Marin Software (NASDAQ:MRIN) Q3 2017 Earnings Conference Call November 9, 2017 5:00 PM ET
Brad Kinnish - CFO
Chris Lien - CEO, Founder and Chairman
Greetings and welcome to the Marin Software Third Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Brad Kinnish, Chief Financial Officer for Marin Software. Thank you, Mr. Kinnish. You may begin.
Thank you. Good afternoon everyone and welcome to Marin Software's third quarter 2017 earnings conference call. My name is Brad Kinnish, Marin's CFO. Joining me today is Chris Lien, Marin's CEO.
By now you should have received a copy of our earnings release, which crossed the wire short time ago. If you need a copy of the release, please go to investors.marinesoftware.com to find an electronic version. Call participants are advised that the audio of this conference call is being recorded for playback purposes and that this recording will be made available on the Investor Relations section of our website within a few hours.
Before we begin, I'd like to note that our discussion today will include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include statements about our business outlook and strategy, historical results that may suggest trends for our business, expectations about our ability to return to growth, impact of investments on product and technology, progress on product development efforts, product capabilities, and future financial results including the outlook for the fourth quarter of 2017. We make these statements as of November 9, 2017, and disclaim any duty to update them.
For more information regarding these and other risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as risks relating to our business in general, we refer you to the sections entitled Risk Factors in our most recent report on Form 10-K and our other filings with the SEC.
This presentation contains certain financial performance measures that are different from the financial measures calculated in accordance with GAAP and may be different from calculations or measures made by other companies. A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our third quarter 2017 earnings press release.
With that, let me turn the call over to Chris.
Thank you, Brad. Good afternoon everyone and thank you for joining our call today. I'll review the quarter and provide an update on our initiatives to return Marin to growth. Brad will then give additional detail on our quarterly results and our outlook for the fourth quarter.
It's about 14 months since I return to the CEO role along with my Co-founder and EVP of products and technology, Wister Walcott. Our goal has been and remains to return Marin to growth and to maximize shareholder value. We're focused on meeting the needs of our customers the world's leading advertisers and their agencies as they seek to grow and optimize the returns from their online advertising investments. Working with our team members and partners, we've been putting various initiatives in place that we believe will return Marin to growth.
As announced in today's earnings release, Q3 revenues came in at $18.2 million, which was above the high end of our guidance, but still down from the prior year. Cash ended the quarter at $30.6 million.
As I've highlighted on prior quarters, as I spent time out in the field with our customers, I'm reminded both the Marin's opportunities and our near-term challenges. Marketer seek to maximize the value of their online advertising investments, but they face an advertising world where the two leading publishers Google and Facebook accounts for some 75% of online traffic and approximately 60% of all online advertising. These two publishers operate at silos or wild gardens leaving advertisers to figure out the growing complexity of their customer's path to purchase across multiple advertising and device touch points.
Marin champions the integrated management of search and social channels that's driving what we call the multiplier effect. Whereby conversion volumes, rates and efficiencies exceed what can be achieved in one channel on its own. In fact Marin's customer case study show that conversion rates more than doubled in many cases when the two channels are managed on an integrated basis.
As part of our thought leadership in this area we published a Google and Facebook Playbook for cross channel success. We're now engaged in selling activities to capitalize on the high level of interest shown in this topic by both existing customers and prospects. We’ve seen in an uptick in both social only, as well as search and social business and have more cross channel customer than at any prior point in our history.
Marin's ability to address the complex fragmented journey for leading brands gives us an enduring competitive advantage, as publisher toolsets don't address cross publisher cross channel needs. Additionally, the lack of independence from publisher tool sets calls into question the measurement, budget allocation and optimization functionality that these close platforms can provide. And even with the concentration in Google and Facebook marketers cannot afford to miss out on the rest of the online audience and need a technology partner that can deliver performance and efficiency at scale.
Marin support for Bing, Gemini Baidu, Yandex, Yahoo Japan and Twitter are good examples of how we help advertisers to reach their prospects and customers across the online landscape outside of Google and Facebook properties.
Our open independent advertising platform enables leading brands to measure, manage and optimize billions of dollars of online advertising investments across channels and devices. Advertisers can leverage their first party data, as well as other datasets to reach the best audience for their products and services. Our many customer case studies demonstrate that Marin's SaaS platform can drive financial lift, time savings and better business insights through greater transparency, efficiency and return on advertising spend.
Despite our ongoing revenue challenges, we continue investing meaningfully in Marin’s future. As a company, we continue to operate with renewed urgency to deliver for our customers. As I have highlighted on prior calls, our initiatives to return Marin to growth focused on sales and marketing execution to drive more bookings. Account management to drive retention and growth and customer facing product innovation. Our results are not yet where we want them to be, but we are improving our underlying execution and believe these investments will pay off in coming quarters.
We continue to invest in sales and marketing, as we work to return to growth. These investments are designed to increase awareness for Marin, add to available sales opportunities and to increase Marin’s overall sales quota capacity. It will take a few more quarters to deliver more clear results, but we are seeing an uptick in overall sales and marketing activities, which lays the foundation for our future return [technical difficulty] the recent delivery of Marin’s mobile score card, this score card uses a proprietary scoring algorithm to rate each of our customers on mobile advertising best practices and teach else the list of recommendations to drive better mobile advertising performance.
In addition, the score card highlights the incremental mobile revenue opportunities available to each customer. Customers can then implement the recommendation via Marin’s platform. Another area of progress with our customers has been the adoption of Marin’s shopping functionality. Marin customers using this capability have grown their annualized spend by 29% on average, reflecting the high performance of the subcategory of search and our platform’s strong functionality in this area.
As part of our efforts to return to growth, Marin also is focusing on customer facing product innovation, as we invest to increase bookings and improve our retention rates. Over the past few months we have continue to build capabilities that enhance our advertisers’ ability to reach their customers across marketing channels. In pursued of this goal, we recently launched audience reporting and optimization to help marketers track customers across channels and test the effectiveness of different engagement methods.
Marin also debut functionality that applies advance machine learning to programmatically move budgets to the most profitable audience segments. Earlier this week, Marin and Google jointly hosted a well attainted webinar on how best to leverage audiences for search, as part of our thought leadership activities in this area.
Some examples of common audience targeting include specific messaging for existing customers, website visitors who haven’t yet purchased or prospects who have yet to visit or purchase. With each of these audiences seeing a tailored search or social message, leveraging audiences leading advertisers can deepen their relationships with their existing customers, driving retention and increasing customer lifetime value.
Marin’s audience level reporting and optimization provides the tools for understanding customer and prospect activity, as well as improving financial performance. We also continue to deploy Marin TruePath, and industry first cross channel measurement solution that links together search activity with Facebook view data to deliver a comprehensive understanding of customer conversion path.
View data is critical because brands have the ability to deeply engage with their target audience on Facebook and Instagram with static and video content. While users may now click the ad, these users are critical part of the customer journey, thus strengthening the need for a cross channel measurement tool, such as TruePath.
The ability to connect Facebook view and click data with search click data is the unique Marin capability that publisher tracking offerings cannot provide. Our initial set of customers are now able to adjust their budgets based on these new insights with the goal to drive better performance in their campaigns. This functionality encourages Marin’s customers and prospects to manage both their search and social channels on our platform.
Continuing on the cross0channel theme, we also added robust automation enhancements to Marin’s search intense feature to greatly simplify launching campaigns on Google and Facebook with a single brand voice. Enterprises can now reach high-value audiences across the customer journey by utilizing purchase intense signals from search, a common used case involves brand versus generic search terms to tailor messaging on Facebook, based on the consumer’s connection to the brand as expressed initially in search.
We have improved Marin’s optimization tools with dynamic actions for shopping that allow advertisers to boost, pause or activate Google shopping ads based on user defined categories and schedule boost that allow an advertiser to pre-program promotions so that bids can automatically change during sale or promotion periods without the need for manual intervention. Schedule boost is another example of Marin enabling automation of scale to drive better performance along with time savings.
Another innovation for Facebook that we launched is Marin’s Facebook budget allocation, which automatically moves budget spend within a campaign to the most productive ad set multiple times per day.
Publisher tools don't offer this functionality, which drives better social advertising performance and greater efficiency when compared to manual budget management. As an open platform Marin is always investing in ways to enable our customers to link to more data sources to drive improved performance. We also want to make it easy for customers to export data and results for Marin to meet their business used cases.
As categorist effect, we recently released a Marin API to address the growing demand for programmatic access to post attributed performance data for use in finance, data science and other staff applications by our customers.
We find more and more of customers are leveraging Marin’s dataset including revenue, cost and ad metrics to populate their data warehouse. And with sales force holding its annual dream force gathering this week in San Francisco I'm pleased to announced that Marin recently added sales force as a supported integration to simplify the conversion tracking for advertisers with longer sales cycles, which is of particular interest to B2B marketers. This is another example of Marin’s open platform.
As an update from our last call, we continue to make progress on our investment and our next generation infrastructure, which uses distributed big data technologies. This investment provides Marin with state-of-the-art architecture on which we can innovate for years to come.
As I have mentioned before, this effort has taken longer than we originally estimated, but we're deploying the functionality using a hybrid approach to enable more benefits to flow to our customers sooner.
Since my last update to investors, we've on-boarded additional customers to our Platform Beta program to enable initial usage to leverage new functionality, including improved data loading, application speed and scale handling. Our recent launched of audience level reporting for our top 200 customers' runs on Platform Beta, introducing new capabilities powered by Platform Beta to a wider customer group.
We continue to add more customers to Platform Beta and we're accelerating our on-boarding activity across the rest of 2017 and into 2018, while also expanding our functionality. While we continue to see the tremendous promise of Platform Beta for our customers, our on-boardings have progressed more slowly than we had estimated earlier in the summer. To address these challenges we've developed a suite of tools to enable us to accelerate the pace of our customers' on-boardings in the coming months.
As brands seek to address the fragmented customer journey across channels, devices and publishers in our always on, always connected world, we believe Marin is well positioned as the preferred technology partner for this mission. We believe these factors play favorably into our business strategy given our SaaS-based delivery model with cross-channel API integrations into many of the world’s largest online publishers and our independent and transparent approach to digital advertising.
While we still have more work to do in our efforts to return to growth, which we now see taking hold mid-2018. We are making progress, even if this isn't yet apparent in our financials, nor in our near-term outlook. I continue to believe that Marin has a tremendous opportunity and that our best days lie ahead.
And now, Brad will review our third quarter financial results and our outlook for the fourth quarter.
Thank you, Chris. I'll provide an overview of our Q3 results and then share our forecast for Q4. I'll begin with a review of our income statements for Q3. For the third quarter of 2017, Marin exceeded the high-end of guidance with net revenues of $18.2 million, down 24% year-over-year. The decline in revenues was primarily driven by customer churn that outpaced new customer bookings. Spend from recurring customers came in better than our internal forecast and helped offset some of the decline from customer churn.
In the third quarter 66% of our revenues were generated in the U.S. and 34% of revenues were generated internationally, in line with our historic geographical split. In terms of direct versus agency relationships, our revenue in the third quarter was 62% from direct customers and 38% from agency relationships. The split is consistent with our split from Q2. Over the next several quarters we continue to expect our revenue from direct customers will increase as a percentage of total revenue.
Moving on to the operating results, our detailed financials, as well as a reconciliation of our GAAP to non-GAAP financials can be found in our earnings release. My comments will now focus primarily on non-GAAP results.
For the third quarter, non-GAAP gross profit was $11.4 million, resulting in a non-GAAP gross margin of 63%, which compared to a non-GAAP gross margin of 69% during the third quarter of 2016.
For the third quarter, non-GAAP operating loss was $5.1 million as compared to a loss of $1 million for the third quarter of 2016. The $5.1 million loss was better than our guidance due to reduced operating expenses and lower cost of revenues during the quarter. We delivered a non-GAAP operating margin of negative 28%, which compared to a non-GAAP operating margin of negative 4% during the third quarter of 2016.
Adjusted EBITDA was a negative $3.9 million for the third quarter as compared to $0.4 million of positive adjusted EBITDA in the third quarter of 2016. For the third quarter, non-GAAP net loss was $5.4 million, resulting in a loss of $0.95 per share based upon the weighted share count of 5.7 million shares. During the quarter we executed a 7 for 1 a reverse split, which resulted in a weighted average share count of 5.7 million shares for Q3. The $0.95 loss per share would be the high end of our split adjusted EPS guidance by $0.31 per share.
For comparison purposes we generated a non-GAAP net loss of $0.8 million and a non-GAAP EPS loss of $0.15 per share based upon a reverse split adjusted weighted average share count of 5.5 million shares in the third quarter of 2016.
In terms of our balance sheet, we ended the quarter with $30.6 million of cash and cash equivalents. Our DSOs have been approximately 62 to 63 days for Q2 and Q3. However, we expect incremental improvement to DSOs going forward. And as a result we expect we will improve our cash burn during Q4. During Q1 and Q2 we burned $1.4 million and $0.5 million in cash during those quarters respectively. We expect Q4 will look similar to Q1 and Q2.
Moving on to guidance, we are encouraged by certain aspects of our business that highlight our ability or return to growth. However, we expect it will take additional time before our sustained return to growth takes hold. As we make progress with Platform Beta and our other efforts to drive growth in Q1 and Q2 of 2018. We expect to see improvements in revenue retention and new bookings, which would improve our revenue performance and profitability.
With that in mind for the fourth quarter of 2017, we expect revenues to be in the range of $17.5 million to $18 million. Non-GAAP operating income is expected to be in the range of negative $5.8 million to negative $5.3 million and non-GAAP net income per share is expected to be in the range of $0.95 to $1.05 loss per share based upon a weighted average share count of 5.7 million shares.
With that, I want to thank you for your time. This concludes our Q3, 2017 quarterly conference call.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
End of Q&A