Marin Software Inc (MRIN) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Jason Starr, Investor Relations of Marin Software. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Marin Software's third-quarter 2016 earnings conference call. Joining me today are Chris Lien, 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 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 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 of our business. We make these statements as of November 9, 2016 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 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 directly comparable GAAP financial measures is available on our third-quarter 2016 earnings press release.

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

Thank you, Jason. Good afternoon, everyone, and thank you for joining our call today. I'm excited to have returned to an operational role at Marin and to be working more closely with our customers, team members, partners and investors to lead Marin to its full potential.

Since returning at the end of August, I've met with these key constituents globally to understand our position, confirming both our challenges and our opportunities. Overall, I'm encouraged by our team's commitment, enthusiasm and engagement. I also am encouraged by the attitudes of our customers and partners, who see Marin as an important platform in our industry and one that can help brands to make more effective online advertising investments.

Marin remains a global leader in our sector, and while we still have significant work in our efforts to return to growth, I believe that Marin has a tremendous opportunity and that our best days lie ahead. With my return, Marin has a renewed entrepreneurial focus on growth and execution, a commitment to improving our customers' advertising effectiveness, and an uncompromising focus on innovation. As passionate as I am about these changes, our near-term outlook remains challenged, leading to a cautious view of Marin's business during this period.

When we founded the Company in 2006, our vision was to become the leading independent cross channel performance advertising platform. We sought to enable brands to maximize the returns from their online advertising investments across leading publishers. Marin's staff platform drives financial lift, time savings, and better business insights through greater transparency, efficiency and return on advertising spend.

Since then, Marin's platform has enabled brands and their agencies worldwide to measure, manage and optimize billions of dollars in ad spending across leading publishers, such as Facebook, Google, Microsoft Bing, Yahoo, BIDO, and others. We live in an age when consumers are spending ever more time online in our always on, always connected world. As we connect to the internet from more devices and to access a broader array of services, advertises need to follow their consumers online to acquire, retain and engage their customers.

As advertisers and agencies look to address the growing fragmentation, scale and complexity of the online world, they need a technology partner to help them to best address the ever expanding array of channels, devices, publishers and ad units to best reach their prospects and customers. As brands seek to meet the consumer at each stage of the buyer's journey across channels, devices, and publishers, we believe Marin is well-positioned to be the preferred technology partner for this mission. We believe these forces all play favorably into our business strategy, given our unique SaaS-based delivery model with cross channel API integrations into many of the world's largest online publishers and our independent and transparent approach to digital advertising.

Before turning the call over to Catriona to review our third quarter results, I'd like to share some initial thoughts on our priorities for the coming quarters and discuss a few steps we've recently taken to accelerate our return to growth. Our primary areas of focus are on our customers, our products and our team. My strong belief is that if we properly meet the needs of our customers through best-in-class products and outstanding service delivery, then Marin will be rewarded with a growing share of our customers' business and a return to growth and a corresponding increase in shareholder value.

As we have shared on previous calls and as I highlighted in my earlier comments, the growing fragmentation, complexity and scale of digital marketing requirements create the need for more robust platform infrastructure to best meet the needs of today's modern marketer. To capitalize on this challenge and to be in better position to support these requirements, we've been making a significant investment in the development of the next generation of our technology platform.

As we deliver new features on this platform infrastructure, we expect to be able to more effectively support some of the faster growing segments of search through the platform's increased scale and improved data analytics and reporting capabilities. The unification of our search, social and display applications onto this next generation technology platform also is expected to deliver more integrated audience data, which will enable marketers to target their online advertising investments. As we deliver more customer facing innovation beginning in Q1, we believe that Marin should be better positioned to return to growth over the longer term and to deliver increased competitive advantage to our customers.

We've made good progress this year, as demonstrated by our social applications migration to the new underlying technologies and our enhanced support for Facebook Hero products, such as Carousel, Dynamic and lead ad units. One recent new feature we rolled out in the third quarter is support for Facebook's new ad unit, Dynamic Ads for Travel, initially targeted at hotel operators. Our team also introduced greater support for Facebook and Instagram video ad units, with additional improvements in workflow, such as bulk creation, bio management and more flexible targeting.

As we announced in September, Wister Wolcott, who co-founded the company with me, has returned to Marin to lead our product and technology efforts as EVP of Product and Technology. Wister has a unique blend of product, technology, market and customer knowledge. His lens for product and technology is to focus on what is the maximum benefit to our customers and already has adjusted our development delivery priorities and timeline to enable Marin to deliver new functionality to customers in the near-term, beginning in Q1 2017.

He has already spent significant time with our customers and partners to make sure that our priorities align property with their business needs. Wister and I are committed to returning Marin to a path of product innovation and service to our customers, enabling them to reap better returns from their online advertising investments through their use of the Marin platform.

Near term, a primary focus for this team will be to further harness elements of the new platform already deployed and to accelerate the timeframe for customers to benefit from the enhanced functionality these new technologies enable. This hybrid approach, which was discussed on last quarter's call, is a great example of the entrepreneurial spirit inherent in Marin's culture.

One such example of this approach is the enhancements that we've recently released for our shopping offering, which now supports SKU level reporting for our customers on both the Google and Bing platforms. We are encouraged by initial market reactions to this new functionality and we look forward to broader adoption across 2017.

Another innovation we released in Q3 was our Smart Sync for Shopping feature, which enables customers to clone their Google shopping ads to Facebook's dynamic ads. While still in beta, we are particularly excited about this new feature, as it demonstrates our open cross channel approach to digital advertising. We also see this innovation as extending our leadership position from search marketing into social marketing. We believe that brands can obtain attractive gains in efficiency and overall advertising returns from this more holistic approach to digital marketing.

Marin's ability to provide open cross channel functionality positions us to be a long-term partner for the world's leading advertisers, as publisher tools and closed platforms cannot deliver these capabilities. For example, PhotoBox, a leading provider of online printing of photo-based products in Europe, used this feature to target both mobile and desktop audiences with the hope of achieving better scale through mobile newsfeed targeting. Early results were promising, with a 37% decrease in cost per purchase through dynamic ads, a 300% increase in conversion rates, and a 200% increase in ROI. Also in this past quarter, we released full support for upgraded URLs for both Yahoo Japan and Microsoft Bing, with full management and reporting capabilities for Bing expanded text ads.

Marin built its leadership position in search with this type of innovation and focus on our customers' advertising success through greater efficiency and driving better advertising returns. And I'm pleased to share that in the third quarter, we had several important wins and renewals from companies such as American Eagle Outfitters, Home Depot, Hulu, Unique USA, Walden Associates, and Zulilly.

In closing, Marin enables many of the world's leading brands to measure, manage and optimize billions of dollars of ad spending across search, social and display channels. We recognize that we still have challenges to work through in our transformation initiative and remain committed to completing this successfully, and enabling us to shift our primary focus back to innovation and growth.

We believe that our open, independent cross channel model is attractively positioned, given the increasing shift to mobile and native advertising and our API connections into the largest publishers, who continue to consolidate inventory. We look forward to seeing the investments we are making in our product, technology infrastructure and our customers lead to improved operating results in the future.

With that, I would like to thank our investors for their continued support, and I will turn the call over to Catriona to review our financial results and our outlook for the fourth quarter.

Thank you, Chris.

As a reminder, our detailed financials, as well as a reconciliation of our GAAP to non-GAAP financials, can be found in our press release.

For the third quarter of 2016, Marin generated revenues of approximately $24 million, $100,000 above the high end of our guidance, down 7% sequentially and 9% year-over-year. As we've shared on previous calls, Marin is investing in its next-generation platform technology to enable the Company to better meet the needs of our customers, including capturing our fair share of the faster growing segments of paid search, expanded social and cross channel functionality.

As Chris discussed, we have recently shifted our approach to a hybrid strategy so that we can accelerate the release of new features in 2017. However, given the delays we have seen in the overall timing of our new platform initiative, as well as certain feature releases to date, we've seen an increase in customer churn, as well as reduced spend, particularly towards the end of Q3. This softer spending trend has continued through October and is influencing our more cautious outlook for the seasonal spending in Q4.

In the third quarter, revenues in the US represented approximately 69% and international revenues were 31%, both in line with Q3 of last year. Revenues from direct advertisers now represent 59% of our total revenue, up from 55% in Q3 of 2015. Agency revenues now represent 41% of total, down from 45% in Q3 of last year.

For the third quarter, non-GAAP gross margin was 69%, up from 66% in the third quarter of 2015, and down from 71% in Q2 of this year, primarily due to the sequential decline in revenue. Non-GAAP loss from operations was $1 million, compared to a loss of $4.3 million in the third quarter of 2015. This annual improvement of $3.3 million is a result of continued focus on managing our discretionary spending and optimizing resources in lower cost markets. There were also some nonrecurring expenses in the quarter, including non restructuring-related severance payments, that negatively impacted this metric.

Q3 adjusted EBITDA was positive $379,000 for the quarter, an improvement of $2.9 million versus the year ago period. Non-GAAP net loss was $833,000, resulting in the loss of $0.02 per share, based upon a weighted average share count of 38.5 million shares. This is an improvement of $4.1 million when compared to a loss of $4.9 million, or $0.13, during the third quarter of 2016 and was $0.05 better than the high end of our guidance of a loss of $0.07 per share.

Cash flow from operations was a positive $2.7 million in the quarter, a $6.5 million improvement compared to negative $3.8 million in Q3 of 2015. We entered the quarter with $36.4 million in cash and cash equivalents, which represented an increase of approximately $1 million sequentially and $3.1 million over the same period last year. This increase was primarily driven by improved collections, as AR declined sequentially from $23 million to $20.6 million.

Now moving on to guidance, in general, the fourth quarter can be challenging to predict, given the variability that typically occurs in retail spending on our platform. We also want to reflect the churn and softer customer spending we've recently experienced, which leads us to be more cautious in our outlook.

For Q4, we expect revenues to be in the range of $21.8 million to $22.5 million. Non-GAAP operating income is expected to be in the range of negative $3.5 million to negative $3.1 million. And non-GAAP net income per share is expected to be in the range of negative $0.10 to negative $0.09, based upon a weighted average share count of 38.7 million shares.

With that, I'd like to thank you for your time, and I'll turn the call back over to the operator to open it up for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Tom Roderick with Stifel. Please proceed with your question.

Hi. It's actually Parker Lane in for Tom. Thanks for taking my question. When you look at the geographic breakdown of revenue for the last three quarters, there's a bit of a differentiation between international and the United States. Wondering if you're seeing anything as far as larger customers that have been lost at a higher rate on the international front or a material difference in demand on that front? Thank you.

Hi, Parker. It's Chris here. No, we haven't seen a change in demand, either domestic or international. I would say that, as Catriona highlighted, we've had an uptick in churn, and more of that churn has been focused in the United States, partly because that's where we have more business and also because some of those advertisers were located in the United States. But I would say overall global demand for online advertising and then going to the next level of search, display, and social, we're seeing a good level of demand worldwide.

Got it. And then as you look to the re-platforming effort, is there any update to the timing of that? Is that something you expect to persist throughout 2017, maybe go into 2018? Is there any renewed outlook there?

Yes, so the approach that we're taking to the re-platforming is a hybrid approach. So what you'll see beginning in Q1 is our delivering to the market customer facing innovation. And it will be a blend of the new technologies, along with existing technology that we have in the current platform. So I would highlight that. Beginning early in the year, customers will begin to see new functionality from Marin. Some of that functionality leverage this infrastructure investment that we've made, such as what we delivered in the past several months with our hybrid SKU level shopping, and then some of that functionality is not dependent on the new technologies.

What I would flag for you that is different is we had more or less gone on a hiatus with regard to how much functionality we were delivering to customers, because we were very focused on the internal infrastructure. And we're going to better balance continuing to invest in the infrastructure, but put a much higher focus on delivering customer facing innovation, beginning in Q1.

All right. Thanks. That's really helpful.

There are no additional questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.