Angi Inc. (ANGI) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Angie's List Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Leslie Arena, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. Good morning, and welcome to the Angie's List Third Quarter 2014 Earnings Conference Call. With me today are Bill Oesterle, the company's CEO; Angie Hicks, our Chief Marketing Officer; and Tom Fox, our 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 statements represent our current judgment, they 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 2013 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 our stock price. 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 and amortization, loss on debt extinguishment, noncash stock-based compensation and the legal settlement accrual adjustment. Adjusted EBITDA is a non-GAAP financial measure, and you can find the reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measures in our third quarter 2014 earnings release, which is posted on the IR 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 will now like to turn the call over to Bill.

Thanks, Leslie, and good morning, everyone. In the third quarter, we continued to add new members and grow revenue while transitioning our business to a marketplace model. We grew margin significantly as we reduced our marketing spend and improved operating efficiency. We are now well positioned to generate significant EBITDA in the fourth quarter. Our performance adding new members was strong. Aided by the tail from our second quarter spend and improved efficiency, we acquired 350,000 gross members, down from 1 year ago, but on a lower spend and a better CPA. As a reminder, we invest heavily in marketing in the first half of the year to meet seasonal demand for home improvement services. That early investment continues to pay dividends. Service provider sales productivity was generally stable sequentially. We are taking decisive actions to improve the efficiency of our sales force. This includes moving from a distributed sale team to a unified one, aligned around industry verticals like plumbing and pest control rather than market, and hiring more experienced reps to focus on our most important accounts. While we made strides executing on our marketplace, we see opportunity for further improvement. Building a marketplace business is hard work, and we're in the heavy-lifting phase. During the quarter, we focused our efforts on adding to our inventory of offers, expanding relationships with service providers to sell commerce (sic) [e-commerce] and training our sales force. We made progress on several fronts. We increased inventory by nearly twofold and doubled the number of service providers who sell e-commerce compared to a year ago. While these results are good, our unit sales and revenue growth failed to keep pace with inventory growth. We believe this was due to the effectiveness of our merchandising, which will be a key area of focus in the coming quarters. Reflecting our increasing focus on Storefront, we grew inventory by 74% sequentially. We increased the number of service providers who sell e-commerce, and we implemented a penetration pricing strategy to provide an attractive entry point for service providers to add their online catalog. Revenue contribution from The Big Deal declined sequentially and from a year ago as we continue to reduce the focus on discounted outbound email offers. Interactions on our platform and gross merchandise value grew during the quarter, contributing to modest revenue growth for the e-commerce segment. Importantly, as our business evolves, revenues and expenses that were managed separately per service provider and e-commerce a year ago are coming together as we rationalize the sales forces and consolidate the products we offer to service companies. We see e-commerce not as something distinct from the business but rather as a critical component of a holistic value proposition to the service company side of the platform. This may have future implications on reporting in terms of the relevance of a separate e-commerce revenue stream. On the product and technology side, we are leveraging technology to improve the member experience and enable e-commerce transactions, including on mobile. We expect to launch a completely redesigned mobile app very soon. With the app, consumers will be able to access the full range of Angie's List functionality no matter where they are. In addition, we continue to invest in technology to enable the rules and tools by which we measure the quality of interactions between service providers and members, which is an important component of our focus on driving better transactions -- transaction outcomes, I'm sorry. Looking to the fourth quarter. We expect to significantly improve operating margin as we continue to focus on productivity and cost management. In summary, we had notable successes, and we had some challenges during the quarter. We increased penetration in every cohort and believe there is significant room to grow. Our financial performance was solid, and we strengthened our balance sheet. While our progress in scaling e-commerce was disappointing, we remain confident in our ability to execute against the expansive opportunity in the local services marketplace. Now I'll turn the call over to Angie.

Thank you, Bill. As Bill mentioned, our progress in member was strong. We grew membership by 25% over the year-ago period and added 350,000 gross new members in the quarter. Consistent with our guidance last quarter, we significantly reduced our marketing spend to $22.5 million. Our spend was efficient, resulting in an average CPA of $64 as we benefited from the tail of last quarter's spend and channel optimization. Member engagement is a positive story for the year. Engagement is an important metric that can correlate highly to member renewals. We are encouraged by the activity on our platform from both legacy and new members who joined after we launched tiered pricing. Turning to member retention. We continue to have very loyal members. Renewals were down a modest 1 point from a year ago due largely to the impact from the numerous, highly publicized credit card breaches, including at Target and Home Depot. Retaining renewals in an environment where millions of credit cards may need to be reissued is a significant headwind, and we are pleased with our performance in keeping up with this challenge. As we look ahead to the fourth quarter, keep in mind that our first-year renewal rate is seasonably lower due to the effect of gift memberships in the fourth quarter. We continue to optimize our channel mix to drive efficiency and are increasingly focused on digital. Our digital spend increased 38% from a year ago and represents a growing portion of total spend. Our marketplace join initiative, where we present e-commerce offers to nonmembers outside of the paywall and offer membership at checkout, was impacted by the same merchandising challenges that we've identified in marketplace. While growth rates are high, absolute convergence remain a small component of total member additions. Building on the strength of our brand, we see significant strategic opportunities to partner with other strong consumer brands. Through our co-branded arrangement, Allstate is buying memberships from Angie's List and offering them to their policyholders in 8 cities across the U.S. Allstate is advertising the partnership through its agents and across multiple media channels, including TV, radio and digital. While the pilot is small, if successful, it could grow. And we see this as a strategic opportunity to elevate awareness of Angie's List through alignment with a nationally recognized, highly -- high-quality partner. We can do this with others. Before passing the call to Tom, let me take a moment to discuss our marketing outlook. In terms of fourth quarter spend, we expect marketing investment to be approximately $5 million as the bulk of our spend for the year came in the first half. And now I'll turn it over to Tom.

Thanks, Angie. Let me summarize the financial results for the quarter. Total revenue increased 24% from the year-ago quarter to $81 million. Membership revenue increased 7% over last year. Total service provider revenue increased 30%. And within service provider revenue, advertising revenue increased 33% to $56 million, and e-commerce revenue was $7 million. In addition, our service provider contract value backlog ended the third quarter at $146 million, up $8 million sequentially. As a reminder, the backlog consists of that portion of contract value that has not yet been recognized as revenue. Turning to our expenses. As Bill and Angie discussed, we significantly reduced our marketing spend in the quarter, which contributed to a 16-percentage-point improvement in EBITDA margin compared to the prior year. Our operating loss for the quarter was $5 million, which improved significantly from a loss of $13 million a year ago. Selling expense increased $8 million compared to the third quarter of 2013. We ended the quarter with a total of 1,130 people in our sales organization, with 860 responsible for originations and traditional ad sales and e-commerce and 270 responsible for renewals. Adjusted EBITDA, a non-GAAP financial measure, was a loss of $1 million for the third quarter compared to a loss of $11 million in the year-ago period. Moving on to the balance sheet and cash flow. Let me first talk about our debt refinancing. On September 26, we entered into a new $85 million credit agreement to provide increased financial flexibility for investment and growth. The agreement consists of a 5-year, $60 million, senior secured term loan facility and a $25 million senior secured delayed draw facility, which is available for borrowing through the third quarter of 2017. The debt bears interest at LIBOR plus 6.75% or the reference rate plus 5.75%. We used a portion of the proceeds from the term loan to retire $15 million of debt that was outstanding under our prior facility and to pay bank and lender fees and transaction costs. With our previous credit facilities scheduled to mature in 2015 and an attractive interest rate environment, it was the right time to refinance our debt. The new debt provides us with additional flexibility and liquidity to support the expansion of our Indianapolis headquarters, which we announced last week, and the continued investment in future growth while reducing our interest rate and strengthening our balance sheet. If you didn't hear the news last week, we announced that we plan to expand our Indianapolis headquarters, creating hundreds of new jobs by 2019 and growing our footprint on the city's east side. The expansion is enabled in part by an attractive incentive plan from the City of Indianapolis and the State of Indiana, which is expected to begin in 2015 and extend through 2019. Reflecting the impact of the refinancing, we ended the quarter with approximately $79 million in cash, cash equivalents and investments. We had a use of approximately $10 million in cash from operations during the third quarter compared to a use of $1 million in the year-ago quarter. The use of cash from operations in the quarter was due to lower accrued liabilities related to the timing of marketing spend. Turning to our outlook for the fourth quarter. We expect total revenue of $80 million to $82 million, which is slower growth than previously expected, due primarily to the unfavorable trends in e-commerce performance. And we expect to generate significant positive adjusted EBITDA in the fourth quarter and to be EBITDA positive for the full year 2014. We anticipate capital expenditures for the fourth quarter to be between $8 million and $10 million, which includes investment in our website and mobile platforms, infrastructure and workplace. We expect to be a net consumer of free cash flow this year as we continue to invest for growth. And with that, we'll move on to Q&A.

[Operator Instructions] Our first question is from Jason Helfstein of Oppenheimer & Co. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: A few questions. So are you guys considering a -- perhaps moving to more of a short-term contract structure or even offering pay for performance? The reason I ask that, obviously we can do the math, but it does look like kind of sales productivity continues to languish. Some of that probably is the adjustment of 97 people in the numbers, right, that are now gone as far as Big Deals. But in general, though, it does seem thematically like there is a struggle to sign up businesses. And are you thinking about alternative ways to entice them to join your network? And then, on the pricing side, I think this was the first quarter in a long time where basically, ad pricing per member was effectively flat on a year-over-year basis. And I think you alluded to kind of signing out more than you could sell or something like that. But maybe talk a little bit more in detail with that. And then, lastly, assuming we finish in the year somewhere around $320 million of OpEx, give or take x stock comp, how do you think the announcement of the Indy investments has an impact on that number kind of over the next few years? Or how should we think about that on the expense base? And then, I guess, if you're willing to say anything about kind of the marketing outlook for 2015 for modeling purposes.

Yes. So Jason, look, I think have a pretty good -- I can run down through a few of those. But we're always playing around with contact structure. I wouldn't draw so much -- our sales productivity this year, the issues with sales productivity have more to do with us driving 3 and sometimes 4 distinct sales forces to sell different products, and we're going through a process of consolidating those. We actually -- we don't feel like it's an issue with the products that we have in the marketplace. I -- we aren't getting any signs that that's true. It's just how we're going about both selling the traditional product and transitioning some of the new stuff that we have in and doing that efficiently. And we have -- we've made adjustments in that. We're continuing to refine how we do it, and we're pleased with some of the recent results that we've had there. So I don't think -- while we're always experimenting with contract structure, I don't think we need a complete restructuring of the product. We just need to execute on the sales management side a little bit more efficiently. Pricing, when -- per-member pricing, again, what we're seeing is we have good member originations for the quarter and we have this year as a result of we're transitioning the model into commerce. And we've had some issues with Big Deal performance, and that's showing up in essentially the -- I think you're talking about the service provider ARPU per member. And so we're acquiring the households. We've got to monetize them better. We had decent performance, but we should be getting -- as we're building penetration, even better performance than we had this quarter. OpEx will have -- I think you got a couple of modeling questions. I'll let Tom consider how he should deal with those.

Yes, so I think your question, Jason, was on OpEx impact from the expansion? Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Correct. Yes, assuming we finish the year with kind of around $320 million of OpEx, excluding stock comp. Just using that as a hypothetical base, obviously, it may be higher, may be lower than that. But just what's the magnitude on the -- on a number like that next year of these Indy investments?

Yes, I think -- I don't see a significant OpEx impact other than the natural growth of the organization that the expansion contemplates. I think that the expansion itself is largely going to be capital investment. As we talked about in the press release associated with the announcement, we indicated through, I think, 2019 there would be approximately $40 million of collective capital investment in the expansion. I don't see anything material on the OpEx side that would be worth mentioning. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: And then, so -- and that's amortized over, call it -- how many years of that then $40 million roughly get amortized over?

That's going to depend on kind of what the asset is so...

Plus building.

Yes, building [indiscernible] Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Let's just say the bulk of it's building. So that's what? And when you guys do it, 12 years?

Probably 30 years. Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division: Okay, okay. And then, just lastly, any commentary on how we should think about marketing spending for next year for our model?

Not yet, Jason. We're -- obviously, we'll provide some guidance next quarter, but nothing we can comment on right here right now.

Our next question is from Peter Stabler of Wells Fargo.

This is Steve filling in for Peter. I just wanted to ask about marketing spend. Hoping you could give us some more color on what's working for you there on the digital side. I know it was up 38% year-on-year, but it looks like you guys are getting some good results.

Yes. I mean, it's continuing more of the same. I mean, our process of expanding and testing in marketing is we test digital and find things that work. We just continue to kind of -- to increase our investment in those. So that 38% increase year-over-year is more of that real-time marketing, some ad networks, some search activities. So it's just been more of that kind of same mix of things we talked about the last couple of quarters.

Got you. And you guys probably look to increase the digital spend as you continue to optimize.

I mean, we just continue to look to optimize. So that if we find things that are working, we continue to invest in those.

Great. And then just one quick follow-up. In the number of interactions, I think you guys mentioned there was a 4x increase in Q2. And I know you said it was up year-on-year. I was just wondering if you could provide some more numbers around that.

I think that particular engagement metric was a onetime. We shared that on a onetime. But again, our interactions, our engagement for the year looks good. I mean, we're really happy with the impact of these lower-priced members and how they're interacting with the product.

Our next question is from Kevin Kopelman of Cowen and Company.

So just a question on kind of marketing and gross additions. So your marketing guidance shows a reduction of about 60% year-over-year. Just given we've never seen something like that before, can you help us understand what you're expecting to see in terms of gross membership additions in the fourth quarter?

So we don't guide on the gross additions. But I think kind of as you can see -- as the early in the year marketing spend does have a tail, so you need to think about that when you're modeling. As we saw here in Q3, we benefited. We see the benefit from the second quarter of high spend.

So -- but in Q3, you also reduced the marketing spend. So is that -- is there a lag effect there? Will that sort of impact Q4 ads on top of the reduced marketing spend? Or...

I mean, you continue -- there's still a tail as you kind of go into it. We don't give guidance specifically on kind of how long that tail lasts, but you'd expect some efficiency --continue to see efficiency from that early spend. Just remember, that second quarter spend was a high spend.

Okay. And then, in terms of just looking out to 2015, can you help us understand how you're thinking about that?

From -- we're not ready to talk about marketing spend for 2015 yet. We'll talk about that next – in the next quarter.

Okay. And then, I apologize if I missed it, but did you give e-commerce revenue?

We did. It was $7 million in the quarter.

Oh, $7 million. Okay.

Yes.

And then, last question is on CapEx. Just given there was a big increase this year. Are those kind of onetime projects? Or should we think of that as ongoing?

I mean, there are some infrastructure investments that as we upgrade our platform and release new products there are some things in the investment in capital expenditures that are related to onetime. I'm not prepared to quantify that today, but we are continuing to invest in our product. I think that the overall level of investment is up. And I think we will sustain a higher level for some period of time, but there will be some things looking into next year that we won't have to go in and add again, in terms of -- particularly IT infrastructure, whether it's networking equipment or servers and things like that. So hopefully, getting a lot of those projects out of the way here in 2014.

Our next question is from Paul Bieber of Bank of America Merrill Lynch.

A couple of questions. I was hoping you could comment on the media reports on a potential sale of the company. And then, just on the e-commerce marketplace, when do you expect the improved inventory and the merchandising to start to have a positive impact on the growth? I assume some of it has to do with when you anniversary the challenge of The Big Deal as well. But hopefully, you could provide some context around that.

Yes, Paul, I'll start with the second question first. And you are right. The thing that we're dealing with in commerce right now is working through Big Deal. Now I will say, on top of that, we have -- we built up a lot of inventory, which is good. I mean -- that we figured out how to scale the inventory. But we now have to merchandise that better. We're getting better at merchandising it, demonstrably better. And at some point, that mass, in and of itself, will overtake Big Deal. And you'll see certainly better growth rates than we had this quarter. We've got a base we can build upon. It's going to take us a couple of quarters to really -- for that to flex its muscle. We're not going to -- Paul, I appreciate you asking, but we're not commenting on rumors, particularly rumors that were just -- is sort of speculative as the ones that was put out there by the Financial Times.

Okay. Quick follow-up question then. On the selling expense line, what drove the deleverage there, the year-over-year deleverage?

In selling expense?

Yes.

Yes. So that's -- the -- we've mentioned a couple of times, we have -- we built up capacity for commerce. And commerce tends to be a long-tail revenue stream. That commerce has built inventory, we've talked about that. But that caused a deleveraging against current-period revenue. Now part of what we're doing, as we've talked about the last 2 quarters, is beginning to combine sales forces, trying to get to a single sales force that carries multiple products. And we're in the midst of that transition. So we expect improving leverage out of the selling lines going forward. I mean, that's a trend that is well underway.

Our next question is from Kerry Rice of Needham & Company. Kerry K. Rice - Needham & Company, LLC, Research Division: So, sorry to go back to the marketing cost again. But maybe different way to ask the question is, you're obviously bringing those down considerably in Q4. And so if you think about this for the full year, you spend more in the first half and you've trailed off quite a lot in the second half. Is that kind of the cadence we should think about kind of occurring kind of over the course of the year? And in that, you'll probably have some gross addition growth in the first half and maybe that comes down year-over-year in the second half. Is that a fair way to think about it? And then, as that relates, do you shift some of that marketing cost to the selling? Or is it just through optimization that you think you can continue to add service providers at kind of the what you grew in, in Q3?

Angie, why don't you take the first half. I'll get the second half then?

Sure. So on the marketing spend, I mean, we're always looking to most efficiently spend the dollars. And you're right, we like to ramp early in the year. We -- this year, we ramped a little more in the second quarter than we typically have in the past. We'll continue to optimize as we move along. So you will always typically see that kind of ramp through the middle of the year as we kind of take advantage of that seasonally strong period of time. Kerry K. Rice - Needham & Company, LLC, Research Division: And the first half?

I'm sorry. Yes, and so on the FP [ph] side, we'll continue as I think I -- we've kind of mentioned before, we should continue to see leverage going forward on the selling lines. I mean, that is an objective of the organization. We're -- we've effectively built some inefficiency into the sales force in an effort to build up our inventory and understand how we're going to sell that -- how we're going to originate that commerce inventory. We now are in a position that we can introduce efficiencies to that equation. So we are expecting -- I would say we're expecting significant leverage out of the -- out of selling expense going forward, and we've seen some of that already. Kerry K. Rice - Needham & Company, LLC, Research Division: Okay. Then just one follow-up. Have you seen any -- or do you feel like you've seen any change in the competitive landscape that you operate in? I know at one point, there were some big e-commerce guys that were talking about getting into more of this service-related marketplace. And just curious if you've seen them go out and be more competitive. Or if the dynamic has changed at all?

I would say the dynamic -- with their -- the dynamic has changed in the press. I mean, there's a lot of -- and they're -- we're going through another wave of entrants into the marketplace. This is not -- we've been through several of these waves before, 2000, 2005. I will say we haven't thought -- we aren't running into them out in the field very much. And that has to do with just the enormous size of this marketplace. We are all just drops in the ocean at this point. And so there's a tremendous amount of -- the best competitive positioning answer I have is that it's just the marketplace is just so huge and so fragmented that it's going to take anyone a while to get -- put a meaningful dent in it. And it's forcing us to iterate our product offerings in anticipation of other people trying to do it, and we're working away. We're putting dollars behind that iteration.

Our next question is from Todd Van Fleet of First Analysis.

Just on this credit card heist that occurred, do you expect to be dealing with membership renewals in that particular issue like 1 year from now? I'm just thinking about my own experience. I think my membership was renewed, I think, in advance of that activity. So I'm just wondering about the timing that this could be impacting your membership renewals and whether or not you're still dealing with it 2, 3 quarters from now.

Yes, unfortunately -- I will say -- we're taking great pride in our renewal performance right now. I mean, we're-- the wave of card reissuance is enormous. I mean, we're talking 40% reissuance rates, and we're still retaining our member. We had a 1-point depletion. That's remarkable durability in what we're seeing today. I would like to think that by next year, this will have worked its way through. We're doing very well in it. But some of these breaches took place long enough ago, the significant ones, Home Depot, for example, that we're bearing -- we're in the midst of the full impact of that. But unfortunately, until the industry gets this stuff under control, it would appear that these -- this may be the new normal. So with any luck, security measures get better, and this is a tide that we don't have to deal with in perpetuity. I think we're dealing with it very well.

Bill, is there a process that you guys have established to go about kind of getting the new card signed on when the member has it available? I'm just trying to think about how your process have evolved.

Oh, yes. We -- like we know -- this does goes back -- the first of these breaches took place 3 or 4 years ago. And it was actually funny. It was kind of quiet. It was -- one of the processers had a big breach. And we developed our -- that hit us hard back then, and we developed our techniques for dealing with it and have remain vigilant, and that's serving us well now. Unfortunately, this has become the norm. So we have a number of -- we participate in a number of updater programs. We have a massive recapture once we realize that a credit card -- we have early detection. We have a massive recapture program in place. And then, we -- the durability of our members are, fortunately, they participate in those recapture programs, which is kind of the subtext of this. So we have an array of activity, that it's become remarkably sophisticated out of sad necessity.

Our next question is from Darren Aftahi of Northland Securities.

Just 2 things. So did I hear you right? You said your inventory on Storefront improved 100%? I'm just trying to triangulate what's maybe the headwind to driving e-commerce faster. And then, I think you said, in this current quarter, you're going to launch a redesigned mobile app? Are you going to be integrating any of the SnapFix function features in that? Just a little color on that would be great.

Yes, so we are certainly integrating. We like SnapFix adoption rates. We're trying to get those -- we're trying to get that feature set integrated into our core app. Our redesigned app is just a lot better, so -- and we're driving lots of mobile activity these days. This will just make that easier. It makes our commerce merchandising easier, which goes to your first question. We built up a lot of inventory. You got to originate the inventory. It's a two-sided marketplace. And it's a marketplace where the SKUs aren't standardized yet. So it's no small task to go after the service company and say, "Okay, first, we have to define a SKU. Now once we've defined the SKU, we'd like you to put it up." And then, we have to sort of hope and modify the SKU based on, "Boy, does the consumer understand this new SKU in such a way -- is it what they want?" And so this is what I referred to as the heavy lifting of -- the merchandising of services is work. You can go load up the inventory, successfully pull that off, and then the consumers either don't want it or you didn't put it in the right place or you've got to figure out how to merchandise it. We had very good success with the first half of that. We actually had pretty good success with the second half in Storefront, but Big Deal is suffering for us, and Big Deal is revenue-rich. So it will mask some of the progress that we've got in Storefront. So it's just we're working through the process of building inventory, building capability and simultaneously building up merchandise. And there is certainly a lag between getting the inventory up, and now we're into the down seasons too. So the fourth quarter is, people stop thinking about home spending and think about holiday spending. And so we'll put up a lot of inventory just in time for them to go off Christmas shopping. So that will be the case. We will be looking to build up our capabilities for spring of next year. I mean, that will be a critical time for us.

Our next question is from Lloyd Walmsley of Deutsche Bank.

Just wanted to follow up on that last question a bit on the e-commerce side and what you're doing on SnapFix. It seems like some other players in the space have taken an approach more around allowing users to kind of really just describe their own jobs and source it and send it out as a lead to multiple potential providers and kind of bid it out. Is that approach something you guys have tested at all or thought about at all to potentially kind of reduce the friction in merchandising some of these bringing these transactions online?

Yes, and I think that's what SnapFix -- that's -- it was designed, it was out in the field, certainly, as early as anybody else with that concept in mind. Take as much friction out of -- come at the problem from a consumer-demand standpoint. And we like -- that one's kind of the inverse ways. We're building that one up. We're coming at it. We've got good consumer adoption. We've got to make sure that we can made up in a synchronized way the service provider fulfillment. And that's the issue. You can broadcast a bunch of leads out to service providers, but they're only going to tolerate that for so long. Efficiency of leads is critically important. So you really want to match capacity up. You capture the lead from the member. You want that to result in a perfect world in one job for one service provider. Because for all the other service providers that you blast it to, it's a wasted effort. So we thought about it a lot, actually. And we're building capability to pull the job in, make sure it's qualified, it's refined, it's a very high-quality user and job, which our members are, and then to deliver it in a pinpointed fashion to the appropriate service provider that's got capacity.

And I guess, as a follow-up to that, when you look at your customer, the kind of end-user behavior in e-commerce, are there certain, either geographical markets or subsectors in terms of verticals, where you've seen particularly strong user engagement or repeat usage that give you confidence, certain pockets of what you've been trying are scalable?

Yes, we have markets that we put particular emphasis on that are -- that their close rates are considerably higher than the averages. So we use those as experimental. With there are -- we are seeing subsectors that look -- as you can imagine, as you're building SKUs around hundreds of local services, there are some that are just much easier than others. And so we're finding lots of -- that's -- this is the fun and interesting part of the business is the packaging and merchandising of these services, really both ways, as I mentioned. The service provider originates SKUs and members originate jobs. Consumers originate jobs that have to be communicated and deconstructed to the service companies. And so we've got lots of different experiments going, and we have some pockets of things that we think are particularly interesting.

And then, just last one. Is SnapFix -- are you offering that to nonmembers? And I guess, as you improve the merchandising of all of this, is the idea to either drop the membership fee to scale the business or further push marketplace join to just kind of open up the floodgates for potential membership?

Yes. Well, strategically, we love our members. We love the membership model and we're going to stick with that. It's just a great -- these are people that are -- they're the most engaged members, and they tell us by paying us. So we're going to certainly going hang on to that. However, what we would like to build is commerce functionality that is accessible to the -- that is accessible to all consumers. And so -- then you suddenly have -- we've introduced this notion of gross merchandise value. That's when a consumer comes to Angie's List, on the web or through mobile, how much are they spending? And we -- are they spending on membership? Well, that's a way for them to spend. Are they spending on commerce? Are they spending with SnapFix? Our job is to drive their GMV, their gross merchandise value. And as you've correctly speculated, all of the tools that we're working on in terms of merchandising can be extended outside of the traditional membership model. We think we can do that and maintain the traditional membership model with a suite of services that are particular to them as many other, as Costco or Amazon or other kind of membership models do.

Our next question is from Shawn Milne of Janney Capital Markets.

Just 2 questions. I wanted to go back to Bill, trying to put together of your comments on e-commerce and maybe sort of the activity outside the paywall. I know you talked about having some merchandising heavy lifting there. But for at least those SKUs that -- and those subsectors that you've worked through, where are you in terms -- it seem like the merchandising of those products on search engines would be a pretty straightforward type of scenario, which should be able to drive real volume. I mean, am I wrong about that? Or if you can update us on that activity. And then, secondly, maybe Tom, just factually, the service provider net ads were very soft. Is -- does that count also someone just running a Big Deal that maybe just dropped out? And then, I have a quick follow-up for Angie.

Yes. So Shawn, you are absolutely correct that it seems like you ought to be able to take a successful piece of inventory on-site and then just move it off -- out into the web and have it work. Unfortunately, that's one of those that seems easy, and it turns out it's hard. So we just -- we are just working through the nuances of, okay, hey, buy it now on-site versus buy it now out in the ether. It's a different thing. And you have to just deal with the differences, and we're doing that. We're learning. We're understanding. Okay, where does it work? Where doesn't it work? What -- why is -- what are the differences? So I don't expect -- I think it's a totally soluble issue. It's just not as simple as it might first appear. Let's see, that was e-com outside the paywall. And then, Tom...

Yes, I think, Shawn, your question, I think, was a mechanical one about what's counted in the participating service providers. Is that correct?

Yes.

That's the advertisers. I mean, there's lots of overlap obviously, with the e-commerce enablement as well. So I mean, substantially, all of the e-commerce-enabled providers are advertisers.

Okay. Is there any further, I mean -- so in terms of the 900 net adds, I know you've talked about focusing not necessarily on just the net number, but that's well below anything we've seen before. Is there anything else you want to call out? Obviously, you're changing the sales force around. I get that.

Yes, I think I just -- nothing really I can add other than Bill's comments on sort of the inefficiency that kind of -- we've been working through over the last quarter or 2, but nothing more to that, to add to that.

I would just add that we are building -- as Tom said, it's a meaningful -- a tremendous amount of our activity and our focus right now is on our existing provider, getting them fully enabled on the system. That is the emphasis.

And we talked in the script about making meaningful progress on that count.

Yes. So we're working inside of the base largely. We'll continue to add to the base, but we're trying to deepen our relationship with our existing providers. I mean, that -- we view that as leverageable, and we're going to do it. If we can get that, then any new origination gets that much more valuable to us.

Okay. And lastly, Angie, just -- I mean, philosophically, as we've known the company, you've always talked about managing around marginal spend and -- but effectively, the overwhelming majority of what you've been spending on is TV. I mean, is there just a natural level -- I mean, if I look at fiscal '13 to '14 with your guidance and marketing spend, it looks like it's totally -- it would be flat year-over-year. Let's just call it $87 million, $88 million, something like that. Is there some level of TV where you believe Angie's got enough brand awareness and then you can begin -- we've seen the digital piece of that grow, but it's obviously very small. I'm just -- I know you philosophically talk about optimizing around TV. I just wonder if that's -- maybe a different way to look at it is what is the natural brand spend in the U.S., maybe that's 50, 60, that you need to continue to put out there. And then the rest of the bucket should really be around pay for performance and optimization of those channels.

Yes, so I think your question -- I mean, we do have a material amount of our spend that's going to digital. So I'll kind of put that out there first. And our philosophy around here is, you're actually right. We manage these things real-time and looking for the right optimization and mix between the different -- among the different channels. And we'll continue to work that process real-time as we move through the coming quarters. So I can't tell you specifically, "Hey, here is the optimal television kind of buy or amount." But we're always looking to improve and perfect that.

And Shawn, I think what you've articulated actually, if you're managing to the marginal spend and you hit a point where the marginal spend isn't effective anymore, you end up with what you just described, which is kind of, okay, you've got a brand presence and then you have -- and then, you're constantly trying to open up new avenues of acquisition. I mean, I think that's -- they actually are -- the way we manage it ultimately ends up in the place that you just described.

Our next question is from Rohit Kulkarni of RBC Capital Markets.

Just a big-picture question. I guess, when you think about kind of balancing growth and profitability in the business as you run the business and working towards this potentially very large addressable market, do you think this positive EBITDA outlook for 2014 is due to a natural and a logical step in your business model as it stands today? Or has there been a compromise along the way you think in terms of growth or investments and forcing the business into a profitable model and perhaps the trade off being some long-term growth over the next 2, 3 years?

No. I think we have been, if anything, if you're going to hit -- the critiques of our management of the business are well-known. I mean, we have always biased to rational growth, if we can find it. And we can put the -- if we have the dollars, and we know where to put them, we put them to work. And so this year, we've done that to the extent that we know how to do it. And the output of that is that we should be able to produce positive EBITDA. It's not a -- we aren't -- we're driving the business around that particular goal. The business should be able to grow. It should be able to produce positive margins and should be able to carry investment for future growth. We will have accomplished that this year, and we expect to be able to accomplish that in the coming years as well.

Great. Just couple other questions. As in, on your churn rates have been ticking up a couple of quarters. So despite marketing spend efficiencies and improving gross adds, you aren't getting the benefit of that. So apart from tiered pricing and probably effect of credit card breaches, can you call out a couple of steps you are taking or planning to take to improve retention rates, especially -- and if you the bracket that around your kind of CPA or marketing spend outlook?

I mean, so we really manage to renewal rates, so we're continually working on improving those. Over the last year or 2, we've also improved the number of annual members that are members versus monthlies, which overall helps the business in the long term. It helps overall retention. So we're continually -- we feel good about where our renewal rates are and continue to work hard at maintaining them.

Great. And lastly, on your sales force and kind of rationalizing advertising and e-commerce, as in where are you in that process? You talked about revenue contributions from service providers. You need to have a probably a better or a more synchronous go-to-market strategy. Is that -- and as you work through The Big Deals and Storefront merchandising, is -- where are you in the process? How long do you think kind of the sales directives and -- would include a very clear message to service providers, and hence, help kind of reaccelerate that revenue contribution from service providers?

Well, I guess -- I'll attempt to answer that with a -- we're trying to improve sales force efficiency. That's where the -- getting some leverage out of the forces by combining them so that we're lowering the cost of selling any particular unit and then we're trying to sell more of those units, which gets the revenue up. And both of those have the opportunity to impact selling cost leverage. I would expect us to be able to drive selling cost leverage going forward.

And lastly, I'll quickly -- I think, Bill, you mentioned the penetration -- penetrating pricing on Storefront. Can you just elaborate? Does that mean discounting? Or is does...

No. That has to do with -- we're giving existing advertisers a lower take rate. They have an advertising relationship with us. They're already paying for that relationship. We're providing them a lower take rate than we're providing to new entrants. And that's just to encourage the transition, and we've had -- that has shown material success as a technique.

Our next question is from Blake Harper of Wunderlich Securities.

Had a question about the P2 revenues that you talked about in the past. Just wanted to ask where those overall renewal levels were. If they're still over 100% and if they had trended any direction in the past quarter?

Yes. So we -- the -- those renewal rates have remained strong. They now -- as we described in the script, we're going to begin to combine in commerce revenue into those numbers. And now the -- we haven't seen the level of renewal that we have in, say, previous years. That's part of the monetization issue that we described on a per-member basis also in the script. So we're driving very good, very solid renewals there, but the number is changing and the sources of the revenue that drive that number are changing.

Okay. And then, one more for Angie. You talked about the marketplace kind of a low conversion -- or marketplace join with a low conversion there of people coming to member -- or becoming members when they go to check out there. And I believe that's what you said. But could you maybe elaborate on that and talk about what you're seeing as far as maybe some numbers around the number of people that are nonmembers that come to the marketplace? And if they're actually getting the deals or not? Or if they're actually becoming members or not? And with that -- would you consider maybe opening up the platform more if that is a hurdle to be able to close the deals?

Sure. So on the commerce outside the paywall, we're suffering from the same merchandising issues we talked about inside the paywall. So we're working on figuring out kind of how we want to present them. What offers are the best ones to present and at what point in time. So while -- those numbers are small, that's certainly an area of focus as we move forward in our general merchandising. As far as the technical, kind of how they can join, you can buy an e-commerce offer outside the paywall with or without a membership. You just get a better rate on the commerce offer with the membership.

Our last question is from Jeff Houston of Barrington Research.

Following up on previous questions about the changes in the sales force. What are some milestones we should be looking for? Just trying to get a better sense of timing around the industry -- shift to industry focus, more experienced personnel and fewer sales processes. What are the milestones we should be looking for?

Well, I think -- traditionally, the investor community has followed a combination of backlog and revenue per sales rep. And I don't think that's the worst thing in the world. And particularly -- so as you see e-commerce growing and you see our traditional backlog growing on a per-rep basis, it's a fairly good way to just think about, gosh, are they getting leverage out of this force or not? And what I described were -- in commerce, for example, where we have long-tail revenue, well, that should start to accrue over time. You won't have perfect transparency into that when we're ramping it, you'll begin to see it as the merchandise ages on the platform and sells more. So you begin to -- the traditional metrics there, I think, will serve you just fine.

I mean, separately, could you provide a bit more color about the options you're exploring to monetize the A- and B-rated service providers that don't currently pay but are probably receiving leads? And how many of the service providers that are eligible to advertise are there versus the 52,000 or so that are actually paying now?

Yes, we have -- it's been a while, since I can't remember the last time that we provided our eligibles. But we've had -- we have lots and lots of eligibles left to do. We still have low penetration rate with our monetized service providers, the ones that we have. Our strategy is to develop a scalable relationship an even more scalable relationship with the existing providers by diversifying their product, advertising with commerce attached to it, both inventory comp-based commerce, which is the SKU-based, and SnapFix-based, which is kind of consumer-based. That's the full suite. If we can build that out with our -- with the existing relationships that we have, then we have a very compelling product to take out to the remaining eligibles, and we-are in the midst of building out that suite.

That is our last question. We'll conclude our call and pass it to Bill for final comments.

All right. Well, thank you, everybody. We will look forward to -- we had a quarter that had -- we had some very good things and we had a quarter that we had some things that were more challenging than we expected. But we do continue to move forward with our strategy. I look forward to speaking with everyone in one-on-one call. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.