Good day, ladies and gentlemen, welcome to the Angie's List First Quarter 2016 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, this conference call is being recorded. I would now like to turn the conference over to Leslie Arena, Vice President of Investor Relations. Please begin.

Good morning and welcome to the Angie's List first quarter 2016 earnings conference call. With me today are Scott Durchslag, Angie's List President and CEO; 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 will also refer to adjusted EBITDA, which we define as earnings before interest, income taxes, depreciation and amortization, non-cash stock-based compensation, contingent liabilities and adjustments, and non-cash long-lived asset impairment charges. Adjusted EBITDA is a non-GAAP financial measure, and you can find a reconciliation to GAAP in our first quarter 2016 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 an 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.

Thanks, Leslie. Good morning and I appreciate you joining us on the call. Since we last spoke to you at our Investor Day and unveiled our profitable growth plan in early March, we have continued to make good progress preparing for the strategic and operational shift in our business we discussed. At the same time, we have been stabilizing our core business. Our first quarter results show progress and challenges on both these fronts. Our first quarter revenue was flat year-over-year as we continue to face short-term headwinds on member and advertising revenue, as well as the expected challenges from migration of our technology platform. Adjusted EBITDA declined from a year ago, due primarily to one-time non-recurring expenses and investments in our initiatives to reignite revenue growth. There were a number of bright notes too. For the third consecutive quarter, we added more than 400 net service providers. We also grew service provider contract value backlog sequentially and saw a 25% increase in total site traffic compared to the first quarter of 2015. While we much rather be reporting that we significantly grew revenue and EBITDA this quarter, the reality is that these results are not surprising as they reflect the company in the midst of a turnaround. As a result, we expect growth to be backend loaded in 2016, with an acceleration of revenue and EBITDA coming in the second half after we have completed the platform migration, the coding necessary to take down the reviews paywall, and launched our new consumer and service provider offerings. Based on the very encouraging results, we are experiencing in pilot markets where we have dropped the paywall, we are optimistic about a reacceleration of our business as we rollout our premium products nationwide in the middle of this year. Indeed, we believe…

Thanks, Scott, and good morning. For the quarter, revenue was $84 million flat compared to a year ago reflecting the impact from a technology transformation that Scott discussed as well as lower member revenue. Total service provider revenue which includes advertising and ecommerce revenue increased 2% in the first quarter compared to a year ago. Ecommerce growth merchandise value, unit sold, and revenue, were negatively impacted by operational issues associated with our technology platform migration. In addition, it was during the first quarter last year that we began reducing take-rates to drive ecommerce inventory. So our first quarter results are impacted by last year's higher take-rates. We continue to make good progress increasing those take-rates. Although the results will take time to translate to revenue. We expect to complete the take-rate migration work by the end of the year. Membership revenue decreased 6% due to the continued shift in mix as newer members joined on lower price tiers. This year-over-year trend is expected to persist at roughly the same rate through the second quarter and until we remove the paywall. Once that occurs this summer, we expect that some visitors to our site will opt for free membership leading to a modest decline in member revenue for the full-year. We expect the membership mix to shift predominantly to free over time, although we expect to see a significant portion remain on the pay tiers due to the high value offering we shared in the Investor Day with the total impact being higher engagement which should drive SP revenue. Adjusted EBITDA was $4.8 million, down from $8.6 million in the same period a year ago, due to the combined effect of non-recurring legal and advisory expenses associated with activist activity which was settled and impacts to ecommerce from our tech platform…

In summary, we made meaningful progress executing our new profitable growth plans and preparing for our transition to freemium. We've aligned our team to execute on our objective, migrated the majority of our markets and members to our new AL 4.0 platform, and continued the important work of reorganizing and strengthening our sales organization, all with the goal of reigniting revenue growth and growing EBITDA. But we still face challenges as we complete the migration of our technology platform. The fundamentally changing of our business model, removing the reviews paywall, and creating a highly compelling user experience. A turnaround of this magnitude takes resilience and resolve. But as I said on Investor Day there is far more risk in standing still and not making some of the changes that are now underway. And when we recently detailed our profitable growth plan internally known as Green Thunder to a gathering of all of our employees, I can tell you that they were on their feet with soul shaking energy and enthusiasm. They already knew change was needed. They are fired up and ready to execute our new strategy and operating plan. They also know we are fully committed to grow revenue by nearly 20% compound average annual growth rate and deliver a 20% adjusted EBITDA margin by 2020. They now have an inspiring vision, a clear winning strategy for sustainable success in a huge $400 billion market and operating plan that define success with specific metrics for every team in the company and aligned incentive. As I reflect on the evolution of the business since joining last fall, it's clear to me that we're on a path to significant value creation. The results from key pilot markets show that we can steer Angie's List to a financial and strategic profile that will benefit Angie's List shareholders in the near-term, the medium-term and the long-term. While we cannot predict the future dynamics of the industry landscape, we will work steadfastly to create value for our shareholders and believe the results in the coming quarters will prove our progress towards that goal. And with that I will pass the call to the operator. Please open the line for questions.

Thank you. [Operator Instructions]. Your first question is from Lloyd Walmsley of Deutsche Bank. Your line is open.

Yes, had a couple on some of the tests you guys are running on the freemium model, I guess first given your confidence in these strategy, why not accelerate the pace of the rollout may be go to some of the key hurdles to doing that. And then, I guess secondly, you talked about some of the pilots running in your largest markets and sales up massively in these markets versus the benchmark. So is it that kind of the markets that are not out of this test are just performing more poorly on the service provider side dragging down the headline results, I guess or the test is so small that the benefits aren't enough to offset the existing markets, any color you can share there would be great?

Sure, well on your first question, we are going as fast as we can to take down the paywall. There is real coding, there is real work required to do that and to be able to deliver the experience. And remember, we're not just taking down the paywall at the same time; we're phasing in the new green, gold, and silver offer. So that can't happen any faster than summer as we've indicated, I wish it could, but it can't. So that's the answer to your first question. On the second question, yes, we're doing several pilots in top markets but in terms of the overall impact on our national revenues, it's just not material enough to probably move that needle.

Next question, operator?

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

Thanks. Two questions. First, in the beginning you're saying as far as the [indiscernible] service provider revenue in the quarter, you're saying that was due to the transactional revenue being weaker but you were happy with what you saw as far as sales force productivity in the quarter. So just kind of clarify that. And then secondly, I mean are there additional metrics you can share, I mean, I guess it's problem of large question, I mean, [indiscernible] asked why don't you accelerate it, but are there additional metrics you can share, I don't know one market. So in other words up to this point 90ish percent of traffic that would end up on the website would go away because they would pay is there any metrics you can share on conversion rates or anything help us understand why we should be enthusiastic about the paywall drop. Thanks.

So Jason, it's Tom. I will take the first question and I'll let Scott to talk about the paywall question. So from an SP revenue perspective there are a couple of kind of forces moving together obviously. Obviously, as Scott mentioned in his prepared remarks, we were disappointed with ecom revenue particularly due in primarily to the system migration issues that we outlined in some detail. So that was a clear headwind in the quarter from a revenue perspective. I would say we are very pleased with performance in originations part of our sales force, we're seeing very good productivity improvements there, we detailed in the script and in fact to sustain kind of those, those sort of increases moving forward. With respect to the renewal side, I mean obviously that continues to lag a bit and it's really one of the major reasons we're so enthusiastic about the paywall moves coming later this year, we think that actually promises some real benefit for our customers. We expect to do some major improvement in the renewal side of the business at that point.

In terms of your question on the metrics side, Jason, on Investor Day I showed you the numbers on registrations, reviews, profile views, contract value. Those metrics are broadly holding up across the pilot markets that we're in. So that's why I'm so confident about it.

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

Good morning. Thanks for taking my question. As you're first removing the paywall, which part of the strategy do you think represents the biggest execution challenge? And then secondly on the competitive landscape, we've noticed that Amazon is getting a little bit more aggressive with its home services offering and Wayfair recently partnered with Porch.com. What are your most recent thoughts on the competitive landscape?

Well I mean in terms of the competitive landscape, it is intensifying and that's a good validation of the attractiveness of the space and even though it is intensifying though when we looked at our performance, we still don't see that, that impacting us adversely in terms of where our consumers or service providers are going, we watch it really, really closely. That has a lot more to do with some of our own issues, which as I hope is clear from this call, we are aggressively moving to correct. So while I saw this announcements, we will see how materially are, I don't think they fundamentally change the structure of the space. And compares to the importance of fixing some of the fundamentals that we're focused on, I'm pretty confident about how that will play out. In terms of the execution risk on the strategy, I think -- I would say there is the biggest one is probably in how we migrate the current members to the new offers, how we launched those new offers and how we sort of handled that transition. We've done a lot of consumer research and testing to make sure that the new offers would be highly valued by them. But in terms of how we actually do that marketing and how we handle those customers as they have questions so that they're comfortable with that transition, that's something that that we'll be watching very, very carefully. And then the second one is just on the service providers side more revenue is going to be coming from the service provider side, I'm really excited about some of the new offerings we have there particularly the metrics dashboard which is something they've very, very much have wanted. But at the same time, we are making a transition from a kind of short-term transactional mindset in the sales force, so long-term relationship and consultative selling and really working with them in a way to be helpful about how they can grow and increase their performance through better using our products and services. That's a significant shift and so there is some execution risk in how we make that shift happen with 900 of our employees.

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

Thank you. Just had a quick question on marketing cost, they seem to be up in Q1 year-over-year and I know you kind of indicated that you expected to come down substantially in Q2. Was there anything in Q1 that would raise that? I would assume you kind of turned that down in Q1 as well as you head towards this free paywall. I didn't know if there was some cost related production of may be the new marketing campaign or not?

I think what you're probably saying is just the change that we made and how we are looking at marketing effective with Q1 of this year. We are now actually including the marketing personnel and the other kind of overhead cost that we previously had included in the general and administrative line of the other P&L. So we've now really got all of the marketing and related cost in one area on the P&L and so actually it was up slightly apples-to-apples but not up, it's almost flat really up $300,000 year-on-year. So it's really not pure ad spend that you're seeing there anymore, it's now the total marketing cost in the organization.

Is there a reason why I guess that we may be we would break that out or I'm kind of I'm looking at a year-over-year, I think you adjusted the numbers in March of 2015 but with the total paid memberships coming down the cost per member has kind of gone back up, so I just didn't know. Are you just looking at it on a total, total number now versus kind of a per member?

Yes, Kerry, we actually are looking at it differently. We made the decision just because the management teams that will be running the business were not kind of looking at it, kind of on a CPA basis, as much as we used to. We are really kind of looking at on a total marketing return on investment. And so we thought it was appropriate to make the change effective in Q1 to report it that way.

Okay. And then a question on service providers, more on the pricing, the way I understood Angie's to price to service providers was the number of members in whatever segment or whatever market they wanted to advertise in, now with a free paywall if you see a surge in members is that going to effectively drive up the cost for service providers or you thinking about pricing that advertising model little bit differently now?

I think it's more the latter than the former, I think that we actually are expecting to see a lot more -- we're going to have a lot more inventory available in the markets, we're going to have more members to satisfy, so we're going to as we described in Investor Day both Scott and I both mentioned in our presentations we expect to see a pretty significant increase in until the last piece paying on the platform over the next couple of years. And so we don't necessarily expect to see a dramatic increase in per advertiser contract value but a pretty significant increase in the number of that piece on the platform.

Yes, I think that's right. I mean the only thing I would add is we have also rolled out a new pricing tool and sort of that gives us more of an ability to kind of manage pricing rather than it's being as much of a discretion of the individual sales person. And so that combined with the greater transparency and visibility into profile reviews and the number of reviews which we know is what really drives performance with those service providers. I think is what arms us to be able to have more constructive discussions with the service providers. So there may be some pricing maintenance, may be even some slight pricing increases but actually the biggest way I think it will manifest itself is in reduced attrition.

I'm just going to mention that. I think what Scott just described we expect to see the principal benefit in the renewal part of the business.

Thank you. The next question is from Peter Stabler of Wells Fargo Securities. Your line is open.

Good morning. Thanks for taking the question. Wondering if you could give us a little bit more color on the pilot markets specifically you might hesitate to give us part numbers but any sort of directional sense of what kind of retention rate you are seeing with the silver and gold whether you expect to tweak those packages or you think you have the right formula on those going forward. And then I've got two quick follow-ups, thanks.

Yes, no thanks. Well look at -- the pilots have been running for just a few months, so it's a little early to talk about kind of retention on it. But to be clear the pilots focused on the impact of reducing the paywall. The offers that we're going to be launching in terms of the new services that we're going to be offering to like paid members, the silver and gold members that kind of a thing that that those are things that we tested kind of a different consumer research. We're in the process right now of simultaneously not only doing the engineering necessary to take down the paywall but there is a whole bunch of work necessary to develop and be ready to deliver that full set of offerings when we launch them this summer. So that's kind of a difference.

Okay. So just to be clear the set of pilot markets now doesn't really include a full court press on silver and gold migration. It's faced, it's dropped paywall, build traffic and then later go to market more aggressively with freemium upsell.

That's right.

Okay great. And then one more wondering if you could give us little color around the traffic increases 25% growth, strong number, I'm pulling back on television, is this SEO strength or there other types of changes you've made to market mix, is it better SEM productivity any color there would be great. Thanks so much.

I think it's coming from a couple of different sources. SEO is certainly part of it as we've discussed previously. We've had a lot of work going on to improve our landing pages and because three quarters of our traffic is organic, which as I've repeatedly said is a massive advantage compared to some of our competitors. We will have to keep paying increasingly rising SEM cost for traffic; it's something that I think will deliver us continuing benefits and returns. At the same time, I think we're also seeing some benefits from the fair price and service quality guarantees and some of the new advertising that we launched which also does. We run those ads, we can see and we test what's happening as that exact moment, the ads are running with traffic on the website and we're seeing very encouraging results from the new campaign there. So I think it's really those two major things.

Thank you. The next question is from Darren Aftahi of ROTH Capital. Your line is open.

Yes thanks for taking the questions. Just a couple. First on, can you talk at all about engagement and conversion in your test markets at all anything beyond what you've given? And then, secondly, I don't think the topic of Google has come up and obviously they are starting to use some service ads I think in San Francisco and in Sacramento. It's not topic I think people bring up all the time but just going to given you're shifting to free, can you just talk about Google potentially as a competitor may be you don't see them as that. Thanks.

Yes, sure. I mean I do see Google as a competitor of course. And there is somebody that everybody in the state should be watching closely. But that said if you remember I showed you an analysis on Investor Day that listed all the different players in the space and where in the value chain they are competing. And I think Google is going to have the greatest impact on those companies that are only in the search and match or just the lead generation part of the space. A lot of our strategy is aimed at really providing kind of an end-to-end experience that gets into hiring and payments and maintenance in terms of where we're going overall with the platform. So while we watched on quite closely, we're not seeing in the numbers anything that would be specifically concerning and I think the other players who have much more sort of constraints, kind of business engines, but just have one cylinder that they're firing on in that search and match phase, I think they're going to feel the heat from that before we will. I would also say that, I think this is an area with the brand because so much of our traffic is organic, consumers know if they want to see quality reviews on the quality service providers and I showed you the data why consumers think this right we have six times as many of those quality service providers and we have a lot more of the reviews for the service providers. And that's compared with Google. So I think that that provides some benefits and I would also say that the service provider relationships and how you really develop those over time and how important you are to those service providers, that is a unique kind of world. So I think there is a curve that -- I think there is a curve that Google is going to have to go through to learn how to really deal well with these service providers. And so this is where having been in the space for the time that we've been in them and have earned the trust and the quality and frankly the importance to their business that we have probably protects us a little more than it may protect some of our competitors. That said I'm not complacent at all about them, it's something that is very important to us as we look at closing the user experience gap, the speed, the latency on the site, I want to see us kind of really get right up there with Google in terms of some of those performance metrics at least get as close as we can. And so, I would say we're keeping an eye on it and we want to really make sure that we are competitively strong as we get the most advantage that we possibly can out of the strategy change and the user experience improvements that we're making.

Thank you. The next question is from Kevin Kopelman of Cowen and Company. Your line is open.

All right, thanks a lot. I just had a couple of questions on SP revenue and then on the guidance. Could you just to start can you give us more color on the revenue loss attributable to the technology platform, what is it specifically that you're looking at with the tech platform that is causing revenue loss? Thanks.

So we're not sharing a specific number, Kevin, for the quarter but it's really just as we shift kind of lift and shift and bring kind of markets over into the new platform. And obviously, as Scott talked, there is -- generally you see some kind of operational challenges, some things that are missing, some things that didn't quite translate or didn't quite actively expected them to and part of that or big piece of that manifested in the ecommerce experience in the quarter, and resulted in some revenue loss in the quarter beyond that we're not kind of providing specific numbers.

Okay. And then just as we look forward, if you look at those two elements that weighed on SP revenue, do you see those still being to kind of big factors in the second quarter and then is it fair to say that there is some Q2 should be it has some seasonal strength there in SP revenues that should go back up again Q over Q?

Yes, we are really, the first part of your question I think is yes, as we indicated in the script, we do expect to see some of these challenges persist into Q2. I think as we have said in the script, we basically expect kind of the first half, first half growth to be relatively flat.

Yes, and that's on -- just to be clear, is that total revenue or SP revenue that should be flat?

That's total revenue. We haven't guided specifically on SP revenue, but total revenue.

Okay. And that would actually imply that kind of the SP trend moderates a little bit. So if you look at a big drop-off in the first quarter, second quarter is more -- almost more stable compared to the Q1. Is that a fair assessment?

Look I think, as Scott said, we're continuing to make progress on the backlog and trying to turn it, so it would resolve or reduce some of the operational challenges, we hope to make some progress in that -- with that in Q2, but our kind of directional guidance is what it is.

Okay. And then just one last follow-up. On the membership revenue, did I understand that correctly? The declines continue at the current trend and then once you make the switch over the year-over-year decline get a little bit worse?

I think that's largely correct, that's what we're expecting. We hope to mitigate that, as Scott has said, we're quite penguin about the new paid offers and we would hope to make those very, very attractive and have a significant portion of our paid members remain on paid tiers.

Yes I mean we will see what actually happens, that's one of the execution risk when I was asked that question but we also have mitigation plans in place and have been very thoughtful about the communications that we have exactly how we're going to present those offers, how we're going to support those offers, this is where our member care center can play a very helpful and valuable role. And similarly on the other execution risk as it relates to building relationships with the service providers, yes, that is a risk, but at the same time I have got a lot of confidence in terms of how successfully we've been able to do that with the originations team and I think there has been a lot of lessons learned from that process that will apply as we roll that out across account management and we are giving the sales force an unprecedented number of tools and capabilities that they didn't previously have in order to be able to support that kind of a shift. And a lot of that starts rolling May 1. So to your question it's really a matter of how quickly those can be embraced and used really effectively by the team in terms of what the impact is on Q2. The more the better as far as I'm concerned but it's difficult to have a crystal ball with something like that.

Next question, operator?

Yes, the next question is from Blake Harper of Topeka Capital Markets. Your line is open.

Thanks. I just wanted to ask, Scott, if you could elaborate some on the Airbnb partnership. Are those hosts going to be able to access some of the freemium tiers that you have? Or would they be -- would it be more tied to just connecting them with the service provider revenue? I just wanted to understand a bit more exactly how the mechanics and some of the economics would work with those hosts.

Yes, sure. I mean what we want to do is make it really easy to be able to connect between our sites from the relevant part within each of our user experiences that will have the biggest impact. So there is a cross marketing element to it, there is kind of a cross linkage element to it and there is sort of a promotion element to it, but we encourage people to be able to work that way and we're developing offers to that end with Airbnb. So it would certainly make sense for example that if you're a host on Airbnb and you are using a lot of Angie's List services to do changeovers in the house or to do maintenance on the house, there is element of our gold offering that would be really, really helpful to you. You can bet that will make sure that those host know about what that is through the partnership.

Next question, operator?

Thank you. The next question is from Rob Sanderson of MKM Partners. Your line is open.

Yes good morning. Thanks. Most of my questions have been asked and answered but I wanted to go back to one thing from Tom's script on the migration of the take-rate migration and just the mechanics of that. How does the impact of the recent ramp up to the year, I'm trying to get a sense of when this may start to become a growth tailwind and then ecommerce in general used to be a revenue metrics but I think most of that activity has been bundled and may be hard to segregate but can you help us sort of recalibrate how significant ecommerce is to SP revenue?

So on the take-rate migration I'd tell you that we probably see more of a growth tailwind probably in the second half of the year. We're making good progress. But as I said, it does take time. This is a big effort on the part of our sales team. We're pretty happy with the progress so far. I would second half of the year. And the second question, we are not really disclosing or breaking out ecommerce revenue as a portion of SP revenue. So I can't unfortunately help you there.

Next question, operator?

Next question is from Aaron Kessler of Raymond James. Your line is open.

Yes, hi guys. Quick follow-up on your comments around the service provider attrition. Any more details on that? And can you talk about attrition by the age of the cohort? Was it the newer service providers generally churning out and any more details would help? Thank you.

I'll just say that, yes, we generally do see a little bit more attrition on the newer advertisers. But that's been the case for some time, it's not a new dynamic, but it's something that we're, as Scott talks about some of the changes we're making to the sales force and the renewal sales force in particular, that's something we're very, very focused. Things like the ROI dashboard and more transparency, and that is a pricing strategy that Scott mentioned earlier is really focused on a better alignment of that ROI to the price point that the advertiser is paying. So we're all over the issue. But it's probably disproportionately then for advertisers.

Okay, great. Thank you.

We have time for one more question, operator?

Okay. The last question is from Peter Stabler of Wells Fargo Securities. Your line is open.

Hey thanks for the quick follow-up. Scott, you took us through a bunch of sales force initiatives and just wondering could you remind us are these all complete fully rolled out or where are you in terms of the phasing of these things? Thanks.

Sure. Peter, no, they are not all complete and rolled out. Phase one is the originations effort and that is complete and rolled out. Phase two which is where I took you through the stuff that we're doing on pricing and tools and conversions and transitioning to relationships and the organization of the sales force itself like, because you remember on Investor Day I showed you that in the past we hadn't been differentiating and often the amount of time our sales force was spending on the bigger accounts versus the smaller accounts and now we're organizing very much around the account value, so the higher value accounts gets significantly more time tools to put and that is effectively launching on May 1. And then we will be rolling out through the quarter and I would expect to have that complete into the summer and we should then be able to get benefit from that that's part of why we see -- we see a kick up in terms of accelerated revenue and EBITDA in the second half. That's all part of what factors into us giving that guidance because we know when that's going to hit and we do expect some positive challenge from that.

So complete by end of Q3?

That's what we're going to be pushing towards, right, I mean.

Okay.

For sure big part of it will be complete, the organization parts of it will be complete, the tools will be rolled out. The only one that will potentially have some tail to it in terms of how long that takes is really the transition to consultative selling and relationship management because those relationships they take time to build right and this is real root behavior change on a day-to-day basis in terms of who you’re calling, what you’re talking to them about, how you’re providing information and advice on how people can kind of grow their business. So I certainly expect the biggest part of that to happen by that but that frankly we will continue and improve even beyond the summer. We will just keep getting better at that right.

With that we will conclude our call, thanks for joining us today. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.