Angi Inc. (ANGI) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Angie's List First Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Vice President of Investor Relations, Leslie Arena. Please begin.

Thank you. Good morning, and welcome to the Angie’s List First Quarter 2015 Conference Call. With me today are Bill Oesterle, the Company’s CEO; Angie Hicks, our Chief Marketing Officer; and Tom Fox, our CFO. At the conclusion of our prepared remarks, we will be happy to take your questions. 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. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. More information about those risks and uncertainties is contained in our SEC filings. We caution you against placing undue reliance on these forward-looking statements and disclaim any intent or obligation to update them. 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, and noncash stock-based compensation. Adjusted EBITDA is a non-GAAP financial measure, and you can find a reconciliation to the most directly comparable GAAP financial measure in our first quarter 2015 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, it should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. I would now like to turn the call over to Bill.

Thanks, Leslie, and good morning, everyone. Before I discuss our results for the quarter, I’d like to take a moment to comment on our announcement last week and my plans to step down as CEO of Angie’s List. This was not an easy decision for me. 20 years ago Angie and I set out to create a business that helped people find the best local service providers. We didn't envision that two decades later the Company would grow to serve over 3 million households and have more than 50,000 service providers; and have one of the most highly valued and recognized brands in the local services industry. I feel incredibly fortunate to have had the privilege to work with an exceptional group of people and I am proud of the team of executives we have built. Together our Company has grown from a door-to-door business into a leading online market place supporting billions of dollars in local commerce. We are strong financially and we are positioned well in a rapidly growing market. After considering what I’d like to do both personally and professionally, it became clear to me that now is the right time to make a change and pursue other interests, including becoming typically active in the State of Indiana. I am confident of opportunity ahead for Angie’s List and I anticipate a smooth transition to the person who moves into this role. With that, let's move the discussion of this -- to the discussion of this quarter’s results. As we discussed in February, we are focused on three key objectives as we build our market place. One, increasing revenue; two, investing in future growth and three growing margins. In the first quarter we achieved our objective. We grew total revenue by 15% from a year ago. This growth came in spite of our deliberate shift in member pricing and the transition to our e-commerce subscription model. You will recall that nearly a year ago we introduced new member pricing to meet the needs of more consumers and facilitate broader access to our marketplace. As these impacts work their way through the system, the pig in the python analogy that I used last quarter, we expect to return to normalized growth rates over the long term without significant increases in our marketing expenditures. We continue to invest in growth during the quarter while demonstrating leverage in those investments versus a year ago. As a percent on revenue we decreased key expense line items including marketing, selling and to a lesser extent product and technology. As a result we improved our adjusted EBITDA margin by 11 percentage points to $9 million. This is up from a loss of approximately $1 million a year ago quarter and is our highest first quarter EBITDA and net income quarter ever. We added 230,000 new paid members, down from last year but on a lower spend and improved efficiency. And while we continue to attract non-members to our marketplace, attracting consumers outside the paved wall is a key component of our e-commerce strategy and we are making progress. As we evaluate spending efficiency, it is important to know that a portion of our marketing dollars are directed to and generate e-commerce purchase activity. As this benefit is not captured in our traditional CPA efficiency metric, we believe that the return on investment for every marketing dollar is higher than what CPA alone would could get. Service provider results also improved. Contract value backlog increased nearly 25% from the year ago quarter. And service provider sales productivity improved year-over-year. Now operating at high levels of efficiency we are focused on scaling our sales team and have recently hired a new leader in sales training and development to help us deliver on that objective. We continue to invest in product and technology which is critical to our future growth and competitive position. These investments are driving significant tangible improvements to our website and user interface. These changes are currently in beta in one market and reflect the first phase of a complete redesign and rebuild which will positively impact the surge, shop and SnapFix experience for members and non-members alike. On the mobile front during the quarter we launched an update to the iOS app and a brand new Android app for consumers. A new service provider mobile app designed to manage SP schedules enabling messaging and improved productivity is expected later this year. We are also improving back end systems operations and capability throughout our business including in HR, finance and operation. Most importantly we are steadily and deliberately building our marketplace. Each of the key indicators by which we measure progress improved versus a year ago quarter. Beginning with inventory, we more than tripled the number of product on our shelves or our inventory compared to a year ago and now have tens and thousands of offers in market. While this is good progress, we have more to do to better align offers with consumer demand in the right locations. Second, transaction volume also grew, increasing 19% year-over-year to approximately a $152,000 in the quarter. Third GMV or gross merchandise value continued to scale increasing more than 30% from a year ago. And fourth, the percentage of service providers participating in e-commerce increased, and now represent nearly a third of our contracted service providers. We anticipate that our transition to subscription pricing will continue or will contribute to greater SP acceptance of e-commerce. While we continue to reduce our strategic focus on our big deal product both big deal and store front continue to represent the large majority of our commerce business. SnapFix is the third product in our marketplace portfolio and we expect it will represent a growing portion of the business over time. As we discussed last quarter, our previous definition of participating service providers accounted for only those SPs who advertised with us. Beginning this quarter we have expanded the definition to also include those SPs who sell only e-commerce. That number exceeded 54,000 in Q1. I want to take a moment to elaborate on the revenue impact resulting from the transition to subscription pricing for e-commerce. We are expecting effect a lower take rate to put near term downward pressure on SP revenue, with the benefit materializing over time in the form of higher dollar renewals. An increase in the number of FPs who sell commerce and greater service provider retention. This benefit will lag the impact from lower take rates and leave revenue growth to slow before ramping in future periods. Building on our existing relationships with all states and Benjamin Moore, the leading paint provider we discussed on the last quarter's call, we continue to increase our focus on strategic relationships. Just this week, we announced two important relationships, one with OnDeck and one with Shaw Industries. OnDeck is a leading platform for small business lending and as a part of our relationship will offer access to loans for quality service providers seeking working capital funding. Service providers can use their loans to invest in their business’s growth, manage cash flow or importantly finance their Angie’s List subscription for advertising and e-commerce. This will provide SP with increased flexibility to deploy their marketing dollars. We believe the availability of competitive borrowing and purchase financing will contribute to stronger relationships with our SPs, as well as increasing their purchasing power with Angie's List. And just this morning we announced a relationship with Shaw Industry, the world largest carpet manufacture. They will provide Angie List members with product offers from Shaw. Under the agreement Shaw will provide discounts to Angie’s List service providers who buy Shaw flooring for installation to Angie’s List members. In addition members will be able to purchase prepackaged offers from Angie’s List online market place that include Shaw flooring and installation. We continue to seek out relationships with the best manufactures in the home improvement industry as a way to deliver increased value to our members. In addition to the relationships I mentioned we see additional opportunities to partner with other premium brands in the future. Lastly I expect there may be questions on the status of our campus expansion plans and the impact to our financials. As you may be aware, we withdrew our proposals for the Ford building from city and State consideration. We are evaluating our alternatives and will provide you with an update as we know more. Before handing to Angie, let me summarize. We are off to good-start this year. Our progress puts us on a path to continue to grow revenue and significantly improve margins to achieve our strategic and operational objective for the full year. The confirmation of our revenue and increase our EBITDA guidance reflect our confidence in our results and outlook for the year. With that I will pass the call to Angie.

Thanks Bill. As Bill mentioned we have a solid start to the year. Our market place model continued to gain traction as we attracted new consumers to Search Shop in SnapFix with Angie's list. Our progress was aided by the continued shift in emphasis in our messaging to focus more on e-commerce. In our new creative which launched nationally in March, we highlighted that users need not the members to take advantage of our Shop and SnapFix services. The campaign is performing very well and our better cleaning spot in particular is significantly our performing last year's creative in driving traffic to the Angie's list Web site. During the quarter we continued to aggressively test web messages and offers with a focus on increasing close rate and monetizing traffic to all web pages. We are very encouraged with the early results from our online SnapFix test which was launched last month. The test highlights SnapFix on the landing page of angieslist.com and we've made the page available to 50% of visitors. Consumer responses are mediate and significant resulting in thousands of incremental SnapFix submissions. These early results highlight a clear opportunity to address the need of nonmembers through our on demand services. We also gained insight into our fulfillment capabilities as we focused on ensuring that we can turn SnapFix request into revenue. Our iOS mobile app and newly launched Android app are providing consumers with access to the full range of Angie's List functionally, no matter where they are. We have seen strong interest in the app with first quarter downloads up nearly 50% from a year ago. Our recently launched digital magazine, Angie's List weekly continued its strong performance winning the Digiday Publishing Award for best new publishing brand. It continues to place near the top of its category in Apple home and Garden Newsstand category and in both the iPad and iPhone Newsstand Home and Garden and Craft and Hobbies category. Our online digital tools are driving result. Turning to unit volume we had our best quarter ever for e-commerce units sold outside the pay wall with year-over-year growth of over a 100% and we continue to increase the number of members who joined by e-commerce field from the first quarter last year although off of a small base. While we made progress increasing commerce transactions, our member results for the quarter will also good with CPA declining to $71 from $82 a year ago. For the quarter we increased total paid households to 3.1 million. We achieved another key membership milestone this time in New York City where we surpassed 200,000 members. New York City has ranked as the Company's largest market since 2011 followed by Washington DC, Los Angeles, Chicago and Boston. We are expanding our destination of engagement as we offer more products and because members can engage with our product outside the pay wall. While the number of daily unique visitors the Angie's List site and monetization of those visits has increased, traditional member engagement metrics such as search reviews, logins were mixed. Reviews declined from a year ago due to a combination of lower spend on review collection and the commerce related engagement activities that contributed to more than a 30% growth in GMV. Additionally it is important to note that a member's engagement is highest as a new member. So as the base ages, engagement declines. New member demand is front end loaded and it spreads out over time leading to less engagement on average. Turning to member retention, first year renewals declined 2 points reflecting the impact from a price increase as members rolled off of promotional rates initially offered in 2014. We expect the pressure from this to persist in the second quarter. In addition reflecting on the ongoing impact from bank and retail data breaches and subsequent credit card reissuances, we experienced modest pressure from lower credit card success rate. Keep in mind that because our memberships renew annually we have not yet cycled through our entire customer base since the data breaches began last year. The challenging credit card environment will likely be a way of life for consumer services companies like ourselves going forward. And we are working hard to build the tools to improve the effectiveness of our renewal efforts. Average renewals declined one point from a year ago due largely to the promotional pricing impact I just mentioned. Bill touched upon on our partnership. So let me briefly discuss our progress with our all state relationship. As you’ll recall through a co-branded arrangement, all fee-defined memberships from Angie’s List and offering them the All State is agent. All state is advertising this through its agents and across multiple media channels. We expect to expand our relationship nationally and include e-commerce as a component of the offering that all state brings. Before passing the call to Tom, let me take a moment to discuss our marketing outlook for the full year. We continue to expect marketing expense to decline on a percent of revenue basis and also expect average CCA to be lower year-over-year. We will assess incremental investments beyond our targeted marketing spend based on total return on investment including our success driving GMV. We expect spend over the course of the year will follow a typical bell shaped curve. And now I’ll turn it over to Tom.

Thanks Angie. Let me summarize the financial results for the first quarter. Total revenue for the quarter increased 15% from the year ago quarter to approximately $84 million. First quarter membership revenue decreased 5% from the year ago quarter reflecting the impact associated with the move to tiered pricing which occurred last May. As a reminder member ARPU is expected to be a drag on year-over-year ARPU through next year. Total service provider revenue, which includes subscription pricing for advertising and e-commerce increased 22% from the year ago quarter. In addition our service provider contract value backlog ended the first quarter at $166 million up 22% from the year ago quarter due in part to national account sales, including Benjamin Moore. As a reminder, the back log consists of that portion of contract value that is not yet been recognized as revenue. Turning to our expenses, we reduced our marketing spend 31% from a year ago which contributed to a significant year-over-year improvement in operating margin. Operating margin in the first quarter grew to 6% from negative 5% a year ago. Our operating income for the quarter was $5 million, up from an operating loss of $3 million a year ago. Selling expense increased $2 million compared to the first quarter of 2014 but declined 180 basis points as a percent of revenue reflecting improved leverage and efficiency. We ended the quarter with a total of 1,006 sales organization with 745 responsible for originations and 261 responsible for renewals. G&A increased sequentially and from year ago, primarily reflecting hiring in strategic growth areas including digital marketing, merchandising and corporate functions including finance and HR and higher stock based compensation. Adjusted EBITDA and Non-GAAP financial measures was approximately $9 million for the first quarter compared to an adjusted EBITDA loss of approximately $1 million in the year ago period. Moving on to the balance sheet and cash flow, we ended the quarter with more $77 million in cash, cash equipment and investments. Cash provided from operations during the first quarter was $21 million compared to $15 million in year ago quarter. The improvement was due largely $8 million increase in net income. We confirmed our guidance for revenue and raised adjusted EBITDA guidance for 2015 as follows. Total revenue to be in the range of $357 million to $363 million and adjusted EBITDA increased to $30 million to $32 million up to $28 million to $30 million. In terms of some of the key expense lines and other items, we expect the following for 2015. Marketing expense to decline as a percent of total revenue for full year 2015 versus 2014. Selling expense is expected to decline meaningfully as a percent of service provider revenue. Product and technology expense is expected to increase year-over-year related to our new platform build launch and transition during the year. G&A for the full year is expected to increase as the percent of revenue versus the prior year. As we proceed through the balance of the year G&A has expected to decline as a percent of revenue from Q1. We expect to return to positive leverage on our G&A investment next year and capital expenditures including investment in software should be roughly in line with 2014. With the expectation for continued margin growth and roughly stable CapEx, we continue to expect to be on a path to generate positive cash flow in 2016. And with we’ll move to Q&A, operator, please open the line for questions.

Thank you. [Operator Instructions] The first question is from Jeff Houston of Barrington Research. Your line is open.

It's really [indiscernible] marketplace transition. A couple questions. First, Bill, could you update us on the CEO search? What is the background that you're looking for and what does the timing look like?

So, the timing is less a fixed variable here than the process. And so we have a meaningful and thorough process that is a part of the succession plan that we've had for a years and we're executing that. And so we’re reviewing candidates externally and internally. We've got -- broadly we're going to be looking obviously for someone who has a deep understanding of consumer and small business marketing and has the technological chops to be able deal with the evolving technologies. So you want someone who is familiar with technology deployments for consumers and small businesses.

Great, that's good detail. Switching gears a bit to the partner, you guys have announced a number of new partnerships. A question there is that are the relationships exclusive? For example with Shaw Industries, will they be the only provider that you have this type of relationship with for carpets? And how you measure the success of these partnerships?

Yes. So -- while the success of the partnerships can be measured just by that -- we're going to be actually building SKUs for them in listing those SKUs and then our service providers are going to be directly accessing improved pricing. So we will have very tangible metrics associated with just are we moving more carpet in the case of Shaw flooring, and are we -- are we driving more services for the providers? And as the transactions are on platform, those are visible things for us. We were able to put these things together because we have a premium brand and we have premium consumers and premium providers. It's a very attractive marketplace for the best brands that are out there. So exclusivity or lack of exclusivity would be totally dependent on the provider in the circumstance and there's no standard formula for that. Obviously -- we're working very hard in the current situation to build out the breadth of services. So that's an implied exclusivity, whether it's contractual or not.

Thank you. The next question is from Kerry Rice of Needham. Your line is open.

First question is on marketing cost, and as I think about the lower marketing, maybe we can use Q1 as an example. That lower marketing spend, how would you allocate that between the shift to digital versus just trying to lower the overall marketing expenses?

I'll let Angie cover that.

On the mix, our mix is similar to the mix we were trending to last year. So we may shift to move more to digital but this is just really about being more efficient in the dollars across the channels that we've been spending across.

Do you expect as we look further into 2015 that digital just becomes a larger and larger percentage of that mix?

As far as how the mix might change as we move through the quarter, it's really dependent on the performance. So we make those decisions within the time period that we're spending them. So as we see performance we’ll make adjustments to mix.

Okay then my second question is just on competition. We had Amazon launch home services. There was some chatter about Google. Have you seen much change just in demand or anything? I know those are -- Amazon is a little bit early. They've had a pilot program out there but any comments on the kind of competitive landscape would be helpful?

No. This is still -- this marketplace is like the vastness of the ocean. So -- we are not running into them from a competitive standpoint at all. Now that doesn't mean -- those are formidable competitors and over the long-term we have to have -- we have to have the best product, best service in the marketplace, but on a near term basis this is -- there's no impact.

Thank you. The next question is from Shawn Milne of Janney Capital Markets. Your line is open.

I have a couple quick questions. Tom, just on housekeeping, your actual technology spend was lower than we expected. Is that part of the capitalization as you work through the platform upgrade and will that again begin to hit the P&L later on this year when you go live?

Yes, on both Shawn. I think that we are -- the lion's share of our technology build efforts are being capitalized for the platform that we discussed in the prepared remarks. So yes in the first question and yes on the second. As we deploy these assets in the back half of the year, we’ll ultimately see a meaningful piece of that cost come back to the P&L.

Okay and the second one is, partnerships certainly look like they are positive relationships and I guess, Bill, when I heard you talk about them I was expecting they do provide discounts to members and what not. I was surprised when you talked about the impact to contract value backlog from them. If you were to take those three out, can you sort of normalize that or give us a sense for the impact on contract value backlog?

No. We're not deconstructing those things. Shawn, they are -- they're essentially traditional contracts, just on a much bigger scale. So they carry a component of traditional advertising. They carry a component of commerce. So they are -- we aren't unpacking those. Those are just a normal component of our origination activities.

Okay, and then lastly, you gave a little bit of detail on unit volume growth. You said, GMB was up 30%. Is that something where you're going to put -- potentially put a number of around GMB's so we can get a better sense for the marketplace transition because it's outside looking in obviously it's a little bit tough to tell how you're working through that pricing change?

Yes. Shawn, the answer to that is yes. GMB is as I'm sure you would quickly remind us, is -- the details are very important, and particularly as we have such a wide variety of transactions that sit on our platform. Some of them are totally completely SKU based and some of them are build me a house. They are that open-ended. So we want to be thoughtful and we’ll actually be soliciting input from you and lots of people on exactly how that metric should be developed. And it's going to change over time. So it's fairly clear today but it's going to evolve. We're certain of that and we want to make sure that we aren’t constantly having to come back and redefine things.

And I would just add to that, Shawn, that as the marketplace builds, and we just had a question on competition, one of the [indiscernible] thoughtful on and how much we're communicating to the world about the process of developing our marketplace. So the numbers remain relatively modest at the moment, but want to be very thoughtful about how much we expose on a quarterly basis.

Thank you. The next question is from Paul Bieber of Bank of America. Your line is open.

First, I may have missed it but what drove the strong service provider additions, and then secondly, I was hoping you talk about the consumer response to the new ad campaign that highlights e-commerce and is that ad campaign running nationwide? And then Bill, good luck with your future endeavors.

Thanks Paul. I've enjoyed working with you. So I'll start there. How about a take them in reverse order. Second one, Angie can describe a little bit about how the advertising that was promoting commerce was going and what we think we get out of that.

Sure. So the new campaign started rolling out in March. And it's focused on activities the consumers can do even without membership, in addition to membership. So it kind of covers both ends of the spectrum. And it's driving SnapFix activity, commerce activity. Our goal here and we talked about this before is how do we just get more monetization out of that traffic that we drive, whether it be membership or whether it be commerce related, and that's what we're focusing that campaign on. So it rolled out and it was a national rollout. So we just are rolling it into the spend slowly over time here as we see success.

Paul, it's worth noting that this is a very big opportunity for us. To the extent we can promote, we can run commerce focused offers all the way down to very, very local; things like direct mail. Those old tools we haven't used for a long time, would it carry commerce, also get the residual benefit of driving some memberships. So you are broadening the return possibilities of every add unit that we've ever used in the history of the business and so it opens up all sorts of avenues for us as we continue to drive commerce and build commerce capabilities around the platform. And I think you asked a technical question about the increase in the SPs? As we noted in our earlier comments, we're now including the commerce only service providers in the total account. Those have been building over time. We have some portion of them -- they are not advertisers but they offer commerce and so our total service provider count carries all of them now.

The next question is from Lloyd Walmsley of Deutsche Bank. Your line is open.

Thanks. I had a couple. For starters when you look at the marketing efficiency gains around gross adds, if you isolate that to kind of paid channels, are you seeing efficiency improve there or is the big reduction in CPA a function of just a higher mix of organic adds as you pull back marketing?

When we think about the CPA, we're obviously measuring the marginal effectiveness of that spend. And there's a little bit more art there. You are right, as we do bring down the spend, the mix of organic traffic becomes a greater portion of the total, but we work to drive efficiencies across both.

And I guess as you guys -- you noted earlier that newer members are far more engaged. And as they age they engage less. So I guess with that in mind, how should we think about the impact of slowing gross adds on the service provider side of the business in terms of turn or monetization. Should we expect this to become an issue in future periods?

When you think about the new members, when you talk about the engagement, the thing that drives the engagement to be higher in those new members is in many way the alignment, the alignment of that demand. Consumers all typically join when they need to hire someone. They need to hire a plumber. So they do a search that very first day and then their usage kind of spreads out based on their episodic use. A lot of the efforts that we're putting forth in the marketplace is really working to drive consumers back to the site to buy commerce and to do things like that even on things that might traditionally be just repeat usages, my housecleaner or things like that. And that I think what I was trying to articulate in the script is that some of the traditional measures of engagement are missing some of the commerce and things like that which we can do outside the pay wall. So we're trying to give some insight to that shift as we moved stuff out to the pay wall. You can come and buy something without having to log in to shop for example.

Yes. Okay. And so those people will show up necessarily in the gross adds?

Right, Yes. They won't show up as a login if they are they here shopping and engaging with our service. There just on the shopping side of things.

Okay. And then just last one for Tom if I may. You mentioned the expectation of seeing a meaningful decline in selling expense as a percent of service provider revenue. Just wondering if you can kind of elaborate on that and explain what's behind that. Is there an improved efficiency in net adds of new service providers? Or should we just think of that as pulling back on investments in new heads in that effort that should ultimately slow the net add there?

I think you should think about it primarily as an efficiency item, I think that frankly I'd position it more as an efficiency and adding CDs than necessarily an efficiency in adding new providers. I think we've talked many times over the past year and a half about that the importance of deeper relationships with fewer providers as opposed to adding -- just adding SPs willy-nilly. So, our expectation and frankly what we've seen so far in our prepared remarks characterize it this way. We've seen meaningful improvement in efficiency and we expect that to continue forward. We feel like we're in a good position to scale if that's what we want to do we will do so on a more efficient basis. So that's what's driving that.

Thank you, the next question is from Blake Harper from Wunderlich. Your line is open.

I wanted to see if you could follow up on the question about the number of service provider adds Bill and just wanted to see if the addition of the e-commerce providers -- is that actually -- or just if you could maybe just one-time give us how many that contributed and just wanted to see if the number of advertisers had increased or decreased or stayed the same.

Yes, we're not going to break down that number, even now just this one time. We're not going to do that. So I'm sorry about that. But I think that it's the right thing to do. So we're going to move forward with that.

Okay. Sounds good. And then Angie, just wanted to follow-up with some of the comments you made too about the nonmember of visits there and just wanted to see if there was any color you could give as far as the number of e-commerce transactions or visits that you are getting from nonmembers now and if there is a larger portion of nonmember traffic that you’re getting that you've been able to convert or if there's change there and as far as the conversion level so far of nonmember traffic?

So the two points that we shared were, the commerce from outside the pay wall. So that would be the nonmember sales from commerce had doubled since last year. And then also our testing around SnapFix, where we've introduced that as being available for nonmembers. While we are working on our fulfillment process and turning that into revenue, that demand and that opportunity certainly shows promise.

Thank you. The next question is from Rohit Kulkarni of RBC. Your line is open.

Great, Thank you. Couple of questions. First one, for e-commerce, is there is a way to quantify the effect of the transition to subscription pricing from take rates pricing and how that affecting your service provider revenue growth as it's going to continue to decelerate; may be a natural flow there. And as a part of this question, obviously you have service providers that are only doing e-commerce. So there is a clear evidence of incrementality. But do you think as there is more e-commerce; 30% of your service providers are doing e-commerce, that those advertisers are reallocating their portfolios and there is any hint of cannibalization if you will -- as they think about Angie's List as a marketing channel?

I will take the second half of that question. First --No, the incentives are very strong for the advertisers. The effective take rate that the advertiser pays with a subscription is a fraction of the take rate that they pay without one. So just the logic of it -- as more -- as you put more transactions, and there are more transaction selling for a particular service provider, they get a very strong incentive to maintain or engage in the subscription pricing. And in fact our selling strategy is -- they put some offers up and try for new sale for non-advertisers, put some offers up, they don’t cost you anything. But if they start selling then hey, take a look at the subscription pricing, the unlimited minutes plan if you will. So very deliberately, it’s a way to encourage people on to platform and then get them into a deeper relationship.

The first question was about the impact the revenue from the transition from take rates of subscription. We’re not going to quantify that but I think Bill mentioned in his prepared remarks, we took two deliberate strategic actions on the pricing side over the last year. One was establishing new member price and benefits and the second was and is the transition to subscription pricing. Both of those are having near term downward pressure on revenue growth. So we have to work through that. That’s really the pig in the python that Bill was referring to early in his remarks. So we expect that once we have worked through those strategic adjustments to our pricing, that will return to more normalized growth rates.

Okay, and generally, as you think about the marketing spend and about the customer activity that’s happening outside the pay wall, is there a way that you can think about how the margin of strength, that you would want to allocate more to that customer activity. So to engage those people their outside the pay wall.

Yes, we were discussing this a little bit earlier. We now have a vehicle to directly promote commerce and it has a residual benefit of bringing membership with it. So absolutely, this introduces a new dimension for all of our marketing vehicles, any that we’ve ever used before. Our candidates for specific commerce marketing that carry the Angie’s List brand and carries the offer of membership. So it is -- we’re examining every vehicle that we have for e-commerce first application in addition to the traditional member first application.

And one last question, did you experience any kind of disruptions in your operations after you pulled your campus expansion projects, as in terms of planned growth or hiring plans?

No. None whatsoever. That project had a two year time horizon on it. So we have all sorts of flexibility here and there is no disruption at all.

As the next question is from Peter Stabler of Wells Fargo Securities. Your line is open.

A couple, first one for Angie. I'm wondering if you could help us think about a normalized marketing as spend as a percent of revenue and let's say a two-year basis. You're seeing a lot more leverage in this quarter than we anticipated and we're just trying to recalibrate here given that your mix is -- your mix of marketing messages is shifting a bit towards e-commerce. And then secondly for Tom, just wondering if you could tell us when you think you cycle through the credit card data breach issue and when that's no longer going to -- assuming no further breaches or major breaches, when you assume that’s going to stop impacting some of your renewal issues?

This is Angie. I'll take both of those. So on the marketing spend, we expect marketing to decline as a percent of revenue for the full year. As far as what's the traditional bell curve, I think it's better to look at year like 2013 versus 2014. We brought the spend up a bit earlier in the year. So I think you should be looking at a 2013 kind of curve. On the credit card reissuance, it really kind of takes us about a year to cycle through once a breach occurs. So when will they stop kind of a year from the last breach that occurred. But they continued to happen throughout 2014. So I would expect some impact from them as we continue on it, and we might have actually just entered a world where we kind of live with that kind of -- that's almost the cost of processing credit cards.

I'll expand on her answer. Remember that the model, as a recurring revenue model, marketing expenses, once they get to what we'll call a stable level of spend, marketing expenses become a fixed cost in the business. The business grows because the revenues were recurring, but marketing is fixed. So it’s percent of revenues, fair steps every year. So the percent of revenues, the next couple of years we expect substantial leverage out of marketing, very meaningful. The only thing that would alter that course would be if somehow efficiently -- efficiency were to change dramatically either way, if it became significantly inefficient then we’d reduce it. If it were to become significantly more efficient, which we've had happen probably 15 times in the history of this business, then we would look at increasing. But assuming that everything stays kind of as it is, then your marketing as an absolute dollar levels out may increase slightly and you pick up substantial margin improvement every year.

Just a quick follow-on that. You're assuming no significant changes to the competitive landscape though or are you?

I’d just translate that into efficiency.

Next question operator

Thank you. The next question is from Darren Aftahi of Northland Securities. Your line is open.

Just a couple here; first can you talk about some of the verticals in which you're seeing the strongest strength in your e-commerce business? And then Tom, you've reeled off some stats on operating expenses. I didn't quite get them all. If you could repeat your comments about 2015 for selling and product, that would be helpful?

Yes, I think we're going to be a little more cautious about speaking about verticals and e-commerce than we have traditionally. We now have competitors. And we do have verticals that work quite a bit better than others and we will seek to exploit those, but we’ll just keep those to ourselves for now. And then Tom you can pick up.

So, Darren you've said on selling and product?

Correct.

So, I said that selling expense, and this goes to a question I was asked earlier; selling expenses is expected to decline meaningfully as a percent of the SP revenue. And then I said that product and technology expense is expected to increase year-over-year related to our new platform build activities.

Thank you. The next question is from Todd Van Fleet of First Analysis. Your line is open.

I jumped on the call a bit late so forgive me if you already covered this, but thinking about the changes in the competitive landscape that you're seeing with Amazon and Google, can you talk a little bit about how the pitch to the service providers has changed possibly over the past – over the course of the past few months, in light of this stepped up competition. So the folks that are manning the phones and reaching out to the service providers, what's the pitch? How are they selling, are they -- well first I guess are they selling against those two and if so what -- how are you differentiating yourself in that pitch? Thanks.

Yes, the reality is that they aren't selling against those. It’s just market opportunity is just too large. It's too big. They're selling against the traditional ways that service providers get business, and we have a superior offering there. We have the best consumers by far, and even on a targeted basis better than the competitors that you mentioned and we're able to deliver them on a geographically targeted basis. And so long as that’s true, the vast majority of service provider spend in this enormous marketplace isn’t on Amazon and Google, it's on billboards and yard signs and cable televisions and yellow pages and they are a long way from having widely adopted any digital platforms.

Thank you. The next question is from Sameet Sinha of B. Riley. Your line is open.

Thank you very much and Bill, all the best for your future endeavors. A couple of questions here. So in terms of the sales team that you have, the number of hunters continue to go down sequentially. Can you talk about your plan there? And the previous dynamic that you use to talk about where the first year the hunters were not -- the new SP was not profitable and the second year was almost 100% profitable. Does that dynamic still hold in this new sort of strategic shift and the second thing is if I look out into 2016, several moving parts here, service provider revenues slowing down this year, your membership growth is slowing down. How should we think about 2016 as these dynamics kind of cycle through, if you can provide any color both to the top and bottom line, that will be helpful?

Yes, Sameet, first of all thank you for your kind words. I appreciate it. I've enjoyed working with you. So the, we've just given directional and we won't get into specific top line and bottom line for ’16 until we get later in the year. But there is a concept of returning to normalized growth levels as that price impact that are associated with – one, the price impact with membership and two, the revenue shift essentially, the timing shift associated with moving commerce dollars into subscription. Those will normalize out as we get into next year and so we expect increases in our growth rate, plus the comps get easier, all kinds of stuff from where we are, but we aren’t going to put specific parameters on those until later in the year. Let’s see, you asked about?

P1 sale reps?

Oh, the P1 sale reps, and that's actually, if you think about it, we've just made sales force more efficient, and it’s a good time to do that because the dollars that we’re getting out of this shift of contract are from a timing standpoint shifted out. So the economics of P1 have improved. The traditional model that you describe was hunters and gatherers, the only deviation from it is that we have improved the profitability of P1. It's not a break even proposition. We’re are now letting it accrue some profitability while we let the shift take place and that timing shift may work itself out as we move through the remainder of this year and then it’s fine and it also allows us to make sure that we have the scripting and the originations and all of that under control and with our best reps. So we've got an efficient sales area right now and then as we get towards the back half of this year, we'll begin to put emphasis on scaling it up. We’re working out on that now, but we’re going to run it a leaner sort of -- leaner model, till will get through this year.

Thank you, the next question from Jason Helfstein of Oppenheimer. Your line is open.

Thanks. I think the number quoted by your main competitors as they 80,000 service providers in their last reported period, and their models have been less of a subscription model and more on a performance base. So can you just talk about how the sales reps effectively are working to go back to let’s say people who you've called in the past who have done a subscription. I said now look you can be a platform on a performance basis effectively to take a second crack at the apple.

Yes, we have offers for those efforts underway and again it does give you a trial capability. That's really powerful and we’ve got that rolled out. It's an easy sort of, hey just put something up and let’s see if it sells conversation, that -- and if we can deliver on that sale, then you’ve got all sorts of opportunities to add follow on subscriptions.

And do you think there's leakage, again comparing the models, your competitor, if you want to be seen, you have to effectively pay, right? With you guys you can be seen even if you don't pay. So effectively, that probably encourages some leakage. Are you thinking about potentially removing service providers who don't pay or was there any to basically use the data for what unpaid service providers go back to them and basically say look, this is how much, how many free leads you've gotten, how do we effectively move this into a paid relationship.

Yes, actually it’s more direct than that Jason. Commerce transaction produce reviews and they also produce data points that can be measured. So if presentation is just dictated by who’s got the most activity, who’s got the best activity? That's our score card initiative, which is a huge imitative for us. That all just takes care of itself, all of it. So it's a wonderful synergy of quality of performance, volume of performance with presentation frequency.

And the lastly, how should we think as we move through the year about sales productivity. Obviously, you had your first quarter typically seasonal bump in productivity. Do you guys expect a steady ramp through the year in call center productivity? Is there timing of different initiatives that will not allow us to be linear? How do you think about it moving through the year?

Let's see it. Through the years of sales productivity, it’ll have some seasonal characteristics but not material stuff. It's kind of on annual basis that you see the dollar percentage improvement. If that makes sense. So again it’s a renewal that drive total efficiency and that happens on an annual basis. While we’re getting incremental improvement and just as running a place better, I expect those to continue through the year.

We have time for one last question, operator.

Yes and the last question comes from Kevin Kopelman of Cowen and Company. Your line is open.

I just wanted to ask about reviews. You mentioned that they were down. Was that new reviews that were down? And how do see that going forward? And then also I was wondering if you could give us the number of total cumulative reviews that you in the platform? I think you've given that before in the past.

Kevin, I don’t think we’ve actually disclosed total reviews historically. Part of the -- as I mentioned in script, we spent less out getting our inorganic reviews this quarter. We haven’t guided as to how we might spend going throughout the year but reviews are certainly something we think about and look for as we move, especially more reviews. We’ve become also more targeted on our review collection as far as making sure we're getting those commerce reviews and closing the loop. So there is also a value of the reviews. So it's not just as volume imply.

I would say it was a -- we were focused on our external activities, we were focused on driving commerce, which still continue to be with the simple – we’re something like eight or nine times as likely to get a review out of a commerce transaction than we are out of a normal transaction. So we’re shifting emphasis on reviews and our direct go get a review activity just had far fewer dollars behind them. The goal, and we think the strategy will be to increase but reviews per transaction and ultimately increase the reviews per household. That’s what we are attempting to do here. This is just effect much more efficient way of going about it, if we’re able to get things pulled together. And if not, we just go back to put dollars behind reviews. It's totally discretionary and within our control.

Okay and can you give us any color around just how many reviews you have? Is it 5 million, 10 million?

I don’t believe we disclosed the total number before.

Not since may be pre IPO, yes. It’s a lot, it's a big number.

That concludes our call this morning. Thanks everyone for joining us.

Thank you ladies and gentlemen you may now disconnect at this time. Good day.