XO Group's (XOXO) CEO Michael Steib on Q1 2014 Results - Earnings Call Transcript

May.10.14 | About: XO Group (XOXO)

XO Group Inc. (NYSE:XOXO)

Q1 2014 Earnings Conference Call

May 08, 2014, 04:30 PM ET

Executives

Ivan Marmolejos - Investor Relations

Michael Steib - President and Chief Executive Officer

Gillian Munson - Chief Financial Officer

Analysts

Jonathan Abodeely - XLCR Capital

Operator

Ladies and gentlemen, at this time I would like to welcome you to XO Group's first quarter 2014 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference over to the company.

Ivan Marmolejos

Thank you. Welcome to XO Group's first quarter 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. 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. Changes in economic, business, competitive, regulatory and other factors could cause our actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today.

For more detailed information about these factors and other risks that may impact our business, please review the periodic reports and other documents filed from time-to-time by XO Group with the Securities and Exchange Commission. 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.

We will discuss non-GAAP measures on this call. We refer you to our press release posted on our website at ir.xogroupinc.com where we report our GAAP results as well as provide a reconciliation of the non-GAAP measures to comparable GAAP financial measures.

We have allotted up to one 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 session.

During this call, Michael will give you an overview of XO Group's strategic position and key achievements, followed by Gillian, with an outline of the financial results, and then we'll open the line up for a question-and-answer session. Thank you for your participation and interest in XO Group.

I will now pass the call to our Chief Executive Officer, Michael Steib.

Michael Steib

Thank you, Ivan. And welcome everyone to our first quarter earnings call. It's always a pleasure to speak with the investors, who support our company.

Our mission is to provide a brand and mobile-driven marketplace that serves young couples, as they navigate the most important stages of their lives. Today, I will update you on our performance and our progress and highlight some of the opportunities for growth that we see ahead, as a result of our technology investments.

First, I'll reiterate that we are investing on top of the foundation of a strong business. Our total revenue for the first quarter was up 7% year-over-year, driven by increases in our core local and national advertising businesses and our resurgent registry services business. Our potential is much greater, but it's good to be building from a position of strength.

Utilized together, I articulated our strategy for allocating a portion of our capital, improve our core digital products, to accelerate our mobile deployments and better connect our brides and vendors with a true marketplace for wedding solutions.

I can tell you today that our early investments in products and engineering are showing positive signals. During the quarter, we rolled out significant new features to our mobile apps that increased bride engagement and provide more leads to our vendors.

To see a glimpse of the future of our company, I encourage you to download our Knot Wedding Planner and Knot Wedding Look Book from the app store. Just search for wedding, we are the first results.

Beyond our consumer-facing improvements, we've made progress in improving our data infrastructure, ensuring that in the future we will be able to fully mind the value of impressive, bride and vendor database for better services and revenue opportunities.

And looking ahead, you can expect us to launch new life stage apps on multiple mobile platforms and executing massive rebuild of TheKnot.com, making it more elegant, user-centric and responsive to mobile devices. I am proud of the good work of our product and technology teams, and excited for the road ahead.

Beyond our tech investments, I want to offer some insight into our operational focus. The unsung heroes and heroines of XO Group, work in the The Knot editorial, creating engaging web content and beautiful print products.

This quarter that work came together in a big event, The Knot Dream Wedding. A wedding planned, executed and live-broadcasted by us between two survivors of last year's Boston Marathon tragedy.

The Dream Wedding delivered significant earned media, a hallmark of our cost-effective approach to marketing, and was covered extensively in major TV, print and online news outlets for weeks, exhibiting once again the strength of our brands and our ability to create the best content in the industry.

We introduced senior executives last quarter. We're keeping them busy. Jennifer Garrett, our EVP of National Enterprise Sales, who joined at the start of Q1, has been in market working on larger partnerships that bring advertisers the value of our audiences across all devices. Looking ahead, you should expect to see us closing tent pole advertising partnerships that demonstrate the specific value of our new mobile initiatives.

Kathy Brady, our new EVP of E-commerce and Registry, has begun a thorough review of the e-commerce business. Performance of our wedding supplies business has been disappointing. But we believe that we're positioned to more successfully connect a highly-engaged bridal audience with the e-commerce solutions for their life stage moments. Over the coming months, we will try to plan to fundamentally address the missed opportunities of this business, and we have put all options on the table.

Focus and right team are critical to our success. On that topic you'll see when Gillian walks you through the numbers, some charges for restructuring and severance. This quarter, we announced the closure of a satellite office in Los Angeles and severance for some executives. Changes like this are difficult, but in a time of critical investments in our products and our business, they're necessary to complete the task.

Finally, we could not be more excited about a U.S. acquisition we closed during the quarter. As you may know, some of our most valued content by brides and advertisers is curated images from real weddings.

In late March, we acquired Two Bright Lights, a marketplace connecting 15,000 photographers to the editors of nearly 500 leading publications. TBL is a master database with millions of images from your weddings that are tagged to over 90,000 local vendors, who provided the products and services for these events.

TBL's deep experience collaborating with 1,000s of wedding photographers will expand our relationship and increase revenue, for one of our most valued local vendor segments. In the next 12 months we expect Two Bright Lights to be a breakeven business and we expect a payback of our investment within two to three years. Today, I am pleased to publicly welcome Two Bright Lights Founder and CEO, Siri Eklund, a respected entrepreneur, a talented operator for the XO family.

We believe our internal tech investments will payoff our shareholders. And a high level of this strategy is enabling us to create superior user experiences and mobile services that connect our members and adverting partners in a seamless and natural way.

These increased connects create opportunities from more advertising professions, vendor leads and commercial transactions, positioning us to grow our established revenue streams, creating monetizable products and drive long-term shareholder value.

Specifically, during the second half of the year, we will roll out the first set of these revenue products. Our national team will be commercializing mobile ad opportunities that properly value increased engagement and functionality provided by mobile ads.

With improved data services and backend analytics that clearly assign attribution to our products. The local team will be running our programs and allow our vendors to buy the advantage in this traffic. The benefit of these products will take time to materialize, probably some time in 2015, but they are important initiatives for our company and shareholders to monitor during 2014. In coming quarters, I look forward to sharing with you our progress.

One last thing for me today, on behalf of the millions of women we serve at The Bump, I want to remind you that Sunday is Mother's Day, don't forget to call your mom, tell her that you love her.

With that, I will turn it over to Gillian, for the financial review.

Gillian Munson

Thanks, Mike. Let be briefly review the drivers of our Q1 performance. I will cover the highlights and guide you to our press release tables for more details.

As a reminder, we are in a transitional year financially, as we are working to manage the business results, striving for revenue growth similar to the last several years, with higher rates of growth in OpEx than we had posted historically.

We are making targeted investments in our business that we believe will pay off over the next several years. Our first quarter results reflect our execution to these goals.

Total revenue for the first quarter rose 7% to $32.4 million. On a GAAP basis, our first quarter loss per share was $0.03. We incurred incremental severance and restructuring expenses of $1.4 million that are included in our GAAP EPS results.

These are important to highlight, as they reflect means to improve the operational focus of the business. They are laid out for you in our press release and include indicative severance and expenses related to the closure of our Los Angeles satellite office. Excluding these costs, adjusted net income per diluted share for the first quarter was $0.01.

As for the components of our revenue, our local online business grew 7% year-over-year. The growth was driven by an increase of 2% in our vendor count and further reduction in churn to 27%, down from close to 30% a year ago, an increase in average revenue per vendor to $2,497.

Our national online advertising revenue was up 5% year-over-year in the quarter, led by The Bump. We continue to gain traction on The Bump as measured by advertising dollars and unique visitors, both of which were up in the double-digits versus 2013. Importantly, the business was down 9% from a weak Q4.

Our registry business continues to perform well. Revenue increased 47% during the quarter compared to the prior year. This is strong growth for this business. However, I should point out that the business will start to see harder year-to-year compares in April, as we anniversary a year of growth driven by product enhancement.

Our e-commerce business is an area of concern for our team. Revenue fell 1% year-over-year in the quarter, while this is a moderation versus the rate of decline we experienced in this business last year, we still have a tough road ahead of us.

While Mike made the point that strategically, we should be able to connect brides to commercial solution, I want to be clear that the rate of decline will likely accelerate from the current period trend.

Publishing and other revenues were up 8% for the first quarter. Both of our national and regional magazines are seeing strong advertising sales, demonstrating the continued value of our publications to our partners.

First quarter consolidated gross margin increased to 86.2%, predominately due to a positive revenue mix shift towards our higher margin businesses. Total OpEx from the first quarter were up 26% year-over-year as we invest to fuel growth, profit and cash flow returns over the next phase of our company's history. Excluding incremental cost we have described, OpEx was up 20% year-over-year.

In the first quarter, products and content expenses grew 29% year-over-year, primarily driven by increased headcount. During the second half of 2013, we gained momentum on our hiring efforts and has continued to bring in talented employees to meet our initiatives.

Sales and marketing expense increased 11% in the quarter. The year-over-year increase was primarily due to the incremental expenses we have discussed before. Excluding these incremental expenses, sales and marketing increased 6% year-over-year. In the coming quarters, you should expect increased spend on a year-to-year basis in those categories to support new product solutions.

In the G&A expense line we posted an increase of 47% year-over-year. While headcount in our G&A area is flat with Q4, transition cost including new management and severance related to executive transitions are adding to our spending early this year. In fact, severance was roughly one-third of the growth in our spent in this category.

Additionally, we have launched a new bonus plan at the company that is a 100% performance-based. As part of this and in an effort to keep an eye on dilution at the company, we have shift our bonus policy to one with a 25% cash component. This has resulted in an accrual of more expense than we would have had in our 100% stock configuration.

Our balance reflects our capital allocation strategy of balancing investment in the operations of core business, stock buybacks and strategic investment. We ended the quarter with an overall cash balance of $75.5 million. Cash utilized included the acquisition of Two Bright Lights for around $5 million, $4 million to satisfy tax withholding obligations employees related to the Q1 vesting, capital expenditures of $1 million and $615,000 in stock buybacks.

On the vesting expense, it is important to point that Q1 is typically our largest quarter of vesting annually. Additionally, the previously announced Touchmedia investment was in the amount of $4 million.

As you look at the remaining three quarters of 2014, I want to update our guidance. On the fourth quarter call, we've said that we expect 2014 revenue growth to match rates seen over last five years, but we intend to invest in the investment with a heavy focus on products and content to a slightly lesser degree in sales and marketing and limit our G&A spend.

The adjustment to that guidance we would like to provide now is that given your transaction with the company to provide us with better focus and operational strength, we expect G&A growth to be in excess of revenue growth, particularly in the first half of the year.

On China, our guidance is unchanged. We are planning for losses similar to the $5 million in 2013 and we plan for 2014 to be our last year of losses in China.

Finally, and as it relates to cash, that we will always the reserve the right to be opportunistic. We are currently not looking at any additional strategic acquisitions or investments at this time.

Thank you for your interest. This concludes our prepared remarks. And I will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we have a question from [ph] Zim Yen of Stifel.

Unidentified Analyst

Could you please share in a little bit of your recent strategy investment in Touchmedia and help us understand the synergies between the two companies?

Michael Steib

The Touchmedia investment is a part of the strategy in China to make this the last year of operating losses in China. Some of the opportunity between Touchmedia and our operations in China includes that the Touchmedia investment comes with a media partnership whereby the Ijie brand and Ijie revenue opportunities are present in the TV sets and taxis that are operated by Touchmedia.

Unidentified Analyst

Are there any other industry in China that strategically sounds interesting to you? And going forward should we expect to see you have more similar investment in China?

Michael Steib

We don't have anything else to report on this topic.

Operator

And next question is from [indiscernible].

Jonathan Abodeely - XLCR Capital

Hi, it's Jonathan Abodeely from XLCR Capital. Thanks for taking my question. I just want to understand the China investments that the company has made over the last three years and in the context of going from a loss of $5 million to a profit in 2015. I just want to understand the major driver of that swing and what you view as the potential for that brand?

So in summary, just want to understand, you've spent years developing brand. That brand obviously you feel has tremendous potential. Just want to understand the amount of investments you've made and sort of the topline potential you see for that particular asset?

Michael Steib

What we see today is that we've established a strong online and print brand in China around weddings. We think that it can be a significant opportunity. We are committed to making this the last year that we have an operating loss in China and we have a number of initiatives in flight, but we just believe that we'll be able to achieve that goal.

Jonathan Abodeely - XLCR Capital

Can you put some numbers around that, just in terms of your audience that you've attracted? And I think you've made comments in the past that it's a very a established and perhaps a leading brand in the China marketplace, but what is the unique value proposition, and how can we from the outside looking in understand the potential audience base? How it's growing, how you monitor the success that you're having in that marketplace.

Gillian Munson

We don't give numbers outside the loss numbers that we've talked about in terms of our investment in China on Ijie. We believe we have one of the leading brands in China and we track it regularly, but we don't give guidance or a visibility into all of the different financials on it at this time.

Operator

Thank you. There are no further questions at this time. Are there any further remarks?

Ivan Marmolejos

Yes, thank you. We'd like to thank you again for joining us this afternoon. Our upcoming conference schedule is posted on the Investor Relations sections of our website. If you 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. A telephone replay is available for next week. A replay of the call will be available at 855-859-2056, conference ID 33533454. If you have any additional questions, please don't hesitate to contact us at ir@xogrp.com. Thank you.

Operator

Thank you. This concludes today's conference call. Please disconnect.

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XO Group (XOXO): Q1 EPS of $0.01 beats by $0.02. Revenue of $32.42M (+7.1% Y/Y) beats by $0.98M.