XO Group Management Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: XO Group Inc. (XOXO)
by: SA Transcripts

Operator

At this time, I would like to welcome everyone to the XO Incorporated Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. At this time, I would like to turn the conference over to the company.

Malindi Davies

Thank you. Welcome to XO Group's second quarter 2013 conference call and webcast. During the course of this conference call, comments that we make regarding XO Group that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements. Any such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words like may, should, expect, plan, intend and other similar terms. You are cautioned that these forward-looking statements speak only as of today's date. Our internal projections and beliefs upon which we base our expectations may change, but we will not necessarily inform you if they do. XO Group's policy is to provide expectations only once per quarter and not to update that information until the next quarter.

The important factors that could cause actual results to differ materially from any forward-looking statements mentioned today include, but are not limited to: one, our online wedding-related and other websites may fail to generate sufficient revenue to survive over the long-term; two, we incurred losses for many years following our inception, and may incur losses in the future; three, we may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall; four, sales to sponsors or advertisers may be delayed or canceled; five, efforts to launch new technology and features may not generate sufficient new revenue or may reduce revenue from existing services; six, we may be unable to develop solutions that generate revenue from advertising delivered to mobile phones and wireless devices; seven, the significant fluctuation to which our quarterly revenue and operating results are subject; eight, the seasonality of the wedding industry; nine, our e-commerce operations are dependent on Internet search engine ranking and our ability to influence those rankings is limited; ten, the dependence of our registry services business on third parties; and eleven, other factors detailed in documents we file from time to time with the Securities and Exchange Commission.

Additionally, if you have not received a copy of today's press release, the release is now posted on the Investor Relations section of the company's website at ir.xogroupinc.com. We have allotted up to 1 hour for today's conference call, including the question-and-answer section that follows. Please take note that the company is operating under the SEC Regulation FD and encourage you to take full advantage of the Q&A section.

During this call, David will first give you an overview of XO Group's performance and key achievements, followed by John with an outline of the financial results and then David and John will be available for a question-and-answer session to complete the call.

At this time, I'll turn over the call to our Chief Executive Officer, David Liu.

David Liu

Welcome to our second quarter earnings call, and thank you for joining us. Today's results reflect strength in our core advertising and registry business. We are pleased with the execution evidenced by these results as our organization continues to deliver high-quality content and tools for our audience and consumers.

Our local team remains focused on more clients, spending more and staying longer, as evidenced by another quarter of solid revenue growth against ever-tougher comparisons.

We continue to refine the local product and services that get our vendors in front of our bridal audience, both proving our value to current vendors and attracting new vendors. In a few categories, we've identified specific opportunities to further develop these vendor-facing products, and we are executing on these as we speak.

Our national business accelerated this quarter, led by strong sales across our pregnancy and parenting website, TheBump.com. We are excited about the growth at The Bump brand where we continue to gain market share from our competitors as measured by both audience and ad dollars.

In the second quarter alone, we had an 88% increase in unique visitors on The Bump. And to date, our editors have appeared on over 35 TV segments on behalf of The Bump brand, a significant increase from last year.

Turning to our registry business. We are already seeing some of the benefits from the re-platform we launched in April of this year. Upgrades to the registry experience for both the bride and her guests drove most of the growth in the second quarter. Over the next 12 to 18 months, we expect to leverage this platform to launch features that make the process of creating and discovering our registry as seamless as possible.

Our publishing business experienced a slight decline this quarter caused by weak newsstand sales. While we are disappointed by our newsstand results, our advertising revenue increased year-over-year with strong gains in our fashion and home categories. Digital magazine sales were also up significantly year-over-year, albeit off of a small base.

Our e-commerce business continues to face challenges. During the quarter, Google had yet another algorithm update, which negatively affected the SEO rankings for our American bridal stores. To mitigate our exposure to these algorithm changes, we are redesigning the site. The next generation will emphasize product pages and content in order to tap into longtail search results instead of more common search terms like a wedding favors or groomsmen's gifts or wedding supplies, which tend to be dominated by paid ads, and therefore, convert at a lower rate.

With that overview of our business lines, I'll transition to a conversation on our long-term goals and vision. As we've discussed in our last call, 8 months ago, we embarked on a significant reorganization of our operations to align our resources around services and products for our consumers. We made a conscious decision to align our operations around opportunities that we believe have the potential to drive accelerated growth. It was an important fork in the road for XO Group, as we could have also, perhaps more easily, chosen the path of incremental fixes had we been satisfied with the low-single digit growth trajectory. Instead, we are choosing to invest in growth.

Today's media and technology landscape is a competitive and quickly evolving environment. To enable nimble and rapid execution, we have created several autonomous units, we're calling them pods, which align product, technology and business people across consumer and advertiser categories. The pod structure is already improving the speed and efficiency of our business as we iterate and innovate our way towards our goal of connecting our audience of brides, newlyweds and first-time parents with the products and services they need easily, seamlessly and beautifully.

Last month, we appointed Mike Steib as our new President. Earlier this year, I was introduced to Mike, an accomplished media and technology leader with exceptional experience and management skills, developed at companies including Google and NBC Universal.

Over a series of conversations, Mike developed such an interest in our transition that he wanted to join the company, and it was clear to me that this presented us with a great opportunity. In his first month here, Mike has tirelessly interviewed our staff across the country, quickly learning our organization from top to bottom. He comes with great experience and great energy, and we're all optimistic that his influence and input will be instrumental in accelerating our transformation of the wedding industry and of our other markets.

With Mike leading the pods towards our long-term growth goals, the next evolution of our organizational structure is to augment the consumer focus of our pods with a strong product focus across the company. As we do so, we expect to invest in senior product managers and engineers who can execute on the long-term roadmap for XO Group. As we make these strategic internal investments, I want to assure you of our measured and careful approach. We are sharpening our metrics and processes around the pod structure, and we'll continue to be disciplined regarding our capital allocation, whether investments in our core business, new initiatives, M&A or share repurchase.

While we've been rolling out incremental changes to our site and services over last year since the beginning this initiative, we expect to have news of a few launches towards the end of this year and early next year. We look forward to sharing these with you over the next several quarters.

The road ahead will be challenging, but we believe we have a strong vision and a dedicated and talented core team with which we can execute this vision.

With that, I'll turn it over to John for the financial review.

John P. Mueller

Thank you, David. Total revenue for the second quarter was $37 million, up 4.4% compared to the prior year. The results were led by national and local online advertising revenue, which grew 9.6% and 9.1%, respectively.

Registry commission revenue grew 21.2% in the 3 months ended June 30, 2013, compared to the prior-year period. Publishing and other revenue was down 1%, while merchandise revenue was down 8% compared to the second quarter last year.

For the quarter ended June 30, 2013, the company's operating profit was $6.4 million compared to $5.2 million in the prior-year quarter. The $1.2 million increase in operating profit was primarily due to increased revenue in our online sponsorship and advertising business, partially offset by lower gross margins in merchandise, publishing and other, and slightly higher operating expenses.

Operating expenses for the second quarter were $23.6 million compared to $23.5 million in the same period last year. The slight increase was driven by increased technology-related investments and higher depreciation and amortization expense, partially offset by decreased stock-based compensation expense.

Net income for the quarter was $4.1 million or $0.16 per diluted share compared to $3.1 million or $0.13 per diluted share in the prior-year quarter.

We ended the quarter with $82.8 million in cash and no debt. As of today's date, we have not repurchased any shares under the $20 million stock repurchase authorization announced on April 10, 2013.

These results are in our press release issued this afternoon. In addition, supplemental data tables in our press release contain local online advertising metrics, gross profit and margin by business, and stock-based compensation charges broken out by product and content, sales and marketing, and general and administrative expense line items.

With that overview, here's a little more detail on our financial performance during the quarter. Our local online advertising revenue increased 9.1% year-over-year in the second quarter. Increases in our vendor count and average vendor spend contributed to the year-over-year growth.

At quarter-end, we had approximately 22,600 vendors displaying 30,200 profiles compared to 21,800 vendors displaying 29,700 profiles during the same period last year. The churn rate was 29.5% at the end of the second quarter, down slightly from 30.2% at December 31, and down 20 basis points from 29.7% a year ago.

The average revenue per vendor was $2,400, up from $2,300 in the second quarter last year.

National online advertising revenue increased 9.6% in the second quarter of 2013 compared to the same period last year. Advertising on TheBump.com led the year-over-year growth with a 63% increase in revenue during the second quarter compared to the same time period last year. The gains on The Bump were partially offset by declines in the retail and travel categories on our bridal properties. The share of bridal and non-bridal advertising revenue was 71% bridal and 29% non-bridal.

Publishing and other revenue was $7.4 million for the second quarter ended June 30, 2013, down 1% compared to the same period last year. The year-over-year decline was due to lower newsstand sales, mostly offset by increased advertising revenue.

Turning to our registry business. Second quarter revenue increased 21.2% to $2.4 million compared to $2 million during the same period last year. Enhancements to our registry platform, which was upgraded in April of this year, led to improved conversion rates, which was the main driver for the year-over-year increase.

Our e-commerce business declined 8% in the second quarter of 2013 compared to the prior-year period. The year-over-year decline was mainly due to SEO challenges and the impact from increased usage of mobile devices by our users. Google's search algorithm changes continue to negatively affect the SEO rankings of our American bridal stores, causing a significant decline in traffic.

On The Knot Shop, conversion rates are down as mobile visitors tend to convert at a lower percentage than desktop visitors, particularly on our core personalized products, which are difficult to purchase on a small screen. On a positive note, these declines were offset by an increase in our average order value due to a mix shift toward higher cost items and successful promotions.

E-commerce gross margin declined slightly in the second quarter of 2013 to 41.7% from 43.4% during the same period last year. The decrease was mainly due to increased personalization labor and higher shipping expense, partially offset by lower damage expense due to improved processes in the warehouse.

Operating expenses were $23.6 million for the quarter compared to $23.5 million for the corresponding period in 2012. The increase in operating expense for the second quarter was primarily due to increased technology-related investments, specifically additional personnel and software expenses.

Depreciation and amortization expense also contributed to the year-over-year increase due to amortization expense related to the WeddingChannel and American Bridal trade names. These trade names were not amortized until the fourth quarter of 2012 and therefore, no amortization was recorded in the second quarter of 2012.

These increases in operating expenses were partially offset by decreased stock-based compensation expense. The decrease in stock-based compensation is a result of a lower estimated accrual compared to the prior year.

Our total expenditures on Ijie.com were $1 million for the second quarter of 2013, flat compared to the prior-year quarter.

The company's balance sheet at June 30, 2013, reflects cash and cash equivalents of $82.8 million, up $5.4 million from $77.4 million at December 31, 2012. The increase in cash was driven by net cash provided by operating activities of $9.5 million, partially offset by capital expenditures of $2.8 million and cash used for financing activities of $1.3 million.

The second quarter results reflect continued growth amidst challenges. Our most profitable businesses, online advertising and registry, continue to post strong results and we continue to make progress, albeit not as fast as we would like, in improving our e-commerce business.

This concludes our prepared remarks. I will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Steve Rubis from Stifel.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

I'd like to start with drilling into your solid advertising growth and really, can you give us a sense of what areas outperformed during the quarter and what areas kind of underperformed? And any sort of color you can give in terms of the back half of the year? And then I have a few follow-ups.

David Liu

Sure. I think if you look at the trend lines for advertising, certainly on the local side, we've seen pretty decent growth over the last many quarters, and that has continued and the team continues to focus on bringing on new vendors, getting them new products to purchase. And then also upping the service and the technology, that allows us to reduce the attrition rate. So that continues unabated and they're working on additional programs to move forward. On the national front, I would say the second quarter was a pleasant surprise, and largely because of growth that we're seeing through the baby site, The Bump, and the non-endemic advertisers that are related to that. The Bump traffic is way up, over 80%, and we see our P volume and also advertising interest growing as that traffic grows.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

Great. And then in terms of your buyback, what kind of plans do you guys have? I know you've had the buyback in place for a while. Should we expect to see any movement there as we go forward?

John P. Mueller

Steve, it's John. I can only share that as a historical data point, over the past 2 years, we have repurchased 9.57 million shares at an average price of about $9.40 for a total of about $90 million, which, I think, is approximately 25% of the total shares outstanding, at least at the time of when we commenced that string of share repurchases. You're correct, we do have an authorization to purchase up to another $20 million of our stock but we haven't bought any stock recently, and it's a time in which our stock has started to appreciate and begun to better reflect the tremendous long-term value that has led us to buy back shares in the first place. So we'll continue to monitor the situation to determine how we can utilize the cash to the highest and best benefit of the shareholders, going into the future here.

Steve Rubis - Stifel, Nicolaus & Co., Inc., Research Division

Great. Can you give us any sense or color of what you can do to kind of better mobile in terms of some of your struggling businesses or underperforming businesses? Is part of the new hire of Mike, is kind of his focus going to be on writing that business and kind of investing in sort of a mobile upgrade? Any color you have is great.

David Liu

Sure. I think mobile is clearly impacting our business, as well as everyone else's, and it's a trend line that is not going to change. And I think consumers are increasingly turning to their handset devices to access what has historically been a desktop experience. So while it has had impact on our business, on the one hand, our media business has actually weathered this transition relatively well. The e-commerce certainly has suffered from this transition because it's much more difficult to transact and personalize products through such a small screen. Mike's coming on board really allows us to focus on upgrading the product and the services that we're providing the consumers. And this is where we believe the mobile platform gives us an enormous opportunity. As a technology and a new platform, you're able to provide levels of service that was not achievable through a desktop experience. And so one of the things that we've been working on is determining the resources, the staffing, the technical sort of expertise required to build out these services that will be take able to take advantage of the mobile platform. We don't view mobile as a separate business, we view it an augmentation of our entire company and everything we do as a business. And so this is a product kind of orientation around how we run the organization that Mike is spearheading.

Operator

Your next question comes from the line of Sameet Sinha from B. Riley.

Sameet Sinha - B. Riley Caris, Research Division

Several questions here. So on the publishing business, obviously, you're clear about why that -- news sales, newsstand sales is impacting revenues. I mean, is this just part of that secular decline that we're seeing in this industry or was there anything specific that happened during the quarter? Secondly, in terms of local, any reason for the first time we're seeing local vendor count -- I'm sorry, profile count actually drop sequentially? This is, seasonally, the strongest quarter for you, so I'm a little surprised seeing that. Also, just going up against a question asked by the previous caller about the buyback. Can you give us more detail, John, what are you thinking about -- I know you bought at $9.40 earlier. The stock is much higher than that, that's why you're kind of waiting for a pullback to buy? Or do you think you should have just a steady, strategic buyback in place? That's it, and then I have a couple of follow-ups.

David Liu

Sure. I'll start with the first two. On the publishing front, newsstand sales were down and it was a combination of things. Primarily, we had our national book, we increased the distribution and unfortunately, with some of the closings that we're seeing in a lot of the bookstores, which is where we sell most -- have most of our circulation, the increase in our distribution, the reduction in storefronts and probably, a more aggressive approach with our covers probably added to a small decline in our circulation revenue. But again, it's important to note that publishing, as a whole, has actually been doing extremely well and advertising through our publishing products have been up. So we don't view this as being reflective of a larger, overall decline in the publishing world. Magazines, particularly in the wedding category, are something that the brides will continue to buy and utilize for the wedding planning. I think this transition for us is to figure out how to become a little bit more surgical and more exacting in terms of where we place the magazines and coming up with a circulation strategy that will maximize the distribution of the product. On the local front, the profile count dropping is simply one networked vendor had 270 profiles that were being retired, and so it has very little to do with the actual sales velocity of the individual vendors or how the sales have been progressing. Occasionally, we will do networked relationships where we'll be able to augment a particular category and bring in a whole bulk set of vendors. And that's really the only difference between why we have profiles decline in the quarter.

John P. Mueller

Sameet, I don't have any further comment on the buyback.

Sameet Sinha - B. Riley Caris, Research Division

Actually David, if I can do a couple of follow-ups. So I mean, if you can just talk about, I mean, this -- when you said aggressive covers on the publishing side, what did you mean specifically by that? And also, for a digital magazine, do you charge for that copy or is it available for free download?

David Liu

Sure. Yes, we do charge for the digital copies, and we're actually seeing pretty decent growth in our digital subscriptions and the circulation in digital. It is off a much smaller number, but increasingly, we are seeing people not only buying one issue, but actually buying subscriptions of 4 editions of our national magazine at a time. And so that's actually a very positive trend. The cover side, we took a look at the category and what we could potentially do to just differentiate ourselves. And we've hired a really fabulous photographer, and our editors and creative folks came up with a positioning for our brand that, I think, has been very impactful. It has attracted top advertisers who probably would have not looked at the bridal category if it weren't for the creative execution. Now with that said, oftentimes, when you come up with an aggressive cover that may be a little bit more aspirational, you trade subscription sales or not subscription, circulation. It may not be as attractive to the consumer who -- or by a newsstand. But again, we're talking about very small percentages here and the jury is still out in terms of the long-term benefit that we think this new strategy is going to take. We have had very strong selling magazines in the cycle of the last year. So I think this is just a blip in the -- for this quarter.

Sameet Sinha - B. Riley Caris, Research Division

Okay, and just one final question. In terms of China, I think at the beginning of the year, you had said you expect about $6 million in expenses over there. It seems like 2 straight quarters where you've held it down to $1 million. Should we assume you'll do about $4 million for the year or is it some of these expenses are pushed out into the second half?

David Liu

I think there's a -- China, right now, is at a critical moment where I think they are looking at a lot of different opportunities and they're -- we just launched the Beijing magazine in the first quarter. The second issue has come out and has doubled in size. They're negotiating with a number of localities to launch additional publications. So I think this is about the timing of when these deals will kick off and when we'll incur those expenses. So I wouldn't expect it to be flat. Whether or not we would achieve the numbers that we had originally talked about really depends on the timing on when we get the deals done.

Operator

[Operator Instructions] Your next question comes from the line of Brad Safalow from PAA Research.

Bradley G. Safalow - PAA Research LLC

I was hoping you could elaborate a little more on kind of the scope of the hiring plan, and put a little more meat on the bone there.

David Liu

Sure. I can you give a general idea. We talked about the reorg we started in our last call and by design, we are trying to restructure the organization from a matrix hierarchy into sort of more autonomous groups, where the individual pods have mandates and KPIs, and then the properly allocated resources dedicated to achieving those. I think the challenge in that structure is that you will not be able to leverage platforms or services within the organization to service every group. What you gain is, I think, a nimbleness and a speed to respond to either changes in the market or to how the consumer is utilizing our services or our site. And so one of the things that we have been lacking and are focused on bringing on board is engineers, product managers, people who are much more product and service focused. And that is something that we've had a real hard time hiring, in fact, over the last year. Technology and engineering resources, I think, are difficult to secure everywhere, and it's no different for us. But I think one of the things that Mike brings to the table is the experience and relationships and the network effect that allows us to, I think, secure some top-level talent.

Bradley G. Safalow - PAA Research LLC

Okay. So I mean, can you comment -- like, are we talking about 25, 50 people and those -- between product managers and engineers that you want to bring in or is it a lot less than that?

David Liu

We're not going to comment on that. It...

Bradley G. Safalow - PAA Research LLC

And just based on that you made the mention of kind of moderating this, I guess, from our perspective and the P&L that we see, is it going to be kind of seamless? You mentioned measured I think, in your prepared remarks, about the pace of hiring.

David Liu

Yes. I think one of the things that -- if you followed us for a while, you know that we're pretty careful about making sure we don't wreck our numbers. We certainly are being sensitive to the fact that it is important to maintain a certain level of growth and profitability. I think with that said, the trade-off for us right now is a prioritization of the various services and platforms that need to be either upgraded or made more mobile-centric. And that will impact our ability to grow our top line more and more into the future. And so we're being very calculated in terms of what we're investing in, what we'll be launching. You'll start seeing the fruits of our labor in the third and fourth quarter as we begin to launch many of the things that we've already been redesigning. And keep in mind, all of last year, we were working on the re-platform of the registry business, which launched in April. We're now seeing some benefits from that. We have been working on a number of these initiatives throughout the past year that have not had any detrimental impact on our numbers. And so when we say measured and careful, we mean we're being very responsible about it.

Bradley G. Safalow - PAA Research LLC

Okay. And then just actually on the registry side. On GR 360, you relaunched, I guess, the core platform. Are you now able to kind of get the proper integration you need to make that more of a strategic initiative, prospectively?

David Liu

Yes, absolutely. Now that the platform has been upgraded and we're seeing the positive impact of that, GR 360 is absolutely something that we're looking at being able to -- the services within GR 360, we're looking to be able to bring onto that new platform.

Bradley G. Safalow - PAA Research LLC

Okay, and then last question. With this pod structure and an increased cadence of bringing things to market, is there any change in your priorities or strategically how you're positioning the company? You've articulated, even going back to your Investor Day from a few years ago. Has anything changed from that process and say, hey, this is a big opportunity for us today than we maybe we thought a year ago, and that's where we need to go? Obviously, you mentioned mobile several times and I understand that's a critical endeavor for you. But anything outside of that?

David Liu

Yes, I think we've sort of intimated on this on the call last quarter. The decision to effect this reorganization and focus on the consumer, in some respect, is responding to a very dynamic and changing landscape of the digital media space, as well as the e-commerce space. But it was also as a result of a great deal of analysis and discussion internally with the management team as well as our board, to look at the path that we want to take the company. And I think the fork in the road for us, really, was do we want to be a growth business and do we believe that there's an opportunity to more aggressively grow the business or is it -- is this a 1% and 2%, 3%, 4% annual grower with strong cash flow? We have -- we believe and we have decided that the path to take is to grow this business more aggressively. It's one of the reasons why I wanted to bring Mike on as well, is to really begin to focus on the opportunities that mobile presents. And when you have the trusted brand, the audience of our size and the resources that we have the ability to leverage, we believe that we're in a really good position to execute on these new platforms and services to become more of a high-growth business.

Operator

[Operator Instructions] There are no further questions at this time. Will there be any further remarks?

Malindi Davies

Yes. We'd like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the Investor Relations section of our website. If you have missed any part of today's call, you can access the replay of the entire conference call in the Investor Relations section of the company's website at xogroupinc.com or at (855) 859-2056, conference ID 25961596. If you have any additional questions, please don't hesitate to contact us at ir@xogrp.com. Thank you.

Operator

This does conclude today's conference call. Thank you for your participation. You may now disconnect.

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