search as well, with all three ad channels now being managed in-house by American Eagle on one ad cloud platform solution from Marin.

Another retailer that elected Marin in Q3 was MandM Direct, one of the largest online fashion retailers in the UK. MandM Direct was looking to significantly expand their digital marketing program requiring an ad management platform that they were confident could handle the growth. Marin's extensible cloud-based architecture is designed to specifically handle immense amounts of data. In fact many of our customers are bidding and reporting on millions of key words at a time.

Aside from scalability, MandM Direct was impressed with the campaign management tools as well as usability of the platform. Marin allows MandM Direct to set in place automated rules and manage by exception, saving them a substantial amount of time and allowing them to react on market changes much more nimbly.

We also added to our customer roster of major sports leagues by adding the National Hockey League in the third quarter. Sports leagues like the NHL are unique given the huge spikes in seasonality they experience as the season starts and progresses. Consequently, the NHL needed a platform that could take full advantage of changes in fan interests during the season and react as quickly as possible.

With Marin, the NHL will be able to capture more conversions during peak times by setting bidding rules that are triggered by seasonal shifts, league trends and even individual team and player results. Other campaign management tools such as our key word automation, URL builder and creative testing features will save NHL significant time and allow them to more efficiently grow their online ad program.

On the technology front, we completed several important efforts in the quarter. First and foremost we launched the Marin audience marketing suite, the offer I alluded to in my American Eagle example earlier. Targeting audiences effectively is a constant struggle for marketers as consumers engage with different channels and devices at different times at different stages of their buying journey. Bringing a cohesive campaign incorporating data from a variety of sources is just one challenge, executing these campaigns seamlessly across channels and touch points is another aspect.

Through our audience marketing suite, we are able to combine buying signals from search and social campaigns with second and/or third party data to create and manage campaigns across search, social and display within a single platform. Our critical mass of commercial intent search based data for more than $6 billion and annualized search advertising spend that our clients manage on their Marin platform is a key differentiator in driving better results in not just search but also display and social. But combined with our open transparent SaaS business model, we believe the power of our platform is unique and is at the heart of our evolving positioning in the ad cloud market that I described earlier.

In the quarter, we also advanced our partnership with Atlas, an ad serving and measurement platform owned by Facebook. I'm sure many of you saw in the past quarter that Facebook relaunched Atlas enabling marketers to target ads across multiple devices. We already help a large number of our customers connect to the Atlas tracking platform. This expanded relationship allows us to integrate more deeply with Facebook thereby combining the data for both realms and driving powerful new insights to further optimize campaigns and improve results.

On the publisher front, we added support for Yandex, the largest search engine in Russia with roughly 60% of their market. Russia is growing quickly in prominence among global advertisers and has become the second largest online ad market in the region behind the UK, surpassing both Germany and France. We have numerous large global companies running campaigns on Yandex, and while Russia is a small part of our international business today, we anticipate that our increased support will help contribute to further growth in this region.

We also improved our support for (inaudible) campaigns and by do -- integrated campaigns by streamlining cross device work flows and campaign management capabilities across desktop, mobile and tablets as well as expanding our functionality around Google shopping and site links.

Finally, we have continued to bolster both our Management team and Board of Directors. In Q3, we were thrilled to add Head of Global Business, Marketing at Twitter and former CEO of Performics, Daina Middleton, to our Board of Directors. Dana was able to experience the power of Marin firsthand in her role at Performics and her experience in the digital market space will prove invaluable as we continue to expand more our cross channel capabilities and advertising cloud offering.

More recently, we added Avik Dey as EVP Technology, and Stephen Kim, as EVP General Counsel. Avik has spent more than 25 years in technology management, most recently at Intel as Director of Hadoop Engineering, along with other leadership positions at eBay and Yahoo. And Steve brings more than 20 years of the legal experience to Marin following leadership roles at Diamond Foods, Oblix and Wilson, Sonsini. We're excited about adding both these seasoned professionals to Marin's Senior Leadership team.

In summary, we took several important steps to support our continued growth in evolution as a Company. The Ad Cloud market is large and changing rapidly. We believe we are well positioned to lead the Ad Cloud market with the number one leadership position in search and expanding footprint in display and social. Marin's open, independent SaaS-based approach positions us well to capitalize on the evolving needs of advertisers around the globe. So with that, let me turn the call over to John to discuss the financials in more detail.

Thanks, Dave, and good afternoon, everyone. We reported revenue of $25.7 million for the third quarter, up 28% year over year and 8% sequentially, and above our prior guidance of $25 million to $25.4 million. Our results in the period did include a headwind of roughly $200,000 from foreign currency, compared to our expectations coming into the quarter given our geographic revenue mix, which came in at 66% domestic and 34% international.

Consistent with prior quarters, we saw a balanced performance from both our direct and agency customers, with a mix this quarter coming in at 51% from our direct clients and 49% from our agency clients respectively.

We served 825 total advertisers in Q3. This was up 49 sequentially from the second quarter of 2014 and 215, or 35% from the third quarter of 2013. The increase in this metric was also helped by a very small number of advertisers moving above the $2000 revenue threshold, inherent in our active advertiser metric definition.

In addition, the average length for all active enterprise contracts approached 15 months in the quarter, a further increase from Q2 levels. For the quarter our revenue retention metric was in the mid 90s. As we have seen in the past, this metric tends to vary from quarter to quarter due to a number of factors.

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. Year to date, this metric was just under 100% and we will look to get this metric back above that threshold through a combination of our customer success initiatives and enhancements in customer life cycle management.

Before moving onto 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.

We are pleased to report that our gross margins for the third quarter were 68%, up from 66% in Q2 of this year and up from 63% in Q3 of last year. This 440 basis point improvement year over year is indicative of the continued leverage we are seeing from our prior investments in our service and operations infrastructure.

Sales and marketing expenses of $11.5 million for Q3, up from $9.9 million in the year-ago period. The year-over-year increase was driven largely by higher investments in sales capacity, customer success and the expanded go to market efforts.

Research and development expenses were $7.3 million for the quarter, compared to $5.7 million in Q3 of last year. This increased spending was driven by our continued efforts to expand the functionality and breadth of our platform to deliver on our Ad Cloud vision.

G&A expenses were $4.8 million for the quarter, compared to $4.2 million for the year-ago period. Operating losses came in at $6.3 million for the third quarter, compared to a loss of $7.2 million in Q3 of last year. This was significantly better than our guidance of a loss of $8.4 million to $8 million in spite of the foreign exchange headwinds I mentioned earlier due to higher revenue and gross margins along with continued cost optimization efforts across all lines.

Compared to Q3 of last year, we have improved our operating margin by more than 1100 basis points as we continue to make progress towards break even. Net loss for the quarter was $6.4 million, compared to a loss of $7.4 million in the year-ago period. Based on a weighted average share count of 34.8 million, this produced a net loss per share of $0.18, exceeding our guidance of a loss of $0.25 to $0.23. This compares to a net loss per share of $0.23 in Q3 last year based on a weighted average share count of 32.5 million.

For the quarter, our adjusted EBITDA was a loss of $4.9 million compared to $5.9 million in Q3 of last year. We continue to target break even adjusted EBITDA in the second half of 2015, and are pleased with our ongoing progress towards this milestone.

On the balance sheet, we ended the third quarter with $75.8 million in cash and cash equivalents, compared to $83.9 million at the end of the second quarter. We also saw a modest uptick in our deferred revenue balance due to an increased level of pre-payments from some large customers.

Now let me turn to guidance for the fourth quarter and full year 2014. For the quarter ending December 31, we expect revenues to range from $25.8 million to $26.2 million. As you contemplate this guidance, please consider three important factors. First, we expect the recent shifts in foreign exchange rates to create a headwind of approximately $500,000 compared to our prior expectations.

In addition, similar to last year, we have taken into account the potential variability created by the holiday spending of the retail segment of our business in the second half of Q4. And finally, the ongoing work to optimize our go to market efforts as discussed by Dave earlier.

With this revenue and guidance in mind, we expect Q4 non-GAAP loss from operations to range from a loss of $7 million to a loss of $6.6 million. This should lead to a non-GAAP net loss per share in the range of $0.21 to $0.19, based upon a weighted average share count of 35.1 million.

Accordingly, for the 2014 calendar year, we now expect revenues to range from $98.2 million to $98.6 million. And non-GAAP loss from operations to range from a loss of $26.8 million to a loss of $26.4 million. This should lead to a non-GAAP net loss per share in the range of $0.82 to $0.80 based upon a weighted average share count of 34.2 million.

Overall, in the quarter we were pleased with the steps we have taken to enhance our go to market model. We believe that we are well positioned to capitalize on the emerging Ad Cloud market and look forward to the opportunity ahead. With that, I want to thank you for your time, and I'll turn to back over to the Operator to open it up for questions.

(Operator Instructions)

Brent Thill, UBS.

This is John Young for Brent Thill. The question I had is wanted to see how you feel about positioning for the seasonal Q4 in terms of your products, pointing the latest ad tech requirements in terms of prospects for spending by your customer base?

Yes, this is Dave. So we feel real good. We have a couple initiatives in play. We support the latest features available through Google shopping. So those were released prior to this period, so we've got clients fully engaged with those features.

We have an integration with a company by the name of Productsup that helps us on board and standardize their product feeds to the different publisher taxonomies. So we're in full support and we think we're set up real well for this holiday season. Retail, as you know, is one of our larger verticals, especially in Q4. It's in the range of 22%, 23% of our total revenue, I think in that period.

And secondly, there's been a lot of M&A in the whole ad space and advertising space and I want to hear your thoughts on the implications for Marin in general.

Could you give me a specific point, example of what you're referring to so I can comment on that specifically?

Well yes from the ad agency side and as well as the ones that really do take more of an inventory rolling as opposed to pure technology like yourself, but is there any overall implication in terms of your positioning and enrolling the digital advertising industry?

Yes, well, I've been pretty vocal about the trends that I see in the market. Things moving from what I call managed services to choosing platforms that are more open. I'm a big believer that media, all types of media ad formats are becoming what's called programmatic. Which means you can bid and buy all different formats through a platform like Marin as opposed to having to go through an intermediary like an ad network arbitrage model.

I think some of the things that you've seen in the Yahoo Gemini release for example is a good signal on where the market is going where all ad formats are becoming biddable. I think companies that are probably interested in consolidating are trying to take advantage of that. They're trying to bring in-house things that make them smarter, more efficient, more effective in acquiring media that way.

Thank you.

(Operator Instructions)

Tom Roderick, Stifel Nicolaus.

This is actually Parker Lane in for Tom Roderick. Wondering if you guys could comment on the success you've had with realtime bidding and the Facebook integration you have with the Perfect Audience acquisition?

Yes, so that came into the marin business through our acquisition of Perfect Audience. They've got full integration with the Facebook inventory. We've made comments in the past that Marin is actually a unique platform in that Marin's proprietary social product has access to Marin -- excuse me, to Facebook inventory through our EPI integration with Facebook. So we're able to manage the advertising within the news feed. Perfect Audience is able to complement that to manage all of their ad formats outside of the news feed.

We have our own proprietary technology that we use for realtime bidding, we're integrated with all the major exchanges. That is the sole source of how we run media through display, it's all realtime bidding.

Okay. And then also, I think you guys commented last quarter that mobile was accounting for roughly 30% of spend under management. Is there an updated number you could provide on that?

John, have we provided an update?

Yes, we -- it generally remains within that range. It continues to grow but I think that that's a good proxy for what's coming across the platform.

All right, thank you.

Just a reminder, mobile is -- it's woven into everything that we do in the same way that Google on their platform, they've made enhancements for mobile. Marin has actually taken a number of steps for beyond that in allowing our clients to bid separately based on device for example so that when a user -- when a client has an opportunity to bid on a user for a specific search, we're able to identify that and allow our clients to bid separately and optimize separately based on device types.

So that's a feature that's built within the Marin platform. So as we see user behavior go mobile, the Marin platform supports that. So we're going to represent the overall consumer behavior in terms of mobile usage that's going to represent the total volume that we manage that's mobile-based.

Nandan Amladi, Deutsche Bank.

Hi, this is Sameer Kalucha calling in for Nandan. Curious about the Perfect Audience acquisition, is the integration totally complete? And then a follow on would be how much did PA contribute in third quarter and what do you expect for the fourth quarter?

I'll comment on the integration piece and maybe John can comment on revenue contribution. Integration, we did complete our first phase of integration, there is more work to do. Clients are able to build audiences now within the Marin application. They're able to see reporting within the Marin application.

So it's exciting to see the combined channel data now within the Marin application, you can see your display performance next to your search performance next to your display performance. So that phase of the integration is complete. We have longer term plans to having everything operable within the Marin application. But we're excited with the first phase of development.

Hey and then Sameer, it's John. Then in terms of the contribution for revenue in the third quarter, we talked on the last call we weren't planning on breaking it out going forward. We did give guidance that we thought that Perfect Audience would contribute roughly $2 million in revenue in the back half of the year.

What I would say is that PA is performing at expectations or above. We're pleased with its performance in terms of the contribution to revenue for the quarter.

So roughly split between the two quarters would be a reasonable assumption?

That would be reasonable, again, we're not going to give the individual quarter contributions. But that's the general guidance for the back half of the year.

Got it. Thank you.

Frank Robertson, Goldman Sachs.

Two quick ones from me. One, last quarter there was some commentary that you were a little light on the bookings plan, [wondering if you] give an update there? How you're tracking the plan and how the pipeline is looking for the first of the year and also 2015?

And then second regarding the announcement that Adobe and Publicis have teamed up to deliver some Adobe marketing cloud. I want to know would you comment on one, how big of a business is Publicis for you guys? And have you seen any effect to that post the announcement and how do you think it will affect business going forward? Thanks.

Sure, I think we may have three people chime in on this one. So let me get it started. So first on sales pipeline, what I could say is that I am pleased with the performance in the quarter. Some of the deals that we had talked about on the last call that had slipped through, we did close a number of those deals.

We've been heavily engaged, as I mentioned in my comments earlier, at an intensative training program. We are moving from a single product Company primarily to a multi-product Company. So that's requiring some training effort because we've really refined our strategy and positioning from a sales strategy standpoint that way. But -- so I'm pleased with the performance, but we still have more work to do in terms of ramping our sales organization.

When it comes to Publicis and their deal with Adobe, all I can say is that those deals are not exclusive. Publicis is a very large agency. Meaning there's a number of agencies within Publicis that make up the conglomerate of Publicis and we have relationships with a fair number of them. So at this point, we believe the impact to be negligible on existing Publicis clients. John, I don't know if you have any -- ?

Yes, no Dave, I would leave it at that. We haven't quantified that and I think that that's the case, it would be negligible right now based on the breadth of the relationship across all of the agencies.

Perfect. Thanks, guys.

Karen Russillo, Wells Fargo Securities.

I had a question, John can you walk us through the revenue guidance again looking at this going into Q4 at the low end of the guide, I understand the FX headwind. But at the low end of the guide, it's only a little bit over flat from Q3. So can you walk us through those things that we're supposed to think about as we're looking at the revenue guide for Q4?

Yes, sure, Karen. So I tried to lay out a couple considerations with regard to the guidance. One I did try and quantify relative to the guidance we gave last quarter that the impact of the headwind from FX and we quantify that at roughly $0.5 million versus when we provided prior guidance.

The second data point that I added is just the fact that with the retail concentration at Marin, particularly in the fourth quarter, a lot of that spend starts to pick up in the call it the back half of November early part of December. So it's difficult to guide on that. Over the past couple of years, we've seen different patterns in terms of that spend. So we tried to be prudent as we thought about the potential what that spend could be when we crafted the guidance.

And the third part I pointed people back to the commentary that Dave made regarding the sales organization and the ongoing efforts there.

Okay and then secondly, as we're looking at the -- on the expense side. R&D had a pretty material pick up in Q3, whereas sales and marketing was virtually flat quarter on quarter. It seems with a lot of the changes that you guys are doing on the sales and marketing side that we would have seen maybe more spending there and not as much on the R&D side. So how should we think about those line items going forward?

Yes, generally don't give commentary in terms of guidance at that cut of the green. What I'd say in Q3 keep in mind that the Perfect Audience acquisition closed at the beginning of June. So you saw in Q3 on the R&D line the full impact of the engineers that we brought on from that acquisition.

With regard to sales and marketing, I don't know Dave, if you want to add color on that? We again, continued to tune the organization there. So that is something that we're working on.

Yes, I would just say in both cases, this is Dave speaking, so I've been on board for six months and I have gone through and made assessments in all aspects of the Company and have made some organizational changes throughout. Specifically with engineering, in my commentary I talked about the addition of Avik Dey.

So we've made organization changes both this engineering and product. These are changes that I feel are required for the direction that Marin is moving to when we talk about the positioning of the icloud, et cetera. So there's definitely some work to do there. And pretty much all areas of the Company have been reorganized and some bigger than others, with the exception of finances, probably the only group that hasn't been reorganized in some way.

On the sales front, it's been more about getting the strategy right and now enabling them to take that to market. As we've been ramping, we continue to -- or we expect to accelerate more ramping within that organization as we're getting closer to end of year and starting 2015.

I talked about the sales event that we have planned and I don't know if I mentioned it specifically in my comments. But we have a final event in January, where we're realizing -- we're testing the results of all the training that's happening now. Our intention is to have sales and marketing align at the start of the year, and we should expect to see the benefit from that investment several quarters after as those deals start to come through.

Okay, great. That's very helpful. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.