Angi Q3 2026 Earnings Call Transcript

Angi (NASDAQ:ANGI) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Angi Inc. reported a 8.9% year-over-year decline in third quarter revenue to $242 million, but adjusted EBITDA increased by 6.3% to $42.2 million, marking the highest quarterly margin since 2018.

CEO Mike Steib outlined strategic initiatives focused on maximizing cash flow, improving operational efficiency, and leveraging AI to enhance both homeowner and pro experiences, which included a reduction of approximately 300 roles.

The company anticipates EBITDA less CAPEX to grow significantly in 2027, with a return to growth expected in the latter half of the year, driven by strategic shifts towards larger pros and AI integration.

Operational highlights include a decline in service requests and leads due to reduced organic search and affiliate marketing, offset by gains in revenue per lead and a strategic focus on large pros who provide more capacity and higher conversion rates.

Management emphasized a high-velocity operating system and AI-powered initiatives to transform homeowner and pro interactions, aiming to enhance retention, capacity, and overall marketplace value.

Full Transcript

OPERATOR

Good morning everyone and welcome to the Angi Inc. third quarter 2026 earnings call. After today’s prepared remarks, we will host a Q&A session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. As a reminder, this conference is being recorded.

Before we begin, the company would like to remind you that during this presentation, the company may make certain statements that are considered forward-looking under the federal securities law. These statements may relate to the company’s outlook, strategy, and future performance and are based on current expectations and information currently available to the company. Actual outcomes and results may differ materially from the future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in the company’s most recent quarterly report on Form 10-Q, its most recent annual report on Form 10-K, and any subsequent SEC filings. The information provided on this conference call should be considered in light of such risks.

The company will also discuss certain non-GAAP measures, including adjusted EBITDA, which they will refer to today as EBITDA for simplicity. During the call, the company will also refer you to its earnings release, public filings with the SEC, and the Investor Relations section of its website for all comparable GAAP measures and full reconciliations for all non-GAAP measures. Now it is my pleasure to turn the floor to Angi CEO Mike Steib and its CFO Julie Gosal Hoarau. Mr. Steib will begin with some introductory remarks. Please go ahead.

Mike Steib (Chief Executive Officer)

Thanks, Alan, and good morning, everybody. I’m excited to be here. Before I begin, I want to thank Jeff for the work he’s done at Angi and for his support during this transition. I also want to thank our board and our leadership team for embracing a lot of change in a very short period of time. I thought to get started I’d share a little bit about my background, why I came to Angi, and what I’ve learned about the business in my first few weeks. And what we see is the path to victory.

I’ve spent much of my career building marketplaces and transforming businesses, especially in my last three roles as CEO. At the Knot, we built America’s most used and highest rated wedding planning app, and we delivered annualized shareholder returns of more than 30%. At Archie, we built a global transactional marketplace for art, we grew revenue aggressively and we made an unprofitable business sustainably profitable. At Tegna, we used technology and AI to improve productivity, to build better digital products and deliver approximately 40% annualized shareholder returns and a $6.2 billion exit.

We did that by building strong teams, great products, and operating companies that move fast and invested shareholders’ money wisely. That’s the playbook I’m excited to bring to Angi. Angi is one of the most recognized brands in home services, a network of almost 200,000 pros around the world and a leading position in a nearly $2 trillion global home services market. These are advantages that would be difficult to replicate, but today we’re not getting enough out of them. Too many homeowners come to Angi looking for help and don’t end up hiring a pro. And too many pros miss opportunities to turn these leads we deliver into jobs.

We can make Angi work better for both, and we can run this company far more profitably while we do so. Let me start with how I think about the business, because we’ve reported a lot of different metrics in the past, but we haven’t always made it clear how they connect to revenue and profit. I want to change that and I want to walk you through how this business makes money in simple terms, that will also let us tie what we’re working on directly to revenue and profit in the future. Homeowners come to Angi looking for help with a project, and they tell us what they need.

That is a service request. We match that request with one or more qualified pros, and each match is a lead. Pros pay us for those leads, and we set the price of each lead based on its expected value to the pro. Pros can pay per lead within a monthly budget they set, or they can pay a subscription for an estimated number of leads each month. We call that budget or that subscription capacity. As we deliver leads, pros spend against that capacity and thus we generate revenue.

So the business comes down to three things. One, generating service requests. Two, turning those service requests into valuable leads through matching and pricing that we sell to the pros. And then three, building the right amount of pro capacity to purchase those leads. We generate service requests in four ways. About a third come to us directly. These are homeowners who search for Angi by name, visit our website or app, or respond to our emails, our calls and texts. Others come from unbranded search, where Google sends us free traffic from people looking for, say, a plumber or a roofer. We also buy clicks through paid marketing, and we buy service requests from third party affiliates. Finally, we win homeowners through LLM integrations and LLM advertising.

A nascent but an exciting growth channel. We drive the number of leads and the value of leads through matching, connecting each service request to the right pros, and by setting the price of each lead fairly in order to balance pro retention and spend, we build capacity in three ways. Pros sign up online, our sales team signs up new pros, and we work with existing pros to increase their budgets. Now, here’s what’s been happening over the last few years, Angi has seen declines in service requests and leads. Some of that has come from changes in organic search traffic as unbranded search has fallen by about two-thirds since 2023 because of changes to the Google search experience, which have reduced traffic across the whole industry. Unbranded search now contributes only about 5% of our service requests, so that pain is largely behind us.

Some of the decline has been self imposed as Angi has reduced affiliate marketing channels by about 80% since 2023, narrowing the number of partners we work with and focusing on channels that deliver good outcomes for pros. Affiliates now represent about 6% of service requests, so we are much less reliant on that channel than we used to be. Finally, Angi has reduced paid marketing over time where spending wasn’t earning an acceptable return. Paid marketing remains an important and sustainable source of homeowner demand.

These changes have put significant pressure on revenue, but they mean that as we roll into 2027, we do so on a much steadier base of service requests and leads with myriad opportunities to improve on capacity. Fewer service requests and leads have reduced the amount of pro capacity that we can serve. Most of our capacity now comes from more tenured pros, a much stickier client base. We retain around 80% of that capacity annually, and that means we need less new sales activity to replace capacity churn and grow the marketplace. This allows us to shift some resources from our small and medium sized pro efforts to our large pro sales efforts.

While smaller pros are an essential foundation of the marketplace, these large pros generally have much bigger marketing budgets and they have more resources to respond to homeowner inquiries, which is good for both capacity and lead value. So we’ve reduced our smaller pro new business sales team by about 70% since 2023. Our sales team is now sized appropriately for the business that we have today. And once leads return to growth, we can easily dial up our investment in sales and online enrollment to grow capacity.

In short, the team has been managing declining search traffic, has been reducing affiliate and paid marketing activity where the economics weren’t attractive, and adjusting the size of our sales organization. That has hurt revenue, but it was the right work to do to sustainably grow cash flow. We have a healthier business to build on now and I see clear opportunities to improve our products, run the company more profitably and return to growth. Which brings me to our near term priorities. First, we are going to maximize cash flow. We can run this company at much better margins and at higher velocity. I’ve seen companies like Angi become too layered and expensive to operate. Unnecessary bureaucracy erodes focus, it adds complexity and it frustrates talented people who are trying to build great things. Angi had become too layered and we’ve already acted to address it. Yesterday we made the sad decision to reduce our headcount by approximately 300 roles, primarily in middle management and support functions.

These changes are expected to generate approximately $40 to $50 million in annualized operating expense savings and reduce capital expenditures by approximately $10 million. Some of these savings will be reinvested, but the majority will go right to the bottom line. These actions improve efficiency. More importantly, they make Angi a more nimble and fast moving place where talented people can do their best work. Second, we’ll bring greater focus and speed to how we operate. Simplifying how we look at the business as we’ve done on today’s call, is part of that. Removing unnecessary layers and support functions also puts our leaders closer to the work, gives talented people more responsibility and minimizes wasted time. We will also be putting in place a high-velocity operating system with clear objectives and key results, and fast, data-driven decision making.

My teams at prior companies have implemented this successfully several times and it can really speed our return to growth. Third, we’re going to turn a good product into a great product. We are already making progress against two clear opportunities here and AI is foundational to both. On the homeowner side of the marketplace, many homeowners visit Angi needing to get a job done, but they do not get the right pro for the job. To address this, we’re building AI-powered experiences that help homeowners find and book the right pro and encourage them to return to Angi every time they need a job done.

On the pro side, too often pros miss opportunities to turn leads into completed jobs. We’re building AI-powered tools that help pros respond to homeowners, follow up and book appointments at much higher success rates. And I can tell you the early tests here have been very promising. The better we convert homeowners’ needs into service requests, the happier users will be, the more business we will bring our pros and the more profitable revenue we’ll book for Angi.

And the more jobs we help our pros win, the more valuable our leads become. This should support better retention, more capacity and pricing that maximizes the value for pros and for Angi. These improvements can have compounding benefits for our marketplace and unlock tons of profitable revenue. The work you’ve heard about previously, including our re-platforming, pro CRO and the homeowner agent work, continues to make exciting progress. Fourth, we will supercharge the enterprise with AI. When I was recently CEO of Tegna, we introduced AI and automation across our largest departments and identified approximately 2 million hours of annual productivity improvement opportunities that unlocked cash flow and productivity. It freed up people to focus on delivering better work and expanding our offering. AI capabilities have only multiplied in the months since. I’m excited to build a team here of elite AI-enabled talent that can multiply their impact by managing teams of agents.

Fifth, as a leader in our space, we will ensure we are plugged into the LLMs that will provide new sources of both free and paid traffic. We are already making big strides here in AI answers. Our internal data show that our share of voice is the highest in the category. Our apps are live in ChatGPT and Gemini and we’re building out ChatGPT ads as a growing and promising marketing channel. You’ll see another big announcement on this front later today.

Now with all that, let me talk about the financial outlook. I’m not ready to give you a detailed financial forecast for 2027, but I expect EBITDA less CAPEX to grow meaningfully in 2027 and I believe we can run Angi at structurally higher margins from now on. My first priority is going to be maximizing and growing cash flow. Our third quarter performance demonstrates what’s possible. We delivered our highest quarterly adjusted EBITDA margin since 2018, reflecting the cost actions already taken and more disciplined marketing spending compared with earlier this year.

And that was before the savings from our latest organizational changes, due to the efforts the team has been making to remove unprofitable or lower quality marketing and sales. Revenue comps remain challenging for the next few quarters and the year-over-year impact will continue into 2027 even as those decisions improve the fundamental economics of our business. That said, everything I’ve seen so far suggests the team’s outlook for a return to growth in the back half of 2027 makes sense.

In the meantime, profitability will be greater than expected. Most of the savings from our recent reorganization will flow to the bottom line and I expect EBITDA less CAPEX for 2027 to be substantially better than the $50 million floor my predecessor previously provided for this year. Going forward, I plan to provide you with regular updates on the priorities I shared today, along with clear and consistent KPIs that demonstrate the impact of our work on Angi’s marketplace and financial future.

And I’ll be back on our next earnings call with greater fidelity on the 2027 outlook. So let me close with this. I’m excited to be working with all of you and the team here at Angi. Angi is a great brand, a large network of pros, and enormous opportunities ahead. I’m proud of how our team has responded to the changes we’re making, and I’m excited about what we can accomplish. Together, we’re going to build better products that delight homeowners and pros. We’re going to run this company at better margins. We’re going to return to growth as a much stronger, more valuable company.

Thank you and I’ll turn it over now to Julie to discuss our financial results in more detail.

Julie Gosal Hoarau (Chief Financial Officer)

Thanks, Mike. So I’ll briefly review our third quarter financial results, the key driver of revenue and profitability, and close with our outlook. Third quarter revenue was $242 million, down 8.9% year over year. Adjusted EBITDA increased 6.3% to $42.2 million. That’s our highest quarterly gross margin since 2018. As Mike mentioned, let’s start with revenue. Our marketplace revenue is driven by three factors. First, we generate homeowner service requests. Second, those service requests turn into leads through matching. And third, pro capacity. So service requests represent homeowner demand, matching determines how many leads we can deliver against pro budgets to generate revenue, and pro capacity represents the budgets available to purchase those leads.

Starting with homeowner demand, service requests declined 2.4% year over year to about 4 million, compared with a 5.5% decline last quarter. So this improvement reflects a more stable demand, while lower affiliate and organic search traffic compared to last year continued to pressure results. Turning to leads, leads declined 17.6% year over year to 4.5 million. This reflects the wind-down of our legacy advertising product and the overall reduction in pro capacity from our reduced sales force.

On pro capacity, average monthly active pros in the U.S. declined 14.4% year over year to approximately 101,000. That reflects the purposeful reduction in our sales organization and our shift toward large pros who have bigger budgets, convert more leads, and stay longer. Average pro capacity increased in the low double digits, partially offsetting the decline in active pros, and as a result, total pro capacity declined in the mid single digits. Revenue per lead increased 9.8% to $47 as we moved out of the heavily discounted legacy advertising product and large pros became a bigger part of the mix, partially offsetting the decline in lead volume.

Large pro revenue grew 20% year over year, while revenue from smaller pros declined 17%—sorry, revenue from smaller pros declined by 13%. In summary, service requests are more stable, leads per service request have declined year over year, partially offset by improved revenue per lead, and we’re continuing to shift our pro capacity mix to large pros. Turning to profitability, adjusted EBITDA increased, primarily reflecting lower fixed expense and more disciplined marketing spending compared to earlier this year. That’s before any benefits from the new cost actions Mike described. Fixed expense declined $14 million, or 24.4% year over year, reflecting the workforce reduction announced earlier this year in Q1.

Sequentially, consumer marketing declined $13 million, from 41.4% of revenue in Q2 to 37% in Q3, while fixed expenses were about flat. As Mike discussed, our latest organizational changes are expected to generate approximately $40 to $50 million in annualized operating expense savings and reduce capital expenditure by approximately $10 million. So that’s $50 to $60 million of total annual savings. We’ll also have approximately $18 to $30 million of one-time restructuring costs, primarily related to severance expense. We expect to reach the full annualized savings run rate by the end of the first half of 2027.

These savings are incremental to the $70 to $80 million that we announced earlier this year in Q1. Some of those savings will be reinvested, but the majority will fall to the bottom line and increase profitability and cash flow. Now on to cash flow and our balance sheet. Our operating cash flow for the quarter was $28.5 million compared with $21 million last year. Capital expenditures were $14.1 million, resulting in free cash flow of $14.4 million compared with $4.9 million last year. We ended the quarter with $202 million in cash and about $400 million in debt, with no borrowings under our revolving credit facility.

Lastly, closing with a near-term outlook before we turn to questions. As Mike noted, due to efforts the team has been making to remove unprofitable or lower-quality marketing and sales efforts, revenue comps remain challenging for the next few quarters, especially with unusually high marketing expense in Q4 2025. At the same time, we do expect profitability to benefit from the cost discipline already underway. So while we’re not providing detailed financial guidance for 2027 today, we expect the actions we’ve taken will drive higher adjusted EBITDA with stronger cash flow.

We’re focused on improving pro capacity, increasing leads, and operating at higher margins. This will result in a stronger and more profitable operating business. And with that, we’ll open it to questions.

OPERATOR

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you’re using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Sergio Segura of KeyBank. Please go ahead.

Sergio Segura (Analyst)

Great. Thanks for taking the questions, and good morning, Mike. Appreciate the comments up front and how you’re viewing the business and breakdown of the business. I’m curious, just as you’ve come into Angi and developed your initial framework on strategy, how we should think about the priorities that were laid out over the past few quarters from previous management? And are the core pillars largely intact, or do you see any areas where you think you’re going to make more meaningful changes?

Mike Steib (Chief Executive Officer)

Thanks, Sergio. The core pillars are intact. From my time on the board, the time I’ve spent with Jeff and with the leadership team here since I joined, I believe we’re very much on the right track. Taking advantage of the power of AI agents in our homeowner product and in our pro product can ensure many more people who need to get jobs done get those jobs done, and our pros can recognize much more value in the marketplace. Making these better connections is what has compounding benefits to a marketplace in my experience.

Secondly, the shift to large pros grows capacity, and it brings you pros who often have a lot more resource to put against converting leads to happy, satisfied customers. Again, good for the marketplace and good for revenue. Finally, the work that the team has been doing and the great expertise we’ve built internally to plug into the LLMs and make sure that this trusted Angi brand and the value we bring can open up this new channel for service requests through LLMs as well is right on the money.

I would just add that I bring a high-velocity operating system that insists on leadership being close to the action, making fast, data-driven decisions. And the RIF that we were talking about today, while sad, I do believe for those who are staying with Angi now sets this organization up to move with alacrity and to allow talented people to do their best work.

Sergio Segura (Analyst)

Understood. And maybe just to follow up on the large pro strategy, can you just give us a little bit more detail—go under the hood there—on the traction you’re seeing there and the opportunity that you see going forward?

Mike Steib (Chief Executive Officer)

Yeah. So to reiterate from my script, with the sort of unbranded SEO declines and the affiliate declines that the team has implemented—self-imposed, if you would, for the benefit of the marketplace—we needed less pro capacity to consume those service requests, which gave us the opportunity to both reduce the size of the small business sales team but also to shift resources to larger pros. Shifting those resources to larger pros does two things for us.

One, these pros come with, you know, two orders of magnitude greater budget than the average small pro. And secondly, they often have these teams and sophisticated technology that they put to work to make sure an inbound lead turns into a job. We saw better than 20% growth in the large pro segment this quarter. It’s our second consecutive 20% growth quarter. The team is scaling up with people who are skilled in enterprise sales, and I’m watching those new members of the team ramp in their productivity. So to me it all looks very encouraging.

Sergio Segura (Analyst)

Understood. Thanks for the color, Mike.

OPERATOR

Our next question comes from Eric Sheridan of Goldman Sachs. Please go ahead.

Eric Sheridan (Analyst)

Thanks so much for taking the questions. Maybe two, following up on the prepared remarks: With respect to the cost savings you mentioned, is there a way to conceptualize or quantify the mix between cost saved dropping into margin and free cash flow relative to what needs to be reinvested? And maybe the broader question would be how you think about broadly investing or reinvesting in the platform over the medium to long term. And then, how would you characterize the difference in what you were trying to accomplish with this restructuring as opposed to what took place earlier this year?

Thanks so much.

Mike Steib (Chief Executive Officer)

Yeah, thank you, Eric. I’ll reiterate, we expect $40 to $50 million in annualized operating expense savings, plus $10 million in reduced capital expenditures. I expect at least half of that to fall to the bottom line, and any reinvestment is going to be reinvestment in the strategic priorities I outlined earlier. I’m looking forward to future earnings calls where I can give you more fidelity on the 2027 numbers as I get my arms all the way around the business.

But for now, that’s how to think about the positive financial impact of restructuring the company. Secondly, this is the second RIF this year. The first one impacted roughly 350 roles, this one roughly 300 roles. The way that I would say this one is different is it’s very much focused on my operating principles of having leaders close to the action. The average manager should be able to manage between six and twelve people. At Angi, the number of people managed by the average manager was three. With this change, we now put more responsibility into our managers.

It also allows us to take down some support functions that were out of line with our investments in the company—in the core work of building, marketing, and selling. And in my experience, and I’ve seen this work, when you put your leaders closer to the action, especially at a moment where you’re bringing new technology into the organization, where you’re bringing new features and capabilities in your products, it is so important and valuable to be close to the action that the restructuring that we’ve just done, while positive for cash flow, is most important for the velocity it can unlock in our organization.

Eric Sheridan (Analyst)

Thank you.

OPERATOR

The next question comes from Dan Kernos of StoneX. Please go ahead. Mr. Kernos, could your line be muted?

Dan Kernos (Analyst)

Yes. Apologies. Mike, good morning, and, you know, different sector, but great to be working with you again.

Mike Steib (Chief Executive Officer)

It’s nice to be working with you again, Dan.

Dan Kernos (Analyst)

So a couple for you, and you know, you’ve given us some great color already. I think there’s some—clearly some of the ad wind down is going to be impacting this, and I appreciate that you’re going to refocus us on the KPIs that truly matter in your view going forward, which I think has been a little jumbled in the past. But I will ask two questions since we have what we have today. I think they’re related on this. So you guys did address a little bit the pro churn—so it did increase pretty significantly year over year and quarter over quarter as you’ve shifted more towards larger and more tenured pros. And I guess we kind of know what’s driving that, but I’m sort of curious if you want to give more color there, and just where you think the bottom is, how much more internal decision you have to make around either reallocating resources or focusing more of those resources on large pro.

And then, as kind of a byproduct, you also have leads per service request have fallen, but you have seen revenue per lead increase. And again, I think that’s primarily large pro. But is that a trend that continues? We’ve had some commentary in the past from prior management about a shift towards smaller jobs. You know, the economy is kind of all over the place. So if you could just help us think about how we should think about those two trends, given your now strategic priorities, it would be super helpful.

Thank you.

Julie Gosal Hoarau (Chief Financial Officer)

So regarding churn, our pro churn has increased, and that’s due to the launch of our online enroll product, which we started to ramp up in Q4 last year and has really scaled up this year. These online-enrolled pros sign up online with no upfront payment or commitments, and they have a much lower cost of acquisition, so they do not talk to our sales team. However, since they have lower commitments and a low barrier to entry, these pros are less attached to Angi and have a higher churn rate as a result.

To date, we’ve signed up thousands of those pros, and this has driven our overall reported churn rate up. If you look at pros who have signed up through our traditional sales channel—so excluding online enroll—churn is actually meaningfully down year over year. Large pros have larger budgets; they tend to stay and increase their budgets over time with Angi when Angi works for them. In addition, we have a smaller salesforce, so that means we’re acquiring fewer net-new pros and have a more tenured and more stable pro base with a higher retention rate.

We’re happy with the progress we’re making to improve the pro experience and drive retention. However, the measure that really matters is pro capacity to sell service requests rather than the nominal number of pros. So active pros could decline while capacity and revenue rise. You should really think about pro capacity.

Mike Steib (Chief Executive Officer)

Yeah, and I want to double-underline that pro capacity is the number for us. It’s not hard to imagine having two small pros churn out and one large pro join, and the capacity difference to be 100x to the positive. So the number that really matters is capacity, not the number of pros or the churn of the total pro base.

Julie Gosal Hoarau (Chief Financial Officer)

So regarding your second question on leads per service request and revenue per lead: we wound down our legacy advertising product, and that generated a lot of very heavily discounted or, in many cases, free leads. As a result, our number of leads per service request has fallen. But at the same time, revenue per lead has increased as we moved away from that product and large pro became a higher part of the mix. We’re prioritizing the economics and success of the connection, and we’re not maximizing the lead volume.

Dan Kernos (Analyst)

Got it. Thank you both so much.

OPERATOR

The next question comes from Steven Ju of UBS. Please go ahead.

Tarani (Analyst)

Hi guys, this is Tarani on for Steven. So first, Google headwinds have been a drag on growth for the past few years. Do you guys see them continuing to have an impact on the business? And then as kind of a follow-up, because of those headwinds, Angi stock is cheap and other companies in your sector are probably cheap too, and you guys have some debt coming due. You could buy back stock, and from an M&A standpoint, you could be a buyer or a seller with your increased cash flow.

How are you guys thinking about capital allocation? Thanks.

Mike Steib (Chief Executive Officer)

Thank you. So on the first question, SEO declines I think have been the story for consumer internet broadly in the last couple of years. For Angi, unbranded SEO is now 5% of total service requests, so I think that story is largely behind us. I will note that the advent of the new LLM channels is something that we’re really excited about. It’s the first what seems to be a significant potential source of new service requests going forward, and our team has us well positioned for that channel.

On capital allocation, thank you for noting that the stock is cheap. Part of the reason I’m here is that I agree with you— the optionality and opportunity here is substantial. My first priority as we think about capital allocation is the 2028 notes, and I’m glad that we’re going to be approaching that from a position of strength now with improved margins in the business. As for the rest of our capital allocation strategy, the core principle here is this is not our capital; it is our shareholders’ capital, and it’s our job to deploy it where it creates the most value for our shareholders. All of the levers that you all know well will have our attention, and we will approach this in a way that maximizes shareholder value, and hopefully my track record gives you all confidence. I have a good record of creating value for my shareholders.

Tarani (Analyst)

Great, thank you.

OPERATOR

Our next question comes from Brad Erickson of RBC Capital Markets. Please go ahead.

Khadijah (Analyst)

Hi, good morning. This is Khadijah on for Brad. Two questions for me, if I may. The first one is what progress have you made on Pro CRO since last quarter? Are there any updates you can give on that front? And then secondly, can you dig a little more into what drove the EBITDA outperformance for Q3? Thank you.

Mike Steib (Chief Executive Officer)

I’ll take the Pro CRO one, and if you’ll indulge me, I’ve had a chance to get to know a bunch of our pros in my time here. What I can share with you is that these large pros who are putting up roofs in 20 or 30 markets, or fences or siding, have built organizations that often look like a technology company that happens to install roofs. They have sophisticated AI that warms leads and helps to convert people to appointments. They have live operators standing by to get their hands on a lead as soon as it’s available, and they’re very good at turning someone who needs a fence or needs their lawn mowed into an appointment and ultimately into a booking.

The average small pro, whether it’s one plumber, electrician in a truck, or a small outfit, tends to be spending all of their time and energy on doing the work. They don’t have, often, the same sophisticated capabilities that maybe a private-equity-backed or just large multi-state operation can. What we’re doing with Pro CRO is giving the small pro the power of a large pro in receiving a lead and turning it into a job that they can do well. What we’ve seen so far on our Pro CRO work is the replatforming that is foundational to it, that Jeff talked about in our previous calls, has continued on schedule and on budget. The early Pro CRO work that we have in the field started with a small group of test pros. We now have about 1,000 pros in that test.

We launched the alpha migration of the replatforming on the pro side on schedule earlier this week, all of which is giving us a lot of confidence in our ability to build these features in the test group. It’s still early. We are seeing that the conversion rate to an appointment is in line with the conversion rates that you would expect when a human reaches out and talks to the homeowner, and that’s very encouraging for what it can mean longer term for the value of our leads. It’s early, but this is the kind of work I was excited to come here and dig into with the team, and what they’ve achieved so far gets me very excited.

Julie Gosal Hoarau (Chief Financial Officer)

Yeah. Regarding the Q3 EBITDA performance, two items contributed to the overperformance. First, we had lower fixed cost reflecting the workforce reduction we announced in the first quarter. And second, we had more disciplined marketing. As we said last quarter, we pulled back on TV and other offline spend where the returns weren’t there, and we shifted dollars to higher-return channels like paid social. As a result, consumer marketing was down from 41% of revenue in Q2 to 37% in Q3, and that came before the action we just announced.

So the new savings are on top of that. On whether this carries forward, we do think that the structural pieces do carry forward over time, and we believe that this should be a structurally higher-margin business. Prospectively, the lower fixed cost base is permanent, and we will continue to run marketing to a breakeven return on the last dollar. The majority of the new savings should reach the bottom line. However, I’d caution against extrapolating the Q3 margin quarter by quarter. Marketing is variable, and we’ll adjust it to returns.

In addition, regarding Q4, seasonality is softer, and we do have a difficult revenue comparison against a higher market in Q4 last year. So as we said on the Q2 call, Q4 usually comes down a bit. So in summary, quarterly results can still vary with seasonality, channel mix, and investment timing. Our goal is a sustainably more efficient cost structure, not simply maximizing one quarter’s margin, but we do expect the cost action to drive higher adjusted EBITDA and stronger cash flow over time.

Khadijah (Analyst)

Great. Thanks for the color.

OPERATOR

The next question comes from Brian Smilek of J.P. Morgan. Please go ahead.

Vignesh (Analyst at J.P. Morgan)

Yeah, hey guys, this is Vignesh on for Brian, and thanks for taking my question. I guess you kind of touched on it, but just looking at the tech replatforming as a key milestone to getting more agentic features to market, could you talk a little more about the status of the project and maybe what you expect from this product in the future? And then second, real quick on accounting, it seemed like the SBC, depreciation, and tax rate kind of had a notable step up.

If you can share any color on that, it would be helpful. Thanks.

Mike Steib (Chief Executive Officer)

Yeah, so—and I believe everyone has this background—but the tech replatforming is bringing together the technology stack that drives our European marketplaces and the technology stack that drives our U.S. marketplace. I say international and U.S., and there are advantages to each, and bringing them together should give us the best of both, and an easier platform to manage and maintain, and a platform on which we can innovate and ship features a lot faster.

The progress has been good here so far. I’m really proud of the work I’ve seen in my short time with the company from Chris Boone and the rest of the organization. Tech replatformings are hard, and these guys are on it, and they have been hitting their milestones so far. On the homeowner side, we’ve seen a large portion now of the homeowners and revenue moved to the new platform. On the pro side, the alpha product with a handful of pros launched earlier this week.

We’ll continue to ramp these up incrementally—want to test and make sure it has the right impact on the marketplace performance before you scale it all the way. I’ve got a lot of confidence in this team, and I’m optimistic that this will continue to click along on schedule.

Julie Gosal Hoarau (Chief Financial Officer)

Regarding your accounting questions. So taking this into pieces: on stock-based compensation, it was higher in Q3, but that was due to a one-time acceleration of stock-based compensation expense related to the outgoing CEO separation agreement terms. So it’s really a one-time item. Depreciation expense has been running a little higher for the last few quarters. This is linked to our One Platform work. We’ve been capitalizing more internally developed software costs, which we depreciate over two years.

So that’s showing up in higher depreciation as we place the new platform into service. We also have some assets that are being retired related to One Platform and also resulted in some accelerated depreciation. And then last, on tax: as pre-tax income decreased and is closer to breakeven, the effective tax rate movements are magnified in Q3. Specifically, the rate is elevated because the Q3 pre-tax income excluding discrete items was significantly higher than Q1 and Q2. So a larger share of the year’s tax expense was recognized in Q3, including a catch-up from applying the higher effective tax rate to prior quarters. Year to date the rate is negative, and that’s not meaningful because of the Q2 goodwill impairment, which is largely a non-deductible item.

So the pre-tax loss generated little tax benefits.

OPERATOR

Our next question comes from Matt Condon of Citizens Bank. Please go ahead.

Matt Condon (Analyst at Citizens Bank)

Thank you for taking my questions. Michael, welcome aboard. You know you’ve addressed this a lot on the call, but you’ve expressed a lot of confidence in Angi’s ability to improve EBITDA and cash flow in the near term. But as you evaluate the business, can you just talk about how you balance that? Obviously a lot of that’s going to flow through to the bottom line, but how do you balance that against investments that are necessary to return the business to sustainable growth?

And then can you also just talk about your AI strategy more broadly across products, but also in the enterprise as well? Thank you so much.

Mike Steib (Chief Executive Officer)

Thank you, Matthew. The reductions that we described today, we did not reach that number by saying we have to get to a number of cuts. We said, what is the right organization, and the right structure of that organization, to deliver on the strategic priorities I laid out for you before? So that’s the way that we think about the balance of investment. The balance is return to growth, execute your priorities, and don’t spend a dollar that’s not necessary to build, market, and sell that product and deliver profit for our shareholders.

Second thing I would just note for you is some companies will stretch their sales and marketing spend from one quarter to the next to hit a revenue or a growth target. I just want to be transparent with you all that my focus is always going to be on what maximizes the present value of future cash flows. And so that means we’re not going to approach quarter to quarter with a target on what percentage of revenue, for example, we’ll spend on marketing.

We’re going to look at the cost of acquiring service requests, and we’ll do it at the point that maximizes cash flow today and over the long term. And while it was important to get this restructuring of the organization done and behind us so we can get cracking with the right organization on our priorities, I know better than anyone you can’t cut your way to growth. The growth is going to come from us executing on our agentic future on our products, our agentic future in our enterprise, our agentic future in our partnerships with LLMs, and the shift of the composition of our revenue to accommodate more and more of the large pro capacity.

Matthew, second question was about the AI strategy. So let me touch on it in three parts, each of which you’ve sort of heard through today’s conversation. The first is when a homeowner comes to us, she has a problem that needs to be solved. And the problem is not always simple. It’s not always as simple as, I need a plumber at zip code 10001. People want to describe the problem. They want to describe when they’re available, the kind of pro that they think they need.

It could be something more complex, like a kitchen renovation or an addition to the home. All of these things are underserved by the historical sort of user experience that people run into on the web or on an app. And an agentic partner to that homeowner, however, can much better come to understand their needs and help to match them to the right solution in our marketplace. As I discussed on the pro side, having an agent there, especially for smaller pros who can step in and work with that homeowner and the pro to get you to that magical moment of an appointment, both, I think, will create a lot of incremental value for the participants in our marketplace and therefore for the marketplace.

The second part, though, is bringing AI into the enterprise. And I have seen firsthand the power of this. When you move from being a company that doesn’t really use AI, which is where most companies truly are today, to a company where people use AI to support their work, which is probably where Angi sits today, to becoming AI-supercharged people who manage teams of agents and who not only use those agents to help them do the work, but who actually teach the agents how to do the work with them.

We’re already starting to see the results from that in our engineering organization, although it’s still early. And we’ve got a roadmap for the ways that AI can take the busy work, the grunt work, off the plates of our people and free them up to do the really high-impact selling, marketing, and building that’s going to drive our growth in the future. Last part I want to sort of leave us with is these LLMs in a lot of ways to me remind me of the early days when we were all figuring out Google. Google was going to become a source of free traffic and was going to become a source of paid traffic. And the question was, how do you maximize your opportunity there? And one way was have a strong and trusted brand that people recognize, and Angi’s very fortunate to have that. The second was to have your team very focused on it and to be building ahead of the growth in that platform.

And that’s what you see Angi doing today. And thirdly, there are technical capabilities. In the same way that we were building technical capabilities for SEO and SEM two and a half decades ago, Angi has built the technical capabilities in house to know how to partner with and embed with these LLMs to set us up for longer-term success as the average user starts to become the power user in an agentic world. I think we’re putting ourselves in the right position there.

And we’ll have another announcement later today that just shows the drumbeat of the work that we’re doing here.

OPERATOR

This concludes the question and answer session. I would like to turn the conference back over to Mr. Steib for any closing remarks.

Mike Steib (Chief Executive Officer)

Well, I just want to thank you all for your interest in Angi, and the questions are really helpful, and thanks for the warm welcome. The team here is doing an incredible job.

OPERATOR

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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