XOXO
#<UNK> is filling in for Ivan, who is out on paternity leave.
Our warmest wishes to the whole Marmolejos family.
Thank you, <UNK>, and welcome, everyone, to our second quarter earnings call.
As always, it is a pleasure to speak with our fellow stockholders.
I will start with a quick recap of our Q2 performance.
Total revenue for the quarter was up 9% year-over-year, led by a double-digit increase in our local marketplace revenue and continued strong performance in transactions.
During the quarter, our local online revenue increased 14%, the highest growth rate since Q1 2016.
We ended the quarter with just over 26,000 vendors, also up 14% year-over-year.
The increase in revenue was driven by improved productivity in our sales force that began in the second half of 2016 and continues.
We also experienced a 75% retention rate in the quarter, our best result since 2015.
We continue to improve our marketplace and help our vendors close business.
In Q2, we enhanced our recommendations, closed-loop inbox and request for quote features.
Our continued product efforts, paired with growth in our sales team headcount, has put us in a position to continue to drive local revenue and build on the momentum we saw in Q2.
Turning now to transactions.
This continues to be our fastest-growing revenue line, up 27% in the quarter.
This is a direct reflection of the product enhancements we've made in the last year, and we look forward to ongoing growth in this business.
We were up low single digits in national online.
National advertising throughout the industry is challenged by macro trends, and our performance this quarter reflects that we're not immune to this.
Though there was downward market pressure on CPMs, this was offset by our continued growth in audience and user engagement.
I'm more optimistic than ever about our company's future, and I hope you will all join us at our Analyst Breakfast on Wednesday September 27.
I will now turn it over to <UNK> for the financial review.
Thanks, Mike.
In Q2, we made solid progress towards reaching our current target model of double-digit revenue growth and a 20% adjusted EBITDA margin.
Total revenue for Q2 was $42 million, up 9% year-over-year.
In our local online business, revenue increased 14% year-over-year.
As Mike mentioned, we ended the quarter with just over 26,000 vendors, up 14% as well.
On a trailing 12-month basis compared to the prior year, our vendor count reflects the productivity issues from last year and was down 1%.
We had a 7% increase in average revenue per vendor and a very strong retention rate at 75%.
In transactions, the increase in revenue of 27% was largely driven by an increase in registry and commerce revenue.
For national online, revenue was up 2% year-over-year, which was up against a 12% growth rate in the year-ago quarter.
This was primarily due to macro trends and our execution in that environment.
During the quarter, display ads revenue increased 16% even with an eCPM decline.
This was offset by declines in both custom and lead generation.
Publishing and other continued its managed declined and fell 13% in the quarter.
Our gross profit grew 10% year-over-year in the quarter, and we posted a gross margin of 93%, nicely within our target model of 90% to 95%.
Total operating expenses were up 21% in the quarter.
A 10% increase in product and content was driven by talent costs.
A 22% increase in sales and marketing expense was driven by the expanding local sales organization.
A 37% increase in G&A was driven by trends I will touch on shortly.
As for our adjusted EBITDA margin, that came in at 19% in the quarter, a solid climb back from the Q1 results and just a touch under our target model.
Our GAAP EPS, including the write-off of our investment in Jetaport, were $0.06, and our non-GAAP EPS were $0.11.
There is some noise in the quarterly results that I'd like to try to parse for you.
First, our G&A growth of 37% was largely driven by the ongoing cost of the implementation of the 606 revenue recognition standard and elevated compliance costs.
We estimate that of our $8 million in G&A, roughly $800,000 was elevated.
Excluding this cost, our G&A growth in the quarter would have been 23% and our total OpEx before G&A growth roughly 18% versus the 20% reported.
Secondly, we consistently review our product portfolio to ensure we are focusing on product with the highest <UNK>OI.
With respect to that, D&A was up 23% in the quarter due to roughly $500,000 of accelerated amortization on a couple of products we end of life-d.
Ex this, D&A would have been flat in the quarter on a year-to-year basis.
Lastly, our non-GAAP tax rate for the quarter was 30% and was impacted by the impairment of Jetaport, which reduced the rate in this quarter versus a more typical tax rate of 40%.
Putting all this together and using our expected long-term effective tax rate of approximately 40%, our EPS results would have been roughly $0.01 better per share, and our adjusted EBITDA would have been 1 point over our target of 20%.
We ended the quarter with $98 million in cash, down from $103 million at the end of Q1 and bought back $8 million of stock in the quarter.
Through the first 2 quarters of 2017, we have bought back $13 million of our stock.
Our 2017 guidance remains unchanged from last quarter.
That guidance calls for our business to continue its trending back towards our target model of double-digit revenue growth and an adjusted EBITDA margin of 20% but continues to have us falling shy of that model on a full year basis.
On a top line basis and consistent with our past guidance, this implies a continued healthy double-digit growth rate in local, a 20% growth rate in transactions, a single-digit growth rate in national online and print and other continuing to be in a state of managed decline.
Of these, we see the most risk in our Q4 national online revenue due to operating in the environment of macro trends Mike mentioned.
As for the second half of 2017, you should model a higher year-over-year revenue growth rate in Q3 versus in Q4, largely due to uncertainty in our national pipeline and getting to a more normalized double-digit year-over-year growth ---+ run rate in local online.
While we expect Q4 revenue to be up sequentially from Q3 in dollar terms, we do not today expect Q4 revenue growth to be at our double-digit target model.
We expect our overall OpEx growth rate to decelerate in the second half of the year to the high single digits, including our current expectations of elevated G&A.
To make that more crisp, I want to point out that we are today modeling $3 million of elevated G&A costs for the full year 2017, of which $2 million has already been spent in the first 2 quarters.
Additionally, we expect a double-digit decline in stock-based compensation in both of the quarters of the second half of 2017.
Our expectation is that our D&A growth will drop back down to single digits in the second half of the year.
This should put us in a good position to be at or close to our adjusted EBITDA margin target of 20% in the second half.
Finally, our tax rate has been fluctuating in 2017, and we believe it will continue to do so.
I would model a 40% tax rate in Q3 and a 45% tax rate in Q4 due to the timing of tax benefits and windfall benefits of the new stock-based comp rules we talked to you about in Q1.
In general, we expect our long-term effective tax rate to be approximately 40%.
Thank you for your continued interest and support of our company.
This concludes our prepared remarks, and I'll now open the call for your questions.
Sure, <UNK>, and thanks.
There are a handful of extraordinary items that [weren't] on the quarter that we should make sure you're clear on.
So let me hit those first, and then we'll hit your registry/transactions question second.
So on the numbers, there are really 2 ---+ 3 things you're going to be pulling out of the numbers to get to a normalized look at the business.
The Jetaport investment, there's about $200,000 in the G&A expense that will come out, and then you obviously have the investment line of about $1 million that you would pull out to get to a non-GAAP basis.
What we've also pointed out, because we want to make people understand the core of the business as well, is that in the G&A line, that 37% reported growth includes $200,000 from Jetaport as well as an $800,000 of ---+ roughly $800,000 of elevated expenses.
If you take all of that out, you end up at an adjusted EBITDA margin of roughly 21%, so nicely above our target model.
And we wanted to make sure people understood that.
If you taxed all that at about 40%, you would end up with another $0.01 in EPS.
At the tax rate we reported, it would actually give you another couple of pennies from there.
So that's just to kind of try to clarify the numbers, and we're happy to walk through those with you.
In terms of the transactions business, because of the timing of weddings in ---+ with 2 of the big months being June and also October, you tend to see higher total revenue in the transactions business in Q2 and in Q3.
The team had a pretty tough comp in Q1, and as we had said last quarter, we think this is about a 20% growth business.
So you are seeing the business transact towards that.
When you look at the set of businesses themselves, you saw really strong results in the registry business and really strong results in the commerce business.
Both increased their rate of growth sequentially.
So all the product work that, that team is doing is really paying off for us.
And as we said in our guidance, we continue to view it as a 20% growth business.
So we're trying to make sure we give you some color on how the business is working.
We are seeing our customers trend towards display this year, and we are growing that business even with eCPM declines.
But the national online business is a business that we have a conservative view on overall, and we ---+ the whole mix of the business is what you need to consider when you do your models.
Mike, do you have any add-on to that.
I would just reiterate something we've said previously, <UNK>, which is that the team has done a good job of getting more larger budgets into the national business.
It's contributed to the growth of that business over the last couple of years.
The downside of that is any $0.5 million or $1 million move in a quarter, you just ---+ you feel that a lot in the numbers.
So as you think about our national advertising business, just think ---+ understand that it is a chunkier business now than our local business or our registry business, our transactions business.
I'll cover the first, and I'll ask Mike to give a little color on the national business.
With regards to the G&A, what we said is included in our numbers is about $3 million of expense in G&A that we don't think would be repeated next year.
We do think that 606 implementation will roll into next year, and so there could be some costs in there, but I don't think it will be enough that we would want to point out and make sure you understand that elevation going into '18.
So I think that's how that will roll out.
As we said on the call, about $2 million of that has already been spent, and I would put a little bit more of it into Q3 than in Q4 as you model out the rest of the year.
But importantly, our guidance for the coming quarters includes that elevated expense.
So we think the business should trend really nicely relative to our target models even inclusive of that expense.
So that's the G&A.
Maybe I'll have Mike give you a little bit of color on the national business.
Yes.
<UNK>, we compare the national business to other more mature online publishers in the space.
We are seeing on average low single-digit percentage growth numbers.
We've been able to outperform that the last few years as we put together a good team here and they have been picking away at the low-hanging fruit of undersold inventory and accounts that we hadn't exploited in the past.
I think we're now reaching a point where I would expect us to grow in those single digits in the national advertising business.
And while there are macro-level trends that are affecting online advertising, some of which we've talked about here before, pressures from programmatic advertising, for example, pressures from Facebook and some of the larger players in the space, at the same time, we have 2 things that are working to our advantage.
One, we continue to improve our products, which continues to grow our audience and our audience engagement, and that just creates more inventory that we can sell.
Secondly, we have what continues to be a very hard to reach audience, young millennials and particularly young millennial women engaged in big spending events.
So we continue to see those 2 factors working in our favor.
We've articulated to our fellow shareholders here it is going to be local and transactions that are going to continue to drive growth on the top line for our business.
But we are confident that national can continue to be a positive contributor to the overall enterprise.
Yes.
<UNK>, it's a good question.
I'd encourage you, in the context of this question, to think of 3 factors that are impacting our growth rate.
The first one is by us investing in and improving our sales force and the size of our sales force, it puts us in a position to very simply make more phone calls, reach more potential customers and get more new business into the top of the funnel.
The next 2 things to consider are the things that drive retention.
The first is the improvements in our products that continue to bring more couples to The Knot and connect more of those couples to our vendors.
So we are just seeing a lot more users, couples connecting with a lot more vendors through our platform, which creates more value for both sides, both parties and makes it more likely that a vendor is going to want to stay with you.
The second is we've made a bunch of investments in features that better connect our users and our vendors.
So not only do we have more brides and grooms coming into that ecosystem, not only do we have more brides and grooms connecting with more vendors, more venues, more DJs, more photographers, but once we make the connection between the 2, we're doing a better job of helping them communicate, share information and get closer to an actual purchase.
Those things make that lead, if you would, make that traffic more valuable to our vendors and increases the likelihood that those vendors stay with us.
So to sum that up, a larger and more productive sales organization can bring in more new business, high-performing products at the middle and bottom of the funnel both ensure that the connections that we're making are valuable and that those new accounts that we're bringing onboard will want to stay with us.
And <UNK>, just from ---+ I don't know how far into the call you joined, but from a KPIs perspective, we grew the ending quarter vendor count 14%.
The increase in average revenue per vendor was 7%, and we had a very strong retention rate of 75%.
All contributed to that growth rate.
Is there anything in particular.
There's ---+ if you're going through the site today and you're using it as a couple, you'll find that versus a year or 2 ago, we're doing a lot more to collect information about our couples and help to guide their journey.
We are recommending vendors now.
So we're not just leaving it to our couples to find a particular ---+ to go hunting around and finding a vendor through our marketplace.
We're actually using what we've learned about our couples to better connect them to the vendors that we believe are the right ones.
And then you remember, early last year, we replatformed the entire site so that our users and our vendors could communicate with each other through our products, rather than going offline to e-mail.
That opens up the opportunity for us to use that communications platform to better inform both sides, tell the vendor more about the couple, the couple more about the vendor, and keep that communication flywheel moving.
Sure.
So in general, 4Q comes up over Q3, and what I would do is model a higher rate of revenue growth in Q3 than in Q4 given the outlook we see, particularly in the national business.
So just to kind of give you a little more color on that, we're feeling very good about Q3.
We think you should model it at or above our target model in terms of double-digit revenue growth, a 90% to 95% gross margin and the 20% adjusted EBITDA margin target.
And then in Q4, we're feeling very good about the adjusted EBITDA margin target.
On the revenue growth, we would have you keep that number coming down, largely due to the national pipeline caution that we have.
Sure, <UNK>.
Thanks for the question.
To oversimplify it, think of our transaction business as predominantly driven by our registry business.
And think of the primary drivers of our registry business us capturing couples early in the wedding planning cycle, having them create a wedding website with us, create a registry through us or attach a registry that they've created with one of our retail partners to their wedding website, and then share it with the guests coming to their wedding.
Over the last few years, one of the most important improvements you've probably noted in our website, especially following the relaunch of our website 2 years ago, was the improvement in the wedding website product.
We are the leading ---+ we are now the leading provider of wedding websites in this space.
The features that you've seen us shift in the last quarter or so that we are more encouraged by are our new guest list manager, which allows the couple who's created a wedding website to manage the guests that have been invited to the wedding and manage <UNK>SVPs in particular.
The second feature that we think is pretty interesting is The Knot's cash registry product.
We're providing ---+ the increasing percentage of couples who want money or experiences rather than gifts, we've provided them an option to request that from their guests right through our website.
And then, I think I neglected to give you some KPIs on transactions in my prepared remarks.
But the way to think about it is that the growth in the business was primarily driven by user traffic and conversion rates, and our take rates were stable.
