Q3 2020 Fluent Inc Earnings Call
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Good day and welcome to the <unk> third quarter 2020 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by person to Star key followed by zero after.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to ride and of course. He please go ahead.
Good afternoon and welcome. Thank you for joining us to discuss our third quarter 2020 earnings results.
Joining me on today's call are fluent so you know Ryan chunky and CFO, Alex Mandel our.
Our call will begin with comments from right now.
Bendel, followed by a question and answer session.
I would like to remind you that this call is being webcast live and recorded a replay of the event will be available following the call on our website.
To access the webcast. Please visit our Investor Relations page on our website Www Dot Louis co Dot com.
Before we begin I would like to advise listeners that certain information discussed by management. During the conference call will contain forward looking statements covered under the safe Harbor provisions of the private Securities Litigation Reform Act of 90 95.
Any forward looking statements made during this call speak only as of the date hereof.
Actual results could differ materially from those stated or implied by our forward looking statements due to risks and uncertainties associated with the company's business.
These statements may be identified by words, such as expects plans projects could will may anticipates believes should intend estimate and other words of similar meaning.
The company undertakes no obligation to update the information provided on this call for a discussion of the risks and uncertainties associated with fluids business. We encourage you to review the Companys filings with the Securities Exchange Commission, including the company's most recent annual report on form 10-K, and quarterly reports on form 10-Q.
During the call. We will also present certain non-GAAP financial information relating to meet your margin adjusted EBITDA and adjusted net income.
Management evaluates the financial performance of our business on a variety of indicators, including media margin adjusted EBITDA and adjusted net income.
The definitions of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today.
With that I'm pleased to introduce fluent CEO Ryan chunky.
Thanks, Ryan and good afternoon, and thanks to everyone for joining us today as we continue to navigate this challenging environment I couldn't be more proud of our entire colleague base.
Leadership team, we are grateful for our teams resilience perseverance now eight months into this remote work environment.
The strength of loan is our culture as once again, we were recognized as one of New York's Best places to work such acknowledgement is a great source of pride even more show during these difficult times. We also recently announced the launch of our business empowerment program, which will support minority and women owned businesses with their direct to consumer digital marketing.
Efforts.
And as we continued to traverse a challenging regulatory environment with heightened scrutiny by regulators and elected officials of some of the major players in the technology industry.
Well it remains diligent in enhancing our brand equity improving our own standards for the benefit of our clients and consumers as well as our shareholders.
Today, we're pleased to share strong results for the third quarter with year over year revenue growth of 21% media margin growth up 39% and adjusted EBITDA growth of 167%.
We believe this performance is significant and that reflects innovation and growth during this challenging macro environment as well as the successful lapping of last year's challenging third quarter.
For context, and thinking about the potential for influence market opportunity I spoken about the notion of our flywheel.
To the extent, we can generate higher monetization returns on media spend through levers such as product innovation analytics and technology. We can then reinvest some of that upside into tapping incremental media supply and accessing new markets. This in turn can yield further gross incremental profit and additional investment capacity.
During this quarter through effective product innovation and advances in our analytics driven AD, serving we were able to advance our flywheel.
And now as I've done in the past several calls all further contextualize our results.
Forward looking priorities around three strategic growth pillars.
First our performance marketplace. This refers to the demand or interactions between our advertising clients and consumers on our platform.
Fluence Advertiser solutions enable our clients to bid on down funnel outcomes, rather than impressions or clicks and predictable pricing in scale. We continue to serve a vertically diversified client base the benefit of which has been particularly evident during the pandemic in terms of providing continuity of demand on our marketplace. In addition.
Breadth of offerings from such diversified client base.
Enables us to profitably monetize a larger and broader audience on a daily basis more than most companies in the performance marketing business.
During the third quarter, we continued to see strong demand from our media and entertainment vertical including gaming apps and streaming services. We also saw a lift from our financial products and services vertical which earlier in the pandemic catching softness.
Well he's industries represent two of our largest verticals I'll point out that fluid continues to operate in a variety of additional verticals such as health recruitment CPG and retail we diversify in this manner due to our consumer first orientation aligned against a fundamental thesis that our platform affords us the ability to.
Engage consumers and extract practical insights about their needs and preferences with the goal of helping them discover new products and services that are right for them. Today, we worked with hundreds of advertising partners that represent dozens of product or service categories, we're committed to expanding those relationships and into new industries and profit.
Categories in order to grow our marketplace.
Second fueling our marketplace growth, it's fluence media footprint. This pillar is backed by a portfolio of digital media properties and our ability to attract millions of engaged consumers consumers to those properties every day.
During the quarter, we were able to scale up several new promotions, which resonated well with consumers and yielded strong monetization on our marketplace.
We were able to leverage these outcomes to go deeper in the major digital media platforms for additional supply and the incremental audiences both in the us and UK. This.
This is in essence, an example of the flywheel notion I noted earlier looking ahead, we anticipate these outcomes will support our efforts to further expand geographically with Canada already in testing and several other markets in our plans.
Third our platform represents the technology analytics and product innovation that why are the first two pillars together.
I've spoken previously about our investments over the past year into our analytics capabilities and technology infrastructure during the quarter advances in our matching or AD, serving logic yielded improved monetization, which carries high incremental margins.
In addition, we announced the launch of our enhanced performance marketing platform powered by a double U.S. upgrading our technology stack to drive value for clients support market expansion and enable the agility, we desire in the quickly evolving digital landscape.
Looking ahead, we continue to prioritize expanding lifetime value of consumer relationships, we establish on our platform.
Were investing into additional CRM channels to reengage consumers with activation costs that are substantially lower than the initial paid media activation. There are several channels that we are building out that are on our roadmap for 2021.
In closing, we're pleased with our third quarter results and the strategic value of the operational initiatives underpinning These results.
We also recognized it was important to reestablish confidence in our ability to deliver a seasonal lift in the third quarter as we get in 2017 and 2018.
And all of this was achievable of course due to the value our clients place on the performance marketing services. We provide we believe the fundamental alignment of our clients' needs and objectives with our core competencies and providing them clarity on ROI and predictability that optimizes their marketing budget continues to validate our market.
Opportunity.
Thanks for your support now Alex will review the numbers in further detail and I'll return for Q and a afterwards.
Thanks, Ryan and good afternoon.
We report our results for the third quarter today as Ryan spoke about the quarter was marked by innovation and efficiency driven growth.
No consumer facing promotions experience favorable engagement, which coupled with enhanced AD serving logic, we opened strong monetization on our platform.
Putting generated 78 point my opinion quarter up 21% year over year, albeit in comparison with a challenging quarter last year.
Revenue was also up 9% sequentially.
The factors underpinning revenue growth well amplify that the media margin level with 29.79 in the quarter, reflecting growth of 39% year over year and representing 37.9% of revenue.
It's relatively higher margin profile as a percent of revenue related to the increased monetization our return on that spend Ryan spoke to earlier.
As a partial offset to the increased margin, we incurred higher costs fulfilling rewards earned by consumers fulfilment cost is not captured a media margin is captured in our GAAP gross.
Cost of revenue.
That said the increase media efficiency outweigh the incremental fulfillment costs.
Cost of revenue as a percentage of revenue decreased.
In Q3, as compared with 69% than last year's Q.
Our operating expense on a GAAP basis, comprising sales and marketing product development and DNA grew in aggregate by 1.3% or 250000 year over year.
Point $1 million.
Within that mix, we continued to invest in product development.
Board of innovation and efficiency is like those that during the quarter.
Our DNA line includes certain litigation related costs of $2.7 million in the quarter inclusive of a 1.5 million accrual established this quarter as the loss contingency in respect of the New York Attorney General matter, which we first disclosed in our Q1 2019 10-Q.
Jan I also includes 650000 of non cash accrued compensation expense relating to the one operating acquisition now.
No no cash amounts are anticipated to be incurred in connection with this prior to the fourth anniversary of the acquisition, which closed on April 1st of this year.
Adjusted EBITDA of $11.6 million in the quarter represented 14% of revenue.
The increase of 167% year over year.
Interest expense declined by 400000 year over year to 1.3 million as we reduced our debt principal outstanding in.
In Q3, we continued to be a noncash federal taxpayer due to the availability of I know.
We reported net income of 1.2 million a quarter or one cents per share and adjusted net income a non-GAAP measure of 6.3 million or eight cents per share.
Our non-GAAP metrics are reconciled in today's earnings release, and our 10-Q and 10-K filings.
Turning to the balance sheet, we ended the quarter with 16.9 million of cash and restricted cash.
Working capital defined as current assets minus current liabilities ended the quarter at 34.5 million.
Total debt as reflected on the balance sheet ended the quarter at 41.1 million, while upgrading the unamortized discount revenue.
The balance of 43.9 million.
Debt declined by 13.1 million as compared with your <unk>.
Our team continues to operate seamlessly in a fully.
Well so I.
Great and the uncertainties associated with the upcoming election potential effect on media supply yes.
Unfortunately continuation of the pandemic and the holiday shopping season that will likely have a different cadence arc and anybody for.
At the same time, we perceive that these facts are going up.
Salary the ongoing shift to performance based digital solutions markers and brands to see measurable outcomes and greater accountability from their ad spend.
We believe this place squarely to flow and long term market opportunity.
We wish you and your families well and hope everyone takes proper precautions to stay safe.
We're glad to field questions at this time.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset for pressing the keys.
Withdraw your question. Please press Star then too.
And at this time, we will pause momentarily to assemble the roster.
And our first question today will come from Jim Goss with Barrington Research. Please go ahead.
Thank you.
Several questions first.
First and given the.
The steadily increasing number of streaming services. It seems over the course of the year and before this year.
There's more and more entrance into that space provide you with more opportunity or more competition.
I Wonder if you could navigate that for us.
Yes, Hi, Jim it's good to hear from you.
And.
As a performance marketing company not an agency the fact that more and more players are coming into this space is a positive thing for us.
Gives us more.
Products and services to offer to our consumers more options.
And choices, which which is a good thing and ultimately it helps really flesh out that marketplace effect that we've spoken about so it's a it's a very positive thing for us.
Okay and you also mentioned gaming and you were referring more to apps, but what type gaming. It are you referring to specifically is that.
Now on a betting gaming or is it does include that sort of thing as well.
There may be some some of the game of skill type.
Apps in there, but predominantly these are more.
Social games, they're light and we have a variety of different gaming apps that we're working with right now so.
So I think you may be referencing the more game skill type a category that's.
Thats something that those guys are in customer acquisition mode and growth mode. So we see some of that in terms of our client base, but also.
Hi variety of gaming apps.
So it sounds like this would apply to anything that is subscription based or transactional base now one wonder if there are a lot of other categories you could enter that would broaden your.
Applications as well.
We absolutely believe that and as we kind of as we expand our the channels that we're operating in.
Some of the AD products, we delivered we spoke of our contact center capability the ability of drive inbound call things like that there are really many different types of product applications that you can apply a performance marketing model against and that's really something that we're focused on at this point is expanding the amount of.
Product and service categories that were able to operate in and match our consumer base with.
Okay, and the 5% of your business that's it.
International I think mainly UK and what you might want to do in Canada are they going to target the same sort of areas.
Areas that you're already involved in the United States.
Yes, absolutely in the UK, we have been able to demonstrate.
For that be the dog and on so to speak and it's something that we anticipate will be.
Something will have success on in other countries. There may be cultural differences here in their work that we have to respond to in order to be successful at the type of scale. We are here in the U.S.
But we ultimately believe it's the same model that's that's driven.
While the growth and success, we've seen here domestically.
Okay, and one last one for now the shared the targeted seasonal revenue pattern. The run of sequential improvement over the course of the year I was just looking for the last several years the patterns and there wasn't a consistent pattern over to them over the course of those years and I'm wondering if that is really what for seeking to.
Generate.
Yes, we're a growth company and I can have Alex comment to some of the details in the financials, but you will see some occasionally abner abnormal growth.
From time to time with the business. We noted last Q3 was a challenging quarter, but in 2017 and 2018 Q3 saw lift over Q2.
Generally the back half in Q4, specifically tend to be strong for us.
So you can see some macro patterns. If you were to look across a longer timeframe than than what we may have publicly available but.
Ultimately.
You know I can have Alex comment on any of the more specifics, but but the business is a growth business and we do tend to have certain period that tend to be outsized a little bit in terms of the the growth.
Okay.
Yes, Alex wants to go ahead or we can cover it.
Subsequent discussion.
Sure I was just going to.
Brian shared in what you observed which is that historically Q4 has been sequentially stronger than Q3.
We simply noted on the earnings release upfront some of the uncertainties that are present than this year's environment, which makes it simply a different type of a year then are they yet at the same time, we're cautiously optimistic at this point.
Okay. Thank you very much.
Thanks, Jim.
And our next question will come from Maria Ripps with Canaccord Genuity. Please go ahead.
Oh, great. Thanks for taking my questions.
I just wanted to follow up on your media and entertainment vertical.
It sounds like you expect this vertical to remain the most significant growth driver going forward, how by streaming services and mobile gaming I.
I guess, how is that versus your revenue from this source it and are there any sort of revenue concentration issues.
Hi, Maria it's great to hear from you and.
To answer your question directly no. We don't have any specific concentration issues no one particular client.
North of 10% to my knowledge and really.
We have been enjoying the benefits of a.
A vast array of products and services that our consumers are.
Discovering on the platform and really.
It's been a testament to where we're seeing a lot of growth.
So no no particular concentration issues at this time.
Got it and that just maybe another question here.
Can you give us an update on your structural profitability you had really great flow through this quarter from revenue upside to EBITDA.
GAAP side.
This change how you think about the potential for margins over the next year or two.
Alex I think you're on mute.
I'm sorry, it's Alex thanks.
Thanks for the question great to hear from you as well as we think about margin profile over the next year.
Sure, Let's say I don't think that we experienced this quarter necessarily materially changes our outlook.
We tested the new promotions that we spoke about that were effective and at the same time, we're continuing to invest into areas that we see potential opportunities from so I think that no material change to our outlook at this point.
Got it that's very helpful. Thank you bye.
Thank you.
And our next question will come from Bill Dezellem with Titan Capital. Please go ahead.
Thank you.
What would you like to share about your plans relative to the higher cost debt that you have on the balance sheet.
Hi, Bill and I'm going to let Alex field that one directly.
You bet. Thanks for the question I note that our credit facility currently priced at LIBOR, plus seven and suffice it to say that.
We continue to focus on opportunities available in the market and.
We review them regularly and will update.
We'll update publicly if there are any changes to that.
Great. Thank you and then.
Ryan would you. Please expand further on the comment you made in your opening remarks about the flywheel and and you and I know you did kind of give an example later in the in the discussion.
But I want to give you an opportunity to really expand on that if you would please.
Yeah absolutely.
And you know.
For lack of better term fluent spends money to make money. We go out partner with many of the major media owners platforms to go out and traffic our properties. Our clients are on the other end of our digital media properties on a pay per performance basis.
Which makes their campaigns extremely scalable for US show the flywheel really has to do with that that pent up demand. The fact that our clients want more of what we're delivering.
You know since they can see the ROI, so predictably and essentially really all we need to do to grow is go out and buy more channels in which to traffic goes meat digital media properties and.
And appropriately position our clients offerings within them. So there's many ways to skin that cat so to speak and we're really focused on going out.
And ensuring we have a vast variety of products and services in clients that deliver those products and services that is in essence, our our demand side of our house and in turn that enables us to go out and access more supply leap frog competitors to go out and outbid for traffic on I'll call. It a major platform like base.
Book, or Google or any of our other media partnerships websites and apps, where we acquire audiences from an essence that is the flywheel.
Great. Thank you and then lastly, the restructuring and severance cost that was referenced I think 565000.
Would you please detail at.
Could you.
Alex are you on mute.
Nope.
Okay, we got to know.
Yes, we can hear you can hear you now Alex.
Great could you. Please ask the question about the 565 in relation to restructure.
Restructuring and severance costs, what what was it then.
Really asking the question in the spirit that you had a great quarter. So congratulations.
It's a little unusual to to have restructuring and or severance during a great quarter, usually companies save that for a year for a bad time.
Sure of course in the ordinary course.
We have people that.
He joined the company and Thats, the part that company in different circumstances, we have different agreements in terms of severance and so forth, but nothing major or material per se.
Tom discussed further on that one but thank you for raising the question.
Thank you.
Thank you ladies and gentlemen.
This will conclude our question and answer session and also concluding today's call we'd like to thank you for attending today's presentation. At this time you may now disconnect your lines and have a great day.
Good bye.
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