Brad Kinnish - VP, Finance and Acting CFO Chris Lien - CEO, Founder and Chairman.

Analysts:.

Greetings. And welcome to the Marin Software First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Kinnish, Marin's Vice President of Finance and Acting CFO. Thank you, Mr. Kinnish.

You may begin..

Thank you. Good afternoon everyone and welcome to Marin Software's first quarter 2017 earnings conference call. My name is Brad Kinnish, Marin's Vice President of Finance and Acting CFO. Joining me today is Chris Lien, Marin's Chief Executive Officer. By now you should have received a copy of our earnings release, which crossed the wire short time ago.

If you need a copy of the release, please go to investors.marinesoftware.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, historical results that may suggest trends for our business, expectations about our ability to return to growth, impact of investments on product and technology, progress on product development efforts, product capabilities, and future financial results including outlook for the second quarter of 2017.

We make these statements as of May 9th, 2017, 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 2017 earnings press release. With that, let me turn the call over to Chris..

Thank you, Brad. Good afternoon everyone and thank you, for joining our call today. I'll review the quarter, including an update on some of our recent wins, provide an update on our initiatives to return Marin to growth, including product features that we've recently debuted and the status of our new platform.

Brad will then provide additional detail on our quarterly results and our outlook for the second quarter. As you'll recall, I'll return to the CEO role at the end of August, along with my Co-Founder and EVP of Product and Technology, Wister Walcott. Our goal is return Marin to growth and to maximize shareholder value.

We are focusing on meeting the needs of our customers, the world's leading advertisers, and their agencies as they seek to grow and optimize the returns from their online advertising investments.

Working with our team members and partners, we've been busy over the past eight months putting in place the foundation which, we believe, will return Marin to growth over the course of 2017. I'll talk more about our initiatives to return to growth in a few moments, but first let me comment on our financial performance in Q1.

As announced in today's earnings release, Q1 revenues came in at $20.3 million which was above the high end of our guidance but down from the prior year.

While our current revenue performance continues to be disappointing, I'm pleased to report that we have continued to operate with financial discipline, which has enabled us to deliver adjusted EBITDA of negative $1.8 million for Q1, which also was above the high end of our guidance.

Free cash flow in the quarter was negative $1.5 million and we ended the quarter with total cash of $34.3 million, which is down just $1.4 million from year end levels. Non-GAAP gross margin was 66% for the quarter, primarily reflecting the drop in revenue.

Despite our ongoing revenue challenges, the underlying operating leverage in the business, along with cost and efficiency initiatives are enabling us to continue investing meaningfully in Marin's future. As I spend time with our customers, prospects, partners, and team members, I'm reminded both of Marin's opportunities and our near-term challenges.

Marketers seek to maximize the value of their online advertising investments, but they face an advertising world where the two leading publishers, Google and Facebook, account for some 75% of online traffic and approximately 60% of all online advertising.

These two publishers operate as walled gardens, leaving advertisers to figure out the growing complexity of their customers' path to purchase across multiple advertising and device touch points.

Marin's ability to address this complex fragmented customer journey dynamic for leading brands gives Marin enduring competitive advantage as the publisher tool sets will not address cross-publisher cross-channel needs.

Additionally, the lack of independence from publisher tool sets calls into question the measurement, budget allocation and optimization functionality that these closed platforms can provide.

And even with the concentration in Google and Facebook, we still see the rise of new publishers with the opportunity to reach new customers or to retain and engage existing ones. Marketers cannot afford to miss out on the rest of the online audience and needed technology partner that can deliver performance and efficiency at scale.

Our open independent advertising platform enables leading brands to measure, manage, and optimize billions of dollars of online advertising investments across channels and devices. Publishers can leverage their first party data as well as other data sets to reach the best audiences for their products and services.

Our many customer case studies demonstrate that Marin's SaaS platform can drive financial lift, time savings and better business insights through greater transparency, efficiency and return on advertising spend. With my return to Marin and with the support of our team, we are operating with renewed urgency to deliver for our customers.

Our initiatives to return Marin to growth focus on sales and marketing execution; account management and customer success delivery; and customer-facing product innovation. As we execute on these initiatives, we also acknowledge that Marin will have some difficult quarters as we address ongoing challenges.

In the sales and marketing area, we are positioning Marin as the leading ad management platform that can deliver the best value to advertisers and agencies. Even as we add the Marin's feature sets in search, social, and cross channel, our efforts are centered on delivering value to advertisers via financial lift and time savings.

We've increased our investment in sales and marketing, including adding to our quota-carrying sales teams and deploying more advanced technologies to improve our lead generation efficiency and output. We also expect to increase our investments in this area in the coming quarters as part of our efforts to return to growth.

Our customer success teams continue to focus our retention and account growth. Again, our focus is on conveying Marin's measurable value to our customers, while partnering with them to better meet their business goals through growth.

Current customer growth initiatives include efforts to increase adoption of Marin's shopping functionality, Marin Social and Yahoo Gemini among others. Marin continues to be very well regarded for our customer support and our investments in this area serve to improve our ability to partner with our customers.

Marin's Customer Management tool or CMT enables Marin team members to quickly survey a customer account to better address any issues or opportunities.

This proprietary in-house technology product provides an at-a-glance, holistic view of our Marin customer, integrating platform data, billing information, support tickets, and account history among the other information. We believe our deployment of Marin's CMT will lead to better retention and growth of our customers.

As we have discussed on prior calls, even though we are still in the early days for marketers to coordinate their spending across channels, Marin is already delivering cross-channel results for our customers.

Marin's ability to leverage search intent to remarket on social as well as functionality to copy Google Shopping Ads to Facebook Dynamic Product Ads are two examples of solutions Marin can deliver now to drive better performance for brands by leveraging the cross-channel power of search and social.

Marin also is focused on customer-facing product innovation. In the quarter, we expanded our forecasting capabilities, which now enable marketers to engage in longer horizon what-if analysis with regard to incremental advertising investments and expected returns.

In the coming quarters, we plan to expand this functionality to encompass cross-channel activity. In social, Marin launched an upgraded user interface and improved our support for Facebook Dynamic Product Ads. In making these investments, we were able to deliver automation at scale for social marketers.

We also are increasing our marketing efforts with Facebook and we recently held a joint webinar on Dynamic Product Ads that drew significant interest from the online marketing community.

Consumers have responded well to mobile product-driven ads as shown by the success of Google Shopping Ads, and advertisers are now adopting Facebook Dynamic Product Ads to address the same opportunity in the social channel.

While marketers are eager to apply new approaches to customer acquisition and growing revenue, they often lack an independent source to guide them in the best ways to pursue these activities.

Marin looks to play a larger role in providing both the technology and best practices for advertisers to maximize returns from adoption of new advertising functionality across search and social. Marin's thought leadership and product innovation in this area builds on our work with Google Shopping Ads, which are the search channel counterpart.

As an update from our last call, we also continue to make good progress on our investment in our next-generation infrastructure, which uses distributed big data technologies. This investment provides Marin with a state-of-the-art architecture on which we can innovate for years to come.

This effort has taken longer than we originally had estimated, but we are deploying this functionality using a hybrid approach to enable more benefits to flow to our customers sooner. We have begun our platform beta program to enable initial users to leverage new functionality, including improved data loading, application speed, and scale handling.

Using this infrastructure, Marin will be able to innovate in the areas of audiences, devices, geo-location, and intraday functionality to enable our customers to maximize their online advertising investments.

This infrastructure, which runs side-by-side with our existing platform and is seamlessly accessible by our customers, also will enable Marin to innovate more rapidly by leveraging the micro services architecture of our platform beta investment.

As brands are seeking to address the fragmented customer journey across channels, devices and publishers, and our always on, always connected world, we believe Marin is well-positioned as the preferred technology partner for this mission.

We believe these factors play favorably into our business strategy given our SaaS-based delivery model with cross channel API integrations into many of the world's largest online publishers and our independent and transparent approach to digital advertising.

As excited as I am about these developments and as I've shared before, our near-term outlook remains challenged, leading to a cautious view of Marin's business during this period, as we work through improve our execution and sales in marketing, account management, and product delivery.

While we still significant work to do in our efforts to return to growth, I continue to believe that Marin has a tremendous opportunity and that our best days lie ahead. And now Brad will review our first quarter financial results and our outlook for the second quarter..

Thank you, Chris. I'll provide a brief overview of the quarter and then go through the detail. The first quarter highlights Marin's strategy of financial discipline around cash management, while selectively making investments that allow Marin to return to growth.

As evidence of the strategy, Marin ended the quarter with $34.3 million of cash and cash equivalents, which represented a modest cash decline of $1.4 million from our December 31st, 2016, cash balance.

During the quarter, we chose to invest in R&D and sales and marketing initiatives, which is highlighted by the sequential increase in these line items as a percentage of revenue. These investments are consistent with our strategy. We will continue to strive for financial discipline while making select investments that allow Marin to return to growth.

On to the details; first, I'll address revenue. For the first quarter of 2017, Marin exceeded the high end guidance with net revenues of $20.3 million, down 11% sequentially, and down 25% year-over-year. The decline in revenues was primarily driven by customer churn in excess of new customer wins.

In the first quarter, 67% of our revenues were generated in the U.S. and 33% of revenues were generated internationally, which is in line with our historic geographical split. In terms of direct versus agency relationships, our revenue in the first quarter was 62% from direct customers and 38% from agency relationships.

This shift in mix toward direct customers is due in part to our focus on strengthening our relationships with key advertisers and bringing them on to direct contracts.

We continue to view agencies as an important channel, but also recognize greater competition in the segment resulting in lower retention and a decline in same-store sales among agency advertisers. 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 profit was $13.4 million, resulting in a non-GAAP gross margin of 66%, which compared to a non-GAAP gross margin of 71% during the first quarter of 2016. For the first quarter, non-GAAP operating loss was $3.2 million as compared to a loss of $242,000 in the first quarter of 2016.

The $3.2 million lost exceeded the high end of our guidance by $1.1 million. We delivered a non-GAAP operating margin of negative 16%, which compared to a non-GAAP operating margin of negative 1% during the first quarter of 2016. Adjusted EBITDA was a negative $1.8 million for the first quarter, down from a positive $1.4 million in Q1 2016.

For the first quarter, non-GAAP net loss was $3.3 million, resulting in a loss per share of $0.08 based upon a weighted average share count of 39.1 million shares. The $0.08 loss per share exceeded the high end of our guidance by $0.03.

For comparison purposes, we generated a net loss of $600,000 and an EPS loss of $0.01 per share in Q1 of 2016 based upon a weighted average share count of 37.8 million shares in the first quarter of 2016. For the first quarter, cash flow from operations was a negative $800,000 compared to a positive $600,000 in the first quarter of 2016.

We ended the quarter with $34.3 million in cash and cash equivalents. Moving on to guidance. As Chris mentioned, we are excited about some of the key wins and renewals that occurred in Q1 and about the opportunity to rollout new customer-facing features on platform beta.

With that said, we anticipate additional revenue decline in upcoming quarter due to ongoing customer churn that exceeds new customer bookings. We expect our platform beta project will have a positive impact on customer churn and new bookings in the latter part of 2017.

With that in mind, for the second quarter of 2017, we expect revenues to be in the range of $18 million to $18.5 million; non-GAAP operating income is expected to be in the range of negative $6 million to negative $5.5 million and non-GAAP net income per share is expected to be in the range of a $0.14 to $0.15 loss per share based upon a weighted average share count of 39.5 million shares.

With that, I want to thank you for your time. This concludes our Q1 2017 quarterly conference call..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..