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What: Shares of Angie's List (NASDAQ:ANGI) soared on Wednesday after the company turned a surprise profit during its first quarter. After rising as much as 19% in early morning trading, the stock was up about 12% at 11:30 a.m.
So what: While Angie's List fell short of analysts' revenue estimates, delivering $83.5 million of revenue, up 15% year-over-year, the company handily beat estimates for earnings. Analysts were expecting a breakeven quarter, but Angie's List reported EPS of $0.07. This represents a significant improvement over the $0.06-per-share loss the company reported during the first quarter of 2014.
The main driver of this improved profitability was a reduction in marketing spend. During the first quarter, Angie's List spent $16.3 million on marketing, down about 30% compared to the first quarter of 2014. Total operating expenses rose year-over-year, but revenue grew at a faster rate, pushing Angie's List into the black.
While the number of markets in which Angie's List operates was flat year-over-year, average revenue per market jumped 22%. The company brought in less revenue per member, but growth in the number of members mostly counteracted this decline. All of the company's revenue growth during the quarter came from increased revenue from service providers, while revenue from members declined slightly.
Now what: Angie's List maintained its previous full-year guidance, calling for revenue between $357 million and $363 million. While things appear to be looking up for Angie's List, a big unknown going forward is whether this reduction in marketing spend is sustainable. CEO Bill Oesterle stated that "The strength of our business model lies in our ability to increase profitability as markets mature. That is playing out as expected and contributes to our outlook for continued margin growth over time."
With new competition in the form of Amazon's home services, the path to higher margins may not be so simple. If Angie's List is forced to spend more on marketing going forward in order to keep up its growth, the company's newfound profitability could prove to be a short-lived affair.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.