Jason Starr - Investor Relations David Yovanno - Chief Executive Officer.

Brent Thill - UBS Parker Lane - Stifel, Nicolaus & Co..

Good afternoon and welcome to the Marin Software Second Quarter 2015 Financial Results Conference Call. As a reminder, today’s call is being recorded. At this time, I would like to turn the conference call over to your host, Jason Starr, Investor Relations for Marin Software. Please go ahead..

Thank you. Good afternoon, everyone, and welcome to Marin Software’s second quarter 2015 earnings conference call. Joining me today is David Yovanno, Marin’s Chief Executive Officer. By now, you should have received the copy of our earnings release, which crossed the wire a short time ago.

If you need a copy of the release, please go to investor.marinsoftware.com to find an electronic version. Call participants are advised that the audio of this conference call is being recorded for playback purposes and that a recording of this call will be made available on the Investor Relations section of our website within a few hours.

Before we begin, I’d like to note that our discussion today will include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.

These forward-looking statements include statements about our business outlook and strategy, and statements about historical results that may suggest trends for our business. We make these statements as of August 5, 2015 and disclaim any duty to update them.

For more information regarding these and other risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as risks relating to our business in general, we refer you to the sections entitled Risk Factors and our most recent report on Form 10-K and our other filings with the SEC.

This presentation contains certain financial performance measures that are different from the financial measures calculated in accordance with GAAP and may be different from calculations or measures made by other companies.

A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our second quarter 2015 earnings press release. With that, let me turn the call over to Dave..

Thank you. Good afternoon, everyone, and welcome to the call. Today, I’ll provide an update on some the progress we’ve made against our ad cloud vision, as well as some color on recent customer wins and product enhancements. Next, I’ll review our second quarter financial results, as well as some of our key operating metrics.

Then I’ll provide an updated review of our expectations to the rest of 2015 and share some of the recent trends that we’ve seen that have made us more cautious in the near-term. Following my prepared remarks, I will then take questions from our sell-side analysts on the call.

We made solid traction during the second quarter with 18% year-over-year constant currency revenue growth and our active advertiser count increased by 33 to 853 quarter-over-quarter.

We also continue to execute our plan to support our long-term growth opportunity, including ramping our sales organization on expanded capabilities of our cross-channel platform, and integrating and advancing the social and display technologies from acquisitions of SocialMoov and Perfect Audience.

We are winning an increasing number of multiproduct deals as advertisers such as Meliá Hotels International and Mutual of Omaha look to adopt an integrated suite of solutions that helps them manage their digital advertising programs across multiple channels using a single integrated platform.

We’re excited and encouraged by growing interest in our new social and display solutions, as those markets experience higher growth rates in search. However, I should note that it’s still early with respect to market adoption and bringing our newer solutions to market.

Our early success in expanding into the display and social channels is only part of our broader plans in this market. Within the overall marketing cloud space sits the ad cloud market with access to over $150 billion in online ads done this year.

This ad cloud segment encompasses the largest publishers and platforms in the search, social and display channels including native, mobile, and video ad formats, which are largely served today through vendors addressing each component as a standalone business process. We’ve all seen this play out before.

When an attractive market first develops, the vendors that initially emerge are focused on smaller portions of the overall opportunity. Marin was no different when it started as a company focused on search, given the size of the ad spent and the immediate need at companies across the globe.

However, as markets mature and the needs of buyers become more sophisticated, these individual silos eventually combine to create the need for broader solutions. We are proud to be leading the charge in providing a solution encompassing all three primary segments of the ad cloud market today.

And we have been investing heavily this year in not only integrating our new display and social products, but also in our core platform, in order to lay the foundation for more scalable and extensible platform on which to build and innovate into 2016. We were pleased doing several notable advertisers in the last quarter.

One example was a new relationship with Safestore, a store solutions provider with over 100 centers, offering safe and secure storage across the UK. What brings Safestore to Marin was our platform’s ability to help them manage their budget in an efficient and profitable manner, leveraging Marin’s patented bidding algorithms and advanced reporting.

The key win factor in solidifying our relationship with Safestore was enabling the company to bid on extremely granular keywords while considering factors such as geolocation value, lifetime value and multiple costs-per-lead goals.

As a result of our collaboration, we have managed to significantly reduce Safestore’s cost per lead, while maintaining the number of conversions which the company was unable to achieve with its previous provider.

Another brand we’re proud to have brought on board this quarter is EF Education, a company built on experiential learning, cultural immersion, and authentic connections. One of the key benefits EF saw on Marin was our ability to provide a true cross-channel environment to manger their search, social, and display campaigns together in one interface.

EF was particularly impressed with the quality of the new Marin social platform, particularly with message booster, but it was the integration with Marin Tracker and the ability to report social alongside search that was the biggest win.

EF Education is in the process of connecting their CRM data with their search data and Marin’s ability to link this data with social was a big plus. Seeing the value of using both Marin search and display tools together, EF now plans to incorporate social into their advertising efforts to leverage the full Audience Marketing Suite or AMS experience.

We also made several developments on the products side during Q2 to improve the value we’re able to deliver across our platform. In search, we launched major enhancements to help marketers optimize and drive their campaigns across key publishers.

For example, our new Budget Optimizer Tool assist marketers in predicting daily and monthly search spend levels, forecasting sales and revenue, and optimizing budgets across all their paid search portfolios.

This is a powerful new feature, which allows advertisers to run different scenarios of their marketing investment and make more impactful decisions with their marking spend. Second, Marin also debuted Smart Sync, enabling search advertisers to easily scale their programs across multiple publishers with less effort.

For example, brands can create and manage a campaign at Google AdWords and the Marin platform will automatically sync those changes with other search publishers. There’s a great example of the automation and innovation that customers rely on when using the Marin platform.

Finally, for Google’s recent URL upgrade, Marin launched a migration portal, which provided our clients with automation and support to migrate over 1.5 billion URLs to Google’s new URL format. Ultimately, this migration was a good thing and it will make it easier for advertisers to make changes to the tracking information on their paid search URLs.

Compared to enhanced campaigns in 2013, which was a last major upgrade requirement from Google of this size, this is a significant undertaking in a very short period of time. I want to give a shout-out for our customer success and engineering teams for their efforts in accomplishing this project.

In social, we’ve made good strides completing the first phases of integration between Marin and SocialMoov.

With the addition of SocialMoov’s assets, we are providing more cross-channel reporting insights, including leveraging our existing deep first-party revenue integrations to incorporate conversions and sales data from social advertising all within the core Marin application alongside search and display.

We’ve also released support for several new Facebook ad units and functionalities, including Facebook’s Dynamic Product Ads and Facebook Engagement Targeting.

Marin is enabling advertisers to more easily reengage users with strong brand affinity and purchase intent to scale their advertising programs and leverage Facebook’s growing inventory of video ad units. Marin can now track the level of engagement of a Facebook video ad.

For example, 90% completed view and then retarget that audience using another Facebook ad unit based on that attribute. I’m also pleased to announce that we’re one of the few companies invited to participate in the Instagram Advertising API alpha, which launched recently.

In display, we announced a new product integration that enables customers of HubSpot’s award-winning inbound marketing platform to use their landing pages and contact lists to power retargeting campaign via Marin’s display product.

This partnership enables a more consistent way to reengage high-value audiences with personalized messaging across more than 8 billion daily impressions on desktop and mobile devices worldwide. We also launched an iOS SDK to help mobile marketers build targetable audiences in real-time from actions that occur on mobile devices.

And finally, we integrate with Smaato, a leading mobile app Ad Exchange to provide even greater access to mobile app ad inventory to our customers. As we work to integrate our products across our platform, we’re encouraged by the early success for our approach, reflected in multiproduct deals signed in the quarter.

For example, in Q1, approximately 10% of our deals included two or more products, and in Q2 that number grew to 19%. We also believe that our new display and social products are helping us to drive more search deals, as a growing number of marketers seek to manage their online channel holistically, as opposed to in silos.

Finally, as recently announced, we’ve also strengthened our financial leadership with a hiring of Catriona Fallon to serve as Marin CFO.

I’m excited to have her on board and believe her experience in driving performance and helping much larger companies scale, most recently at Cognizant and formerly at HP, will be invaluable as we look to capitalize on Marin strong market position and take our company to the next level in the years ahead.

At the same time, we’re also happy to announce that Jason Starr has joined us recently to lead our investor relations efforts. Jason most recently built out and let investor and analyst relations functions for Equinix.

I look forward to introducing both of them to our analysts and investors over the course of the third quarter and working with them to articulate the opportunity we see from Marin shareholders. Moving onto financial details for the second quarter, revenue came in at $26.8 million and within our guided range.

This represented a 12% increase year-over-year, or 18% when excluding foreign exchange. Our geographic revenue mix was 67% domestic and 33% international. The revenue mix between direct clients and agency this quarter came in at 54% and 46% respectively.

Marin served 853 active advertisers in the second quarter, up from 820 in Q1, with healthy ads from social and display. The average length for all active enterprise contracts was approximately 15 months. As a remainder, Marin’s standard contract terms have monthly minimums that range from 50% to 75% of expected monthly recurring revenues.

In Q2, our revenue retention metric approached 90% on a constant currency basis. And was impacted in the quarter by a moderation of same-store sales growth and search spend from our existing customers. Churn on a dollar basis remained stable in the quarter.

As a reminder, revenue retention tracks revenue from all advertisers in the corresponding prior-year period that remained advertisers in the current period, and includes growth and spends from retained advertisers net of churn.

Before moving onto the profit and loss items, I would like to point out that I will be discussing non-GAAP results going-forward, unless otherwise stated. A detailed reconciliation of our GAAP results, with these non-GAAP results can be found in our earnings release. For a review of our operating expense line items, please refer to our press release.

For Q2, our gross profit margin was 65%, down from 67% in the prior quarter. This decline was due to less than anticipated revenues, while we continued our investment in display and social advertising initiatives. We expect margins for these businesses to improve as revenue for these channel increases.

Operating losses came in at $6.8 million for the quarter, in line with Q2 of last year. And adjusted EBITDA was a loss of $5.1 million in the quarter, a $400,000 improvement compared to a loss of $5.5 million in Q2 of last year.

Please note that Q2 included our first quarter of expenses for the SocialMoov acquisition, annual merit increases, and an increase in facilities charges due to a lease renewal of our San Francisco headquarters office. Net loss for the second quarter was $7.1 million compared to a loss of $7.3 million in Q2 of last year.

Based on a weighted average share count of 36.4 million, this produced a net loss per share of $0.20, above the high-end of our guidance of a loss of $0.23 to $0.21. This compares to a net loss per share of $0.22 in the second quarter of last year.

We ended the quarter with $41.5 million in cash and cash equivalents, compared to $52.8 million at the end of Q1. We believe we have sufficient cash on hand to fund our operations through cash flow breakeven next year and beyond. Let me now discuss our thoughts for the rest of the year and provide an update on our expectations for 2015.

Our Q2 results were within our expected guidance range and we remain optimistic about our long-term opportunity.

At the same time, as we look ahead to Q3 and the remainder of 2015 we are seeing a few headwinds that I’ll detail in a moment, which have let us to take a more cautious view on our revenue outlook, while maintaining our committing to reaching adjusted EBITDA breakeven by year-end.

Based on current spot rates for the full year 2015, we now expect revenues to range from $105 million to $106.5 million and non-GAAP loss from operations to range from the loss of $21 million to a loss of $20 million.

This should lead to a non-GAAP net loss per share in the range of $0.60 to $0.57 based upon a weighted average share count of 36.6 million shares. For the quarter ending September 30, we expect revenues to range from $25.5 million to $26 million and non-GAAP loss from operations to range from a loss of $6.4 million to a loss of $5.9 million.

This should lead to a non-GAAP net loss per share in the range of $0.18 to $0.16 based upon a weighted average share count of $37 million.

As you consider this guidance, please recognize that at current spot rates our guidance assumes a 4% negative impact revenue growth for both Q3 2015 and full-year 2015 versus the comparable period of fiscal year 2014. Let me review some of the factors that led to this decision.

As noted earlier, search spend was specifically challenged in Q2, as Google required advertisers to upgrade their paid search URLs to a new format.

While this new format makes it easier and faster for advertisers to update tracking information in their paid search campaigns, a one-time migration cost and additional slowdown in search spend beginning in June, ahead of the July 1 migration date, as clients awaited editorial review by Google the upgrade URL changes.

We believe many clients also took time to reevaluate their overall paid search programs during this migration. Once completed, spend level started to increase again in July, though they are still not at the level they were prior to the upgrade.

On a more macro level, we expect to see some moderation in overall search growth, which still drives the majority of our revenue. Search overall is still increasing in absolute dollars, but at slower rate of growth than we have experienced in prior periods. Within search there is a consumer shift from desktop to mobile.

And although, mobile CPCs continue to rise, the overall effect is softer year-over-year growth in search spend.

Specific to Marin, we are also under indexed, that is we get less than our fair share in two specialized areas of search that are showing higher levels of growth, specifically, shopping campaigns and Google Display Network, that we are actively investing in our platform to increase our share of these higher growth opportunities in 2016.

Finally, we are seeing clients invest more of their advertising budgets in the emerging performance channels of social and programmatic display, areas where we have invested, but aren’t yet getting our fair share of our customers’ budgets.

As we noted last quarter, the challenge and opportunity for our sales teams is to show that we are much more than just a search company today, and that we can provide a true cross-channel add management platform that solves a growing number of pressing needs for digital advertisers.

Last year, we completed our first phase of cross-channel sales training. And this year, we are building our pipeline, converting our legacy social clients to the new SocialMoov platform and focusing on multiproduct selling. But as with any new product or initiative, there is a learning curve.

For example, during the second quarter, we made changes to our display sales efforts to focus on higher quality display campaigns. Longer term, we expect this will drive more sustainable customer relationships, but there is a period of adjustment to the change.

We are seeing early success from these efforts with increasing sales productivity evidenced by the record number of deals signed in the month of June. Also, as I mentioned last quarter, both social and programmatic display have a ramp period and typically begin with smaller revenue commitment as these are less mature categories in search.

Contributions from social and display for our revenue base are modest today. Yet, we still expect them to be approximately 10% of our revenues by the end of the year.

Importantly, we expect these to grow significantly over the next several years as we benefit from our investments in sales and technology as well as the broader secular shift towards digital marketing and increased demand for marketing platforms.

On the cost side, we have taken a number of steps to support our drive towards achieving adjusted EBITDA breakeven by year-end.

We have realigned our resources and are driving greater overall efficiency in the business, by reducing headcount and other costs in customer success, sales support and marketing, while maintaining our strong investment in engineering and products.

We believe these moves will improve our execution and efficiency, drive higher gross margins and help the company reach our long-term probability target. As I noted earlier in the call, we believe best-in-class technology-based products will drive long-term growth.

We will continue to invest at a healthy level in our platform and feature-set to better meet the needs of the world leading brands. As we look at Marin’s overall market position for the long-term, we remained very encouraged by the opportunity in front of us.

We believe Marin is well-positioned to be the market-leading ad management platform for brands and their agencies who are trying to drive efficiency and performance through advertising on the larger search, social, and display publishers and platforms. We believe we have the right assets and strategy.

Marin’s customers use our platforms to manage over $7 billion of annualized ad spend as of the end of 2014, more than any company in our category by far. And we continue to execute and streamline the business, while investing to lead with technology and products offer compelling value proposition for markets around the world.

With that, I want to thank you for your time and I’ll turn it back over to the operator to open it up for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment please, while we pull for questions. Our first question comes from the line of Brent Thill with UBS. Please proceed with your question..

Hi, Dave, thanks for taking the question. Just as it relates to the customer count in the first-half of the year, you’re down almost 67% in terms of number of net new customer adds on a first-half year basis.

I’m just curious what’s happening on the go-to market side and your sales side, it terms of the friction that you are seeing on bringing the new clients and what seems to be the barrier that you’re running into?.

Yes. In terms of active advertiser count, we talked about this in at least the last quarter, maybe even the quarter prior to that, as we continue to streamline and push for efficiency within our support organization, we’ve created service level peers. Essentially our lower spenders are getting less support.

We’re trying to build more automation in the platform, but it has resulted in some churn of our lower volume spenders. The far majority of advertisers who have churned out the platform, we’re kind of in that lower range kind of in that $2,000 spend range.

And so we are consciously building efficiency into the model and that has affected that particular metric..

And Dave, can you just speak to the sales force and what you’re doing there to – you’ve talked about the expansion of the product line how you are getting the sales force trained to go-to-market.

Is there – in your opinion kind of an inflection point that you see out in one or two quarters, and maybe it’s further out in terms of where they starts to take hold?.

Yes. We definitely invested a lot of time in training, with social, for example, and this is actually related to your first question in terms of metric on adding new advertisers.

With the addition of new products, we have been selling into our existing installed base, both social and display, and so I have to imagine that had some play on that metric as well. But as you know, we’ve been heavily investing in training in Q2. We had to kind of revisit social training to learn the new SocialMoov platform.

We had to convert our legacy social clients because Marin did have its proprietary social product. It was just not at the same level of scale as SocialMoov. So we had to sign new agreements with our new pricing, so that did require the sales activation there to bring those clients over to the new platform.

But it has been about increasing quotas – second-half of the year, quotas have gone up.

But we are seeing very positive metrics in the pipeline and shared some on the call in Q1, 10% of deals closed in the quarter had two more products in Q2, that’s up to 19, where I look further in the pipeline the – over half of the opportunities you got on the pipeline have multiple products attached to them.

So we’re at this – I think, we’re in that inflection point, where we are getting traction in terms of getting multiple products sold through.

Part of the challenge that we’re also working through is that, particularly, with the new products and the social and display, it is taking a little bit longer to get that revenue to ramp to get those clients onboarded, and so we’re kind of working through that..

Okay. And sorry, just last question. Just as I – we look at your market for a while and you have been the leader in the ad cloud. I guess, when you look at other clouds that we covered, they’re growing at a pretty rapid rate. And it’s for one of the reason, it’s not growing at a rate that anyone had imagined a year ago.

What’s in your view has been the biggest constraint? Is there some type of new competitions coming to the market? And some of the partners just made it hard. You mentioned Google changing some dynamics in there that had some disruption.

What – if you kind of had to boil it down, what you think is happening overall as an industry?.

Yes. I would just say that we’re still early. We’re primarily a search-based company today, more than 90% of our revenue is search. We didn’t buy established revenue lines, sales teams with both social and display.

These are new assets, new product features that that we’ve brought into Marin, and we’ve been busy kind of integrating those assets, at the same time, we’ve actually been upgrading the core Marin infrastructure and platform to be able to make it extensible to the new things.

And then taking on the challenge to have a sales team that in the past have been primarily have been selling a social product, training them up and ramping them up to sell multiple products and new products.

So I would just say that we’re at the early stages of that, and so the revenue reflection that you see today is still largely search-by-search [ph] and see that changing in time..

Great. Thank you..

Thank you. Our next question comes from the line of Tom Roderick with Stifel. Please proceed with your question..

Hi, it’s Parker Lane in for Tom Roderick.

I was just wondering if you could kind of breakdown the catalyst for growth in the international front, and how you characterize that opportunity versus the opportunity here in the U.S.?.

Very similar. We have some advantages in Europe with the new addition of SocialMoov. They have a decent share of wallet in the European market within social.

One of the positive things that we’re seeing with the addition of social within our ad cloud suite of products now is that, it is helping us to sell more search, so we think that’s been an important addition.

We do not have plans in the near-term to open up new offices, it’s more about getting increased productivity with our current investment in sales. And so we’re down that path..

All right.

And then the last one for me, do you have an updated timeline on when you expect display and social to kind of exceed that 10% revenue margin or would you see that maybe a year out from now?.

Yes, so I made comment about it in the call, we are expecting by year-end that our non-search revenues will be more than 10% or at 10%. We’re not at a point where we’re guiding 2016 yet, but we’re seeing healthy growth rates in our non-search businesses. They are growing at a faster rate than search..

All right. Thank you..

There are no further questions at this time. This will conclude today’s conference call. Thank you for your participation. You may now disconnect your lines at this time..