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Bazaarvoice (BV)

February 27, 2013 3:45 pm ET

Executives

Stephen R. Collins - Chief Executive Officer, President and Director

James R. Offerdahl - Chief Financial Officer

Analysts

Adam H. Holt - Morgan Stanley, Research Division

Adam H. Holt - Morgan Stanley, Research Division

Morgan Stanley on the research side, and I'm very happy to be starting off the afternoon session with Stephen Collins, the Chief Executive Officer; and Jim Offerdahl, the Chief Financial Officer of Bazaarvoice. So thank you so much for coming.

Stephen R. Collins

Thanks.

Adam H. Holt - Morgan Stanley, Research Division

Why don't I maybe, Stephen, start with a question for you? The last 6 months has been a busy 6 months for you all. You had a couple of acquisitions, some changes, maybe set the table for how you have moved the positioning of the company for the opportunity set that you see on a going-forward basis?

Stephen R. Collins

Okay, great. Thanks for having us today. So first and foremost, the acquisitions we've undertaken over the last 6 months have -- are consistent with our strategy that we articulated, as we went public a year ago, just about a year ago today. And number one, so I think most of you know what we do, we provide ratings and review solutions to online retailers and to the brands that sell their products through those retailers. That's a very valuable digital marketing asset. And in providing that, we have built a position where we have the largest number of online retailers and brands on a single network, on a single technology platform, with all that consumer data and sentiment data in a single database. So we've got a network that exists because it does. And the way we help create value from that network is when Procter & Gamble deployed our solution on tie.com[ph]. They collect the content. We then display that content on the retailers that sell their products like Walmart, for example. So that's how we create value. So when we think about growth and with think about how to build the value of our company and create value for customers, we think about how do we monetize that audience. And in fact, our clients, particularly our retail clients, ask us how can we monetize our site better. So the first question is how do we build a bigger audience. So when we acquired PowerReviews, the impetus behind that acquisition was to expand the consumer audience, which would help us grow our brand business, which is grow -- is the fastest-growing segment of our company. So they had 85 IR 500 or Internet Retailer 500 businesses as clients, clients like Toys "R" Us and Staples, for example. So we brought them into our network. We were able to integrate the data site and use our content operations capabilities to do more structuring of that data. And what started to happen is now Procter & Gamble is taking their content. We're now able to display that on PowerReviews clients, and Procter & Gamble pays us more money to do that. So that was a key synergy there.

The second acquisition that we made was the acquisition of Longboard Media. So again, the hereto, this was a transaction that was consistent with our strategy of monetizing the audience. What Longboard does is they sell advertising on online retail sites. And this is something that's really new in the ecosystem of interactive advertising and marketing. Online retail audience had -- it isn't really part of the equation. And one obvious reason is that retailer does not want someone to click away from their website once they spend a lot of money to get them there. So the better way to think about what Longboard does is they're bringing co-op dollars from the brands that are spent in physical stores to the online realm.

In addition, Longboard had clients and has clients like Sears, Overstock and Newegg. These are all very important retailers that are not currently Bazaarvoice ratings and reviews clients. So there's a natural channel synergy there. And very importantly, again, our retailers say, "We want you to work on site monetization." We now have that capability, and there's also a very important data synergy here. And that when you're working with your retailers and you can create value from their audience and their data, that allows us to improve and enhance our data assets and what we can do from an analytics perspective for our installed base. So that's why a media capability is important for our company. We sell a digital marketing solution. We monetize audience.

Adam H. Holt - Morgan Stanley, Research Division

Okay, got it. And then if you were to overlay a couple of things outside of the acquisitions that you've done. You've introduced some new products, and you've made some changes to your structure, could you walk us through what you've done there as well?

Stephen R. Collins

So from a product perspective, honestly, it's really pretty straightforward. Our objective is to add a lot of new accounts, build the audience, build the number of retailers and brands around the world. And that is and has been our #1 objective. Our new products include the media capability. They include what we call Connections. And so to define the 2 offerings for brands and retailers, if you have a website with lots of traffic, whether you're a retailer or tie.com [ph], you buy our ratings and reviews platform. But if your brand and you do not have a tie.com [ph] equivalent site, so you don't have that traffic, until 2 or 3 quarters ago, we had no way to do business with you. What Connections allows a brand to do, someone who sells their products and one of our retailers or more of our retailers, is directly connect to the review feed across our entire network. So they can respond to reviews, answer questions and monitor what consumers say across thousands of retail sites. So that's the offering for a brand that does not have or a need for ratings and reviews. And on our network today, just looking at our database, there are more than 50,000 brands and suppliers that have a product with at least one piece of content on our network today. And so, every single seller should want to plug right into that portal and monitor their activity there. And so that provides a great efficiency to them. Now -- so that's really where we are with the product. You've got the media capability, you've got connections, and the rest is all land grab[ph]. In terms of our structure, I would say not too much has changed. We segment our sales force by the brand side and the retailer side, because the value prop and the pricing is very different. Obviously, we had a CEO change at the beginning of the quarter. But that was not structural, that just a single position. And we aren't really making fundamental changes in that regard. We are trying to bring in additional personnel or expanding the sales force. We're bringing in more leadership talent to supplement the team that we already have. We have aspirations to expand into emerging markets and APAC through partnerships in China and things of that nature to get ahead of the e-comm curve.

Adam H. Holt - Morgan Stanley, Research Division

If we were to look at the brand and the retail markets, how would you speak to the opportunity set in each? And how you think about the growth dynamics of each?

Stephen R. Collins

Sure. So a retailer wants the following 3 things from us. They want some other things, but this is what they'll list if you talk to them. We want more content and to quote a large retailer, "We would like to have more reviews per SKU than Amazon has for our competing SKUs." If they only have a few hundred thousand visitors, that's hard. But that's where were come in with our network effect. They want better conversion. They want us to use our -- all our tools and capabilities to help them convert more shoppers when they visit the site. Obviously, reviews help them do that. The data behind the reviews helps them do that. They want them to buy more when they're there. And third, they very specifically say, "We want you to help us with site monetization." And one way to do that is through shopper media advertising. They also talk about SEO capabilities and helping them get more traffic. Traffic, they talk about using our data for retargeting to get more traffic to their site. So that's what the retailer asks us to do. What the brand asks us to do, if -- so let's use, again -- let's use 3M as an example. They want to obtain reviews about their products, and they want to own those reviews. And then they want to take that content and use it in a number of ways. Internally, they use it in market research. They use it in product marketing. They determine how to enhance their product. They build advocates. Most importantly, they want us to display that content to a large audience. So when we take the reviews on a posted note and, yes, there are thousands of reviews on posted notes, and then we put that out at Staples, OfficeMax, Office Depot, Home Depot, et cetera, hundreds -- tens to hundreds of millions of consumers see that content and it has a profound impact on their purchasing. So that's how each aspect of our business thinks about our value proposition. And there was another part of the question. I think...

Adam H. Holt - Morgan Stanley, Research Division

How big do you think those relative opportunities are? And how penetrated are the relative opportunities?

Stephen R. Collins

So on the retail side, both in terms of dollars and in terms of available accounts, we are more penetrated. That's been the case for some time, and that's a good thing. But still, we only have about half of the largest 500 retailers in the U.S. We only deal with their online businesses. All our clients have robust offline businesses that constitute 80% to 95% of their revenues. Just think, again, Home Depot, Walmart, Walgreens, Best Buy, et cetera. So that data can be equally valuable to them for their off-line business. But we haven't even gone to that side of the fence yet. We have about 25% of the largest 400 retailers in EMEA, and e-commerce is just emerging in APAC and Latin America. It's very concentrated and very small. And mobile, I think, will play a big part there.

Adam H. Holt - Morgan Stanley, Research Division

So the greater retail ecosystem has a large addressable market but if you just narrow it down to ratings and reviews for online retailers, there's room to run there. But it's not a $1 billion business. On the other hand, what brands spend through co-op marketing and what brands spend on marketing technology is a vast addressable market. So even with our largest brand clients, which are, in client count terms, are only about 1/4 of our client base on the enterprise side, yet half of our revenues. The most penetrated -- we're about half penetrated into some of the larger accounts. And that means multiple brands, multiple countries. We have approximately 120 to 125 Fortune 500 clients. And in terms of share of wallet, these budgets have not even become coalesced into formal spend. So we think, looking at the brand spend around what we could do in terms of whether it's advertising selling our SAP solutions, selling share voice analytics, et cetera, there's an enormous addressable market there. And it starts with establishing a relationship with the next Procter & Gamble, getting content for them and then getting that content to the audience of shoppers that they want to reach. And we grow the business from there.

Adam H. Holt - Morgan Stanley, Research Division

You hit on actually a couple of, I think, really interesting points there. So the first is that a lot of the marketing dollars haven't really become specifically targeted around tech. And one of the things that we've heard consistently is a theme this conference and over the last few months is that marketing is a big area of potential technology automation. Do you feel like -- where do you feel we are from a buyer perspective in terms of that actually becoming to a reality? We're seeing...

Stephen R. Collins

I think we're a long way off. So first of all, there's marketing automation. We are not marketing automation. We are flat-out audience reach. When -- our products, we directly interface with the consumer. So when you go to Walmart and Home Depot, those consumers are directly interacting with Bazaarvoice. There's no middleman. So we actually control pixels and audience numbering in the hundreds of million. So -- but -- so we provide a very important tool, but it's not a workflow tool. There are lots of workflow tools, and there are lots of ad technologies with SaaS models that are being marketed to CMOs. That's the problem. I was at the Interactive Advertising Bureau Conference yesterday. There were 300 companies with some form of marketing technology. Many of these companies have Saas pricing models. It is an incredibly confusing landscape. And what I can tell you is, if you're a marketer, it's -- where do I reach my audience? That's where it starts. And so there's a huge amount of experimentation, and there's a huge amount of fragmentation in terms of these new offerings coming into the space. And I think they'll be a -- an enormous shakeout and an enormous level of consolidation. So how do you pick the winners? Well, for us, we have a challenge on that front, too. What do we sell to our clients. So there's perhaps acquisition opportunities there. But for investors, more generally, I think you can look at, is the client -- is the target doing something very narrow in terms of marketing need? Do they have assets like content, data, audience? The winners tend to aggregate audience and provide an efficiency to the marketing spend that you're interfacing with. So I think we have a unique position in the fact that our installed base and our reach in terms of brands, retailers and consumers is vast compared to any of these other players. So I think we're a natural consolidator, and I think we have the raw material that gives us sustainability and a platform to grow, while all this works itself out. I think if you look at Facebook, there's plenty of debate about whether or not they got it right with advertising. Maybe they do, maybe they don't. But they do have 1 billion people that they reach. And that's what matters to a marketer. So value in the marketer's eyes is a function of content and data times audience, times utility, utility being whatever technology is brought to bear. We can bring all 3 components to bear to create value. We reach a massive audience. We have unique content and review content and the metadata associated with that. And we've got utility in the form of the intellectual property we've developed with our platform. Most of these companies you're referring to often just have the utility aspect of the formula or the equation. And so they look at us and say, "Can you please let us sell to your 1,200 clients. You've already got them all."

Adam H. Holt - Morgan Stanley, Research Division

So how do you then think about the competitive landscape?

Stephen R. Collins

I think of it a lot, first of all. It's the same thing that I think gives pause to investors when they're trying to understand what are the competitive threats is also the same dynamic that creates our opportunity. So there are a number of consumer behavioral changes around mobile, social networking. There's big data. And a lot of these are buzz words, but they're creating a lot of confusion and disruption in how people are thinking about marketing and merchandising their products. So that creates opportunity. But you -- there are open-source, free solutions to provide reviews in a non-network way. That's always been true and our primary competition is that people just simply do it themselves. For brands, they may choose, "That's not that important to me. I don't have tie.com [ph] site. This is irrelevant to me." So they spend their money elsewhere. Maybe they do social listening with a company like Radian6, or they really enhance their Facebook presence with working with Buddy Media. Both these companies are owned by salesforce.com, as a matter of fact. And while I don't have the exact numbers, Bazaarvoice is substantially larger than those 2 companies put together. They -- and they're considered leaders because of the value they create. So Bazaarvoice today is already one of the largest and most successful companies in this genre, if you will. Let's call it social e-commerce. But everyone is competing for that share of wallet. Everyone is trying to build a better mousetrap. So you have hundreds of startups that have a very narrow solution that could be something we might -- that might be an opportunity for us. In addition, ad:tech, tags and tracking pixels and cookies and Google AdSense and any number of other technologies are coming into retail. Walmart sells a lot of advertising. Amazon.com, in just a few years, has a $1 billion to $2 billion a year co-op ad business, display ad business, that they sell through Amazon media division. And that's huge -- that gives them huge competitive advantage against our clients, for example.

Adam H. Holt - Morgan Stanley, Research Division

I want to drill onto you a couple elements of the model that I think are very compelling. One, you talked about, on the brand side, the evolution and growth of your customers. Can you walk through some of the cohort work that you've done and how your customers tend to grow over time, both in terms of volume and product usage?

Stephen R. Collins

Yes. So our first class, I think it was the class of 2006, so we're up to the class -- building the class of 2013. I'm a football fan, so I think about these as recruiting classes. So you have a good recruiting class. Those grow. So on the roadshow, we called out the class of 2008. And we -- and just to jump ahead, we're getting question, is this class an anomaly? And the answer is no. So the dynamics I'm about to describe are characteristic of the classes of 2006 through 2012. So the class of 2008 started with approximately 124 clients. There are 91 left. And that book of business was about an annual recurring value of $13 million. That book of business now is about $30 million. And so what we see happening is when we bring clients in, the first thing they do is they expand horizontally, more brands, more countries, which is how we price. And even retailers have this opportunity to some degree, if they have multiple sites. In addition, we have add-on products, most notably, content syndication, for example, Facebook applications and other things. This is less of a driver of our growth but still an important driver all the same. And so the successful approach for us is get that first ratings and reviews implementation and then penetrate the account from there. So as we discussed on our earnings call more recently, while those dynamics are in place, our class of -- our recruiting class of 2012 and early 2013 in the form of new account addition was not robust enough to continue the dynamic that we desire. And that was simply because our sales force in our company had leaned more towards upselling the accounts like P&G and not as much towards adding those new accounts to build another strong recruiting class. So now we've got the -- since I've taken over, we've hired great recruiters. And they're back out talking to the high schoolers and bringing them in. And that's essential to our growth model. We want a balanced attack. Roughly 50% of our new billings and bookings are coming through new clients, and 50% are coming from the client base. If you get out of balance, when you're at a point where they will never be a cheaper to acquire your market share, you run the model out too quick. And so those are the economic characteristics of the business. They're important. You have to have that balanced attack. And when we do that, when we focus on share acquisition, land expands and grow over time. We have a very robust growth engine. If we get unbalanced, we don't.

Adam H. Holt - Morgan Stanley, Research Division

You're fairly comfortable that you'll get to that 50-50 mix over the next 6 to 12 months.

Stephen R. Collins

Well, without being specific about the mix, what I can tell you right now is I'm over-indexing the team on the new. Because we spent too much time farming, and this is I've talked about quite a bit on earnings calls. And it's very -- if we have to choose, strategically, it's much more valuable to acquire the new. And you don't necessarily have to monetize them the next day. So I want to get us back into balance first. But that means, for a while, we're going to over-index on new and make sure we retain on the existing client base.

Adam H. Holt - Morgan Stanley, Research Division

You've also had a nice increase in the number of sales folks that you have. Maybe walk folks through how long it takes people to get ramped and sort of when you would expect those capacity adds to come into the model.

Stephen R. Collins

It's 9 to 12 months. I think that's typical of many companies. And -- but we're not in a replacement market. So I think there's greater hiring risk and ramp risk for us because you're selling the brands and other things. And you're often talking to very important top officers, CMOs, when you're doing that. And so I think it's prudent to have extra capacity to account for the folks, the bat -- maybe the inherently lower batting average that you might have in a market that you're creating. And we didn't do that, as well as we should have in 2012. But I think we're getting on track. But we're still in a ramping mode there.

Adam H. Holt - Morgan Stanley, Research Division

Got it. I'm going to ask you one more question and then I'll turn it over to the audience for any questions that you have. I've got to ask this sort of obligatory question to at least give you the opportunity to address it.

Stephen R. Collins

That's a scary setup.

Stephen R. Collins

Well, I mean it seems to me in the conversations that we've had is that the DOJ action is not actually taking much of your management's time and you got some folks working on it. But the operational disruption has been very limited, if any. But maybe can you talk about what you've seen there and how you're -- to the extent you can't comment on what you would expect to happen around that, that would be...

Stephen R. Collins

Let me briefly comment. I also invite, in just a second, Jim to comment. He's been here 4 weeks, and he's been able to observe the company, that impact on the company. Our legal team is pretty much dedicated to this. But they're taking most of the burden. Speaking for me personally and particularly the brand teams and other things, I would say there's a de minimis impact on our time now. I tend to think about it often, but I'm able to focus on the business as the rest of the executive team is able to focus. There's no question that on the retail side, you have to be a little more circumspect about -- during this kind of phase about how you run the business and how you deal with the PowerReviews client base. And so we're being respectful of the uncertainties there as you would imagine that we would. But we disclosed on the call, trial date is set for September 10. We're looking forward to that -- having our day in court. And so I think resolution is not too far off. So Jim, do you want to comment?

James R. Offerdahl

Yes. My observation is in just watching your company for the last 4 weeks is, it hasn't really impacted us operationally. People are doing their jobs and not really impacted by the DOJ situation. Other than, like I said earlier, the folks are in it and will be in it for a while. But again, it's nice to see that it is scheduled. There is an end, and it's not too far in the future.

Adam H. Holt - Morgan Stanley, Research Division

A few hundred-degree days in Austin. [indiscernible]

Stephen R. Collins

Well, I don't want to be too cavalier. But yes, it will be fine if we could bring the Department of Justice guys down to Austin and just do our work outside.

Adam H. Holt - Morgan Stanley, Research Division

That's right. They'll do it out under the oak tree.

Stephen R. Collins

But they're doing their job, and this is the world we live in. The employees that we brought over and the clients that brought over, I feel very confident. They're pleased to be part of this team. The efficiencies we brought to the marketplace vis-à-vis our brands, I think, are highly valued by the marketplace. We're using our fraud detection and content operations capabilities for the benefit of PowerReviews' clients with no additional charge. That's a huge benefit to the consumer, into the industry. So as I said on the call, we feel very confident about the fact the law, and the marketplace realities are on our side. But it's very difficult to predict the outcomes obviously.

Adam H. Holt - Morgan Stanley, Research Division

In the front?

Unknown Analyst

So from the time of your IPO to now, could you tell us from a big-picture point of view whether or not this sort of psychologically shoots around the DOJ and management changes versus perhaps the execution issues? How you feel the company has done from your point of view from what you said on the IPO to where you are now?

Stephen R. Collins

Well, interestingly enough, the tale of the tape is pretty compelling. We went public, and I think when we first officially initiated our guidance, it was in the mid-130s. So we're tracking in the zone of $160 million in revenue today. But just if you look at apples-to-apples organic growth, we're about 20% above that range. If it's valuable to you, we'd beaten and raised pretty much every quarter we've been public. Our strategy has been consistent both before and after the CEO change. Accelerating our -- we used our balance sheet to add a bunch of new accounts for the Powerviews acquisition. That was strategically important. We -- at the IPO, we talked about developing a media capability. We ultimately put money behind that organic effort and concluded that buying was the way to go. So I think we've done everything strategically we set out to do. And there really hasn't been a deviation from that, and we're significantly larger and more profitable than we were and what we forecasted at the time of the IPO. Our position in the marketplace in terms of the number of clients we have, the lead position, the intellectual property, the content, I think, outstrips people in the same space. So I like our -- the assets we've accumulated. I think we've got an outstanding team. Now what didn't we do well? An area we didn't do well are -- is the team really and the management, that's me, too, we all got focused on dollar -- adding dollars. And we didn't incent the sales team to discriminate between the new account and existing account. The compensation program treated each equally. We didn't get that great recruiting class in 2012, and that inhibited our ability to maintain growth momentum in the near term. But because we're not in a replacement market, the market opportunity remains. We just didn't take advantage of that through successful execution that would've allowed us to maintain even substantially higher growth rates than we are right this second. But with that being said, what was our year-over-year growth rate this quarter?

James R. Offerdahl

55%, including a couple of acquisitions; organically, between 35% and 40%. So still pretty strong.

Stephen R. Collins

Can't change the last 2 or 3 quarters in terms of new client adds -- new account adds, but we have the same competitive position and strength and asset base the we have before and then some. And Jim, as part of his diligence coming into the company and certainly my diligence this last quarter as CEO, the primary question I'm trying to answer for the company and is, what's the addressable market? And I wouldn't be in this role. I don't think Jim would've joined the company if that analysis didn't yield a darn good answer. And the question for us is, how much does it cost to win that market? And how do we define success and bring in the right personnel to do it? So I think we're in an outstanding position, and do I wish we had been sharper on new account acquisitions? You betcha. Do I wish we didn't have a DOJ issue? Of course. But this too, shall pass.

Adam H. Holt - Morgan Stanley, Research Division

Yes. Unfortunately, we're out of time. But...

Unknown Analyst

Should I do it real quick?

Adam H. Holt - Morgan Stanley, Research Division

Yes, let's. Please.

Unknown Analyst

It's a sort of potential conflict-of-interest question for the brands and the retailers. I argue that as a consumer, one of the reasons to go to Amazon, not the only reason, is that they have more reviews than anybody else. So we can figure out what you want to do or not do. It seems like if you're buying a shredder or something, Office Depot wouldn't want that review, and Staples would not review and sellers would not review so -- and as a consumer, that's frustrating because I have to go to many places to find out something about that product. How does that...

Stephen R. Collins

Yes. That's where we come in. By building a network, we go to the manufacturer of that shredder. And if they get one review, we can take that review and put it in every single place that shredder is sold. So when you go to Office Depot, Staples or OfficeMax or Amazon...

Unknown Analyst

But Staples do not like that.

Stephen R. Collins

But Staples wants that. That's exactly -- that's -- they want more content. That's their #1 objective for us, and that's why we have a brand business. Just like our accounts say, "Where can I get more reviews?" So the brands actually pay us to put that content at retailers. And that's the #1 demand or expectation of a retailer for us is to bring them that content. That's what we do. That's why our network solution is so important.

Unknown Analyst

So were you finding that the retailers are okay with that?

Stephen R. Collins

Not only are they okay with that, they -- that's how they define value. They stay and they -- we retain them only if we get some content.

Adam H. Holt - Morgan Stanley, Research Division

Terrific. Thanks so much, everyone.

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