Q1 2021 Fluent Inc Earnings Call
Good afternoon, and welcome to the fluent Inc. First quarter earnings Conference call.
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I would now like to turn the conference over from Ryan Mccarthy. Please go ahead.
Okay.
Good afternoon and welcome. Thank you for joining us to discuss our first quarter 2021 earnings results.
Joining me on today's call are fluent CEO, Ryan Schulke and CFO Alex Mandel.
Our call will begin with comments from Ryan Schulke announcement, 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 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.
For a discussion of the risks and uncertainties associated with fluent business. We encourage you to review 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 media margin adjusted EBITDA and adjusted net income.
Now there's been evaluated for financial performance of our business on a variety of indicators, including media margin adjusted EBITDA and adjusted net income.
The definition 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.
Thanks, Ryan and good afternoon, thanks to everyone for joining us today.
As I shared with you on our last call mid March fluent operates in a dynamic and rapidly evolving marketplace.
We see a clear long term strategic opportunity and further responding to the demand for higher quality digital experiences for consumers more affected and sustainable solutions for marketers in turn were motivated and energized as we thoughtfully accelerate the strategic transition of our business, but the quality is a foundational principle.
Through this process, we're committed to enhancing our media properties and consumer experience against an industry backdrop that is experiencing rapid change in many ways, including through a regulatory lens.
We see the endgame is delivering a fundamentally higher quality experience for consumers, which will enhance <unk> brand equity with our clients and build enterprise value for our stakeholders.
I previously contextualize this transition relative to our three strategic growth pillars.
Significant progress we've made on boarding and scaling larger more sophisticated clients on our performance marketplace and increasing the monetization on our platform has motivated us to further redefine our media footprint in the form of our traffic quality initiatives we.
We see higher quality as the road to sustainable long term gross and believe it will position us as an industry leader, even though in the near term, we're knowingly foregoing some revenue opportunities.
In our earnings release today, our numbers for Q1 reflect revenue being down 11% year over year media margin up 4% year over year, and adjusted EBITDA, representing 7% of revenue.
All of these metrics are consistent with the range as we indicated on our last call.
For further elaborate on our trapped quality initiative, we're shifting from a higher volume approach for quality based approach, which we believe will accomplish several important objectives. These objectives start with improving consumer satisfaction with fluent promotional programs, thereby improving conversion rates and ROI for advertisers.
For clients, thereby driving increased pricing for fluent products and ultimately, enabling us to reinvest that incremental monetization into further improvements in our media sourcing. This represents the spending of our flywheel.
Putting some time context around this initiative in the latter part of 2020 and in Q1 of this year, we cut back more significantly on traffic sources that did not meet our quality requirements, which sits at the crux of the reduction of our revenue in Q1.
While we actively monitor traffic on an ongoing basis, we believe the steepest cuts needed at this time are behind us that said given the traffic adjustments to date and the time needed to develop partnerships with those for as committed to quality as we are while concurrently on boarding and optimizing new supply we do anticipate revenue in Q.
Two to be down year over year.
Well, it's still early to call. We're currently anticipating revenue in Q2 trending similar to what we called for Q1 down 11% to 13% year over year.
I shared on our last call that we anticipate this strategic transition will take a couple of quarters to reestablish prior trending levels and we continue to maintain that outlook.
The natural cadence for these traffic initiatives, which are known phenomenon in our industry. It's now net rebuild our supply base through both expanding existing partnerships and activating new partnerships channels and strategies to drive our rebuild on this partnership front, we're leaning in with existing and new media partners, who are aligned with our phone.
On quality and share our vision for building sustainable and profitable businesses together, we're working to forge deeper more strategic sourcing relationships, where we can innovate develop bespoke campaigns and invest our time and energy and redefining our media footprint with confidence there will be an exciting return profile on our.
Afterwards.
On the media front, we're seeing compelling opportunities in areas. We've long played in as well as new channels and strategies that this initiative has prompted us to debt. Although it's early innings, we see green shoots in our rebuild phase.
To demonstrate how important strategic imperative is for fluent I'm personally leading our quality initiative along with two key co founding executives Matthew <unk> President of our performance Media group and Sean Collins, Our executive Vice President of product, we'd been energized by our experience to date as we can clearly see that redeploy.
Our media supply will open up significant strategic product opportunities that can further expand and deepen our addressable consumer audiences and overall market opportunity.
Regarding our second growth pillar our platform I mentioned on the last call that monetization has increased significantly in 2020, approximately doubling from Q1 to Q4.
We saw that as a sustainable win monetization remained strong in Q1 of 2021 and continues to remain strong in Q2. This implies that as we build back our traffic supply even smaller volume wins can have a more meaningful financial benefit than they would have a year ago.
Another aspect of our platform I've spoken to is the expansion of our CRM efforts through which we have extended our relationship with consumers beyond their initial experience on our media properties and enhance their lifetime value.
The key initiative on this front has been our investment in a monopoly business, which is uniquely situated to provide telephony activations for fluent clients through a live agent capability you have.
Seeing that business perform ahead of plan and gross strategic partnerships with clients on the high value verticals, including senior care financial services and home services.
Our third pillar our performance marketplace, we continue to see world class brands leaning in with strong demand that well exceeds our available supply.
Strength further supports our efforts to redefine our media footprint fluent provides an innovative high value solution that addresses a massive market opportunity the quality of our client base and demand from them validates for seven days a week.
I'd like to restate that we're enthusiastic about our strategic course, and it remains our core tenet behind the current transition we're working through fundamentally we're confident that the higher quality model. We are forging is the right path to achieving substantial and sustainable growth, while generating a revenue and earnings profile that will be more highly valued by the market.
Our experience through this transition thus far confirms our confidence in the mission fluent.
It remains diligent and enhancing our brand equity improving our own standards for the benefit of our clients and consumers as well as our shareholders and with that I'll turn things to Alex for the detailed financial review.
Thanks, Ryan and good afternoon.
As Ryan spoke to our team led personally by fluent founding executives has been leaning in to drive the strategic transition of our business through our traffic quality initiatives.
In that context the outlook. We've previously shared for Q1 reflected a known and purposeful investment into redefining our media footprint.
In the quarter the company generated $72 million of revenue down 11% year over year, which is on the favorable end of the outlook we have provided.
We've mentioned the improvement in monetization on our platform during 2020 and the continuation of that benefit in 2021.
Our media margin in Q1 of $24 9 million, representing 35% of revenue was up 4% year over year ahead of the outlook we had provided.
In addition to strong monetization media margin was supported by continued progress on our programmatic data offering and our CRM strategies, which target increased lifetime value of consumer relationships.
We noted that in the second half of 2020, as we tested various enhancements to the design of our rewards programs, we incurred higher costs of fulfilling rewards earned by consumers for.
From a cost is not reflected in media margin, but is captured in our GAAP cost of revenue fulfillment cost moderated in Q1, although the increased media efficiency, which benefited our media margin was outweighed by the incremental fulfillment costs such that our cost of revenue as a percentage of revenue increased to 72, 7% in <unk>.
Q1, as compared to 71, 7% in last year's Q1, Q2 fulfillment expense is likely to represent a further sequential reduction which would benefit cost of revenue and adjusted EBITDA.
Our operating expenses on a GAAP basis for Q1, comprising sales and marketing product development and G&A grew in aggregate by $1 5 million or 9% year over year to $19 3 million. However, G&A includes $1 7 million of noncash accrued compensation for a put call expense relate.
Adding to the monopoly acquisition, which was fully incremental on a year over year basis G&A costs. Excluding this item overall operating expenses were relatively flat year over year.
Last week fluent executed a settlement agreement with the New York Attorney General putting finality around this matter, which has been disclosed in our SEC filings beginning with the 2019 10-K.
Flow it will satisfy payments of the $3 7 million settlement amount. This month, which had previously been fully accrued for as of December 31st and therefore has no current or future P&L impact.
Adjusted EBITDA of $4 $7 million on the quarter represented nearly seven percentage of revenue relatively consistent with the outlook previously provided.
We closed on our new 65 million credit facility on March 31st So it is reflected on our balance sheet, but not meaningful to our P&L on the quarter. The facility consist of a 50 million term loan drawn at close with a $15 million unfunded revolver. This new financing reduces our current effective interest rate by 500 basis.
Points and we therefore anticipate a significant reduction in interest expense in Q2 and going forward. The facility also provides meaningful financial flexibility for fluent and extends the maturity of our debt to 2026.
In connection with the transaction, we recorded a loss on early extinguishment of debt of 3 million on our P&L of which $2 2 million as a noncash write off of capitalized discounts on financing cost from our prior term loan.
Q1, we continued to be a noncash federal taxpayer due to the availability of Nols.
We reported GAAP net loss of $6 3 million in the quarter and adjusted net income a non-GAAP measure of 351000.
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 $34 1 million of cash and restricted cash working capital defined as current assets minus current liabilities ended the quarter at $45 8 million up $13 1 million year over year, and $9 9 million sequentially.
Total gross debt at March 31, 51, and a quarter million included the $50 million funded term loan and remaining one on a quarter million note payable in connection with the 2019 as part of our acquisition, which will be funded on July 1st.
As we continue on our journey to strategically enhance the value of our customer acquisition solutions for our clients and build value for our stakeholders. We appreciate your support.
The strategic course, we are charting has has its core premise the belief at a higher quality model will enable substantial and sustainable growth while.
While near term financial results will reflect this transition and investment we are motivated by the opportunity to enhance fluent value proposition and brand equity and generate a revenue and earnings profile that will be more highly valued by the market for.
We're glad to field questions at this time.
Okay.
We will now begin the question and answer session.
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Yeah.
And our first question will come from Michael Graham of Canaccord. Please go ahead.
Yeah. Thanks, so much and I appreciate you guys, taking the question and.
No I think it's I think it's.
Precip in and the good reflection that Youre able to grow your media margin you go on revenue is coming down from the traffic quality initiatives.
I think just a couple of questions to kind of maybe dive a little deeper into that initiative.
One is can you just maybe put any color around I know you said you think that the.
The peak of the traffic cuts is behind you can you put any color around.
How much longer you think you need to kind of work through the initiatives and.
I also just wonder if you might be able to characterize a little bit for us.
How much traffic has come down from from sort of peak levels and you know where you think that that process bottoms out.
Yeah nice to connect with you Michael and I. Appreciate the question on the on the traffic quality initiative.
So really you know as we've been talking about it and and for the last earning calls we did say, we'd probably take a couple of quarters to get back to a prior trend level. So we are anticipating.
Anticipating a store.
<unk> back half.
As we really.
Really start to strategically partner with.
Both existing partners that are adhering to our traffic quality.
And compliance standards as well as new partners that were on boarding a there is a bit of an investment period.
In the sense of going out and establishing new relationships and and testing into new types of channels and strategies.
We're seeing nice progress on that front and it's something that we do anticipate we'll teach more shape greater shaping in the back half of the year with respect to overall traffic volume there. There's a couple of different ways to look at it one of the things. We highlight is that from Q1 of 2022.
Q4, we almost doubled our.
The yield per visitor that we make users that we drive to our properties. So if you think about you know the the 11% figure in terms of revenue traffic actually you know went down quite a bit more than that even at that 11% number, but where we're making a lot of it back due to higher quality <unk>.
<unk> and advertisers begin beginning to pay up for that it does take some time for it for advertisers to recognize some of the the quality that they're seeing in and true to pay up for it but those are active conversations we're having and we are seeing a material amount of movement with respect to clients.
Our quote unquote bidding up for for our performance inventory.
Thanks for that Ryan and then and just to clarify I know you you you know even with revenue down 11% you had nicely positive EBITDA in the quarter.
Are you anticipating that conditions persisting here as we go through the remaining quarters of the initiatives.
I would say that you know we're willing to sacrifice for media margin dollars to really get strategic footing in the right places that are going to sustain over time and have a lot of scale behind it. So we will take a bit more of an aggressive attitude toward.
Securing inventory and doing what we have to do even at the expensive of media margin. If that is to come though we will maintain a fairly disciplined.
Our approach to overall operating expenses below that that media margin line to ensure that there's continuity with respect to the amount of revenue flowing through to EBITDA.
Okay, great. Thanks, so much appreciate it Ryan.
Thank you.
Our next question comes from Jim gross.
Goss of Barrington Research. Please go ahead.
Thanks.
Ryan could you talk a little about what has been put to this point and our other areas still on the block and maybe what the new business mix looks like in the aftermath of the address club for quality initiatives.
Yes, nice to hear from you, Jim and and I would say that sort of falls into two buckets.
One being.
Publishers supply side partners, we were working with that are either the type of content we were.
You know being featured within or the way they would run AD creative or their their lack of controls around AD creative was a big part of the conversation. So partners just not willing to adhere to certain guidelines that we outlaid and then second maybe more importantly, any concerns that we had around.
Consumer data consumer privacy and things like that partners, who were not adhering to what where we really believe the market is going with respect to our consumer privacy and data policies in general those for those.
The sharpest cuts I would say, there's there's nothing I'm aware of that we havent cut and we're eager to be forging the path forward with the partners that are still with us as well as the new ones. We've been on boarding quite actively over the last few.
A few months.
So it didn't involve the.
The verticals, you're serving the media or on services. As you mentioned are those sort of things it rather involved which even as you're using to promote.
The services, you're choosing to promote.
Right. It represented publishers, even specific channel or a sudden and ways to go out get our ads in front of the general public to drive traffic to our properties. So it wasn't theres not a specific vertical to point to that that would have been impacted more.
More than another for instance at our core.
Okay can you talk about whether they're in.
Global implications as you're a bit neighborhoods begun to move into certain of the European markets in particular.
Is it more.
For a man that area.
Where we're doing a solid job in English speaking, that's certainly is something that we we've focused on and will be a continued focus for scale.
The English speaking markets.
On the EU is something that we haven't talked about.
And quite a bit though we are.
Are reexamining, how we may approach.
On especially the western European market and potentially things beyond that such as APAC I would I don't have anything.
To announce at this point however.
However, we are continuing to perform very strong in new English speaking markets, where you do need to rejigger, some some thinking around how to better enter the western European markets.
Okay, and maybe lastly, I think he made a comment about the better half second half clicking a little bit better. So are you thinking the entire initiative.
We will only take a couple of quarters to run its course.
Which was sort of the optimistic kind of think of what you said several months ago.
Yeah, we do believe that we have good momentum you know, especially as we get toward Q3 Q4, we believe that a lot of this behind us from.
The company has been designed and the culture is extremely agile our client demand is extremely strong right now so as we lean into these higher quality suppliers and channels and different strategies on the product and that we're deploying to go out and engage consumers on the conversations are happening more rapidly with our partners around.
And quality the ability to pay at higher rates for.
Some of these new traffic sources that we're on boarding and we anticipate that we'll be able to scale nothing has changed materially in terms of our product output and are our clients demand for our products. It really is you know was and if you think about it a couple of steps backwards to be able to make many many steps forward over the long.
And that's really what we're how we're thinking about this and we believe that the back half will be stronger than the first half.
Alright, thanks very much appreciate it.
Thanks, Jim.
Next question comes from.
Oh tight on capital. Please go ahead.
Thank you I'd like to start with the contact center exceeding your expectations would you please discuss that and if it in any way ties in with the traffic quality initiative.
Yeah Bill good to hear from you and we certainly are excited about that.
Transaction when I believe in terms of where things have gone fluent had historically been excellent at web based execution. So if you think about the business in terms of how it consumer looks at the products and services that we're promoting on behalf of our advertising clients really were really strong as we can.
I always said in media and entertainment streaming services gaming things like that also a lot of direct to consumer commerce and subscription commerce, where it has a lower cost consideration for the consumer and therefore, we're driving those trials that are converting into paid trials our advertising clients can see it in near.
For real time, and therefore, there there's ton of demand there.
Pre having the live agent capability and some of the more complex verticals things like financial services home services other types of professional services like legal or or senior care products.
We really werent able to take consumers as far down that bundle without a live agent capability.
These are more complex decisions consumers are looking for more information so that capability enabled us to start partnering and going further down the funnel with with.
Major players in these verticals and work with them to even and then sale or some sort of appointment set whereas before we had the live agent capability, we'd probably be working with them at some sort of qualified lead that we would drive for or something like that which results in more cat based budgets also with the CRM hooked.
And now we're able to see a consumer in which consumers are actually traveling that journey, they're qualified they're motivated to purchase whether it's a home security system or or whatever the product or service may be that we're offering to them.
We actually have real time data flowing into us. So we know which consumers are actually converting on on these types of higher value offers from products and services. So it's really been a boost from our standpoint in terms of the commercial outputs.
And that's that's helpful and and what do you think is driving that Oh, well Napoli business exceeding your expectations.
I think it's been a combination of being able to just go further down the funnel and see down the funnel, whereas you know at a prior stage really once we would drive a click out of one of our media properties too to our customer. The best we were seeing was that our lead was being generated we didn't actually know.
Who was converting on these offers and if you look at the core of our business, where we're driving uncapped demand as I described in streaming services subscription commerce and things like that we're getting all of that in real time. So it's really a lot of it it's about being able to ingest the data and and make the optimizations needed the CRM.
Okay, and and we do have really strong operators on top of that business that we that we brought in through that that a JV. So you know all of those things coming together are really playing playing strongly for us.
Right. That's really helpful and then I too will jump to the traffic quality initiatives.
We have as I think about this.
We really should be looking at it on a week to week, so sequential week basis, it sounds like and assuming that that characterization is accurate have volumes bottomed.
Now.
Yeah, Yeah, I mean, you can never say anything with with 100% certainty, but from our point of view, we've worked through the traffic quality initiative anything that we were looking to move away from you know, we've we've really completed that and where we're looking at rebuilding a better asset.
I would say so you know I I can't make it.
On the call. However, I can say, we have gone through things on our side and feel good about the types of traffic we are sourcing.
And the future partnerships, where we're establishing at the moment.
That's helpful and and I know, it's a little bit hard to pinpoint a specific time, but I'm going to ask it anyhow, what week or a week. So it was with the bottom reached when you cleared out all of the traffic he wanted to move away from.
Okay.
You know this this type of initiative.
Does have a life of its own and it's it's as you mentioned very real time, but I would say is as late as you know the last week or two you know we were you know upon review satisfied with where we were at not to say something couldn't pop up but we've been fairly robust I believe in terms of how we've gone about this.
Will we get some potential false positives, where we think a new sources is doing great, but there's some things that we need to address from a consumer satisfaction standpoint, and consumer experience potentially but we really do believe we're working on a lot of the right things right now and are beginning to establish some some momentum behind it.
That's really helpful. So given that you've given the provided the same guidance for the 11% to 13% a decline in revenues that implies that that you kind of went through the first quarter and a bit of a for a week to week downtrend, but you're going to be coming out of the second quarter in that week to week.
Uptrend and so we're kind of we're looking now at the at the light at the end of the tunnel.
Correct, Yeah, Yeah. That's that's an accurate summation great. Thank you and if you'll allow me I'm going to ask one more question on this are there examples of other companies who have done similar traffic quality initiatives and if there are would you talk about there are there longer term outcome.
And what that ultimately meant for their business.
Yes, and I I've played a less directly with you know some of the companies that have gone through these types of initiatives, but it is something that happens in our space I know that Alex being the former CFO of lending tree is aware of a couple of his former competitors who went.
Through initiatives like these I'd love for him to maybe share a little bit more detail here.
Sure Hi belt and good to speak with you again and there are companies on our space, who have gone through these types of initiatives Youre correct. Some historical examples going back for 2012 would include companies like bank rate as they worked through them.
Lead quality initiatives in respect of a specific client vertical which related to insurance Quint Street also had a similar experience and also address that with education leads and then another company ever quote you know improved its traffic quality in 2018. So we have seen other companies go through this and you know that supports line.
Earlier statement I think I mean, the recorded remarks about this being a known phenomenon within our industry and those companies have gone on to have successful upticks from those various initiatives. They take a different amount of time different set of circumstances, but in each case those were companies that were able to turn the corner it tick up and make meaningful gains both.
And on their stock prices you know on the 12 months following those initiatives.
Great. Thank you both and congratulations on the refinancing.
Thank you thanks Bill.
Yeah.
This concludes our question and answer session. The conference has now also concluded thank.
You for attending today's presentation and you may now disconnect.
Okay.
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