XOXO
#Thank you, <UNK>, and welcome, everyone, to our first quarter earnings call.
As always, it is a pleasure to speak with our fellow stockholders.
I'll begin by reiterating the strategy we laid out in my letter to stockholders in our annual report.
We believe this strategy puts us in a position to drive meaningful growth to our revenue and EBITDA and will unlock significant shareholder value.
I'll end with the headlines from Q1.
XO Group's mission is to help couples navigate and enjoy life's most important moments together.
For most young couples, they have never had a bigger moment than their wedding.
Pulling off their event requires the average couple to instantly become wedding experts and qualified event planners to book over a dozen local vendor professionals they have never met before, to coordinate about comings and goings of over 100 guests and to spend more than a year's after-tax income on this single event.
They are anxious, overwhelmed, and they turn to The Knot for help.
Our strategy is to help our couples by providing them an indispensable wedding planning product that connects them to the services they need, thereby increasing the number of valuable connections between our couples and our partners.
We do this first by informing our couples how to plan their weddings and what to do next for the brand, app and website content trusted more than any other service in the space.
Secondly, we help our to-be-weds discover the perfect vendors for their wedding, including the venue, photographer, entertainers, invitations and hotel room blocks for their guests, through the marketplace that we've been aggressively building and improving over the last 3 years.
Thirdly, we help our couples manage their guests, RSVPs, gift purchases and more.
Entering 2017, we're focused on following initiatives in pursuit of this strategy: one, product improvements to attract and engage our couples and match them for local vendors or services they need; two, more features to help our local vendors respond to these couples, meet their needs and close more business; three, expansion of our local sales capabilities to capitalize on these improved connections and grow our local marketplace; four, more tools to help our couples manage their guests, continuing the growth of our guest transactions business; and five, managing our national advertising business for sustainable profit.
We have unique and significant opportunity to grow our company to the benefit of our users, customers, employees and stockholders.
I'm excited about this plan, and I am confident in our ability to do this, as this team has shown the ability to vastly improve our products to better serve our users and partners.
Now turning to our Q1 results.
Our financial results are in line with the guidance we laid out, but honestly, we want to do better.
Our financials in Q1 continued to be impacted by the challenges we've faced in the early part of 2016, but our underlying KPIs are strong, and our execution on key initiatives has set us up for success in the quarters to come.
In our local organization, we added new system local sales and sales support members.
By the end of this year, we expect this team to grow by around 50% compared to 2016.
The team is still ramping up, but we believe the early traction they are gaining will lead to increased sales, more paying local vendors and stabilized retention rates.
In our transactions business, continued product improvements contributed to revenue increasing 18% year-over-year, solid growth on top of an 84% growth rate in the prior year.
International online business.
We're in an environment where large-cap Internet companies and programmatic trading desks are putting downward pressure on the prices that publishers like us can charge.
However, we believe our efforts in product and content development will drive growth in impressions and performance for our partners.
We're making good progress, and we're off to a good start.
We still have a lot of work ahead of us, but we've never been more opportunistic about the long-term opportunity for our company.
One more thing, this Sunday is Mother's Day.
And to all the moms out there, we want to thank you for everything that you do.
With that, I'll turn it over to <UNK> with the financial review.
Thanks, Mike.
Our focus is on moving our financial results back towards our current target model of 10% revenue growth and a 20% adjusted EBITDA margin and continuing to be good capital allocators.
In pursuit of this, in 2017, we are taking steps to return our local online revenue to growth, drive solid results in our transactions revenue, deliver stable results in national online advertising and manage our publishing business.
We are also making investments that better position the company to execute our growth road map and into some elevated compliance items.
Total revenue for Q1 was $36 million, flat year-over-year.
Total operating expenses were $34 million, up 13% year-over-year.
Q1 EPS were $0.01.
We ended the quarter with $103 million in cash, down from $106 million at the end of last year, and bought back $5 million of stock in the quarter.
As of last Friday, we have bought back almost $9.5 million worth of shares year-to-date, surpassing the yearly repurchased totals for 2015 and 2016.
Now turning to the individual revenue lines and their respective key drivers of our performance.
In our local online business, revenue increased 1% year-over-year.
For The Knot, on a trailing 12-month basis compared to the prior year comparable period, we ended the quarter with a 4% decrease in vendors, a 5% increase in average revenue per vendor and a 72% retention rate.
I'd note, our quarter-end vendor count was 24,168, up 3% compared to December 31, 2016.
And our retention rate of 72% is up from a low 68% at the end of last year.
In transactions, the increase in revenue of 18% was driven by an increase of our user traffic to our services and the majority of our partner sites.
Additionally, a slight improvement in the conversion rate for our partners contributed to the year-to-year growth, partially offset by lower average order value.
Our take rates remain stable.
For national online, the increase in revenue of 3% was driven by a 25% increase in display ads, partially offset by a 30% decrease in custom ads and lead generation revenue.
The increase in display advertising, which accounted for 64% of national online revenue, was driven by a double-digit increase in sold impressions and a high single-digit increase in our effective CPMs.
Turning to operating expenses.
In sales and marketing and product and content, our 2 largest expense categories, the increase in expenses were consistent with our strategy.
For sales and marketing, the increase was driven by our investment in expanding the local sales organization and advertising.
In product and content, the increase was driven by our continued investment in enhancing our user experience and the functionality of our local vendor marketplace.
In G&A, the increase was primarily due to an incremental corporate business tax charge and compliance costs.
Finally, our 2017 outlook remains unchanged from what was discussed during our last earnings call.
As a reminder, that guidance calls for our business to trend back towards target model after Q1 but has us falling shy of our model on a full year basis.
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.
Yes.
<UNK> on the first question, as we look across the different business lines, we continue to see good product development, good KPIs and good execution, in particular on our transaction line item and on our local business, as our local business climbs back out on the systems issues from last year.
So we continue to feel optimism there.
On our national advertising business, we continue to believe that we can deliver a steady growing business.
It's one that's going to require us to push harder on the inventory that we sell to our customers and the way that we deliver for those customers because we've got some of these bigger macro level issues affecting the online display business.
We've articulated those on ---+ in these discussions before.
But overall, what we're seeing is in line with what we have planned for and expected and what we've guided you guys to, and that's the source of our confidence.
On your second question, we don't specifically ---+ we don't share the exact number of sales and support people in the local ad sales team.
I've indicated that we're growing that team to help to support the growth of our local business, and the costs of that growth are already contemplated in the guidance that we've given you guys.
Sure.
So on national online, I'm not sure if you were on the beginning of the call, but it was driven by a 25% increase in display, offset by a 30% decrease in custom ads and lead gen.
That display business is about 64% of the business in the quarter.
And there, we are growing our sold impressions in the double digits, with a high single-digit increase in our effective CPMs.
In terms of the custom and lead gen, the decrease was driven by just the lumpiness of that custom business.
And as Mike said, our goal here is to deliver a steady business, and we're watching this business carefully to make sure that we are always operating against the environment we are in.
And we continue to believe we can deliver a steady business in this area.
Yes.
<UNK>, what drives the success for the local business is us doing a good job of connecting ---+ attracting more couples, connecting those couples to the vendors who can pull off their wedding.
And as we continue to see solid performance in our user metrics and in our ability to connect those users to vendors, we have to continue to invest in the team that sells and services the vendors who drive that local revenue line.
That's what you're seeing there, and it's all in line with what we've been planning for and the expectations that we've set for you guys in recent calls.
Yes.
And then in case you've missed this part of the call, I would just note that the December ---+ the vendor count from the end of December to now is up 3%.
Our retention rate is now 72%, up from 68% at the end of last year.
So you're starting to see our KPIs come forward with us to underline the business as well.
<UNK>, if you ---+ to refer to the investor presentations we've shared in the past, you tend to see the bulk of our optimism and enthusiasm for our long-term opportunity to be around really growing that ---+ the local business and continuing to drive strong growth in our transactional business.
We think of our national advertising business as a ---+ as one that can be a steady grower, but not one that delivers that same kind of numbers as our opportunity in local and in transactions.
Our print business is in secular decline and will continue to be in that ---+ to be in a significant state of decline, just as is the rest of the industry, and we've prepared ourselves for that.
<UNK>, would you just ---+ would you say the last sentence, again.
We lost you there.
Great.
So to your first question, it's important that I restate this.
Our goal and our intent is to grow EBITDA at this company, and the way that we're going to get that is growing revenue faster than we grow costs.
I'll let <UNK> chime in with more of the specific guidance, but I don't want that to be lost in this discussion.
We're here to significantly grow value to our shareholders, which we will grow by growing EBITDA.
<UNK>, did you want to comment on the Q2 number.
Yes.
I think we don't really give quarterly guidance.
But what we have said last quarter and we continue to say now is that in Q2, we think the financials can trend back towards our target model, so that guidance is unchanged.
In terms of the operating expenses of the company, if you kind of run through our model, you end up with OpEx growing a little bit faster than revenue, particularly here in the early part of the year.
And as you look at that one thing I'd have you note is G&A, in particular, we have some elevated costs there, mainly due to compliance issues and also the adoption of 606.
606, for a company like ours with so many revenue lines, is a big, big project.
Our long-term intention is for G&A to grow slower than revenue, but you will see that be higher here in '17.
And again, our overall '17 guidance is unchanged from what we went through with you guys last quarter as well.
And <UNK>, you had a question there on the national advertising business.
Our ---+ as you think about the 2 different ---+ the 2 components, one is the display business, the other is custom content and performance products.
The display business is driven by the amount of inventory we can create, which is based on the amount of the number of couples we can get to come to the site and how many times they click.
The second is the price that we're able to charge advertisers for that inventory and our ability to sell through that inventory.
We saw fine growth in that piece of the business in the first quarter of 2017.
The second piece of these bigger custom-content deals on a business pinhole whose total revenue in a quarter is in the $10 million range, any one of these custom-content deals could be $0.5 million, $0.75 million, et cetera.
And so the lumpiness of the performance of that custom-content business just ---+ it really shows up in one quarter's numbers.
So there's nothing broader going on there other than we had planned for the team to sell another 1 or 2 of those deals in Q1 that didn't just come through in Q1.
Yes.
I'm have to double-click on that again.
<UNK>, one of the things that we started hearing from our investors and our analysts was we started to see folks look at our local businesses as if we're now becoming 2 different businesses, one where we sell listings, and one where we sell transactions.
And that's not the way we're looking at the business, so we try to bring clarity to that business model and how you should look at our business from the outside.
As far as we are concerned, it is our job to connect our couples with local vendors and help those couples transact with those vendors.
That is the job.
When a venue or a DJ or a photographer buys inventory from The Knot, that is the reason that they're buying inventory from The Knot.
We are launching a bunch of products that bring that couple and that vendor closer and closer together, and ultimately, facilitate the transaction.
We are flexible on whether or not we will charge our vendors for a listing or for a transaction.
We will continue to pursue the pricing strategy that maximizes our revenue opportunity.
If you look at our suite of products, you already see a blended model on GigMasters, where we ---+ when you sign up for GigMasters, you pay a listings immediate fee, and you pay a percentage commission per transaction.
You don't see a model like that today on The Knot.
But to re-emphasize, we continue to be bringing our couples and our vendors together so that they can execute the transaction, and we will continue to be flexible on the model that we use in our local business that optimizes its revenue.
Does that make sense.
Yes.
We've ---+ as always, there are a lot of product development pokers in the fire.
And as these products launch, we get a better sense for how much impact they'll have on the business.
So I can best give you color on this by looking backwards at some of the things that we've done in the past that have worked.
In 2015 and 2016, work that we've done around the overall guest platform and work that we've done specifically around creating the best free wedding website product in the space.
It's what has been a significant driver of that business.
The more couples are coming, create wedding websites with us, the more likely they are to create a registry with us or connect one of their registries to us, and the more likely they are to share it with their guests.
That's been a real driver.
We've got a bunch of stuff we're working on here in 2017 that we believe in aggregate will be a real contributor to the business.
As things ship and as they start to demonstrate success, those are the kinds of things that we'll continue to share with you guys.
