Leaf Group Ltd. Reports First Quarter 2018 Results

  • Q1 Leaf Group Revenue Grows 24% Year-over-Year to $33.7 Million
  • Q1 Marketplaces Revenue Grows 32% Year-over-Year to $21.0 Million
  • Q1 Media Revenue Grows 12% Year-over-Year to $12.8 Million
  • Leaf Group Properties Reach Over 54 Million Average Monthly Unique Visitors in the U.S. during Q1

SANTA MONICA, Calif.--()--Leaf Group Ltd. (NYSE: LFGR), a diversified consumer internet company comprised of several marketplace and media properties, today reported financial results for the first quarter ended March 31, 2018.

 

Financial Summary

(In thousands, except per share amounts)

                         
Three months ended
March 31,
2018 2017
Marketplaces revenue $ 20,967 $ 15,876
Media revenue   12,780     11,362  
Total revenue $ 33,747   $ 27,238  
 
Net loss $ (5,925 ) $ (10,018 )
 
EPS - basic and diluted $ (0.26 ) $ (0.50 )
 
Adjusted EBITDA(1) $ (1,247 ) $ (4,425 )
 
Net cash used in operating activities $ (5,299 ) $ (7,699 )
Free cash flow(1) $ (7,001 ) $ (8,715 )
 
(1)     These non-GAAP financial measures are described below and reconciled to their most directly comparable GAAP measures in the accompanying tables.
 

Q1 2018 Financial Summary:

Leaf Group is comprised of two reporting segments: Marketplaces and Media.

For the first quarter of 2018:

  • Total revenue increased 24% year-over-year from $27.2 million to $33.7 million due to a 32% increase in Marketplaces revenue and a 12% increase in Media revenue.
  • Marketplaces revenue increased 32% year-over-year from $15.9 million to $21.0 million due to a 25% increase in Society6 revenue, inclusive of Deny Designs acquired in May 2017, and a 103% increase in Saatchi Art revenue, inclusive of The Other Art Fair.
  • Society6 revenue growth was driven by the acquisition of Deny Designs in May 2017 and an increase in average order value from price increases and a reduction in promotional discounts.
  • Saatchi Art revenue growth was driven by the introduction of three art fairs hosted by The Other Art Fair, increased conversion on Saatchi Art, and a higher commission rate on Saatchi Art initiated in Q2 2017.
  • Media revenue increased 12% year-over-year from $11.4 million to $12.8 million. The increase in Media revenue was primarily driven by a 25% increase in Livestrong revenue as a result of traffic growth and improved revenue per visit.
  • Net loss was $(5.9) million for the quarter, improving 41% year-over-year and Adjusted EBITDA was $(1.2) million for the quarter, improving 72% year-over-year, reflecting revenue growth in both Marketplaces and Media, reduced Media operating expenses, and a decrease in Marketplaces expenses as a percentage of revenue.
  • Cash and cash equivalents was $46.5 million at period end, reflecting $23.4 million in net proceeds from the follow-on offering of 3,373,332 shares of Leaf Group common stock completed in February 2018.
  • On a consolidated basis, Leaf Group’s properties reached over 54 million average monthly unique visitors in the U.S. during Q1 (source: Jan – Mar 2018 U.S. comScore).
 

Operating Metrics(1):

               
Three months ended
March 31,
2018           2017          

%
Change

Marketplaces Metrics:
Number of Transactions(2) 307,935 267,768 15 %
Gross Transaction Value(3) (in thousands) $ 26,592 $ 19,675 35 %
 
Media Metrics:
Visits(4) (in thousands) 771,571 695,543 11 %
Revenue per Visit (RPV)(5) $ 16.56 $ 16.34 1 %
 
(1)     Beginning in 2018, gross transaction value was added as an operating metric for the Marketplaces segment. Gross transaction value provides a measure of the overall volume that flows through the Company’s marketplaces in a given period. The Company will no longer be reporting on average revenue per transaction, video views and social media followers as management no longer uses these as key operating metrics to evaluate the business.
(2) Number of transactions is defined as the total number of transactions successfully completed by a customer during the applicable period, excluding certain transactions generated by Saatchi Art’s The Other Art Fair that relate to the hosting of the art fairs, such as sales of leased space to artists, sponsorships fees and ticket sales.
(3) Gross transaction value is defined as the total dollar value of Marketplaces transactions, excluding certain transactions generated by Saatchi Art’s The Other Art Fair that relate to the hosting of the art fairs, such as sales of leased space to artists, sponsorships fees and ticket sales. Gross transaction value is the total amount paid by the customer including the total product price, inclusive of artist margin, shipping charges, taxes, and is net of any promotional discounts. Gross transaction value does not reflect any subsequent cancellations, refunds or credits and does not represent revenue earned by the Company.
(4) Visits are defined as the total number of times users access the company’s content across (a) one of its owned and operated properties and/or (b) one of its partners’ properties, to the extent that the visited partner web pages are hosted by the company. In each case, breaks of access of at least 30 minutes constitute a unique visit.
(5) RPV is defined as Media revenue per one thousand visits.
 

Conference Call and Webcast Information

Leaf Group will host a corresponding conference call and live webcast today at 4:30 p.m. Eastern time (1:30 p.m. Pacific time). To access the conference call, dial 833-287-0803 (U.S./CAN) or 647-689-4462 (International) and reference conference ID 2295616. To participate on the live call, analysts should dial-in at least 10 minutes prior to the commencement of the call. A live webcast also will be available on the Investor Relations section of Leaf Group’s corporate website at http://ir.leafgroup.com and via replay beginning approximately two hours after the completion of the call.

Use of Non-GAAP Financial Measures

To supplement its consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”), Leaf Group uses certain non-GAAP financial measures, as described below. These non-GAAP financial measures are presented to enhance the user’s overall understanding of Leaf Group’s financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. The non-GAAP financial measures presented in this release, together with the GAAP financial results, are the primary measures used by the company’s management and board of directors to understand and evaluate the company’s financial performance and operating trends, including period-to-period comparisons, because they exclude certain expenses and gains that management believes are not indicative of the company’s core operating results. Management also uses these measures to prepare and update the company’s short- and long-term financial and operational plans, to evaluate investment decisions, and in its discussions with investors, commercial bankers, equity research analysts and other users of the company’s financial statements. Accordingly, the company believes that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating the company’s operating results in the same manner as the company’s management and in comparing operating results across periods and to those of Leaf Group’s peer companies.

The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense, or cash flows, that affect the company’s financial performance and operations. An additional limitation of non-GAAP financial measures is that they do not have standardized meanings, and therefore other companies, including peer companies, may use the same or similarly named measures but exclude or include different items or use different computations. Management compensates for these limitations by reconciling these non-GAAP financial measures to their most comparable GAAP financial measures in the tables captioned “Reconciliations of Non-GAAP Financial Measures” included at the end of this release. Investors and others are encouraged to review the company’s financial information in its entirety and not rely on a single financial measure.

The company defines Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) as net income (loss) excluding interest (income) expense, income tax expense (benefit), and certain other non-cash or non-recurring items impacting net income (loss) from time to time, principally comprised of depreciation and amortization, stock-based compensation and acquisition, disposition and realignment costs. Management believes that the exclusion of certain expenses and gains in calculating Adjusted EBITDA provides a useful measure for period-to-period comparisons of the company’s underlying core revenue and operating costs that is focused more closely on the current costs necessary to operate the company’s businesses, and reflects its ongoing business in a manner that allows for meaningful analysis of trends. Management also believes that excluding certain non-cash charges can be useful because the amounts of such expenses is the result of long-term investment decisions made in previous periods rather than day-to-day operating decisions.

The company defines Segment Operating Contribution as net income (loss) excluding corporate or unallocated expenses, interest (income) expense, income tax expense (benefit), and certain other non-cash or non-recurring items impacting net income (loss) from time to time, principally comprised of depreciation and amortization, and stock-based compensation. Management believes that the exclusion of certain expenses and gains in calculating Segment Operating Contribution provides a useful measure for period-to-period comparisons of the segment’s underlying revenue and operating costs that is focused more closely on the current costs necessary to operate the segment, and reflects the segment’s ongoing business in a manner that allows for meaningful analysis of trends. Management also believes that excluding certain non-cash charges can be useful because the amounts of such expenses is the result of long-term investment decisions made in previous periods rather than day-to-day operating decisions.

The company defines Free Cash Flow as net cash provided by (used in) operating activities net of cash flows from acquisition, disposition and realignment activities; capital expenditures to acquire property and equipment; and purchases of intangible assets. Management believes that Free Cash Flow provides investors with useful information to measure operating liquidity because it reflects the company’s underlying cash flows from recurring operating activities after investing in capital assets and intangible assets. Free Cash Flow is used by management, and may also be useful for investors, to assess the company’s ability to generate cash flow for a variety of strategic opportunities, including reinvesting in its businesses, pursuing new business opportunities and potential acquisitions, paying dividends and repurchasing shares.

About Leaf Group

Leaf Group Ltd. (NYSE: LFGR) is a diversified consumer internet company that builds enduring, creator-driven brands that reach passionate audiences in large and growing lifestyle categories, including art and design (Saatchi Art), fitness and wellness (Livestrong.com), and home and décor (Society6 and Hunker). For more information about Leaf Group, visit www.leafgroup.com.

Cautionary Information Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements set forth in this press release include statements regarding potential synergies achieved from acquisitions, the impact of strategic operational changes and our future financial performance. In addition, statements containing words such as “guidance,” “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” and “estimate” or similar expressions constitute forward-looking statements. Actual results may differ materially from the results predicted, and reported results should not be considered an indication of future performance. These forward-looking statements involve risks and uncertainties regarding the company’s future financial performance; could cause actual results or developments to differ materially from those indicated due to a number of factors affecting Leaf Group’s operations, markets, products and services; and are based on current expectations, estimates and projections about the company’s industry, financial condition, operating performance and results of operations, including certain assumptions related thereto. Potential risks and uncertainties that could affect the company’s operating and financial results are described in Leaf Group’s annual report on Form 10-K for the fiscal year ending December 31, 2017 filed with the Securities and Exchange Commission (http://www.sec.gov) on March 1, 2018, as such risks and uncertainties may be updated from time to time in Leaf Group’s quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, including, without limitation, information under the captions “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These risks and uncertainties include, among others: the company’s ability to successfully drive and increase traffic to its marketplaces and media properties; the company’s ability to attract new and repeat customers and artists to its marketplaces and successfully grow its marketplace businesses; the impact of increasing mobile usage on the company’s marketplace businesses; changes in the methodologies of internet search engines, including ongoing algorithmic changes made by Google, Bing and Yahoo!; the effects of shifting consumption of media content and online shopping from desktop to mobile devices and/or social media platforms; the potential impact on advertising based revenue of lower ad unit rates, a reduction in online advertising spending, a loss of advertisers, lower advertising yields, increased availability of ad blocking software, particularly on mobile devices and/or ongoing changes in ad unit formats; the impact of certain changes made to the business model for the company’s media properties, including the ability to successfully launch, manage and grow new vertically focused web properties; our ability to effectively integrate, manage, operate and grow our recently acquired Deny Designs marketplace business; the company’s dependence on various agreements with a specific business partner for a significant portion of its advertising revenue; the company’s ability to effectively manage its expected uses of the proceeds from its recent follow-on offering of common stock; the company’s ability to successfully expand its current lines of business and grow new lines of business; changes in amortization or depreciation expense due to a variety of factors; potential write downs, reserves against or impairment of assets including receivables, goodwill, intangibles (including media content) or other assets; and the company’s ability to retain key personnel. From time to time, the company may consider acquisitions or divestitures that, if consummated, could be material. Any forward-looking statements regarding financial metrics are based upon the assumption that no such acquisition or divestiture is consummated during the relevant periods. If an acquisition or divestiture were consummated, actual results could differ materially from any forward-looking statements. The company does not intend to revise or update the information set forth in this press release, except as required by law, and may not provide this type of information in the future.

                           

Leaf Group Ltd. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

 
Three months ended
March 31,
2018 2017
Revenue:
Product revenue $ 18,451 $ 14,584
Service revenue   15,296     12,654  
Total revenue 33,747 27,238
Operating expenses:
Product costs (exclusive of amortization of intangible assets shown separately below)(1) 13,337 10,534
Service costs (exclusive of amortization of intangible assets shown separately below)(1)(2) 6,287 5,790
Sales and marketing(1)(2) 6,989 6,724
Product development(1)(2) 4,710 4,750
General and administrative(1)(2) 7,308 7,653
Amortization of intangible assets   1,026     1,837  
Total operating expenses   39,657     37,288  
Loss from operations (5,910 ) (10,050 )
Interest income 18 43
Interest expense (1 ) (2 )
Other (expense) income, net   (8 )   3  
Loss before income taxes (5,901 ) (10,006 )
Income tax expense   (24 )   (12 )
Net loss $ (5,925 ) $ (10,018 )
 
Net loss per share - basic and diluted $ (0.26 ) $ (0.50 )
 
Weighted average number of shares - basic and diluted 22,957 19,942

 

 

(1)

Depreciation expense included in the above line items:

Product costs $ 182 $
Service costs 654 743
Sales and marketing 8 9
Product development 20 23
General and administrative   565     655  
Total depreciation $ 1,429   $ 1,430  
 

(2)

Stock-based compensation included in the above line items:

Service costs $ 149 $ 155
Sales and marketing 210 201
Product development 508 396
General and administrative   1,341     1,326  
Total stock-based compensation $ 2,208   $ 2,078  
 
 
                         

Leaf Group Ltd. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(In thousands)

 
March 31, December 31,
2018 2017
Assets
Current assets
Cash and cash equivalents $ 46,523 $ 31,344
Accounts receivable, net 8,886 8,663
Prepaid expenses and other current assets   3,216     2,741  
Total current assets 58,625 42,748
Property and equipment, net 11,988 11,665
Intangible assets, net 9,452 10,431
Goodwill 17,186 17,152
Other assets   1,093     1,246  
Total assets $ 98,344   $ 83,242  
 
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,619 $ 1,980
Accrued expenses and other current liabilities 14,220 17,182
Deferred revenue   1,936     2,064  
Total current liabilities 17,775 21,226
Deferred tax liability 51 40
Other liabilities   3,438     3,456  
Total liabilities 21,264 24,722
Commitments and contingencies
Stockholders’ equity
Common stock 2 2
Additional paid-in capital 547,445 523,012
Treasury stock (35,706 ) (35,706 )
Accumulated other comprehensive income (loss) 35 (17 )
Accumulated deficit   (434,696 )   (428,771 )
Total stockholders’ equity   77,080     58,520  
Total liabilities and stockholders’ equity $ 98,344   $ 83,242  
 
 
                         

Leaf Group Ltd. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 
Three months ended March 31,
2018 2017
Cash flows from operating activities
Net loss $ (5,925 ) $ (10,018 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,455 3,267
Deferred income taxes 11 (57 )
Stock-based compensation 2,208 2,078
Other 100 1
Change in operating assets and liabilities, net of effect of acquisitions and disposals:
Accounts receivable, net (323 ) 134
Prepaid expenses and other current assets (479 ) 903
Other long-term assets 55 1
Accounts payable (387 ) 40
Accrued expenses and other liabilities (2,886 ) (3,493 )
Deferred revenue   (128 )   (555 )
Net cash used in operating activities   (5,299 )   (7,699 )
Cash flows from investing activities
Purchases of property and equipment (1,673 ) (1,058 )
Purchases of intangible assets (29 ) (46 )
Cash received from disposal of businesses and online properties, net of cash disposed 385
Restricted deposits 606
Other       1  
Net cash used in investing activities   (1,702 )   (112 )
Cash flows from financing activities
Proceeds from exercises of stock options and purchases under ESPP 148 309
Repurchases of common stock (65 )
Proceeds from issuance of common stock 23,367
Taxes paid on net share settlements of restricted stock units (1,402 ) (1,791 )
Cash paid for acquisition holdback (119 )
Other   (17 )   (16 )
Net cash provided by (used in) financing activities   22,096     (1,682 )
Effect of foreign currency on cash, cash equivalents and restricted cash (18 ) (4 )
Change in cash, cash equivalents and restricted cash 15,077 (9,497 )
Cash, cash equivalents and restricted cash, beginning of period   32,300     51,957  
Cash, cash equivalents and restricted cash, end of period $ 47,377   $ 42,460  
 
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents $ 46,523 $ 41,504
Restricted cash included in other current assets 136 136
Restricted cash included in other long-term assets 718     820  
Total cash, cash equivalents and restricted cash shown in the statement of cash flows $ 47,377   $ 42,460  
 
 
                         

Leaf Group Ltd. and Subsidiaries

Reconciliations of Non-GAAP Financial Measures

(In thousands, except per share amounts)

 

Three months ended March 31,

2018 2017

Adjusted EBITDA:

Net loss $ (5,925 ) $ (10,018 )
Add (deduct):
Income tax (benefit) expense 24 12
Interest (income) expense, net (17 ) (41 )
Other expense (income), net 8 (3 )
Depreciation and amortization(1) 2,455 3,267
Stock-based compensation(2) 2,208 2,078
Acquisition, disposition and realignment costs(3)       280  
Adjusted EBITDA $ (1,247 ) $ (4,425 )
 

Free Cash Flow:

Net cash used in operating activities $ (5,299 ) $ (7,699 )
Purchases of property and equipment (1,673 ) (1,058 )
Purchases of intangible assets (29 ) (46 )
Acquisition, disposition and realignment cash flows(3)       88  
Free Cash Flow $ (7,001 ) $ (8,715 )
 
(1)     Represents depreciation expense of the company’s long-lived tangible assets and amortization expense of its finite-lived intangible assets, including amortization expense related to its investment in media content assets as included in the company’s GAAP results of operations.
(2) Represents the expense related to stock-based awards granted to employees, as included in the company’s GAAP results of operations.
(3) Represents such items, when applicable, as (a) legal, accounting and other professional fees directly attributable to acquisition, disposition or corporate realignment activities and (b) employee severance and other payments attributable to acquisition, disposition or corporate realignment activities.
 
 
                         

Leaf Group Ltd. and Subsidiaries

Reconciliation of Segment Disclosure

(In thousands)

 
Three months ended March 31,
2018 2017
Segment Revenue:
Marketplaces $ 20,967 $ 15,876
Media   12,780     11,362  
Total revenue $ 33,747 $ 27,238
 
Segment Operating Contribution:
Marketplaces(1) $ 61 $ (1,405 )
Media(1) 5,457 3,615
Add (deduct):
Corporate expenses(2) (6,765 ) (6,915 )
Acquisition, disposition and realignment costs(3)       280  
Adjusted EBITDA $ (1,247 ) $ (4,425 )
 
Reconciliation to consolidated pre-tax income (loss):
Adjusted EBITDA $ (1,247 ) $ (4,425 )
Add (deduct):
Interest income (expense), net 17 41
Other income (expense), net (8 ) 3
Depreciation and amortization(4) (2,455 ) (3,267 )
Stock-based compensation(5) (2,208 ) (2,078 )
Acquisition, disposition and realignment costs(3)       (280 )
Loss before income taxes $ (5,901 ) $ (10,006 )
 
(1)     Segment operating contribution reflects earnings before corporate and unallocated expenses and also excludes: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.
(2) Corporate expenses include corporate and unallocated operating expenses that are not directly attributable to the operating segments, including: corporate information technology, marketing and general and administrative support functions and also excludes the following: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.
(3) Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities and (b) employee severance and other payments attributable to acquisition, disposition or corporate realignment activities.
(4) Represents depreciation expense of our long-lived tangible assets and amortization expense of our finite-lived intangible assets, including amortization expense related to our investment in media content assets, included in our GAAP results of operations.
(5) Represents the expense related to stock-based awards granted to employees as included in our GAAP results of operations.
 

Contacts

Leaf Group Ltd.
Investor Contacts:
Jantoon Reigersman
Chief Financial Officer
(310) 656-6253
IR@leafgroup.com
or
Shawn Milne
Investor Relations
(415) 264-3419
shawn.milne@leafgroup.com
or
Media Contact:
Sharna Daduk
(310) 917-6405
sharna.daduk@leafgroup.com

Contacts

Leaf Group Ltd.
Investor Contacts:
Jantoon Reigersman
Chief Financial Officer
(310) 656-6253
IR@leafgroup.com
or
Shawn Milne
Investor Relations
(415) 264-3419
shawn.milne@leafgroup.com
or
Media Contact:
Sharna Daduk
(310) 917-6405
sharna.daduk@leafgroup.com