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Analysts: Activists may turn up heat after Angie's earnings miss

February 23, 2016

Angie's List Inc. just notched its first annual profit, but analysts say that milestone isn't likely to offset investor concern about a different storyline: slowing revenue growth.

The Indianapolis-based home-services marketplace company on Tuesday reported quarterly results that missed analyst expectations on both the top and bottom lines, sending shares tumbling more than 10 percent. Shares traded at $8.22 each shortly after noon, down nearly 12 percent for the day.

Lower spending on marketing helped the company ensure profitability last year, but revenue grew only 9 percent from 2014 to 2015, to $344.1 million, after swelling 28 percent from 2013 to 2014.

The underwhelming results could be a tailwind for activists who urged the company to sell itself last fall, analysts said, despite the fact that new CEO Scott Durchslag is intent on turning the company around to increase shareholder value. The earnings could also prompt Internet giant IAC/InterActiveCorp to make another bid for the company after seeing its $8.75-per-share overture rejected by the Angie's List board last fall.

"I don't think this [earnings report] will buy him more time," said analyst Blake Harper of New York City-based Topeka Capital Markets. "If anything, the investors look at this, the activists look at this, and they say, 'This is the reason why we need to sell.'"

Angie's List in the fourth quarter earned $14.15 million, or 24 cents a share—2 cents below the forecast of analysts surveyed by Thomson Reuters. Revenue in the quarter was $86.26 million, missing analysts' forecast of $87.68 million.

Revenue grew 5 percent in the latest quarter versus the year-ago quarter. In 2014, fourth quarter revenue grew 20 percent compared with the same quarter in 2013.

For the year, the company earned $10.2 million, or 18 cents a share, one cent short of analyst forecasts. It raked in $344.1 million in revenue, below the consensus mark of $345.6 million.

"They're doing some things to make progress," said analyst Kerry Rice with New York-based Needham & Co. "Member subscriptions were above expectations and service providers were higher in the quarter, but that's not translating into revenue re-acceleration. Ultimately that's the name of the game. You can't save your way to growth."

Increased profit margins last year resulted largely from deep marketing cuts. Almost every expense line, including employment and technology costs, saw an increase in 2015. But executives slashed marketing expenses 18 percent, to $71.5 million in 2015 from $87.3 million the year before.

Marketing as a percentage of operating expenses sat at 21.6 percent in 2015, its lowest mark since the company went public in 2011. That year, marketing had a 42 percent chunk of operating expenses.

In a post-earnings-call interview, Durchslag said he's intent on reigniting revenue, and he plans to do that in part by improving user experience by launching a new Angie's List platform dubbed AL 4.0. He also said he looks to increase the revenue he generates from non-members with products such as Lead Feed, which connects them with service providers—historically limited to members.

"At the end of the day, we want to be able to get at a broader group of consumers, convert more of those consumers to paying members and expand the pool of service providers," he said. "Those are the key levers to reignite revenue growth, and, believe me, I'm laser-focused on that."

New York-based TCS Capital Management had been Angie's most prominent activist investor last fall, but has been relatively quiet in recent months. It pushed for a merger with IAC portfolio company HomeAdvisor in October, about a month before IAC offered to buy Angie's List for for $512 million.

TCS has a stake of about 10.7 percent in Angie's List, according to its latest public filings. On Monday, Vajra Asset Management LLC disclosed that it spent $49.2 million from Jan. 26 and Feb. 19 to acquire a 9.1 percent stake in Angie's List.

Harper, of Topeka Capital Markets, said he considers Vajra an activist.

"Between [Vajra] and TCS, they have about 20 percent of the stake," Harper said. "I would say that they would probably tick up the pressure on Angie's List."


 

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