Angie’s List narrowly beat market expectations announcing stronger than expected earnings in Q3, bringing in $42 million in revenue on a $18.5 million loss. That’s a 75% jump in revenue year-over-year. While losses ticked up 6%, the reviews firm showed strong growth among its service provider segment with revenues nearly doubling on a quarter-over-quarter basis.
The reviews firm continues to push its balance sheet toward cash-flow -positive as it looks to suss out some of the leverage the model gains at scale. During an earnings call on Wednesday, CEO Bill Oesterle told investors that while the company did not expect marketing expenses to decrease in the near future, it was “starting to see the leverage in the business starting to accrue.”
“As the markets mature, the network effect starts to take place on the service provider side,” Oesterle explained, referring to the company’s advertising business. “If we have enough cash flow in those markets to keep the [membership] prices down, we get this happy phenomena where we can increase the value of the network [through advertising] while either maintaining or reducing member pricing.”
In order to sustain growth in the more mature markets, where advertising sales take an incrementally larger share of revenue, the company needs to scale its sales force without constraining its working capital. That means a new compensation structure announced during the call, which ties commissions to cash collection from advertisers, essentially allowing the company to grow its sales force without killing its balance sheet.
The second part of the plan includes added investment in improving the analytics across the network needed to measure return on investment to advertisers. A big part of this plan is a new agreement with payments company Square, which was announced during the call, to integrate payment solutions into its mobile products for service providers. While Oesterle remained tight-lipped about the specifics, he painted the agreement as part of a wider push by the firm to gain “visibility” throughout its network.
“Payment is a big piece of that transaction cycle, but it is by no means, the only piece,” Oesterie added. “The Square relationship fits into a much bigger and more important activity set that’s around deconstructing the local service transactions – measuring it, monitoring it, improving it, and enforcing it.”
The company sits at critical point in its trajectory as it begins the process of harvesting maturing markets rather than planting new ones. While its e-commerce product generated less than 8% of total revenue in the third quarter, long-term growth will rely on its ability to introduce new advertising products like this, and effectively increase the incremental value per advertiser. This is where Groupon has dug itself a hole: by overselling its deals product the company forfeited its ability to upsell merchants on ancillary services, essentially capping the lifetime value of the advertiser at their promotions spend.
Shares of Angie’s List were up 13.1% in after-hours trading.
Steven Jacobs is deputy editor at Street Fight.