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Angie’s List, Inc. (NASDAQ:ANGI)

Q1 2014 Earnings Conference Call

April 23, 2014 16:30 ET

Executives

Bill Oesterle - CFO

Tom Fox - CFO

Angie Hicks - CMO

Analysts

Shawn Milne - Janney Capital

Jeff Houston - Barrington

Paul Bieber - Bank of America

Darren Aftahi - Northland Securities

Kerry Rice - Needham & Company

Lloyd Walmsley - Deutsche Bank

Aaron Kessler - Raymond James

Sameet Sinha - B. Riley

Steve Cho - Well Fargo

James Cakmak - Telsey

Todd Van Fleet - First Analysis

Blake Harper - Wunderlich Securities

Michael Graham - Canaccord

Rohit Kulkarni - RBC Capital Markets

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Angie's List First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to follow at that time. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference call over to Tom Fox, Angie's List, Chief Financial Officer. Please go ahead, Tom.

Tom Fox

Good afternoon, and welcome to Angie's List first quarter 2014 earnings conference call. This is Tom Fox Angie’s List CFO. With me today are Bill Oesterle, Angie's List's CEO; and Angie Hicks, our Chief Marketing Officer.

As a reminder, today's discussion will include statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including predictions, expectations, estimates, or other information that might be considered forward-looking.

Throughout today's discussion, we will present some important factors relating to our business, which may potentially affect these forward-looking statements.

While these forward-looking statements represents our current judgment, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements made today.

As a result, we caution you against placing undue reliance on these forward-looking statements. We encourage you to review our public filings, including our 2013 annual report on Form 10-K and subsequent quarterly reports for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. We are not obligating ourselves to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events.

In addition, as we refer to earnings, we also will refer to adjusted EBITDA, which we define as earnings before interest, income taxes, depreciation and amortization and excluding non-cash stock-based compensation. Adjusted EBITDA is a non-GAAP financial measure and you can find a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure in our first quarter 2013 earnings release, which is posted on the Investor Relations section of our Web site.

We believe that the use of adjusted EBITDA provides additional insight for investors to use in evaluation of ongoing operating results and trends. However, non-GAAP financial measures, such as adjusted EBITDA, should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

I would now like to turn the call over to Bill.

Bill Oesterle

Thanks Tom. Good afternoon everyone.

As we told you in February, our financial themes for this year are focused on growth in three areas. Membership, revenue and margin. We think our first quarter results show that we are on track against all three. We had a strong period in terms of revenue growth dollars with over $20 million in additional revenue and I will spend a moment on what we are seeing in each of the revenue areas. I will keep my comments on membership brief as Angie will talk more about that.

Growth in new members improved significantly with growth additions of nearly 287,000 in the quarter, 4% ahead of last year. We did this at a cost per acquisition that was higher than last year, but was consistent with Q1 of 2012 and well within our acceptable range.

As I have said many times, we continue to operate with the discipline, but always comparing the marginal CPA with the lifetime value of each member. Our members are more valuable than they have ever been. And so we continued to responsibly reinvest our operating cash flow in member growth.

The new member join technology we mentioned last quarter is performing well and beginning to yield the expected benefit. We are able to move perspective members through the join process faster and to modify membership products, prices and promotions more nimbly than ever before.

We told you about our tiered membership test last quarter and we have now expanded that test to 20 markets. We are happy with the preliminary results. Consistent with previous quarters member retention remains strong. On the service provider side, we saw continued improvement in ad sales rep productivity. In fact, we are approaching levels that are closer to what we have experienced historically.

In the ecommerce business, we are focused on building the shopping experience for our web and mobile properties. And we allocated the lion share of the attention and resources to those efforts. Our operating plan is very clear. We need to drive scale and expand capacity in the sales team.

We are bringing on more sales reps to activate SPs service providers and build the catalog. This is complex and difficult work and we get smarter with each new store. Sales emerged slower than we expected after the holidays but we saw good progress toward the end of the quarter.

We are also investing in the product and technology side to make – building offers and consuming services faster, easier and more valuable.

On the whole, our progress in terms of total ARPU or average revenue per user or member was very good. We grew ARPU both sequentially and year-over-year despite strong member growth and lower member price points. This trend is important because it demonstrates the growth in SP revenue was able to more than offset lower membership prices.

Turning to products and technology, last year we focused primarily on fulfillment capabilities which support messaging, scheduling, payment and the like. This functionality is scaling quickly and is a key differentiator for us.

The Snapfix mobile app which is in beta takes advantage of those assets. It asks users to snap a photo of a project or provide a brief description of the job and we present a quote from a top-rated SP. Once the user agrees, we can schedule the work and accept payment on the app and more importantly monitor the progress of the transaction from beginning to end.

It’s still early but we think Snapfix demonstrates the value proposition of Angie’s List is changing and the increasingly important role technology is playing in our mission to transform local service.

Finally, we continue to add managerial talent to the organization. During the quarter, we announced the addition of our new Chief Technology Officer, Robert Wiseman. We have also made key VP level hires in marketing and sales team that we think strengthen these organization. These new additions bring a wealth of experience in consumer products, web technology, mobile application and ecommerce. And we look forward to their contributions.

Now let me turn the call over to Angie?

Angie Hicks

Thanks Bill.

The member side of the business saw an improvement in the quarter consistent with our focus on member growth, we put significant marginal marketing dollars to work in the quarter to spend up 19% compared to a year ago. With the marginal spend we saw a 14% increase in average CPA to $82, which is within our targeted range. As we have heard in the past, the dynamics of rising CPAs against marginal spend is very typical and with consistent with our expectation.

Turning to member retention, we continued to have very loyal engaged members. I’m very pleased with our renewal rates in the first quarter particularly in light of both our record number of Q1 first year annual members up for renewal and in light of data breach that lead to increased new credit cards being issued. We are here to monitor the level of missed card issuances in the coming months to see if it has any material impact on renewal rates.

On the engagement side, member interactions remain strong and consistent and we saw particularly nice growth in mobile app downloads. Additionally, we saw substantially increase use of our messaging platform compared to last year which is critical to our strategy of keeping transactions in band needing communication between the member and the SP takes place on our platform. We are able to do this we can play a bigger role in improving the overall service experience.

Turning to member join activities, we began to use the technology we built toward the end of last year to deploy new member acquisition tool. I will provide an update on two in particular. First a tired membership structure was rolled out to 11 test markets in the first quarter and nine more in Q2. We like the results we are seeing across all the markets in terms of the quality of the new memberships and the attach rate on premium membership especially on renewal.

We are attracting engaged members and seeing less solution to member ARPU than we have planned. As a result, we expect to scale the tired products to additional markets. Second, our development efforts continue and we saw marketplace join. As a reminder, this is when we present ecommerce offers to non-members outside the pay wall and bundle a membership to check out. We are optimistic about the potential for marketplace going to do two things. First to drive improved closed rate on the non-member traffic business side.

And second, to enable us leverage out third party platform for displaying offers. We expect to put this into the test later this quarter.

With respect to advertising and promotion during the first quarter we quite a bit to refresh our messaging. First the new commercials we told you about in Q4 hit the air across the country as part of this new national campaign with meaningful ways behind the new Snapfix commercial. And second, we developed even more new creative focused on how we are increasingly using technology to make shopping for local service fast and easy. These new ads should be out very soon.

On the digital side, we are putting a lot more effort in resources in the new channels not including the funds we put behind branded paper click advertising, we tested increasing our digital spend by more than 50% in March including a big allocation to real-time advertising which is basically highly targeted display. We will continue to scale these ads placements along with additional digital vehicle.

During the second quarter, we expect marketing expense of $35 million to $37 million. The seasonal trend is fairly consistent with years passed and during the sequential growth in spend.

The second quarter is always a very important period in terms of our marketing presence as consumers become decisional about home repairs, improvement, landscaping and the like. As Bill mentioned we monitor the marginal CPA and we will continue to invest our cash flow as long as we are happy with the expected return on the marginal member.

I would now like to turn the call over to Tom.

Tom Fox

Thank you, Angie.

I will provide some additional detail on our financial results for the first quarter. I will then provide our outlook for the second quarter as well as update on our expectations for the full year. We delivered a good first quarter, total revenue increased 39% compared with the prior year. Membership revenue increased 25% over last year. And total service provider revenue increased 45%.

Within the service provider revenue advertising revenue was $48 million an increase of 46%. And ecommerce revenue was $6.3 million. In addition, our service provider contract value backlog ended the first quarter at $132 million an increase of 39%. As a reminder, the backlog consist of that portion of contract value that is not yet been recognized as revenue.

Turning to our expenses. We made significant investments in the quarter to grow our base of membership and service providers and to develop products to improve all members address their local service needs. In spite of that investment growth, we continue to see leverage improvement in the business whether operating loss improved by $4.2 million compared to the year ago period.

Selling expense increased $6.5 million compared to the first quarter of 2013. And we ended the quarter with a total of 1118 people on our sales organization with 881 responsible for originations and 237 responsible for renewals.

Adjusted EBITDA, a non-GAAP financial measure was a loss of $554,000 for the first quarter compared to a loss of $5.8 million in the year ago period despite substantially higher operating costs.

Moving on to the balance sheet and cash flow, we ended the quarter with approximately $64.7 million in cash, cash equivalents in investments. We generated approximately $14.9 million in cash from operations during the quarter compared to approximately $9.9 million in the year ago period.

Turning now to our outlook. For the second quarter, we expect total revenue of $79.5 million to $80.5 million, marketing expense of $35 million to $37 million. Non-cash stock-based compensation expense of approximately $2 million and approximately $58.7million weighted average shares outstanding.

We anticipate second quarter capital expenditures of approximately $9 million to $10 million. This is up significantly from last year primarily for two reasons. First, as we have mentioned previously, we are implementing major upgrades to our web and mobile platforms. And you are capitalizing a significant portion of that expenditure. We are just beginning to see the results and we expect to see more in terms of new and improved member in SP products in the coming quarters.

Second, the business has grown significantly over the past few years and we are investing in the infrastructure to better support our current need and anticipated growth. For example, we were implementing new IT hardware and software including business systems, network capacity, computer equipment, data storage and the like.

We are also adding work space here in Indianapolis to accommodate growth to personnel particularly in the sales teams.

For the full year 2014, we continue to expect positive adjusted EBITDA. In terms of key assumptions that underlie that outlook, we expect approximately $7 million to $8 million in depreciation and amortization expense and approximately $8 million to $9 million in non-cash stock-based compensation expense.

As I shared last quarter, we are investing across the business to grow our membership, field our sales force and improve the overall experience for members and service providers. As a result, I expect meaningful increases in both selling expense and product and technology expense as well as capitalize investment in the Web site and other software.

This concludes prepared remarks. Operator please open the lines for questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question come from the line of Shawn Milne with Janney Capital. Your line is open.

Shawn Milne - Janney Capital

Great. Thanks and good quarter. Tom, I wonder if you could talk a little bit about the backlog for a second. The quarter recorded change was up nicely from the – seasonally low in the fourth quarter. And I was just wondering if we can get into maybe a period in the next couple of quarters where that those dollar changes start to ramp up year-over-year. If you could provide a little bit color on that?

And then maybe just a follow-up on ecommerce, you said it was a little bit slower coming out of the holiday, but then picking up maybe some – give a little more color on some of the underlying metrics in that? Thanks.

Tom Fox

Sure, Shawn. On the backlog question, I think as I mentioned in the script or perhaps still mentioned the productivity has been better, it’s certainly improved significantly from the back half of last year. So we are seeing, that’s manifesting better performance in terms of new sales originations. So I don’t want to get into predicting what exactly will happen to the backlog in future quarters. But certainly something that as you pointed out in prior calls, we do pay a lot of attention in terms of the total originations and that impacted the backlog.

So we obviously are more focused on that. But I don’t want to get into exactly how we might see it trending for the back half of the year or the remainder of the year.

On the ecommerce question, so as Bill mentioned, we did see kind of a slower emergence from the seasonally low Q4 holiday period in terms of the ecommerce business. But I think that there is some – improved performance especially as we looked at the last month of the quarter. So we are seeing that’s kind of a good momentum as we proceeded into Q2.

Bill Oesterle

One thing I will add on the backlog. As we continued perform in commerce, is that the backlog as the predicator of revenue begins to lose some of its potency just as an increasing percentage of our revenue was coming from commerce. So I thought that’s one little thing to keep in mind. We got some good growth rate in commerce. We like the way things are developing. And that will begin to impact how the backlog is constructed. It’s not a major factor now. But just everyone should keep that in mind as we move forward.

Shawn Milne - Janney Capital

Okay. Thank you.

Operator

Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is open.

Unidentified Analyst

Good afternoon. This is [Jon] (ph) for Jason. Just looking at the ecommerce traditionally it went between about 11% and 13% of overall service provider revenue. Should now with the new CTO, all the investments you guys are making, should we expect that ratio to go up over 15% or so going forward.

Bill Oesterle

Well, that would require not just a prediction of overall revenue but the split as well. We are growing both area. We got emphasis on traditional advertising growth and productivity. And we are attempting to grow commerce particularly from a unit sales standpoint. Now, we want to get the math behind that. So that obviously the relative success of those two things can move around in the short-term. Clearly, we want to migrate more of the business ecommerce revenue. So is a very long-term projection absolutely. In the short-term, that’s going to demand on relative performance.

Unidentified Analyst

Thank you.

Operator

Our next question comes from the line of Jeff Houston with Barrington. Your line is open.

Jeff Houston - Barrington

Hi. Thanks for taking my questions. This one is for Angie. You mentioned that you are in 20 markets now for the tiered pricing and goes up from 11 – up from 9 last quarter. I guess 11 in the first quarter. Could you talk bit about the dynamics of those 20 markets that you are in now and how you trying to expand that out and grow to 253 other markets that you are in?

Angie Hicks

So we started the testing on the tiered pricing last quarter got 9 markets in and as we saw performance and like we were seeing, we continue to roll more markets, continue to do that as we move forward here through Q2. We are really as we kind of stick the market it looks like a nice representative sample of the total market basis we selected those to test first.

Jeff Houston - Barrington

Okay. Thank you.

Operator

Our next question comes from the line of Paul Bieber with Bank of America. Your line is open.

Paul Bieber - Bank of America

Hi, guys. I have a couple of questions. First on, just on engagements, I know that you guys don’t disclose the number of reviews on Angie’s List. But can you give us a sense for how reviews per user are trending? Another you have actually hired a CTO, can you talk a little bit about the technology roadmap and what the key areas of investments are if for the rest of the year?

Bill Oesterle

Yes. Absolutely. So what we don’t give specific guidance on reviews. What we can say is engagement is very good. It is being aided by our commerce – the growing percent of the transactions will fall into commerce just because we were interacting much more with the members. And so we like the trends very much.

That also ties into the answer on technology investments. We are putting a tremendous amount of energy into transaction tools particularly mobile transaction tools. And on essentially marketplace rules and tools as we talked about before. We see a growing opportunity there. We like the dynamics of it. We like how the members will respond to it. We are going to put substantially behind marketplace and mobile marketplace tools.

Paul Bieber - Bank of America

Got it. And one quick follow-up on the tier pricing, are you testing a free offering at all?

Angie Hicks

No. The tier pricing and basically there is three offers and they are all pay basic cost and premium membership, its varying price points. So there is not a free offer there.

Bill Oesterle

I will say, however, Angie talked about in her script marketplace join. And that is our front porch project experiment which is – you effectively are able to search the offers that are available. And if you purchase one, you get a bundle of membership. So from that standpoint – from that vantage point, its not a fully three product that we are giving a substantial amount of content outside the web. And we are allowing people to engage much more fully with high quality service provider previous to join. We have never done that before. And we like the opportunity there.

We had some what I will call very preliminary offerings out in the field last year and we like what they did and so we are putting some weight behind that. We can view that as the front porch offering for the business.

Operator

(Operator Instructions) Our next question comes from the line of Darren Aftahi with Northland Securities. Your line is open.

Darren Aftahi - Northland Securities

Hey, guys. Thanks for taking my questions. So it looks like you are accelerating – you did accelerate marketing spend year-on-year in 1Q and also in 2Q. Can you kind of give us some parameters around where you are spending those dollars and then as it pertains to the Snapfix, what are some of the metrics or above it we need to see in order for that to kind of move on the pilot? Thanks.

Angie Hicks

We really have happy with how our marketing perform in Q1 as we expanded the marketing spend variably at marginal dollars to work in still perform within our acceptable balance. And so we are continuing that process here in the Q2 remember Q2 is our seasonally – the quarter that we step up and so we are continuing that process.

As far as how we are spending it, we have got some nice test going on the digital space to increase the amount of spend that we are putting there to start to alter that mix between television and digital that kind of gives the right mix there. So had some good test in Q1 looking to expand those in Q2.

As far as Snapfix, we are seeing some nice initial responses from that. We got a good download activity on it still in beta. So we are still kind of gathering our metrics and kind of formulating that process there but earlier indicators good look for that product.

Bill Oesterle

One quick thing I will add on Snapfix, which is a nice feature of the Snapfix, allocation of advertising it. It is essentially we are getting both – those ads are driving membership and we are getting a residual a secondary benefit of the driving downloads and transactions.

So we really like the opportunity to introduce Snapfix into the advertising because it gets us dual benefits. It doesn’t – it’s a very leveragable activity.

Operator

Our next question comes from the line of Kerry Rice with Needham & Company. Your line is open.

Kerry Rice - Needham & Company

Thanks a lot. Just a couple of questions, question was asked earlier about maybe the percentage what ecommerce could be – maybe ask a different way. You obviously could have a long run way of growth here and a lot of service providers on the platform that you can market the ecommerce deals to.

How do I think about maybe where you are today and how do I think about you kind of stepping it up through each quarter because this is clearly you guys getting a big take rate on these deals and so it seems like a great opportunity that it seems like a penetration its still really low and maybe what you think about penetration next quarter or any of that?

And then the other question is around brand key words that you are still having to kind of fight your competitors around that, and if you how much would you say of your spending maybe marketing spend went to those key words – branded key words kind of competitiveness?

Bill Oesterle

So we are in the very early innings of commerce still. We are putting some as we discussed in the scripts and last call. We are building the sales force there. We are building our marketing tools to take cost out of signing up service provider. We are putting tools out in the field that make it easy for them more attractive for them to adopt. There is still nothing but opportunity for us to scale that business. And we have got tremendous energy going into it.

Now part of it is, as we talked about it, a year or so go, we also bear the responsibility of have more scaling and making sure that we got the right service providers on the platform that they are delivering the right consumer outcomes. And we spend a lot of energy this last year working out the fulfillment infrastructure to do that.

We feel very good about our ability now to qualify to enable, to monitor and to essentially engineer consumer outcome. And that has been important to us. And so now we are in a position to put sales and marketing energy behind it.

Kerry Rice - Needham & Company

Can I just ask one follow-up to that kind of looking on the San Francisco market and kind of looking through the deals, it seems like maybe you are at – maybe 1% penetration of San Francisco, is there any sense you can give us about, does it take a year to kind of move that from 1% to 2% or is that something that can move quicker, is there any metrics or any kind of sense even though you are in the early stages that anything that we can follow initial progress there, what we should expect to see as far as progress there, it’s not just a revenue number?

Bill Oesterle

We are just giving – we were just providing essentially the revenue. Our expectation is that we are going to accelerate the rate of adoption that’s our expectation. So if we are 1%, I haven’t done the calculation in San Francisco. It is – we expect to begin to move that number at an increasing rate.

Operator

Our next question comes from the line of Lloyd Walmsley with Deutsche Bank. Your line is open.

Lloyd Walmsley - Deutsche Bank

Thanks. Forgive me, if I miss some of the numbers to build up to this, but I’m curious to just dig into the comments around improving sales force efficiency, if I heard it correctly, it seems like you are growing, the sales employees focused on new contract initiation a lot faster than the T1 service provider revenue, assuming renewals rates continue to be above a 100% for T2. I don’t – forgive me again, if you have already said this, but can you just talk about what the renewal rates are on service provider and then square the – what appears to be almost no growth in the P1 revenue despite a large headcount ramp focus on selling that?

Tom Fox

I can speak to the first – first part of the question, I just want to answer. So repeat of the renewal rate. The renewal rate remind above 100% on T2 for the first quarter, I apologize, I had a blank on that. So I can confirm that was the case. In terms of the originations in the T1, we – as I mentioned a couple of times, we have seen good improvement in productivity on the origination side that’s going to start to see more and more of that in terms of T1 in the future quarter.

So and the accounting there is really keep in mind that when you pull a new origination you got kind of a monthly recognition on that. And so, you are not going to see an immediate pop when you have a pick up in originations. So its important to keep the – kind of keep the accounting minus a bit of a lag in terms of the recognition against that T1 revenue.

Lloyd Walmsley - Deutsche Bank

Okay. So we should see that start to come through in faster T1 growth.

Tom Fox

That’s the whole point. Yes.

Lloyd Walmsley - Deutsche Bank

Okay. Thanks.

Operator

Our next question comes from the line of Aaron Kessler with Raymond James. Your line is open.

Aaron Kessler - Raymond James

All right. Thanks. Couple of questions, just in terms of the conversion rate funnel that Angie talked about, can you talk about maybe what’s left to do there with further improvements in terms of the funnel. And instead of going back to the ecommerce again, do you feel at this point your additional friction point that need to be removed within that. And I know you given some of the transaction date around ecommerce before. Any updates there in terms of number of transaction in the quarter? Thank you.

Tom Fox

Yes. We aren’t going to break out the number of transactions this quarter. We provide – we had a little bit of anomalistic one relative to revenue in the past. What I will say is, there is tremendous friction that we can pick out of the onboarding process. There is all kinds of room for improvement and we are working actively at prioritizing those areas and getting after them.

So we believe we have a scalable sales model – direct sales model, and its workable, we can add bodies and get yield out of ecommerce. We are going to – but we also think that we can improve the efficiency of that process dramatically. And so much of what we are doing internally, scale, and improve efficiency at the unit level. There is all sorts of activities going on to do that. All of that translates into better ability to grow faster.

I think there was a marketing question.

Angie Hicks

Yes. Your question on the join funnel the – the converging funnel we used for new members. We are really happy with that funnel. It is kind of optimizing that as continual improvement process. There are always test that we are running to improve conversions. So it’s always a work in progress. So we are happy with the transition we made to that funnel last year.

Bill Oesterle

Sorry, as Angie said marketplace join we are about – we are right on the cost of release that’s a major initiative that we believed can impact join. So there is a lot of big stuff coming there.

Aaron Kessler - Raymond James

And Bill, so finally in terms of advertising revenues you are going to decent size in term of membership base any thoughts maybe getting some advertising revenues from brand partners? Thank you.

Bill Oesterle

Yes. We got some stuff that’s going on with National Accounts that is – that was non-existent a couple of years ago. And it’s a meaningful number for us. So and s we just continued to – we have always known, going all the way back to the early days. As you grow the base you get a national network effect as well. And we are beginning to see the – some of the dynamics of that. And we are building sales capacity. It’s different sales pipeline and different sales force and we have been building capacity there and we are getting some traction.

Operator

Our next question comes from the line of Sameet Sinha with B. Riley. Your line is open.

Sameet Sinha - B. Riley

Yes. Thank you very much. Couple of questions, first, Angie could you speak about how you are thinking about marketing obviously last quarter you spent significant amount of dollars on branding including 4Q. Do see yourself shifting some of the dollars back to direct response. And if you could help us some how quantify that and some sort of magnitude, how is the real-time advertising, booking, if you can help us differentiate between search ads and zero-time advertising that would be helpful.

And secondly, can you talk about sales people capacity, you continue to hire – at what point do you think these or these sales people starts stepping on each others toes. Is that a natural feeling on that or do you think that you still have ways to go before that happens? Thank you.

Angie Hicks

On the marketing question, there was a question about how much we are investing on brand. We talked about last quarter, we feel though we kind of develop the tool that is at our disposal as far as really want to own a term whether its an approach to using on Angie’s List, this is the term or other terms in general. Our ability to really invest in that opportunity and from a search perspective, we did some of that in Q1 as far as the real-time advertising, we are really, we are investing our activities now, of course we are feeling our pay for click activity. But, its really about a more display advertising that’s where the real-time network came in.

So the ability across two demographics we want to target and using these ad networks to find that demographic. And we are finding some nice wins there.

Tom Fox

On the sales force, we have tremendous room to scalable sales force and much of that comes from commerce but we are still think we still have penetration to drive an traditional ad business. So we have significant room to expand the sales force. We are going to continue to invest in doing so.

Sameet Sinha - B. Riley

If I can just have a one follow-up seems like, if you are developing a separate ecommerce sales force, I want to make sense as to have your existing sales guys go out with the new product to their book of business -- to the (indiscernible) already on their list? And this is your retention sales guys?

Bill Oesterle

Certainly, if you can pull that off and you can get that work obviously done. We're experimenting with one sales rep, multiple products and we're also experimenting with different sales reps for different products to figure out what's optimal. So we certainly want to leverage the sales force as much as we possibly can, that's where we have all the upside and productivity. However, right now we're adding reps in an economic way for the unit economic work for a sales rep and we expect that those unit economics will continue to work for a long time, so we're going to scale with the existing model and then simultaneously introduce efficiency improvements to that model.

Operator

Our next question comes from the line of Peter Stabler with Wells Fargo. Your line is open.

Steve Cho - Well Fargo

Hi, everyone. This is Steve filling in for Peter. Congrats on the quarter.

As you guys work towards building out the ecommerce marketplace and productizing home services, you guys are obviously, making some growth investments that's reflected in the CapEx spend of $9 million to $10 million for the 2Q. We're just kind of wondering how we should think about that going forward in the near term or that's more of a one-time type of event?

Bill Oesterle

I mean, I think that we provided guidance on Q2, we're not going to get in to the full year. I think that we talked a lot about the investment and product. So that's going to be – going to be a reality for a while, I think we feel very strongly it's the role of technology and product is going to increase in terms of the value proposition to both the member and the service provider. So there is a lot of investment and attention both in terms of the management team and throughout the engineering and product organizations on kind of delivering a truly in a delightful and unique experience and valuable experience as we mentioned in the prepared remarks where both sides of this business member in SP. So without getting in to specifics in terms of the overall spend, I think we should expect this to continue to invest in the products.

Steve Cho - Well Fargo

Great. That's helpful. And I had one quick follow-up, we've downloaded the Snapfix app and tried it out and we're pleased with the UX and UI. And it looks like your installs have improved nicely throughout the quarter. We're just wondering, if you're going to maybe start providing some mobile metrics like UBs or app installs in the future?

Bill Oesterle

Those are always things we talk about, I think we'd love for those things to become sort of material before we begin to talk about them systematically. So Angie's side we're pleased with the early progress, Snapfix is still in beta, still changes to the product, there is still ways for tweaking user experience. So the value proposition is fully big, so we're very pleased with what we see in terms of reaction so far and progress and we'll continue to look out whether it make – if and whether it makes sense to you provide more detail in terms of that progress.

Operator

Our next question comes from the line of James Cakmak with Telsey. Your line is open.

James Cakmak - Telsey

Hi, thanks. Just two questions. First, I guess for Angie, you talked about the tiered membership structure going well and reducing pressure and so forth. I was just hoping if you could provide some of the takeaways that you're seeing, is it really the price sensitivity, is it the contract term, where are you seeing the best results in reducing the funnel friction.

And then, Bill with the new CTO in place, I guess could you talk about some of the objectives you're charging him with for his mission in new role, are these in the same objectives as your prior CTO just looking for a better execution or is it going broader beyond that? Thank you.

Angie Hicks

Well, on the tiered pricing, it allowed us to really differentiate our offering to the consumers. So we're able to offer a variety of products, if a basic product that we can introduce that are not – at a low price but additionally have more premium offering so that consumers have more choices to really what's the right level of product for them that they want to do. And this kind of differentiation has worked successfully for us in the past with regards to, we talk about that was probably 15 years ago, at this level we introduced a monthly membership and it really gave people an opportunity to test the product if they wanted to, I see this new basic membership option another variety of that and another way people to get introduce to the product and really experiment it, experiment with it.

But we're seeing in the adoption, we're just seeing for example, we're seeing more adoption with the premium products and we initially forecasted which is great news for member ARPU as well. So we're pleased and looking forward to continuing to roll this out.

Bill Oesterle

So the short answer is the strategy is exactly the same. Give us the technology platform that allows us to transform local service. And we have a good understanding of what that requires, all these years in the business. And so from that standpoint, the charge is exactly the same and do it quickly and efficiently. The tactics that he is deploying are new there. He is approaching it from his perspective he has taken ownership in it. And so there are lots of changes at the tactical level which we like, we like the early start that these got on so and we're beginning to Snapfix and few of the other things are evidence of the progress that we're making. So same strategy, let's do it faster and better.

Operator

Our next question comes from the line of Todd Van Fleet with First Analysis. Your line is open.

Todd Van Fleet - First Analysis

Hi. Good afternoon guys. Angie, you'd mentioned that's a marketing cost, I think the paid member acquisition cost in the quarter was within a range that you guys been acceptable, I'm not sure I've ever heard a range that's acceptable to you. Could you kind of calibrate that range for us?

Angie Hicks

We haven't given specifics on kind of exactly with the range. But we operate both on our average and marginal CTA within a range based on how that compares to the lifetime value of the member that we calculate. So we manage within that range and it's not where we're operating, it's not so different from where we've operated historically as well. So real excited to be able to get the volume of dollars to work inside that range.

Todd Van Fleet - First Analysis

Yes. I'm just trying to understand the story behind the acceleration, the marketing cost on a year-over-year basis. It seems like you're doing some pretty interesting things with the real-time bidding in the programmatic exchanges and maybe you could tell us, are you working with multiple vendors there, is it a single vendor that you've been kind of cultivating relationship over a period of time. How -- maybe you could tell us how long you've been kind of doing the real-time programmatic buying? That would be helpful. Thanks.

Angie Hicks

So we've got and we've got several vendors we've been testing and working with and we've been – and some of them kind of renewed in Q1 but others we've been working on bringing along for a longer period of time and we will continue that process. As we've mentioned before, as we find marketing vehicles that work, we continue to scale them until we see the marginal benefit decline. So we would treat this successfully with any other vehicle we've scaled over the history of the business.

Operator

Our next question comes from the line of Blake Harper with Wunderlich Securities. Your line is open.

Blake Harper - Wunderlich Securities

Thanks. I had two questions, first of all Angie, you talked about the marketplace join. Can you about this strategy to address and capture either consumers that are outside of you memberships. And how else you would address them.

And then second for Bill, you talked about the sales productivity levels, could you talk about maybe what you think is an optimal sales productivity level either as far as a quarter level maybe or as far as percentage of where you think they are, now to where you think that they should be.

Angie Hicks

So on marketplace, I think what I'm – what's really exciting about marketplace join, it’s really an opportunity to change the selling cycle. So currently and historically what we'd is, hey, come to Angie's List and say you need to replace your water heater and we're kind of like buy in membership at Angie's List and then we'll start talking to you about your water heater problem. And this is really turning it around where we're addressing the consumer needs first, you need a water heater look, we have these opportunities and deals in regard to water heater. And by the way hey let's bundle that Angie's List membership with it. So you can continue to take advantage of these great opportunities.

So it's an offering for us to kind of bring people into the fold in a little more consultive approach than we've taken historically and being able to put these offers out on our platform and then additionally it's an opportunity for us to use these across other platform too to increase our traffic.

Bill Oesterle

And then on the sales productivity side, so the first order of business last year, we lost average productivity because of the competition. For reasons that we're somewhat expected and that we understood we're certainly not all that surprising. So the first order of business was to attempt to get sales productivity back to its historic highs which we were operating at before the transition.

We are within the shooting – spitting distance of getting back to historic highs and what's interesting is that we're driving that at the same time that we are at high for scaling the sales force, which is a really good thought. We got a lot of new reps and we'll drag the average then. And we're getting better and we're providing better tools and we're enabling them faster that all bodes well for the future. The average tenure of our sales reps right now is lower than at many periods that we've had in the past. And in spite of that, we're driving high average productivity that is a wonderful sign, very good indicators for future activity.

Blake Harper - Wunderlich Securities

Okay. Thanks for answering my questions.

Operator

Our next question comes from the line of Michael Graham with Canaccord. Your line is open.

Michael Graham - Canaccord

Thanks. Just a couple of questions about your service provider side of your business. You had healthy additions in terms of number of service providers and ARPU did expand although the pace of expansion is slowing down a bit. Can you talk about some of the moving parts within what's the ARPU dynamics whether it's price or volume of service providers buying more members to reach or mix of different service categories. And then the related – and how to think about that going forward. And the related question is, have you made any progress in terms of measuring ROI for the service providers and is that coming up a lot in renewal discussions? Thanks.

Bill Oesterle

Yes. So one thing, we obviously take a look at average ARPU across the business redundant to clicks. If we look at ARPU across the business, but at the same time it is an average. And so Angie's just had a very good quarter putting membership on and that depletes the average. So both the numerator and denominator are moving. So the dynamics there are somewhat, it's a bit of an output.

The good news is, we sort of look at the trajectory if Angie's brought in the business and ARPU is either flat or growing, we say that's got to be good. You're putting ARPU under strain and we're holding serve and we've seen that. Now the dynamics that are allowing us to do that are just that were – the member base is getting older and as the member base gets older the network effects kicks in on the service provider side. And we're able to more efficiently monetize and we're demonstrating that. We continue to demonstrate that.

There is lots of evidence in our cohort table that there is plenty of room to continue to demonstrate that. And so we were adding ecommerce; we're adding additional members; we're adding member concentration which has – it's really the fundamental driver of the network effect and its working. So but ARPU can decline if Angie's have – if she has an outlandishly good quarter, it's not the worse thing in the world, but if we’re holding serve against the good quarter that by definition.

Michael Graham – Canaccord

Okay. And then just on ROI?

Bill Oesterle

Oh, ROI. Yes. We provide a number of – we provide a number of metrics for the service companies that they understand and ecommerce being where you have a perfect ROI allocation. But they're able to see how much traffic is coming to them what sort of clicks are in there for their particular profile. And our sales reps provide that information, obviously it – we've been driving high renewal rates for a long time now no coincidence. And we're driving those high renewal rates across a large body of service providers.

I'm confident that that's the best indicator that they're seeing something in their ROI. We just continue to get them back and we continue to get them back and monetize marginal members, which is not easy to do, we're taking a service provider and we're saying that territory that you bought last year now it has a bunch of additional members in it and you have to pay for them and that's working. So the ROIs I think there is all sorts of evidence that we are driving good ROIs to our service providers.

Operator

Our next question comes from the line of Rohit Kulkarni with RBC Capital Markets. Your line is open.

Rohit Kulkarni - RBC Capital Markets

Thank you. Thank you for taking the questions. Again, big picture can you talk a little bit more about your mobile strategy and again you talked a little bit about Snapfix and app downloads, can you comment on what portion did your traffic today come from mobile and how see that going forward and if not perhaps talk about, did you see mobile as a way to acquire members, other Internet companies seem to have found a way to acquire members on the more kind of cheap basis or increase engagement, increase already used, and on the service provider side, is there, are there any mobile only used cases you think that would help get more stickiness or create more kind of engagement from them?

Bill Oesterle

The answer to all of the above is yes. Mobile presents a tremendous opportunity for us to engage the members and we are treating on our mobile offerings as a tool set to actually complete our project. More emphasize on the action of purchasing. And that Snapfix is the best evidence we have with that. And then on the service provider side there are substantial pool that can be brought to bear on a mobile basis and our service providers tend to be mobile. That allow them to perform their jobs more efficiently and that just brings – these are service providers with big capacity and to the extent you can bring efficiency into their operations. It drops straight to the bottom line.

So we announced the partnership last quarter I believe with the work app, very, very good field service management tool and we are rolling that out to our service providers. And we are serving as the connectivity plug for that product. And we like that a lot and we like how the service providers are deploying it. And we think this is going to bring efficiency to the entire transaction set.

There is lots of efficiency that can be bought to this transaction set. So that’s what it gives. Mobile gives – its far and away the best place for us to do that and we have demonstrated empirically in the past, if we are going to improve the transactions, we improve engagements. We improve retention. So that’s what we are doing.

Operator

Our next question – I’m sorry.

Rohit Kulkarni - RBC Capital Markets

I just had a quick follow-up if I could, on the CapEx I may have missed your comment on, it seems like a pretty big jump, can you break it if possible into couple of pieces as in almost your – almost an annual CapEx was in that range past couple of years. Any color that you can give?

Tom Fox

We are not going to break the number down. I can only say that that the numbers is the best evidence I can think how to underscore the emphasis on product and technology in the organization and its going to build on the comments Bill just made in terms of all the work that we are doing on the product engineering side to advance to experience for the triple size of the business.

So its what we are – we think it’s a very positive sign in terms of the company’s emphasis on product in the future.

Operator

Our next question is a follow up question from the line of Paul Bieber with Bank of America. Your line is open.

Paul Bieber - Bank of America

Hey, guys, thanks for taking my follow up question. Sorry to beat the CapEx question again. But just wondering if there are any one time items in the 2Q CapEx outlook. And then, if you can give us some insight, do you think that you will generate positive cash flow in 2014 given the revised CapEx outlook?

Tom Fox

So I don’t – I will give a one-time CapEx item, but I think its – I can’t think of any thing that is particularly one-time in nature in that spend. So I can’t really comment on that.

And the second question was again –

Paul Bieber - Bank of America

If you would generate positive free cash flow for the –

Tom Fox

We are not going to – we are not providing cash flow guidance for the year.

Paul Bieber - Bank of America

Okay. Thank you.

Operator

And our next question comes from the line of Sameet Sinha with B. Riley. Your line is open.

Sameet Sinha - B. Riley

Yes. Thank you very much. Bill as we look at, since the IPO and how the business has changed and the sales compensation, sales structure everything has changed. New media being put into the mix you are trying out new things. And all this, how – what’s the trend in the life time value of each member that you bring on board and I’m sure its headed in a positive direction, could you give us a sense of magnitude and any other color would be very helpful? Thank you.

Bill Oesterle

Yes. We haven’t provided magnitude changes, what I can tell you is, since we have – this is using our computation for lifetime value and we don’t disclose that either. So you just have to take our word for it.

Our members are getting more value. So the members that were acquiring today are more valuable than they have ever been. And we are acquiring more out of them than we ever had. So we continue to try to drive both of those things. Scale more members and more valuable making more – making every member more valuable and since we have taken the company publicly consistently delivered on both of those. And then we did this course.

Sameet Sinha - B. Riley

Can you get us one or two things which make – which are more important towards escalating importance versus some of the other thing?

Bill Oesterle

Yes. One of them that we don’t even – you don’t even get much insight – we felt a lot more annual memberships than we used to which is a very good sign for the business. And then it coupled with, we had some reinforcement for this dynamic. Angie was talking about one of the pleasant surprises of tiered pricing is that we are getting greater premium sales than we expected, which tells us the members that we are selling to value the services that we are selling, not everyone migrated to the low price point, which could happen with that that might have been an impact.

So those things have a significant impact and then renewal always had. If you are continuing to make progress on renewals then you are extending your lifetime value and then finally service provider monetization and as we have demonstrated we’re continuing to drive per member monetization in spite of the fact that we have grown the number of members rapidly.

So those are the main components and all of those metrics steadily been moving along since we have taken the company public and we expect to continue to migrate them particularly with the prospect of ecommerce to add make every membership more valuable.

Operator

I’m not showing any further questions at this time. I would like to turn the call back over to Bill Oesterle for closing remarks.

Bill Oesterle

All right. Well, thank you everyone for your time and good questions. We feel like we had a good quarter and we liked the prospects of the remainder of the year. So we look forward to updating you on that. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a good day.

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