People Incorporated (PPLI) Earnings Call Transcript

All right. So we'll go ahead and get started. Good morning, everyone. My name is Brad Erickson. I'm the Internet services analyst here at Needham & Company. Thanks, everyone, for joining us today for the somewhat redundant virtual Internet conference. Very pleased to have the CEO of ANGI Homeservices here with us this morning, Brandon Ridenour. And Brandon, thanks for joining us and taking the time of your day.

Thanks so much for having me, Brad.

Good to chat. So we'll just get right into it. But obviously, we have a question-and-answer capability here. If you do have a question, feel free to enter it in to ask a question at the bottom of the box, and I'll try and get to a few questions here as we move through the 40 minutes or so. So -- but yes, let's get right into it. Obviously, supply has been a challenge lately. Service provider capacity constraints. That's the topic of the last few months. Just talk about how much in control you are of being able to solve that problem? And how much is beyond your control, just to start out.

Yes. It's obviously an important topic. I would start by saying, I think it's worth perhaps recasting the way we think about it a bit. We have been, as a business, phenomenally successful in growing homeowner demand, and it's not just this year, but over the last 8 years, really. And we have what must be the largest audience across our brands of very high intent homeowners with needs and demands for services for their home. This is incredibly valuable, like just intrinsically incredibly valuable. We have -- when we talk about being supply constrained, the real challenge we've had is sort of keeping up with the growth in that demand and monetizing it in a sort of correlated fashion or at the same pace. When I think about digital properties and those digital properties that have large consumer audiences or that even better have a sort of high intent consumer audiences, I think history shows that the businesses are able to figure out ultimately how to monetize that demand even if it sometimes takes longer than folks would like, and there are lots of examples to point to. We are really in the same position. We have grown a large homeowner audience. When we think about building a business over the next decade, that is large and durable and extremely profitable, to me, the most important thing is capturing that audience and being the top-of-mind destination for homeowners with a need for their home. In terms of how we monetize that, we have -- we do it a number of different ways. We have, in our matching product, probably the most successful product that's ever been brought to market. It's well over $1 billion in revenue, and we serve a very large market of SPs. At the same time, we came into this year, actually, probably 2 years ago, we recognized that, that product alone was not enough. It's not the only way we can package up and serve this high-intent consumer demand. And so we started our efforts around fixed price 2 to 3 years ago in terms of when we originally started down the path with the strategy. And that brings more capacity and monetizes that demand in yet a different way. And as we sit here today, I think when we think about the path forward, in order to further monetize -- the traditional model continue to grow. Fixed price is obviously in the early stages of growing. We also believe that we'll -- we're going to package up this demand in a number of different ways and bring it to market in different ways in such a way that it will enable us to tap into segments of the provider macro economy that we're not appealing to today. We've got a great product for very small providers. I think fixed price is its own sort of unique offering. But I think we have the opportunity to further package up the demand and bring it to market for larger providers in a format that is more appealing to them. And so that's sort of out there on the horizon for us. In terms of this year and thinking about the sort of the worsening of that challenge or the worsening of our rate of monetization this year, I mean it's really been simply about the effects of the pandemic. There are 2 components to it. It's really straightforward. One is that we weren't able to grow our workforce, our sales force either in our traditional business or in fixed price at the end of Q1 and then throughout Q2, we were really on pause. In fact, our sales force shrank a bit just because of the nature of attrition, so not being able to hire during that period and then having just a normal attrition rate. We actually saw our sales force shrink. So that -- we had intended to grow our sales force substantially in the first half of the year. We weren't able to do that. And that obviously has a bit of a drag in terms of our ability to sort of propel growth of our advertising network. The other thing that has, I think, been the bigger financial impact for this year is that a lot of providers have simply pulled back and they started in April, right, when the pandemic hit. They pulled back on their advertising budgets. I think initially, they pulled back due to conservatism with the lockdowns and uncertainty. And then as the year's unfolded, it became clear that we sort of went from a cratering of consumer demand to an incredible explosion of consumer demand, and a lot of these businesses have sort of been caught on their heels. They didn't grow their capacity or operating in an impaired environment either because of staffing issues or supply chain issues. So their ability to take on work was a little bit hampered anyway. And then there's just an immense amount of organic demand, and so these companies have pulled back on their advertising budgets. It's a unique environment. We certainly expect their advertising budgets to normalize next year. The best research we've seen says that they think their ad budgets are going to normalize next year. Of course, this is one of the most uncertain environments, many of us have ever operated in, so we'll have to see how it plays out. But hopefully, that's the case. And hopefully, we do see their willingness to engage and spend at levels as previous comes back...

Sure. Sure. So I guess, just maybe in the context of kind of where you are in terms of monetizing the transactions. You guys obviously give that metric a portion of inbound service request that you're able to monetize had been running sort of historically, maybe around 40% or so that were unmonetized lately because of all the factors you just described. It ticked up above 50%. I guess help us unpack what's in your control to give a number back lower versus what are the exogenous forces that you maybe can't control here?

So that number is still elevated in and around 50%. And what we can control is the growth in our sales force. So we had a pause during Q2. We have spent Q3 figuring out how to hire and onboard remotely for sales reps. That's complicated for a lot of reasons, but the team was able to figure that out. And as we sit here in Q4, we're ramping up our team size quickly. And as we ramp up the size of our sales force, then each -- we simply have more people to bring on more providers, and that will accelerate the growth of our traditional ad network and professional network. And so that's in our control quite clearly. It were delayed. I'd say we're 6 months delayed from where we thought we would be, but it's clearly within our control going forward. What's not in our control is the willingness for these providers to raise their ad budgets to former levels. And I think the factors driving that are their own operational capacity as well as their own appetite and ability to take on new customers. Those things are obviously interrelated. But even if I have full operational capacity in an environment like this where there's just an incredible amount of demand given everybody sheltering in their homes, a lot of these companies have been able to essentially feed off of organic sources and free sources more at a higher clip than they otherwise would have been. So I think a little bit of normalization in the supply -- in the macro economy from a supply and demand standpoint will benefit us. It's clearly outside of our control. The other thing is fixed price. We continue to scale our provider network there. That's a different value proposition for providers. We are -- we're obviously growing very quickly this year, but we are operating at the edge of our capacity there as well. However, we'll continue -- that's smaller, just by its nature, and we'll continue to grow our capacity there and throughout the next year. And as we do that, we'll be able to funnel more transactions through that ecosystem. We have kept that constrain from a bookings volume standpoint because we simply have as much demand as we can fulfill. And we manage that ecosystem to a fulfillment rate sort of threshold, right? We want to -- if somebody places an order with us, we want to make sure that we're able to fulfill that order a certain percentage of the time because if we don't, it's not a good experience. So we've kept that flow of demand constrained. We have actually taken prices up a bit because we simply are getting more orders than we could handle. So we keep that equilibrium, but there's the opportunity to grow that throughout the next year. And then the last thing is, I just think productizing this demand in new ways and taking it to market toward different SP segments is our next big opportunity that I would pair up with our traditional business and the fixed price business that we've launched in the last couple of years.

Got it. Okay. Yes. There's a lot there. I want to unpack, and we'll come back to fixed price, but maybe just one more related to -- Glenn made some comments on the conference call a week or so ago, just around growth, probably remaining muted here for the next few quarters. I guess would love to hear a little bit more about the relationship there between the underlying service request growth monetized piece. So meaning, are you guys kind of looking for sort of deceleration at the top line level? You kind of just called out, you can't -- you don't really want to spend more on demand right now, right? You don't have the supply constraint? Or is it a function of -- are you able to unlock some of those supply constraints and just talk about which of those levers is moving more in Glenn's comment there?

Yes. Well, we definitely don't expect over any longer period of deceleration in the top line. Month-to-month, there's a lot of noise for structural reasons that don't matter, but we're not expecting deceleration. The factors driving sort of that outlook, first is we're not getting to our sales force target until the end of the year, and most of that is coming in November and December. And once we hire salespeople, we're hiring a lot of them, many hundreds of them. And they take about 12 weeks to go through the training program and sort of graduate at full productivity. And then once you've got those folks operating at full productivity, their impact on growing the network takes time to unfold. It's effectively selling a few providers a week. That just takes time to aggregate in a way that will affect the overall growth rate of the company. So that's one factor that's very predictable. We understand where we're at. We understand how that will unfold as we look at the financial trend over the next year. The things that we don't know are, we don't know what service request growth looks like next year. I don't think that's as big a factor as one might think. We have an enormous reservoir of service request, if that number -- if that decelerates, then we'll monetize simply more -- a higher percentage of what we do get. The factor that is a bigger deal and is totally unpredictable is when do some of the larger advertisers that have pulled back on their advertising spend. They've stayed in our ecosystem, but they're spending less because they're busy, generally speaking. When do they come back and raise their spend to former levels? Do we see that normalize? Does it take until the end of the pandemic for those businesses to normalize? Or does it happen sooner as we're kind of getting into a slower part of the year and Q1 is generally somewhat slow? So maybe those providers have an appetite that returns for new customers, it returns sooner than the total resolution of the pandemic. We just don't know. If I look at the financial -- if you look at January and February, we were growing right around 20%. And clearly, that's dropped down by about 10 points for the remainder of the year. And the majority of that -- to see that sudden of a drop off, that is largely a result of a change in behavior of our existing service providers that are in the network as opposed to anything we're doing operationally from a new sales standpoint. And when we look at that, we analyze it, those providers haven't left our ecosystem. They're still there. They're still spending. They're simply less active. And one of the things that makes our product for service providers, the best-in-class in the market, is we actually provide -- we provide service providers with the ability to turn it off anytime they want. It's more powerful and more granular than most advertising products. You can go in, not only you can specify what jobs you want with ZIP codes, but if you are busy and you can't take on new customers, you can go turn it off. And that's what we're seeing. We're seeing folks turn their sort of matching service off more frequently than they would have otherwise. And when we talked to them, they said they're booked. A lot of them are booked out there for the year, so.

Yes. Yes. No, that's fair. So it's a good lead-in. I'm going to try and layer in a few questions. We are getting a fair amount from the listening audience. One on ROI. Just how do you guys think about how your ROI compares to Google right now? I know they're different products. And certainly, you think of yourself as a different product. But I think a lot of investors tend to want to look at the comparison there. And then secondarily, how do you think about the ROI difference between the lead-gen product and fixed price and how you sort of look to allocate capacity between those 2? Or I should say, put differently, how would the service provider think about allocating capacity therein?

So with regard to Google's product, I think they have a product that is pretty well suited to larger providers. I haven't looked at it terribly recently, but the last time I did, the nature of way Google works is generally speaking, you're searching for plumbers in Denver or electricians in Indianapolis. And from an advertiser standpoint, that's not a very fine-grained sort of fine grains or granular combination to advertise on. Meaning, if you're a service provider at HomeAdvisor, you can say, I only want tankless water heater installations. I only want them these 4 ZIP codes. And we put people through an interview process, and we're able to match at a very granular level, and then you can also obviously turn the service off if you're too busy. With Google, typically, it's a plumber in Denver. And so that tends to appeal to larger providers that cover an entire market and cover an entire category. I think they're -- they obviously have a very large top of funnel from a consumer demand standpoint, and they've got the best real estate on the search results page, which is right at the top. And they can set prices wherever they want in terms of the advertising product they're selling. And so I think they're probably delivering an experience, particularly for larger SPs that has a good ROI. And the challenge for us is, obviously, we have to compete with that. And we think about that in 2 different ways. First, when I think about our long-term path to creating an enduring and very valuable business, it's largely about capturing the consumer market and less so about the provider market. If we can become the top-of-mind destination for consumers, and we have control of that high-intent traffic from consumers homeowners, we will build a very valuable business, and we will monetize it. I have no doubt about that. I think we are -- in terms of our ability to do that, I don't think we are competing with Google. I think we're the only company in the world that's focused solely on this one problem. We're the only company in the United States, certainly, that's focused only on creating a transformational experience for homeowners around how they procure home services. I don't think of advertising product at the top of the surf is meaningful, at least at this stage in terms of that transformation. So that's where we have to run. On the provider side, in terms of providing an advertising product, absolutely, we've got to make sure we're competitive in terms of ROI. That's something we have to keep our eye on. I mean we have the ability and willingness to monitor and ensure that we're providing a higher ROI product. I think the opportunity, as I stated earlier, is I think we've got a great product for very small companies that want to like have granular control, and the ROI is very strong. I think as we look at sort of the higher end of the market, much larger providers who operate a little bit differently, there's opportunity for us to come to market and productize this demand in ways that we're not today. And that's something we'll talk about more in the future. And your second question, in terms of how do we apportion demand, whether it be for a traditional model or fixed price, it's really -- sorry, go ahead.

Yes. I was actually more asking about if you're an SP, right, and you're looking at either fixed price or lead gen from an ROI perspective, how do they -- what is the determinant of their capacity allocation relative to those 2 platforms?

We -- so at this stage, we have totally distinct provider networks for those 2 different lines of business. And we have different teams and operations that go after providers to participate. And so for our traditional products, whether it's the matching product or advertising product at ANGI's list, that's more of a traditional sales force. It's a pretty high cost sale with a known sort of return on investment for the providers that we acquire. And then fixed price has a completely different team that goes out and tries to find providers to participate in that ecosystem. That's a very different operation altogether. It's a different value proposition. You're really not selling anything. You're going out and finding a provider and telling them you have a job for them that you'll pay them to do, are they interested? And so it's very low cost. It's not a sales team. It's more of an operations team. And the provider isn't paying us anything. We're paying them. The ROI for us is great either way, but for providers, it's a very different -- it's just a very different experience. It's very appealing if you're a provider to get a job and get paid for it even if perhaps the percentage of revenue of that job might be higher to us, but I have no sales costs, I have no marketing costs. I don't have to come out-of-pocket for anything. I don't want to take any risk from a psychological standpoint, paying for advertising, so to speak. So it's really, really, really compelling. And then there are advertising products, obviously, we just talked about. So they're really just very different. I think we have a question which we get and we ask ourselves frequently, which is when do we sort of cross-pollinate, when do we allow our traditional advertisers to get fixed price jobs? It's -- the answer is probably not within the next year. We really like clarity of managing these 2 things distinctly. We were low enough penetration in the service provider market that we shouldn't have to dip into our network of traditional advertisers to find people to take on fixed-price jobs. And it just gives us clarity of operations and clarity that we're bringing in new capacity. Clearly, over the longer term, we're going to allow all of our customers to dabble on all of these things because it's in their best interest. But operationally, where we're at today, we're keeping them separate.

Got it. Okay. And then just want to walk through the mechanics of kind of how you're finding fixed price to be working in its earliest form. And we've obviously talked to some service providers and heard about some of the bidding and quoting processes. Talk about that and conversion and just what needs work, what's worked well? What are the friction points that are proving sort of toughest to overcome as you get going with fixed price?

So I actually read your note and some of the discussion around the SP feedback that they were having to bid against each other. That wasn't actually about fixed price. I mentioned this in a couple of our earnings calls that we were testing a wind fee product also. With the wind fee product, we actually do -- we kind of shoot it out to 3 different providers and allow them to give bids and then the consumer can pick which bid they want. That's just a small pilot that we were testing. And that's what you were getting feedback on. It's actually very difficult to find a fixed price provider. They're not listed on our website, and the number in the -- I don't know, in the sort of 5 figures, low 5 figures in terms of how many them we have. So unfortunately, for anybody on the outside, it's a bit difficult to do the research, to find those providers to do the research to understand how they feel. What we found -- in terms of our -- the way we think about the satisfaction of fixed price providers, is just in their sort of longevity and willingness to accept jobs from us. And the biggest determinant of whether they're happy or not -- to be 100% clear, there's no bidding or competition on fixed price. We offer the job to a provider, and they simply can say yes or no as to whether they want it. And what we find is the biggest determinant of whether or not they stick is if we give them a job today, can we give them another job within the next 2 or 3 weeks? Because if you go to -- if it's 6 weeks or 8 weeks later, that we give them their next job, they get stale. Like they grow stale, and they're just not -- they're not there and not responsive. So the key for us is to reach a frequency of offering these jobs to these providers so that they kind of stay busy. And even though we're big and at $150 million plus, that seems like a reasonably big business, the truth is the U.S. is enormous. There's 400 markets. There's 200 different types of jobs. It takes a lot of scale, actually, to keep providers busy. And so I would think of this as an opportunity for sort of a network effect to take hold as we get bigger and bigger and can raise that frequency, then providers should stay stickier and stickier. Our ability to find out which providers are good is enhanced. And then our ability to keep them busy and sort of flush with work is enhanced. And that's really the key to it. But in terms of their satisfaction, there's really nothing to be dissatisfied with because all we're doing is saying we have a job for you, and we're willing to pay you for it. And you can say yes or no based on whether you have the appetite and ability to do the work and whether it's at a price that you find attractive.

Got it. So at this point, there's obviously some of the gating factors around supply that you mentioned in sales force. But in terms of how the product is actually working and converting, it's been in line with your expectations progressing well. Is that -- am I characterizing that correctly?