Good day, ladies and gentlemen, and welcome to Angie's List Third Quarter 2015 Earnings Conference 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, today’s conference is being recorded. I would now like to discuss today's conference call. Ms. Leslie Arena, Vice President of Investor Relations. You may begin, ma'am.

Thank you. Good morning and welcome to the Angie’s List third quarter 2015 earnings conference call. With me today are Scott Durchslag, Angie's List President and CEO and Tom Fox, our CFO. Angie Hicks, our Chief Marketing Officer will not be providing prepared remarks but is in the room with us as well. 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, non-cash stock-based compensation, loss on debt extinguishment, the litigation settlement adjustment and non-cash long lived asset impairment charges. Adjusted EBITDA is a non-GAAP financial measure, and you can find a reconciliation to the most directly comparable GAAP measure in our third 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 Scott.

Good morning. I’m honored to be the second CEO in the 20 year history of Angie's List and delighted to be talking with you today. I was attracted to joining this company because I firmly believe that Angie's List as an iconic brand, with an exceptional opportunity for both growth and value creation. Before diving into the Q3 results, I want to share observations from my first six weeks on both the company's opportunities and its challenges. As many of you know I've led successful turnarounds at other consumer and tech companies. Angie's List is unique and that it’s actually looks better from the inside than it does from the outside. Having seen the internal data, reviewed the externally conducted research met the talent and talked personally with many of our customers, I can say categorically that while we have our challenges they are manageable. Knowing what I now know my judgment is that we are as undervalued, as we are underestimated. The strength of our assets and competitive position is formidable and I would not want to change positions with any other competitor. But I also understand the company needs to deliver better results in the future. In many cases improving our performance doesn't require a lot of investment, instead it will take good fact-based analysis, better front-end planning, more rigorous decision-making and execution and clear consistent communications with our customers, our employees, our partners and our shareholders. We will listen first, especially to customers. We will analyze data. We will make thoughtful stock-based decision. We will test and then we will execute in that order. I've been identifying revenue enhancements, scrutinizing every aspect of the company's operations for cost efficiencies and seeking opportunities to leverage previous investments to harvest more returns on invested capital. I am also guiding…

Thanks, Scott. As Scott discussed we improved leverage and grew the bottom line. In the third quarter, total service provider revenue, which includes advertising and e-commerce revenue increased 11% from the year ago quarter. Service provider contract value backlog ended the third quarter at $163 million, up 12 % from the year ago quarter and up approximately $4 million sequentially, which is a turnaround from the sequential decline we reported last quarter. We've also arrested the sequential decline in service providers, adding 404 net participating SPs in the quarter, up from a net loss of 827 service providers in the second quarter. In addition, we grew the percentage of service providers selling e-commerce by 200 basis points sequentially to more than one third. Third quarter membership revenue decreased 6% from the year ago quarter, reflecting the impact associated with the move to tiered pricing which occurred last year. We are evaluating opportunities to increase pricing, which may partially offset that negative impact. Barring any change to pricing, number ARPU is expected to be a disproportionate drag on year-to-year total ARPU through next year, before we return to normalize number growth - member revenue growth rate over the longer term. Our marketplace continues to grow as we increase e-commerce inventory 47% year-over-year, grew GMV 27% and grew net unit sold by 15%. Revenue from marketplace however did not keep pace with unit growth. The rollout of higher take rates that was discussed last quarter could take a few more quarters to implement more broadly. We expect to drive growth by ensuring a better selling SKUs are available broadly to more geographies and develop tools to enable sales reps to identify best-selling SKUs, to do a more consultative sell in discussions with service providers. Turning to our expenses. Marketing expense increased by…

Thanks, Tom. My top priority is to improve the operational execution of the business, to reignite revenue growth, drive EBITDA and deliver free cash flow. Where ever possible and prudent, we are optimizing the cost structure, improving pricing analytics and generating returns from underutilized assets or past investments. I'm also assessing the crispness and competitiveness of our value proposition, diagnosing our organization and our talent gaps and determining a plan for sustainable profitable growth that will generate attractive returns and value creation. Our profitable growth plan has three phases. One, strengthen the core, two, leverage the platform, three, accelerate growth. While we are working hard now to develop the details of the plan, we are taking action now. Examples of phase 1 actions already underway, include identifying cost reduction, completing our sales force redesign, base lining our net promoter scores, making changes in the marketing mix and agencies, strengthening service provider marketing and launching Angie's Fair Price and Service Quality Guarantees. Examples of phase 2 actions initiated this quarter include beginning to scale the new AL 4.0 platform, releasing our new service provider mobile application, building our internal engineering and product management capabilities and strengthening our e-commerce offerings, as well as take rates. Phase 3 actions will include building new products and partnerships to monetize our over 100 million unique visitors. I've highlighted what we have done thus far and look forward to sharing more with you next quarter. In particular, we are planning to share the detailed plan, roadmap and outlook at an Investor and Analyst meeting we will host next quarter. Specifics on the meeting will be forthcoming. I really look forward to seeing you in person. Let me conclude by saying, I am encouraged by what I've seen in my first six weeks. Angie's List has powerful differentiation and uniquely strong asset in our brand, our repost granular data, our committed passionate employees and our loyal customer base. At a time when this large rapidly growing local services market just keeps getting hotter with more new entrants, our strategic position built over the last 20 years remains truly formidable. That said, we also have challenges to meet and significant opportunities for improvement that will take some time to execute well. I want to be clear in executing against those opportunities, I am committed to striking a thoughtful balance between profit and growth. Doing so, we'll enable the opportunities for substantial, sustainable, profitable growth to drive very significant long-term shareholder value. Operator, we will now take questions.

[Operator Instructions] Our first question comes from Paul Bieber with Bank of America.

Good morning. Thank you for taking my question. Scott, congratulations on the transition. I think, first of all, what are your thoughts on the pay wall? Is that an asset for Angie's List or is it a growth headwind? And then, Tom, I was wondering, I think you had previously said that next year would see free cash flow positive results. Does that guidance still hold?

Thanks, Paul. On your question on the pay wall, I'm looking at that now as part of the strategy and the plan that we are developing. So I haven't reached a conclusion on it yet

So Paul on your question on free cash flow, the company still continues to be on the path towards positive free cash flow in 2016.

Okay. And then on the sequential increase in service provider, was that a just improved sales force execution versus last quarter or was there any change in strategy and service provider acquisition go to market strategy?

Not at this time. It was really as you say just really improved the execution on the sales force side, some of the stuff we shared with you in the Q2 call really just had some traction in the quarter and so we're pleased with the results.

Okay. Thank you.

Next question operator?

Our next question comes from Lloyd Walmsley with Deutsche Bank.

Thanks. Scott, just a couple big picture ones. The first one is, when you kind of look at the challenges of the company, how fundamental do you think the monetization model structure is? Is that something that needs to be changed or looked at or do you feel like you have the right model, and it's more tweaking around the edges? And then I guess, the second big picture question, just philosophically, would you prioritize revenue growth or are you more focused on profit growth looking forward?

In terms of the monetization model, no I think that – I think that the fundamental elements of it are sound. I think in terms of being able to maximize the opportunities there are things that can be done to strengthen it, particularly at the different tiers. And more importantly I think in terms of being able to grow the whole business there's opportunities to potentially diversify that model to be able to generate additional incremental revenue stream. So we are now in the process of developing what those can look like and trying to quantify what the impact of that would be and how these things can work together in a way that would have clarity to consumers and be able to be executed well by the company. In terms of your question on revenue versus growth, I mean, I think what we really want to try and do there is be able to strike a careful balance. If it goes too far, obviously towards purely the profit side, then there is in the opportunity to do the investments that are necessary to maximize the full set of returns that can come from some of the opportunities we're seeing. On the other hand, if we go too far the other way, we're not delivering the value that we can and maximizing that part of it in terms of how we want to try and sort of earn the right to be able to make some of the bets that need to be there. So I want to strike kind of a balance down the middle on that, as a general rule my view is given where we're at right now, we need to earn the right to make bets. But at the same time we can't be in the position where we don't take any bets or take any investments that are necessary where we are seeing clear success and progress. And so that's the approach that we're going to take. We're going to is try and strike the balance with a real eye towards what's going to create long-term shareholder value.

And I guess, just following up, you mentioned opportunities to diversify the model to generate additional revenue streams. Is that from a category perspective, or is that - anything you can share on new products that could generate new streams like things you are thinking about doing or that are in the pipeline?

What we're doing is, we're looking at new ways to monetize existing assets and services to make some of them available as a compliment, right, to the current paid membership model. For example, we could sell ads to reach our free users or we can could product ties some of our other benefits and sell them on a per drink basis, right. So, we're not really ready to provide details on this yet and there is a lot of competitive sensitivity here. I'm not going to signal to everybody all those things that we're going to be doing on the product side. But I'll tell you I'm really excited about some of the ideas that we have here and they will be able – they will be enabled in some uniquely powerful ways by the new platform that we've just begun scaling up. And remember, we've got something like 100 million users visiting our site. Given that a very small number of those actually convert to members, right, the chance to be able to take advantage of that traffic, to be able to sell them things they are looking for, I think is very, very substantial. And the power of that is, it has a network effect in terms of also generating real incremental value and leads to our service provider. So there is sort of a flow-through impact in terms of being able to attract more service providers and being able to deliver higher quality leads that have a higher close rate to our existing service providers and they get to participate in this.

Next question, operator?

Our next question comes from Kerry Rice with Needham.

Thanks a lot. Couple questions. Just on the revenue guidance for the balance of the year. Is there any particular thing that you pulled out or specifically pulled out, was it across-the-board cut, and so that's why you are just bringing it down because you don't believe that you just need to kind of bring it down? And then the second question is around the 4.0 platform. Can you talk a little bit, are you changing anything with the consumer user interface to make it more interactive with the consumer or give any more details around that? Thanks.

I'll answer the revenue question Kerry and then I'll let Scott talk about AL 4.0. So on the revenue guidance I think as I indicated in my remarks and I think Scott may have referenced to it or maybe he didn't, but the take rate issue on the e-commerce side is something that I think was among the factors that we considered in reducing the revenue guidance. So I would point to that. I think we continued to make progress on the ad sales side, but of course, given the revenue model there its going to continue to take some time to get where we want to go there. So I think, as Scott indicated in his comments on runway, was kind of running out of days and weeks in the year to see revenue impact for some of those efforts. So I think those are really the two things that drove the decision.

Kerry, on your question on Angie's List 4.0, basically the situation is this, right, I mean, the experience on the site is unsatisfactory. It is not where it needs to be and it’s been stuck there for some time, too long. The beauty is with that new platform that we're scaling we will be lifting and shifting the existing experience first and getting that out there and making sure that’s working well everywhere. But the real power of the platform is that once it's scaled we're going to be able to very rapidly test, kind of iterate and learn, so that we can move very quickly to first catch up and then we're going to get ahead. And so that's going to be the approach. You're not going to see a dramatic improvement in the user experience until it scaled first. But we intend to do that as fast as we can and should be complete early next year. And then a big part of next year is going to be spent on dramatically improving the user experience and that's our focus on the product side.

Thank you.

Next question, operator?

Our next question comes from Jason Helfstein with Oppenheimer.

Thanks, two questions. So one, Scott, is it too early to ask you upon about where you think the long-term margin of the business is? And then second, you alluded to the fact that if there's $10 billion to $15 billion of commerce happening as a result of connections you make for service providers. That implies something like a 2% take rate this year. And what I'm hearing is, it sounds like for the current e-commerce product, that take rate may be too high, but 2% seems to low. So I guess the question is, is there some other product that's somewhere in between 2% but less than the current quote, unquote, e-commerce take rate that's a fair price to charge service providers? And how ultimately you get them to pay you, and should this be more linked to a transaction at the end of the day, as opposed to the subscription? So just kind of too big picture questions. Thanks.

Yes. Thanks, Jason. Well, look on your first question, honestly it's too early for me to opine on the long-term, kind of business margins. It’s only been six weeks. On your second question, yes, I mean, basically what we're - first of all the take rate on it today is too low and there are some things we want to try and do to be able to increase prices, but we have to do that carefully, right, because we don't want to see retention drop dramatically, and we've got some good ideas on how to do that. But I think on your second question, we are definitely looking as I said about being able to bring in some other elements of the offering that will allow us to have some additional revenue streams and what you are suggesting there is very consistent with some of the things that we're thinking about.

And I guess, how do you I guess, manage this in the context of protecting free cash flow? And is that just what you were saying in the comments where you are finding efficiencies in the business, and then you can reinvest those in areas to do these new things?

Yes in part. But, also, what – look, I'm finding here quite honestly is that there's just a lot of areas where there have been past investments made in creating capabilities. But the full potential to be able to take advantage of those capabilities hasn't been driven all the way through, right. So I'm trying to identify those, to prioritize those and to think about how do you turn that into a product offering that achieve some broader objectives in terms of how we - on the member side deliver more value at each of the tiers. On the non-member side how we create some of these more per drink or premium type offerings to be able to monetize it. And then there's a wealth of things on the service provider side that not only relates to some of the existing offerings in terms of advertising, but other things that we might do in terms of information or tools that could be helpful to the service providers. So there is a range of things there and they don't require dramatically large investments to actually make those things happen. Like I said in a lot of cases most of that investment has already been made. It's just driving all the way through to commercialize in a way that generates a return.

Okay. Thank you.

Next question, operator?

Our next question comes from Kevin Kopelman with Cowen and Company.

Hi. Thanks a lot. Could you give us anymore color on the 10 billion to 15 billion metric and how you arrived at that? And then secondly, can you talk about how you are thinking about advertising spend levels for the fourth quarter? Thanks a lot.

Sure. Kevin. This time I'll take those. So the 10 billion to 15 billion is a number we talked about for a while, at least as long as I've been here, over two years now. So it's basically an estimate that we performed that relies on the information submitted through the review process. So I'll remind you that, the review asks the consumer or member to submit the estimated total cost of the project. And so what we do is, we take that information and perform some statistical analysis on it and try to extrapolate from the reported numbers what we think the effective total, almost a total GMV in some sense across the platform might be. The range is fairly large because as you might imagine there is quite a bit of estimation that goes into it. But when you pull those numbers together and do the extrapolation it tells you it's roughly $10 billion $10 billion of total value, that's generated off the connections that are made through our platform. On the selling expense number, we don't provide specific Q4 guidance. I think what I tried to say my prepared remarks is that we've seen really good efficiency and productivity frankly. Partially due to some of the re-org that we've been implementing and testing in Q3, but just overall I think we've just seen better execution in the sales organization and which has manifested in some of the efficiency metrics and frankly leverage off of the expense that we reported in Q3.

Okay. Thanks, Tom.

Next question, operator?

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

Hi. Good morning, guys. Scott, wanted to get your thoughts on the digital marketing side of things. You had mentioned that you expect to increase the share of the overall marketing budget devoted to digital, and you changed some agencies. Could you maybe elaborate on your thinking regarding the digital marketing strategy, or maybe the overall marketing strategy for the Company, in light of some of the recent moves? Thanks.

Sure, Todd. Happy to do that. Look I mean, I am used to - when it comes to the marketing strategy to be sort of having the software and tools to be set up to just – to optimize marketing return on investment, right, and then to be able to look at all the different channels and with some fairly sophisticated, but quite proven modeling be able to pull the levers to be able to achieve the objectives that we are looking for, bit it either in terms of traffic or conversion or awareness and how that then drives through to conversion or membership join. Quite honestly some of that software and tools has not been here. I went to get that foot in place literally in the next three or four months, because it's so fundamental to what I think we need to do. And then what I think it implies is we'll be able to use other data we have and this company has got some amazing history, right on what different spend levels have accomplished in terms of the results. We ought to be able to be pretty precise, particularly with moves up for in the past year for the first time they got data they never had before and what happens when you move the marketing spend down on TV to be able to inform what's the best way to do it. In terms of what I anticipate from that is we'll be tweaking within each of the different channels of digital and I expect that it probably involves some overall shift that will take down TV some to be able to drive that traffic through. But it has to be done in a way that synchronized with the platform rollout and what's available in terms of the user experience. Unless the user experience is good, right, spending a lot of money to drive a ton of traffic to that doesn't necessarily make a lot of sense. So we went to be very thoughtful about how all elements of the plan kind of tied together to be able to deliver a better result. But I think there is a fair bit of opportunity based on what I'm seeing to be able to get more efficiency out of the existing marketing spend and have that drive objective that we want to achieve.

Thanks.

Operator?

Our next question comes from Peter Stabler with Wells Fargo.

Hi. Good morning. This is Steve filling in for Peter. Thanks for taking the questions. So looking out at trends over the past three quarters, it looks like GMV growth continues to outpace transaction volume growth. Can you help us understand what's driving growth on the pricing side here, maybe in terms of how you're actively managing SKUs and search results or conversations with SPs to drive pricing growth? And also, can you provide some color on what verticals are performing well for you guys?

I think I can comment on the GMV side. I don't know if we can comment on categories, I don't have that data at my fingertips here for this call. But our strategy going back a few quarters and reducing the take rates was in fact to break down the barriers or obstacles to service providers posting or surfacing bigger and bigger ticket price offers on their profile pages in our storefront marketplace. And so I think we're just seeing the expected result, not only we have seen a proliferation of offers, we're seeing the ability for consumer’s numbers to purchase bigger ticket items. So I think it's just having our efforts, our strategy and kind of reducing the take rate have had intended impact really. And so we're - I think we'd expect to see some of that continue moving forward. Again, I can't comment on categories success, I just don't have that – we don’t have that information here at our fingertips.

I'll just give you my sense for it though, which it's the home verticals that are doing quite well HVAC, plumbing, carpet cleaning, electrical, handyman. I wouldn't want to go into more detail than that any how for competitive reasons. But that should give you some feel for it.

Got it.

Okay. Next question, operator?

Our next question comes from Rohit Kulkarni with RBC Markets.

Great, thanks. Welcome, Scott. And just to get this out of the way, on the letter from ECS Capital last week. I know you may not say more, but can you comment on whether you are or do you expect to be in active dialogue with them directly or through any intermediate parties?

Well, look, I stand by what I said in the prepared remarks. We talk with all of our investors, right. And all I would say on this is that we're always looking for ways to increase value and I think the right thing to do now is to let us develop our plan, right and then people can take a look at what we can do organically and compare that with other options. I don't know how anybody can say they know what the best option is for the company until that happens.

Makes sense. And also on the pay wall region of things, particularly for consumer and service provider activities outside the pay wall. In the past you have given some data points, some metrics just to build out the mosaic to indicate successful you are being in terms of increasing the consumer activity or e-commerce outside of the pay wall. Would you kind of be able to give more metrics as to what of those ex-billion dollars that you – think you generate of economic activity, what happens outside the pay wall? I know the CPA metric starts to become increasingly less important and misleading to a certain degree. But from the outside, what can you give us to get more comfort around that this strategy is working as the pay wall is getting thinner and shorter, as we can see there are a lot of options out there for consumers to just check out products services, listings what have you, and so on and so forth?

Yes. That's a great question, Rohit. I mean, what I intend to do because quite frankly when I sort of came in and looked at all the different data we have, there is a lot of different metrics that float around. And even in what I see has been released historically has sort of grown up over time around the company. Part of what I want to do on the Investor Day when we share with you our full-blown situation on the market size and growth and competitor activity and how we see our strategy, where we're going to compete, how we're going to compete, what that means for the business model, how that translate into a set of financial projection, required investment, cash flows, margin, some of the questions that you guys are asking on this call. We will clearly answer and project out, so you will get a sense of timing. And a key part of what I want to do there is not only give you milestones and metrics to which we will be held accountable, I want to give you clarity on what will be the most important metric to be monitoring to see our progress and performance against that plan. And I'm not ready to do that right now. But your point is very well taken. There is a lot of noise that floats around those different metrics. And I think if we can crystallize it to the ones that really move the needle that are kinds of the strategy metrics and the financial metrics that assess the performance of that strategy it will give all of you greater clarity and keeping track of how we're doing and it will be very helpful in terms of the whole company and organization to make sure that we're managing well those things that we're measuring.

Great.

Next question, operator?

Our next question comes from Aaron Kessler with Raymond James.

Thanks, guys. Scott, just quick question for you. In your initial talks with the advertisers, insurance providers, your thoughts why they churn or the things that – Angie's could do better to service them. It seems like some of our research it's kind of a two-tier system where the guys on the platform long-term get lot of value from Angie's some of the newer search matters, not as much value, and maybe those guys churning, just your initial thoughts and some of the feedbacks from search providers? Thanks.

Yes, sure. I'm happy to do that. I mean, so I think – I think in terms of what I'm hearing from the service providers that first of all they greatly value what we've been able to deliver to them in terms of the traffic and the quality of the lead. But the way that we interact with them can be too transactional and that's in part a reflection of some of the previous incentive plans, it was in part a reflection of the organization and kind of the way that it grew up. So a lot of what we're trying to do now is to shift it toward the relationship and sort of what's the total value that we can create for them and then what's our share of that value. And what we're doing is sort of triaging analytically what we've been able to do for the different service providers and you are right for some of the newer ones we haven't been delivering enough value to them. And so we want to be able to have a more differentiated set of offering to be able to meet their very different needs and we want to be able to have some capabilities that if we fall short with what we've said we could do for them, we have a way to be able to kind of make that up within the context of making sure that the overall relationship makes sense. We have in some respects made it harder for ourselves than we needed to because we would go out to these guys sometimes too quickly with ideas that we would just roll out to all of them, and if they work great, but if they didn't work we then change the message the next month when we're…

Thank you. Next question, operator? Operator Our next question comes from Blake Harper with Topeka Capital Markets.

Thanks. I've had most of my questions answered. But I just wanted to ask you Scott about some of the partnerships that you have with a home improvement brands and have any of those yet been contributing to your revenue and do you expect to expand those with other brands and with possibly permanent retailers?

Yes. That's a great question, because I do see partnerships as a major opportunity and I think frankly the companies has only scratch the surface on what you can do in that regard. And its one of the key benefits of the new platform, as it will be much easier for partners to be able to integrate with us. The essence of the idea is because this home service is such an incredibly large and very, very fragmented market, it’s quite hard for some of the manufacturers to be able to reach that. And they are facing real challenges with some of their existing distribution. But to the extent that we offer kind of an efficient and effective way for them to be able to reach directly to consumers in this fragmented market, I think it can be incredibly attractive. We've gotten some good learning from that from some of the partners that we first started to work with, but it’s still right now a relatively small component of total revenue. Over time I see that becoming a bigger component of revenue, because there's just a lot to do there and it does it in a way that strengthens the whole ecosystem. Those partners being tightly integrated to platform can create some great advantages for consumers to be able to get access to those products or to get incentives and rewarded for using those products and similarly service providers to pull that through. So there is a way to have a win, win, win I think if you are strategic and build the right element into the product offering and the platform. And we're looking quite aggressively at doing that and what we will describe on Investor Day and what we'll be rolling out next year.

Thanks, Scott.

Okay. And we have time for one more question, operator?

Our next question comes from Chris Lafayette with Clark Estates.

Thank you. So as an agent for shareholders, I was just hoping that you can explain why you felt the need to seek outside counsel and spend shareholder capital in response to an activist shareholder? Especially, when, as you mentioned, the Board and management already control 20% of the stock. Because it does create the appearance that there is not alignment.

No I don't think it creates any appearance of their being alignment. I think it's completely typical in situations where there is an activist shareholder that the company gets appropriate advice.

Okay.

Okay. If there are no more questions, operator we'll conclude today's call. Thank you everyone for joining us. Operator Ladies and gentlemen, this concludes today's conference. You may disconnect. And have a wonderful day.