Q4 2020 Fluent Inc Earnings Call
[music].
Good day and welcome to the fluent incorporated fourth quarter and fiscal year 'twenty 'twenty Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing star key followed by zero.
Today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would like now turn the conference over to Ryan Mccarthy of fluid Inc. Please go ahead.
Good afternoon and welcome. Thank you for joining us to discuss our fourth quarter and full year 2020 earnings results join.
Joining me on today's call are fluent CEO, Ryan Schulke, and our CFO Alex Mandel.
Our call will begin with comments from Ryan Schulke and Alex Mandel, 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 fluent co dot com.
Before we begin I would like to advise listeners that certain information discussed by management. During this conference call will contain forward looking statements covered under the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
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 intends 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 of the company's filings with the Securities and 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 the media margin adjusted EBITDA and adjusted net income.
The man, it's been 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 Schulke.
Thank you Ryan and good afternoon, thanks to everyone for joining us today.
2020 was year on like any other and I'm extremely proud of our team and their execution against our strategic plan. This past year, our industry saw a significant acceleration in the adoption of digital marketing services. This shift has profound implications for consumers and advertisers and we're pleased that so many entrusted us to provide.
In the beat them and valuable performance marketing solutions.
Back in mid January we released preliminary metrics for Q4, and the full year 2020 today, we're providing vinyl figures and I'm pleased to report that we came in at the high end of the ranges across revenue media margin and adjusted EBITDA.
For the full year 2020, we delivered $310 7 million of revenue of 110 point for millions of media margin and $41 2 million of adjusted EBITDA, which represents top line growth of 10, 3% growth of media margin of 18% and adjusted EBITDA of 18, 7% over 2009.
Adjusted EBITDA represents a margin of $13 three per cent of revenue.
For the fourth quarter revenue came in at 82 million media margin was $32 million and adjusted EBITDA was $11 1 million.
On our last call at the end of October we indicated cautious optimism that Q4 will show seasonal growth over Q3, notwithstanding the uncertainties rising from the election, the pandemic in a very different holiday shopping season.
Ultimately our.
Our Q4 did deliver on that outlook growing four 7% sequentially over Q3, similar to our experiences in both 2017 and 18.
Reflecting on both full year and the fourth quarter I'll share some thoughts in the context of our three strategic growth pillars, which I've spoken to over the last few calls.
We're excited to update you on the significant progress we made on two of these are performance marketplace and our platform and our strategic advances against these two pillars of motivated us to redefine our third pillar of our media footprint. There, we see our commitment to driving higher quality traffic is the road to sustainable growth.
Even though it has implications for our near term revenue and earnings profile, which I will speak to further in a moment.
Regarding the first pillar of our performance marketplace or the client demand side of our business.
In 2020, we're highly motivated by the fact that we partnered with five of 25 largest companies in the world by market cap of the.
Three of our new in the year, including one in the fourth quarter as I've noted before we see ourselves on a reflection of the brands, we partner with and this progress further confirms that we're bringing an innovative and valuable solution to a large addressable market opportunity.
In Q4 with the enhanced capabilities of our live agent platform now fully integrated we saw very strong demand from high quality clients and high value verticals like senior health due to the Medicare open enrollment cycle and some we're seeing incredible market demand from quality clients demonstrating that they have the strategic appetite for our performance Mark.
<unk> solutions.
The second pillar I've spoken to is our platform, where we've made significant investments in technology analytics and CRM over the last two years on the last call I referred to some innovative new promotions, we began that we're resonating well with consumers those continued through Q4 and they're still performing for us in the new year.
Also notable on our platform initiatives has been a significant improvement in our AD, serving effectiveness, which delivered meaningful lift of monetization during the second half of 2020.
Through a combination of new promotions and more effective AD serving against the premium tier advertiser demand I just referenced we effectively doubled our unit monetization in 2020, when comparing Q4 with Q1 and we anticipate this to be of sustainable win.
As a result volume through our platform is now incrementally more valuable for us.
Our third strategic pillar of our media footprint is an area. We're now focused on making some strategic adjustments.
As our business has grown we've attracted larger and more sophisticated clients to the platform.
Further increase our value proposition to these types of your clients frankly to all of our clients, while fortifying our leadership position in relation to the evolving regulatory landscape of our industry. We commenced the traffic quality initiatives in 2020.
Over the last year I've spoken on the earnings calls about evolving our business model and our products improving our standards and enhancing our media properties against an industry backdrop that is experiencing rapid change in many ways, including regulatory changes.
And as our industry is evolving so too is fluent and we're doing so leading by example through our traffic quality initiative, we're bringing an enhanced longer term focus to our media strategy.
In doing so we are foregoing some revenue in the near term based on our beliefs debt on the other side of this transition will fundamentally deliver a higher quality offering to our clients, which will build fluent brand equity with our clients and enterprise value for our stakeholders.
Well, we currently anticipate taking of 11% to 13% hit on top line in Q1, 2021 as compared with Q1 last year. We are convinced that this strategic determination will pave the way for future growth.
We believe our go forward model and the year ahead will be one where more fortune 500 brands see the value of that fluent can play as their marketing partner. So while we'll deliver somewhat less volume will be at higher quality and monetization, we're pedal to the metal on rebuilding our supply base under our traffic quality initiative and anticipate this transition.
We'll take a couple of quarters to reestablish prior trend levels from there. We believe we can achieve substantial sustainable growth with the revenue and earnings profile that will be more highly valued by our clients and the market.
Again for context demand is strong clients are leaning in for more and monetization of consumer traffic has been robust at nearly two times, where we were in Q1 of last year.
In turn our commitment to higher quality traffic represents a sustainable and profitable growth plan.
To conclude my prepared thoughts for today I want to reiterate that we see our mission is fully intact fluent provides an innovative high value solution that addresses of massive market opportunity the quality metrics of our client base and increasing demand from our clients encourages our vision seven days a week.
Our foundation is rock solid and rests on timeless operating principles sustainable business strategy, leading edge operating protocols and best in class code of conduct fluent remains diligent and enhancing our brand equity improving our own standards for the benefit of our clients and consumers as well as of our shareholders.
And with that I'll turn things to Alex for the detailed financial results.
Thanks, Ryan and good afternoon.
I noted in our earnings release and 10-K filing today, we confirmed the final results for Q4 and the full year 2020 at the top ends of the range. As we previously released in Q4 of the company generated $82 million of revenue of two 5% year over year and up four 7% sequentially from Q3.
In line with historical seasonal patterns for context on our last call in late October we noted that in Q3, new consumer facing promotions experienced favorable engagement and coupled with enhanced the AD serving logic yielded strong monetization on our platform.
We saw those trends continue in Q4, and they continue to benefit performance in Q1.
For the full year fluent generated $310 7 million of revenue up 10, 3% year over year and in line with overall industry growth in digital advertising revenues.
As Ryan spoke too from the standpoint of volume versus monetization, our revenue profile began to shift more notably in Q4.
As part of our traffic quality initiative, the business moves more aggressively in Q4, and focusing on higher quality traffic, while reducing the volume of lower quality traffic, which has continued in the first quarter of this year.
Thank you for the increased monetization, which Ryan noted was to ask that of Q1, offset the reduced volume of which supported year over year and sequential revenue growth.
In Q1, while monetization is trending similar to Q for the year over year improvements will not be sufficient to offset reduced traffic volume and we anticipate revenue will be down approximately 11% to 13% year over year.
We see this period as the transition on the road to fundamentally improving the quality of our offering to advertisers strategically higher quality traffic sourcing should yield higher engagement by consumers on our media properties higher conversion rates and more valuable customer acquisition of outcomes for our clients.
We believe this approach will thereby yield further increases in monetization, which we can then reinvest into higher quality of media sourcing and product development driving further client satisfaction on loyalty and turning the flywheel of our model.
Our media margin in Q4 of 32 million, representing 39% of revenue benefited from several factors.
First the enhanced monetization noted before second with strength in our data sales, including notable progress on our programmatic offering and third was progress on our CRM strategies targeting increased lifetime value of consumer relationships.
The benefit of these factors, we see continuing in Q1 of this year.
Anticipating they will offset much of the reduction in revenue at the media margin level.
Q1 media margin, maybe down 1% to 3% year over year.
We noticed that in Q3 as we tested various enhancements to the design of our rewards programs, we incurred higher costs fulfilling rewards earned by consumers for.
Film on cost does not capture the media margin, but is captured in our GAAP cost of revenue.
For some on cost increased further in Q4 of.
Although the increased media efficiency, which benefited our media margin outweighed the incremental fulfillment cost.
That our cost of revenue as a percent of revenue decreased to 69, 2% in Q4 as compared with 69, 9% in the last year's Q4.
Q for fulfillment expense is likely to represent the near term peak the.
Test and learn efforts for our rewards program have enabled us to optimize for consumer benefit and program economics, and we anticipate sequential reductions to the this expense in Q1 and Q2 of this year.
Our operating expenses on a GAAP basis for Q4, comprising sales and marketing product development and G&A grew in aggregate by $1 8 million or 10% year over year to $19 3 million.
Within that mix, we continued to invest in product development and support of innovation and efficiencies like those evidenced this quarter.
Our G&A line includes certain litigation and related costs of $4 million in the quarter, an increase of $3 million year over year.
And includes a 2.25 million incremental accrual as the loss contingency in respect of the New York Attorney General matter.
The total accrual on this matter of stands at $3 7 million, which we believe will be the ultimate outcome.
G&A also includes 600000 of noncash accrued compensation expense relating to the monopoly acquisition, which we completed on April 1st and therefore was fully incremental on a year over year basis G&A costs as.
As we've noted no cash amounts are anticipated to be incurred in connection with this prior to the fourth anniversary of the acquisition.
Adjusted EBITDA of $11 1 million in the quarter represented $13 six per cent of revenue and for the full year came in at $41 2 million or $13 three per cent of revenue.
Given the outlook items. We've noted we currently anticipate Q1 adjusted EBITDA in the range of 7% to 8% of revenue.
Interest expense declined by 500000 year over year to $1 2 million as we reduced our debt principal outstanding by 11 8 million year over year.
In Q4, we continued to be of noncash federal taxpayer due to the availability of Nols.
We reported GAAP net income of 178000 in the quarter and adjusted net income of non-GAAP measure of $5 4 million or seven cents per share.
Our non-GAAP metrics of reconciled in today's earnings release, and our 10-Q and 10-K filings.
Turning to the balance sheet, we ended the quarter with $22 6 million of cash and restricted cash.
Working capital defined as current assets minus current liabilities ended the quarter at $36 million up $6 7 million year over year, and $1 5 million sequentially.
Total debt as reflected on the balance sheet ended the quarter at $46 million, while including unamortized discount yields the closing balance of $43 million.
Our debt balance has declined by $11 8 million as compared with a year ago of balance sheet and we recently made of $2 5 million excess cash flow of payment further reducing our debt balance.
Over the past year key areas for capital deployment have included the nearly $12 million debt principal reduction I mentioned.
$3 8 million servicing our debt.
4 million on addressing litigation matters $2.8 million of capitalized costs, primarily relating to product development of technology.
And 1.6 million relating to acquisition costs.
I'd also like to note that the material weakness in internal controls relating to the revenue recognition process, which as noted in the 10-K filings for 2018 in 2019 has now been Remediated and as noted as such in our 10-K filing today for 2020.
As we continue on our journey to strategically enhance the value of our customer acquisition solutions for clients and build value for our stakeholders. We appreciate your support.
The strengthening of our client base and robust demand for our innovative solutions gives us confidence in the substantial opportunity ahead.
We wish you and your families well and hope that everyone takes proper precautions to say safe, we're glad to field questions at this time.
We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up of your handset before pressing the keys. If at any time of your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to.
Assemble our roster.
Our first question will come from Maria reps with Canaccord. Please go ahead.
Oh, great. Thank you for taking my questions.
I just wanted to follow up on the topic of acquisition. Then you should do is that you talked about any more of a sort of color you can share with us on the specific steps that you're taking on that front are you working with the new media sources or is it sort of.
Different practices are with your current media partners and a human debt. This was already launched Oh, my sort of almost in the end of Q1, what kind of feedback are you seeing from advertisers Sundays and then I have a quick follow on.
I'm Maria good to hear from you and yeah, great. Great question overall, so the implied impact of the traffic quality initiative with our monetization increasing by by two times is.
We have walked away from a decent amount of of traffic, which didn't fall into certain protocols that we set forth the under new policies a lot of a lot of what we're doing is going into new channels of investing into channels that we believe in in terms of where consumer attention is being spent and timing.
The energy, we really do believe that the.
These advances are of positive direction for our business and we're starting to see a lot of that in terms of the feedback from our advertiser base from a quality perspective on our unit economics are moving in the right direction of lot of our top tier clients are very responsive to this initiative. Thus far did I did I answer your question.
Yes, yes, I think so and that if I could just a follow up sort of how should we think about your revenue and media margin progression sort of relative to the numbers for Q1 that you shared with US as you go through the year.
We will continue managing to the spreads that we're comfortable with I believe I've I've stated on calls previously that where we're comfortable dropping to certain levels in terms of the spread on media margin. We look at that as a percentage of revenue. So the low bar historically for us really being 28 <unk>.
The nine recently more in that mid 30 range. So we'll test at different types of margin thresholds, but we we tend to be in that 28 on the very low end 40 on the high end when we're fully invested into a specific media channel.
We're seeing quality be backing our advertisers leaning in I don't expect that to change materially on the more sizable opportunities that we're pursuing right now so it's those those levels are.
Relative to the spread on media margin should remain fairly consistent but in times like this what where we're testing new channels and really focused on quality over quantity at the at the onset we will test it at some lower margin levels to get in the door and get the learnings that we need.
Got it thank you for the color.
Thanks Mary.
Again, if you have a question. Please press star then one to be joined into the queue. Our next question will come from Jim Goss with Barrington Research. Please go ahead.
Yeah.
Thanks, Hi, Ryan.
I was wondering the you've mentioned quality several times could you help us understand what you mean by quality, but what is the definition your who are focusing on.
We're really looking at how consumers are interacting on our websites and with our brand partners when they reach of our websites.
Against the traffic that we're sourcing upstream whether that be media buys with direct publishers website owners app owners large platforms and the AD creative and rendering that is driving that activity. So looking at our partners' data privacy policies for instance, we're looking at.
How they render creative to the consumer and is that aligning with the value proposition that we're really offering on our end of the equation. So the traffic quality initiative is really all about looking at <unk>.
Yield when a consumer reach is one of our properties that to US tells us if the consumer is going out and generating more activity when they breached one of our properties. They understood when they clicked on an AD wherever they were and the internet that when they landed on one of our properties. They understood what the value proposition was and they're interacting with our hour.
Advertisers offers.
And that's really something that we're most focused on so, albeit you could go out and buy much lower quality of traffic across the internet of at lower rates.
And the results may in the short term give you some profit and revenue, but it's really not a great consumer experience and it's really not great quality for our advertisers on the other side of the spectrum. So we've made the decision to really move more aggressively in this direction towards higher quality based on our.
Belief and really just my knowledge and operating the space running digital businesses since 2007 that it will yield much better longer term result.
So you mentioned that you're going into or you now have five of the largest companies on the world and your roster of clients and a couple of them are fairly new.
And I Wonder is.
Do they fit into some of the verticals you've been dealing with are those verticals changing dramatically and is the reason margins will be compressed in the.
Initially.
Because.
Of the either.
The other type of media or what other factors are going in debt would be that would sort of eat into the first half of at least for them the way you're describing it.
It's a great question, Jim and I, you know we referenced that we're now working with five of the 25 largest companies in the world at the onset of this year that number was too I have all the data on the two and they made a meaningful difference in terms of fluids progress over the past four to five years in terms of a relief.
And chip with them and how that's progressing and what that's meant to our business upfront Onboarding. These types of clients and ensuring that we can have them really believe in what fluent is able to deliver and invest alongside us with our growth initiatives. There is some cost of bear on that that's that's reached.
Of course internally for us that's some sacrifices like the ones we spoke about in terms of our traffic quality initiative.
And and being able to level up to the their standards and and overall.
The longer term profile is very positive so we're very focused on.
Not just those three but the two that had been standing with us for longer periods of time.
Out of the understanding that this could be extremely valuable for our business. So over the long term. However in the short term there are certain types of implications relative to the Onboarding. A large brand is as you know many of you on the call know you know these are companies that are you know they they have.
Certain types of processes, and it's a bit it's a bit more leg work to get those things going on.
In the long run they do represent the opportunity of you increase the overall monetization of the consumer experience on our media properties consumer see these brands they trust them, they love them and we're finding new ways to introduce offers on behalf of these brands to the consumer that of rent resonating very well so the first year tends to.
B are not exactly you know massive in terms of the overall revenue profile. However over the long time long term. These these things turning to material wins for the business and that's our belief.
Just a couple of other things first with those larger companies do.
Do they tend to be willing to pay more for the better experience or do they expect to get a much better deal because of their size and scale.
Yeah.
The former they they tend to.
Be able to pay more not only for the stronger consumer experience, but a lot of the tools that fluent brings to the table and we've talked about this probably.
Maybe many quarters ago in terms of Ah.
My reflection on our business and some of the unique distinctions around it again fluent surveying still hundreds of thousands of consumers.
Every single day, we're able to collect unique and discrete insights on it.
Some of these larger brands they look at market share for instance, so if we're able to go out and help them identify a competitors.
The consumer that's currently using a competitors.
Product or service and convert them over they ascribe of higher value to that right. So they'll go out and for for certain segments of balloons traffic there.
The bill to rationalize the premier premium against that because for them at this moment in time market share may be more important than simply profit through the door. Those those unit economics and return on AD spend is consistent across all of our clients, but some of these larger clients.
We'll take short term you know point of view on if I can go out and conquest against the competitor through the balloon platform I'm willing to pay a premium for that so they are you utilizing those types of assets that we've brought to the table is really been a key advantage for our business no matter what type of client, we're working with and really.
By segments of traffic that they can pay a premium for.
Okay and lastly.
In terms of verticals are the ones that we are the leading verticals last quarter of the same ones now or has that shifted because of this change in your strategy.
No. We're still we're still very much in line with things that we've previously presented from a on overall if you think about our business. You know you have the verticals that are more geared towards <unk>.
Web based conversion, it's a simpler decision for the consumer to make whether it's the purchase decision or engagement decisions. So we have our media and entertainment category for instance, which is dominated by music and video streaming apps as well as mobile gaming. So that's if you think about it higher frequency touch points lower on up.
From cost of consumer easy to convert through digital CPG and retail kind of falls into the same boat for us in that area, where it's lower cost consideration higher frequency.
And those buckets for me inconsistent in areas, where we're doing really well on one side of the house. The other side you are looking at more financial services home services legal things like that where our live agent capability and being able to have a consumer on the phone with us talking about of more complex decision.
And ultimately getting them to a good option within the hour Advertiser base that continues to be strong and it is increasingly getting strong due to that live agent capabilities. So it's it's certainly starting to pick up some more momentum.
You know in the fourth quarter, and we anticipate that to continue in.
In 2021.
Alright, Thank you very much.
Thanks, a lot of them.
Our next question will come from build the xylem with tightened capital. Please go ahead.
Thank you group of questions first of all.
With the fourth quarter our.
Revenues have been higher without.
Without the election and had we had a a normal on Christmas shopping pattern or were those really not factors this year.
Hi, Bill good to hear from you I do believe it was a bit of of factor for some of the areas, especially investment areas for us in which we were.
Pushing into go acquire more traffic, we do understand it to be good quality traffic was somewhat.
Boxed out on the election cycle that that did.
How have the.
Back on us in terms of specifically October leading up to the election. So.
That certainly you know was something that influenced some of the results on Q for the.
The irregular heart holiday season of I would say I don't have data points, specifically pointing to that I don't think that disrupted us as much.
Disrupted maybe a few areas in terms of delayed shipping and things like that and the overall sort of chaos that was.
All of that went on this year, but.
More of the election and everything else I believe.
Thanks, Ryan and then I believe it may have been and now you're filing to the somewhere along the way my sense is that you think the mobile apps are a big opportunity would you talk about that opportunity.
And and if it in any way it fits in with the traffic quality initiative would you. Please link those in your answer.
Absolutely so we've talked and we've talked about mobile app slot fluent predominantly.
Our media properties of our mobile web where mobile web player and when we shot out to go and play into the mobile App ecosystem back you know this is this is dating back for five years now.
We were one of the few mobile web players trying to really entered the space.
Really much of the ecosystem trades mobile apps, the mobile apps and as we broken into that space we become.
The very known and developed an excellent reputation as one of the top suppliers for user acquisition in the mobile App community and specifically the mobile gaming community. So on the advertiser side of our house, we've really established a strong reputation we have many accolades that we've gotten around incrementally and growth of for the most.
The lab ecosystem, we're known player in this in this ecosystem what I believe we've spoken more about on recent calls as we believe format expansion is another way the fluent can expand its media footprint in the healthy way and go out and deliver more great outcomes for out of our advertising partners, we haven't talked about anything.
Forward looking at this point. However, just know we have been actively looking at this specific area. We have a belief that we can go and play in the space develop some of our own content in the way of apps and do more great things for advertisers and the ecosystem and I do apologize I believe you had a book.
To that question, yes, yes, I did and that was just the traffic quality initiative and does it do they do they relate in any way.
If they do they do so this area in terms of you know operating on a web site, which is predominantly mobile web in terms of interaction with the consumer.
And really the technologies in terms of how they work together and things like that it's very different for the app ecosystem in terms of how you develop how do you how you iterate optimize and get things to a place where you essentially have a flywheel, where you know if you can get consumers in an ex amount of dollars.
Revenue of why he is going to come out and it's gonna be ex percent you know more debt than you know you acquired the traffic at so some of those learnings have been per.
Perhaps a little slower than we had initially.
I assume they would be however, the data points. We're looking at we'd still do believe this is a really large opportunity for fluent to get right and we're still a steadfast on that mission.
Great. Thank you and then the last day I'd like to touch on is went Napoli you mentioned in the release that it was exceeding expectations would you talk to are really the Hawaii and the cause of of their success.
Absolutely. We really this is an area of the business that we always knew we can be taking greater advantage of historically, we had worked with third parties, who would be interacting with our consumers on behalf of bin and the advertiser of theirs. There was always a lot of demand for this product in our ecosystem.
So frankly said, we on boarded a great team with the great entrepreneur, who knows how the how to lead and drive.
The business forward and in connection with our teams how we product ties the round.
What was monopoly, we're really referring to it as a live agent capability.
And and at this point, you know being fully integrated where we're looking at the same datasets together, we're going through audience segmentation schemes together and really fluent being able to see end to end the types of consumers that came from the top of the funnel interacted with US agreed to receive a phone call from us about a particular product or.
Service, and who actually ends up being productive connecting with the advertiser and also being qualified for that product or service.
Being completely connected there as opposed to arm's length with third party partners has just made of world of the difference of the data is just coming in in real time, we're able to optimize our teams are coming together and developing new concepts, new scripting themes and solving problems of just such a more rapid pace and that's really been a lot of the core tenant.
For the success of the.
The live agent business, so that that's something that we're really excited about.
Thank you for taking all the questions.
Thanks Bill.
This concludes our question and answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.