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ANGI > SEC Filings for ANGI > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for ANGIE'S LIST, INC.

Form 10-Q for ANGIE'S LIST, INC.


24-Apr-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q (this "Form 10-Q") contains statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, each as amended. All statements other than statements of historical fact, including statements regarding market and industry prospects and future results of operations or financial position, made in this Form 10-Q are forward-looking. In many cases, you can identify forward-looking statements by terminology, such as "may", "should", "expects", "intends", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates, financial results, our plans and objectives for future operations, growth initiatives or strategies, or the expected outcome or impact of pending or threatened litigation. There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors, many of which are beyond the Company's control.

The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based upon those assumptions also could be incorrect. Risks and uncertainties may affect the accuracy of forward-looking statements. Some, but not all, of these risks are listed in Item 1A. of Part 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in Item 1A of Part II of this Form 10-Q.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We operate a consumer-driven service for our members to research, hire, rate, review and purchase local services for critical needs, such as home, health care and automotive services. Our ratings and reviews, which are available only to our members, help our members find the best provider for their local service needs. We had approximately 2.6 million paid memberships at March 31, 2014. We allow local service providers who are highly rated by our members to advertise discounts and other promotions to our members.

We generate revenue from both our members and our service providers. We derive membership revenue from subscription fees and, in certain cases, nonrefundable initiation fees for monthly, annual and multi-year memberships. These fees are typically charged in advance. Subscription fees are recognized ratably over the subscription period, and initiation fees are recognized ratably over the expected life of the membership. As of March 31, 2014, approximately 94% of our total membership base purchased annual or multi-year memberships. These subscription fees represent a significant source of working capital and provide a relatively predictable revenue stream.

We derive service provider revenue principally from term-based sales of advertising to local service providers. Our members grade local service providers on an "A" to "F" scale, and we invite local service providers with an average grade of "B" or better and at least two reviews submitted in the last three years to advertise to our members through any or all of our website, email promotions, monthly magazine and call center. Service provider contracts can be prepaid or invoiced monthly at the option of the service provider and carry an early termination penalty. We recognize service provider revenue ratably over the period in which an advertising campaign is run. We are expanding our service provider sales personnel to drive increased service provider revenue. Our high service provider renewal rates, both in number of service providers renewing and as a percentage of initial contract value renewed, have provided us with a relatively predictable revenue stream.

In addition to traditional advertising on our website and publications, our e-commerce solutions offer our members the opportunity to purchase services through us from service providers rated highly on our website. These offerings are available through both email promotions and through postings on our website. When the member purchases a service, the transaction is processed through Angie's List. The member then can work directly with the service provider to schedule the service. These e-commerce offerings provide our members a discount and an easier way to fulfill their service needs.


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To establish a new market, we begin by offering free memberships and actively soliciting members' reviews of local service providers. As the number of members and the number of reviews of service providers grows, we begin charging membership fees and offering advertising opportunities to eligible local service providers. Historically, we begin to convert most markets to paid membership status within 24 months after launch.

Increasing new paid memberships is a key growth strategy. Increased penetration in a market results in more member reviews of local service providers, which increases the value of our service to consumers and drives further membership growth in that market. Increased penetration in a market also drives increased advertising sales to service providers and supports higher advertising rates as the pool of members actively seeking to hire service providers grows. However, our ability to increase advertising rates tends to lag increased penetration of our markets due to our inability to increase rates under existing service provider contracts prior to renewal. Our primary strategy for new member acquisition is national offline and online advertising. Our marketing expense increases in the second and third quarters of the year, typically peaking in the third quarter, as we increase our investment in advertising to attract consumers during the periods when we have found they are most actively seeking Angie's List services.

As described further in the "Market Cohort Analysis" herein, we believe that our estimated penetration rate and average revenue per market will increase as markets mature, and over the long term, we believe that these increased revenues will more than offset our operating expenses. In addition, our advertising spending is focused on the acquisition of new members, rather than the maintenance of existing members. Given that our advertising contracts are typically short-term, we can rapidly adjust marketing expense and thus decrease total operating expenses to reduce cash used in operations or generate cash and profits from operations should we begin to experience adverse trends in marketing cost per paid membership acquisition or wish to optimize for profitability at the expense of rapid growth. We believe that our high membership renewal rates and "word of mouth" referrals from existing members, combined with effective purchasing of lower volumes of advertising and increasing utilization of search engine optimization, or SEO, would enable us to maintain and potentially grow the size of our paid membership base at a lower level of overall advertising spending.


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Market Cohort Analysis

To analyze our progress in executing our expansion plan, we compile certain financial and operating data regarding markets we have entered, grouped by the years in which the markets transitioned to paid membership status. The table below summarizes this data for the twelve month period ended March 31, 2014 by each respective cohort. The pre-2003 cohort includes our ten most established markets where we initially built out our business model. The markets in this cohort include several mid-sized urban markets in the Midwest as well as Chicago and Boston. The 2003 through 2007 cohort includes the first major subset of markets, including many of our largest potential markets, which we targeted in our national expansion strategy. The markets in these older cohorts have generally achieved penetration rates that allow us to transition beyond introductory membership and advertising rates. The 2008-2010 and post-2010 cohorts include markets that most recently converted to paid status and that still utilize predominantly lower membership and advertising rates as the markets in these cohorts generally are smaller markets that we entered to fill out our national presence.

                                                                   Service           Average                                        Annual
                             Average         Membership           Provider          Marketing                       Estimated     Membership
                # of        Revenue/        Revenue/Paid        Revenue/Paid         Expense/       Total Paid     Penetration      Growth
Cohort         Markets     Market (1)       Membership(2)      Membership(3)       Market (4)     Memberships(5)    Rate (6)       Rate (7)
Pre-2003           10     $ 6,662,119     $         38.54     $        113.63     $  1,375,876          493,817        12.6 %           29 %
2003-2007          35       4,766,477               33.79              100.09        1,456,256        1,427,873         9.8 %           34 %
2008-2010         103         285,235               17.02               38.37          198,781          606,325        10.4 %           33 %
Post 2010         105          29,693               12.65               28.39           57,530          100,689         5.9 %           97 %
Total             253                                                                                 2,628,704

(1) Average revenue per market is calculated by dividing the revenue recognized for the markets in a given cohort by the number of markets in the cohort at period end.

(2) Membership revenue per paid membership is calculated as our membership revenue in the cohort divided by the average number of paid memberships in the cohort. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort.

(3) Service provider revenue per paid membership is calculated as service provider revenue in the cohort divided by the average number of paid memberships in the cohort. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort.

(4) Average marketing expense per market is calculated first by allocating marketing expense to each cohort based on the percentage of our total target demographic for all markets in each cohort, as determined by third-party data, and then dividing the allocated cohort marketing expense by the number of markets in the cohort at period end. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort. According to a March 2014 demographic study by Merkle Inc. that we commissioned, there were approximately 29 million households in the United States in our target demographic, which consists of homeowners aged 35 to 64 with an annual household income of at least $75,000. Approximately 26 million of these households were in our markets. The average number of households per market in our target demographic target was 390,000, 410,000, 60,000 and 20,000 for the pre-2003, 2003-2007, 2008-2010 and post-2010 cohorts, respectively.

(5) Includes total paid memberships as of March 31, 2014. Total paid memberships in each cohort includes a de minimis number of complimentary memberships in our paid markets for the period presented.

(6) Estimated penetration rate is calculated by dividing the number of paid memberships in a given cohort as of March 31, 2014 by the number of households meeting our target demographic criteria in that cohort.

(7) Annual membership growth rate is the rate of increase in the total number of paid memberships in the cohort between March 31, 2014 and 2013.


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Our average revenue per market and total revenue per paid membership have generally increased with the maturity and corresponding increased penetration of our markets in prior periods. In the future, we expect total revenue per paid membership to fluctuate from period to period, reflecting the timing of our ability to adjust advertising rates given our advertising contract terms and membership pricing innovations designed to drive increased penetration. For example:

         Our average advertising contract term is typically more than one year,
          and we are only able to increase rates for a given participating
          service provider upon contract renewal. As such, there is a lag in our
          ability to leverage increased penetration in a market into increased
          advertising rates?



         Increasingly, we are seeing members opt for annual memberships, and as
          such, the percentage of our membership base on monthly memberships has
          declined. While we believe annual memberships are more beneficial to
          members and promote high renewal rates, these memberships generate
          lower proceeds than monthly memberships on an annualized basis? and



         On average across all markets, we are utilizing lower membership
          pricing than historically used in order to drive deeper penetration via
          enhanced membership growth and to increase service provider
          participation.

Our most important growth strategy remains driving membership growth, which creates the network effects of a more valuable service for consumers and a more attractive commercial platform for service providers. We intend to continue to evaluate and adopt innovative pricing and packaging strategies, such as deeply reduced membership pricing, to deliver compelling value to our members and thereby support membership growth and retention. Although these overall dynamics have caused and may continue to cause membership revenue per paid membership to decline sequentially in some of our cohorts, we believe that the increase in our membership base is critical for continuing to produce the overall growth in average revenue per market, service provider revenue per paid membership and total revenue per paid membership across all cohorts.

As a market matures, our penetration rate typically increases. Historically, while the absolute number of paid members may grow faster in large markets, our small and medium markets often achieve greater penetration over a shorter time period than our larger markets. We believe that a principal reason for our lower penetration rates in large markets is the manner in which we market Angie's List to our target demographic in such markets. We spend the majority of our marketing dollars on national advertising, and we believe that this advertising strategy provides us the most cost effective and efficient manner of acquiring new paid memberships. However, advertising nationally means we deliver the same volume of advertising regardless of the size of the market. Since each market differs in terms of the number of advertising outlets available, the impact of our spending on national advertising varies across markets. In our experience, smaller markets typically provide fewer advertising outlets than larger markets. Therefore, we believe the same volume of advertising in a smaller market is more effective in building brand awareness and generating new memberships than in larger markets. We expect to continue to see lower relative penetration rates in our larger markets for these reasons. As several of these larger markets are in the 2003-2007 cohort, over time our penetration rate in this cohort may lag other cohorts.


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Key Operating Metrics

In addition to the line items in our financial statements, we regularly review a
number of other operating metrics related to our membership and service provider
bases to evaluate our business, determine the allocation of resources and make
decisions regarding business strategies. We believe information on these metrics
is useful for investors and analysts to understand the underlying trends in our
business. The following table summarizes our key operating metrics, which are
unaudited, for the three months ended March 31, 2014 and 2013:
                                                                  Three Months Ended March 31,
                                                                    2014                 2013
Total paid memberships (end of period)                             2,628,704            1,951,774
Gross paid memberships added (in period)                             286,626              274,896
Marketing cost per paid membership acquisition (in period)    $           82       $           72
First-year membership renewal rate (in period)                            73 %                 73 %
Average membership renewal rate (in period)                               76 %                 75 %
Participating service providers (end of period)                       49,370               39,265
Total service provider contract value (end of period, in
thousands)                                                    $      211,635       $      150,262

Total paid memberships. Total paid memberships reflects the number of paid memberships at the end of each period presented. Total paid memberships also includes a de minimis number of complimentary memberships in our paid markets for all periods presented. We generally expect that there will be one membership per household and, as such, each membership may actually represent multiple individual consumers.

Gross paid memberships added. Gross paid memberships added reflects the total number of new paid memberships added in a reporting period. Gross paid memberships added increased substantially in each period presented, which we believe was driven by our continually significant investment in national advertising and, to a lesser extent, by "word of mouth" referrals from our existing members.

Marketing cost per paid membership acquisition. We calculate marketing cost per paid membership acquisition in a reporting period as marketing expense divided by gross paid memberships added in that period. As we advertise in national media, a portion of our marketing expenditures also increase the number of unpaid memberships. On a comparative basis, marketing cost per paid membership acquisition can reflect our success in generating new paid memberships through our SEO efforts, "word of mouth" referrals and experimentation and adjustments to our marketing expense to focus on more effective advertising outlets for membership acquisition. We typically incur higher marketing expense in the second and third quarters of the year in order to attract consumers during the periods when we have found they are most actively seeking Angie's List services. Our marketing expense is normally reduced in the fourth quarter, reflecting reduced consumer activity in the service sector and higher advertising rates generally due to holiday promotional activity.

Membership renewal rates. First-year membership renewal rate reflects the percentage of paid memberships expiring in the reporting period after the first year of membership that are renewed. Average membership renewal rate reflects the percentage of all paid memberships expiring in the reporting period that are renewed. Renewal rates do not include monthly memberships, which comprised approximately 6% of our total membership base as of March 31, 2014. Given the correlation between increased penetration and higher total revenue per paid membership, we view first-year membership renewal rate and average membership renewal rate as key indicators of expected operating results in future periods.

Participating service providers. We include in participating service providers the total number of service providers under contract for advertising at the end of the period.

Total service provider contract value. We calculate service provider contract value as the total contract value of active service provider contracts at the end of the period. Contract value is the total payment obligation of a service provider to us, including amounts already recognized in revenue, over the stated term of the contract.

In addition, we track contract value backlog as a key metric. Contract value backlog consists of the portion of service provider contract value at the stated date which is not yet recognized as revenue. At March 31, 2014 and 2013, our contract value backlog was $132.1 million and $95.1 million, respectively.


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Results of Operations

The following tables set forth our results of operations for the periods
presented in absolute dollars and as a percentage of our revenue for those
periods. The period-to-period comparison of financial results is not necessarily
indicative of future results.
                                   Three Months Ended March 31,
                                      2014               2013
                                      (dollars in thousands)
Revenue
Membership                      $      18,300       $      14,637
Service provider                       54,357              37,534
Total revenue                          72,657              52,171
Operating expenses
Operations and support(1)              11,548               8,298
Selling(1)                             26,122              19,645
Marketing                              23,481              19,722
Product and technology(1)               7,457               5,595
General and administrative(1)           7,356               6,380
Operating loss                         (3,307 )            (7,469 )
Interest expense, net                     461                 463
Loss before income taxes        $      (3,768 )     $      (7,932 )
Income tax expense                         15                  15
Net loss                        $      (3,783 )     $      (7,947 )

(1) Includes non-cash stock-based compensation as follows:

Operations and support       $    13    $  16
Selling                          104       25
Product and technology           209      215
General and administrative     1,207      566
                             $ 1,533    $ 822


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                                Three Months Ended March 31,
                                  2014                2013
Revenue
Membership                         25  %               28  %
Service provider                   75                  72
Total revenue                     100  %              100  %
Operating expenses
Operations and support             16                  16
Selling                            36                  38
Marketing                          32                  38
Product and technology             10                  10
General and administrative         10                  12
Operating loss                     (4 )               (14 )
Interest expense, net               1                   1
Loss before income taxes           (5 )               (15 )
Income tax expense                  -                   -

Net loss (5 )% (15 )%

Comparison of the three months ended March 31, 2014 and 2013

Revenue
                                                     Three Months Ended March 31,
                                                        2014               2013            % Change
                                                        (dollars in thousands)
Revenue
Membership                                        $      18,300       $      14,637             25 %
Service provider                                         54,357              37,534             45 %
Total revenue                                     $      72,657       $      52,171             39 %
Percentage of revenue by type
Membership                                                   25 %                28 %
Service provider                                             75 %                72 %
Total revenue                                               100 %               100 %

Total paid memberships (end of period)                2,628,704           1,951,774             35 %
Gross paid memberships added (in period)                286,626             274,896              4 %
Participating service providers (end of period)          49,370              39,265             26 %

Total revenue increased $20.5 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Membership revenue increased $3.7 million, primarily due to a 35% increase in the total number of paid memberships, partially offset by a 7% decrease in membership revenue per paid membership in the three months ended March 31, 2014. The decrease in average membership revenue per paid membership resulted primarily from growth in paid memberships in less penetrated markets where average membership fees per paid membership are lower. In addition, we reduced new membership fees, on average, across all markets in the current year as compared to the prior year, which further contributed to the year over year decline in average membership revenue per paid membership. The decrease in membership revenue per paid membership in the three months ended March 31, 2014 also resulted from an increase from 92% to 94% of total memberships constituting annual and multi-year memberships year over year. Consumers pay more per month for a monthly membership than for an annual membership. Therefore, in periods in which our percentage of memberships shifts to more annual and multi-year memberships, our membership revenue per paid membership decreases.


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Service provider revenue increased $16.8 million to 75% of total revenue, primarily as a result of a 26% increase in the number of local service providers participating in our advertising programs and a 15% increase in service provider revenue per participating service provider. Service provider revenue primarily consists of revenue from advertising contracts with service providers. As our . . .

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