Jason Starr - IR David Yovanno - CEO Catriona Fallon - EVP, CFO.

Parker Lane - Stifel Nicolaus.

Good afternoon and welcome to the Marin Software Third 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 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 third quarter 2015 earnings conference call. Joining me today are David Yovanno, Marin's Chief Executive Officer, and Catriona Fallon, Marin's Executive Vice President and Chief Financial Officer.

By now you should have received a copy of our earnings release, which crossed the wires 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 November 4, 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 the risks relating to our business in general, we refer you to the sections entitled Risk Factors on 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 third quarter 2015 earnings press release. With that, let me turn the call over to Dave..

managing spend across the largest publishers using one platform to unite audience data, measurement and optimization, to deliver better advertising. That is exactly what we are building and driving here at Marin.

According to the IAB and PwC's joint annual report, over 70% of total digital ad spend today goes to just ten major digital publishers such as Facebook, Google and Yahoo!. Each of these companies are investing in their own ad technology platform proprietary data.

Due to their own financial and competitive interest, these platforms are typically siloed from each other in a walled garden approach. This fragmentation of publisher tools only serves to increase the complexity for brands.

In addition, ads themselves are becoming more native, programmatic and mobile, and therefore accelerating the concentration of supply with these large publishers because of the increasing effectiveness of their ads.

Marin is well-positioned to address this new marketing technology landscape, or martec, through our API integrations with these major publishers. Marin is able to complement their proprietary data and direct their programmatic marketplace decisions, and we combine this with a unique SaaS business model.

I'd like to now provide a quick update on some of the new features we released during the third quarter to help our clients more effective target their customers across search, social and display. In search as well as indicated earlier, we're seeing substantial growth in mobile.

To extend this, we released support for both Google mobile app campaigns and Bing mobile app extensions, which enables advertisers to drive mobile app downloads and scale their app install ad campaigns. With the holiday season quickly approaching, we also launched support for Google local inventory ads targeted primarily at mobile users.

This new offering allows regional advertisers, our largest customer vertical, to connect online and offline shopping experiences and direct customers to nearby physical locations carrying in-stock inventory.

Finally, as part of our philosophy of enabling advertisers to efficiently broaden their reach across multiple publishers on a single platform, we released campaign cloner support for Yahoo! Gemini. Through this feature, customers can easily scale their existing Google campaigns into another of our search partners to help grow their business faster.

In display, Marin announced the general release of a Marin iOS Software Developer's Kit. This SDK allows mobile marketers to create audiences based on in-app actions, re-target them with in-app banner and interstitial ads, and track performance from impression to conversion.

Marin has also integrated its mobile audience building tools with leading app install tracking provider AppsFlyer tune and adjust so that mobile markets on the Marin display platform can build audiences without installing another SDK.

In addition, in early Q4 we migrated the bulk of our display traffic to a new proprietary real-time bidding platform we've developed. With this now in place, we've been able to enhance customer bidding performance and provide access to additional ad inventory with more transparency.

In fact, in some cases, we've seen some clients whose reach expanded as much as 30% while maintaining campaign performance objectives, which translates into increased ROI for our customers and additional revenue for Marin.

Throughout 2016 we expect to continue to expand our inventory capacity in this channel by connecting to additional advertising exchanges and other inventory sources including top publishers and sell side platforms. Moving to social, as mentioned last quarter, Marin was invited to be an early participant in the Instagram AD API Alpha Program.

This is now in general release, with Marin Social Platform providing support for all formats of Instagram's ad units, including video, and we're pleased with early results.

To date we've seen increasing interest in this new publisher opportunity from advertisers and agencies, particularly those conducting brand awareness, direct response and app install campaigns. We believe Instagram represents a significant opportunity for advertisers given their 400 million user base.

We are already seeing an increase in CPC pricing as more brands embrace this new channel on the Marin platform. Our participation in the program is a great example of our multiyear partnership with Facebook paying off, and capitalizes on our preexisting support for Facebook targeting an ad unit [ph].

In the third quarter we also completed the migration of legacy Marin Social clients to our recently acquired Social Moov application. These customers now have access to Twitter in a more robust set of solution features.

Brands can also leverage search intent data to retarget users on Facebook using website customizers for example or they can use social data to retarget users using Google's RLSAs. Additionally, customers now gained incremental access to many new Facebook ad formats including carousel and video adds, and of course they gain access to Instagram.

This client migration required sales effort over the past two quarters, including familiarizing these customers with the new applications, demos and entering into new Marin contracts. Finally, and as we announced yesterday, we've launched a new social feature called TV Sync through a partnership with TVTY.

As research has shown that customers regularly use social media while watching television, there's a great opportunity for advertisers to drive engagement and conversions like coordinating their advertising across screens.

This new offering can amplify and extend TV advertising messages through Facebook, Instagram and Twitter to more effectively reach audiences and drive more real-time engagement.

For example, advertisers can activate social ads in near real time based on customizable offline events such as TV program or flight schedules, changes in weather, or sports events, and drive customers to immediate call-to-action.

This is a trend towards what is called moment marketing, and we're excited about this opportunity and believe it will be an important differentiator in our offering going forward.

Let's now shift the discussion to update you on our progress to re-platform Marin's core infrastructure, which is a critical element of our strategy to capitalize on these exciting trends into next year and beyond.

As we indicated on our last call, over the past several quarters, Marin has been making a significant investment in developing the next generation of our technology platform stack. The new data platform is based on Apache open source technologies such as Hadoop, HBase, Phoenix, Spark and also Presto.

These distributed systems are the foundation for our new services-based application architecture leveraging both micro-services and shared data services.

Marin's investment in these new technologies will help our SaaS platform to scale, improve platform response time, and deliver customer-facing innovation at a more rapid pace to better meet the digital marketing needs of our customers.

The investments also will improve Marin's efficiency and ability to operate more cost-effectively as we deliver on our commitment to adjusted EBITDA breakeven and becoming financially self-sustaining.

This new platform should also enable Marin to more efficiently and rapidly support some of the faster-growing segments of search such as Google display network and shopping.

As the platform comes online, we expect to offer a broader range of marketing options for our customers, such as enhanced bidding capabilities and intra-day [ph] adjustments, which we believe should lead to increased customer advertising spend through our platform.

Finally, our new publisher framework is expected to significantly reduce the time and effort required for Marin to onboard new publishers to our platform. Just like we integrated with Instagram recently, we plan to more rapidly support additional publishers in the future, thereby increasing our addressable market.

Phase one of our migration to this platform includes our social application which is scheduled to cut over this month. Phase two and phase three will follow with migration of our search and display products, respectively, over the first half of 2016.

As a part of this migration throughout 2016, we also expect to offer our customers a more unified interface experience for their search, social and display marketing needs.

We also expect those platform investment to open up opportunities for capturing additional brand spend through availability of a wider range of new product offerings on our platform into the future. Overall we are pleased with the progress we've made in laying the foundation for growth.

As the platform work is completed, we expect to start seeing a higher revenue growth rate towards the back of 2016. As we have shown this year, we have made significant strides in better managing operating expenses and we expect to build on this into 2016.

With that, let me turn it over to Catriona to discuss our financial results and outlook in greater detail..

Thanks, Dave. We're pleased with the performance we saw in the third quarter, with revenues of $26.3 million, exceeding the high end of our guidance, and adjusted EBITDA improving to 49% year over year. Revenue growth was approximately 3% year over year or 6% when adjusting for the effects of currency.

The $300,000 revenue over-performance versus the high end of our guidance was driven by a return to more normalized customer spending in September, and this is carrying over into the fourth quarter, typically our strongest revenue quarter due to increased seasonal advertising spend. From a geographic perspective, 69% of revenues were from the U.S.

and 31% was international. The stronger growth in U.S. revenues was driven by an uptick in spend on some of our largest publishers. The revenue mix was 55% direct and 45% through agencies. The shifts towards direct on a year-over-year basis includes the impact of the transition of a few clients from agency relations to direct contracts with Marin.

We served 827 active advertisers in the third quarter, up from 825 in Q3 last year, and down from 853 in Q2. While this metric is lower sequentially, it's important to remember that a significant amount of sales activity this year has been focused on selling our new social and display products into the existing search client base.

This figure was also reduced by the fact that a few dozen advertisers that remained on the Marin platform have reverted back below the $2,000 active advertiser threshold compared to the prior quarter. And we also continued to prioritize service levels for higher-spending customers, which led to some churn at the low end.

Since our IPO, we've come to view this metric on a quarter-to-quarter basis as less indicative of the direction of our overall business given the opportunity that we now have to cross-sell more into our existing customer base.

Revenue retention on a constant currency basis for the third quarter was in the mid-80s, down from approximately 90% last quarter, primarily driven by moderation of same-store sales growth within our existing search client base.

As a reminder, revenue retention tracks revenue growth from advertisers in the prior-year period that remained advertisers in the current period net of churn. Churn remains stable year over year. Moving on to the operating results.

Our detailed financials as well as the reconciliation of our GAAP to non-GAAP financials could be found in our press release. My comments going forward will focus primarily on known GAAP results. As we discussed on last quarter's call, we implemented several actions to improve the efficiency and effectiveness across the business in the third quarter.

We conducted an organizational restructuring effort, managed travel and entertainment expenses, and were more measured on our marketing investments.

These efforts, and increased operating discipline, contributed to the improvement in our financial results in Q3 and are expected to support continued progress towards profitability in the quarters ahead. For the third quarter, non-GAAP gross margin were 66%, up from 65% in the second quarter.

This increase was due to efficiencies from the onboarding and services side of our business. We expect gross margins to continue to improve as we scale revenue across all three channels and deliver further efficiencies. Non-GAAP operating losses came in at $4.3 million for the quarter, an improvement of $2 million year over year.

Adjusted EBITDA was a loss of $2.5 million in the quarter, an improvement of $2.4 million, compared to a loss of $4.9 million in Q3 of last year, reflecting the cost savings I mentioned earlier. Non-GAAP net loss for the third quarter was $4.9 million, compared to a loss of $6.4 million in Q3 a year ago.

Based on a weighted average share count of 37 million shares, this produced a non-GAAP net loss per share of $0.13, $0.03 above the high end of our guidance of a loss of $0.18 to $0.16 and an improvement from a net loss of $0.18 per share in the third quarter of last year.

We ended the quarter with $33.3 million in cash and cash equivalents, compared to $41.5 million at the end of Q2. Contributing to this sequential decline was the timing of certain payments, including severance associated with our restructuring plan, a delay in our refund payment for leasehold improvement and an increase in accounts receivable.

As we look to Q4, we expect our cash balance to stabilize given the reduced operational spend in our plan and the leasehold improvement reimbursement which we received in October. We continue to believe we have sufficient cash on hand to fund our operations through cash flow breakeven in 2016.

I'll now provide an update to our outlook for the full year of 2015, as well as the detailed expectations for the fourth quarter. As a reminder, Q4 is typically our strongest performing quarter due to the seasonal increase in advertising spend. For the full year we are increasing our revenue expectations to a range of $106.6 to $107.1 million.

At the midpoint, this represents an increase of $1.1 million over the previous range provided on our last earnings call, and translates to more than 11% growth in constant currency over our 2014 results. Non-GAAP loss from operations is now expected to be in the range of $18.4 million to $17.9 million for the year.

Full year non-GAAP net loss per share is now expected to be in the range of $0.54 to $0.52, based upon our weighted average share count of 36.6 million shares. For the fourth quarter, we expect revenues to be in the range of $27.1 million to $27.6 million.

Non-GAAP loss from operations is expected to be in the range of $1.8 million to $1.3 million, and non-GAAP net loss per share is expected to be in the range of $0.06 to $0.04, based upon a weighted average share count of $37.2 million.

In addition, we expect to exceed our goal for adjusted EBITDA breakeven and could generate as much as half-a-million dollars in positive adjusted EBITDA for the quarter. Given our increased outlook for the fourth quarter, I wanted to take a moment to share our initial views on 2016 for modeling purposes.

As Dave indicated, we're making progress on reengineering the core elements of the Marin platform, with this functionality being delivered by the end of Q2 2016.

This effort is expected to support our ability to embrace some of the faster-growing segments within search, improve revenue retention, and increase our customers' overall ad spending on the Marin platform.

As we look to 2016, we believe that our annual growth rates will remain in the low single digits for the first half of the year, with an improvement to the high single digits in the second half of the year as our reengineered platform drives initial benefits towards to our top line performance.

With this outlook as a baseline, until we have a clear path towards higher revenue growth rates, I'd like to underscore our commitment to manage our operating costs in a disciplined fashion, targeting positive free cash flow in the second half of the year and positive adjusted EBITDA for the full year, with a sharp focus on preserving cash.

We will provide more detail on our 2016 outlook during the fourth quarter earnings call in February. 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 the question-and-answer session. [Operator Instructions] Our first question comes from the line of Tom Roderick with Stifel. Please proceed with your question..

Hi. It's actually Parker Lane in for Tom Roderick.

Wondering if you could provide an update on the number -- or the percentage of multi-product deals during the quarter and whether or not you're seeing display or social service more of a prominent driver of new business?.

Yeah. Thanks, Parker. We, you know, I've shared some detail in the past, we don't want to get in the habit of providing updates each quarter on specific metrics like that with bookings.

What I can tell you is that each quarter this year, the number of multi-product deals has continued to increase, the number of opportunities in the sales pipeline continued to increase each quarter. So, sales activity is up. And so we're seeing good evidence of our strategy working to that end.

We do, however, see, typically with social and display deals, it does -- those deals typically start out a little lower in terms of revenue compared to search. It takes a while to ramp those. But the multi-product deals are up..

All right.

And then as you look beyond the search, display, social channels you got now, do you foresee any additional acquisitions in the future to kind of broaden your technology base and getting to these new channels?.

Yeah. I mean, we're -- the ad ecosystem is quite diverse. I could point to one channel that we'll either build or buy our way into at some point, that being video. We already support video units within our Facebook advertising, including Instagram, and we're seeing a good advertiser response to those units.

We'd like to do more in that channel, perhaps into 2016. We're in the process of kind of finalizing our product roadmap for the full year next year. It's too early to say. We're not in the position for much M&A, I would say over the next year. But that's one area I'd point you to..

All right. Thank you for taking my question..

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