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

Ian Strgar - UBS.

Good afternoon, and welcome to the Marin Software First Quarter 2016 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the 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 first quarter 2016 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 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 May 5, 2016, 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 in 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 first quarter 2016 earnings press release. With that, let me turn the call over to Dave..

Thank you. Good afternoon, everyone, and thank you for joining our call today. I will provide a quick review of our Q1 results, including a summary of some of the wins we had in the quarter, and an update on the progress of our re platform efforts. Catriona will then provide additional detail on the quarter's results and our outlook for Q2.

As indicated in today's release, Marin's first quarter results came in above our guided range, with revenues of 27.2 million and non-GAAP gross margins and adjusted EBITDA also coming in above plan. Our sales team had several wins in the quarter, including Libratone, Malone Media Group, Talbots, and Vidas Fashion.

We also won a long targeted, well known technology provider, which was a competitive takeaway. Marin's unique bidding features, our global footprint, open architecture for data integration, and software usability were all important factors in this. One notable win was with Libratone, a global designer of high fidelity Wi-Fi audio speakers.

With their recent entry into the U.S. to begin marketing their products, Marin was recommended to them by one of our existing agency customers to bolster their advertising strategy.

Marin's complete cross channel audience marketing suite and capabilities to manage the full customer journey from prospecting through retargeting were key elements in their decision to choose Marin for their search, social and display needs. Another win in the quarter was Talbots, a leading retailer of women's clothing and accessories.

Talbots viewed search marketing as an important way to target their next generation of customers compared to traditional offline methods. They wanted to improve their results with AdWords, expand targeting via non branded keywords, and automate their bidding to improve their advertising ROI.

A key factor in their decision was the results from a competitive bake off, and additional elements were Marin's open architecture, our ability to manage audiences across all three channels, and our roadmap for new features.

One final update as it relates to our sales organization Russell Wirth, our Chief Sales and Marketing Officer, has made the decision to leave Marin at the end of this quarter. I'd like to thank him personally, and on behalf of the Board and the entire Marin team, for his six years of service, passion for the business, leadership and teamwork.

We wish him well in his next pursuits. We've begun an external search for a Global Head of Sales. And in the interim, I will be stepping into the global sales leadership role. I will also rely on our very capable regional sales leadership team to step up in the interim.

I'd like to now provide you an update on our efforts to re platform the core infrastructure that supports our search, social and display applications.

As we've indicated on prior calls, we are in the midst of an important project to transform the back end of our infrastructure to a cutting edge, and more distributed and scalable, Hadoop based data architecture. This is a complex and significant project with three major components.

First, we are replacing a relational MySQL database stack with an advanced big data Hadoop stack. Second, we're developing a new publisher interface framework. Third, we're deploying a redesigned, faster frontend architecture. We are essentially disconnecting everything, and reconnecting things differently to new technologies.

And at the same time, we are innovating new architecture in how we interface with both publisher APIs and our frontend applications. Our team has made great progress to this end, and I'm pleased to report that the final phase of the migration of our social application to this new architecture was completed in Q1.

With the platform in place, we are now releasing innovative new features for our social application that were dependent on the new platform's deployment. We've also accelerated to a 2 to 3 week average major release cycle of post migration.

One recent release is our enhanced support for Facebook's reach and frequency product, which enables customers to reach unique audiences on Facebook and Instagram, and also to control the frequency of messaging to avoid advertising overexposure. Customer feedback has been positive, particularly due to the improved workflow.

Additional releases for this quarter included enhanced support for Facebook ad units, such as carousel, video, lead gen, and dynamic product ads.

The completion of our social migration represents an important milestone for Marin, as it is critical that all Marin applications share the same scalable back end to enable an integrated product experience for our clients, especially with regards to audiences, campaign workflows, optimization, and measurement.

As our team shifts its focus to the migration of our search application, we have taken our learnings from the social migration and have updated our plans for this. We now expect to complete this in the fourth quarter, and then gradually transition search customers onto the new platform.

As Catriona will discuss, this updated timeline has also impacted our expectations for the remainder of 2016, but we believe it is necessary to provide our team additional flexibility to coordinate final testing of the back end for search, and to ensure our customers have a seamless of a cut-over as possible.

In summary, over the past year we have enacted many changes strategically, financially, technically, and organizationally. We've made significant progress in transforming our search platform to a cross-channel, cross-device ad cloud platform to better meet the needs of global advertisers and agencies, as their enterprise marketing platform of record.

This has been a considerable undertaking, and will take some additional time to complete, yet it is also critical to our long-term success. As a reminder, we believe there are four main benefits from this re-platforming effort.

First, it will help reaccelerate our top-line revenue growth, especially in our core search business, through the new features it enables, which will position Marin to deliver a differentiated product functionality with compelling advertiser benefits around financial lift, time savings, and better business insights.

Second, it should improve customer retention through enhanced platform performance and capabilities. Third, it will enable us to support publisher changes and new publishers much more rapidly, allowing Marin to better meet the needs of our customers, and positioning Marin to capture more of our addressable market.

Lastly, it will allow us to further deliver on our cross-channel ad cloud vision by bringing audience measurement and optimization capabilities to all of our channels from an integrated back end.

As Marin completes our re-platforming effort, we will be positioned as the leading independent, open, cross-channel, cross-device, enterprise ad cloud for global advertisers and agencies. We are confident that the investments we are making today will yield strong results as these initiatives take hold in the coming quarters.

With that, let me turn the call over to Catriona to review our financial results in greater detail..

Thanks, Dave. Operational discipline has become a cornerstone in our management culture and decision-making here at Marin. We have transitioned from a company that was on a run rate to burn more than 20 million in cash a year to one that has stabilized its cash position with improved gross margins and positive adjusted EBITDA.

We still have work to do but we expect to stay focused on managing and improving the profitability of the Company while we execute the platform upgrade. In the first quarter, Marin generated revenue of approximately $27.2 million, up 3% year over year and above the high end of our guidance range. 67% of revenues were from the U.S.

and 33% were international, compared to 66% and 34% during the same quarter last year. The revenue mix was 56% direct and 44% through agencies. Social and display remained roughly 10% of total revenue.

Moving on to the operating results, our detailed financials, as well as a reconciliation of our GAAP to non-GAAP financials, can be found in our press release. My comments will now focus primarily on non-GAAP results.

For the first quarter, non-GAAP gross margin was 71%, up from 67% in the first quarter of last year, and down slightly from 72% in the fourth quarter.

This annual improvement reflects our continued focus on expense management and the operating efficiencies within the customer success organization, in part due to the build out of the center of excellence, which enables the delivery of tiered service levels to our customers based on their overall business with Marin.

The quarter-on-quarter change is due to both the lower seasonal revenue in Q1 and the reset of payroll taxes at the beginning of the year. Non-GAAP loss from operations was $200,000, compared to $5.4 million in the first quarter of 2015, an annual improvement of $5.2 million year over year.

Adjusted EBITDA was a positive $1.4 million for the quarter, ahead of our expectations for a break-even result. This represented an improvement of $5.2 million compared to a negative $3.8 million in Q1 of last year.

Non-GAAP net loss was $600,000, resulting in a loss of $0.01 per share based upon a weighted average share count of 37.8 million shares outstanding. This is an improvement of $4.8 million, compared to a loss of $5.4 million or $0.15 per share during the first quarter of 2015, and above the high end of our guidance of a loss of $0.04 per share.

We ended the quarter with $36.2 million in cash and cash equivalents, a decrease of $1.1 million sequentially, due in part to the increase in accounts receivable and the repayment of equipment loans, partially offset by positive operating cash flow of $700,000.

We will continue to diligently manage our cash balance, and expect to finance Marin through free cash flow breakeven with cash and financing resources on-hand. As we look towards the rest of the year, there are a few considerations that we are factoring into our operating assumptions.

First, the delay in the migration of the social platform resulted in higher-than-expected churn and also impacted the timing of incremental revenues expected from the release of the new social features. We are encouraged by the new social platform, but we have reflected these headwinds in our outlook.

Second, as Dave noted, we learned several lessons from the social process, and have included them in our planning around the search migration. This had led us to refine the timeline for our search cut over to later in the year.

Given the proximity to the holiday advertising season, we expect that the majority of our customers will make the migration to the new platform in 2017. Therefore, we do not expect an increase in search revenues from the new platform in 2016. Finally, we've seen a slow start to the year in terms of sales productivity.

We will be working to recover to more normalized levels of productivity in the latter half of the year with the social product on the new platform and from the expected demand for the new features that we are introducing.

Taking these factors into consideration, for the second quarter we expect revenues to be in the range of $25 million to $25.6 million.

Non-GAAP operating income is expected to be in the range of negative $2.9 million to negative $2.3 million, and non-GAAP net income per share is expected to be in the range of negative $0.08 to negative $0.06 based upon a weighted average share count of 38.3 million shares.

In closing, we've made significant progress in transforming Marin's business over the past few quarters. We still have a lot of hard work ahead of us, and we will continue to actively manage our expenses to deliver on our goal of positive adjusted EBITDA for the year.

We're making a major investment in our platform and new features; and while challenging, we expect it will enable Marin to return to top line growth. With that, I want to thank you for your time, and I will turn it back over to the operator to open it up for questions..

[Operator Instructions] And we've got our first question from the line of Brent Thill with UBS..

Hey guys, this is Ian Strgar calling in for Brent Thill. Thanks for taking my question. You guys are showing good discipline on the cost side, particularly in sales and marketing.

But I'm wondering with the slowdown in growth and your Q2 revenue guide calling for negative 5%, negative 6% top line growth, I'm just wondering how you are thinking about managing investing in the sales force and maybe bringing on some new heads, while also controlling the bottom line?.

Hey, Ian, this is Catriona. Let me start, and then Dave will jump in on the sales force piece. Certainly, the bottom line is a key focus for us. We're definitely taking a look at the impact from some of the social churn in Q1, and with that taking a look at what kind of discretionary expenses and other types of OpEx we can manage into Q2.

We are very committed to maintain our positive adjusted EBITDA for the full year. And I think we have good visibility into how to stay on that track.

On the sales side, Dave?.

I would just start with, Ian, in Q1 it was more or less contained with regards to the migration event for social there. That essentially didn't go as smoothly as planned. It did cause some additional churn that we weren't planning for. That is showing up in our Q2 guidance. We do expect to come out of that.

We've got on that migration, we had 20 plus new features released at the same time. We've got a very robust roadmap of things. We're on a good cadence of feature releases. So we are expecting to get back on track this year with bookings, essentially, for social. We are seeing, as we talked about in the past, better correlation between social and search.

So we expect that to improve. I would say on the cost side, you do have correlation in bookings performance relative to cost. So some of that is self-correcting, and as Catriona pointed out, we feel that we've got some other areas to really optimize operating expenses to still hold true on our goal for adjusted EBITDA positive for the full year..

Okay. Got it. And if I can squeeze another one in.

Just with the slowdown in sales that the platform migration is causing, we get questions from investors like, where can the top line growth get to? And so I know you guys aren't giving a full year guide, but is there just some way to kind of think about the longer term, medium to longer term growth of the business, once the re-platforming is all in good shape? Is this something that can get to double digit growth rates again? Or anything you could share would be appreciated..

Absolutely. Growth in our core business 90% of our revenue is still search based. As we address this upgrade to our back end, essentially, it is going to enable some key features in our core business.

These higher growth areas of search, as we migrate customers over to the new platform starting later this year, that's going to get us on pace to growing top line at a more competitive rate. I would just point you to what you see as growth rates for the industry in search.

There's a lot of different reports, but I think they are showing the global search rate kind of in the 10% range. Then you can also look at what are the global rates in social and display, at least programmatic display. And you should expect that Marin at some point at least gets to those levels, if not above, once we are fully on course..

Okay, okay. That's good to hear.

So then just given the circumstance of the re-platforming taking longer, is that -- the lower revenue guide, is that basically attributable to the higher churn in social? Or is there a way to drill down into that a little further?.

That is the largest driver in terms of our Q2 guidance with some of the disruption of the migration in social. I do think that the sales productivity is somewhat correlated to that, though. We are seeing tighter correlation today between the social and the search buyer.

When I look at how the sales team is trying to sell more search as well they are trying to tie in social with that to get more momentum there. I have to believe that that had some impact. I would just add that the good news is we have accomplished the most important first milestone in this migration effort.

We have stood up an entirely new technology stack on the latest and greatest technologies. Set it in place. We have successfully moved over our first application, the social application, over to this new backend. It was a little disruptive as you would expect, especially with the first cut over, but that is behind us now.

We are absolutely moving forward full speed with social features. And we have a very detailed plan, and well thought out plan, which we've had to adjust based on what we've learned with the social migration for the search migration that's going to play out towards the end of this year..

[Operator Instructions] Okay, there are no other questions in the queue at this time. We'd like to thank everybody for participating in today's teleconference. You may disconnect your lines at this time, and we thank all of you for your participation..