Q3 2019 Earnings Call
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As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section of quotient website. Following this call.
I will now turn the call over to Stacie Clements Vice President of Investor Relations. Thank you Ms. comments, you may now again.
Thank you Hello, everyone and welcome to our third quarter 2019 earnings call on the call with me today, our CEO Stephen Bowl Enron feel or our CFO . They have come up all of a slightly different format for prepared remarks have been posted on the IR section of our corporate website investors that wasn't dot com alongside our press release an earnings presentation.
Any interest as timely as summarized as posted remarks for today's call and look forward to jumping into Q1, a little quicker than usual before we begin. Please note that during this call you will hear forward looking statements. These forward looking statements include projections for fourth quarter and full year 2019 expectations first Elutions partnership product launches acquisition of of email.
Unplanned and cpds plants to exit at the site as well as the expected with an investment energy business generally forward looking statements are based on information available to it and a good faith beliefs about management team as other kindness call and are subject to known and unknown risks and uncertainties that could cause actual performance as a result to differ.
Materially.
Additional information about factors that could potentially impact of financial results can be found in today's press release and and the risk factors identified in our quarterly report on Form 10-Q filed with the FCC on August nine 2018, we disclaim any obligation to update information contained in these forward looking statements, whether as a result of new information future events or otherwise.
It's not that with the exception of revenues operating expenses gross margins and not lost financial measures discussed today on a non-GAAP basis and up in adjusted to exclude certain expenses. It reconciliation between GAAP and non-GAAP measures can be found in the financial results press release should stay and on the flight that first on the company's website with that I'll now turn the call over to Steven.
Thank you Stacy and welcome everyone to our Q3 earnings call Q3 results came in above the high end to both our revenue and adjusted EBITDA guidance recognizing that these targets were lowered after last quarter's release.
We delivered $114.8 million in revenue $13.6 million, an adjusted EBITDA and strong cash flow from operations of $6.2 million.
As Stacy mentioned all of our prepared remarks, and accompanying slides were already posted on our web site, we're not planning I'm reading those remarks, verbatim and rather will take the time to provide additional color on some of our exciting strategic initiatives as well as some of my observations having been back as CEO for a full quarter.
Before we get started today, we announced that Ron few or our Chief financial officer will be retiring by the end of the year I've enjoyed working with Ron and I'd like to take a moment to thank him for his contributions and wish him well in his retirement I'd also like to welcome Pam Strayer to the team Pam brings rock solid Fanapt in public company leadership experience.
The quotient and we're thrilled to have or join us as we head into 2020, and what we believe will be our most exciting year, yet Pam takes over his CFO on November 11, and Ron will continue until the end of the year to help with the transition.
We also announced today that we signed a definitive agreement to acquire it would be mill, a leading data and media activation company, who PMO brings best in class technology to further strengthen quotient digital media solutions, which we believe will improve campaign performance and cost efficiencies and accelerate the development of quotient self.
Service platform.
BMO has worked closely with us for the past five years and we're excited to have them join the quotient family when fully integrated onto our existing quotient platforms, we expect to be ammo to help drive even better results inefficiencies in campaign deployments and have a positive effect on our gross margin in 2020.
On the topic of gross margin, we have already begun the work to be able to automate several parts of our business and expect us to have a positive effect on gross margin in 2020.
Given the promotion growth, we're anticipating and assuming Q4 20 Nineteens median promotion mix remains consistent into next year, we expect roughly five to six points of gross margin improvement sometime in 2020 from increased automation process improvement and to be Mel.
We're also starting to see positive signs from the large three cpgs, who had reduced their spending on national promotions over the past three quarters.
As you know declines from these three have represented significant headwinds and have impacted our overall CPG growth trends. We are in strategic discussions now with these cpgs as they look to take full advantage of the breadth of our platform, including targeted digital offers quotient audiences and retailer performance media and.
Expect to see a return to year on your growth for all three starting the first half of 2020.
Additionally, albertsons companies has rolled out in lane targeted coupons and over 2000 stores.
Inland enables retailers to merge their digital and physical promotions platforms. So they can make maximum effective use of data to engage with and delivered a shoppers. The right offers both digitally and in the store. This is an industry onest where brands and retailers can use the same data from the same platform to target shoppers across.
Online and offline touch points at scale and offers a far superior solution then what was available before.
We're in discussions with additional retailers about adding in linked to their stores to replace their standalone legacy checkout coupon printing service.
Our audience business continued to scale with two strategic partners already integrated the first Nielsen Leverages, our data with their measurement solutions. This partnership also allows our audience segments to integrate with their Nielsen marketing cloud connecting us to key dsps that serve our CPG brands and agencies.
Additionally, in Q3, we were named a Facebook marketing partner, bringing our data and industry, leading capabilities to the Facebook platform. These partnerships validate the strength of our solutions, our data scale and market leadership and give us greater access to marketing dollars as we head into the annual planning processes with our clients for calendar year 2000.
20.
Over the past eight weeks I visited many of our clients and partners and the level of engagement and receptivity I have witness to quotient products and services has never been that's high.
I've also had the opportunity to visit with most of our offices and teams what stood out the most to meet with the level of expertise and thought leadership within closure, we have several new engagements underway with existing and exciting new partnerships and I look forward to sharing more about some of these in the coming weeks and months.
With regard to our product portfolio. During my first few weeks back I made the decision to terminate an initiative that had been under development for the past year and had just recently gone live.
The product was not something I considered on strategy and additionally, with having a negative effect on morale as many of our team members had been pulled off of their products to help get this initiative to market given the size of the market. We're going after it's important that we stay focused on strategy teams are now re energized and we're seeing meaningful innovation and delivery.
Core product portfolio.
The final point I'd like to make is about the change taking place in the annual client and budgeting processes between Cpgs and retailers.
The digital first approach that we've been talking about is becoming reality.
Over the past quarter, we have seen retailers and cpgs collaboratively plan to shift meaningful dollars onto digital engagement.
In some cases quotient RPM retailers are requiring cpgs to commit up to 1.5% of their gross sales to be spent on digital marketing and merchandising.
Let me contextualize. This as this is a big change that's happening in the industry right now.
If a CPG sells a billion dollars' worth of product in a specific retailers. They would then spend up to $15 million and digital marketing on the quotient platform that powers that retailer.
We believe quotient sits in prime position to help shift those digital marketing dollars, our measurement and analytics have been a core business driver for this change and serve as a catalyst to expand beyond the 1.5% with retailers and brands.
This is both a shifting dollars from offline to online and the redirecting of marketing dollars to be place, where shoppers are with the highest return on ad spend.
When we started the company 1998, our thesis was it like all other industries that would ultimately be district be disrupted by technology. The paper coupon most commonly distributed in the freestanding insert or FSRU would ultimately be replaced by a more efficient digital solution.
Well I took much longer than we had originally expected over the past quarter. We have been told by top cpgs, making up over 20% of all Fs high coupon distribution that they are planning to exit the FSRU entirely during the course of 2020 .
The implications of moves like this are wide, reaching for cpgs. It enables them to have more dollars deployed to more effective vehicles and for retailers. It will allow them to provide more value and better experiences to their shoppers by their digital platforms.
There are also other significant nonworking dollar connected to the distribution of paper coupons in the Fi like legacy paper clearing that cpgs and retailers can find additional savings to redeploy.
Cpgs, eliminating the FSRU are now engaged in meaningful planning around how to further capitalize on the scale of digital and I could not be more excited to see how this unfold over the next several months in summary, I'm feeling confident about our business and the focus direction. We're headed in our teams are working together and meeting regularly with greater.
Collaboration after meeting with our clients and visiting our offices and spending time with our teams I believe we have a tremendous opportunity to deliver great products and services with continued disciplined focus.
In a market that is ready to what we believe make a large leap forward into digital in 2020, I hope to see you. All next week at our first Investor Day in New York for those of you can't make it a webcast will be available on our website and will also be at the RBC conference on November Twentyth I'll now turn the call over to Ron and look forward to take your questions.
When he wraps up Ron.
Thanks, Steven and welcome everyone. In Q3, we continued to grow revenue gain operating efficiencies and generate cash total revenue was up 11% over last year and reflected growth in digital paperless RPM and oncology.
Additionally, the three cpgs that had been a headwind over the last three quarters are starting to show positive signs for a return to year over year growth as they start to think of both are 2020 budgeting.
In the third quarter once CPG was essentially flat and another delivered growth total digital promotions declined 2% over Q3 last year, primarily related to the three Cpgs I, just mentioned and an expected 34% decline in specialty retail.
Revenue from digital Paperless grew 12% year over year and digital print declined 27% over last year.
Media revenues were up 31% year on year for Q3.
Gross margin.
On both a gap and a non-GAAP basis gross margin in the third quarter was slightly down from Q2 and down from Q3 2018 as media revenue continues to grow and has a lower gross margin than promotions looking at Q4, we expect gross margin to be relatively flat quarter on quarter as some of our margin improvement initiatives take hold.
These initiatives include increased automation process improvement and utilization of of BMO technology.
We continue to actively manage our costs and invest where appropriate while leveraging operating expenses.
Q3 operating expenses were up from Q2, and essentially flat with Q3 2018.
non-GAAP operating expenses in Q3 were up approximately 1.1 million compared to a year ago.
As a percentage of revenues non-GAAP operating expenses continued to show leverage declining from 36% of revenues in Q3 last year to 33% of revenues in Q3 2019.
non-GAAP operating expenses excludes stock based compensation the net change in fair value of escrowed shares and contingent consideration amortization of acquired intangible assets certain acquisition related costs and restructuring charges.
Adjusted EBITDA, adjusted EBITDA was $13.6 million, representing a 12% EBITDA margin.
On a year over year basis. It was impacted by the product mix decline in gross margin offset by continued leverage and operating expenses.
Adjusted EBITDA excludes interest expense income taxes, depreciation and amortization.
The net change in fair value of Escrowed shares and continued consideration stock based compensation restructuring charges other income expense and certain acquisition related costs.
Stock buyback.
In the third quarter, we bought back 1.3 million shares for approximately 14.6 million and completed our May 2019 stock buyback program in August the board approved a new $50 million buyback program.
Moving to cash we ended the quarter with 238.1 million in cash down 15.4 million from the end of Q2 2019, primarily related to the $17.2 million use on our stock repurchase program.
Guidance.
As noted earlier, we're pleased to announce the signing of a definitive agreement to acquire a demo for 15 million upfront and an earn out of up to 25 million over two years based on attainment of certain targets.
They'll be most engineering team is based in Tel Aviv, while their sales team is out of New York.
We expect the acquisition to close by the end of the month with minimal revenue contribution for Q4 and 2020 .
We expect this acquisition to have a positive impact on gross margin and be accretive to EBITDA in 2020.
For the full year 2019, we expect revenue in the range of $425 million to $429 million or approximately 10% growth versus last year at the midpoint.
This translates into fourth quarter revenue range of $107.4 million to $111.4 million.
Adjusted EBITDA for the full year 2019 is expected to be in the range of 43% to 45 million or approximately 10% of revenue at the midpoint.
This translates into fourth quarter, EBITDA range of 9.3 million to $11.3 million.
Finally, after working 42 years straight Im looking forward to retiring at the end of this year I would like to thanks, Steven and all the great people I've worked with here at quotient for the past three years as well as all of you on this call I welcome Pam to this great company and I will be around for the next couple of months to help with the transition.
Thank you.
Operator, please open the call for questions.
At this time, if you would like to ask your question. Please press Star then the number one on your telephone keypad again that is starts in the number one we will pause for just a moment to compound acuity roster.
And your first question comes from the line of Schweda Korea with RBC capital markets.
Great. Thank you two questions. Please one the targeted promotions.
That is now live and in across.
2000 stores within Albertsons can you Steven can you. Please talk a little bit about hot once you've seen so far how it is tracking and.
The.
Sort of a dime lining 2020 without getting much specific in terms of partnerships with other potential new.
Dealers and then second is on guidance for the full year, what kind of the what kind of bad.
Expecting from the three Cpgs.
Based on what you've seen so far thank you.
Sure. Thanks to the question so.
With regard to the first question on in Lane.
We're just rolled out and so it's too early to really have a scope on what the performance looks like other than to say that it's meeting expectations.
With regard to 2020 and additional can you hear me.
Well, yes.
Oh I think the thank you.
Sorry about that I wouldn't read I thought were on mute. Okay got you see on Rusty everybody here you go.
With regard to 2020, an additional retailers.
As I said, we're in discussions with other retailers now about implementing in lane that would apply to both occurring.
Right, you retailer I, Q and RPM customers and also some potential new ones, but with any specificity I probably couldn't.
I couldn't drill into that.
And then on what was the question the three Cpgs just that we're now we're now anticipating them returning to year on year growth in 2020, which you know as we've been talking about we expected that what happened. It was just hard for us to pin down exactly when we would see that but we are now seeing that so that thats pretty that's pretty exciting.
For us.
Okay. Thank you.
Your next question comes from the line of Ralph Schackart with William Blair.
Good afternoon, Steven just kind of wanted to get your perspective on the 2020 outlook.
Strategic overview, you gave that contemplates a change or I guess I added shift for digital marketing for brands was that comments, but more industry specific or and or was it related to sort of the three large cpgs that I think it's kind of struggled to grow up budget or actually decreased budget over the last three quarters and just.
I want to get your perspective on the square those comments with what you've seen over the last three quarters and then just from a product standpoint, obviously made another acquisition sounds like.
Looked under the Hood shutdown, another product or shutdown a product. When you came in you feel like you have the portfolio in place today are there any sort of meaningful gaps that you would explore potentially for further acquisitions. Thanks.
Sure I'll begin to reverse order so.
I think we made we made comprehensive and quick work of reviewing the product portfolio and I do believe now with the addition of BMO that our product portfolio is the right has the right set a balance and that is the right for our product portfolio going forward. So.
I feel very good about that we're innovating on that product portfolio and and that's very exciting, but the core product portfolio I think is intact.
For the foreseeable future on the brands there are two pieces to that so let me just let me just address both of those one is on the most recent discussions around exiting the FSRU.
And then the other pieces on.
Quotient retailers that are retail performance media and shifting dollars and that was the reference to get up to 1.5% of gross sales. Let me just explained both those on the FSRU looking 1998, we started the company. The expectation was at the FSRU would go the way of many other industries that are disrupted by digital it took 22 years.
Or is it didnt take the five years that I thought it was going to take but but hearing clients now tell us that they are exiting the epas Sai entirely in 2020 and during the course of the year 2020.
That's pretty that's pretty Earth, shattering news and so we're trying to unpack exactly what that means but from a forecasting perspective, so stay tuned right at our next quarterly.
Release will have a better view of what next year, it looks like but it's pretty exciting.
On the retailer side look brands spend money merchandising with retailers and a lot of that gets done in the form of in store media end cap displays discounting in stores, the physical circulars and now that the platforms that we partner with retailers to build our.
Real scale. They now can actually shift dollars into these vehicles and there is a higher return on AD spend we've already proven the digital shoppers people, who are digitally engaged with retailers.
Frequent the stores more often and buying more products and so those dollars worked harder for cpgs and in a slim margin industry that were in working dollars.
Our very important and so now that that's the case at least for brands and retailers that are on our platform.
Retailers are asking brands to stand up to 1.5% of their total sales in digital marketing and that's a pretty big changes taking place in the industry and it is brand new for 2020. So obviously, we're very excited about that.
Great. Thanks, one more if I could the five to six points of gross margin improvement.
Talked about for sometime in 2020, how should we think about the just in terms of linearity through 2028 would that sort of just ramp through the year, perhaps you'd be exiting the year five or six points of gross margin improvement how should we think about that.
I would say exiting the year at that at that is probably the right way to think about it I don't know that it will be straight a straight linear change because we've got to work.
We've got to work some of the automation process improvement into the system, but but you should definitely think about exiting the year there yes.
Okay. Thanks.
Thank you.
Your next question comes from the line of Chad Bennett with Craig Craig Hallum.
Great. Thanks for taking my questions. So it looks like the media business decelerated meaningfully in the quarter growth Wise. My guess is your that's because you analyze or annualized on holiday.
And in due to the fact that.
You Havent seen gross margin improvement.
This quarter and aren't expecting any next quarter.
My guess is your expectations for either audience cloud to do anything meaningfully this quarter next our low and then in line promotions.
Expectations.
See very low and then my guess is sponsored search, which we didnt hear anything about or at least I didn't catch.
With Albertsons is yet to gain real traction can you address all that.
Yes, I think thats, probably the wrong the wrong set of conclusions.
Media is typically much higher in Q4, and so we would expect that the media business would actually be accelerating in Q4, and so I think that kind of balances out the question about all the other items as well those will be growing but we do expect the media business to accelerate in Q4 and Thats.
Lastly, how the media businesses operate.
So you expect to promotion business too.
Be weaker in Q4 and seasonally.
When it typically takes up it's going to be.
And weaker than expected.
No. It's the opposite we expect a promotion business to be stronger in Q4 in the media business to be even stronger.
So thats the impact that you would see on margin is that we expect that promotion you recipes.
Your revenues are forecasted to go down sequentially right.
We.
We took the we took our estimates for the year.
And we came in higher than we had reforecasted for Q3 and because as we have said for many quarters now we're better at predicting the years because of the budgets with our clients than the quarters that they ship them in in order to make sure that we didn't see shifting budget from Q4 to Q3, causing.
Beat we're maintaining our guidance for the year.
So that's that's why you're looking at those numbers that was the guide that we set out last quarter and just to make sure that we didn't see budget moved from Q4 to Q3, we're not we're not going to take our numbers out based on the beat and and get ahead of ourselves again.
Okay. One last question if you did not acquire.
Google Mall.
How would that gross margin improvement that you talk about for next year, what would that looked like without them.
Obama is going to be much smaller component to the five to six point.
Okay. Thanks.
Thank you.
And as a reminder, if he would like to ask your question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Shawn Harrison with D.A. Davidson.
Yes, hi.
Thanks for taking my question first off.
Do you enjoy your retirement and then Pam welcome the quotient.
Steven the question I'm getting asked.
Investors, which is how should we think about new privacy laws, including in California, and the potential impact on your business.
Sure. Thanks, Tom.
Thats, obviously, a big topic across the industry much like GDPR and if we all recall the impact that GDPR had.
The privacy laws are continuing to evolve most recently, obviously as you referenced the CCP a law in California look there is an opportunity.
All of this we're working closely with our clients on how to implement the new regulations as of now we don't expect to see immaterial impact to our business as a result of these laws.
Go forward basis, they were going to be log in other states and ultimately our thesis is that there will be some kind of federally mandated privacy laws to try and make some sort of order to all the independent states coming up with their own sets of privacy laws, but.
As it sits right now we just don't expect immaterial impact to our business.
Great and then one quick follow up.
Can you talk about historically and provide excellent contact.
Your thoughts.
Free shipping on groceries, what impact do you think that 11 your retail partners and then what impact if any.
Sure.
Sure so.
Like it's a great question you have to of course ask yourself why are they doing that right. So if you step back and second and say white why have they rolled that out that's obviously it cost to them and it must be because you know there grocery delivery program isn't growing the way they have expected it to be and particularly in a marketplace now where traditional brick and mortar retail.
Mailers that have got the relationship with shoppers are starting to roll out their own ecommerce initiatives. So Amazon was operating in a competition free environment for a long time and now that's not the case and so what what will develop what will develop from here at least it's our thesis is that the retailers with the most Phil.
Physical store locations closest to their shoppers in their talents are going to win in this market ecommerce is still three ish percent of total grocery and so the impact of Amazon Rolling out free delivery is going to be marginal at best and again, we've seen some really exciting development. It from retailers, who are traditionally thought of as brick and.
Order retailers and their customers reacting very well to their initiatives because they've got the opportunities to do things like delivery fresh pickup it curb pickup in store have a shopping experience in the store, even though most of the groceries that said shopper, who selected have been pre bag for them and overall thats just going to be a much.
Better or shopper experience and a winning propositions I am I.
I wish Amazon luck in this but.
It's clearly a reason why they're taking cost on to try and be competitive.
Great excellent points look forward to the analyst day next week. Thank you.
Thank you very much.
There are no further questions at this time and I would now like to turn the call back over to CEO Steven ball.
Thank you everyone for joining us today as you can hopefully tell I'm thrilled to be back and given the changes now taking place in the industry. It's both personally and professionally gratifying to be playing a leading role in the digital transformation of the CPG and retail industry. We hope to see you. All next week at our analyst day in New York. Thanks again.
Yeah.
Today's conference call you may now disconnect.