Q4 2019 Earnings Call
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Quotient website following this call.
I will now turn call over to Stacie Clements Vice President Investor Relations. Thank you Ms. Clarence you may now begin.
Great. Thank you operator, Hello, everyone and welcome to our fourth quarter and year end 2018 earnings calls on the call with me today, our CEO, Steven Bull pen stay or a CFO and Scott Raskin, our president for prepared remarks have been posted on the IR section of our corporate website investors Dot com alongside our press.
Releasing earnings presentation, and the interest of timely as summarized the poster remarks for today's call and look forward to jumping into <unk> before we begin. Please note that during this call you will have forward looking statements. These forward looking statements include projections by first quarter and full year 2020, the impact to revenue from the change in delivery in certain media services.
[laughter] patients first Elutions partnership product launches the female Cpds and Tpds plan to the I plan to exit appetite and our ability to leverage and Mexican operating expenses as well as expected gross stuff and investments in our business generally over that these statements are based on information available to you and a good faith beliefs.
Our management team at that time in this call and are subject to known and unknown risks and uncertainties that could cause actual proportionate to the results to differ materially.
Additional information about factors that could potentially impact our financial results can be found in today's press release and then the risk factors identified in our quarterly report on form 10-Q filed with the FCC on November eight 2018, and our future filings with the FCC, we disclaim any obligation to update information contained in these forward looking statements whether as a result, the meal information.
Peachtree, that's right away.
Please note that with the exception of revenues operating expenses gross margins on that last financial measures discussed stayed on a non-GAAP basis and have been adjusted exclude certain expenses a reconciliation between GAAP and non-GAAP measures can be found in the financial results press release issued today and on the slide deck posted on the company's website with that I'll now turn the call.
Never to Steven.
Thank you Stacy and good afternoon, everyone.
Along with our earnings release, we also published a complete transcript of prepared remarks, consistent with last quarter, rather than read those verbatim I want to spend just a few minutes highlighting some important points I'd also like to welcome Pam Sprayer, whatever first quotient earnings call.
I couldn't be more pleased with how we ended the year, we had a great quarter and as you saw from our release, we delivered record revenue in the fourth quarter and well above the top end of gardens, ending the full year with revenue of $436 million or 13% year over year growth.
Our fourth quarter performance delivered continued strength in retailer right Q retailer performance media or RPM, and social influence marketing and benefited from some overall budget flush from those cpgs ending their calendar fiscal budgeting cycle.
For the fourth quarter. We also delivered adjusted EBITDA above the top end up guidance and we ended 2019 with $45 million of adjusted EBITDA.
Our teams have worked hard demonstrating truteam work in collaboration and I couldn't be more proud of all that we've accomplished over.
Over the last six months, we strengthened our team and established key operating priorities to drive the business forward. We are now on course for steady growth in revenues gross margin and adjusted EBITDA.
Start with some of the business changes.
We're making some process changes to improve the delivery of some of our media products.
As a result, and starting with Q2, well now be recognizing revenue from these products on a net basis as opposed to gross.
Pam will give more details around this but the impact to 2020 revenue would be estimated to be about $33 million higher if he takes into consideration the forecast for 2020 revenue growth would've been 20% significantly higher than our 12% guidance at the midpoint of our range, which includes the net accounting.
Treatment.
This demonstrates the accelerating growth of our core and stronger margin businesses.
We also expect to dry five to six percentage points of gross margin improvement over the course in 2020.
Portion of this improvement comes from these process changes around some of our media products, which I just mentioned with the remaining improvement coming from BMO acquisition, and additional automation and process improvements together. We believe these efforts will yield overall improvement in gross margin.
With these changes were forecasting steady progress and getting to a Q4 adjusted EBITDA margin in the high teens.
With an eye on operational excellence, we've identified several other areas, where we can improve how we run in the past five years, we've nearly doubled our revenue to almost half a billion dollar without the benefit of focusing on automation and internal process improvements that you would expect from a company our sites.
This is started to change over the past few months and we're already benefiting from the internal attention.
[noise] to say that the past six months have been exciting would be an understatement. Since I have returned along with Scott Raskin, we've brought onboard a new CFO, a new SVP of revenue operations, a new SVP of customer success, and the new Chief people Officer, who starts this coming week.
Each of these leaders are world class executives in their respective areas with strong track records delivering results. We have also flatten parts of our organization, which eliminated the need for certain other senior roles in an effort to streamline decision, making with clear accountability.
We've also expanded our network and shopper demand on the platform launched numerous products and market and acquired a demo, bringing many benefits, including a great team technology and cost efficiencies.
This is an exciting time in the CPG and retail sectors retailers and brands are in sync with each other as they look to leverage digital to help them transition from offline to omni channel. This dynamic has created a tailwind for our growth in 2020, we expect to see continued growth and the three CPG that had softer spend with us in 2019.
We also expect to see benefits in the second half a year from certain CPG is planning to exit the episodic.
As a reminder, cpgs representing more than 20% of national coupons are expected to come out of the print FSRU by the end of 2020, creating an opportunity to bring those dollars to quotient.
And we also expect to see growth from RPM as retailers start to mandate that cpgs coming up to 1.5% of their gross sales. He spent on digital marketing and merchandising.
We spoke about this at great length at our Investor day and over this past quarter, we've seen strong momentum build as brands commit dollars towards these retailers initiatives.
The industry is finally shifting to digital at an accelerated pace. We've laid the foundation for this opportunity we have one of the largest networks of retailers and shoppers, we have integrated solutions that pull all the necessary levers to drive sales and shift non working dollars to working dollars and we bring robust analytics and insights to our customers and partners.
We've done a lot of heavy lifting over the past six months, we now have a great team in place the right products in a market leading position to capture more dollars as they shift to digital there's still work to be done, but there's a new energy and excitement from our customers partners employees and leadership. The gives me the confidence that we're focused on all the right things.
I'll now turn the call over to Pam.
Thank you Stephen good afternoon, everyone.
I'm excited to be here with you today and I look forward to meeting you all over the coming month I'll touch on a few piano items right now, but encourage you to read the full prepared financial results posted on our website for additional detail.
We delivered Q4 and full year 2019 revenue and adjusted EBITDA above the top end guidance.
We delivered record revenue for the year, a $436.2 million given by strength in retailer I, Q RPM and social influence there.
Our customer continued to spend more on our platform and when combined all three of our customer cohorts grew revenue by 15% over 2018 with 20% growth coming from customers outside our top 40.
GAAP gross margin for Q4 was 39.1% and although it was down over Q4 2018. It wasn't improvement approximately 50 basis points over Q3 2019. This is the first time in two years, we saw improvement in gross margin gross margins over the past two years had been primarily impacted by product mix shift.
In Q4 gross margins benefited slightly from product mix shift and as Steven mentioned, we've put in place to continue this improvement throughout 2020.
Q4 operating expenses declined as a percentage of revenue compared to Q4 2018, even with increased headcount in sales and marketing and the absorption of you've them all expenses.
Over the past few months, we've done a review of our operations and sales and marketing effectiveness.
As a result, we have added talent and realigned resources and business functions to how scale the business and operate more effectively going forward.
For 2020, we expect a typical seasonal increase in operating expenses in Q1 with a relatively flat spending trends through Q3, or we expand margins and don't leverage throughout the year with increasing revenues.
Q4, with the typical seasonal increase in operating expenses, but we expect revenue growth during the year to outpace that span with expanding margins throughout the year.
We delivered $11.5 million of adjusted EBITDA in Q4, 2019, which was down over Q4 2018 impacted by product mix shift and onetime charge of approximately $600000 taken for bad debt expense.
We offset by leverage and operating expenses.
On a full year basis, 2019, adjusted EBITDA was $45.2 million or 10.4% margin compared to $57.6 million in 2018 or 14.9% margin.
Looking at cash in 2019, we spent approximately $85.5 million repurchasing approximately 8.1 million shares.
We ended the year with cash on cash equivalents of $224.8 million, excluding cash paid for the Uboe acquisition and capital expenditures, we generated cash flow from operations of approximately $1.8 million during the fourth quarter.
I want to spend a minute discussing a change we're making to a portion of our media business and the impact. This change will have to both our 2020 revenue growth rate and gross margin.
Starting in Q2, we will be improving the delivery of some of our media products not only do these changes improve the customer experience, but they also strengthen the health of our business as we continue to grow.
As a result, and starting on April 1st 2020, we will recognize revenue from these products on a net basis as opposed to growth, which increases our gross margin and reduces the total media revenues we were recognized in 2020.
As a result with these changes the revenue growth rates for 2020 will be lower than if we have not made these changes Q1 2020, how work or if not it not effective.
To try to quantify the impact if we continue to recognize revenue on a gross basis the impact of projected revenue in full year 2020 will be approximately $33 million spread over Q2 Q3 in Q4.
Our revenue growth rate in 2020 would therefore be approximately 20% over 2019.
This change will also result in approximately three percentage points improvement on the gross margin in the quarter, we make the change.
Overall, we expect gross margin to approved by approximately five to six points by the end of 2020.
In addition to the approximately three points improvement from operational change in certain media products, we expect about one and a half points improvements from even now with the remaining improvement coming from operational automation.
This change in our media business has no impact to our net income or adjusted EBITDA.
As for guidance for the full year 2020, we expect revenues to be in the range of 485 millions of 495 million or approximately 12% growth at the midpoint compared to last year.
Which includes a portion of our media business delivered as net in Q2 through Q4.
For the first quarter 2020, we expect revenue to be in the range of $106 million to $109 million.
We expect the second half of 2020 to be stronger than the first half with approximately 66% of total revenue being delivered in the back half of 2020.
Revenue mix between promotions and media for the year is expected to be similar to the back half of 2018 with media revenue contributing approximately 46% to 47% total revenue for the year in 2020.
Adjusted EBITDA for the full year 2020 is expected to be in the range of $58 million to $62 million or approximately 12% of revenue at the midpoint.
Adjusted EBITDA is expected to grow throughout the year with the fourth quarter adjusted EBITDA margin in the high teens, resulting from increased revenue improved gross margins and level operating expenses.
For the first quarter 2020, we expect adjusted EBITDA to be in the range of $1 million to $3 million.
We expect weighted average diluted shares outstanding for 2020 to be approximately 92 million.
In summary, I believe quotient has tremendous opportunity in the market quotient team has laid an incredible foundational technology and partnerships throughout the retail CPG ecosystem the focus for us in 2020.
Take us Great Foundation, and improve operations for greater scale and sustainable growth.
That's more dollars shift to digital and more importantly through our platform.
I believe we're well on our way.
Operator, I'll now open the call for questions.
Just as a reminder, if you would like to ask a question.
Please press star followed by the number one on your telephone keypad.
As a facelift your phone receiver and press.
Before asking your question one moment please.
First question comes from the line of Schrader.
Cajori <unk> from RBC.
Great. Thank you a few questions. Please oh first could you please provide us some guidance on the cadence.
Revenue growth.
Pro forma basis on a fair calm basis, it will be 20% that you called out for the full year, how should we think about through the year. It seems like it would be an acceleration from Q1 through Q4 second media growth revenue growth was 12% in Q4, any any color there that seemed a little bit lower than.
Would have expected and then third is on just EBITDA margin guide of high teens in fourth quarter versus the guidance that you gave for first quarter. How should we think about it I know Sam you talked about it a little bit any any guidance on that cadence will be helpful. Thank you.
Yeah sure what are this is Pam so.
In terms of the revenue guidance for 2020.
Yes, we said.
If you look at apples to apples comparison, the growth is expected to be 20% year over year.
But because of the gross to net change thats a bit lower than that on an as reported basis. The revenue throughout the year will accelerate quarter over quarter from Q1, all the way consistently through Q4. So that's what gets us leverage at the bottom line throughout the year on its going to be a consistent.
Pattern throughout that whole year.
I talked about EBITDA. The margin guide if you can see for the full year, we expected to be somewhere between 12% to 13%.
However, there is a strong growth ramp through the year, we start out Q1 with lower revenue and as we do every year, there's a small step up and operating expenses from Q4 to Q1 of payroll taxes turnover and we have our sales meetings then.
So it's like step up and operating expenses in Q1, and then it remains flat through Q3 with another small seasonal increase in Q4.
So with relatively flat operating expenses with gross margin expanding throughout the year.
Ending close to 50% in Q4.
That's going to expand EBITDA margins consistently throughout the year.
And then I think your last question was on media grow 30% year over year and whether that's low.
Sorry, your question was 12.
Well for Sun is that right.
Maybe I read that Roberson media growth year on year I think it was 30.
In the fourth quarter media revenue grew 11.5%.
Our fourth quarter 2018.
Is what I thought I read.
Okay and your question is about that growth rate being lower than you would have expected. It would have to it would depend on what was in Q4 2018, but I think the year on year media growth rate was 30.
Hey, we're just we're just looking at what that comp on that is.
[laughter].
Yes, our year over year for the full year 2018 in 2009 media grew by 34% right and the Q4 growth franchise doing them off the road.
With 11%.
It was 11% I was going to depend on what was in Q4 of the must have been a strong growth in Q4 of 18, we can come back to you at that Twitter.
Okay. Thank you.
Thank you.
Your next question comes from the line of Chad Bennett from Craig Hallum.
Yeah. Thanks for taking my questions, so going back to the media gross.
The prior caller whats right. It was 11 half or 12%, which is pretty material deceleration from where you started the year or are you thinking fundamentally different about the growth rate of that business going forward and you know what would that.
Yeah, I think we're going from.
Maybe last year this time, believing.
Because of our our special sauce. There that you know we were going to be that what's going to be the significant growth part of this business, but it seems like that might not be dictated.
Yeah actually Chad this Stephen so.
The the fast growth rate on the media business remember the standing start business not too long ago sell with on a low base that we were growing as fast as we work well. We also said is that we expect.
The product mix to stay roughly even with where we were at the end of 19 through 2020, and so we actually expect to see promo growing as well this year and and so again just keeping in mind a it was off off of a smaller base getting started and be the year over year costs.
Quarterly number if they just look at what was in Q4 of 18 I don't have that it from me.
Okay. So we should just view the media business as a media business growth rate industry wise.
Yes, definitely not our year on year again.
And we've talked about this.
With with this significant focus for a long time, you really need to look at the way our business runs year on year, the way dollars move in and out of the quarters effects, our media business as well, it's not just promotion spend our client spend money in the media segment with us in the promotion segment, because we have a lot of products in both in cell.
Year on year, our media business grew I think the number now 34% year on year. That's the way you have to think about this business. So again quarters are very hard for us to predict and a single quarter doesn't predict the outcome of the year or future growth rates.
Got it thank you.
And your next question comes from the line of Steven Frankel from Dougherty.
Good afternoon, Steven maybe little more insight to start with about these three large cpgs you talked about the nice snap back year on year, but on average maybe tell us what you think their budgets are with spending to you in 2020.
Sure Hi, Steve So.
Obviously, I can't talk specifically about what their budgets are because we have a good idea at this point.
What their minimum spends will be because we've gone through some planning with them, but all three of those cpgs have returned to growth spending with us.
And so and Thats and that's factored into our thinking right now for 2020 remember when we when we do our projections, we really work against a minimum committed spend and thats, how we build our our programs with our customers over the course of the year. So all three of those Cpgs and we said this last quarter as well, but we will put up we'll put a finer point on it now there.
We're continuing to process with them all three of those cpgs are returning to growth spending with us this year.
Okay, and how material is the FSRU by decline as a part is the growth you're forecasting for the year.
I would say that I would say that.
It from an industry perspective, it's material.
We're hearing about it from more and more clients now than we were just a quarter ago in discussions and the biggest impact will be in 2021 as I said.
Last quarter.
CPG is representing over 20% over 20% of national coupon distribution offline vehicles are completely withdrawing from the FSRU by the end of 2020 and sell for their 2021 calendar years. After those that are on calendar year basis, They will not be in the FSRU and for anyone who is on a half year fiscal wolf.
Start see somebody some impact of that in the back half of this year.
We think it's we think it's very meaningful one of the things that happens when you start to.
When you start to change the dynamics of a vehicle like that.
Is that others, who are left in that vehicle are left sitting in a in a non performing.
Assets, so they're sitting with dollar value of coupons in a product that isn't being utilized anymore, because the aggregate value that products gone down and so that's sort of speeds up the process a little bit. So we actually think it's quite meaningful.
Okay, just switching gears dot one thing here just want to make one comment on the media question. If we could yeah. So just looking forward to 2020 to give you a little bit more context around our media growth.
On an as reported basis, we do expect media to continue to grow health at least 24% year over year on I'd like for like basis, So kind of up a pro forma when you compare apples to apples.
Assuming that we would have kept our portion of our media business recognize this growth the whole year.
Year over year growth would have been more like a 35%.
Okay. That's helpful.
Hi, just sneak in a clear that ecommerce.
Yes.
Currently does so could you talk a little bit about the pipeline for the Pos couponing product and also for potential new RPM partners.
Oh, absolutely the pipeline for both is is healthy.
We expect to add more retailers exciting more retailers.
Over the course in next.
Months in quarters. This year and we also expect to add more retailers onto our main product both.
Okay, great. Thank you.
Thank you.
And your next question comes from the line of Jed Kelly from Oppenheimer.
Great. Thanks for taking my question.
Just on your approach to guidance Pam since you've been at the company. It's Steven since you Bob taken over six months ago is there any of any change in approach the way you're approaching guidance I know it was back half weighted last year it.
Any changes you're kind of thinking on how you're approaching the guide.
Yes, if you're asking about changes from maybe what the former CFO dead I don't have a lot of insight into how he set guidance, but I will say that we go through a whole process up looking at.
Pipeline.
Revenue expected to close.
What you know path.
Forecast accuracy either in accuracies, we've had we look at risks and opportunities. So what are the upside in the downside we take that all into account when we set guidance.
We set a range based on what we think will.
I'll be a realistic but conservative range for us. It's also based on feedback we get from our customers assessment of our Tpgs on their annual budget.
I think we've made a lot of progress in talking with Cpgs and getting annual commitments to spend during the year and actually raising commits year over year, we're talking with a lot of Cpgs right now and what their commit will be for the 2020 year. So all of that taken into account when we set there when we set the range for guidance.
And then is I mean, I guess this is hard to answer but.
Do you have any exposure in the supply chain with the ground buyers.
Non.
Mike.
All right and then one last question for me.
Steve that you you've been at the company now back six months I mean, where have you where do you think you've made the most impact.
That's fair question I would say.
Culture.
Number one.
Organizational alignment clarity of roles accountability number two.
And.
Greeting, creating probably greater ability for our teams to go out and do their jobs without without a lot of interference.
So we really created an opportunity for people to go out and scale and do their jobs. The way that they had intended to do for a long time.
Thank you.
Thank you.
Next question comes on line of Elliott Alper from D.A. Davidson.
Great. Thanks, I'm sure ask how quotient is helping retailers kind of work to grow the number of shoppers onto their digital loyalty programs.
And then secondly, and separately how much visibility do you guys have into your CPG partners spending with you throughout the quarter in there.
Great highlighted Steven So let me take our the second one first so I think we have a very good.
Ability now to see into the spending patterns of our Cpgs. It gets it gets a little bit better as we continue to move forward. So.
This year with the changes that are anticipated taking place in the FSRU overtime and with retailers.
Really engaging directly with their CPG partners to drive digital spending on their platforms. Because the evidence is now in the marketplace that the ROI on a digital shopper is much higher than in non digitally engaged shopper I think our visibility is getting a lot better.
So thats, so that that part of it and again on the year. Our visibility is getting a lot better quarters are tough to manage they really are tough for us to predict sometimes.
And that goes to pam's comment about taking a conservative view, we have to be we have to do planning with our customers and our clients on an annual basis and then we do the very best we can to quarter Isaac.
The question about how do we help retailer partners grow we take a very active role in helping our retail partners grow we share best practices, we work with them on their marketing initiatives. We in many cases have team members on their teams sitting in their offices working with them day in and day out.
We help them run programs, we brings value to them. So when a retailer is going to run a program to drive shopper registrations and engagement our network will bring national dollar value to help amplified basically the message that are delivering on their own.
And I can give you specifics if you'd like but suffice to say I think that when when cpgs are running national promotions and a retailer is going to go launch an initiative to drive more registrations. They typically do it with some form of promotion. So we'll bring national dollars to bear as part of our network on top of the promotion dollars that they're bringing to bear.
And that just drives an awful lot of engagement. So I think where I think we're playing a very active role in helping our retailers grow those registrations.
Great helpful. And then one more just wanted to ask if you're seeing any impact on GCP or expect any headwinds from these regulations and the future.
You know there were a lot of questions about this two quarters ago, three quarters ago last quarter. What I can tell you is that as we predicted CCP a is really turning out like GDPR.
Offers see the banner they click except in they move on and the number of people that opt out of tracking their data is really very very mild. So I would tell you that there's been no impact that we can feel at all from ccps other than the expense of getting ready for it.
Appreciate it.
Thank you.
And your last question comes from the line of David Gearhart from first analysis.
Good afternoon. Thank you for taking my questions first question I wanted to talk a little bit about the gross margin last quarter.
Mentioned five to 600 basis points improvement as you go through the year and you cited you BMO greater automation terminating about strategic.
Product and the new products, gaining traction we're set guidance last quarter contemplating the change with the media segment in terms of how you record revenue from for gross to that.
If not the shouldn't have not been additive to that expectation last quarter.
So that was that was under heavy consideration, but we had a lot of work to do internally to make sure that we could make those changes so their process changes here and engagement changes here and so we have a number of initiatives on the on the table to drive gross margin improvement that was part of the contemplated sad, but we have to get through the process.
As of getting ready to do it to be able to to really quantify.
Okay, and then lastly from me can you give us an update on your spots future problems excuse me sponsored search product.
Sure we have to date to retailers that are alive with sponsored search we have a good pipeline against rolling that out two additional retailers and that product is being met with.
Very favorable responses implementation times are quite quick.
It.
Seamless integration into web sites and.
And content availability. So we're very happy so far with that product. It's early days, but we're very happy with that product and we're especially happy with the fact that weve wrapped it all up into our overall suite of products. So that we can actually deliver targets in there and then we can measure the effectiveness of it.
I'm I'm personally very pleased with where that's going.
Okay. Thanks for the color.
Thank you.
Well now turn the call back over to quotient for closing remarks.
Thank you operator, and thank you all for joining us today as you've just heard the combination of our sharp focus on operating priorities, including improving gross margins coupled with major tailwinds now converging in the market CPG is planning to exit the FSRU and retailers mandating a shift to digital merchandising and marketing we believe quotient.
As well positioned to accelerate both our revenue growth and margin expansion, while continuing to expand our network share of market. We're also on the road the week of March nine and look forward to seeing many of you then thank you everyone.
Thank you for joining the conference today you may now disconnect. Thank you for your participation.