Angie’s List’s Woes

Local business reviews have a significant influence on a consumer’s decision about a local service provider. A survey conducted by UK firm BrightLocal found that 55% of consumers in the U.S. rely more on a local business if they read a positive online review of it. In fact, 67% of users trusted online reviews as much as a word-of-mouth recommendation for a local business. But while consumers may be willing to trust online reviews, firms such as Angie’s List (Nasdaq:ANGI) are still struggling to turn the concept of a reviews engine into a profitable business.

Angie’s List’s Financials

Angie’s List’s Q3 revenues grew 75% over the year to $41.3 million driven by 96% growth in service provider revenues, which rose to $29.3 million. Total paid memberships for the site grew 68% to more than 1.65 million. The membership renewal rate remained flat for the quarter at 78%, and the overall cost per acquisition of new subscribers fell 3% to $76. But Angie’s continued to suffer losses and reported a net loss of $0.32 cents for the quarter, compared with a loss of $0.34 projected by the market.

For the current quarter, Angie’s projected revenue of $45 million-$46 million, in line with the Street’s expectations of $45.6 million.

Angie’s List’s Mobile Expansion

Angie’s List recently tied up with Square, the mobile payments solutions provider, to add mobile payments services to their offerings. Square’s services will be available through Angie’s List Business Center mobile app. At present, the Business Center app enables merchants to accept payments in their stores, track e-commerce purchases, create invoices, and respond to member reviews. Through the tie-up, merchants will now have access to analytics reports as well that can help in their decision making. In addition, the feature will let merchants accept payments not only in their stores, but also in their customers’ homes.

Angie’s List’s Marketing Costs

During the quarter, Angie’s List’s rising costs remained a cause for concern. Sales and marketing expenses rose 53% over the year to $42.33 million to attract a bigger subscriber base. Besides ad campaigns, Angie’s List also turned to discounted subscriptions to lure consumers. During the last quarter, Angie’s List sent out promotion mails to attract consumers to sign up for services offering as much as a 40% discount. New subscribers could also get an additional 20% discount on a subscription if they sign up using PayPal. The discount tool may attract subscribers, but given the company’s already poor profitability, I doubt if they can truly afford such costly schemes. Angie’s List does not disclose the trend of average revenues per paid member, but analysts estimate that membership rates for new members work out to an average of $19.11, compared with the nearly $50 an average user was paying earlier. Declining membership rates on Angie’s List will continue to hurt their profitability.

The recent partnership with Square may have helped the Angie’s List stock recover from the lows of $8.94 it touched in September 2012, and it is now trading at $13.09 with a market capitalization of $756.79 million. But I still have serious concerns about whether Angie’s List will ever make it as a sustainable business model.