Executives
Ian Morris – CEO
Jacqueline Davidson – VP of Finance
Mark Lamb – Director IR
Market Leader Inc. (LEDR) Q3 2008 Earnings Call November 17, 2008 4:30 PM ET
Operator
Welcome to Market Leader conference call regarding results for the third quarter of 2008. Joining us today on the Market Leader call will be the CEO Ian Morris and the CFO Jacqueline Davidson. To introduce today’s call I will now turn it over to Market Leader’s Director of Investor Relations, Mr. Mark Lamb.
Mark Lamb
Welcome everyone to Market Leader’s third quarter investor conference call. This conference call contains forward-looking statements relating to the company’s anticipated plans, products, services, and financial performance.
The words believe, expect, anticipate, intend and similar expressions identify forward-looking statements but their absence does not mean that statement is not forward-looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that could cause actual results to differ materially from those anticipated in the forward-looking statements.
The factors that could affect the company’s actual results include its ability to retain and increase its customer base, to respond to competitive threats and real estate market conditions, to manage lead generation and other costs, to develop new products, to successfully rebrand the company, and to expand its new lines of business.
Please refer to the company’s 2007 Form 10-K and the most recent Form 10-Q filed with the Securities and Exchange Commission for a more detailed description of these and other risks that could materially effect actual results.
Given these risks and uncertainties you should not place undue reliance on these forward-looking statements. The forward-looking statements are made as of today’s date and the company assumes no obligation to update any such statements to reflect events or circumstances after the date hereof.
Unless otherwise noted comparisons of results made on this call are sequential quarter comparisons that we believe are most meaningful.
This conference call will include discussion of adjusted EBITDA, a non-GAAP financial measure that is a term defined in Regulation G. A reconciliation of adjusted EBITDA with net income, the most directly comparable GAAP measure, is presented in our press release and was furnished to the SEC on October 28, 2008, on our Form 10-K and posted to the Investor Relations section of our website located at www.marketleader.com.
For the third quarter the company scheduled its regular quarterly investor call for today, rather then coinciding with the October 28th date on which we released results under our former company name of HouseValues, Inc.
Our purpose in separately scheduling these events is to facilitate today’s discussion of recent events including the company’s name change to Market Leader Inc. The corporate name change was effective on Friday afternoon, November 7th, and the company’s stock last traded under the ticker symbol SOLD on that date.
The company shares resumed trading on Monday, November 10th, under ticker symbol LEDR.
With that, I’ll turn the call over to Ian Morris.
Ian Morris
Thanks Mark and thanks everyone for joining us on today’s call. We believe that great companies are built in down cycles, a philosophy we’ve shared many times on these calls. And this month we’re pleased to point to the achievement of several significant milestones that demonstrate our progress toward building that company.
First, we announced the launch of Growth Leader, our new marketing solution for real estate agents that’s unlike anything on the market today. Second, we launched Team Leader, the first real estate marketing solution designed specifically to address the needs of real estate agent teams that we believe drive a significant portion of transactions and marketing spend.
And third, we have re-launched the company as Market Leader. HouseValues continues to exist as a well-known consumer website and lead generation product that provides local real estate professionals with the opportunity to showcase their expertise to perspective home sellers.
The same is true of our Just Listed product and consumer website which was recently updated with a new look and feel and will continue to service prospective homebuyers across the US and Canada.
But HouseValues is just one product in our portfolio and as a corporate name it doesn’t effectively communicate the customers that we serve, real estate professionals, or what our services are designed to help them become.
Our new brand reflects our commitment to real estate professionals as well as our ability to provide them with all of the innovative marketing and technology solutions that they need to help them grow and manage their business.
We didn’t take the task of rebranding the company lightly. Our [inaudible] included the engagement of an established brand strategy firm. They interviewed customers and prospects, dug deep into our existing services as well as our product roadmap and had free rein to recommend anything.
This research led to the conclusion that the best name to support our strategic objectives was Market Leader. The Market Leader name tested very well with both prospects and customers. It’s a brand that our customer identifies with because its what they aspire to be and what our offerings help so many of them become.
As a result customer reception to this change has been very positive and the fact that we already owned the trademark and the domain made Market Leader a pragmatic choice as well.
But let’s be clear, while rebranding the company is an important and highly visible milestone, its only one stage in the process of a company-wide re-launch that’s been underway for the past year and we’re confident that our efforts thus far will begin to bear fruit in 2009 and beyond.
The first major step in this process was taken last November with our acquisition of Realty Generator. That acquisition added a profitable standalone business while expanding our customer base to include brokerage companies.
Just as significantly the purchase gave us a software solution that we were confident that we could build into a broader and more unified platform that could benefit all of our customers.
With our product announcements earlier this month, Market Leader now offers the new product family with each product specifically designed to serve a distinct real estate professional customer. For real estate agents Growth Leader provides a steady stream of prospects and the tools and training to help convert these prospects into customers.
For agent teams we deliver this value proposition through Team Leader, which also adds functionality to monitor agent activity and supports team collaboration to deliver better service to buyers and sellers.
And Realty Generator is an enterprise solution for brokerage companies. It delivers everything found at Team Leader and adds both consumer qualification via our call center, and lender integration into the consumer value proposition.
All of these products reach well beyond the capabilities of anything else we see on the market today. At the core of each are three common elements. First a customer branded response-generating website that provides consumers with instant gratification in the form of immediate access to all of the home listings available.
At the same time the site is optimized to both attract consumers and to convert these visitors into prospects. Secondly, each product also provides vision, our powerful new contact management system that provides unprecedented insight into consumers’ online behavior and integrates performance measures and best practices that help our customers cultivate all of their prospects into clients.
And third, access to Market Leader’s ad buying team enables all of our customers to take advantage of our scale and expertise to drive visitors directly to their website at costs below what they can achieve on their own.
We believe that this new product platform represents a major advance in both performance and performance for both consumers and for our professional customers. These new products also mark the beginning of an important shift in our business model that provides benefits to both Market Leader and to our customers.
For many years we were known for the lead generation services, house vales, and just listed, coupled with the leads customers received training, best practices, and powerful software tools. While this bundled approach drove customer and company success and enabled rapid scale, it also diminished our ability to get paid for the full vale we deliver via our software and training components, components which are increasingly becoming important differentiators for Market Leader.
With our new family of products, Growth Leader, Team Leader, and Realty Generator, a key difference is that our value proposition is aligned with the value added. Instead of selling leads which were generated on our site, we’re providing a complete online marketing system along with the advertising services that enable our customers to generate a steady stream of prospects on their own branded site.
We believe and our experience would [inaudible] generate our customer support that this approach delivers a higher quality and more engaged consumer prospect. As a result we expect agents and teams to embrace this technology as their marketing system, just as Realty Generator customers already have.
As they do, we’ll enjoy recurring revenue from this software as a service model while giving the customer new flexibility to customize their offering and adjust their monthly advertising spend. In addition to these new products we’ve also begun implementation of new internal business systems that streamline our back office processes all built around off-the-shelf software solutions.
Ultimately we expect these new tools to provide the infrastructure to rapidly scale all lines of business, replacing inflexible proprietary systems that have limited our ability to deliver new products quickly and achieve operating efficiencies.
Our technology and operations teams deserve credit for delivering these new products and their supporting internal business systems despite intentionally constrained resources and I commend them for their exceptional efforts throughout the year.
Even as we’ve taken these bold steps to build a truly great company, we’ve done it while demonstrating disciplined expense management. The result is that Market Leader generated $1.4 million in cash from operations and $1.5 million in adjusted EBITDA during the first month of the year despite market conditions that have been and continue to be worse them many anticipated.
Unfortunately we expect the challenging real estate market to persist in the coming months agitated by recent turmoil in the financial markets. This will require us to be both disciplined and creative as we continue to enable real estate professionals to utilize our products despite their own financial challenges, and their understandable caution in taking on new commitments.
Fortunately we have the resources, the talent, and the products to weather this storm and the commitment to do what it takes to position ourselves for profitability, long-term growth as [continues to] normalize.
And with that I’ll turn it over to Jacqueline who will discuss our results for the quarter.
Jacqueline Davidson
Thanks Ian, revenue was $9.3 million for the quarter compared to $10.1 million in the second quarter. Our revenue included $1.6 million from Realty Generator. The Realty Generator contribution represented 13% sequential growth over the second quarter.
The company posted a third quarter net loss of $1.8 million compared to $1.3 million in Q2, the increased loss driven by higher stock compensation charges as well as slightly lower adjusted EBITDA.
Our lower revenues Market Leader generated positive adjusted EBITDA of $700,000 compared to $900,000 in Q2. Taking a look at the expense line items, sales and marketing expense was $400,000 less in Q3 compared to Q2 and increased slightly to 63% of revenue from 62%.
We expect the cost of our Market Leader rebranding efforts to add approximately $300,000 to our expenses in 2008 that will effect primarily our sales and marketing expenses. Of this amount we incurred about $66,000 in Q3 and expect to see the balance in Q4.
Technology and product development expenses were slightly lower in absolute terms and 15% of revenue, consistent with the Q2 percentage. The $100,000 general and administrative expense increase reflects higher stock compensation expense that was somewhat offset by operating expense savings.
G&A’s percentage of revenue increased to 25% from 22% on lower revenue in Q3. The primary driver of our lower revenue this quarter was fewer customers. We ended the quarter with 8,381 real estate professional customers. Overall we added 971 customers in the third quarter. Cancellation of 1,668 customers was lower in the first and second quarters.
We continue to focus on finding solutions for customers who want to keep their service but may need to temporarily reduce their marketing expenses due to financial pressures. We believe this customer retention focus may continue to drive some downward pressure on average revenue per customer.
In the third quarter we saw a modest revenue impact from lower average revenue per customer that was $351 compared to $360 in the second quarter. The average monthly retention rate was 93.6% in the third quarter which was the best retention rate we’ve seen in seven quarters and consistent with the second quarter rate.
Given the current difficult economy we may see lower retention rates in the near-term. Regarding headcount, we ended the quarter with 167 employees which compared to 176 at the end of the second quarter. The third quarter count includes 117 in sales and marketing.
Turning to the balance sheet, note that a $2 million liability associated with discontinued operations comes due in Q4. Our cash position though remains strong at $62 million at quarter-end. Our investments are Treasury Bills, and money market funds that invest in high quality short-term US government obligations and repurchase agreements fully collateralized by US government obligations.
We continue to monitor our investments with the primary goals of security, liquidity, and reduced risk. Year-to-date we have generated $1.4 million in cash from operations. We have invested $1.8 million in capital expenditures, a majority of which pertains to capitalized software development costs related to the new products and improvements in our internal business systems that Ian mentioned earlier.
We consider our strong cash position an asset to be deployed for strategic purposes and we consider the limited repurchase of shares at opportune prices to be one of these purposes.
Year-to-date we have used $2 million to repurchase and retire approximately 822,000 shares at an average cost of $2.44 per share. We have approximately 900,000 shares remaining under the existing share repurchase authorization.
While we may take advantage of attractive buying opportunities created by market volatility we also believe that continued investment into our products and building a profitable base of customers best position Market Leader for the eventual turn in the cycle.
While existing home sales suggest that some real estate markets may have bottomed, we believe that broader economic anxiety increased in October and November, and that this negatively impacts transaction flow.
As this slowdown will no doubt impact commissions that ultimately fund our customers’ marketing expenditures, we are expecting recent revenue trends to continue in the fourth quarter. Nonetheless given our performance year-to-date, and our ongoing management of our cost structure, we have increased confidence that both adjusted EBITDA and cash from operations for all of 2008 will be positive.
Operator
There are no questions at this time; I would like to turn it back over to management for any additional or closing comments.
Ian Morris
I would just like to thank everyone for joining us on today’s call. While we’ve been quietly at work for some time November has been a very exciting month for us as we finally shared publically, yearly fruits of our efforts in the form of an updated suite of products, wrapped in our new Market Leader company name and product framework.
To commemorate the official launch of Market Leader, NASDAQ will feature the company in its closing bell ceremony at the NASDAQ market site in Times Square, on Monday, November 24th. In the meantime we look forward to continued discussions with investors in the weeks and quarters ahead and as always, thank you for your support.
Question-and-Answer Session
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