Q3 2019 Earnings Call

Ladies and gentlemen, please remain on your lines. The third quarter 2019 cartilage Inc. earnings conference call will begin momentarily once again, the third quarter 2019 cartilage Dick's Inc. earnings Conference call will begin momentarily. Please remain on your line. Thank you.

This time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over the chief legal and privacy Officer Kirk Summer.

Good evening and welcome to cartilage third quarter 2019 financial results call before we begin let me remind everyone that today's discussion will contain forward looking statements based on a current assumptions expectations and beliefs, including fourth quarter and for your 2019 financial guidance expectations on adjusted.

EBITDA for 2019, and 2020, the anticipated impact of our key priorities on driving growth the timing of the rollout of Wells Fargo and its anticipated impact on our financial institution monthly active users or any use.

The number of card swipes, the United States expectations regarding adding additional marketers and merkur spend and 2020.

Impact of investments on driving revenue nascent industry verticals, the evolution of our platform to reach more advertisers and provide a better bank customer experience and our expectations regarding 2021 average revenue per user ARPU levels.

For a discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion. Please refer to the risk factor section of the company's 10-Q for the quarter ended September Thirtyth 2019, we plan to file later today and in subsequent periodic reports filed with the Securities and Exchange Commission.

Also during this call we will discuss non-GAAP measures of our performance GAAP financial reconciliations and supplemental financial information are provided in the press release issued today and the 8-K that will be filed with the FCC.

Today's call is available via webcast a replay will be available for two weeks you can find all the information I've just described on the Investor Relations section of card, but its web site.

Please note that he's supplemental presentation to our third quarter result has also been posted to our Investor Relations website.

Joining us on the call today, our critics leadership team, including CEO and co founder Scott Grimes COO and co founder then lobby and CFO David Evans following their prepared remarks, well open the call to your questions with that let me turn the call over to Scott Grimes catalytic CEO and co founder Scott.

Thanks, Kirk Thank you to everyone for joining as in our third quarter 2019 earnings Conference call.

We're pleased to announce that we delivered strong third quarter results, which exceeded all key metrics from the guidance I never Q2 earnings call. There were some highlights.

Total billings for the third quarter were $82.8 million, an increased 70% year over year.

Total revenue, which sequel to billings net consumer incentives was $56.4 million up 63%.

Adjusted contribution was $24.7 million growing 46% year over year, and we generated adjusted EBITDA positive $3 million.

As a result of her strong third quarter and year to date results were raising our full year 2019 guidance, which David will discuss in more detail later in the call.

In the third quarter, we continue to grow the reach of our platform.

Increased our quarterly average if our it may use to 128.3 million a 7% increase from the second quarter and 116% from Q3 2018.

We also remain on target to start the launch of Wells Fargo. Later this month so.

Similar to other National Bank launches, we expect the bank to rollout across customer portfolios and digital channels any phased approach.

Based on our current view launch timing, we expect to exit the year with 130 240 million.

Right.

At the Wells Fargo launch nears completion in the first half of next year. If I may use will surpass 150 million, which we believe were roughly equate to went out of every two card swipes news.

This represents significant scale, that's as unpopular with the other major advertising platforms in the us.

And then and I are proud of our team's hard work dedication, making the wealth watch possible important incredibly strong quarter.

We continue to make progress and all of our key priorities in the third quarter, which Lynn will now discuss we knew more detail before handling the cops David discussed our results and guidance.

Thanks Scott.

We're discussing the progress were making on key priorities I'd like to give you little bit more detail on the Wells Fargo Watch we are progressing well towards an initial phase launch later this month.

Includes links on Wells Fargo mobile and online sites for a portion of their customers to drive Im sure offers.

Going into 2020, the broader exposure to wells Fargo channels rolled out in a similar phase for last National Bank Watch once complete we expect wells Fargo to have a robust user experience across all channels mobile online ending.

Now I would like that's our key long term priorities to drive interesting stuff.

First is to increase the number of marketers, we count as quickly as clients and increased the amount this market or spend on our platform.

We're pleased to say, we continue to expect increase bogo and spend for 2020 as marketers fully understand the impact we can have on your business.

Second to continue to bring our capability to new verticals, including our more nascent verticals E Commerce travel and entertainment grocery and premium.

Third to continue evolving the carpet platform by making a multi year investments to move through more highly automated platform.

Hi friction.

The extended to third parties.

Support richer media.

Feedback from my partners had been very positive and they're excited about the richer content and user experience.

And finally, we continue to demonstrate operating leverage in our business from the investments we've already made in our infrastructure technology and workforce support over 200 million F. I am.

We expect to finish the year out strong if we keep these objectives.

With that I will turn it over to David.

Thanks, Lynn as Scott mentioned, we deliver very strong third quarter results that exceeded our expectations and we are therefore, raising our full year 2019 guidance based on our strong results.

In our business.

We're tracking very well through the plan that we have been communicating to investors over the last several quarters.

Again back commenting on our third quarter and will then discuss our for work we are 2019 funny to level.

Billings, which at the gross Mount built markers inclusive of the consumer incentive for the third quarter increased 70% year over year $82.8 million.

Total revenue for the third quarter was $56.4 million, representing 63% year over year growth.

Total U.S. revenue increased 65% year over year in UK revenue increased 47% year over year.

Adjusted contribution profit was $24.7 million in the third quarter of 2019, 46% year over year end up 53%. If you exclude an 800000 dollar benefit from the Lloyds contract in Q3 2018.

Adjusted EBITDA was positive $3 million in the third quarter of 2019. This is compared to a loss of $1.7 million in the third quarter of 2080, we're pleased with our adjusted EBITDA results in Q3, which is reflective of the operating leverage which we anticipated coming through our business model and the second half of this year.

While we continue to expect to see the benefits from a fixed cost business on a profitability going forward. We believe it's also important highlights we will continue to make strategic investments across our business to capture significant growth opportunities, we see for car clinics in the market today.

As a result, our adjusted EBITDA will likely experienced some fluctuation from quarter to quarter in future.

Average if I may use grew 116% from 59.3 million in the third quarter of 2018 to 128.3 million in Q3, 2019, primarily reflecting the launch of chase.

Looking to 2020, we expect additional if I may you growth from the phase launch of Wells Fargo. In addition to continued growth and if I am I use the natural maturation on the network our ongoing efforts without my partners and digital adoption.

Our third quarter 2019, ARPU was 44 cents down approximately 24% from 58 cents and the third quarter 2018, but up 10% from 40 cents in the second quarter 2019.

As expected our Europe . Your ARPU decline, primarily reflects impact of rapid growth and our average I find that use we expect this dynamic to play out for the near term and continue with the growth in our if I am I use that will come from the Wells Fargo rollout.

Moving to our balance sheet and the impact from the follow on offering completed in September .

On September 13, we successfully completed and close to follow on offering in which we sold 1.9 million shares and selling software sold 1.2 million journey, which resulted in approximately $61 million net proceeds to the company after deducting underwriting discounts and commissions and expenses.

We believe this capital raise provides increased strategic and financial flexibility to execute our long term strategic goal. We also received $19.2 million and proceeds from the exercise of options and warrants to purchase shares of common stock in the third quarter with that we ended the quarter with $95.2 million in past $246000 in restricted.

Cash on the balance sheet compared to $32.5 million in cash and 10.3 million unrestricted cash at the end to 2019. We also ended the quarter with effectively zero debt outstanding in the third quarter, we eliminated the balance of our 2018 term loan using the $10 million.

On our balance sheets during alone.

In addition, we use the cash on hand to pay down the $26.7 million outstanding on our $40 million arbitrarily remains fully available for us to borrow again.

As a result, our total cash plus available dollar to us in our credit facility as of September Thirtyth 2019 was approximately $135 million. We ended the quarter with 25.7 million shares outstanding in order to date weighted shares outstanding for the quarter 23.6 million.

Compared to 22.8 million outstanding at the end of the second quarter.

Difference in common shares outstanding relative to the June 32019 number reflects the increased 1.9 million primary shares issued in the follow on and 1 million here from the exercise of warrants and options made during the quarter.

Now turning to guidance.

For the fourth quarter, we expect billings to grow 17% to 25% year over year to between $80 million to $88 million, we expect GAAP revenues to be between 55 and $59 million and we expect adjusted contribution profit for the fourth quarter to be between 23.5, and 25.5 million dollar representing 15 to 23 parts.

Revenue growth.

Seen percent adjusted contribution growth year over year. Finally, we expect adjusted EBITDA for the fourth quarter to be between one and $2 million.

For full year 2019, we're raising our guidance, we expect billings growth.

36% to 38% to be between 297 and $303 million. We currently expect GAAP revenue to be between 196 and $200 million and adjusted contribution for 2019 to be between 87.5, and $89.5 million, representing 30% to 33% revenue growth and 26.

Next to 29% adjusted contribution growth for 2019, we also expect adjusted EBITDA for full year 2019 to be between zero and $1 million.

Overall, we are pleased with our strong third quarter and your today 2019 results. We continue to see good momentum in our business driven by increasing demand for our platform and strong execution against our key threat.

Including our efforts that span advertising budgets with existing markers and drive deeper penetration into new verticals.

With that I'll hand, it back to Scott for his closing remarks before we open the call to your question Scott.

Thanks, David Q3 was a strong quarter, we remain excited about our opportunities for growth.

And believe we can continue building on our strong momentum.

And I are proud of our team's ability to generate consistent solid results. We remain exactly on track to deliver against our key 2019 priorities.

Which set up well for success in 2020, M. beyond with that I'll open up the call for your questions. Thank you.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby, while we compiled the culinary roster.

Your first question comes from the line of Youssef Squali with Suntrust.

Hi, guys. Congrats on the strong quarter two quick questions for me on the wells can you remind us again, how me debit and credit card holders. They have how many do you think.

Can you penetrate over the next say 12 months.

And maybe a Lynn you can speak to the the more automated buying model that you spoke to I think this is a work in progress maybe you can just tell US where are you out where you are in that evolution.

Thank you.

Good afternoon, using the scope of doing well.

In terms of this specific account numbers with wells or for any of that banks, yeah. We don't speak to their accounts they do publicly disclose them.

Well certainly one of the largest.

Debit card issuers in the country and add the outside of the significant credit card portfolio in terms of how much debt, we penetrate over time, so much where either national bank launches we.

I expect to be live with the overwhelming majority about their customers.

And you just in terms of automating the platform I think we have stated some goals around phase one of the platform automation is to find a partner or two who can start to test what weve automated with us that will likely be either a performance agency or maybe some other type of.

Yes.

Arch Advertiser partner and our goal is to try and get that Don sometime in 2020 in terms of.

Testing partner or too.

Okay. Thank you.

Thank you.

Our next question comes from the line of Chris Shutler with William Blair.

Hey, guys. Good afternoon wanted to gauge your thoughts on the the amount and quality of the Mark marketing content that you have on the platform today I know, obviously, you're playing catch up with a rapid expansion.

Grants from the I may use but.

How do you plan to make the offers more targeted overtime.

This is Mike.

I think that is a big part of the platform automation that we're doing is to try and use more machine learning to make the offers more targeted relevant you are right. You know if we get an offer from like a large food retailer. It tends to go to a lot of people because everybody, but that doesn't necessarily mean, it's a well targeted offer so a lot.

Most of the automation that we're bringing to the platform is going to enable targeting that quite frankly, an individual human can't do.

And you're also correct because we are playing a little bit of catch up on the RP side, given the significant M&A you scale. You know we have a lot of new logos that are in the system. We're quite pleased with those but they're not spending at scale. Yet. So you don't have the variety of content that we would ultimately how force I think those are both fair.

Questions and critiques and you know something we're very very aware of in a big part of what we're very focused on as a team.

Hey, guys. Thanks Clynt.

And our next question comes from the line of Doug Anmuth with JP Morgan.

Thanks for taking the questions.

She was first just on a force you guide just help us understand what factors that go into the growth rate there for Fourq you relative to waiting in queue I know to tougher comp if you could.

But these cells that are there and then secondly, just going back to the more automated platform.

Outline the magnitude of investment.

Required here and over what timeframe that could play out.

Sure Hey, Doug. This is a this is david as it relates to the Fourq you Guide obviously, we raised for the year a couple of dynamics here that we're at play number one.

We did consume more budget or or pull budget into Q3, just given.

The success, we were having a with the platform. The good news as we were able to find some additional budget dollars.

For the fourth quarter, which which they're in a allowed us to raise the guidance.

For.

For the year, you point out fairly that Q4 last year is a pretty tough comp to go against and therefore, that's why you've got the growth rate.

That you do but nonetheless, you know we're super excited about this past Q3, if you go back and look over the past few a few quarters that Q2 Q3, a sequential growth number for that for this go around is pretty impressive when you consider the prior year. So.

That helps answer the question the investment in automation.

Yeah, So investment and automation is certainly.

This is something that we are continuing to evaluate as Glen talked about.

Oh, I'm, obviously, we'll set aside some investment dollars in both Opex and Capex for next year.

To make prudent investments that should accelerate kind of our time to market on that front.

Doug in terms of the timeline you know we see this is a.

Series of Rollouts in but 2020 in 2021 to get us from what I would describe what we do today as a.

Well White glove managed service, where we have.

You know really smart aim is thinking about how we targeted in manage our campaigns.

In doing that across hundreds of advertisers the journey, where on an automated be go.

Automated surface benefit of Serban hundreds is serving thousands of advertisers and we'll get there through a series of releases that about capabilities out across our value chain.

I think we would reiterate what weve, what we've talked about the path which is.

A profitable adjusted EBITDA for 2020 and that should still allow for.

Continued investment with the things, we're trying to do around automation.

Uh huh.

Thank you.

Next question comes from the line of Aaron Kessler with Raymond James.

Yes, hi, guys a couple of questions noticed some newer verticals that it can update us there maybe some of the traction as well as maybe traction with some of the larger advertisers I think you've talked about starting to see from fair Tractions from a larger advertisers given your increase I know you side.

Finally, I believe via an updated their mobile App recently, just maybe thoughts if youre seeing some at higher click through rates et cetera, and engagement on their mobile. Thank you.

Yeah. This is Glenn so in terms of advertisers here that the growth that you've seen in 2019 is primarily from advertisers who've been on the platform prior to the Chase and Wells Fargo lunch simply growing their budgets now they're not all growing their budgets as quickly as we grew the any use but most.

The material growth that you're seeing is coming from existing advertisers spending quite a bit more we're very pleased with the number of new logos that have entered the channel but for the most part those new logos are not responsible for the growth that you're seeing in Q2 to Q3 to Q4. However, we do you think we are well positioned.

For those new logos to be a material part of the growth in the back half of 2021, and we've talked about the verticals that those new logos are in so we're feeling good about you know the concentrated focus and dedicated hiring that we put against those verticals and again the hiring as people with expertise deep expertise in those differ.

Current industry.

In terms of DNA, yes, they did update their mobile App, we're pleased with the engagement.

No banks are constantly updating their mobile app and generally speaking we have continued to maintain and elevated position and our and are pleased with.

The real estate that banks are dedicating to this program.

Great. Thank you want.

Thank you. Our next question comes from the line of Tim Willi with Wells Fargo.

Hey, Thanks, and good afternoon.

A couple of questions here first it's just sort of walk through maybe taking back over the last couple of quarters where that.

Positive surprises since then and were made and you're still learning.

It's worth tweaking the business plan or the strategy is obviously depend a lot of successes demonstrated by the results. So I just wanted to get your thoughts around the upside drivers, but then sort of where there might still be some levers haven't quite kicked in and if you could share of that.

Yes, I can't Miss Scott you know I think the person I would say is.

We went public a couple of years ago, we kind of add a.

A plan for how this company unfolds over.

Between now and 2023 and at the highest live I'd say, we're still really tracking against that plan that we laid out a couple of years ago, we feel good about it.

You know we're tracking against rapid have consolidating the banking market, we're really seeing the results of that.

I think places that.

We were a little more cautious about early into your that we're feeling better and better about now was first of all the ability to scale advertising budgets as we've grown in the U.S when spoke to that Thats really been the driver Brett.

This year.

When we think about driving growth in 2020, we of course went to continue to grow budgets for the existing advertisers, but we went to new verticals to kick in.

We're seeing.

Great adoption, the new verticals in budget expansion. So I think it's fair to say that we feel good about our momentum there.

And then you know.

The past automation, we believe is really important to 2021 and beyond and.

We're really happy with the progress our team is making in that journey. So.

I would see less around surprises and more as we continue to execute against the plan. We we feel more confident in the plan.

The Great then I had to Ah two follow ups.

Yes. So the first one is obviously you get a lot of data and more and more data sort of every minute of everyday given the way the business runs and.

Sort of curious your thoughts whether its intermediate term longer term near term about finding other ways to monetize that data on that perspective that you have especially once you have wells up and running along with DNA JP Morgan, obviously lots of other banks surely there are other people other institutions and would love to have.

The insights.

It would seem like you could monetize that beyond what you're hearing and I'm sure that.

Hey, privacy issues in firewalls and got to figure out how to do it what's what's your bank partners, but just any thoughts you have there I'm gonna have on my follow up Yeah, Ken Let me touch it is but when you may want to dive in.

Our focus is.

Very much on we have created a walled garden would scale similar to the other very large walled gardens out there.

We've just now achieved this customer scale. So the full focus of the company is now scale in the financial scale of the walled garden.

Based on that kind of massive customer reach so all the stuff, we do with our data all the analytics, we do with our data.

To grow the number of advertisers, we serve and expand what they do with us.

And.

And we don't spend any time thinking about the things we could do we made we may be doing things over time potentially that's not our focus today and you touched on some of the Super important Tim.

Great thing about our business model is the way that we handled it really sensitive data that we do it without PII data ever these card that X and that's sort of very central to that attendance at around how we run this company.

Great. My last one was built out the capabilities in terms of your bank partners.

The verticals that you're calling on for for the contents.

The automation et cetera.

How does that change your thoughts I guess and timelines around M&A and maybe what partner sort of indicating they would like to see things you are discovering if you sort of think through those strategies with those large partners just because it prompt.

M&A discussions about maybe it's as we've gotten larger.

Yes, Mark sophisticated that we need to spend a bit more time thinking about acquiring capabilities 40 feel like organically you can address whatever the partners are sort of thinking about.

Great question can you sort of sit back my prior comment that our focus is solely on route around scale in our walled garden and make any go from serving hundreds of advertisers to thousand an increasingly targeted and relevant way.

The obvious question as part of that is is when you think about build versus buy and we have we have a great Corp. Dev team, that's always out there in the market thinking about that but also thinking about M&A in the context up the way, we run our business versus the broader digital media.

Ecosystem. So we think about it we spend a lot of time thinking about it I would say we don't in any way feel compelled to rush ourselves unless we see something that really creates a lot of value for for the company in for our shareholders.

Great. That's all I had I appreciate the time. Thank you thanks to.

Thank you and as a reminder, ladies and gentlemen, if you have a question. Please press Star then one on your touched on telephone.

Our next question comes from a line of Andy Rob here with Keybanc. Your line is now open.

Who.

A couple things one the growth in the UK I assume that's acceleration, we haven't heard that number before but just wondering if theres a renewed effort there or.

There are anything specific there.

Yeah, I think it's David I think we're still seeing.

Great performance out of the UK.

We still see opportunity to continue to grow and May use we still see opportunity to continue to grow advertisers. So.

We're we're making appropriate investments around that business, because we still see a lot of opportunity. There got off you know anything to that I agree with that we're really proud ever UK team. We're definitely study in the changes going on an open baking in the UK in Europe more broadly we're globally.

And.

As that unfolds in the market, we will see if it creates additional opportunities done lots speakers at this point however.

And then a couple of people who've tried to asses I think but I wonder if you can give us any clarification on a 2020 EBITDA understanding there's a lot of moving parts right now and.

And then it could move around quarter to quarter, but just.

Are you thinking about.

I think about profitability.

Sure as a whole and how much.

New growth.

You want to lift flow through.

Yeah. It's certainly it's a fair question, obviously, we'll we'll be ready with formal guidance at the next call, but I'm just a couple of data points you know as we mentioned at the outset, we are starting to see nice data points around a business that's benefiting from a fixed costs business. So just to put in perspective, you know I don't think I think delivery went down year over year and the.

These are these are the people who are involved with front running and campaigns and you're seeing that leverage just as just as one example, so as it relates to positive EBITDA for 2020, I still think I'm of the mindset that that's.

Thats, certainly well within [laughter], what wasn't well within the our sites I think all a large part of what we're going to try to figure out here hopefully sooner than later or is that if we find ways to accelerate our go to market around automation, we're going to want to make those investments obviously that will impact the degree to which we see positive EBITDA in 2020, but nonetheless.

Jeff.

We do see again.

We are seeing nice data points around a fixed cost business. We are seeing a trajectory that that makes us feel good about profitability on the EBITDA line I'm 2020, but we're also trying to make sure that we've got the dry powder to make the investments necessary to accelerate go to market.

Thank you yes.

Thank you I'm showing no further questions at this time I will now turn the call back over the CEO Scott grants for any further remarks.

Well first of all everyone. Thank you for joining the call today, you know as I said it earlier, but when and I are just really proud of the quarter. The team delivered and also are really excited that the wells launch is now underway in that we are continuing that journey to build a walled garden on scale with the other leading platforms out there that has some.

Credibly unique capabilities in terms of finding the most valuable customers.

Driving them into our advertisers that measure in the return and he has been to the pity so.

We are very much focused our mission mission and feeling great about how we're executing against it.

So thanks, everyone have a great evening.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.