Angi Inc. (ANGI) Q2 2013 Earnings Report, Transcript and Summary

Tom Ward William S. Oesterle - Co-Founder, Chief Executive Officer and Director Angela R. Hicks Bowman - Co-Founder, Chief Marketing Officer and Director Charles Hundt - Interim Chief Financial Officer and Controller Robert R. Millard - Former Chief Financial Officer and Principal Accounting Officer

Sameet Sinha - B. Riley Caris, Research Division Deepak Mathivanan - Deutsche Bank AG, Research Division Paul Judd Bieber - BofA Merrill Lynch, Research Division Jed Kelly - Oppenheimer & Co. Inc., Research Division Andre Sequin - RBC Capital Markets, LLC, Research Division Shawn C. Milne - Janney Montgomery Scott LLC, Research Division Darren Aftahi - Northland Capital Markets, Research Division Todd Van Fleet - First Analysis Securities Corporation, Research Division Kerry K. Rice - Needham & Company, LLC, Research Division Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division Michael Graham - Canaccord Genuity, Research Division Gavin Richey Nathaniel Brogadir

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Angie's List Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to introduce and turn the conference call over to Tom Ward, Angie's List Vice President of Investor Relations. Please go ahead, Tom.

Thank you, Kate. Good afternoon, and welcome to the Angie's List's second quarter 2013 earnings call. With me today are Bill Oesterle, Angie's List's Co-Founder and CEO; Angie Hicks, our Co-Founder and Chief Marketing Officer; and Chuck Hundt, the company's interim CFO. 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 represent 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 most recent public reports, including our 2012 annual report on Form 10-K, 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, amortization and noncash, 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 second quarter 2013 earnings release, which is posted on the Investor Relations section of our website. 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 Oesterle, Angie's List CEO. Bill?

Thanks, Tom, and welcome everybody. To start off, I'd like to refer everyone back to 2 quarters ago when we forecast, when we began to describe what our projections for 2013 might be. And if you recall, we described the opportunity that the company had the executed trifecta. And that trifecta consisted of 3 points. The first one was continued rapid growth. In this quarter, we've achieved 62% growth over the same quarter last year. So we've successfully achieved that thus far into the year. The second was that we would maintain adequate levels of cash, secure levels of cash for the year. I'm happy to report that this quarter, we increased our cash balance by over $3 million and in fact, that brings the increase in cash to $14 million year-to-date. Finally, we felt that we could simultaneously increase our investments in product and technology. And as you can see from the results, we've done that. The focus of those investments has been in our increasingly important marketplace initiatives. We are investing heavily in marketplace. We're doing so because of the tremendous progress that we've been making in the marketplace initiatives and the opportunities that exist for those. Finally, I'd add -- I'd like to remind everybody that the third quarter continues to be a quarter where we make considerable investments. It's still the peak season. We also are in a position where we're paying for the investments of the second quarter, the beginning of that season. So it is likely that we will have investments of cash in the quarter. This is a critical time for us because the success of our investing in this coming quarter will determine the size of our yield in the fourth and first quarters of 2014. Lastly, I'll mention that we are in the midst of our CFO search. We are pleased with how that's coming along, and we expect to make an announcement sometime this quarter. All right. I will now turn the call over to Angie. Thank you.

Thanks, Bill. Our marketing team continue to perform very well in the second quarter. We added a record number of new member sales for a quarter, and increased total paid members by 51% compared to last year. These strong results were achieved on only a 1% increase in our total marketing investment, while our CPA declined 12% compared to the second quarter of last year. Our membership results this quarter are a clear example the yield we can achieve in our new member sales. As I've mentioned previously, we continue to successfully move more of our new members to annual memberships. Remember, this is good for the business because it improves overall member retention and cash. But it may provide downward pressure on first year renewal rates as more marginal members move into that bucket. Additionally, this could provide downward pressure on revenue per member since the annual members are at a discount to monthlies. For the third quarter of 2013, we expect our marketing spend to be in the range of $28.1 million to $29.1 million. Now, I'll turn it over to Chuck.

Thank you, Bill and Angie, and good afternoon, everyone. I will provide you with some additional details on our financial results for the second quarter and then we will discuss our outlook for the third quarter. As a quick reminder, my comments on growth rates will refer to year-over-year changes for the respective period unless I indicate otherwise. We delivered a very good second quarter. Total paid memberships increased 51% during the quarter. Total revenue increased 62% to $59 million. Membership revenue increased 41% and total service provider revenue increased 72%. Our solid revenue growth rates reflect the successful investments we continue to make in the business to acquire new members and advertising service providers. As I mentioned previously, total revenue for the second quarter of 2013 was $59 million, an increase of 62%, compared to the prior year period. Service provider revenue was $43.3 million or approximately 73% of our total revenue. Within service provider revenue, advertising revenue was $38.3 million, an increase of 76%, and eCommerce revenue was $5 million, up 44%, compared to the second quarter of 2012. In addition, our service provider contract value backlog ended second quarter at $102 million, an increase of 66%, compared to the prior year period. If you recall, the contract value backlog consists of that portion of the service provider contract value that has not yet been recognized as revenue. Looking under expenses, we continue to invest aggressively in the quarter to grow our base of memberships and advertising service providers, as well as technology to provide innovative, efficient tools to our members and service providers. And in spite of these continued investments, we realized significant leverage in the business as our operating loss improved to 23% of total revenue, compared to 63% in the prior year. Adjusted EBITDA loss and non-GAAP financial measure was $11.7 million for the second quarter, compared to $21.5 million loss in the prior year period despite higher marketing and selling investments in the second quarter of 2013. Turning to the balance sheet. We ended the second quarter with approximately $66 million in cash, cash equivalents and investments. We generated $4 million of cash from operations in the second quarter of 2013, compared to $15 million used in operations in the prior year period. We generated $14 million in cash from operations for the first half of 2013. The year-over-year improvement in cash generation for the second quarter was due to a combination of increased operating leverage and improved working capital. From an operating leverage standpoint, our net loss improved by more than $9 million compared to the prior year period and accounted for approximately half of our cash from operations improvement, while our working capital improvement was primarily due to the lower amounts of cash used for prepaid commissions. We believe our second quarter operating financial results position us well for the remainder of 2013 to deliver continued rapid growth in revenue and margins, increased investments in products and technology, and with appropriate levels of cash. Before we open the lines for your questions, I'd like to provide you with our outlook for the third quarter of 2013. We currently expect total revenue in the range of $65.5 million to $66.5 million. As Angie mentioned, we expect marketing expense in the range of $28.1 million to $29.1 million. As a reminder, we expect to complete the transition to our new sales rep compensation plan during the third quarter. Therefore, this will be the last quarter that we provide outlook for our selling expense. With that said, we anticipate selling expense to be in the range of $23.5 million to $25.5 million for the third quarter. Non-stock based compensation expense is expected to be approximately $1.4 million in the third quarter, and we anticipate approximately 58.5 million shares outstanding at September 30, 2013. This concludes our prepared remarks. Operator, please open the lines for questions.

[Operator Instructions] Our first question comes from the line of Sameet Sinha with B. Riley.

Two questions. First one, in terms of your eCommerce business, can you tell us how you're thinking about it? How that is tracking? We know you deliberately kind of slowed it down so that you can monitor the quality of the members, of the margins that you're putting on and so you can control the experience for the consumer? The second question is in terms of marketing cost, you grew marketing cost by about 2% in the second quarter, indicating about 10% year-over-year growth in the third quarter. Can you tell us was there something in the second quarter of last -- third quarter of last year that was -- caused an anomaly and kept the marketing cost slower that's why it's going up faster than you saw in the second quarter?

All right. We'll start with question one. You have the characterization of our marketplace initiatives exactly right. We have -- we actually grew the number of transactions this quarter fairly dramatically. We -- I believe last quarter, we had something like 91,000 in total transactions. This quarter, we were something like 116,000. And so, that growth effectively represented growth inside a fairly constrained marketplace, as we were working with improving the transaction. So think of it as 116,000 transactions that were now -- are now totally visible. They're on our -- in our marketplace and we can monitor their success and failure and we're building tools and business practices to do so. We're scaling that in spite of these sort of much tighter screens and criteria that we're applying to those transactions, which is a very good sign for us. So that's sort of characterizes. We're going to continue. We're making sure that we have quality transactions taking place, once as it were becoming increasingly satisfied with that, we'll scale faster. So I'll let Angie answer the marketing question.

Sure on the marketing question, it's a couple of things. One, it's not unusual for there to be some back and forth as to whether Q2 or Q3 is the higher spend mark, the higher spend quarter per se. So we really manage things to the marginal CPA. So, as we look to deploy dollars, we kind of managed that during the year. Additionally, last year, I think we talked about the fact that as we came into Q4, we were -- marketing spend, we didn't invest as much in marketing spend in Q4 as we typically do. So we're kind of bringing the spend a little bit down in the back half of Q3 as well as we're kind of heading into the election, as we talked about last year because we knew it's going to be a crowded marketplace. So yes, it's not unusual to see Q2 and Q3 to be the peak quarters of spend.

Be the fact I can ask a follow-up question. The number of transactions you gave, 91,000, this was in Q1 of this year? Or second quarter of last year?

That was in Q1 of this year, and the second quarter of last year, the number was actually around 75,000. I'm sorry, I'm sorry, that is q -- so it's 91,000 in Q1 of this year, it was 75,000 in Q2 of last year, so quarter-over-quarter.

So sequentially, the number of transactions went up 27% but your revenues were up in a sequential -- just about 6.5%, Can you talk about the dynamics there? Maybe it's the difference between Storefront and daily deals? Or is it something to do with the take rate?

Yes, it's -- you have it exactly right. It's the shift from a much greater preponderance of those transactions is now in Storefront, a greater percentage, which is exactly the direction we wanted to go. Their take rate tends to be lower. Both transaction size and take rate tends to be a little bit lower, and that's just a -- sort of a product mix that as you forecast, produce that dynamic.

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

This is Deepak, actually, sitting in for Lloyd. Just wanted to get some color about the member engagement levels in the network. I just wanted to ask maybe what are the engagement levels of the new members that you're adding, compared to members who joined probably about 1 year or 2 ago. Do you think that paid conversion rate is still holding up within new members than it was maybe like 2 to 3 years ago?

I'm actually very happy about this particular. Our member engagement metrics across the board have been improving. So their improving with scale, and I believe that's direct evidence of the network effect that we get as we get more members in a given geography. More members produces a better product which produces more engagements. And that's -- we've been making great progress with that, and that's a very good sign for us.

Okay, maybe just if I could follow-up on that. Is that particularly due to the consumer mobile apps that you've developed? Is there any difference in the dynamic between, say, mobile consumer and traditional desktop consumer?

Interestingly, the effect is much less for us than it appears to be for lots of other companies. Our transactions port across mobile -- people engage at similar levels on the desktop whether their mobile or whether they're using a tablet. So I think it's really more -- has to do with the inherent product itself, which is the quality and volume of the reviews and our member's ability to engage in commerce transactions with our service companies.

Our next question comes from the line of Justin Post with Bank of America Merrill Lynch.

This is Paul Bieber for Justin. In the cohort analysis, it seems like there was a slight decline in the service provider revenue per paid member in the oldest most mature cohort, I'm just wondering if we should read into anything there? And then secondly, the growth rate in gross member adds seems to have decelerated quite a bit over the last 2 quarters. Hoping you could just give us a little bit of context around that deceleration, whether it's -- is something going on with the marketing? Or it's just the large numbers kicking in?

Okay, so on the first one, the slight decline in revenue per member, that's a seasonal effect. When we're growing -- I think very positive news that we continue to grow the oldest cohort at rapid rates, 37% I think was the number. And when you do that and the member acquisition ramps up in the second quarter, then there's a lag period between the new adds that come in. And so that's the effect there. There's all good news in the mature cohort. Your second question was about -- was that about member growth specifically or overall revenue growth?

It was growth member adds.

Okay. Angie, I'll let you.

So yes. So I think -- your question is -- we're heading into -- we're into the high season. But I think it's some say a law of large numbers as you mentioned. I mean you're getting kind of a -- you still see efficiency despite the fact that we're spending and putting on more members than we ever have before. So, a really great quarter, but you don't see -- it's, the engine is just a lot larger. So the percentage of the efficiency may not be as large.

Yes, I mean, it was a record quarter for us. We had a 347,000 members and that's an all-time record for us. And we did that without dramatically increasing the spend.

And one quick follow-up. What drove the deleverage in operations and support this quarter?

We tend to see that as the members increase in the Q2. So our cost per member, we gain efficiencies throughout the year. You get the revenue later because of the revenue lag effect.

Our next question comes from the line of Jason Helfstein with Oppenheimer. Jed Kelly - Oppenheimer & Co. Inc., Research Division: This is Jed Kelly on for Jason. Two questions. One, your technology expense continues to grow pretty fast year-to-year, can we expect that same type of growth in the back half? And then, what should we expect for CapEx in the back half? Is it going to be similar to what we saw in 2Q?

So the technology growth, you can continue to expect us to invest in technology. We see lots of opportunity there to improve the product, to improve the customer experience with local commerce generally, and we're going to -- as long as we have the capital available to us and the business is -- its improving margin are allowing us to make those investments, we're going to do it. Chuck, CapEx.

Yes. CapEx, I guess, the second half of the year, we'll be -- we don't expect any drastic changes from the first half of the year. Jed Kelly - Oppenheimer & Co. Inc., Research Division: Okay, and then just one more. Can you just talk about the engagement that service providers are having with the technology you're spending in the marketplace like the engagement? Or can you touch on anything of that nature?

Yes, I'm going to say that transaction number that I provided earlier, I think is, one, is a compelling number about engagement. We're increasing the number of service providers even though we're not -- we have not sort of stepped on the gas to heavily market engagement with service providers. We're growing the number of transactions that are flowing through them and we've been seeing really, really good reception. And service providers, they want information and tools to provide better service. The good ones do and we have spent a long time figuring out who the good ones are. And so, I've been, actually, very pleasantly surprised, we all have by how willing the service companies are to deploy our tools and adopt our practices.

Our next question comes from the line of Andre Sequin with RBC Capital Markets.

So CPA still showed a nice drop year-over-year this quarter, can you talk to us a little around the trends you're seeing in there? Is there anything new going on in that? And then on a related topic, have you noticed a faster ramp in subscriber growth in new markets from the awareness you've driven through the national TV ads? Or just generally, have you noticed a drop in the efficacy of the television advertising ads?

Sure. So obviously, we continue to see efficiency in the CPA but I always remind folks that we don't manage to the average CPA. We manage to the marginal CPA. So it's going to be in kind of where that average comes out is really dependent on how many dollars we put to work and how that marginal dollars behave. It's really where you get to the -- where you get -- it's kind of where it's coming out. We just continue to -- we're continuing to refine what we do on the marketing standpoint. I mean, I know we've talked about SEO before and just improving our channels. We're still seeing nice growth kind of across-the-board, across all markets. The young markets, as well as the older markets on how we're attracting members. So it seems like, from our perspective, things seem to be moving along really nicely on the marketing side. So does that help you give a little flavor there?

I will say to answer your specific point on the new market, every cohort is growing faster than its predecessor cohort.

At that same age, right. Yes.

Yes. So we -- our marketing or our time penetration rate has been accelerating in all of the cohorts, and it -- and actually has been accelerating in all of the markets.

Right.

So that continues to be a very good sign for us and it's working.

Our next question comes from the line of Jordan Rohan with Stifel Nicolas.

This is Alex [ph] filling in for Jordan. Quick question on -- and follow-up on eCommerce, when do you guys expect to really let the reins loose and see that ramp up? I'm going to have to follow-up.

It's a -- eCommerce is actually a much more deeply embedded product. Then -- it's almost -- often times when we get asked a question about when are you going to -- you really going to unleash it, and what actually is happening is -- so we have a -- as I've mentioned, we have these 116,000 transactions the last quarter. Our goal is to deconstruct each one of those transactions into a 10 or 15 component steps and improve it. And if -- when we do that, then organically, you get this growth. You get increased satisfaction. You get increased usage, increased service provider uptake without really much marginal investment in promotion and marketing. And we still have a lot of room left to go to improve those transactions. Now, how long it will take us and when we'll begin to really put some weight behind the activities? We're unwilling to forecast at this point. This is why I described the growth of this quarter sort of organic. Just by improving the individual transactions, commerce is growing on its own and that's a very good sign for us. It's just leveraged growth. So, I -- we're hesitant to put out forecast for what the trajectory is going to be. It's growing nicely. We're improving it every day. Every day that we improve it, it's going to grow some more and that compounding process is our goal, and we're working on that and we're making progress on it.

And then a question on strategy. How do you guys think about expanding into new markets versus trying to increase penetration rates into some of the larger markets?

For the time being, I think that question can be distilled down to, hey, how long do pursue national marketing versus diverting some of that budget into local marketing in the largest markets. It's really how that would translate into operational tactics. And for the time being, we're getting such good leverage out of the national buy but it does not make sense yet for us to begin to focus, go back into the local market whereby definition, what you're buying is very inefficient even in the largest markets. At some point, you sort of cross. Or it's very likely in New York, for example, that you can buy the best local vehicles at a rate that's attractive relative to your worst national vehicle. And we may be getting close to that. I can't say definitively but just as we look at it, we may be getting close to that and that's how we would evaluate how to make those tradeoffs. But right now, the national buy is really working and when it begins to run out of gas, that effect becomes more prominent.

[Operator Instructions] Our next question comes from the line of Shawn Milne with Janney Capital Markets.

Bill, I wonder if I could just start, and couple of questions. I may have missed it, did you give the sales force update in your introductory comments in terms of size and any growth in the quarter?

We did not in the opening comments. Chuck can give you those numbers.

Yes, the number of a salesperson responsible for new contracts is 682 and the ones renewing contract is 178.

Okay, and are we still seeing over 100% renewals or there's been a change there either way?

We are still seeing well over 100%. So we've had very good performance on the renewing contract and that, given the success we had last year in originating contract, that's a very positive outcome for us.

Is it -- was this like the first quarter where you're still in the middle of changing sales force compensation plan then that restructuring a bit, so you were less likely to put a lot of effort on new origination folks?

We're still in the transitional, although we're getting -- I would say we're sort of in.

In the last quarter.

Yes, we're in the last quarter of that transition, last quarter of the financial transition. I think the operational transition, we feel pretty good about these days. So certainly, in the first quarter of that effect was true, we're just making sure we had everything strapped down. In the second quarter, we entered the quarter being very conservative and we've become, as each day goes by, we're more and more comfortable with the key operating metrics coming out of that area and we feel more confident in our ability to put new reps on and train them and get them productive.

Okay. I can follow up on that, and then strategically, there was a question earlier about gross ads slowdown. Well obviously, you've slowed down your marketing spend growth significantly. I guess, just big picture, your renewal rates continue to be good. If not improving, your cost per acquisition is good. You set the stage for very strong growth in service provider revenue. I mean, beyond your Angie's self-imposed constraint of some free cash flow comment, why won't you start spending more again on marketing? Is there something that you're -- I think if -- we were initially talked at the time of the IPO, roughly a 3 million member number and after seeing that very strong growth the last couple of years, I think there was perhaps expectations, maybe it would be, certainly north of that. Has there been a change there?

No, there hasn't been at all. This is a question of whether the business is now, Shawn, driving very high growth rate, 52% and it's doing -- it's effectively cash flow neutral. So it's self-funded. Those growth rates are self-funded. And so, as you can sense, the margins of the business are increasing and so, we've hit sort of self-funded high growth this year. Well, if that margin improvement were to continue next year, then it could potentially be self-funded higher growth and we'll make that decision based on Angie's results from this year and on the margin improvements that we're experiencing as we head into next year. So it's really a question of we could -- you make a compelling argument. That's a very interesting one, which is, hey, your -- the value of your members is going up, your acquisition cost is going down, why don't you stoke the fires a little bit. We want to do that within the cash -- internal cash capabilities of the business. And so, that's our current operating strategy. We're just not -- we told everybody we weren't going out into the market to raise money this year and we don't see any reason to when you can drive the high level of growth that we're driving. And so, so far we're sticking to that strategy. We always reserve the right to change our mind but that's where we are today.

Right. And I understood on that answer, but as you will roll into next year and that self-funding growth in margin does pick up significantly, we believe on the renewal rates of the contract value. Is there anything that Angie's is seeing that tells her, there wouldn't be a return in the marketplace from the ability to perhaps accelerate new member growth next year. That's a little bit hypothetical, but is there anything out in the marketplace that says to you there's some limit on that membership growth capacity?

No, the answer to that is no. We've been -- the marginal rates look good. There are lots of places we can still buy ads. We have lots of room for efficiency in our joint funnel, in our online activities. We continue to remain very bullish about our ability to expand the marketing activities of this business out in the future.

Our next question comes from the line of Darren Aftahi with Northland Securities.

Just a couple. Back on the eCommerce, can you give us what Storefront and Big Deal relative growth rates were and then what the relative ASP on eCommerce was for the quarter?

Yes, we don't break out the individual growth rates, it's not that I'm aware of. What I alluded to earlier is that we're growing Storefront faster. That's the strategically important area for us. And in fact, and it's -- this is one of the reasons revenue -- if we're converting business or -- not even converting, converting will be the wrong word -- but if we're growing Storefront revenue faster than Big Deal revenue or transactions, Big Deal tends to be more revenue rich. And so, in spite of the waiting shift to Storefront, we're still posting growing revenue numbers, which is just a good sign for us because we're swimming upstream a little bit as we make that conversion. As I say, we don't break it out, but from a trends standpoint, I think that gives you a pretty good sense where we're going.

And then did I hear you correctly, Bill, did you say you'd be burning cash on an operating basis in the third quarter? I'm just trying to understand what's different. I think last year you improved cash flow from operations by about $5 million on a sequential basis.

Yes. So the third and fourth quarters, historically, are -- effectively, you can think of them as the quarters where we pay the bills. And so just from a working capital standpoint, we increased the spend, we get some trade finance out of that in the second quarter -- first and second quarter, then we start paying those bills in the third and fourth. And so, it would be very likely that we'll burn cash in those quarters. But as I stated last quarter, we expect the year to be at least cash flow neutral. So we're plus 14 at the half way point, which is better than we've ever done before and I think something like $17 million ahead of last year. So a plus 14. Effectively, what -- the statements we made last quarter was, we're going to make sure that, that number doesn't turn to a negative number. So we sort of pay the bills in the second half of the year and that's likely to show up in terms of negative cash flow, but we should have a positive, at least a neutral 2013.

And then I guess last question, any changes in the competitive landscape? There's been a number of smaller competitors that popped up, and obviously, there's an article today about eBay higher in the U.K. Can you just comment on that? Any dynamics you're seeing in terms of competition?

Yes, there's certainly been competitive entrants and this year has been a little heavier than some, but we've been through kind of 3 waves of competitive entrants. There's a big wave in 2000, there was a big wave in 2005. It looks like as the economy is improving. It always is when the economy improves and we've seen a few more this year. We have yet to run into -- we are still operating in this very, very large marketplace and we're not running into direct competition. We're still fundamentally competing with the old ways that consumers consume these services and that service providers promoted these services, and we're going to be -- that is a very, very large marketplace.

Our next question comes from line of Todd Van Fleet with First Analysis.

Just a couple of clarification questions on ops and support. Just to be clear, there were no kind of what we might consider to be unusual one-time expenses in the quarter?

No, there were none.

Okay. And then on the low end of the range for selling expense, could you run that by me again, for Q3? Is that 24.5 or...

Yes, it was 23.5 to 25.5 was the range.

Okay. And just on the deferred membership revenue uptick in Q2. So should we assume that, that $5 million uptick in deferred membership revenue is really a function mainly of the shift from maybe monthly memberships to annual memberships or how do we think about that?

Yes. Yes. I mean, that's definitely going to have an impact in this. Angie and Bill both pointed out, we also had a record number of ads in the quarter as well, so.

Our next question comes from the line of Kerry Rice with Needham. Kerry K. Rice - Needham & Company, LLC, Research Division: Just a couple of quick questions. Going back to contract-valued service provider or you can look at contract value for backlog as well. Certainly strong growth there still, but any reason for the deceleration in growth somewhat, is there some seasonality impact there? And then the second question around marketing expense and while it may be early, it sounded a little bit like the second half you were going to spend a little bit more this year than you did the last year, should we typically think about the second half looking though we're closely similar to the second half of 2012 as we see kind of this big step down but maybe not quite as big a step down as we saw last year?

Yes, why don't you start with the marketing?

Okay. Sure, sure. So the marketing question, so 2012 was the anomaly in kind of the way we spend in marketing because we do have a typical bell curve to the spend. We're at slow in Q1, ramps up in the second and third quarter and then ramps down as we head into the fourth quarter and the holidays. But last year, because of the national -- because of the presidential election, the fourth quarter is just a seasonally slow period for us and we knew that the market was going to be tight for advertising that we just really felt there was no reason to kind of go in and fight for that, putting extra marketing dollars to work there. So kind of saw the last few months of the year last year were lighter than they normally would be. So that helps you. Kerry K. Rice - Needham & Company, LLC, Research Division: Yes, that helps.

I think the second part of your question was about growth rates so marginal growth rates on advertising and a little bit of that is, we're comparing percents to percents, which always get a little bit precarious because we had a very, very big second quarter last year and we won't always say -- so we had a record second quarter this year, but it wasn't as big a step up over last year as it was this year. And so, on an absolute number basis, it was our best quarter, still growing very fast and there's kind of a timing hump that is producing the dynamic that you described. We grew very rapidly in the first quarter. We've grown rapidly again in the second quarter. It's just we're growing on top of bigger, very big step up last year. So on a relative basis, it doesn't look at as strong, but the numbers, the absolute numbers look great.

Our next question comes from line of Jeff Houston with Barrington Research.

It looks like revenue and EPS in the quarter were roughly in line with expectations. Was there anything in the quarter that did not meet your internal targets?

Well, we have all kinds of internal targets here. So I'm not sure -- we don't disclose those. We don't talk about them. And so, I wish I could give you more insights than that, but we had a really good quarter. We're happy with it. We're happy with all of the numbers that we're reporting here, irrespective of exceeding or not exceeding our internal targets.

Got it. And so for the question for Angie. Was there any shift in your marketing mix in the quarter? And do you plan to make any for the rest of the year or is it pretty business as usual?

It's pretty business as usual. I mean, as we've mentioned before, we continue to invest in the channels and kind of the mix until we see diminishing returns. So you'll get very slight kind of movement here and there but all in all, the mix is on whole, the same.

Okay, last question for me is, as you look out potentially expanding internationally, is that something you could consider more into next year?

Yes, we certainly -- we have tough tradeoffs with respect to where we're investing these days. We have some really good candidates. So Angie's got marketing working. We've got very interesting investments in technology, in the application of that technology in the marketplace. So if anything international suffers from just a competition that other initiatives that we have, had for those dollars. But it's -- we've got things underway in a few places that we're gathering up the data and sort of doing the prework for markets. And it will really boil down to whether we have the resources available to put hard marketing dollars against those markets, and that's just going to be a trade-off question based on the other investments that we have.

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

I just wanted to ask a question about the service provider experience on a couple of different ways. One is, we calculate the monthly ARPU per service providers, $353 this quarter. Can you talk about what kind of spread there is between like some of your ways that are paying a lot versus maybe service providers who are paying very little. I mean, I know it varies a lot based on the category and everything, but just wondering like within a category or within a certain area, do most of the service providers that are listed in a particular category, do they pay more or less the same? And then related to that, can you talk a little bit about the difference in the experience that a service provider has? Let's say I'm on the top of the first page of the search results versus on the bottom of the second page or however you want to characterize it, how many leads am I getting and how much am I paying? I mean, what's the difference in what I'm paying from the top to the bottom? So specific question, but anything that you can say around that would be helpful.

Yes, so while -- as you -- it's a difficult question to answer because of the tremendous spread in price. We have one of the most sophisticated activities that we have in the organization is determining all the way down to the individual household level what the pricing ought to be for an individual service provider. So it's a combination of service category market as defined all the way down to the household level. Essentially competition in that marketplace and those things when you mix them all together, you have tremendous spread. So a tangible example is a dog walker in a suburb of Tucson, Arizona versus a plumber in Manhattan. Those are 2 very, very different experiences. Now I think if you start to constrain, okay, how about the second plumber in Manhattan. And if you've constrained it further, saying they want to advertise to exactly the same households, well then the contents are going to be very similar, very similar. They'll be somewhat dependent on, do they buy any other products, do they put it -- it's a pretty sophisticated matrix and it gets constructed. It's very rare that 2 service providers consume -- it's not very rare, but it's rare that 2 service providers consume exactly the same territory because, they have the opportunity to manipulate the territory that they want to consume. So and then the second part of your question will be -- it's very, very difficult for me to give a [indiscernible] a specific description of the difference in traffic between, say, first page and bottom of the second page. The heavily trafficked pages, the dispersion is less significant than it is in the less trafficked pages. So again, using the plumbers in New York, there are lots of them on those first 2 pages with lots of reports. And as a result of that, there's more dispersion of the lead activity. For the dog walker in Tucson, there is very low report coverage. And so, someone at the top, by definition, is going to have a greater spread of reports and they're going to accrue more lead generation. I hope that's helpful. It's actually a much more complicated question than it may appear just because of the market, the individual market characteristics and service category characteristics.

Yes. No, but that's a helpful description. I appreciate it.

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

A couple of follow-ups. Actually, on the salesperson pay per breakout, can you divide for us what was the quarter bearing sales force? Was it the support? And in terms of selling cost, I understand that you get to the first year anniversary of the change in compensation in the fourth quarter, how should we think about the fourth quarter because the number of things that determine the dynamics of what it could be, so I think it will be helpful if you could help us in sort of modeling that out?

Sameet, we don't break out -- we've never provided the support functions versus the selling part. Though we've provided the details with respect in new origination versus renewal headcount. That's as far as we've gotten there. And then because of the complexity as opposed to us providing a lot of detail into the organization chart, we're just providing specific guidance on selling while we get through this transition in an attempt to help the modeling. So I hope that, that -- obviously, there are other things -- selling is -- forecasting selling, we have a great sympathy, it's difficult to forecast and that's why we're providing the direct number now. So we understand, but that's sort of our current course of action.

If you can probably just remind us about the cash flow and the income statement dynamics that will go away in the fourth quarter so that we can at least think about it directionally?

Yes, so what's happening is expense -- Chuck, jump in here if I start screwing this up. But we're front-loading if our expense goes up. So current -- All right. You've already got to jump in. Chuck?

Expense really hasn't changed because of the expense that goes -- follow the revenue of the contract. It's the cash component that is changed. So before we used to pay the commissions upfront and then, and now we're paying as the service provider pays us.

Our next question comes from the line of Gavin Richey with Rockwood Investment Partners.

How many additional headcount will be needed between now and at the end of the year?

Total headcount?

Total headcount, yes.

I don't know that we've provided any projections on total headcount. So as many as we think we're going to need. I don't mean to be cute about that but we just haven't provided that.

Okay. And what percentage of traffic comes from -- or new members comes from SEO as opposed to advertising?

We haven't disclosed the breakout of SEO from sales from the rest of it, but SEO has been growing but we're still a destination site. I mean, a lot of consumer -- we get -- large portion of our traffic comes because of our off-line spend and the activity involved with driving people to our brand.

I think we mentioned one of the previous quarters that...

The growth over the previous quarter, but not the...

Yes, the percentage growth has been greater...

Yes, on the SEO side. Yes. The SEO has been growing.

Our next question comes from the line of Rajit [ph] with Harpers Bank [ph].

Two really quick questions. One is, your retention rates were flat. Were you expecting that, and do you think that they're going to hopefully improve over the next few quarters? And the second question is, your CPA was better year-on-year but if you compare your CPA to the prior quarter, the change I think actually -- it actually went up because it's -- or was roughly around -- or it hasn't improved as much. Could you comment on that? I think it's $77 this quarter versus $72 last quarter? And the last question is, I guess on free cash flow, you had a great first quarter or the second quarter not really as much despite your CPA improving a lot. What was the reason for making less cash this quarter, and how much of that benefit came from the change in sales commission structure?

Yes. I guess I would start off. The second quarter is when we owe it -- that's when we make our investments in marketing. So it's our -- and I think we talked a fair amount about this in the last call. This is when historically, for 18 years now, we've made the big investments in the spring season, and so seasonality is a business. And as a result of that, you see your marginal -- your CPAs deteriorate because you're putting so many more dollars to work. And the tail on that CPA, the benefit of it stretches out for a couple of quarters. And so, the trend for years and years and years has been that the CPA, the sequential quarters from first to second will always go up. It did so less this year than it had in a long time. And that's a similar dynamic. This is the first second quarter in the history of the business as far as I can tell that we've produced cash in the second quarter. Here is a rare and remarkable thing for us to produce cash in the second quarter because our marginal investments are so big in the second quarter. So I would -- our expectation, it was actually a little bit surprising to us, to have the business produce cash in the second quarter. It's a good thing. It rarely does. And so, it's just a testament, the majority of that cash improvement is actually just the growing EBITDA margins of the business. The recurring revenue of all of the previous years is funding the acquisition activities of the current year, and that's exactly what the model is supposed to do. That exemplifies the entire year. All the acquisition activities of all the previous years at Angie's List are recurring and they're producing internal cash for us to invest in growth, and we're achieving significant growth with the internal cash flow. I stated last quarter that we expected to be -- we expected to be cash flow positive or at least cash flow neutral. This quarter, maybe $1 cash flow positive, as I think might have been the term I used, that we're not changing that statement at all. We expect this year to fund a tremendous amount of growth from internal cash flows, and that is a significant milestone for us and the second quarter is an example of that.

That question on the retention rates being flat?

Yes. Retention rates, actually, they -- so as the base gets bigger and you're -- when you have a record number of new ads as we had a year ago in the second quarter and as we had this year, that puts downward pressure on the average renewal rate. And we don't like to talk about the average as much because it's not a weighted average. But you can look at the first year number and we're doing really well there. And as Angie mentioned in her comments that in spite of the fact that our marketing staff has done a great job of originating more annual members and fewer monthly members, and that will, by definition, you're converting people who are monthly members to annuals and they tend to be the most at-risk annuals that will put downward pressure on your renewal rates in spite of Angie -- I think if I remember it correctly, we've increased that rates, what, 50% and it's a really, really big step up. We're still achieving very good cohort renewal rates, first year renewal rates. So the numbers, those numbers are strong.

Our next question comes from the line of Nat Brogadir with Citigroup.

Sorry I jumped on a little late. I was wondering if you could comment at all on the new eBay, rollout of eBay higher. If Angie's List hasn't any -- because it's such a similar product, if you have any comment on that?

Yes, we just saw the press release that everybody else did. It's in the U.K. It's very small and we haven't seen anything other than the press release. So -- and it's one of the softest press releases we've ever seen. So we really -- we'd be happy to comment on. It's just there's not that much to comment on yet. So that's all we know about it.

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

Okay. Well, thank you, everybody. We appreciate you listening in. I just want to reiterate in context, we are achieving, I think we're something close to 65% growth through the first half of the year and we've done that while producing $14 million of cash flow. So we are financing those growth rates. There's no need for external capital to fund very high rates of growth, and that's a new and happy phenomena for us and that's because of all those years to building the recurring revenue base to do that. And in addition, we're increasing our investments in technology and product in order to ensure that those growth rates continue out into the future. So this is a turning point year for us. It's where we demonstrate that our internal cash flows are sufficient to do all those things and 6 months through that year, it's working very well. Thank you, all, for your time. I look forward to speaking with you all individually.

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