Angi Inc. (ANGI) Q3 2013 Earnings Report, Transcript and Summary

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

Thank you, Kate. Good afternoon, and welcome to the Angie's List third 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 Tom Fox, the company's 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 public filings, including our 2012 annual report on Form 10-K and subsequent quarterly reports, for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. We are not obligating ourselves to revise our results or publicly release any revisions to these forward-looking statements in light of new information or future events. In addition, as we refer to earnings, we also will refer to adjusted EBITDA, which we define as earnings before interest, income taxes, depreciation, 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 third 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. During the Q&A session today, we would like to accommodate as many questions as possible, so please limit to one question and one follow-up. I would now like to turn the call over to Bill Oesterle, Angie's List's CEO. Bill?

Thanks, Tom. Let me start by introducing our new CFO, Tom Fox. We're thrilled to get him, so welcome, Tom. Tom will be giving the financial results overview today, but Angie and I will handle most of the details, as Tom is only a few weeks into the job. As everyone is aware, the coincident timing of our CTO announcement and the public media release of our price tests combined to produce a very understandable set of questions recently. Unfortunately, we were in a quiet period and could do little to answer these. I will attempt to provide those answers today. On September 30, we announced the departure of our CTO, this was my decision. I believe my most important job is to be sure that Angie's List has the right leadership to execute on our very substantial opportunity. We've made considerable progress this year by adding Tom Fox as CFO, Mark Howell as COO, Pat McKieran Gudakanda [ph] as VP of Engineering, and additionally, Pat Brady, joined us as president of our marketplace. In technology, I determined that we no longer have what we needed. This company deserves exceptional leadership in the CTO role. We intend to have it and we have a formal search underway. While our CTO announcement was in our control and manageable in the quiet period, the public release of our price testing was not. As many of you who followed the company over the years know, we are constantly testing pricing and merchandising. In fact, we've done so continuously since the very first days of the business. We added free membership for new markets in 2005. We've added lower-priced monthly options and higher-priced lifetime options along the way. In addition, we've had an incredible variety of promotions over the years. We introduced both bundling and unbundling of health and auto categories in 2009. We test, we evaluate, we learn and we improve. This particular test was in the normal course of business for us and we were caught off guard when it became news. As soon as it did, we terminated the test for the very obvious reason that the test became immediately invalidated. So why do we price test so much? Because we are constantly evaluating marginal current investment in the growth of our customer base against its total long-term return. We want more target customers faster and we want each of them to be increasingly valuable. Our economic value analysis takes many things into consideration, including marketing costs, speed of acquisition, renewal rates, subscription revenue, service provider revenue and, increasingly, marketplace revenue. The depth and sophistication of our unit economics are distinct competitive weapons for us. We've used them well over the years. Moving on to the actual quarter. I would call it consistent. We continued the trend of rapid growth: revenue grew 56% year-over-year; we continued to improve cash flow; we are $41 million better through September; and we continued to make substantial marginal investments in products and technology, this included the acquisition of BrightNest and substantial additions to our engineering and design teams. Member acquisitions are lower than I like, and Angie will discuss this further, but renewals remain excellent. Advertising originations labored through the compensation change we instituted in earlier quarters but like membership, ad renewals were very good. Lastly, marketplace made considerable progress in both transactions and revenue, with Storefront making the biggest gains. Now let me turn the discussion over to Angie.

Thanks, Bill. In the third quarter, we added 371,000 new members and increased total paid members by 44% compared to last year. These levels were achieved on an 8% increase in our total marketing investment while our CPA was flat compared to the third quarter of last year. We invested more absolute dollars in marketing in the third quarter than we ever had before. The marginal dollars in the third quarter weren't as efficient as they were in previous periods, which as we had mentioned before, isn't unusual when you increase the spend, but we did see marginal CPAs during the quarter that were above our comfort level. We responded real-time, as we would in any time period, and adjusted the spend accordingly. Additionally, we took the opportunity to continue pricing experiments by evaluating redeploying marketing dollars in price testing. This allowed us to evaluate the most efficient way to scale the membership base. We continue to have very loyal members. Our first-year members renewed at 75% and overall members renewed at 78%. These are great results, given we continue to successfully move more of our new members to annual memberships. It's good for the business because it improves overall member retention and cash, but it provides downward pressure on the first year renewal rates, as more marginal members move to that bucket. You can see this in the 1-percentage-point decline in the first-year membership renewal rate this period. So if it weren't for these marginal annual members, the first-year annual renewal rate would be at record level. As we head into the fourth quarter, keep in mind that our first-year renewal rate is always seasonally lower to the effect of guest memberships in the fourth quarter. For the fourth quarter of 2013, we expect our marketing spend to be in the range of $10.7 million to $11.7 million. This spend level is representative of a typical fourth quarter slowdown, but it's higher than what we invested last year, primarily due to a particularly more competitive advertising environment last year. As a reminder, the fourth quarter is typically a seasonally slow quarter for us in marketing, because we don't see any reason to chase sales in a crowded holiday retail advertising environment. I'd now like to turn the call over to Tom.

Thanks, Angie. And good afternoon, everyone. I will provide some additional detail on our financial results for the third quarter, and then I'll provide our outlook for the fourth 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 solid third quarter: total paid memberships increased 44%; total revenue increased 56%; membership revenue increased 34%; and total service provider revenue increased 66%. Within the service provider revenue, advertising revenue was $42 million, an increase of 66%; and eCommerce revenue was $6.4 million, up 70% compared to the third quarter of 2012. These revenue growth rates reflect the successful investments we continue to make in the business to acquire members and service providers. In addition, our service provider contract value backlog ended the third quarter at $114 million, an increase of 53%. If you recall, the contract value backlog consists of that portion of service provider contract value that has not yet been recognized as revenue. Now looking at our expenses in the quarter. Our investments were focused on increasing our base of memberships and service providers; developing new technology to provide innovative tools to our members and service providers; and acquiring the talent and infrastructure to support our growing organization. The increase in our G&A expense is due to incremental operating costs from our acquisition of BrightNest, infrastructure to support new product and our other investments to support our growth. In spite of these continued investments, we realized significant leverage in the business as our operating loss improved by 23 percentage points. Adjusted EBITDA, a non-GAAP financial measure, was an $11.3-million loss for the third quarter, compared to a $16.5-million loss in the year-ago period. Despite higher marketing and selling investments in the third quarter of 2013. It is important to remember that in our business, adjusted EBITDA is not the same as operating cash flow. While we have reported EBITDA losses this year, our cash generation has been positive, due in part to favorable working capital dynamics. That said, let's discuss the balance sheet. We ended the third quarter with approximately $63 million in cash, cash equivalents and investments. We used approximately $800,000 in cash in operations during the third quarter of 2013, compared to the use of approximately $10.5 million in the year-ago period. The year-over-year improvement in cash generation for the third quarter was due to a combination of increased operating leverage and improved working capital. From an operating leverage standpoint, our net loss improved by $5 million, compared to a year ago, and accounted for approximately half of our cash from operations improvement. While the working capital improvement was primarily due to lower amounts of cash used for prepaid commissions compared to the prior year. For the 9 months ended September 30, we generated approximately $13 million in cash from operations, compared to approximately $28 million used for the 9 months ended September 2012. Now I'd like to provide you with our outlook for the fourth quarter of 2013. As a reminder, the fourth quarter is a seasonally slower quarter for both marketing investments and eCommerce transactions. We currently expect the following: Total revenue in the range of $68 million to $69 million; marketing expense in the range of $10.7 million to $11.7 million; non-cash stock-based compensation expense of approximately $1.5 million; and approximately 58.5 million shares outstanding at September 31, 2013. At this point, this concludes our prepared remarks. Kate, I'd like to ask you to open the line for questions.

[Operator Instructions] Our first question comes from the line of Darren Aftahi with Northland Securities.

Just a couple here. So in terms of operating leverage on the P&L, I think, Tom, you'd said that the tick up in G&A, sequentially, was from BrightNest, but it looked like the incremental revenue gained, year-on-year, were similar 2Q but it looked like the operations number was up. If you'd kind of talk to that a little bit, I thought that number would be a little bit lower on kind of an adjusted-EBITDA basis and then I've got a follow-up.

I'll actually take that question. The -- we obviously -- we have the BrightNest acquisition in there. Some of the product and technology investments that we're making will -- are being picked up in our G&A costs as well. So you can see that technology lines are up but some of those costs will bleed over into the G&A line. So it's really reflective of marginal product investment, marginal technology. Chuck, you have anything to add to that?

I do not.

And then on the eCommerce side of it, can you give the number of transactions? And it looked like it was a decent tick up sequentially. What sort of changed? Have you opened the floodgates a little bit more from going from a test to more of a full roll out?

Yes. So what I'll say is you can see -- we disclosed the transaction in the last quarter on a one-time basis because we have this anomaly of take rate differences in the transaction. You can see clearly, this quarter, that transactions are up and they're up significantly, and that is translated into revenue. The uptick is being primarily driven by adoption of our Storefront products, which are our -- that's the key strategic area for us. It is not as revenue-sexy as The Big Deal offers, which we've brought up several quarters now, but we have good momentum. And that's high-quality revenue, those were the offers that are on our destination site, so they're leveraging the traffic that we already have at the site. This is really good stuff for us.

Our next question comes from the line of Jason Helfstein with Oppenheimer & Co. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: So I'm going to ask one 2-part question about the pricing, the member pricing and then just, Bill, ask you to comment about your stock sales. So on the member pricing, Angie, can you talk about how you guys look at conversion rates? So if you're basically spending national television dollars and you're looking at people who come to the website, and you can obviously see what percent of those people convert at a certain price and who don't, can you just give us some more color on what's making you confident that if you lower pricing, you will have -- you will generate a higher conversion rate? And I also think there's some concerns that if you have a lower-pay member, is that a reflection of the value of them to an advertiser? Can you still sustain, basically, ad revenue per member, even at those lower prices? And then, Bill, just on your stock sales and the 10B 1 plan (sic) (10b5-1 Plan) -- I mean, I think we -- obviously, all understand the benefit of having one of those. But just given the weakness in the stock, wouldn't it make sense to suspend that? And any other color on that?

So let's start with the, let's start with the...

Yes. On pricing, we've -- when you look at membership price testing, it's actually testing, so we will actually run A/B testing and understand exactly what happens to the list and conversion rate. And we always evaluate decisions we make compared to the long-term value of the member. And we are always monitoring the engagement activities of those members, but you have to -- keep in mind, we have members and have years of history of members at varying price levels, so even over the years, we've had some of these younger members at $9 members, and they looked just as engaged as members in our more mature markets at higher prices. I think -- in a lot of ways, you're thinking about from, hey, from an advertiser standpoint, the key here is this member is an engaged member, has an intention to buy services and we have experience at varying price levels that they can exhibit some of those same characteristics. So it's continual optimization. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: And then can you just give us a sense though of like the price testing you've done now that everybody knows about? Is there a sense like how -- what you've been able to see with conversion rates as you price test without giving us specific numbers?

So we continually -- so testing. Price testing, is a continual process here so we don't disclose all the details and all the learnings we have kind of in the price testing, specifically, because that's -- it's an important part of our business from a proprietary standpoint, but we continually price test to kind of figure out exactly where we should be on a pricing spectrum. And some of the price testing we did, this quarter, as kind of other quarters, gives us more data points as to how we can optimize. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: And, Bill, on the stock sale?

Yes. So I filed the 10b5-1 last year, set a volume of shares to be transacted monthly regardless -- let's see, with price limits in them, actually. So built in that level of security, the -- it is intentionally designed to be executed so that I don't have control over when I execute those or don't execute those. So I intend to leave it in place and there are provisions in it, if the stock doesn't perform that the sale will terminate.

Our next question comes from the line of Shawn Milne with Janney Capital Markets.

Bill, I know there's a lot of questions around pricing. But I wanted to dig in a little bit more on the service provider number. You talked about -- I think you called it laboring through the compensation plan. And the quarter-over-quarter ads, if we have it right, are about 2,400, 2,450 around there, which is the lowest in 2 years. Is there something that's happening in the market? I know you hired 113 people at the end of the second quarter, I realized those won't be up to full capacity for some time. But I'm surprised by the quarter-over-quarter dip in new service providers. All else equal, this would be the number that sticks out to me as being an outlier.

Yes. Shawn, I think one thing that gets lost in that number is that we're -- it's a net number. So we're adding and we're subtracting simultaneously. I mean, the entire focus of the business is to direct consumers to the best service company and we're, in fact, we're getting better at that. Because we're now monitoring the transactions, we're monitoring the communication between our members and the service company, that is a tightening of the funnel, driving business to the better service company. So what you don't have access to is how many go into the top of that funnel and how many come in the bottom of that funnel. And it is possible that, that number will fluctuate up and down just depending on the relationship of those 2 numbers. This -- it is not going to be necessary for us to drive that number exceptionally high if we're doing a good job of directing business to the highest quality service providers and getting compensated by them.

So I get that point in terms of those service providers providing that level of service and probably the larger, better positioned ones might be able to generate better ad growth for you, but what would cause more service providers to come out of the bottom this quarter? Because I think you actually used the term laboring through this transition, so to me -- I mean, I took that as a sales productivity issue on the top of the funnel. So maybe if you can speak to both of those?

Yes, we -- the commission changes, we have had to work through the impacts of those. I mean there were significant commission changes. So there's no question, our productivity into the top of the funnel suffered. It didn't suffer dramatically, but it suffered. Simultaneous with that, we've been putting in a set of criteria that the service companies that are eligible to participate in our revenue-producing activities, with the advent of marketplace, those criteria are increasing. We are raising the standards for which companies actually can pay us. And my point is just that that's a net number, in fact -- there were significant progress. We've instituted a whole series of new signal and criteria, and those have worked, we've been applying those. And so, again, you can't just draw -- you can't draw too great a conclusion out of the net number there.

I understood, and you -- again, you have several people on this call are modeling that just based on growth in the base of service providers, which makes no sense. So I'm just trying to draw the conclusions from that. Did you hire salespeople in the quarter?

Yes. We've been adding salespeople. And another thing that will -- well, yes, we added salespeople in the quarter. We've continued to add, as we did last quarter and those people are now in their ramp-up period. So as they become more productive, we expect to continue to drive ad sales and commerce sales.

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

Great, I'd like to ask a question about some of Angie's comments. When you look at the subscriber ads, certainly lost a little momentum, you were looking lower SAC [ph] year-over-year and then growth rates have slowed. I think, if you back a couple of years, you kind of found cable advertising, national level, that was really successful. Maybe you found some SEO improvements about 1 year ago, and those are really helping. As you look out now and over the next year, are there still pockets of areas you could hit or any hope of seeing the SAC [ph] trends or the year-over-year ads start to improve versus where they are now? And then I have a follow-up on the service provider side.

Sure. So, obviously, what we're seeing, I think you're right on some of your efficiency points. I think that as we move forward, we're always looking for ways to make the buy more efficient, as far as the absolute growth. But also remember that the last couple of years, we've been kind of in an unusual world where marginal dollars were actually behaving better than average. We were actually coming down on marginals spend. And in the story of the business, kind of the period we've been going through most recently is probably -- is more the unusual than the norm. It's not unusual that when you add marginal dollars or less dollars, are less efficient than the first ones you put in. So I just want to kind of point that out but -- so kind of speed of the spend -- speed of the growth is going to be dependent on the efficiencies we're garnering, as well as the amount of dollars that we're putting to work -- extra dollars we're putting into work in the quarter or in the time period.

Is there anything recently that you're optimistic on that's working for you or anything there? And then maybe for you, Bill, just on the service provider side, obviously, about 20% increase in average revenue per service provider. If you're putting less up there and less competition for space on your site, that makes sense, but are you getting any pushback on the pricing increases?

So I mean -- I think, Justin, on kind of the continued improvement, I think that though we're constantly turning dials to make kind of changes to various things, so it's kind of the sum of the whole, I think you kind of -- the ideas that you threw out there of like, "Hey, when you found cable advertising and switched to national advertising, that was a big, that was obviously a big move, and that is kind of big move -- a big move like that is harder to kind of replicate year-after-year. But we're continually looking for improvements kind of across-the-board.

Okay. So on service provider pricing, one of the things that -- one of the dynamics that is also helping here is that we're converting -- we're doing a much better job of capturing member commerce on the site, and that's what the -- the big win for us is if we're able to get the members to actually transact in band, because -- I mean, we can demonstrate it and it's easier to monetize it for us, and so we're doing better at that. We're doing better at that both in terms of direct consumption through Storefront where they click Buy It Now. And we're doing better at that in just keeping more of the transactions in band. The opportunity for us -- and the pricing discussions get very easy if we're continuing to drive identifiable marginal traffic to the service companies. If they view that our price increases are tied to member activity that's benefiting them, the conversations are very straightforward. And, so far, we've been executing that well.

[Operator Instructions] Our next question comes from the line of Jordan Rohan with Stifel, Nicolaus. Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division: Great. I have a couple of questions. The first is just from a high-level, I mean, how do you rate this quarter? We know all the drama of the stock and the pricing and -- is this -- was this a good quarter to you? If you had to use A, B, C, D kind of thing, what would you give yourself on that? And I know that -- and why? Second, there has to be some lessons learned already, back to the health gene [ph] question. It seems to me that if you lower the friction of a $30 or $40-subscription price that you might massively increase the number of subscribers that joins Angie's List. So this could be delivered and materialized and passed through to the service providers, who, in turn, will be quite happy with the higher call volume and lead volume that they get. Is this a direction the company wants to go in long-term? And if it's not, why not? Because that strategy seems to make all the sense in the world to me.

Yes. So, Jordan, your -- any observation of what we've been doing in the mature markets, we've talked about this before, quite a bit actually, our unbundling strategies, our -- we've been bringing price points gradually down because we've been doing a very good job of monetizing the marginal members and their activity. So now, does that mean that -- first of all, the test that we had in place was truncated, so we didn't get the results out of it that -- we typically we get all the information, we'd be evaluating specifically the dynamic that you described, which is can you capture more of the target demographic without deteriorating their performance and can you capture them faster? And if you can do that and you can monetize on the back end, then you've enlarged the size of your opportunity. We are monetizing on the back end very well right now, that's -- the progress in Storefront is very promising to us and it affects the math that you described. So it is certainly natural for us to evaluate. It's consistent with the long-term trends that we've been pursuing. Whether we're ready to make a significant move like that or not is in no way determined. But we are constantly looking at those trade-offs, constantly. And it is possible we could dramatically affect uptake rates in the target demographic and have them operate just like they always have. Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And as far as the how the quarter was in your eyes?

Oh, yes, yes. Let's see. I mean, it's a good question. I don't know if -- I'll call that B minus. I mean, we had great renewals, we had -- we took some of the upside off our originations. I mean some of that is just mechanical stuff that we have to work through and I would like to -- we are addressing those things. We're working on them. They were record origination months for us but still not good enough. We have a big, big opportunity here and we set the standard very, very high for ourselves. Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division: Okay. One follow-up to that. The dollar contract renewal price has consistently been above $100 and -- well it depends how you do the math, based on originations versus renewals and such. It seems to be trending closer to $100 these days, is that right in your view, based on what we know on the quarter? And does that become a problem or is that something that you can move back up a little bit, significantly above $100 at this point?

Yes. I don't agree with your calculation. So our performance there has been consistent and it's good and by no means are we going to concede, particularly when we've got the prospect of eCommerce that it's going any direction. We're improving the throughput of our member's commerce for the service companies and that gives us -- there's lots of upside for us if we can execute.

Our next question comes from the line of Gene Munster with Piper Jaffray.

Can you talk a little about just the trajectory of the eCommerce growth rate, and that was up 70%. How should we think about that kind of going forward? I know you said that, that's one thing that's been a strength of the business and you're very happy with that, but how should we think about that going forward?

Well I would say the first thing you want to think about is that last year we thought was seasonal, so before we get out over our skis, let's keep in mind that we're heading into the slow quarter. It's the holidays, people don't -- they don't worry about painting the exterior of their house. That we've learned -- we know that from 20 years of doing this -- 18, I guess. So that's the first thing to remember. Second point is we just got -- it's a little difficult when you're growing things 70%, it's a little difficult to predict how long you can maintain that, whether it's going to be greater than that. We've got good momentum in that area where -- and we got lots of things that we can do better, lots of them. So our prospects are very good. I expect to continue to drive meaningful traffic there. There will be seasonal impacts in both the fourth and first quarter. So let's keep that in mind but there's lots of room for us to grow here and we're going to be working to grow as fast as we possibly can.

Won't those be comping off of easily seasonal quarters 1 year ago, too?

Well, yes and no. The mix has changed quite a bit and we have -- so last year, was almost 100% big deal. This year, substantial percentages of Storefront. And so we're working off a little base there. We've got the mixture changes. We've modified our merchandising quite a bit. We haven't reduced this to science yet. If we had, we'd give you a much more detailed insight, but we're not -- I don't have any good sense for how the holidays are going to react, what that's going to do to different parts of this business this year. It's going to have an impact, I know that.

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

Great. This is Deepak, actually, sitting in for Lloyd. Just, actually, 2 quick questions. The first one I had was actually related to the service provider side. I mean, I wanted to ask about whether there's any trends that you're seeing which is different in terms of contract termination, early contract termination for this quarter compared to your prior periods. Is there any dynamic that's changing there at all? Because what's I'm trying to evaluate is like the service provider revenue per member in some of your oldest cohorts kind of like declined for 2 quarters straight now. So is there anything that's playing on that front? And I have a quick follow-up related to modeling.

No, there haven't been any -- we haven't seen any -- in fact, our -- that -- let's go to the earlier question. Our service provider renewal rates are as strong as they've been. So the service provider ARPU in the old cohort will just be related to how quickly we're growing the member base there. When you -- every marginal member you put on in the most mature cohorts require that a disproportionate amount of incremental contract value from the service provider. I mean, we get $150 in some of the markets for service provider revenue per member. You've got to go -- every time you add a marginal member in that, you got to go keep up with that. And so you get a more distinct lag in those markets, but that has nothing -- if you were to normalize, which you could, by the way, normalize against -- service provider revenue against membership 6 months before, so you would normalize the effect out and it would be more distinct. There's nothing -- we don't see anything wrong with the service provider relationships in those markets.

Got it, and then I might have missed this, was it -- was the service provider dollar revenues still about 100%?

Yes.

Okay. And then on -- I just wanted to get some headcount-related numbers for sales, for the modeling purpose. I mean, what's the total heads involved in new contracts and renewals for salesforce?

Sure, at this time, I can provide that. So we had 732 salespeople on the origination side and 186 on the contract renewal side. One thing, since you raised the idea of selling, one thing to keep in mind is last year's fourth quarter we had a $1 million benefit related to an accrual, which we, obviously, don't expect to happen again this year.

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

Everyone, this is Njoku, filling in for Peter. I had 2 quick questions. First, can you please provide color on the competitive landscape right now? What you, guys, seeing and what kind of effect, if any, is it having upon on your business in terms of pricing and membership growth? And, two, looking forward, can you please touch upon how you guys are thinking about future M&A activities?

Yes, there's a -- we haven't seen anything with respect to direct competitive pressure, this is consistent. We're operating in a very, very large marketplace and we still have lots and lots of our demographic to work with. And we are, essentially, deepening the relationship with them that we have, and I think we're differentiating it. We're beginning to directly affect the quality of the service that they're receiving. And I think that puts us in an unusually powerful competitive position and distances us from some of the other players who simply are directory businesses. That is how we're going to differentiate ourselves and we're making progress on that. Let's see, your second question was?

M&A.

Future M&A.

Oh, M&A. We're always looking around. We don't have anything that is imminent to disclose, but we're always looking for content. We're looking for engagement tools and we're looking for verticals that we can further monetize. Those are the 3 categories. And if we see things that fit into that, then we're going to -- and they're affordable, which is a big -- then we'll attempt to execute them.

Our next question comes from the line of Kerry Rice with Needham & Company. Kerry K. Rice - Needham & Company, LLC, Research Division: I just wanted to revisit pricing one more time, just based upon some of the things you said, Angie. It sounded like, through the quarter, that obviously, the efficiency of marketing seemed to decline in Q3 and sounds like you shifted a little bit from maybe your traditional advertising, maybe national advertising, you cut back and started to shift to pricing cuts or pricing discounts. Is that true the way I'm understanding it and should we kind of think about that similarly going forward? Because you mentioned the marginal dollars may be coming down or flattening out, or marginal utility of those marketing dollars flattening out. So should we expect, to get the same number of ads, you're going to have to start spending more dollars? And then the last question on just the marketing piece was, as we think about the progression of Q3, can you talk a little bit about the CPA trend? Did you start out spending more and kind of started to reduce that as you ended the quarter? And then just one last follow-up question on service provider. Q3 of 2012, you added a lot of net new service providers. Was there something unique about last year's Q3 in that area?

Okay. So on the spend versus the pricing question. So as we were spending in the quarter, we watch all of our analytics, real time. So we will watch how behavior is happening on marginal CPA. And if we ever hit a time that we're like, "Hey, we don't like what we're seeing on a marginal basis" we'll adjust the spend, we'll adjust the buy, we will continually turn dials to change the course. So we saw a little bit of that going on, but then we also -- pricing has kind of been an ever-present part of our marketing testing. I mean, there's been -- as we've talked about, price testing is part of the campaign to determine what's the appropriate price level. So you just -- you're just seeing the 2 coincide here. And it's the question, there can always be a question like, "Hey, where is the best place to spend those -- spend marginal dollars? If I have an extra million dollars, how could I spend it?" And because we pulled the marketing back a little bit, it just created some dollars that we could experiment with. But unfortunately, as Bill mentioned, the cuts got cut short as well, so we didn't quite get as much learning as we might have hoped. Kerry K. Rice - Needham & Company, LLC, Research Division: But is it fair then to maybe assume that, yes, every quar -- I mean, you learn, obviously, from all your price testing and things like that. But as you enter the next quarter, and maybe thinking about Q4, there's not a major shift here between the spending, maybe on the national level, versus how many -- versus discounting?

No. We do not have a plan to kind of have a strategic shift from what our mix is today.

In fact, the guidance that we provided -- we think we've got an opportunity to get marginal dollars over last year to work. Last year fourth quarter was unusually low because of the presidential campaign we've -- that, so -- I think it was $8.9 million. So the guidance we've given you would suggest that we think there's ways to put those dollars to work. Now, Angie runs that real time. So... Kerry K. Rice - Needham & Company, LLC, Research Division: And then CPA trends, maybe through Q3, they fluctuate a great deal and start out differently than kind of the way they ended or anything you can provide color on there?

I mean, we don't give detail into kind into how they performed kind of within the period.

But this wasn't -- so I think the question goes to -- this wasn't -- we didn't have substantial deterioration that we were attempting to offset or anything. It was a fairly, fairly stable quarter from that standpoint. Kerry K. Rice - Needham & Company, LLC, Research Division: Okay. And then just service provider ads, last year quarter, Q3?

Yes. So that -- I think, primarily -- this will be testing my memory a little bit. Because we were -- we had a very successful run of expanding the salesforce in the fourth quarter, first quarter and second. But it was probably really fourth quarter and first quarter of last year. And they all got productive in the third quarter. So if -- when we can add -- when we have the dials -- dialed in right and we can add people to the salesforce effectively, it has a material impact in the future quarters. I mean, that's an important part of the business.

Our next question comes from the line of Aaron Kessler with Raymond James. Aaron M. Kessler - Raymond James & Associates, Inc., Research Division: I'm following up on the service provider questions. Can you give us a little sense maybe just if there has been any change in the renewal rate? I think, historically, you've given, maybe, roughly 60%, I believe. First year 60%, 65% and then kind of 100% and over 100% revenue renewals. Any updates on that news? Any sense for maybe the number of leads per service provider and the trends in that? I'm just curious if maybe the service providers aren't getting enough leads and you're seeing any increased churn there. And the reasons behind the churn when you guys do churn off?

Yes. So, no, our renewal activities have been better on the service provider side. We are -- they have been -- we're maintaining the dollar renewal percentages and, if anything, we've been increasing the per-provider renewal percentages. What -- now, there is a certain level of attrition we want there. We're attempting to identify the service companies that are providing less value to the members and, very specifically, take business from them and direct it to the ones who objectively, that we can measure, provide better service. So some of the reasons -- in fact, the majority of churn will come from a statement from the service -- Well, I didn't get the return I was looking for. Often that is a product of the system working. They weren't getting the return because they weren't delivering the value to our members, or there were other companies that were superior to them. So there is a natural selection in this process. And in fact, the message that I want to make absolutely clear, we're driving that process now. It is not a reactive process. We are measuring who does a good job and who doesn't. And we're going to direct business to the people who do a good job, that's going to be intentional. And the measurements of that performance are getting higher, not lower. We think that benefits the members and the whole thing works. Aaron M. Kessler - Raymond James & Associates, Inc., Research Division: Great. That's helpful. And quick follow-up on the Marketplace side, do you have to be a subscriber to also participate in the Marketplace or would that be an option and a feature to your marketplace to not pay the annual subscription fee of the service provider?

Yes. Occasionally, we'll have promotions where a member can refer a transaction to somebody else. There are occasional channels that we'll have, but they're nominal where they can come in and test from the outside.

Were you asking about consumers or service companies? Aaron M. Kessler - Raymond James & Associates, Inc., Research Division: Yes. Sorry. On the service provider's side.

Oh, sorry. I'm sorry. I'm sorry. Completely misinterpreted the question. So, Angie, why don't you take that?

So is your question can a service company participate in Marketplace and not be an advertiser with us, like a coupon advertiser? Aaron M. Kessler - Raymond James & Associates, Inc., Research Division: Correct.

Yes. So companies can have Storefronts and not be coupon advertisers.

That's correct. Now they still have to -- they actually -- the criteria for them to participate is the same. They have to have positive ratings with the business. They have to maintain those. And in fact, what's interesting about Storefront participation is we get higher reporting efficiency, which means, as they participate, we get a truer picture of what kind of service they're providing, and we get it faster. And that will produce churn intentionally. We won't -- if they aren't performing for the members, we want to know about it quickly and we want to get them out.

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

Trying to focus on service provider section. So by my math, the gross service provider addition is fairly flat year-over-year. And I guess, you've indicated that last year you didn't hire as much and so you're not seeing the benefit this time. But can you talk about how many salespeople do you plan to hire in the fourth quarter? And also how many of those are recorder [ph] carrying reps versus administrative? And also, on your site, I noticed some openings for national-level salespeople versus feet in the street, or at least that's the impression that I got. Can you elaborate on your strategy there?

Yes. So we're going to continue to hire. In fact, our hiring in the quarter has been faster than it was in the first and second quarter because we were going through the transition of -- we had to rebuild the comp plan, we had to get it communicated. And that -- so the slowdown in hiring took place in the first and second quarter, maybe even fourth and first. So we're picking -- we're at a higher rate now compared to the beginning of the year. And I think that's about all we'll provide on that. We're continuing to hire. It's interesting that you know that the advertising for national providers, that we are -- as the business is deepening it's national penetration, meaning the penetration in the demographic across all our markets, we're finding that we're becoming relevant for a class of both product suppliers and national service suppliers. And we have begun to build on a, what I would call, an enterprise sales team to work on those accounts. That is -- we talked about this at the IPO as a speculative thing that someday we thought we would encounter the upward network effect, where we had enough people nationally to become relevant to national advertisers and we're beginning to see that. And that is another additive way for us to add service provider revenue to each household.

Can you -- and I might have missed this, but what was the forecasted selling expense for the fourth quarter? And on those lines, I mean, you guide to a couple of operating expense lines, and obviously we can get it wrong, would it be better to guide to a top line and EBITDA number so that our models are in order?

Well, let's see. We have -- we're through the sales transition and we're through the impact of that and our deal with the analysts was we would provide that guidance until we were through it, and we're through it. So we're going to honor that deal. The -- now, to your second question, we've provide top line guidance. It is -- we're not going to provide EBITDA guidance because EBITDA doesn't represent much in this business. I mean, you can put together -- we provide some of the major expense categories but EBITDA will fluctuate based on the rate of investment that we have, and it's just the matching principle doesn't apply for our EBITDA guidance. It's not even a metric that we want to -- we particularly want to point people to. We would much rather -- we think it's much more appropriate that they look at our operating cash flow, those are indicative of the performance of the business.

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

Just wondering, could you give us a quick update on your scheduling product and the rollout and adoption thereof? And then a quick question for Tom, also, just curious as to what your mandate is for the time being or if there's anything you've seen in your first few weeks that you'd particularly like to focus on?

So scheduling, we've got -- we've put scheduling under incremental scale. We've got lots of feature sets that are in queue for scheduling. I would like to get them out faster because we think scheduling has a lot of upside for us in terms of continuing to capture more of the transactions that we have out there. We have it at more scale than we've ever had it before, we have more transaction types but we think there are a number of features that we can add to it that will make it really pretty slick. Tom, I'll let you reflect on your...

So on the question of sort of my reflection on -- it's been a few weeks, and I'm certainly not prepared to share any specific agenda points or plans. I'm very much still kind of in learning mode, getting the -- finding the water cooler as it were. We've -- I've got a lot more learning to do and a lot more thinking to do before I'll be prepared to kind of set forth an agenda on my first year.

That does conclude our question-and-answer session. I would like to turn the call back over to Bill Oesterle for closing remarks.

Okay. Thank you, everyone. We appreciate -- obviously, the last couple of weeks have been filled with uncertainty and it was a difficult time for us when we couldn't make all the commentary we wanted. We appreciate everyone's patience with that and we hope we're providing insight into the specific points there. So thank you, all, and we look forward to talking to you 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 good day.