Marin Software Inc (MRIN) 2016 Q2 法說會逐字稿

Welcome to the Marin Software quarter-two earnings earning conference.

(Operator Instructions)

I would now like to turn the conference over to Jason Starr, Investor Relations, Marin Software. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Marin Software's second-quarter 2016 earnings conference call. Joining me today are David Yovanno, Marin's Chief Executive Officer; and Catriona Fallon, Marin's Executive Vice President and Chief Financial Officer. By now you should have received a copy of our earnings release, which crossed the wire a short time 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 the 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 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 historical results that may suggest trends for our business.

We make the statements as of August 4, 2016, and disclaim any duty to update them. For more information regarding these and other risks and uncertainties that could cause actual 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-K 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 likely comparable GAAP financial measures is available on our second-quarter 2016 earnings press release.

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

Thank you. Good afternoon, everyone, and thank you for joining our call today. I'll review some of the highlights for the quarter, including an update on some our recent wins, new product features that we've introduced and progress in the development of the next generation of our market-leading cross-channel advertising platform. Katrina will then provide additional details on the quarter's results and our outlook for the third quarter.

As announced in today's release, Marine's second-quarter results came in above our guided range, with revenues of $25.8 million with non-GAAP gross margins, operating income and adjusted EBITDA all above plan. This represented the third sequential quarter of positive adjusted EBITDA for Marin and is a strong demonstration of the significant progress we've made in improving our operating efficiency and cost structure. Our sales team had several wins in the quarter, including American Airlines, [Betlemen], Moneysupermarket, Photobox and Wargaming.

One other notable win in the quarter was Autodesk, a leader in 3-D design, engineering and entertainment software, which was a competitive takeaway from the Google stack. The search marketing team at Autodesk and used Marin's application in prior roles and was not what satisfied with their existing solution. They upgraded to Marin based on this past experience and our applications ease of use, known reporting capabilities and a time-savings and efficiency gains our application delivers.

Smart Sync is a great example of this, which automates cross-publisher campaign workflows. Marin's advanced fitting capability is also expected to help improve their ROI. These core factors have always been important tenets of our value proposition and continue to serve our customers well.

Another win in the quarter was LaneTerralever, a full-service marketing agency who brought their customer Gore-Tex onto the Marin display platform to support a major branding effort around their new Surround foot ware line. The key driver for their selection of Marin was to more heavily brand their product, drive meaningful engagement with their customers and measure brand outcomes. This campaign was implemented in Q2 and is expected to drive additional growth in our display channel throughout the remainder of the year. Finally, Wargaming, an award-winning online game developer and publisher, selected Marin for their search and display advertising campaigns in North America. Marin's strong reputation, open architecture, and unique ability to leverage search and tent data for display retargeting were important in this customer's decision.

One final note I'd like to share regarding sales, over the past few months I have conducted an extensive skills and pipeline assessment with the entire team and developed a better understanding of our strengths and opportunities to drive more efficiency and productivity. Overall, I have been encouraged at the level of resolve and commitment our team has shown during this process. We've made several adjustments to better align resources and have modified elements our sales incentive programs to drive improved sales productivity. We firmly believe these changes will yield positive results as they take hold.

One area in particular where we have made organizational adjustments is in how we sell to our agency clients and partners. We have simplified our approach, which should enable our field sales team to focus more on direct relationships and further improved our cost structure. We have also focused on enhancing the customer success organization to not only maintain but also grow revenues and improve-cross channel adoption of our offerings throughout our customer base.

I'd like to now provide a quick update regarding a recent product release. As many of you may be aware, Google recently introduced a significant change to the format of their search text ads called Expanded Text Ads, or ETAs, which enable advertisers to effectively double the amount of text they can place within them. ETAs are expected to help improve advertising presence, visibility, and performance, especially in mobile, to drive substantial improvements and advertisers return on ad spend. I'm pleased to report that Marin was one of the first independent providers to successfully release full support for ETAs last month. Initial results from our customers that have embraced this new ad format indicate a substantial improvement in click-through rates, cost per click and overall conversions.

In our display segment we continue to see attractive annual revenue growth, driven by several new customers. While display spending can be highly seasonal, we are encouraged at the steady progress we are making.

Finally, I like to provide an update on our progress in building out the technology infrastructure for the next generation of our search, social and display offerings. As we have shared on previous calls we have been executing a strategic initiative to completely transform the underlying technology that delivers our SaaS-based ad management platform. While this has contributed to some of the headwinds that impacted our growth shorter term, we remain encouraged that these investments will yield strong results from the unification of our search, social and display applications onto a single state-of-the-art technology platform.

As a reminder, we believe there are three main benefits that we'll attain from this initiative. First, it is expected to help reaccelerate our top line, same-store sales and bookings through the new features it enables and enhanced platform performance. As we have noted before, there are more specialized and higher growth areas of search that we expect more fully address once the new platform is released. Second, it will enable us to more quickly support publisher changes and add new publishers to better meet the needs of our customers and capture more share of our customers online ad spend. Lastly, it will allow us to further deliver on our cross-channel ad cloud vision by bringing audience, measurement and optimization capabilities to all our channels based on integrated backend.

The first phase of this project was completed at the end of the first-quarter with the migration of our social application. Our social engineering team has since been able to accelerate the feature release cycle to ship new features every two to three weeks. For example, we launched enhanced support for several new Facebook ad formats, including carousel, dynamic, and lead ads. Initial customer feedback on these new features has been positive and we have several more under development.

One recently released capability currently in alpha is Smart Sync for Shopping, which enables customers to automatically replicate their existing search shopping campaigns to create Facebook dynamic ads campaigns. This innovative feature is expected to allow customers to easily launch sophisticated cross-channel shopping campaigns with significant time savings and extend their advertising reach. Smart Sync for Shopping is also a great example of our strategy and unique ability to leverage our leadership position in search marketing and extend it into the rapidly evolving social marketing landscape. This improved agility and innovation are a direct result of the increased scale and flexibility of this new platform.

Our remaining objective is to deploy the next generation of our search application onto this new platform. Our technology team has completed a majority of the difficult architectural work which is the critical first step before customer migration and new feature adoption. Given the work completed, we are starting testing and creating plans to support initial customer migrations towards the end of the fourth quarter.

In fact, as an aside, I recently sat in on an internal demo of the new search application running on the new technology stack and was very impressed with the speed and scalability improvements I saw. For instance, complex data query jobs that can take several hours on the existing platform took just minutes on the new platform. The new interface is more integrated and intuitive and supports the ability to seamlessly scroll through millions of rows of large reporting grids. We expect this to be a game changer and represents an important technical and competitive advantage for our software suite compared to publisher and other independent tools available today. Completion of the new platform remains a key requirement for the development of several important revenue-driving features.

At the same time, we have been analyzing near-term opportunities to develop some revenue-producing features on our existing platform that may leverage elements of the new platform technologies. One recent example of this approach is the enhancement of our shopping offering that we released last month, which includes enhanced bidding and reporting powered by elements of the new platform. We will be looking at additional opportunities to pursue this hybrid approach during this transition. As we move forward, we will be prudent and thoughtful about making trade-offs between this strategy and resources required to migrate customers to the new platform.

In closing, we have made significant progress at transforming Marin's business, with several important milestones now behind us. While challenging work remains in the coming quarters, we are confident our prospects. As we emerge from this with a state-of-the-art platform and the robust features it enables, we believe we will extend our market-leading position, setting the foundation to return to growth.

With that, let me turn the call over to Catriona to review our financial results in greater detail.

Thanks, Dave. Our second-quarter results for 2016 demonstrate our continued progress and operational efficiency and effectiveness. This is part of our DNA now and we intend to maintain this discipline while we execute our transformation and strengthen our enterprise marketing suite.

In the first half of 2016, we've improved our non-GAAP net income by $11 million year over year while continuing to invest in the innovation of business. Our six-month adjusted EBITDA went from negative $8.9 million in 2015 to positive $2 million in 2016. We have produced $2.2 million in positive operating cash flow in the first six months of this year. As always, our detailed financials as well as a reconciliation of our GAAP to non-GAAP financials can be found in our press release.

For the second quarter 2016, Marin generated revenues of approximately $25.8 million, $20,000 above the high end of our guidance range and down 3.8% year over year. We saw relatively stable year-over-year performance in the US, which is now 70% of total revenues compared to 67% in the year-ago period. International revenues across EMEA and APAC represented 30% of total revenues versus 33% during the same period of last year. Revenues from direct advertisers were up slightly year over year and now represent 58% of our total revenue. Revenues from our agency clients have been more challenged and are now 42% of total. As Dave mentioned, we are adjusting our approach to agency relationships to improve our penetration in these larger accounts.

For the second quarter, non-GAAP gross margins was 71%, in line sequentially and up from 65% in the second quarter of 2015, due primarily to efficiencies in onboarding and support. Non-GAAP loss from operations was $1 million compared to a loss of $6.8 million in the second quarter of 2015. This annual improvement of $5.8 million year over year is a result of our efforts to optimize operations through more effective use of our resources and leveraging lower-cost regions for administration, customer success, and R&D. This also reflects the significant steps we been taking to optimize our sales and marketing investment.

Q2 adjusted EBITDA was approximately $544,000 for the quarter and represented an improvement of $5.7 million versus the year-ago period. With these results, we are well on our way to meeting our goal of generating positive adjusted EBITDA for the full year of 2016. Non-GAAP net loss was $922,000, resulting in a loss of $0.02 per share based upon a weighted average share count of 38.3 million shares outstanding. This is an improvement of $6.2 million compared to a loss of $7.1 million, or $0.20, during the second quarter 2015 and $0.04 above the high end of our guidance of a loss of $0.06. We ended the quarter with $35.4 million in cash and cash equivalents, which represented a decrease of approximately $800,000 sequentially. I'm pleased with our cash management. However, DSO increased sequentially to 81 days from 76 days in Q1. This was primarily due to seasonal insertion orders on the display side for which we collected payment in July.

Now moving onto guidance, as we discussed last quarter, our focus on developing the new cross-channel platform has caused some near-term revenue headwinds, such as reduced productivity and customer spending. As Dave noted, we are revisiting and adjusting some of our product development plans to include enhancements in the near term that may leverage elements of our newer technology in advance of the full release of the new platform and the subsequent customer migration throughout 2017.

With that as context, for the third quarter we expect revenues to be in the range of $23.4 million to $23.9 million. Non-GAAP operating income is expected to be in the range of negative $2.9 million to negative $2.4 million. Non-GAAP net income per share is expected to be in the range of negative $0.08 to negative $0.07 based upon a weighted average share count of 38.5 million shares. Again, we have made significant strides from an operational perspective in transforming Marin's business. With our improved cost structure we are in a position to scale profitably when we returned to revenue growth and our improved margin profile and reduced cash burn provide our team ample runway to execute the remaining elements of our plan.

We've already released Marin Social on our new platform and are now on a schedule of features release sprints, including enhancements to Facebook hero products such as dynamic ads and carousel ads. We have strengthened our display offering and have developed the cornerstone customers necessary to start building scale. We have renewed the investment in search features including further support for Google shopping ahead of the holiday season. In summary we believe that we are making good progress in realizing our vision for our cross-channel enterprise marketing suite and with strong focus and execution we will be well positioned to capitalize on the attractive longer-term growth opportunities.

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.

(Operator Instructions)

Tom Roderick, Stifel.

It's actually Parker Lane in for Tom. Considering the revenue contribution from the US versus international, can you comment on some of the demand trends you are seeing on the international versus the US and then maybe some of the investment plans in those regions? Thanks.

Thanks, Parker. I think the trends, international versus US, we believe a lot had to do with some of the revenue trends in our social business. We did experience some churn in Q1 that was a result of the social migration to the new platform that did create higher-than-expected churn in that quarter, which carried into revenue trends into Q2. A lot of our social business is also based in Europe so I think those two are somewhat related. I think that is the main trend there.

Got it. Can you comment on the progress of your search for new Head of Sales and how you're feeling about the sales leadership in general?

Yes. As soon as we made the change with Russell Wirth I stepped in to that role immediately, had one-on-one conversations with everyone in the sales group, did an assessment of skills, allocation of resources. We've made some adjustments there, in particular how we're pursuing business with our agency partners and have made some changes there. We have been in an active search with a number of candidates using an outside recruiting firm. We believe we are close on a handful of candidates and we'd expect to have that position filled soon.

All right, thank you.

Nandan Amladi Deutsche Bank.

Thank you. Thanks for taking my question. The revenue guidance for third quarter is still on a year-on-year decline trajectory. I know you said you are planning to launch some of these new features in the fourth quarter. That's when a lot of the holiday season spending happens. Should we expect to see return to growth in the fourth quarter heading into next year?

Thanks, Nandan. This is Catriona. We've provided guidance for Q3 and I think what you'll notice is some of the trends that we have discussed, you saw that we saw in Q3 a decline in agency revenue and a decline on the international side. As we look to Q3, we're still working on the migration of our search application and as you said, we are revisiting some of the ways to leverage some of that technology. We have recently released a shopping feature and we're building that out further and do expect to expand that into a number of our clients, but we are still facing the same overall trends that you saw in Q2 and that we're guiding for, for Q3. At this point, we still expect to see some of those headwinds. We will provide more guidance after our Q3 call.

Fair enough. On the platform migration and the availability of new features on the new platform, not enhancements to the old one, are you comfortable enough that there will be enough of that available in the fourth quarter? Perhaps if not the fourth quarter, early next year?

This is Dave. We have accomplished a number of really important milestones with the new platform developments. We had the new stack up and running. As you know, we cut over the social application to it. As I mentioned during my part of our call, we are actually at a point where we're able to demo our core search business running on the new stack and it's impressive. We still have a lengthy cutover plan that spans into 2017 for customers migrating to the new platform based on new features that are developed on the new platform. That fans out over the year.

What we have done is we've learned some capabilities of the new platform and so what we're trying to do is revive some of our plans and we're trying to take advantage of some newer technologies earlier than originally planned and being selective on things that we think we can pull in a little sooner even ahead of the full cut over throughout next year. We think that, that could contribute to some higher growth than what our current trend is. We're busy prioritizing that and adding that in. As Catriona mentioned, we have already made some enhancements to our overall shopping solution across all products that are leveraging some components of the new platform. We think that, that could add some real value.

Thank you.

At this time there are no more questions in queue. This concludes today's conference call today. You may now disconnect your lines. Thank you all for participating and have a pleasant day.