10-K 1 angi20131231_10k.htm FORM 10-K angi20131231_10k.htm Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K

(Mark One)

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

  For the fiscal year ended December 31, 2013

 

 OR

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 

 

  For the transition period from                     to

 

 Commission file number 001-35339

 


ANGIE’S LIST, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

27-2440197

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1030 E. Washington Street

Indianapolis, IN

46202

(Address of principal executive offices)

(Zip Code)

 

(888) 888-5478

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of each class)

 

(Name of each exchange on which registered)

Common Stock, $0.001 par value

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act:

 

None.

(Title of Class) 

 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes      No  

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

       

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2013, computed by reference to the number of shares outstanding and using the price at which the stock was last sold, was $1,134,108,866.

 

As of February 27, 2014, the number of shares of the registrant’s common stock outstanding was 58,507,109.

 

 
 

 

  

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement relating to its 2014 annual meeting of stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2013. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Definitive Proxy Statement is not deemed to be filed as part of this Annual Report on Form 10-K.

 

 

 

     

PART I.

 

Item 1.

Business

1

Item 1A.

Risk Factors

6

Item 1B.

Unresolved Staff Comments

26

Item 2.

Properties

27

Item 3.

Legal Proceedings

27

Item 4.

Mine Safety Disclosures

27

   

PART II.

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

28

Item 6.

Selected Consolidated Financial and Other Data

30

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 8.

Financial Statements and Supplementary Data

48

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

70

Item 9A.

Controls and Procedures

70

Item 9B.

Other Information

72

   

PART III.

 

Item 10.

Directors, Executive Officers and Corporate Governance

72

Item 11.

Executive Compensation

72

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

72

Item 13.

Certain Relationships and Related Transactions, and Director Independence

72

Item 14.

Principal Accountant Fees and Services

72

   

PART IV.

 

Item 15.

Exhibits and Financial Statement Schedules

73

 

 

PART I.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Annual Report on Form 10-K contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. In addition, some of the industry and market data contained in this Annual Report on Form 10-K are based on data collected by third parties, including The Nielsen Company (“Nielsen”) and Merkle Inc. This information involves a number of assumptions and limitations. Although we believe that each source is reliable as of its respective date, we have not independently verified the accuracy or completeness of this information. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “Risk Factors” included in this Annual Report on Form 10-K. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. We qualify all of our forward-looking statements by these cautionary statements.

 

ITEM 1.      BUSINESS

 

Overview

 

Angie’s List operates a consumer-driven service for members to research, hire, rate and review local professionals for critical needs, such as home, health care and automotive services. Our ratings and reviews, which are available only to our members, help our members find the best provider for their local service needs. We allow local service providers who are highly rated by our members to advertise discounts and other promotions to our members. As of December 31, 2013, we offered our service to approximately 2.5 million paying members in 253 local markets in the United States.

 

We help consumers purchase “high cost of failure” services in an extremely fragmented local marketplace. These services, which include home remodeling, plumbing, roof repair, health care and automobile repair, are typically expensive and carry a high cost to the consumer if performed poorly. Consumers seeking reputable providers of these services generally are forced to rely on incomplete data from word-of-mouth testimonials, local advertisements, the Yellow Pages or Internet search results, all of which may be incomplete, unreliable or misleading. Our ratings are based exclusively on reviews from our members and we accept no anonymous reviews. As a result, we believe our reviews are a trusted resource for consumers to find high quality local service providers.

 

We also help local service providers find quality customers and differentiate themselves in a competitive marketplace. Our members represent an attractive, targeted group of consumers for service providers. Our typical member is between the ages of 35 and 64, is married, owns a home, is college educated and has an annual household income of at least $100,000, based on information derived and interpreted by us as a result of our own analysis from general demographic data provided by Nielsen.

 

 

The value proposition we offer to both consumers and local service providers strengthens our position as a trusted resource and allows us to derive revenue from both members and service providers. As more members contribute reviews to our service, we increase the breadth and depth of content offered to members, attracting more members and enhancing the value of our service to reputable local service providers, for whom our members constitute a large pool of qualified customers for their services. We believe our high level of member engagement and our consistently high membership and service provider renewal rates are evidence of the value we offer both members and service providers.

 

Our Services

 

We offer an efficient way for consumers and reputable service providers to find each other, always placing the interests of the consumer first.

 

Member Services

 

Applying the “ask-your-neighbor” approach across our target markets, we compile a breadth of highly relevant, member-generated ratings and reviews that provide insights consumers cannot obtain on their own. We collect reviews from both members and non-members, and we prohibit anonymous reviews. Only our members’ reviews factor into service providers’ ratings, and consumers must subscribe to access our ratings and reviews. We actively monitor for fraudulent reviews.

 

Our members’ reviews span more than 720 categories of high cost of failure services such as home, health care and automotive services. Consumers may purchase monthly, annual and multi-year memberships to Angie’s List, Angie’s List Health & Wellness or Angie’s List Classic Cars in certain markets, or bundled membership packages that include access to reports on local service providers in all three lists. The following table highlights some of the service provider categories included in each of our three lists.

 

Angie’s List

  

Angie’s List Health & Wellness

  

Angie’s List Classic Cars

Carpet cleaning

  

Dentists

  

Appraisals

Electrical

  

Dermatologists

  

Bodywork

Handymen

  

Elder care

  

Chrome work

Heating & A/C

  

Hospitals

  

Custom painting

Housecleaning

  

OB/GYN

  

Detailing

Painting

  

Ophthalmologists

  

Engine modification

Plumbing

  

Pediatricians

  

Parts locators

Remodeling

  

Plastic surgeons

  

Restoration

Roofing

  

Primary care

  

Storage

Windows

  

Psychiatrists

  

Wheels and tires

 

Our members rate local service providers on an “A” through “F” grading scale based on six criteria: overall experience, price, quality, responsiveness, punctuality and professionalism. Ratings on each criterion are averaged across all member reviews submitted for the service provider to produce the service provider’s grade on Angie’s List. Non-member reviews do not factor into the ratings, but appear in a separate section from the member reviews on a service provider’s profile. Service providers cannot influence their ratings on Angie’s List. In addition to a letter grade, we encourage members to provide a detailed description and commentary on the service experience. We also ask for the approximate cost of the service, the date that the service was provided and whether the member would hire the local service provider again. Members can report on each unique experience they have with a service provider. However, if a member submits more than one review on the same service provider within 180 days, the second review is published only if we determine that it is for a separate service experience. Member ratings determine which local service providers are eligible to offer discounts and other money-saving promotions.

 

 

We do not allow our members to submit reviews anonymously. We believe that this policy is critical to maintaining the integrity of our reviews. We permit local service providers to respond to reviews, both positive and negative, to provide our members both sides of the story. We also deploy a variety of other resources, including a team of internal audit personnel and our proprietary fraud detection technology, to ensure that our members can trust the reviews they find through our service. We use automated techniques to screen all reviews for fraudulent activity, duplicate reviews and vulgar language prior to their publication. Flagged reviews receive additional screening to ensure their accuracy, reliability and propriety.

 

We provide convenient access to our members’ reviews on the Internet, by smartphone and telephone. We also provide our members with live customer support from our inbound member call center and help our members resolve disputes with service providers through our complaint resolution process.

 

In 2013, 2012, and 2011, membership revenue accounted for approximately 27%, 31% and 38% of our total revenue, respectively.

 

Service Provider Services

 

Our members are looking for reputable providers of high cost of failure services, and use our service to find them. Consumers subscribe to our service when they are ready to purchase. Local service providers with high ratings from our members benefit from access to this large, qualified pool of demand.

 

We offer local service providers with an average grade of “B” or better and at least two reviews submitted in the last three years the opportunity to offer exclusive discounts to our members through their online profiles, through our inbound member call center and in Angie’s List Magazine. If a service provider’s grade falls below a “B” during the term of its contract, or if a service provider refuses to engage in our complaint resolution process or engages in what we determine to be dishonest behavior on our service, we immediately terminate its contract and suspend its discounts and other promotions. This policy, which may cause us to forgo revenue that we otherwise would receive, is guided by our commitment to our consumer-first philosophy.

 

In addition to traditional advertising on our website and publications, we offer our members the opportunity to purchase services through us from service providers rated on our website, which we refer to as e-commerce. These offerings are available through both email promotions and through postings on our website. When the member purchases the service, the transaction is processed through Angie’s List. The member then can work directly with the service provider to schedule the service. These e-commerce offerings provide our members a discount and an easier way to complete their service needs.

 

Because our membership, not Angie’s List, determines which local service providers are eligible to advertise with us based on their reviews, service providers who advertise are known to be reputable. We believe that smaller local service providers particularly benefit from our service because they compete based on the quality and value of their services rather than the size of their marketing budgets.

 

A local service provider does not need to advertise with us to be included on Angie’s List or to manage its online profile. We encourage local service providers to take an active role in managing their profiles and monitoring members’ ratings and reviews through our free Business Center service. Through this service, local service providers can update their profile contact information, sign up for email notification when we receive a new review of their services and respond to members’ reviews.

 

In 2013, 2012, and 2011, service provider revenue accounted for approximately 73%, 69% and 62% of our total revenue, respectively.

 

  

Marketing and Sales

 

We focus our marketing efforts primarily on acquiring new members to increase our market penetration. Our marketing strategy includes a mix of advertising offline on national cable and broadcast television, national broadcast radio and magazines as well as online through search engine marketing and online display. Our co-founder and Chief Marketing Officer, Angie Hicks, serves as the company spokeswoman. Additionally, we use our original content to supplement our advertising spend and further strengthen our brand through search engine optimization.

 

Our sales personnel focuses on originating and renewing advertising contracts and identifying and converting e-commerce opportunities with service providers. The majority of this sales force is located at our headquarters in Indianapolis, Indiana, and they will call upon eligible local service providers in our 253 paid membership markets in the United States.

 

Competition

 

We compete for members with traditional, offline consumer resources and with online providers of consumer ratings, reviews and referrals on the basis of a number of factors, including breadth of our service provider listings, reliability of our content, breadth, depth and timeliness of information and strength and recognition of our brand. We also compete for a share of local service providers’ overall advertising budgets with traditional, offline media companies and other Internet marketing providers on the basis of a number of factors, including return on investment, our high quality membership profile, effectiveness and relevance of our member discount program, our pricing structure and recognition of our brand. Our competitors include:

 

 

 

Traditional, offline competitors. We compete for members with a number of traditional, offline consumer resources, such as the Yellow Pages and Consumers’ CHECKBOOK. Many of these competitors also have consumer reviews and information about service providers available online.

 

 

 

Online competitors. We compete for members with “free to consumer” online ratings websites and referral services funded directly by service providers or by service provider advertising, such as HomeAdvisor, Inc., the “Diamond Certified” directory operated by American Ratings Corporation, Yelp, Inc., Kudzu, an indirect subsidiary of Cox Enterprises, Inc., and Insider Pages, an indirect subsidiary of IAC/InterActiveCorp. In our Angie’s List Health & Wellness categories, we compete for members with other online resources for patients, such as RateMDs, Inc. and Health Grades, Inc. Across all categories, we also compete with established Internet companies such as Facebook, Inc., Google, Inc., Groupon, Inc., LivingSocial, Inc., Microsoft Corporation and Yahoo! Inc.

 

Our Technology

 

Our proprietary technology platform is designed to create an engaging user experience for our members, to enable us to collect and verify the integrity of our members’ reviews and to help us to connect our members with relevant local service providers. We have a team of product and engineering professionals at our headquarters in Indianapolis, Indiana and in Palo Alto, California dedicated to enhancing our technology platform, developing new services for members and service providers and conducting product and quality assurance testing.

 

Key elements of our proprietary technology platform include:

 

 

 

Search. Our search technology combines structured and free-form content to allow members to search for service providers in numerous categories. Our search uses a number of factors, such as grade, number of reviews, service area and current discounts or other promotions to connect our members with the most relevant local service providers.

 

 

 

Targeted review acquisition. We have developed a review targeting engine for collecting reviews on local service providers from our members. This engine enables us to identify members who may have hired a service provider they found through Angie’s List, and we encourage these members to submit a review of their service experience.

 

 

 

 

Fraud detection. We use various technology-based algorithms and filters to detect fraudulent reviews. Because most of our memberships are paid, our reviews are not anonymous and provide a degree of traceability and accountability not present in other sites.

 

 

 

Service provider sales lead targeting. We use a lead scoring engine to identify the most qualified service provider leads for our service provider sales representatives to target. This engine assigns scoring weights to a variety of attributes which we believe make service providers a good prospect for our sales representatives.

 

 

 

Membership, contracts and renewal tools. We have developed sophisticated and proprietary tools for managing memberships and markets, highly localized and targeted service provider contracts and automatic renewals of both memberships and service provider contracts.

 

 

 

E-commerce tools. We have developed tools to allow members to purchase services through us from service providers rated on our website. Our Big Deal and Storefront offerings give our members the option to receive email alerts of deals or search through service provider offerings on our website.

 

We have developed our website and related infrastructure with the goal of maximizing the availability of our service to our members and service providers. Our website and related infrastructure are primarily hosted on a network located at our headquarters and in a redundant third-party facility in Pittsburgh, Pennsylvania.

 

Intellectual Property

 

We protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our personnel and contractors and confidentiality agreements with third parties. In addition to these contractual arrangements, we also rely on a combination of trade secrets, trademarks, trade dress, domain names and copyrights to protect our intellectual property. We believe our domain names, trademarks and service marks are important to our marketing strategy and development of awareness of our brand, and therefore, we pursue their registration in the United States and in certain locations outside the United States. As of December 31, 2013, we have registered 24 trademarks in the United States, including “Angie’s List,” and two registered trademarks in Canada, as well as four pending trademark applications in the United States.

 

Personnel

 

As of December 31, 2013, we had 1,637 full-time personnel in the United States. None of our personnel is covered by a collective bargaining agreement. We believe that relations with our personnel are good.

 

Seasonality

 

While we believe seasonal trends have affected and will continue to affect our quarterly results, our trajectory of rapid growth may have overshadowed these effects to date. We believe that our business will be subject to seasonality in the future, which may result in fluctuations in our financial results.

 

Operating Segments and Geographic Areas

 

We manage our business on the basis of one operating segment. Substantially all of our revenue in the year ended December 31, 2013 was from members and participating service providers in the United States.

 

Available Information

 

We were organized in the State of Indiana in April 1995 as Brownstone Publishing, LLC. In April 2010, we became a Delaware corporation and changed our name to Angie’s List, Inc. Our principal executive offices are located at 1030 E. Washington Street, Indianapolis, Indiana, 46202, and our telephone number is (888) 888-5478.

  

 

Our website is located at www.angieslist.com and our “Investor Relations” website is located at investor.angieslist.com.

 

We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC. We make available on our “Investor Relations” website, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We use our “Investor Relations” website as a means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD. Accordingly, investors should monitor investor.angieslist.com, in addition to following our press releases, SEC filings and public conference calls and webcasts. References to our website and our “Investor Relations” website in this report are intended to be inactive textual references only, and none of the information contained on our website or our “Investor Relations” website is part of this report or incorporated in this report by reference.

 

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

ITEM 1A      RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should carefully consider each of the following risk factors and all other information set forth in this Annual Report on Form 10-K. The following risks and the risks described elsewhere in this Annual Report on Form 10-K, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially harm our business, financial condition, operating results, cash flow and prospects. If that occurs, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business

 

We have incurred net losses each year since inception, and we expect to continue to incur net losses as we continue to invest aggressively to grow and penetrate our markets.

 

We have incurred significant net losses each year since inception. As a result, we had an accumulated deficit of $252.3 million as of December 31, 2013. Consequently, we have funded our operations through equity and debt financings. A key element of our strategy has been to aggressively grow both the number of markets in which we offer our service and our penetration in each of these markets. In addition, we have expanded the number of local service provider categories that we maintain for our members’ review, launched new products and services for members and local service providers and significantly grown our service provider sales headcount and sales activity. We anticipate that our expenses will continue to increase as we continue to invest in growing our paid membership base, increase the number and variety of our service provider categories, increase the number of service providers participating as advertisers, develop new marketing initiatives and enhance our technology platform. In particular, we intend to continue to invest substantial resources in marketing to acquire new paid memberships, in selling to grow our base of participating service providers and in technology to enhance our product offerings. These planned investments may consume a portion of our cash flow and may result in additional net losses and negative cash flow. We also expect to incur increased operating expenses as we hire additional personnel and invest in our infrastructure to support anticipated future growth and the reporting and compliance obligations to which we are subject as a public company. In addition, in our efforts to increase revenue as the number of members has grown, we have expanded and expect to continue to expand our sales personnel. If our hiring of additional sales personnel does not result in a sufficient increase in revenue, the cost of this additional headcount will not be offset, which would harm our operating results and financial condition.

 

If our revenue does not grow or declines, or if our operating expenses exceed our expectations, we may not become profitable on a sustained basis. In addition, if our future growth and operating performance or our negative cash flow or losses resulting from our investment in membership acquisition fail to meet investor or analyst expectations, our operating results, financial condition and stock price could be materially adversely affected.

 

 

We have significantly increased our annual investment in membership acquisition. If the revenue generated by new paid memberships differs significantly from our expectations, or if our membership acquisition costs or costs associated with servicing our members increase, we may not be able to recover our membership acquisition costs or generate profits from this investment.

 

We spent $87.5 million and $80.2 million on marketing to acquire new memberships in 2013 and 2012, respectively, and expect to continue to spend significant amounts to acquire additional memberships, primarily through national advertising. Our decisions regarding investments in membership acquisition are based upon our marginal marketing cost per paid membership acquisition and our analysis of the revenue we have historically generated per paid membership over the expected lifetime of such membership. Our analysis of the revenue that we expect new paid memberships to generate over their lifetimes depends upon several estimates and assumptions, including membership renewal rates, future membership fees and incremental advertising revenue from service providers driven by increased penetration in a particular market. Due to our recent expansion, our experience with long-term financial and operating trends is limited to a relatively small proportion of our overall number of paid membership markets. Our experience in markets in which we presently have low penetration rates may differ from our more established markets.

 

Our average revenue per market and total revenue per paid membership in a geographic market have generally increased with the maturity and corresponding increased penetration of our markets in prior periods. In the future, we expect total revenue per paid membership to fluctuate from period to period, reflecting the timing of adjustments to advertising rates given the advertising contract terms and membership pricing innovations designed to drive increased penetration, among other factors. In addition, we intend to continue to evaluate and adopt new pricing and packaging strategies, such as reduced membership pricing, to support our strategy of driving increased membership growth and improved retention, which have caused and may continue to cause membership revenue per paid membership and total revenue per paid membership to decline in some or all of our membership cohorts.

 

If our estimates and assumptions regarding the revenue we can generate from new paid memberships prove incorrect, or if the revenue generated by new paid memberships over the periods such members continue to subscribe differs significantly from that of paid memberships acquired in prior periods, we may be unable to recover our membership acquisition costs or generate profits from our investment in acquiring new paid memberships. Moreover, if our membership acquisition costs or the costs associated with servicing our members increase, the return on our investment may be lower than we anticipate irrespective of the revenue generated by new memberships. If we cannot generate profits from this investment, we may need to alter our growth strategy, and our growth rate and results of operations may be adversely affected.

 

Our business depends on the strength of our brand, which has been built by the trust of consumers, and the failure to maintain that trust would damage our brand and harm our ability to maintain or expand our base of paid memberships and participating service providers.

 

Trust in the integrity of the “Angie’s List” brand and in the objective, unbiased nature of our ratings and reviews has contributed significantly to our ability to attract new paid memberships and participating service providers. Maintaining consumer trust and enhancing our brand will depend largely on our ability to maintain our commitment to and reputation for placing the interests of the consumer first. If our existing or potential members perceive that we are not focused primarily on helping them make more informed purchasing decisions about local services transactions or that the advertising revenue we receive from service providers interferes with the objective rating of service providers on the basis of member reviews, our reputation and the strength of our brand will be adversely affected. Complaints or negative publicity about our sales and business practices, services, personnel and customer service, irrespective of their validity, and data privacy and security issues could diminish consumers’ confidence in our service and adversely impact our brand. For example, in August 2012, a lawsuit seeking class action status, Fritzinger v. Angie’s List, Inc., was filed against us in the U.S. District Court for the Southern District of Indiana, alleging that we automatically renew membership fees at a higher rate than customers are led to believe, breaching our membership agreements.

 

 

 

Trust in our brand also will suffer if we are not able to maintain the quality and integrity of the ratings and reviews that appear on Angie’s List. We collect reviews from both members and non-members and make these reviews available to members on our website, although non-member reviews are not factored into the service providers’ ratings. While we use various technology-based algorithms and filters to detect fraudulent reviews, and we believe that our prohibition of anonymous reviews provides a degree of traceability and accountability not present in other websites, we cannot guarantee the accuracy of our reviews. Moreover, as our base of paid memberships expands and the number of local service providers rated and reviewed by our members grows, we may see an increase in fraudulent or inaccurate reviews. If fraudulent or inaccurate reviews — positive or negative — increase on Angie’s List and we are unable to effectively identify and remove such reviews, the overall quality of our ratings and reviews would decrease, our reputation as a source of trusted ratings and reviews may be harmed and consumers and local service providers may be deterred from using our products and services. We regularly employ steps designed to ensure that consumer reviews are not inaccurate or fraudulent and that service providers are rated according only to member reviews of them rather than their advertising with us or any other factor. If such steps prove ineffective or if members otherwise believe that we are not objective, we could lose their trust, and our brand and business could be harmed.

 

In addition, our brand could be harmed if others use any of our trademarks inappropriately. For example, local service providers may use our trademarks without our permission, including our “Super Service Award,” which is available only to local service providers that have maintained superior service ratings. We have in the past taken, and will in the future take, action, including initiating litigation, to protect our trademarks and the integrity of our brand. If such efforts are unsuccessful, our brand and our business would be adversely affected.

 

If our efforts to increase the number of our paid memberships, to retain existing paid memberships and to maintain high levels of member engagement are not successful, our growth prospects and revenue will be adversely affected.

 

Our ability to grow our business and to generate both membership revenue and service provider revenue depends on attracting new paid memberships, retaining our existing paid membership base and maintaining high levels of member engagement. We must convince prospective members of the benefits of our service and existing members of its continuing value. In addition, we must convince our members to submit reviews of local service providers to our database. We are dependent upon increased penetration and active member engagement in each of our markets to grow our database of reviews of local service providers, and in turn to enhance the value of our service to other members and prospective members in that market and to increase membership revenue per paid membership. We also depend on growing our paid membership base to increase our service provider revenue in that market by driving greater participation by service providers in our advertising programs and higher advertising rates. We cannot assure you that we will be successful in maintaining or expanding our paid membership base, or in increasing our revenue per paid membership.

 

In addition, we have historically relied upon high membership renewal rates and “word of mouth” referrals from existing members to maintain and grow our paid membership base. If our efforts to satisfy our existing members are not successful, we may not be able to maintain our renewal rates or continue receiving those referrals. Furthermore, although we use our number of paid memberships as one indicator of the growth of our business, some of our members may not actively use our service or submit reviews of local service providers to our database. If member engagement does not meet our expectations, we may lose members or service providers who advertise with us, and our revenue may not increase or may decline.

 

Our ability to increase the number of our paid memberships and to maintain high levels of member engagement will require us to address a number of challenges, and we may fail to do so successfully. Some of these challenges include:

 

 

 

continuing to build our database of member-generated ratings and reviews of local service providers;

 

 

 

increasing the number and variety of local service providers reviewed by our members;

 

 

 

convincing consumers of the benefits of our service, and making it easy for them to become paid members; 

 

 

 

delivering an optimal member experience, including relevant, high-quality discount, coupon and other promotional offers from our participating local service providers and compelling, easy-to-use e-commerce offerings; and

 

 

 

continuing to innovate and keep pace with changes in technology and our competitors.

 

Our inability to increase the number of our paid memberships and to maintain high levels of member engagement would have an adverse effect on our growth prospects, operating results and financial condition.

 

 

 

Any failure to convince local service providers of the benefits of advertising with us would harm our business.

 

For 2013 and 2012, we derived 73% and 69%, respectively, of our revenue from service providers, and we expect to continue to derive an increasing percentage of our revenue from service providers in the future. Our ability to attract and retain participating service providers and, ultimately, to generate advertising revenue depends on a number of factors, including:

 

 

 

increasing the number of paid memberships in our existing markets;

 

 

 

maintaining high levels of member engagement;

 

 

 

competing effectively for advertising dollars with other online and offline advertising providers; and

 

 

 

continuing to develop and diversify our advertising offerings.

 

Historically, advertising markets for local service providers have been dominated by traditional offline advertising media, such as broadcast and cable television, broadcast radio, newspapers and the Yellow Pages. We offer both offline and online advertising products to eligible local service providers, and our business will depend in part on local service providers’ willingness to pay for our advertising products. Local service providers may view advertising with us as experimental and its long-term effectiveness as unproven, may choose not to advertise with us, or may leave us for competing alternatives upon expiration or termination of their agreements with us. Failure to demonstrate the value of our service would result in reduced spending by, or loss of, existing or potential future participating service providers, which would materially harm our revenue and business.

 

Unlike competitors such as Yellow Pages, we generally do not employ local “feet on the street” sales forces to sell advertising to service providers and instead rely on call center sales personnel. The resulting lack of a personal connection with local service providers may impede us in growing service provider revenue. As we grow, we will need to recruit, integrate and retain additional skilled and experienced call center sales personnel who can demonstrate our value proposition to service providers and increase the monetization of our membership base. We will be adversely affected if we hire poorly and if sales personnel do not reach levels of effectiveness within a period of time consistent with our historical experience or if we are unable to convince service providers to advertise with us through our call center model.

 

Our success depends in part upon our ability to increase our service provider revenue per paid membership as we increase our market penetration.

 

Historically, our service provider revenue per paid membership in a given market has generally increased with market penetration as we attracted more service providers and charged higher advertising rates as the pool of members using our service to actively seek local service providers has grown. Because we only increase advertising rates at the time of contract renewal, such rate increases in a given market may trail increases in market penetration. In addition, in certain markets we have not increased our advertising rates as rapidly as the number of paid memberships has grown. Moreover, trends in market penetration and growth in service provider revenue per paid membership in our larger or less penetrated markets have differed from our experiences in our smaller or more penetrated markets. Accordingly, growth of our membership may not result in service provider revenue increases until future periods, if at all. In addition, we are subject to risks associated with the credit quality of our service providers. If service providers to whom we have provided advertising services are unable to meet their contractual obligations to us, our service provider revenue could decrease, and our results of operations could be harmed.

 

 

We are and will continue to be faced with many competitive challenges, any of which could adversely affect our prospects, results of operations and financial condition.

 

We compete for both members and service providers with a range of established and emerging companies. We compete for members on the basis of a number of factors, including breadth of service provider listings, reliability of our content, breadth, depth and timeliness of information and strength and recognition of our brand. We compete for a share of local service providers’ advertising budgets on the basis of a number of factors, including return on investment, our high quality membership profile, effectiveness and relevance of our service providers’ discount offers to our members, our pricing structure and recognition of our brand. Our current competitors for memberships and service providers include a number of traditional offline consumer resources, such as the Yellow Pages and Consumers’ CHECKBOOK. Many of these competitors also have consumer reviews and information about service providers available online. We also compete with “free to consumer” online ratings websites and referral services funded directly by service providers or by service provider advertising, such as HomeAdvisor, Inc., the “Diamond Certified” directory operated by American Ratings Corporation, Yelp, Inc., Kudzu, an indirect subsidiary of Cox Enterprises, Inc., and Insider Pages, an indirect subsidiary of IAC/InterActiveCorp. In our Angie’s List Health & Wellness categories, we compete for members with other online resources for patients, such as RateMDs, Inc. and Health Grades, Inc. Across all categories, we also compete with established Internet companies who have significantly greater resources and name recognition than we do.

 

To compete effectively for members, we must continue to invest significant resources in marketing and in the development of our products and services to enhance value for members. To compete effectively for service provider revenue, we must continue to invest significant resources in our sales force, in the development of existing and new advertising products, the acquisition of new paid memberships and the collection of our members’ reviews of local service providers. Many of our competitors for service providers utilize local sales forces or “feet on the street,” and we may be at a disadvantage as a result of our call center-based sales model. Failure to compete effectively against our current or future competitors could result in loss of current or potential participating service providers or a reduced share of our participating service providers’ overall advertising budget, which could adversely affect our pricing and margins, lower our service provider revenue and prevent us from achieving or maintaining profitability. We cannot assure you that we will be able to compete effectively for memberships or service providers in the future against existing or new competitors, and the failure to do so could result in loss of existing or potential paid memberships, reduced membership base and service provider revenue, increased marketing or selling expenses or diminished brand strength, any of which could harm our business.

 

If we are unable to replicate our performance in our larger markets, our operating results and financial condition will be harmed.

 

Our penetration rates in a number of our larger geographic markets lag those of our mid-size markets. Many of our largest markets, including New York City, Los Angeles and San Francisco, were converted to paid status beginning in 2006 and 2007, and these markets have produced the largest number of new members in recent years. However, the penetration rate in these larger markets has lagged, on a percentage basis, those of our mid-size markets that converted in the same time frame. We believe that a principal reason for the lower penetration rates in our larger markets is the manner in which we market Angie’s List. We have chosen to spend the majority of our marketing dollars on national advertising. We believe that this advertising strategy provides us the most cost-efficient manner of acquiring new paid memberships. However, advertising nationally means we deliver the same volume of advertising regardless of the size of market. Since each market differs in terms of the number of advertising outlets available, the impact of our spending on national advertising varies across markets. In our experience, smaller markets typically have fewer advertising outlets available than larger markets. We believe the same volume of advertising in a smaller market is more effective in building brand awareness and generating new memberships than in larger markets. We expect to continue to allocate our marketing dollars in accordance with our national advertising strategy and accordingly expect to continue to see lower relative penetration rates in the larger markets.

 

Slower penetration of our larger markets may delay or prevent us from increasing total revenue per paid membership in these markets. If we are unable to replicate the performance we have achieved in our most mature markets in our larger and less penetrated markets, or if growth in larger or less penetrated markets is significantly slower than we anticipate, our operating results and financial condition could be harmed.

 

 

Interruptions or delays in service arising from our third-party cloud-based data services providers or our own systems could impair the delivery of our service and harm our business.

 

We rely in part upon third-party vendors, including data center, Internet infrastructure and bandwidth, and payment processing providers, to provide our products and services to our members and service providers. We do not control the operation of the third-party facilities, and both our own facilities and the third-party data center facility are vulnerable to damage or interruption from tornadoes, floods, fires, power loss, telecommunications failures and similar events. They also are subject to break-ins, sabotage, intentional acts of vandalism, cyber-attacks, the failure of physical, administrative, and technical security measures, terrorist acts, human error, the financial insolvency of the third-party provider and other unanticipated problems or events. The occurrence of any of these events could result in interruptions in our service and unauthorized access to, or alteration of, the content and data contained on our systems and the content and data that these third-party vendors store and deliver on our behalf.

 

Our technology infrastructure is critical to the performance of our systems and our overall operations. Certain aspects of our technology infrastructure run on a complex distributed system, or what is commonly known as cloud computing. We own, operate and maintain the primary elements of this system, but some elements of this system are operated by third parties that we do not control and which would require significant time to replace, thereby increasing our vulnerability to problems with the services they provide. We have experienced, and expect to continue to experience, interruptions and delays in service and availability for such elements. Any errors, failures, interruptions or delays experienced in connection with these cloud computing technologies and information services could negatively impact our relationship with our members, our brand and reputation and our ability to attract, retain and serve our members and service providers.

 

In addition, we have designed and built key portions of the software code and technical infrastructure through which we serve our products and services, and we plan to continue to maintain and develop certain elements internally. Our software code and technical infrastructure are complex, and such efforts may lead to increased technology expense, operational inefficiencies, or interruptions in the delivery or degradation of the quality of our products and services. These issues may not be identified immediately, which could result in further interruption, degradation or cost.

 

If we fail to effectively manage our growth, our business, operating and financial results may suffer.

 

We have experienced, and expect to continue to experience, significant growth in new and existing markets, which has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. We expect that our growth strategy will require us to commit substantial financial, operational and technical resources, and we expect that our marketing cost per paid membership acquisition may increase in the near term. Continued growth also could strain our ability to maintain reliable service levels for our members and participating service providers, to effectively monetize our membership base, to develop and improve our operational, financial and management controls, to enhance our reporting systems and procedures and to recruit, train and retain highly skilled personnel. As our operations grow in size, scope and complexity, we will need to improve and upgrade our systems and infrastructure and may determine we need to open additional operational locations, such as call centers, to support our advertising sales, which will require significant expenditures and allocation of valuable management resources. If we fail to maintain the necessary level of discipline and efficiency, or if we fail to allocate limited resources effectively in our organization as it grows, our business, operating results and financial condition may suffer.

  

We may not maintain our current rate of revenue growth.

 

Our paid membership base has grown rapidly in recent periods in new and existing markets. As a result, our membership revenue and service provider revenue have increased quickly and substantially. We believe that our continued revenue growth will depend on, among other factors, our ability to:

 

 

 

improve our penetration of our existing markets by efficiently deploying marketing expenditures to attract new paid memberships and by retaining our existing paid memberships in these markets;

 

 

 

maintain high levels of member engagement and the quality and integrity of our members’ reviews of local service providers;

 

 

 

increase the number and variety of local service providers reviewed by our members and convince highly-rated local service providers to advertise with us;

 

 

 

 

retain service providers that currently advertise with us and convince them to increase their advertising spending with us;

 

 

 

continue to develop and diversify our product offerings for local service providers;

 

 

 

recruit, integrate and retain skilled and experienced sales personnel who can demonstrate our value proposition to service providers;

 

 

 

provide our members and local service providers with superior user experiences;

 

 

 

react to changes in technology and challenges from existing and new competitors; and

 

 

 

increase awareness of our brand.

 

We cannot assure you that our paid membership base or our service provider participation will continue to grow or will not decline as a result of increased competition and the maturation of our business. If our growth rates were to decline significantly or become negative, it could adversely affect our financial condition and results of operations. You should not rely on our historical rate of revenue growth as an indication of our future performance.

 

The Company’s inability to implement its strategic plan and growth initiatives may have an adverse impact on future results.

 

The Company’s ability to succeed in its strategic plan and growth initiatives could require significant capital investment and management attention, which may result in the diversion of these resources from the core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks, including customer acceptance, competition, product differentiation, challenges to economies of scale in merchandise sourcing and the ability to attract and retain qualified management and other personnel. There can be no assurance that the Company will be able to develop and successfully implement its strategic plan and growth initiatives to a point where they will become profitable or generate positive cash flow. If the Company cannot successfully execute its strategic plan and growth initiatives, the Company’s financial condition and results of operations may be adversely impacted.

 

Our future growth depends in part on our ability to effectively develop and sell additional products, services and features.

 

We invest in the development of new products, services and features with the expectation that we will be able to effectively offer them to consumers and local service providers. For example, we have introduced two e-commerce offerings, Angie’s List Big Deal and Storefront, which give our members the option to receive email alerts or search through service provider offerings on our website for deals. We plan to continue to develop additional advertising products for qualified local service providers. In addition, we may acquire vertical offerings that address additional “high cost of failure” segments of the market for local services.

 

Our future growth depends in part on our ability to sell these products and services, as well as additional features and enhancements to our existing offerings. As our new offerings evolve, we have adapted our sales and marketing strategies for them, and changes in these strategies may delay or prevent growth in these parts of our business. For example, we continue to refine our service provider eligibility criteria, pricing and our vendor credit and customer refund policies for our e-commerce offerings, which may cause our revenue from these offerings to fluctuate from period to period in the future. Further, many of our current and potential service provider advertisers have modest advertising budgets. Accordingly, we cannot assure you that the successful introduction of new products or services will not adversely affect sales of our current products and services or that those service providers that currently advertise with us will increase their aggregate spending as a result of the introduction of new products and services. If our efforts to effectively develop and sell additional products, services and features are not successful, our business may suffer.

 

We invest in features, functionality and customer support designed to drive traffic and increase engagement with members and service providers; however, these investments may not lead to increased revenue.

 

Our future growth and profitability will depend in large part on the effectiveness and efficiency of our efforts to convert consumers and local service providers who visit Angie’s List into paid memberships and participating service providers, respectively. We have made and will continue to make substantial investments in features and functionality for our website that are designed to drive online traffic and user engagement and in customer support for local service providers who do not advertise with us. These activities do not directly generate revenue, and we cannot assure you that we will reap any rewards from these investments. If the expenses that we incur in connection with these activities do not result in sufficient growth in paid members and participating service providers to offset their cost, our business, financial condition and results of operations will be adversely affected.

 

 

Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.

 

Our revenue and operating results vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside our control. As a result, comparing our operating results on a period to period basis may not be meaningful. In addition to other risk factors discussed in this “Risk Factors” section, factors that may contribute to the variability of our quarterly and annual results include:

 

 

 

our ability to retain our current paid memberships and build our paid membership base;

 

 

 

our ability to retain our service providers that currently advertise with us and convince them to increase their advertising spending with us;

 

 

 

our revenue mix and any changes we make to our membership fees or other sources of revenue;

 

 

 

our marketing costs or selling expenses;

 

 

 

our ability to effectively manage our growth;

 

 

 

the effects of increased competition in our business;

 

 

 

our ability to keep pace with changes in technology and our competitors;

 

 

 

costs associated with defending any litigation or enforcing our intellectual property rights;

 

 

 

the impact of economic conditions in the United States on our revenue and expenses; and

 

 

 

changes in government regulation affecting our business.

 

From time to time we change the compensation plans for our sales personnel. For example, in the fourth quarter of 2012, we transitioned to a new compensation plan for our sales personnel responsible for new advertising originations. Any future changes to such compensation plans could disrupt our sales personnel, adversely affecting sales and reducing our revenue. We cannot guarantee that we will accurately forecast the impact of future changes to such compensation plans on our operating results.

 

Seasonal variations in the behavior of our members and service providers also may cause fluctuations in our financial results. For example, we expect to experience some effects of seasonal trends in member and service provider behavior due to decreased demand for home improvement services in winter months. In addition, advertising expenditures by local service providers tend to be discretionary in nature and may be sporadic, reflecting overall economic conditions, the economic prospects of specific local service providers or industries, budgeting constraints and buying patterns and a variety of other factors, many of which are outside our control. We also expect revenue contributions from our e-commerce offerings to fluctuate from period to period as the offerings evolve and due to seasonality. While we believe seasonal trends have affected and will continue to affect our quarterly results, our trajectory of rapid growth may have overshadowed these effects to date. We believe that our business will be subject to seasonality in the future, which may result in fluctuations in our financial results.

 

Our revenue may be negatively affected if we are required to pay sales tax or other transaction taxes on all or a portion of our past and future sales in jurisdictions where we are currently not collecting and reporting tax.

 

We currently only pay sales or other transaction taxes in certain jurisdictions in which we do business. We do not separately collect sales or other transaction taxes. A successful assertion by any state, local jurisdiction or country in which we do not pay such taxes that we should be paying sales or other transaction taxes on the sale of our products or services, or the imposition of new laws requiring the payment of sales or other transaction taxes on the sale of our products or services, could result in substantial tax liabilities related to past sales, create increased administrative burdens or costs, discourage consumers and service providers from purchasing products or services from us, decrease our ability to compete or otherwise substantially harm our business and results of operations.

 

 

We depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed.

 

We believe that our future success depends in part upon the continued service of key members of our management team as well as our ability to attract and retain highly skilled and experienced sales, technical and other personnel. Our co-founders, William S. Oesterle and Angie Hicks, are critical to our overall management as well as the development of our culture and strategic direction. In particular, the reputation, popularity and talent of Ms. Hicks is an important factor in public perceptions of Angie’s List, and the loss of her services or any repeated or sustained shifts in public perceptions of her could adversely affect our business.

 

In addition, qualified individuals are in high demand in the Internet sector, and we may incur significant costs to attract them. Competition for these personnel is intense, and we may not be successful in attracting and retaining qualified personnel. Many of the companies with which we compete for experienced personnel have greater resources than us. In addition, in making employment decisions, particularly in the technology sector, job candidates often consider the value of the stock options they are to receive in connection with their employment. If we are unable to attract and retain our executive officers and key employees, we may not be able to achieve our strategic objectives, and our business could be harmed.

 

We have historically relied primarily on cash, rather than equity, compensation for the majority of our workforce. As such, we may have difficulty competing on a national scale for candidates focused on equity incentives. If we are unable to attract and retain executive officers and key personnel to our headquarters in Indianapolis, Indiana or integrate recently hired executive officers and key personnel, our business, operating results and financial condition could be harmed.

 

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute crucially to our business.

 

We believe that a critical component of our success has been our corporate culture, which we believe fosters innovation, encourages teamwork, cultivates creativity and promotes focus on execution. We have invested substantial time, energy and resources in building a highly collaborative team that works together effectively in an environment designed to promote openness, honesty, mutual respect and the pursuit of common goals. As we continue to develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

 

We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If capital is not available to us, our business, operating results and financial condition may be harmed.

 

We may require additional capital to operate or expand our business. In addition, some of the strategic initiatives we have in early stages of development may require substantial additional capital resources before they begin to generate revenue. Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. For example, the loan and security agreement governing our term loan and revolving credit facility contains various restrictive covenants, including restrictions on our ability to dispose of assets, make acquisitions or investments, incur debt or liens, make distributions to our stockholders or enter into certain types of related party transactions, and any debt financing secured by us in the future could involve further restrictive covenants, which may make it more difficult for us to obtain additional capital and pursue business opportunities. If we raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of our common stock could be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock. Furthermore, volatility in the credit or equity markets may have an adverse effect on our ability to obtain debt or equity financing or the cost of such financing. If we do not have funds available to enhance our solutions, maintain the competitiveness of our technology and pursue business opportunities, we may not be able to service our existing members, acquire new members or attract or retain participating service providers, which could have an adverse effect on our business, operating results and financial condition.

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our business and our stock price.

 

Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be reevaluated frequently. We have in the past discovered, and may in the future discover, areas of our internal financial and accounting controls and procedures that need improvement.

 

 

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will be detected.

 

Because we recognize membership revenue over the term of the membership and recognize service provider revenue ratably over the relevant contract period, downturns or upturns in membership or in service provider advertising may not be immediately reflected in our operating results.

 

We recognize membership revenue ratably over the term of a paid subscription and recognize service provider revenue ratably over the time period during which the advertisements are run. Because approximately 94% of our members subscribed on an annual or multi-year basis as of December 31, 2013, a large portion of our membership revenue for each quarter reflects deferred revenue from memberships purchased in previous quarters. Similarly, because our service provider contracts run for an average term of more than one year, a large portion of our service provider revenue each quarter reflects purchasing decisions made in prior periods. Therefore, an increase or decrease in new or renewed memberships or new or renewed service provider contracts in any one quarter will not necessarily be fully reflected in our revenue for that quarter but will affect our revenue in future quarters. Accordingly, the effect of significant downturns or upturns in membership or advertising sales may not fully impact our results of operations until future periods.

 

We may suffer liability as a result of the ratings or reviews posted on our website.

 

Our terms of use specifically require members and non-members submitting reviews to represent that their ratings and reviews are based on their actual first-hand experiences and are accurate, truthful and complete in all respects and that they have the right and authority to grant us a license to publish their reviews. However, we do not have the ability to verify the accuracy of these representations on a case-by-case basis. There is a risk that a review may be considered defamatory or otherwise offensive, objectionable or illegal under applicable law. Therefore, there is a risk that publication on our website of our ratings and reviews may give rise to a suit against us for defamation, civil rights infringement, negligence, copyright or trademark infringement, invasion of privacy, personal injury, product liability, breach of contract, unfair competition, discrimination, antitrust or other legal claims. From time to time, we are involved in claims and lawsuits based on the contents of the ratings and reviews posted on our website, including claims of defamation. To date, we have not suffered a material loss due to a claim of defamation. We expect that we will be subject to similar claims in the future, which may result in costly and time-consuming litigation, liability for money damages or injury to our reputation.

 

If we fail to generate or maintain expected high quality reviews and reports from our members, we will be unable to provide members with the information they seek, which could negatively impact our membership retention and growth.

 

Our business depends on our ability to provide our members with the information they seek, which is directly dependent on the quality and quantity of the reviews and reports provided by our members. For example, we may be unable to offer our members adequate information on local service providers if our members do not contribute content that is helpful or relevant to the service category in a particular market. We may be unable to provide members with the information they seek if our members are unwilling to contribute reviews and reports because of concerns they will be sued or harassed by service providers they review, instances of which have occurred in the past and may occur again in the future. In addition, we may not be able to provide members with the information they seek if the information on our site is not updated. We do not remove older reviews, and members may view these reviews as less relevant, helpful or reliable. If our site does not provide current information about local service providers or members perceive reviews on our site as less relevant, our brand and business could suffer.

 

 

Membership growth is impacted by traffic to our website from search engines such as Google, Bing and Yahoo!, some of which offer products and services that compete directly with our services. If our website fails to rank prominently in unpaid search results, traffic to our site could decline, and our business would be adversely impacted.

 

A portion of our website traffic comes from non-paid search results that appear on search engines such as Google and Bing. For example, in 2013, member sales from search engine optimization (“SEO”) efforts grew 57% as compared to 2012. While SEO has a much lower cost per acquisition compared to outbound channels such as advertising and has helped reduce our overall cost per member acquisition, our ability to maintain high organic search rankings is not within our control. As such, our competitors’ SEO efforts may result in their websites receiving a higher search result page ranking than ours. Separately, Internet search engines could revise their methodologies in a way that could adversely affect our search result rankings. For example, Google makes changes to its algorithm(s) every year, any one of which could potentially impact our rankings, which we are dependent upon to drive traffic and ultimately sales to our site. Our website has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of Internet users directed to our website through search engines could harm our business.

 

If local service providers rated on our website do not meet the expectations of our members, or engage in unethical or illegal conduct, we may suffer reputational harm, liability or adverse effects on our profitability and liquidity as a result.

 

Our business depends on our reputation for quality and integrity, which may be harmed by actions taken by local service providers that are outside our control. Given that our members use our service to gather information about projects that carry a high risk of failure, and have the opportunity to purchase these services at a discounted rate through our Big Deal and Storefront offerings, if they are performed incompetently or if service providers fail to perform prepaid services, our reputation could be undermined. We cannot be certain that highly-rated local service providers will perform to the satisfaction of our members or that services purchased in advance through our Big Deal or Storefront offerings will be performed to the satisfaction of our members or at all. In addition, unethical or illegal conduct by local service providers rated on our website could damage our reputation or expose us to liability arising from claims made by or on behalf of those harmed by such conduct.

 

We pay service providers in advance for all Big Deals and Storefront offerings purchased by members. Under this payment model, service providers are paid regardless of whether the Big Deal is redeemed or the Storefront services are performed. Subject to certain limitations, our members may request a refund from us on their e-commerce transactions. As we do not have control over service providers and the quality of the services they deliver, we develop estimates for refund claims. Our actual level of refund claims could prove to be greater than the level of refund claims we estimate, particularly as our revenue from e-commerce offerings grows and we develop additional e-commerce products, services and features. Moreover, our members may make requests for refunds with respect to which we are unable to recover reimbursement from our service providers. An increase in our refund rates, or our inability to recover from our service providers, could adversely affect our profitability and liquidity.

 

Many people utilize smartphones and other mobile devices, as well as tablets, to access information about local service providers. If we are not successful in developing products through the use of these technologies, or our products are not widely adopted, our business could be adversely affected.

 

The number of people who seek information about local service providers through mobile devices, including smartphones and tablets, has increased significantly in the past few years. If our members are unable to access our ratings and reviews of service providers on their mobile devices, if we otherwise fail to develop and maintain effective mobile advertising and e-commerce products and services or if our mobile products and services are not widely adopted by our members, our business may suffer. Additionally, as new mobile devices and platforms are released, it is difficult to forecast the problems that may arise, and we may need to devote significant resources to the development, support and maintenance of these products. Finally, if we experience problems with continued integration of our mobile applications, or mobile apps, into mobile devices, if we have issues with providers of mobile operating systems or mobile application download stores, such as Apple, Inc. or Google, or if we face increased costs to distribute our mobile apps, our business could suffer.

 

 

Failure to comply with federal and state laws and regulations relating to privacy and security of personal information, including personal health information, could result in liability to us, damage our reputation and harm our business.

 

A variety of federal and state laws and regulations govern the collection, use, retention, sharing and security of personal information. We collect and utilize demographic and other information from and about our members as they interact with our service. We also may collect information from our members when they provide ratings and reviews of local service providers, participate in polls or contests or sign up to receive email newsletters. Further, we use tracking technologies, including “cookies,” to help us manage and track our members’ interactions with our service and deliver relevant advertising. Claims or allegations that we have violated laws and regulations related to privacy and data security could in the future result in negative publicity and a loss of confidence in us by our members and our participating service providers and may subject us to fines by credit card companies and the loss of our ability to accept credit and debit card payments. In addition, we have posted privacy policies and practices concerning the collection, use and disclosure of member data on our websites and mobile applications. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices.

 

In rating and reviewing health care or wellness providers, our members may post personal health information about themselves or others, and the health care or wellness providers reviewed by members may submit responses that contain private or confidential health information about reviewing members or others. While we strive to comply with applicable privacy and security laws and regulations regarding personal health information, as well as our own posted privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others or could cause us to lose members and participating service providers, which could adversely affect our business.

 

We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols for personal information, including personal health information, imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. However, such laws and regulations are evolving and subject to potentially differing interpretations, and federal and state legislative and regulatory bodies may expand current or enact new laws or regulations regarding privacy matters. We are unable to predict what additional legislation or regulation in the area of privacy of personal information could be enacted or its effect on our operations and business.

 

If our security measures are breached and unauthorized access is obtained to our members’ or service providersdata, our service may be perceived as not being secure, and members and service providers may curtail or terminate their use of our service.

 

In the ordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our members and service providers and personally identifiable information of our members, service providers and employees in our data centers and networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Our service involves the storage and transmission of our members’ and service providers’ proprietary information, such as credit card and bank account numbers, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. Our payment services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards, debit cards or bank account information, identity theft or merchant fraud.

 

If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and as a result, someone obtains unauthorized access to our members’ data, our reputation may be damaged, our business may suffer and we could incur significant liability. As techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the public perception of the effectiveness of our security measures could be harmed, and we could lose members and service providers, which could adversely affect our business.

 

 

We are subject to a number of risks related to intentional business disruptions, cyber-attacks and piracy.

 

Despite a number of precautionary measures already in place and significant ongoing investments to protect against security risks, data protection breaches, cyber-attacks and other intentional disruptions of our products and offerings, we expect to be an ongoing target of attacks specifically designed to impede the performance of our products and offerings and harm our reputation as a company. Similarly, experienced third parties may attempt to penetrate our network security or the security of our website and misappropriate proprietary information or cause interruptions of our services. As the techniques used by such third parties to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. The theft or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could adversely affect our competitive position, reputation, brand and future sales of our products, and our customers may assert claims against us related to resulting losses of confidential or proprietary information. Our business could be subject to significant disruption, and we could suffer monetary and other losses and reputational harm, in the event of such incidents and claims.

 

We are subject to a number of risks related to accepting credit card and debit card payments.

 

We accept payments from our members primarily through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our service, which could cause us to lose members and membership revenue, or suffer an increase in our operating expenses, either of which could adversely affect our operating results.

 

If we or any of our processing vendors experience problems with our billing software, or if the billing software malfunctions, it could adversely affect our member satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our members’ credit cards on a timely basis or at all, we could lose membership revenue, which could harm our operating results.

 

We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, including the Payment Card Industry Data Security Standard, or PCI DSS, a security standard with which companies that collect, store or transmit certain data regarding credit and debit cards, credit and debit card holders and credit and debit card transactions are required to comply. Our failure to comply fully with the PCI DSS may violate payment card association operating rules, federal and state laws and regulations and the terms of our contracts with payment processors and merchant banks. Such failure to comply fully also may subject us to fines, penalties, damages and civil liability and may result in the loss of our ability to accept credit and debit card payments. In addition, there is no guarantee that PCI DSS compliance will prevent illegal or improper use of our payment systems or the theft, loss or misuse of data pertaining to credit and debit cards, credit and debit card holders and credit and debit card transactions.

 

If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card-related costs, each of which could adversely affect our business, financial condition and results of operations.

 

If we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions or our fees for many or all categories of credit and debit card transactions, credit card companies and debit card issuers may increase our fees or terminate their relationship with us. Any increases in our credit card and debit card fees could adversely affect our results of operations, particularly if we elect not to raise our rates for our service to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.

 

As we develop and sell new products, services and features, we may be subject to additional and unexpected regulations, which could increase our costs or otherwise harm our business.

 

As we develop and sell products and services that address new segments of the market for local services and expand our advertising services, we may become subject to additional laws and regulations, which could create unexpected liabilities for us, cause us to incur additional costs or restrict our operations. For example, our Angie’s List Health & Wellness offerings may become subject to complex federal and state health care laws and regulations, the application of which to specific products and services is unclear. Many existing health care laws and regulations, when enacted, did not anticipate the online health and wellness information and advertising products and services that we provide; nevertheless, they may be applied to our products and services.

 

 

We have e-commerce offerings, such as Angie’s List Big Deal and Storefront, which allow our members to purchase services or products from our service providers. Transactions between members and local service providers in connection with these offerings may be subject to regulation, in whole or in part, by federal, state and local authorities.

 

In addition, the application of certain laws and regulations to some of our promotions are uncertain. These include laws and regulations such as the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, and unclaimed and abandoned property laws. If these promotions were subject to the CARD Act or any similar state law or regulation, we may be required to record liabilities with respect to unredeemed promotions, and we may be subject to additional fines and penalties.

 

From time to time, we may be notified of additional laws and regulations which governmental organizations or others may claim should be applicable to our business. Our failure to accurately anticipate the application of these laws and regulations, or other failure to comply, could create liability for us, result in adverse publicity or cause us to alter our business practices, which could cause our revenue to decrease, our costs to increase or our business to otherwise be harmed.

 

Our business depends on our ability to maintain and scale the network infrastructure necessary to operate our websites and applications.

 

Our members access reviews and other information through our websites and applications. Our reputation and ability to acquire, retain and serve our members and service providers are dependent upon the reliable performance of our websites and applications and the underlying network infrastructure. As our membership base and the amount of information shared on our websites and applications continue to grow, we will need an increasing amount of network capacity and computing power. We have made, and expect to continue to make, substantial investments in data centers, equipment and related network infrastructure to handle the traffic on our websites and the data submitted to us by our members. The operation of these systems is expensive and complex and could result in operational failures. In the event that our membership base or the amount of traffic on our websites and applications grows more quickly than anticipated, we may be required to incur significant additional costs. If we do not maintain or expand our network infrastructure successfully, or if we experience operational failures, our reputation could be harmed, and we could lose current and potential members and participating service providers, which could harm our operating results and financial condition.

 

We may not be able to successfully prevent other companies, including copycat websites, from misappropriating our data in the future.

 

From time to time, third parties have attempted to misappropriate our member-generated ratings and reviews and other data regarding our service providers through website scraping, search robots or other means. We have deployed several technologies designed to detect and prevent such efforts. However, we may not be able to successfully detect and prevent all such efforts in a timely manner or assure that no misuse of our data occurs.

 

In addition, third parties operating “copycat” websites have attempted to misappropriate data from our network and to imitate our brand or the functionality of our website. When we have become aware of such efforts by other companies, we have employed technological or legal measures in an attempt to halt their operations. However, we may not be able to detect all such efforts in a timely manner, or at all, and even if we could, the technological and legal measures available to us may be insufficient to stop their operations. In some cases, particularly in the case of companies operating outside of the United States, our available remedies may not be adequate to protect us against the damage to our business caused by such websites. Regardless of whether we can successfully enforce our rights against the operation of these websites, any measures that we may take could require us to expend significant financial or other resources and have a significantly adverse effect on our brand.

 

Failure to adequately protect our intellectual property could substantially harm our business and operating results.

 

We rely on a combination of intellectual property rights, including trade secrets, copyrights and trademarks, as well as contractual restrictions, to safeguard our intellectual property. We do not have any patents or pending patent applications. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy our digital content, aspects of our solutions for members and service providers, our technology, software, branding and functionality, or obtain and use information that we consider proprietary. Moreover, policing our proprietary rights is difficult and may not always be effective. As we expand internationally, we may need to enforce our rights under the laws of countries that do not protect proprietary rights to as great an extent as do the laws of the United States.

 

 

Our digital content is not protected by any registered copyrights or other registered intellectual property. Rather, our digital content is protected by statutory and common law rights, user agreements that limit access to and use of our data and by technological measures. Compliance with use restrictions is difficult to monitor, and our proprietary rights in our digital content databases may be more difficult to enforce than other forms of intellectual property rights.

 

As of December 31, 2013, we have registered 24 trademarks in the United States, including “Angie’s List,” and two registered trademarks in Canada, as well as four pending trademark applications in the United States. Some of our trade names may not be eligible to receive trademark protection. Trademark protection may also not be available, or sought by us, in every country in which our service may become available online. Competitors may adopt service names similar to ours or purchase our trademarks and confusingly similar terms as keywords in Internet search engine advertising programs, thereby impeding our ability to build brand identity and possibly confusing consumers and local service providers. Moreover, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate marks similar to our trademarks. In addition, in the past, some local service providers have used our trademarks inappropriately or without our permission, including our “Super Service Award,” which is available only to local service providers that have maintained superior service ratings. We have taken in the past and may in the future take action, including initiating litigation, to protect our intellectual property rights and the integrity of our brand, but these efforts may prove costly, ineffective or both.

  

We currently hold the “Angie’s List” Internet domain name and various other related domain names. Domain names generally are regulated by Internet regulatory bodies. If we lose the ability to use a domain name in the United States or any other country, we would be forced to incur significant additional expense to market our solutions, including the development of a new brand and the creation of new promotional materials, which could substantially harm our business and operating results. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names that utilize the “Angie’s List” name in all of the countries in which we currently intend to conduct business.

 

In order to protect our trade secrets and other confidential information, we rely in part on confidentiality agreements with our personnel, consultants and third parties with whom we have relationships. These agreements may not effectively prevent disclosure of trade secrets and other confidential information and may not provide an adequate remedy in the event of misappropriation of trade secrets or any unauthorized disclosure of trade secrets and other confidential information. In addition, others may independently discover trade secrets and confidential information, and in such cases, we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret rights and related confidentiality and nondisclosure provisions, and failure to obtain or maintain trade secret protection, or our competitors being able to obtain our trade secrets or to independently develop technology similar to ours or competing technologies, could adversely affect our competitive business position.

 

Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights, to protect our domain names and to determine the validity and scope of the proprietary rights of others. Our efforts to enforce or protect our proprietary rights may be ineffective, could result in substantial costs and diversion of resources and could substantially harm our operating results.

 

Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

 

Internet, technology and media companies are frequently subject to litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. Some Internet, technology and media companies, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. Third parties may in the future assert that we have infringed, misappropriated or otherwise violated their intellectual property rights, and as we face increasing competition, the possibility of intellectual property rights claims against us grows. We cannot assure you that we are not infringing or violating any third-party intellectual property rights.

 

 

We cannot predict whether assertions of third-party intellectual property rights or any infringement or misappropriation claims arising from such assertions will substantially harm our business and operating results. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s patent or copyright rights, cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others, expend additional development resources to redesign our solutions, enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies, content or materials and to indemnify our partners and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Any of these events could seriously harm our business, operating results and financial condition. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and would divert the time and attention of our management and technical personnel.

 

Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require that we release the source code of certain services subject to those licenses.

 

Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General Public License and the GNU Lesser General Public License. Such open source licenses typically require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietary software, when combined in specific ways with open source software, becomes subject to the open source license. If we combine our proprietary software with open source software, we could be required to release the source code of our proprietary software.

 

We take steps to ensure that our proprietary software is not combined with, nor incorporates, open source software in ways that would require our proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design our proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software code that they design, write and modify, we do not exercise complete control over the development efforts of our programmers, and we cannot be certain that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and prospects.

 

We rely on third parties to provide software and related services necessary for the operation of our business.

 

We incorporate and include third-party software into and with our product and service offerings and expect to continue to do so. The operation of our product and service offerings could be impaired if errors occur in the third-party software that we use. It may be more difficult for us to correct any defects in third-party software as the development and maintenance of the software is not within our control. Accordingly, our business could be adversely affected in the event of any errors in this software. We cannot assure you that any third-party licensors will continue to make their software available to us on acceptable terms, or at all, or to invest the appropriate levels of resources in their software to maintain and enhance its capabilities or to remain in business. Any impairment in our relationships with these third-party licensors could have an adverse effect on our business, results of operations, cash flow and financial condition. These third-party in-licenses may expose us to increased risk, including risks associated with the assimilation of new technology sufficient to offset associated acquisition and maintenance costs. The inability to obtain any of these licenses could result in delays in development of solutions until equivalent technology can be identified and integrated. Any such delays in services could cause our business, operating results and financial condition to suffer.

 

 

We are involved in litigation matters that are expensive and time consuming, and, if resolved adversely, could harm our business, financial condition or results of operations.

 

We are involved in lawsuits, including a putative class action lawsuit brought by members and stockholder class action lawsuits, and we anticipate that we will continue to be a target for lawsuits in the future. Any negative outcome from such lawsuits could result in payment of substantial monetary damages or fines or undesirable changes to our products, services or business practices, and accordingly, our business, financial condition or results of operations could be materially and adversely affected. Although the results of such lawsuits and claims cannot be predicted with certainty, we currently believe that the final outcome of those matters that we currently face will not have a material adverse effect on our business, financial condition, results of operations or cash flows, except as otherwise recorded within the consolidated financial statements. However, there can be no assurance that a favorable final outcome will be obtained in all our cases, and regardless of the outcome, any lawsuit can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. Any lawsuit to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal or in payments of substantial damages or fines, or we may decide to settle lawsuits on similarly unfavorable terms, which could adversely affect our business, financial conditions or results of operations.

 

Covenants in the loan and security agreement governing our term loan and revolving credit facility may restrict our operations, and if we do not effectively manage our business to comply with these covenants, our financial condition could be adversely affected.

 

The loan and security agreement governing our term loan and revolving credit facility contains various restrictive covenants, including restrictions on our ability to dispose of assets, make acquisitions or investments, incur debt or liens, make distributions to our stockholders or enter into certain types of related party transactions. We are also required to maintain certain financial covenants. Our ability to meet these restrictive covenants can be affected by events beyond our control, and we may be unable to do so. In addition, our failure to maintain effective internal controls to measure compliance with our financial covenants could affect our ability to take corrective actions on a timely basis and could result in our being in breach of these covenants. Our loan and security agreement provides that our breach or failure to satisfy certain covenants constitutes an event of default. Upon the occurrence of an event of default, which includes a material adverse change, our lenders could elect to declare all amounts outstanding under one or more of our debt agreements to be immediately due and payable. If we are unable to repay those amounts, our financial condition could be adversely affected.

 

Because we generate substantially all of our revenue in the United States, a decline in aggregate demand for local services in the United States could cause our revenue to decline.

 

Substantially all of our revenue is from members and participating service providers in the United States. Consequently, a decline in consumer demand for local services, particularly in the home improvement and health and wellness segments, or for consumer ratings and reviews could have a disproportionately greater impact on our revenue than if our geographic mix of revenue was less concentrated. In addition, as expenditures by service providers generally tend to reflect overall economic conditions, to the extent that economic growth in the United States remains slow, reductions in advertising by local service providers could have a serious impact on our service provider revenue and negatively impact our business.

 

If use of the Internet does not continue to increase, our growth prospects will be harmed.

 

Our future success is substantially dependent upon the continued use of the Internet as an effective medium of business and communication by consumers. Internet use may not continue to develop at historical rates, and consumers may not continue to use the Internet to research and hire local service providers. In addition, the Internet may not be accepted as a viable resource for a number of reasons, including:

 

 

 

actual or perceived lack of security of information or privacy protection;

 

 

 

possible disruptions, computer viruses or other damage to Internet servers or to users’ computers; and

 

 

 

excessive governmental regulation.

 

Our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. Our growth prospects are also significantly dependent upon the availability and adoption of broadband Internet access and other high-speed Internet connectivity technologies.

 

 

We face many risks associated with our long-term plan to expand our operations outside of the United States.

 

Expanding our operations into international markets is an element of our long-term strategy. However, offering our products and services outside of the United States involves numerous risks and challenges. Most importantly, acquiring paid memberships in foreign countries and convincing foreign service providers to advertise with us would require substantial investment by us in local advertising and marketing, and there can be no assurance that we would succeed or achieve any return on this investment. In addition, international expansion would expose us to other risks such as:

 

 

 

the need to modify our technology and sell our products and services in non-English speaking countries;

 

 

 

the need to localize our products and services to the preferences and customs of foreign consumers and local service providers;

 

 

 

difficulties in managing operations due to language barriers, distance, staffing, cultural differences and business infrastructure constraints;

 

 

 

our lack of experience in marketing, and encouraging viral marketing, in foreign countries;

 

 

 

application of foreign laws and regulations to us, including more stringent consumer and data protection laws;

 

 

 

fluctuations in currency exchange rates;

 

 

 

risk of member or local service provider fraud;

 

 

 

reduced or ineffective protection of our intellectual property rights in some countries; and

 

 

 

potential adverse tax consequences associated with foreign operations and revenue.

 

As a result of these obstacles, we may find it impossible or prohibitively expensive to enter foreign markets, or entry into foreign markets could be delayed, which could harm our business, operating results and financial condition.

 

We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.

 

Our success will depend, in part, on our ability to expand our product and service offerings and grow our business in response to changing technologies, member and service provider demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses or technologies rather than through internal development. We have limited experience acquiring other businesses and technologies. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. Furthermore, even if we successfully acquire additional businesses or technologies, we may not be able to integrate the acquired personnel, operations and technologies successfully or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business or technology. In addition, we may unknowingly inherit liabilities from future acquisitions that arise after the acquisition and are not adequately covered by indemnities. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. If an acquired business or technology fails to meet our expectations, our operating results, business and financial condition may suffer.

 

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

 

At December 31, 2013, we had federal net operating loss carryforwards of approximately $105.3 million and state net operating loss carryforwards of approximately $130.9 million. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” generally occurs if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. We may have experienced an ownership change in the past and may experience ownership changes in the future as a result of future transactions in our stock, some of which may be outside our control. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards, or other pre-change tax attributes, to offset United States federal and state taxable income and taxes may be subject to limitations.

 

 

Our business is subject to the risks of tornadoes, floods, fires, earthquakes and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.

 

Our systems and operations are vulnerable to damage or interruption from tornadoes, floods, fires, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins or similar events. For example, a significant natural disaster, such as a tornado, fire or flood, could have a material adverse impact on our business, operating results and financial condition, and our insurance coverage may be insufficient to compensate us for such losses that may occur. A portion of our technology team is located in the San Francisco Bay Area, a region known for seismic activity. In addition, acts of terrorism could cause disruptions in our business or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential customer data. We currently have limited disaster recovery capability, and our business interruption insurance may be insufficient to compensate us for losses that may occur. As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business and provide high quality service to our members and service providers, such disruptions could negatively impact our ability to run our business, which could have an adverse effect on our operating results and financial condition.

 

Risks Related to Owning Our Common Stock

 

Our stock price may be volatile, and the value of an investment in our common stock may decline.

 

The trading price of our common stock has been, and is likely to continue to be volatile, and could decline substantially within a short period of time. For example, since shares of our common stock were sold in our initial public offering in November 2011 at a price of $13.00 per share, our trading price has ranged from $8.94 to $28.32. The trading price of our common stock may be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section, these factors include:

 

 

 

our operating performance and the operating performance of similar companies;

 

 

 

the overall performance of the equity markets;

 

 

 

the number of shares of our common stock publicly owned and available for trading;

 

 

 

threatened or actual litigation;

 

 

 

changes in laws or regulations relating to our solutions;

 

 

 

any major change in our board of directors or management;

 

 

 

publication of research reports about us or our industry, changes in securities analysts’ projections or recommendations, withdrawal of research coverage, or our failure to meet analysts’ projections;

 

 

 

large volumes of sales of shares of our common stock by existing stockholders; and

 

 

 

general political and economic conditions.

 

In addition, the stock market has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of listed companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. We are currently the subject of multiple stockholder class action lawsuits. These lawsuits, and any future stockholder class action lawsuits initiated against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition.

 

Future sales of our common stock by stockholders could depress the market price of our common stock.

 

As of December 31, 2013, holders of approximately 15,069,628 shares, or 26%, of our common stock vested stock options and options which vest within 60 days and their transferees have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. In addition, in November 2011, March 2012 and October 2013, we filed registration statements on Form S-8 under the Securities Act to register an aggregate of 10,830,475 shares of our common stock for issuance under our amended and restated omnibus incentive plan. This plan also provides for automatic increases in the shares reserved for issuance under the plan. These shares may be sold in the public market upon issuance and, once vested, any restrictions are provided under the terms of the applicable plan or award agreement. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

 

 

We have incurred and will continue to incur increased costs as a result of becoming a reporting company.

 

We have faced and will continue to face increased legal, accounting, administrative and other costs as a result of becoming a reporting company. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and related SEC rules and regulations, the Dodd-Frank Act, the listing requirements of the NASDAQ Global Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs and likely will continue to make legal, accounting and administrative activities more time-consuming and costly. We are also incurring substantially higher costs to obtain directors’ and officers’ insurance than we did as a private company. In addition, as we gain experience with the costs associated with being a reporting company, we may identify and incur additional overhead costs.

 

If securities or industry analysts publish inaccurate or unfavorable research about our business, cease coverage of our company or make projections that exceed our actual results, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

Furthermore, such analysts publish their own projections regarding our actual results. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if we fail to meet securities and analysts’ projections.

 

Concentration of ownership among our officers and directors and their affiliates may limit the influence of new investors on corporate decisions.

 

Our officers, directors and their affiliated funds beneficially own or control, directly or indirectly, approximately 27% of the outstanding shares of common stock. As a result, if some of these persons or entities act together, they will have significant influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit the ability of other stockholders to influence corporate matters and may have the effect of delaying or preventing an acquisition or cause the market price of our stock to decline. Some of these persons or entities may have interests different from yours.

 

Certain provisions in our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.

 

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors, including, among other things:

 

 

 

a classified board of directors with three year staggered terms, which could delay the ability of stockholders to replace a majority of our board of directors;

 

 

 

no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

 

 

the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

 

 

 

the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

 

 

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

 

 

the requirement that a special meeting of stockholders may be called only by a majority vote of our Board of Directors, the Chairman of our Board of Directors, our Chief Executive Officer, our President or our Secretary, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

 

 

the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror to amend our amended and restated certificate of incorporation or amended and restated bylaws to facilitate a hostile acquisition;

 

 

 

the ability of our board of directors, by majority vote, to amend our amended and restated bylaws, which may allow our board of directors to take additional actions to prevent a hostile acquisition and inhibit the ability of an acquiror to amend our amended and restated bylaws to facilitate a hostile acquisition; and

 

 

 

advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

 

We are also subject to certain anti-takeover provisions under the General Corporation Law of the State of Delaware, or the DGCL. Under Section 203 of the DGCL, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or (i) our board of directors approves the transaction prior to the stockholder acquiring the 15% ownership position, (ii) upon consummation of the transaction that resulted in the stockholder acquiring the 15% ownership position, the stockholder owns at least 85% of the outstanding voting stock (excluding shares owned by directors or officers and shares owned by certain employee stock plans) or (iii) the transaction is approved by the board of directors and by the stockholders at an annual or special meeting by a vote of 66 2/3% of the outstanding voting stock (excluding shares held or controlled by the interested stockholder). These provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware law could discourage potential takeover attempts.

 

We do not intend to pay dividends for the foreseeable future.

 

We never have declared or paid any cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future. In addition, our debt agreements restrict our ability to make distributions to our stockholders. We anticipate that we will retain any future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors.

 

ITEM 1B.      UNRESOLVED STAFF COMMENTS

 

None.

 

 

ITEM 2.     PROPERTIES

 

We own approximately 120,000 square feet of office space at our headquarters in Indianapolis, Indiana, which we purchased in 2012. In addition, we lease approximately 70,000 square feet of office space in Indianapolis, Indiana, Denver, Colorado and Palo Alto, California, pursuant to leases expiring in 2014 and 2015. We believe our current facilities will be adequate or that additional space will be available to us on commercially reasonable terms for the foreseeable future.

 

ITEM 3.     LEGAL PROCEEDINGS

 

Information pertaining to legal proceedings can be found in “Item 8. Financial Statements and Supplementary Data — Note 9. Commitments and Contingencies” of this Annual Report on Form 10-K, and is incorporated by reference herein.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

PART II

 

ITEM 5.      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock has been listed on the Nasdaq Global Market under the symbol “ANGI” since our initial public offering on November 17, 2011. Prior to this time, there was no public market for our common stock. The following table shows the high and low sale prices per share of our common stock as reported on the Nasdaq Global Market for the periods indicated:

 

   

2013

 
   

High

   

Low

 

First Quarter

  $ 20.17     $ 11.14  

Second Quarter

  $ 27.66     $ 18.15  

Third Quarter

  $ 28.32     $ 19.05  

Fourth Quarter

  $ 22.62     $ 11.88  

 

   

2012

 
   

High

   

Low

 

First Quarter

  $ 19.82     $ 12.81  

Second Quarter

  $ 18.78     $ 11.77  

Third Quarter

  $ 16.06     $ 8.94  

Fourth Quarter

  $ 12.08     $ 8.95  

 

 

As of February 13, 2014, we had approximately 3,200 holders of record of our common stock. The number of beneficial stockholders is substantially greater than the number of holders of record because a large portion of our common stock is held through brokerage firms.

 

We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

For equity compensation plan information refer to Item 12 in Part III of this Annual Report on Form 10-K.

 

Performance Graph

 

This performance graph shall not be deemed “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Angie’s List, Inc. under the Securities Act, except as shall be expressly set forth by specific reference in such filing.

 

 

The following graph shows a comparison from November 17, 2011 (the date our common stock commenced trading on the Nasdaq Global Market) through December 31, 2013 of cumulative total return for our common stock, the Nasdaq Composite Index and the RDG Internet Composite Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the Nasdaq Composite Index and the RDG Internet Composite Index assume reinvestment of dividends.

 

 

   

11/11

   

11/11

   

12/11

   

3/12

   

6/12

   

9/12

   

12/12

   

3/13

   

6/13

   

9/13

   

12/13

 

Angie’s List, Inc.

    100.00       88.88       123.85       145.31       121.85       81.38       92.23       152.00       204.31       173.00       116.54  

NASDAQ Composite

    100.00       98.59       98.88       112.93       109.79       115.53       111.06       125.24       131.16       146.57       162.74  

RDG Internet Composite

    100.00       96.54       97.63       123.61       117.15       127.66       116.03       119.03       123.52       139.64       160.39  

 

 

ITEM 6.      SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following selected consolidated financial and other data regarding our business should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this report. Our historical results are not necessarily indicative of results to be expected in any future period.

 

   

Years Ended December 31,

 
   

2013

   

2012

   

2011

   

2010

   

2009

 

Revenue

                                       

Membership

  $ 65,307     $ 47,717     $ 33,815     $ 25,149     $ 20,434  

Service provider

    180,335       108,082       56,228       33,890       25,166  

Total revenue

    245,642       155,799       90,043       59,039       45,600  

Operating expenses

                                       

Operations and support(1)

    40,072       27,081       16,417       12,464       11,654  

Selling(1)

    90,143       58,596       33,815       16,892       12,671  

Marketing

    87,483       80,230       56,122       30,237       16,114  

Technology(1)

    26,197       16,870       9,109       6,270       5,062  

General and administrative(1)

    32,828       24,055       18,740       16,302       8,699  

Operating loss

    (31,081

)

    (51,033

)

    (44,160

)

    (23,126

)

    (8,600

)

Interest expense

    1,868       1,856       3,004       3,966       3,381  

Loss on debt extinguishment

                1,830              

Loss before income taxes

    (32,949

)

    (52,889

)

    (48,994

)

    (27,092

)

    (11,981

)

Income tax expense

    40       5       43       154        

Net loss

  $ (32,989

)

  $ (52,894

)

  $ (49,037

)

  $ (27,246

)

  $ (11,981

)

                                         

Net loss per common share—basic and diluted

  $ (0.57

)

  $ (0.92

)

  $ (1.60

)

  $ (0.99

)

  $ (0.45

)

                                         

Weighted average number of common shares outstanding— basic and diluted(2)

    58,230,927       57,485,589       30,655,532       27,603,927       26,666,918  
                                         

(1)   Includes non-cash stock-based compensation as follows:

 

Operations and support

  $ 64     $     $     $     $  

Selling

    147                          

Technology

    17       762       786       496        

General and administrative

    3,836       2,181       3,056       6,203       76  
    $ 4,064     $ 2,943     $ 3,842     $ 6,699     $ 76  

 

(2)

The weighted average number of common shares for all periods prior to April 30, 2010 is based on member units assuming conversion to common stock at the applicable rates effective upon reorganization as a corporation on April 30, 2010.

 

 

   

Years Ended December 31,

 
   

2013

   

2012

   

2011

   

2010

   

2009

 

Other Data (unaudited):

                                       

Total paid memberships (end of period)(1)

    2,484,059       1,787,394       1,074,757       602,882       411,727  

Gross paid memberships added (in period)(2)

    1,218,258       1,092,935       716,350       355,580       219,140  

Marketing cost per paid membership acquisition (in period)(3)

  $ 72     $ 73     $ 78     $ 85     $ 74  

First-year membership renewal rate (in period)(4)

    74

%

    75

%

    75

%

    70

%

    67

%

Average membership renewal rate (in period)(4)

    78

%

    78

%

    78

%

    75

%

    73

%

Participating service providers (end of period)(5)

    46,329       35,952       24,095       15,060       10,415  

Total service provider contract value (end of period, in thousands)(6)

  $ 194,137     $ 132,646     $ 73,609     $ 43,050     $ 30,849  

 

 

(1)

Reflects the number of paid memberships at the end of each period presented. Total paid memberships also includes a de minimis number of complimentary memberships in our paid markets for all periods presented. The number of memberships lost during the periods presented were 521,593, 380,298, 244,475, 164,425, and 140,902 for 2013, 2012, 2011, 2010, and 2009, respectively.

(2)

Reflects the total number of new paid memberships added in a reporting period.

(3)

Reflects marketing expense divided by gross paid memberships added in a reporting period.

(4)

First-year membership renewal rate reflects the percentage of paid memberships expiring in the reporting period after the first year of membership that are renewed, and average membership renewal rate reflects the percentage of all paid memberships expiring in the reporting period that are renewed. Renewal rates exclude monthly memberships.

(5)

Reflects the total number of service providers under contract for advertising at the end of the period.

(6)

Reflects the total contract value of active service provider contracts at the end of the period. Contract value is the total payment obligation, including amounts already recognized in revenue, of a service provider to us over the stated term of the contract.

 

   

As of December 31,

 
   

2013

   

2012

   

2011

   

2010

   

2009

 

Balance Sheet Data:

                                       

Cash and cash equivalents

  $ 34,803     $ 42,638     $ 88,607     $ 9,209     $ 2,016  

Short-term investments

    21,055       10,460                    

Working capital

    (21,672

)

    9,411       58,085       (18,378

)

    (15,331

)

Total assets

    105,643       96,229       111,398       22,601       12,299  

Total deferred revenue

    80,438       55,331       34,786       23,261       18,024  

Long-term debt, including accrued interest

    14,918       14,869       14,820       16,463       22,503  

Common stock and additional paid-in capital

    257,572       248,392       236,015       85,486        

Stockholders’ equity (deficit)

    (18,490

)

    5,319       45,836       (33,757

)

    (36,268

)

 

 

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the “Risk Factors” section.

 

Overview

 

We operate a consumer-driven service for our members to research, hire, rate, review, and purchase local services for critical needs, such as home, health care and automotive services. Our ratings and reviews, which are available only to our members, help our members find the best provider for their local service needs. We had approximately 2.5 million paid memberships as of December 31, 2013. We allow local service providers who are highly rated by our members to advertise discounts and other promotions to our members.

 

We generate revenue from both our members and our service providers. We derive membership revenue from subscription fees and, in certain cases, non-refundable initiation fees for monthly, annual and multi-year memberships. These fees typically are charged in advance. Subscription fees are recognized ratably over the subscription period, and initiation fees are recognized ratably over the expected life of the membership. As of December 31, 2013, approximately 94% of our total membership base had purchased annual or multi-year memberships. These subscription fees represent a significant source of working capital and provide a relatively predictable revenue stream.

 

We derive service provider revenue principally from term-based sales of advertising to local service providers. Our members grade local service providers on an “A” to “F” scale, and we invite local service providers with an average grade of “B” or better and at least two reviews submitted in the last three years to advertise to our members through any or all of our website, email promotions, monthly magazine and call center. As of December 31, 2013, approximately 452,000 local service providers rated by our members were eligible to offer discounts and other promotions to our members based on these criteria. Service provider contracts can be prepaid or invoiced monthly at the option of the service provider and carry an early termination penalty. We recognize service provider revenue ratably over the period in which an advertising campaign is run. We are expanding our service provider sales personnel to drive increased service provider revenue. Our high service provider renewal rates, both in number of service providers renewing and as a percentage of initial contract value renewed, have provided us with a relatively predictable revenue stream.

 

In addition to traditional advertising on our website and publications, our e-commerce solutions offer our members the opportunity to purchase services through us from service providers rated highly on our website. These offerings are available through both email promotions and through postings on our website. When the member purchases the service, the transaction is processed through Angie’s List. The member then can work directly with the service provider to schedule the service. These e-commerce offerings provide our members a discount and an easier way to fulfill their service needs.

 

To establish a new market, we begin by offering free memberships and actively soliciting members’ reviews of local service providers. As the number of members and the number of reviews of service providers grow, we begin charging membership fees and offering advertising opportunities to eligible local service providers. Historically, we have begun to convert most markets to paid membership status within 24 months after launch.

 

Increasing new paid memberships is a key growth strategy. Increased penetration in a market results in more member reviews of local service providers, which increases the value of our service to consumers and drives further membership growth in that market. Increased penetration in a market also drives increased advertising sales to service providers and supports higher advertising rates as the pool of members actively seeking to hire service providers grows. However, our ability to increase advertising rates tends to lag increased penetration of our markets due to our inability to increase rates under existing service provider contracts prior to renewal. Our primary strategy for new member acquisition is national offline and online advertising.

 

 

As described further in the “Market Cohort Analysis” below, we believe that our estimated penetration rate and average revenue per market will increase as markets mature, and over the long term, we believe that these increased revenues will more than offset our operating expenses. In addition, our advertising spending is focused on the acquisition of new members, rather than the maintenance of existing members. Given that our advertising contracts are typically short-term, we can rapidly adjust marketing expense and thus decrease total operating expenses to reduce cash used in operations or generate cash and profits from operations should we begin to experience adverse trends in marketing cost per paid membership acquisition or wish to optimize for profitability at the expense of rapid growth. We believe that our high membership renewal rates and “word of mouth” referrals from existing members, combined with effective purchasing of lower volumes of advertising and increasing utilization of search engine optimization, or SEO, would enable us to maintain and potentially grow the size of our paid membership base at a lower level of overall advertising spending.

 

Recent Developments

 

On August 2, 2013, we acquired substantially all of the assets of SmartHabitat, Inc. (“BrightNest”) for a purchase price of $2.7 million. The purchase price consists of $2.2 million in cash paid at closing and an additional $0.5 million that is payable on the one-year anniversary of the closing, subject to certain performance criteria of BrightNest employees hired by us on the acquisition date. The acquisition of the BrightNest assets adds a user-friendly front end and personalized member experience with expanded content offerings and enhanced technologies. Revenues and expenses related to BrightNest, which were not material for the period ended December 31, 2013, are included in the consolidated results of operations from the date of acquisition.

 

Market Cohort Analysis

 

To analyze our progress in executing our expansion plan, we compile certain financial and operating data regarding markets we have entered, grouped by the years in which the markets transitioned to paid membership status. The table below summarizes this data for 2013 by the following cohorts. The pre-2003 cohort includes our ten most established markets, where we initially built out our business model. The markets in this cohort include several mid-sized urban markets in the midwest as well as Chicago and Boston. The 2003 through 2007 cohort includes the first major subset of markets, including many of our largest potential markets, that we targeted in our national expansion strategy. The markets in these older cohorts generally have achieved penetration rates that allow us to transition beyond introductory membership and advertising rates. The 2008-2010 and post-2010 cohorts include markets that have most recently converted to paid status and that still have predominantly introductory membership and advertising rates. The markets in these cohorts generally are smaller markets that we entered to fill out our national presence.

 

Cohort

 

# of
Markets

   

Avg.
Revenue/
Market(1)

   

Membership
Revenue/Paid
Membership(2)

   

Service
Provider
Revenue/Paid
Membership(3)

   

Avg. Marketing
Expense/
Market(4)

   

Total Paid
Memberships(5)

   

Estimated
Penetration
Rate(6)

   

Annual
Membership
Growth Rate(7)

 

Pre-2003

    10     $ 6,329,201     $ 39.16     $ 113.65     $ 1,317,075       470,206       11.5

%

    31

%

2003-2007

    35       4,385,040       34.39       97.74       1,384,373       1,350,130       9.0

%

    39

%

2008-2010

    103       253,976       16.84       36.08       193,802       574,024       9.3

%

    38

%

Post 2010

    105       24,119       12.46       26.17       56,170       89,699       4.9

%

 

n/a

 

Total

    253                                       2,484,059                  

  

(1)

Average revenue per market is calculated by dividing the revenue recognized for the markets in a given cohort by the number of markets in the cohort at year end.

(2)

Membership revenue per paid membership is calculated as our membership revenue in the cohort divided by the average number of paid memberships in the cohort. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort.

(3)

Service provider revenue per paid membership is calculated as service provider revenue in the cohort divided by the average number of paid memberships in the cohort. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort.

(4)

 Average marketing expense per market is calculated first by allocating marketing expense to each cohort based on the percentage of our total target demographic for all markets in such cohort, as determined by third-party data, and then dividing the allocated cohort marketing expense by the number of markets in the cohort at year end. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort. According to a January 2014 demographic study by Merkle Inc. that we commissioned, there were approximately 30 million households in the United States in our target demographic, which consists of homeowners aged 35 to 64 with an annual household income of at least $75,000. Approximately 27 million of these households were in our markets. The average number of households per market in our demographic target were 410,000, 430,000, 60,000 and 20,000 for the pre-2003, 2003-2007, 2008-2010 and post-2010 cohorts, respectively.

(5)

Includes total paid memberships as of December 31, 2013. Total paid memberships in each cohort includes a de minimis number of complimentary memberships in our paid markets for the period presented.

(6)

Estimated penetration rate is calculated by dividing the number of paid memberships in a given cohort as of December 31, 2013 by the number of households meeting our target demographic criteria in such cohort.

(7)

Annual membership growth rate is the rate of increase in the total number of paid memberships in the cohort between December 31, 2013 and 2012.

 

 

Our average revenue per market and total revenue per paid membership have generally increased with the maturity and corresponding increased penetration of our markets in prior periods. In the future, we expect total revenue per paid membership to fluctuate from period to period, reflecting the timing of our ability to adjust advertising rates given our advertising contract terms and membership pricing innovations designed to drive increased penetration. For example:

 

 

Our average advertising contract term is typically more than one year, and we are only able to increase rates for a given participating service provider upon contract renewal. As such, there is a lag in our ability to leverage increased penetration in a market into increased advertising rates;

 

 

In 80 of our markets, we offer members the opportunity to purchase only those segments of Angie’s List that are most relevant to them, which includes the original Angie’s List (covering 396 categories, including home, lawn, car and pets), Angie’s List Health & Wellness or Angie’s List Classic Cars. These segments continue to be offered in all other markets as a single bundle. We anticipate unbundling our offerings in more of our markets as market penetration increases and the number and categories of local service providers reviewed by members in such markets grow. We believe this pricing model enables us to offer a better value proposition to our members and preserve cross-selling opportunities as members’ needs evolve, although we also expect that this strategy may result in lower average membership fees per paid membership overall;

 

 

Increasingly we are seeing members opt for annual memberships, and as such, the percentage of our membership base on monthly memberships has declined. While we believe annual memberships are more beneficial to members and promote high renewal rates, these memberships generate lower proceeds than monthly memberships taken on an annualized basis; and

 

 

In certain markets we have elected to retain lower membership pricing than we have historically used to drive deeper penetration.

 

Our most important growth strategy remains driving increased membership growth, which creates the network effects of a more valuable service for consumers and a more attractive commercial platform for service providers. We intend to continue to evaluate and adopt innovative pricing and packaging strategies, such as deeply reduced membership pricing, to deliver compelling value to our members and thereby support membership growth and retention. Although these overall dynamics have caused and may continue to cause membership revenue per paid membership to decline sequentially in some of our cohorts, we believe that the increase in our membership base is critical for continuing to produce the overall growth in average revenue per market, service provider revenue per paid membership and total revenue per paid membership across all cohorts that we have experienced.

 

 

As a market matures, our penetration rate typically increases. Historically, while the absolute number of paid members may grow faster in large markets, our small and medium markets have often achieved greater penetration over a shorter time period than our larger markets. We believe that a principal reason for our lower penetration rates in large markets is the manner in which we market Angie’s List to our target demographic in such markets. We have chosen to spend the majority of our marketing dollars on national advertising. We believe that this advertising strategy provides us the most cost effective and efficient manner of acquiring new paid memberships. However, advertising nationally means we deliver the same volume of advertising regardless of the size of the market. Since each market differs in terms of the number of advertising outlets available, the impact of our spending on national advertising varies across markets. In our experience, smaller markets typically have fewer advertising outlets than larger markets. We believe the same volume of advertising in a smaller market is more effective in building brand awareness and generating new memberships than in larger markets. We expect to continue to see lower relative penetration rates in our larger markets for these reasons. As several of these larger markets are in the 2003-2007 cohort, over time our penetration rate in this cohort may lag other cohorts.

 

Key Operating Metrics

 

In addition to the line items in our financial statements, we regularly review a number of other operating metrics related to our membership and service provider bases to evaluate our business, determine the allocation of resources and make decisions regarding business strategies. We believe information on these metrics is useful for investors and analysts to understand the underlying trends in our business. The following table summarizes our key operating metrics, which are unaudited, for the years ended December 31, 2013, 2012 and 2011:

 

   

Years Ended December 31,

 
   

2013

   

2012

   

2011

 

Total paid memberships (end of period)

    2,484,059       1,787,394       1,074,757  

Gross paid memberships added (in period)

    1,218,258       1,092,935       716,350  

Marketing cost per paid membership acquisition (in period)

  $ 72     $ 73     $ 78  

First-year membership renewal rate (in period)

    74

%

    75

%

    75

%

Average membership renewal rate (in period)

    78

%

    78

%

    78

%

Participating service providers (end of period)

    46,329       35,952       24,095  

Total service provider contract value (end of period, in thousands)

  $ 194,137     $ 132,646     $ 73,609  

 

Total paid memberships. Total paid memberships reflects the number of paid memberships at the end of each period presented. Total paid memberships also includes a de minimis number of complimentary memberships in our paid markets for all periods presented. We generally expect that there will be one membership per household and, as such, each membership may actually represent multiple individual consumers.

 

Gross paid memberships added. Gross paid memberships added reflects the total number of new paid memberships added in a reporting period. Gross paid memberships added increased substantially in each period presented, which we believe has been driven by our increasing investment in national advertising and, to a lesser extent, by “word of mouth” referrals from our existing members.

 

Marketing cost per paid membership acquisition. We calculate marketing cost per paid membership acquisition in a reporting period as marketing expense divided by gross paid memberships added in that period. As we advertise in national media, some of our marketing expense also increases the number of unpaid memberships. On a comparative basis, marketing cost per paid membership acquisition can reflect our success in generating new paid memberships through our SEO efforts and “word of mouth” referrals and experimentation and adjustments to our marketing expense to focus on more effective advertising outlets for membership acquisition. We typically have higher marketing expense in the second and third quarters of the year in order to attract consumers during the periods when we have found they are most actively seeking Angie’s List services. Our marketing expense is normally reduced in the fourth quarter, reflecting reduced consumer activity in the service sector and higher advertising rates generally due to holiday promotional activity.

 

Membership renewal rates. First-year membership renewal rate reflects the percentage of paid memberships expiring in the reporting period after the first year of membership that are renewed. Average membership renewal rate reflects the percentage of all paid memberships expiring in the reporting period that are renewed. Renewal rates do not include monthly memberships, which comprised approximately 6% of our total membership base as of December 31, 2013. Given the correlation between increased penetration and higher total revenue per paid membership, we view first-year membership renewal rate and average membership renewal rate as key indicators of expected operating results in future periods.

 

 

Participating service providers. We include in participating service providers the total number of service providers under contract for advertising at the end of the period.

 

Total service provider contract value. We calculate service provider contract value as the total contract value of active service provider contracts at the end of the period. Contract value is the total payment obligation of a service provider to us, including amounts already recognized in revenue, over the stated term of the contract.

 

In addition, we also track contract value backlog as a key metric. Contract value backlog consists of the portion of service provider contract value at the stated date which has not yet been recognized as revenue. At December 31, 2013 and 2012, our contract value backlog was $121.4 million and $82.1 million, respectively.

 

Basis of Presentation and Recent Trends

 

Revenue

 

Membership revenue. Our members sign up for monthly, annual or multi-year subscriptions to our service. Membership revenue includes subscription fees and, in certain cases, non-refundable initiation fees charged to new members. We charge the full price of membership at the commencement of the subscription period and at each renewal date (whether monthly, annual or multi-year), unless the member chooses not to renew the membership before the renewal date. Our members prepay their membership fees at the commencement of the subscription period. We record prepaid membership fees as deferred revenue and recognize the fees as revenue over the subscription period. We charge a non-refundable initiation fee in connection with monthly memberships and the lowest cost annual memberships in less penetrated markets. For the year ended December 31, 2013, we recognized revenue from non-refundable initiation fees over the expected life of the membership, which we estimated to be 15 months for monthly memberships and 76 months for annual and multi-year memberships, based on our historical experience.

 

Service provider revenue. Local service providers generally pay for advertisements in advance on a monthly or annual basis. Our average advertising contract term in effect as of December 31, 2013 was more than twelve months. The vast majority of our service provider contracts cover a period of twelve months. This term allows us to have a predictable revenue stream while providing us an opportunity to adjust advertising rates at the renewal period as our membership penetration of a given market increases.

 

We recognize revenue from the sale of website and call center advertising ratably over the time period in which the advertisements run. We recognize revenue from the sale of advertising placement in the Angie’s List Magazine in the month the advertisement is published and distributed. As our penetration of a given market increases, we are typically able to charge higher rates for advertising because service providers are able to reach a larger base of potential customers. However, as we only increase advertising rates at the time of contract renewal, increases in service provider revenue in a given market may trail increases in market penetration.

 

Our e-commerce offerings primarily consist of Big Deal and Storefront, which allow our members to purchase services or products from our service providers through us. We receive a portion of the offer price at the time of the purchase, recognizing the revenue net of the total transaction. Revenue is recognized in the period the offer is sold to members and is included in service provider revenue. While we are not the merchant of record with respect to our members for these transactions, we do offer members refunds in certain circumstances. Revenue from e-commerce transactions is recorded net of a reserve for estimated refunds.

 

Operating expenses

 

Operations and support. Operations and support expense consists primarily of costs associated with publishing the Angie’s List Magazine, operating our call center and providing support to our members and service providers, including wages and other employee benefits, credit card processing fees for member enrollment and other service provider transactions on our website, report transcription and data entry and amortization of the cost of acquired data. Operations and support expense does not include the cost of maintaining our website, which is included in technology expense. With the growth of our membership base, we expanded our call center staff to maintain high levels of customer service and encourage high renewal rates. We also use third-party marketing research firms to enable our members to submit reviews by telephone to enrich the content available to our members and expand the number of service providers eligible to advertise with us. We expect our operations and support expense to increase in absolute dollars in the future as we continue to grow our membership and scale our operations.

 

 

Selling. Selling expense consists primarily of commissions, wages and other employee benefits for personnel focused on selling and renewing advertising to eligible service providers and e-commerce deals. We pay substantially higher commissions to our service provider sales personnel for contracts with first-time participating service providers than we pay for renewals. Our e-commerce sales personnel earn commissions based on the net revenue received from the sale of Big Deal and Storefront offerings. Selling expense also includes the cost of service provider marketing efforts, facilities related to sales personnel, supplies and sales personnel training, as well as personnel-related costs for account management. Because selling expense primarily consists of commissions, we generally expect it to fluctuate with service provider revenue.

 

Marketing. Marketing expense consists of national television, radio and print, as well as online advertising for the purpose of acquiring new paid memberships. As the vast majority of our advertising spending is related to our growth strategy, and our advertising contracts are typically short-term, we can rapidly adjust marketing expense. We intend to continue to invest substantial amounts in acquiring new paid memberships.

 

Technology. Technology expense consists primarily of personnel-related costs, including wages, employee benefits, including stock-based compensation, and expenditures for professional services and facilities, all of which are related to maintenance of our website and product development. Our technology expense has increased during the periods presented primarily as a result of the addition of technology personnel and enhancement of our technology platform. We expect technology expense to continue to increase in absolute dollars in future periods to support the growth in our members, service providers and personnel.

 

General and administrative. General and administrative expense consists primarily of personnel-related costs, including wages, benefits, including stock-based compensation, and expenditures for executive, legal, finance, human resources, marketing and corporate communications personnel, product management, as well as professional fees, facilities expense, insurance premiums, acquisition costs, amortization of certain intangibles, depreciation of building and improvements and other corporate expenses. We expect general and administrative expenses to continue to increase in absolute dollars in future periods as we support our growing organization.

 

 

Results of Operations

 

The following tables set forth our results of operations for the periods presented in absolute dollars and as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

   

Years Ended December 31,

 
   

2013

   

2012

   

2011

 

Revenue

                       

Membership

  $ 65,307     $ 47,717     $ 33,815  

Service provider

    180,335       108,082       56,228  

Total revenue

    245,642       155,799       90,043  

Operating expenses

                       

Operations and support(1)

    40,072       27,081       16,417  

Selling(1)

    90,143       58,596       33,815  

Marketing

    87,483       80,230       56,122  

Technology(1)

    26,197       16,870       9,109  

General and administrative(1)

    32,828       24,055       18,740  

Operating loss

    (31,081

)

    (51,033

)

    (44,160

)

Interest expense

    1,868       1,856       3,004  

Loss on debt extinguishment

                1,830  

Loss before income taxes

  $ (32,949

)

  $ (52,889

)

  $ (48,994

)

Income tax expense

    40       5       43  

Net loss

  $ (32,989

)

  $ (52,894

)

  $ (49,037

)

 

(1)

Includes non-cash stock-based compensation as follows:

 

Operations and support

  $ 64     $     $  

Selling

    147              

Technology

    17       762       786  

General and administrative

    3,836       2,181       3,056  
    $ 4,064     $ 2,943     $ 3,842  

 

The following table sets forth operating data of the Company as a percentage of total revenue for the years indicated below.

 

   

Years Ended December 31,

 
   

2013

   

2012

   

2011

 

Revenue

                       

Membership

    27

%

    31

%

    38

%

Service provider

    73       69       62  

Total revenue

    100

%

    100

%

    100

%

Operating expenses

                       

Operations and support

    16       17       18  

Selling

    37       38       38  

Marketing

    36       52       62  

Technology

    11       11       10  

General and administrative

    13       15       21  

Operating loss

    (13

)

    (33

)

    (49

)

Interest expense

    1       1       3  

Loss on debt extinguishment

                2  

Loss before income taxes

    (14

)

    (34

)

    (54

)

Income tax expense

                 

Net loss

    (14% )     (34% )     (54% )

 

 

Comparison of the years ended December 31, 2013, 2012 and 2011

 

Revenue

 

   

Years Ended December 31,

                 
   

2013

   

2012

   

2011

   

2013 over 2012

   

2012 over 2011

 
   

(dollars in thousands)

                 

Revenue

                                       

Membership

  $ 65,307     $ 47,717     $ 33,815       37

%

    41

%

Service provider

    180,335       108,082       56,228       67

%

    92

%

Total revenue

  $ 245,642     $ 155,799     $ 90,043       58

%

    73

%

Percentage of revenue by type

                                       

Membership

    27

%

    31

%

    38

%

               

Service provider

    73

%

    69

%

    62

%

               

Total revenue

    100

%

    100

%

    100

%

               

Total paid memberships (end of period)

    2,484,059       1,787,394       1,074,757       39

%

    66

%

Gross paid memberships added (in period)

    1,218,258       1,092,935       716,350       11

%

    53

%

Participating service providers (end of period)

    46,329       35,952       24,095       29

%

    49

%

 

2013 compared to 2012. Total revenue increased $89.8 million for 2013 as compared to 2012.

 

Membership revenue increased $17.6 million, primarily due to a 39% increase in the total number of paid memberships, partially offset by an 8% decrease in average membership revenue per paid membership in 2013. The decrease in average membership revenue per paid membership primarily resulted from growth in paid memberships in less penetrated markets where average membership fees per paid membership are lower. This decline also reflected the effect of allowing members in our more penetrated markets to purchase only those segments of Angie’s List that are most relevant to them at a lower membership rate than applicable for the full service. As of December 31, 2013, there were 80 markets in which we offered members the opportunity to purchase individual segments. We offer only bundled memberships to members in less penetrated markets. In addition, in 2013 we reduced prices in certain markets which also yielded a decline in revenue per average paid membership. The decrease in membership revenue per paid membership also resulted from an increase from 91% to 94% in total paid memberships constituting annual and multi-year memberships. Consumers pay more per month for a monthly membership than for an annual membership. Therefore, in periods in which our percentage of memberships shifts to more annual and multi-year memberships, our membership revenue per paid membership decreases.

 

Service provider revenue increased $72.3 million to 73% of total revenue, primarily as a result of a 29% increase in the number of local service providers participating in our advertising programs and a 22% increase in revenue per average participating service provider. Service provider revenue primarily consists of revenue from advertising contracts with service providers. As our penetration of a given market increases, we are typically able to charge higher rates for advertising because service providers are able to reach a larger base of potential customers. However, as we only increase advertising rates at the time of contract renewal, increases in service provider revenue in a given market may trail increases in market penetration. We also include our e-commerce revenue of $22.1 million and $14.5 million in 2013 and 2012, respectively, in service provider revenue. Our e-commerce revenue is generated by our Angie’s List Big Deal and Storefront offerings. We expect the revenue contribution from these offerings to fluctuate from period to period as the offerings evolve and due to seasonality.

 

 

2012 compared to 2011. Total revenue increased $65.8 million for 2012 as compared to 2011.

 

Membership revenue increased $13.9 million primarily due to a 66% increase in the total number of paid memberships, partially offset by a 17% decrease in membership revenue per average paid membership in 2012. The decrease in membership revenue per average paid membership resulted primarily from growth in paid memberships in less penetrated markets where average membership fees per paid membership are lower. This decline also reflected the effect of allowing members in our more penetrated markets to purchase only those segments of Angie’s List that are most relevant to them at a lower membership rate than applicable for the full service. We offer only bundled memberships to members in less penetrated markets. The decrease in membership revenue per average paid membership in 2012 is also the result of a shift to more annual and multi-year memberships as a percentage of total paid memberships.

 

Service provider revenue increased $51.9 million to 69% of total revenue primarily as a result of a 49% increase in the number of local service providers participating in our advertising programs and an increase in revenue per average participating service provider. Service provider revenue primarily consists of revenue from advertising contracts with service providers. As our penetration of a given market increases, we are typically able to charge higher rates for advertising because service providers are able to reach a larger base of potential customers. However, because we only increase advertising rates at the time of contract renewal, increases in service provider revenue in a given market may trail increases in market penetration. We also included our e-commerce revenue of $14.5 million and $6.7 million in service provider in 2012 and 2011, respectively. Our e-commerce revenue is generated by our Angie’s List Big Deal and Storefront offerings.

 

Operations and support

 

   

Years Ended December 31,

                 
   

2013

   

2012

   

2011

    2013 over 2012     2012 over 2011  
   

(dollars in thousands)

                 

Operations and support

  $ 40,072     $ 27,081     $ 16,417       48

%

    65

%

Percentage of revenue

    16

%

    17

%

    18

%

               

 

2013 compared to 2012. Operations and support expense increased $13.0 million for 2013 compared to 2012. This increase was due in part to a $5.3 million increase in operations and support personnel-related costs as we increased our headcount to service our growing member and service provider base. Additionally, there was a $2.0 million increase in credit card processing fees year over year due to the increased volume of membership enrollment and service provider transactions. We also incurred a $3.7 million increase in publication-related costs associated with the increased circulation of our monthly Angie’s List Magazine due to the continued expansion of our membership base. We expect operations and support expense to continue to increase in absolute dollars as we grow our membership and service provider base. Operations and support expense as a percentage of revenue decreased to 16% from 17% as a result of the increase in revenue and our realization of economies of scale as we service our members and service providers.

 

2012 compared to 2011. Operations and support expense increased $10.7 million for 2012 compared to 2011. This increase was due in part to a $4.4 million increase in call center costs as compared to the prior year period as we increased our headcount to service our growing member and service provider base. There was a $2.2 million increase in credit card processing fees due to the increased volume of membership enrollment and service provider transactions. We also incurred a $2.1 million increase in costs associated with the collection of member reviews of service providers as we continued to increase the content on our website. Publication-related costs increased by $1.3 million due to a 68% increase in circulation of our monthly Angie’s List Magazine which is consistent with the growth of our membership base. Operations and support expense as a percentage of revenue decreased to 17% from 18% as a result of the increase in revenue and our realization of economies of scale as we service our members and service providers.

 

 

 

Selling

 

   

Years Ended December 31,

                 
   

2013

   

2012

   

2011

    2013 over 2012     2012 over 2011  
   

(dollars in thousands)

                 

Selling

  $ 90,143     $ 58,596     $ 33,815       54

%

    73

%

Percentage of revenue

    37

%

    38

%

    38

%

               

 

2013 compared to 2012. Selling expense increased $31.5 million for 2013 compared to 2012. This increase is largely due to an increase in service provider revenue, which increased 67% over the prior year. Additionally, we increased the number of sales personnel and management responsible for originating new advertising contracts and e-commerce transactions by 39% to 773. We also increased the number of sales personnel and management responsible for contract renewals by 38% to 192 from December 31, 2012.

 

Selling expense as a percentage of revenue decreased to 37% in 2013 from 38% in 2012, primarily as a result of our transition to a new compensation structure for our sales personnel. Additionally, as selling expense primarily consists of commissions, we expect it to fluctuate with service provider revenue and the composition of that revenue over time.

 

2012 compared to 2011. Selling expense increased $24.8 million for 2012 compared to 2011. This increase is due to an increase in service provider revenue. Service provider revenue increased 92% over the prior year. We increased the number of our sales personnel and management responsible for originating new advertising contracts and e-commerce transactions by 60% to 558. Additionally, the number of our sales personnel and management responsible for contract renewals increased by 117% to 139 from December 31, 2011.

 

Selling expense as a percentage of revenue remained consistent for 2012 as compared to 2011.

 

Marketing

 

   

Years Ended December 31,

                 
   

2013

   

2012

   

2011

    2013 over 2012     2012 over 2011  
   

(dollars in thousands)

                 

Marketing

  $ 87,483     $ 80,230     $ 56,122       9

%

    43

%

Percentage of revenue

    36

%

    52

%

    62

%

               

Gross paid memberships added in the period

    1,218,258       1,092,935       716,350                  

Marketing cost per paid membership acquisition

  $ 72     $ 73     $ 78                  

 

2013 compared to 2012. Marketing expense increased $7.3 million for 2013 compared to 2012, primarily due to a planned increase in national advertising spending for 2013 to acquire new members.

 

Marketing expense as a percentage of revenue decreased from the prior year period due to total revenue increasing at a greater rate than marketing expense increased in absolute dollars. Even with the current year increase in marketing expense, our marketing cost per paid membership acquisition decreased from $73 to $72 as a result of improved brand awareness, successful SEO efforts, improved effectiveness in purchasing advertising and the “word of mouth” benefits of increased penetration. Consistent with the seasonality that characterizes our business, our marketing expense and marketing cost per paid membership acquisition typically peak in the second and third quarters of the year. We expect marketing expense to decrease as a percentage of revenue in 2014.

 

2012 compared to 2011. Marketing expense increased $24.1 million for 2012 compared to 2011, primarily due to a planned increase in national advertising spending for 2012 to acquire new members.

 

Marketing expense as a percentage of revenue decreased from the prior year period due to total revenue increasing at a greater rate than marketing expense increased in absolute dollars. Even with the current year increase in marketing expense, our marketing cost per paid membership acquisition decreased from $78 to $73 as a result of improved brand awareness, successful web search efforts, improved effectiveness in purchasing advertising and the “word of mouth” benefits of increased penetration. Consistent with the seasonality that characterizes our business, our marketing expense and marketing cost per paid membership acquisition typically peak in the second and third quarters of the year.

 

 

Technology

 

   

Years Ended December 31,

                 
   

2013

   

2012

   

2011

    2013 over 2012     2012 over 2011  
   

(dollars in thousands)

                 

Technology

  $ 26,197     $ 16,870     $ 9,109       55

%

    85

%

Percentage of revenue

    11

%

    11

%

    10

%

               

Non-cash stock-based compensation

  $ 17     $ 762     $ 786                  

 

 

2013 compared to 2012. Technology expense increased $9.3 million for 2013 compared to 2012. The increase in technology expense was primarily attributable to a $5.1 million increase in personnel-related costs and a $2.9 million increase in technology-related outside consulting and professional fees as well as costs incurred to continue to develop our technology platform and service our growing base of members and service providers. This was offset by a decrease in non-cash stock based compensation related to forfeitures occurring in the current year.

 

Technology expense as a percentage of revenue remained consistent compared with the prior year. We expect technology expense to increase in absolute dollars and as a percentage of revenue as we continue to develop our technology and product offerings.

 

2012 compared to 2011. Technology expense increased $7.8 million for 2012 compared to 2011. The increase in technology expense was primarily attributable to a $3.9 million increase in personnel-related costs as we continued to develop our technology platform, including expanding our mobile offerings and establishing a technology presence in Palo Alto, California. We also incurred additional technology costs related to servicing our growing base of members and service providers.

 

For these reasons technology expense increased as a percentage of revenue compared with the prior year.

 

General and administrative