Angie's List has never earned a profit

From USA TODAY - 08.14.2012

By Tony Cook, The Indianapolis Star

After 17 years, Angie's List has never earned a profit -- a fact that CEO Bill Oesterle wears like a badge.

Sometimes, I start my investor presentations with that, he said. When you think about that, it's not easy to do. Losing money for 17 years is hard. You have to continue to find people to supply the capital to you.

The Indianapolis-based company, which provides ratings and reviews of home repair, health care and auto services to paying subscribers on its website, took its appetite for capital -- and the growth opportunities it afforded -- to Wall Street last year.

Its initial public offering on Nasdaq in November was considered a success. Shares of Angie's List shot up 25% on the first day of trading, raising $114 million in that single day.

The company's shares closed at $13.29 Monday, slightly above its IPO price of $13. That's better than many other Internet-services companies that went public during the IPO boom of the past 18 months. Social-networking giant Facebook and online coupon leader Groupon, for example, have seen their stock plummet 43% and 62%, respectively.

(Investors) like the management team, they like the growth rate -- that's why they are holding onto stock despite lack of profit, said Sameet Sinha, an analyst with B. Riley in San Francisco.

But in the three quarters since the IPO, the firm has yet to earn a profit.

Last month, Angie's List posted a second-quarter loss of $23.4 million, up 45% from a year earlier. The losses stemmed primarily from $27.6 million in marketing expenses that helped fund a national advertising campaign intended to break into smaller markets and more deeply penetrate larger ones such as New York City and Los Angeles.

Those efforts are at the heart of the company's strategy. They seem to be working.

Angie's List has more than 1.5 million subscribers, which has driven a nearly twofold increase in advertising revenue from service providers. In all, the company brought in a record $36.5 million in revenue last quarter, beating analyst expectations.

Those growth figures have been enough to keep Angie's most important new customer -- Wall Street -- happy, for now.

But for all its growth, Angie's List continues to lose money. After its earnings report last month, most analysts adjusted their full-year forecasts to reflect even larger losses than previously anticipated. The continuing lack of profitability raises questions about the company's business model. After 17 years, how will Angie's List turn a profit? Will it be soon enough to satisfy investors?

Most analysts expect the company to turn its first profit by the fourth quarter of 2013. By then, Angie's List will have been on the stock exchange for two years, and its big marketing spends should be yielding results.

That's what we are expecting, said Yun Kim, an analyst for ThinkEquity in New York. If that doesn't happen, investors will react negatively.

Signs of investor impatience are emerging.

If Angie's List misses profit expectations late next year, investors could begin walking away.

Despite the analysts' expectations, Oesterle said the company is resolved to continue taking advantage of growth opportunities at the expense of short-term profits. That's the promise he and co-founder Angie Hicks made to investors in the run-up to the IPO, he said.

We are going to continue to invest in acquiring households and service companies so long as the unit economics continue to work, he said. That means that the cost of acquiring individual households leads to substantially greater return in the long run.

That growth strategy is based on a simple -- but unproven -- premise: If Angie's List slows its marketing growth, existing customers will stick around.

A big test for Angie's List will come when it begins to scale back marketing. That's something Oesterle said the company will do only when it runs out of markets where it can grow or runs out of capital for expansion.

The question is whether Wall Street is willing to be patient.

In an effort to reassure investors, Angie's List regularly releases data comparing the company's older and newer markets to demonstrate that the older markets are more profitable.

In a recent phone call with analysts, Hicks, who oversees marketing for the company that bears her name, said that when the company has dialed back marketing in the past, the effect tended to be on new acquisitions, rather than renewals.

Oesterle said he and Hicks are confident their key investors are on board with their game plan and willing to wait on a big return.

(c) Copyright 2012 USA TODAY, a division of Gannett Co. Inc.