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Angie's List (NASDAQ:ANGI) stock is down 25% in the last 3 months in a market that is flat for that period. Lately, various analysts have written about Angie's List and its competitive position including myself. Last month, I wrote (link here) about how various players are competing aggressively with Angie's List by offering similar services adopting a "free for customer" approach including public companies like HomeAdvisor (owned by IACI), Yelp (NYSE:YELP) and Insider Pages and startups like SevaCall, which even offers the ability to call the service provider.

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

Total Paid memberships

2,162,601

1,951,774

1,787,394

1,656,768

1,431,073

1,221,387

1,074,757

988,224

Gross paid memberships added

347,342

274,896

230,921

341,522

305,151

215,341

159,289

240,334

Marketing cost paid per acquisition

$80

$72

$39

$76

$91

$82

$51

$78

First year renewal rate

75%

73%

71%

76%

75%

73%

71%

76%

Participating service providers

42,452

39,265

35,952

33,209

29,930

27,100

24,095

21,927

Total service provider contract value

$165,566

$150,262

$132,646

$119,091

$101,719

$87,335

$73,609

$65,104

Membership revenue

$15,911

$14,637

$13,681

$12,769

$11,292

$9,975

$9,733

$9,109

Svc. Provider revenue

$43,304

$37,534

$32,498

$29,253

$25,212

$21,119

$17,716

$14,899

Total Revenue

$59,215

$52,171

$46,179

$42,022

$36,504

$31,094

$27,449

$24,008

Balance Sheet

Deferred Rev. Membership

33,494

28,587

27,627

27,718

27,627

27,627

17,153

17,153

Deferred Rev. Advt.

32,324

27,959

23,160

20,162

23,160

23,160

13,643

13,643

It was time to dig deeper into the numbers. Here are some numbers, which I used for my calculations, all sourced from the company's SEC filings.

What are the rising concerns?

There are some worrisome trends when one looks behind the top line growth with the intention to better understand the value behind the franchise so that management can address these concerns.

Cost of new customer acquisition

Even though revenue has been growing around 60% Y/Y level, the data is pointing towards a serious dent in the momentum as the company is spending more to acquire every additional customer. Looking at the worksheet below, it is clear that every time the acquisition cost decreases, new member count also decreases. Another thing to look at is that both acquisition costs and new members added are trading close to peak levels.

Q2 '13

Q1 '13

Q4 '12

Q3 '12

Q2 '12

Q1 '12

Q4 '11

Q3 '11

Gross paid member added ('000)

347

275

231

342

305

215

159

230

Mktg. cost paid/ acquisition

$ 80

$ 72

$ 39

$ 76

$ 91

$ 82

$ 51

$ 78

At $80, Angie's List acquisition cost should be among the highest of its peers.

"Derivative" leading indicators are pointing towards stress under way.

Problem of peak growth and the approaching slowdown becomes more evident, when one calculates a "derivative" set of numbers from the numbers provided by the company. Following are a few calculations to better understand the business:

Membership Revenue per member: Declining

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

$7.36

$7.50

$7.65

$7.71

$7.89

$8.17

$9.06

$9.22

How is it calculated? If we divide the quarterly membership revenue by the total number of outstanding members in the given quarter, we get the dollar membership revenue per member.

Significance: As the worksheet suggests, it's in a constant downward trend with every new customer bringing in fewer dollars. This combined with rising costs of customer acquisition is not good for any business.

Strength of service provider contract value: Weakening

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

3.82

4.00

4.08

4.07

4.03

4.14

4.15

4.37

How is it calculated? Service provider revenue/ Total service provider contract value. This is the ratio of quarterly service provider revenue to the total service provider contract value.

Significance: It talks about the strength of outstanding service provider contract value. A lower ratio is suggesting the shortening of the contracted value duration, probably due to service providers becoming less confident, every quarter.

Deferred revenue per new customer: Big cancellation risk

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

$96.4

$104.0

$119.6

$81.2

$90.5

$128.3

$107.7

$71.4

How is it calculated? This is the calculation of deferred revenue in balance sheet per every new customer added so Deferred membership revenue/ gross new members added.

Significance: Since deferred revenue is a liability, it raises serious doubts on the fundamental strength of the balance sheet for a growing business as liability is increasing per customer. Any increase in cancellation of customer orders would put severe pressure on the balance sheet, as the company would have to return cash to the customer. Currently the company has almost an equal amount of cash and deferred revenues.

Pressure on participating service providers: Increasing

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

$1,020

$956

$904

$881

$842

$779

$735

$679

How is it calculated? It is simply the average amount per participating service provider as calculated by dividing quarterly service provider revenue by total participating service providers.

Significance: Rising amount is suggesting the increasing pressure on participating service providers. Over two years, service providers are spending 50% more. The company is simply milking the service providers by keeping charges high on average, which partly explains the rise of other competing sites. The average service provider is spending $340 per month, which is quite high to maintain a listing on one site.

No benefit from acquiring customers at such high cost

Even though revenues are growing nicely yet there is little leverage (ability to expand margins while keeping expenses same) visible. This points to the fundamental weakness of the business. Even after years in operation, business is suffering from negative margin leverage.

Q2 2013

Q1 2013

Q4 2012

Selling as % of Rev.

37%

38%

34%

Marketing as % of Rev

47%

38%

19%

Marketing cost paid per acquisition

$80

$72

$39

Indeed, over the last 3 quarters, sales and marketing expenses are rising, pointing towards growth of more aggressive sales teams rather than the fundamental strength of the business.

Valuation

Looking at the valuation, the only positive number that stands out is the revenue growth that is growing by more than 60%, but equally important to look at is the negative book value of the company.

Stock

$20.7

Market Cap ($B)

$1.21

Cash/ Share

$1.1

P/ Expected 2013 Earnings

Negative

P/ Book

Negative

P/ Expected 2014 Earnings

67

P/ Sales

6.1

EV/ EBITDA 2013

Negative

Rev growth

59%

EBITDA margins

-20%

Operating Margins

-23%

Conclusion

There are more questions, whichever way one slices the numbers. It is better for investors to get answers before committing to new investments. The trends are very worrisome.

Source: Digging Deeper Into Angie's List Numbers Raises More Questions