Good day, ladies and gentlemen, and welcome to the Angie’s List second 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 is being recorded. I would now like to introduce your host for today’s conference, Leslie Arena, Vice President of Investor Relations. Ma’am, you may begin. Leslie Arena Thank you. Good morning and welcome to the Angie’s List second 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 those 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 earnings release, which is posted on the IR section of our Web site. 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.

Thanks, Leslie. Good morning and thank you for joining us on the call. We are now two quarters into the profitable growth plan that we announced at our Investor Day in early March. And I am pleased to say that we are successfully executing on that plan. You’ll recall, at Investor Day, we committed five milestones to strengthen our core business for accomplishment in 2016. In the second quarter, we already achieved three of them; and in so doing, have now completed most of the difficult structural, platform, and customer impacting changes to our businesses for all five milestones this year. Importantly, we did this while keeping first half revenue in our old business model nearly flat and we executed a strong marketing launch two weeks ago into the new freemium business model. That is truly no small accomplishment. The first milestone we completed was the migration of our AL 4.0 technology platform, as we said we would. We accomplished this in April, several months ahead of the timeline we had set for ourselves. Migrating from our legacy platform was an immense undertaking that began in earnest late last year with the migration of smaller, less dense markets. Using a test, iterate and learn approach to guide our pacing, we were able to quickly move to larger markets in the first quarter and completed the rollout early in the second quarter. While I’m really pleased to have finished the migration at an accelerated pace, it did not come without issues. As is common with projects of this size and complexity, and as we cautioned previously, we encountered both anticipated and unanticipated challenges, including some data disruptions and operational difficulties. Specific impacts included e-commerce emails not being sent due to integration issues with the vendor, the press conversion rates due to…

Thanks, Scott, and good morning. For the quarter, total revenue was $83 million, a decline of $4.3 million compared to the year-ago quarter due to lower service provider revenue, which was impacted by the disruptions associated with the technology platform migration and the expected decline in member revenue. Total service provider revenue, which includes advertising and e-commerce, decreased $3 million compared to a year ago, with the majority of the decline coming from e-commerce. Growth, merchandise value, and e-commerce revenue declined from the prior year as the challenges of the platform migration impacted offer displays, email integration, and search capabilities resulting in fewer deals offered and sold. Service provider contract value backlog, which consists of that portion of contract value that has not yet been recognized as revenue, ended the second quarter at $152 million, down 5% from the year-ago quarter due primarily to an increase in service provider attrition and non-renewals. Net service providers declined sequentially due primarily to service provider churn as well as slightly lower gross service provider additions. As expected, membership revenue decreased, declining 7% compared to the year-ago quarter due to lower marketing spend to attract paid members and the ongoing membership to lower-priced tiers, which occurred prior to the removal of the reviews paywall. Adjusted EBITDA was $13.4 million, up from an adjusted EBITDA loss of $3.5 million from the same period a year ago due to the combined effect of lower marketing, operations and support, and selling expense. As you’ll recall, last quarter, we updated our definition of marketing expense to include marketing personnel and other costs that were previously classified in G&A. Marketing expense in the second quarter was $14 million, down 50% from the year-ago quarter as we pulled back on spend to time our investment with the launch of freemium…

Thanks, Tom. In summary, we’re truly turning the company around. We've accomplished the hard fundamental and, sometimes, painful steps to enable us to reignite revenue growth. And we’re operationally on track with our plan as we described it. We now have the answers to four of the five major questions I heard from investors in March related to the level of risk associated with our strategy. And the answer to the fifth one on service provider monetization can only be answered in time. The first question I hear is, ‘will consumers even care?’ The answer is an emphatic yes, as seen in the approximately 700,000 gross additions that we've added since making our first markets free to join and the accelerating growth in member visits and engagement that we reported. We’re only becoming more highly relevant. And consumers, clearly, recognize the value that Angie's List can bring. The second question is, ‘can we maintain consumer revenue?’ Yes. With such a small percentage of paid members downgrading to free and the higher prices of our freemium tiers, our member revenue is expected to be sustainable. The third question I heard was, ‘will member retention hold up?’ Yes. It's exceeding most expectations and were just getting started. And fourth, ‘can management execute a turnaround?’ Absolutely yes. We’re focused on doing what we said. And my confidence is high based on what I'm seeing. We've already achieved three of the five most challenging milestones we set at Investor Day for the entire year. We’re off to a very strong start. While we still have significant work to do with new and existing service providers, we’re making excellent progress on our profitable growth plan. This is really, really exciting. And we look forward to updating you on our results. And with that, I’ll pass the call to the operator. Please open the line for questions.

Thank you. [Operator Instructions] And our first question comes from Rob Sanderson from MKM Partners. Your line is now open.

Yeah, thanks for the questions. Congratulations on all the exciting work you’re doing. A quick one and then a follow-up. First just, you talked about the disruption in the migration to new platform. Can you help us quantify how much of revenue impact that may have had?

Hi, Rob. It’s Tom. We’re not going to get into the precise impact, but I think you can see some of the examples that Scott mentioned in his prepared remarks in terms of the impact that it had. So they were significant, but we’re not getting into precisely how significant.

And then more importantly, [indiscernible] two competing factors. You’ve got this bookings revenue amortization of legacy business that’s in decline now. There will be a tail on that till die off. On the other side, you’re demonstrating some impressive increases in user engagement. Albeit early, how do you expect that will continue? So two questions really. Any color on how to think about that die off and how far can it sort of go? And then second is, since you’re not a CPC or a transaction-based monetization model, at least not yet, what’s the expectation for how long it may take you to really start to monetize that better engagement you’re seeing?

With respect to your first question, the impact from the platform migration change, where you see that starts to translate into your second question is really that there is a lag from the people that we lost or the contracts that didn’t get renewed and it sort of runs out for 12 months or so from when that happens. And as that runs out, that has implications, obviously, for what the whole contract value backlog looks like across the year. And you see the numbers that we’ve provided in the release on sort of what happened there. That said, we are doing everything possible to move as quickly as possible, in large part because we don't want to inconvenience our service providers by having them kind of held up with some of the changes that we had to make. And that's why we wanted to drive the platform migration all the way through. And while we’re doing that, we also are trying to pull all the levers we can, right, to be able to get the new members in and be able to get that process going as they kind of come into our community and they start to get used to using our site and we start to kind of develop them and the contributions they make and kind of understand what their behavior is going to be, what their behavior is going to be with – how it relates to e-commerce, what their behavior is going to be in kind of making their hiring choices. The reason that we did what we did with guidance is because we can't predict the exact timing of exactly when that will happen. And you need to be precise about that, right, when it comes to what those numbers look like for the whole year. What I can tell you is we’re doing everything possible to make it happen as soon as possible, but I don't have a crystal ball about exactly when that's going to happen.

Okay. Thanks, Scott. Thanks, Tom.

Next question please.

Thank you. And our next question comes from Jason Helfstein of Oppenheimer. Your line is now open.

Hey, this is Alex [ph] filling in for Jason. Thanks for taking my question. Scott, we understand that you are investing around a new business model, but can you give us some metrics or tell us how service provider revenues have performed on the test markets where you dropped the paywall earlier in the year or when should we assume service provider revenues return to double-digit revenue growth? Thanks.

Well, we disclosed the results in the pilot markets at Investor Day in March. And we updating you after that. And what you heard me say on this call is, what we've seen since then is even significantly stronger than that, right? As it relates to the second part of your question…

Yeah. It’s really the same answer Scott just gave on the guidance question. It’s very difficult right now to predict with any level of precision how quickly that engagement in that activity translates to service provider revenue growth. You’ll see it first in the originations and then next, as Scott described in his prepared remarks, in wave three which is the renewals. But it’s very difficult to predict with specificity on when that will happen.

All right. Thank you.

Next question, operator.

Thank you. And our next question will come from Kerry Rice from Needham & Company. Your line is now open.

Thanks for taking my question. This is Jinjin on for Kerry. Scott, can you give us more color on how the tiered programs are being received by both the new members as well as existing members? And the second question is for Tom. In terms of the technology expense going forward, since the major migration has been completed, do we expect kind of a wind down going forward? Thank you.

Jinjin, I’ll try to answer the second question first and then turn it back over to Scott. We are not providing specific guidance on tech expense. What I can tell you is that we are continuing to see, as Scott mentioned in his comments around closing the user experience gap, that work will remain ongoing. It’s a pretty – we think is a pretty compelling pipeline or roadmap of new products and product improvement. So you’re actually going to see that investment manifest in two ways. Some of it – a meaningful piece of it will actually continue to be capital expenditures as new products and major enhancements to existing products will be capitalized. But then a lot of the bug fixing, maintenance, sustainment activities against the AL 4.0 and existing products will continue to be recognized as operating expense. So it’s going to remain – I would say, on an all-in cash basis, a significant investment for the company and we think that’s really a high return investment for the company as we look to close the gap even further in the coming quarters.

In terms of your question on the premium tiers for members, what we’re seeing with silver and gold right out of the box is about 5% or so of the members are choosing those. It’s a small, but it’s an encouraging number because we’re not really focused on the upsells there yet. We are going to get very focused on that. And remember that we’re going to be bringing online a lot of the benefits that I think are really, really quite compelling. The home emergency services line is a really strong benefit based on the research we did for becoming a gold number. And, similarly, the handyman line and some of the things that we’re doing with project costing are also really compelling benefits that you’re going to see coming on-stream in the coming months. And as people want to actually use those, they’re going to get prompted to be able to up-purchase the premium tiers. As well as, when they need help with something or they want to call in, when they’re going by chat or they’re calling to our call center, we’re putting in place a whole set pretty sophisticated capabilities to encourage them to purchase the premium offers. But I’m encouraged by the fact that it's just 5% right out of the box without us doing a lot.

Right. Just a quick follow-up. So for the existing paid memberships, are they automatically kind of rolled to the new tiered programs or is it wait for the old subscription to finish before they can choose whether to stay or convert or what’s kind of the message there?

So what we did is we went through a multi-month effort to communicate with the whole existing membership base and tell them about their choices and that they would be migrated over into the silver or the gold plans. So when we removed the paywall, we pretty much converted all of our existing 3 million or so paid members to these new paid tiers. Members who were on plus and the basic tiers in the old plan were moved to silver and members on the traditional or the premium tears went to the gold tier. And all were grandfathered into their current price for a limited period of time. Basically, free users in both paid and free markets became green members. So while we expect the membership makes the shift predominantly toward free over time, we do think we’re going to see a significant portion remain on the paid tiers because, remember, we did very careful research on the value of the offering and what we’re giving them are things they really, really want. And so, we expect the total impact will be higher engagement and we think that’s going to drive service provider revenue. The other thing I’d say is, you’re just seeing in our integrated marketing launch specific, really good content that is going to be – it’s available already online, but it’s going to start to be on TV that really explains the benefits of the premium tiers. And that will further, I think, help with the mix. So that’s how I expect to see it play out over time. But that said, this is an area where we don't have a crystal ball. We’re going to do everything we can to do this as well as possible, as quickly as possible, but it's something that will take some time.

And just one adjustment to that, plus move to gold. Next question, operator.

Thank you. And our next question comes from Lloyd Walmsley from Deutsche Bank. Your line is now open.

Thanks. Can you just give us a bit more elaboration on your comments that you grew eligible service providers 80% in the first half? It looks like origination growth still pretty tepid. So I would be curious to understand better what you're doing there exactly and when you expect it to move the needle? And then, I guess, second question, if I can, would just be, how much of the up-sales from free to paid membership is contingent on future kind of product development that has yet to roll out and kind of what's the update on timing around some of those key features you shared at the Analyst Day? Thanks.

Thanks, Lloyd. And nice to talk with you. So with respect to your first question on eligible, I don’t want to get into the specifics of what we did for competitive sensitivity reasons to expand the eligibility pool. But that was a constraint. That was something that we really needed to solve and I am really happy with the approach that we took to solving it. That said, it’s necessary, but not sufficient, to expand that pool of eligible. The real key that we’re focused on there is how do you get visibility once you kind of have the eligible and you start to give them some experience with being on our site, be it through e-commerce offers or potentially through something like lead feed, give them a good experience and you start to give them exposure, so they can actually start to get to reviews. And that is really the kind of key in terms of being able to monetize them from a revenue point of view. And what I said on timing, I’ll go back to what I shared with you on the waves. I think this all starts with a big growth in the members and their engagement. That starts to create demand in terms of profile views they want to look at and, ultimately, jobs they want to hire. And that then, in turn, creates pull for these eligible to actually start to really truly get opportunities. And as we do a better and better job of getting them visibility and there are some product enhancements that are going to be on the site within the next month or so that start to make improvements in that regard, that starts to really make a big difference. And the timing that we kind of gave you is – think about wave one, where we are now, getting these memberships on, expanding the eligibility, starting to get some of that exposure, that's really what we’re – you’re going to start to see that manifest in terms of net service providers and originations revenue. I don't think in terms of really starting to kind of drive that through all the way into the renewal side. That sort of lags that further by year. That’s that wave three timeframe I shared with you starting in 12 to 18 months. That's why it starts in 12 to 18 months. So this is something you’ve got to kind of look at from not just a short-term point of view, but how it builds over the medium term and how it self-reinforces to really grow dramatically over the longer-term. And that’s what we’re trying to accomplish.

And quick follow-up, if I can, somebody asked a question earlier on what you're seeing in some of the early test markets. I know you shared some compelling statistics at the Analyst Day. I was just glancing through the slides and I couldn't find them. So just from a housekeeping perspective, can you just remind us what you did share at the Analyst Day in terms of lift in engagement in some of those test markets?

We can get back to you with the specifics of it. But I think we were talking about three to four times in terms of new member registrations. And then we were talking – roughly, it was one to two times between the reviews, the profile views, and ultimately the CV. But we’ll get to you with…

Yeah, we can have Leslie follow-up, Lloyd, with the specific slide, if that’s helpful.

Great. Thanks, guys.

Our next question will come from Darren Aftahi from ROTH Capital Partners. Your line is now open.

Good morning. Thanks for taking my questions. Just two. First, I think you spoke to the member side of it. Can you talk about kind of the engagement of new service providers in test markets with the free members and kind of how that correlates with what you’ve seen in the first 45 to 60 days of being live since early June? And then, second question, I’m curious to know, and I know you probably have limited data, the new members that are signing up, say, 150,000 at the end of June, how has engagement trended sort of one week, two weeks, three weeks and how are you keeping free members engaged? Thank you.

Okay. So with respect to your first question, what I shared with you and I’ll elaborate a little bit is in the pilot markets, we did do research and surveys of the service providers to understand kind of their perceptions of the experience with us and what they were actually seeing in terms of the follow-up. And what I reported to you was that they weren’t seeing any meaningful differences relative to the paid members they had previously known from us. In terms of their actual behavior, what we were able to measure was a two times increase in originations contract value. So, like, in terms of putting your money where your mouth is, they were following through in terms of how that translated into CV which will ultimately translate into revenue. With respect to your second question, can you just clarify it for me? You were asking about the 150,000…

What I’m essentially saying is, of the new free members kind of as you’ve launched since June, the 150,000, how has engagement of those members – okay, you sign up – how are they continuing to – engagement dropping off as times goes on. And I know it’s sort of an early time period, but week one, week two, how are you keeping those new free members kind of engaged on the Angie’s List platform, mobile app, et cetera?

Obviously, it's really early with a very short data set of a few weeks. But I have been watching that and I like what I'm seeing because they’ll come in and – they’ll usually come in for a specific reason. And what we then try to do, and we do it a few different ways, is begin to expose them to the broader experience of being part of the Angie's List community and have them come back. And there’s things that we’re going to be doing, in particular, with the benefits that are going to be coming on-stream in the next several quarters, as I described, that very much are things that you don't just come to once or twice a year. There are things you need to update. There are things you need to check. There are things you want to get information on. Or they’re things that are just plain fun to be able to use to start to, like, plan and think about what you want to do around your home, how you want to get your to-do list done. And I'm really pleased with the creativity that we’re bringing to bear on the product side and how that’s going to manifest itself. But just in terms of the raw behavior of those first members in those first few markets, I think what we’re seeing is as good as it can be relative to what the experience is on the site. The real opportunity is for us to expand that as we enhance the product offering on the site and not just close the user experience gap, but really start to innovate. And that’s where we’re headed.

Great, thank you.

Next question, operator.

Thank you. And our next question comes from Kevin Kopelman from Cowen & Company. Your line is now open.

Hi, thanks. You talked about increasing marketing spend in the third quarter. Can you help quantify that at all, what that should look like? Will it look like last year's Q3 marketing spend, higher or lower? Thanks.

Thanks for the question. We’re not going to get into specific marketing guidance in terms of spend. Obviously, we’ve said a couple of different times, once this quarter, once last quarter, that we were keeping dry powder for the freemium launch in Q3 and that’s going to be the lion’s share of our marketing for the year.

In Q3, okay. And one other question. Now that you’ve switched to a freemium model, have you started to open up your reviews content to Google indexing? Thanks.

It’s still behind our registration wall. So all of it is not crawl-able. That’s a decision we made for a variety of business reasons. Again, as Scott mentioned a couple of different times, in order to kind of maintain the member quality and purchase intent and all of that, it's really important that we get some information from the visitors. So, no, that content is not indexable yet.

Okay, thank you.

Next question, operator.

Thank you. Our next question comes from Peter Stabler from Wells Fargo. Your line is now open.

Good morning. This is Rob [ph] on for Peter. Two questions, if I could. First on your existing paid members, I believe you said that retention there is exceeding your expectations. Wondering if you might comment on what you're seeing into July in terms of existing paid members and any trade-down activity. On the grandfathering that you mentioned with respect to price points, can you remind us when that lasts until? And also, just any general thoughts on why retention is outperforming to this point? And then secondly, wondering if you have any early insights on the frequency of content contribution or indicators of quality from the new green members. Thank you.

Well, in terms of your first question, the reason I say it exceeded expectations, right, is – what I was hearing from several of you was the concern that, like, this member revenue would just fall off a cliff. That’s clearly not the case, right? You basically saw in the numbers that we reported, you’re talking about something like 5% in terms of those that are attriting or don’t want to renew and the overall member revenue number was something like 7% down. Those are small numbers. And the reason why I think that’s the case is twofold. Number one, I think that the offering we put together has genuine value. And as people saw what they were going to be getting, they weren’t focused on losing anything because we didn't take anything away by opening the reviews paywall. It is great news from them from the point of view, hey, here’s all the new things that I'm going to be able to get. That's pretty exciting. And we were very thoughtful about how we migrated them into the tiers. And grandfathering them in for a couple of years gives them time to be able to really have the full experience of being part of the Angie's List community, of really being able to see the full breadth not just of what has been developed over the last 20 years and brought to bear, but, most importantly, that timeframe was very deliberately set to give them the chance to experience all the amazing new things that we’re going to be bringing to market over that period of time. And there are things that are very much aimed at being able to have a very rich, engaging, delightful experience. So that’s why I say, I think the consumer revenue piece is sustainable. And that’s to say nothing of the fact that we increased prices for both the silver tier and the gold tier. It’s because we believe in the value and we’re going to sort of stand behind that. So that's the way I see that playing out over time. And that's what we’re seeing in the behavior so far. But that said, again, it’s early days, right? We’ll see what actually happens over time as those renewals come up. We’ll see if that changes at all. We’re not seeing any indications to be concerned about that at this time. Quite the opposite actually.

Next question, operator.

Thank you. Our next question comes from Blake Harper from Loop Capital. Your line is now open.

Hi. Good morning. I wanted to ask if you had an update on the lead feed product, either from the service provider side or from kind of the non-member visitor side of that experience we had set up and if there was any metric that you can share there as far as the adoption so far.

Right. Understand, with lead feed, we launched in beta before we made the decision to launch a freemium offer. So it was implemented when we were operating kind of under the old business model. And the objective was simple, right? When I came in, I couldn't bear the notion that we were just losing 90% of our traffic off the paywall. And to just see it bounce off the paywall and to not try and grab some of them by being able to generate a lead didn't make any sense to me. That said, the way we've done it, it’s kind of kludgy. I'm not proud of popping a model [ph] to be able to catch these folks as they go away. Where we’re going with lead feed now that we have the paywall down is to recognize that consumers come to us for three reasons. They either want speed of being able to get connected with somebody to do a job or you just get it done conveniently quickly. They’re coming to us for quality. They want the best service provider or they want to see quality reviews on the quality of service providers. Third, they’re coming to our for price. They want a deal. And you’re going to see in how we develop the product, as we actually build out these customer-centric products. What we mean by that is you’re going to see us really integrate these into the flow. So the consumer that’s coming to us for speed and convenience, you’re going to lead feed integrated into the flow, so the consumer has the option to get quickly connected to a quality of service provider. And the service provider knows he’s getting one of our members who really wants a job done. That’s a quality lead. That’s a very high quality lead. Or they’re coming through for trying to get to a really good service provider and that’s our core search experience and that's what you’ve always known as Angie's List. And that is only getting better and better as we improve search and kind of optimize a whole bunch of different elements of that user experience. Or the third one, price, that’s what e-commerce is about. So you’re going to see us get much more sophisticated on the user experience and how we kind of handle people through the flow and triage the experience that they have, so it actually becomes increasingly personalized over time and gets to know not only them, but the occasion with which they’re buying us. And so, lead feed becomes kind of an integral part of that broader product experience. And that’s how you’ll see it playing out over time. We’re not backing off of the commitment to it as an idea, but the execution of it is going to become a lot more effective than just popping a modal off when somebody has already decided to go away from the site.

All right. Thanks, guys.

Thank you. And I’m showing no further questions at this time. I would like to turn the call back over to Leslie Arena, Vice President of Investor Relations, for any closing remarks.

Thank you very much. With that, we’ll conclude today’s call. Thanks everyone for joining us. Good-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day