Q2 2021 Fluent Inc Earnings Call

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Hello, and welcome to the fluent Inc. Second quarter 2021earnings results call. My name is Laura and I'll be coupled with an 18 youku today.

If you would like to ask a question during the presentation you may do side by pressing star of flights by 1 of your telephone keypad.

Oh and know how did you weight the chew hoist to begin Ron Mccall say Ryan. Please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our second quarter 2021 earnings results.

Joining me on today's call are fluent interim CEO, Dan Patrick and CFO, Alex Mandel.

Our call will begin with comments from Don Patrick now, it's Mandel, followed by a question and answer session.

I would like to remind you that the call is being webcast live and recorded a replay of the event and will be available following the call on our website. The 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 the conference call will contain forward looking statements covered under the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.

Any forward looking statements made during the call speak only as of the date hereof.

Actual results could differ materially stated or implied by our forward looking statements due to risks and uncertainties associated with the Companys business.

These statements may be identified by words, such as expect plan project.

It 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 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.

The management evaluates the financial performance of our business on a variety of indicators, including media margin and adjusted EBITDA and adjusted net income.

And 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 interim CEO Don Patrick.

Thank you Ryan and good afternoon. Thanks.

Thanks to everyone for joining us today.

Joining me today is Ryan Schulke now, our Chief strategy Officer, Chairman of the Board and company founder as we recently transitioned our roles.

The key motivator to our recent executive changes is the <unk>.

And our founding team fully on the front lines of our business.

Harness the deep expertise and better align our executive team to drive our strategic agenda forward.

And prior calls Ryan has articulated fluent 3 strategic growth pillars of our media footprint and <unk>.

Performance marketplace and.

Of our platform.

And how the best position us and this is very dynamic and rapidly evolving marketplace and which fluent operates.

And the successfully reflected upon in 2020 and beyond.

Vis vis the onboarding and scaling larger more sophisticated clients that our performance marketplace.

Increasing and sustaining improved monetization on our platform.

Motivated us to further redefine our media footprint in the form of our traffic quality initiatives.

We see high quality of the road to sustainable long term growth and of resolute and our belief it will better position us as an industry leader, even though through these more strategic media and client investments, we will knowingly forgo some near term margin.

And our earnings release today, our numbers for Q2 reflect revenue being up 3% year over year.

Media margin being down 19% year over year at 27% of revenue, reflecting investments in the quarter, which I will discuss further and.

And adjusted EBITDA, representing 3% of revenue.

We see our strategic North Star is capitalizing on the demand for higher quality digital experiences for consumers and.

And more effective and sustainable solution for marketers.

With quality of the foundational principle, we've been accelerating our strategic transition of our business.

And then wavering commitment to and significant investment in quality across the performance marketplace.

And practice this means were continuing to enhance our media properties.

Tumor experience.

And in order to create more meaningful enduring.

And high value of connections for consumers with our top tier clients and brands.

The Angola of these efforts is to enhance fluent brand equity with our clients and in the marketplace.

The meeting and exceeding client ROI goals.

Well building enterprise value for our stakeholders.

And we believe we already benefiting from the.

We progressed our journey.

Okay.

So our current operating focus continues to be anchored around our traffic quality initiative is.

As Brian has spoken to and the latter part of 2020 and in Q1 of this year.

And we cut back significantly on our affiliate traffic sources that did not meet our quality requirements.

While we continually monitor traffic quality with the steeper cuts largely in the rearview mirror.

Our focus has been on growing traffic volumes with existing partners, who share our commitment to quality, while testing new partners.

<unk> and media channels.

Relative to of traffic volumes and early April we are currently trending up 25%.

Underpinning the rebound and our volume has been accelerated expansion of traffic source from the big digital media platforms, including Facebook Google.

And picked up.

Okay.

Well on the last earnings call, we indicated an expectation of Q2 revenue would decline of 11% to 13% year over year.

During the quarter, we found opportunities and more rapidly drive platform spend ahead of our prior expectations.

However, the spend.

Along with investing and testing affiliate buying strategies produced a considerably lower margin than our more established side of our traffic mix as is typical and our business the test and learn approach the validating scale and optimizing into profitability.

Position that the leverage our media investments with incremental margin as we move into the second half of the year.

And the last few calls we indicated our view that our traffic quality initiatives would take a couple of quarters to reestablish prior trend levels and.

And we continue to maintain that outlook, we anticipate year over year top line growth in each of the third and fourth quarters.

Albeit with profitability concessions as.

As we invest the test and learn with new affiliate partners and continue to source more media from the digital platforms.

However, we do anticipate sequential improvements and profitability relative to the Q2.

And overall, we see the timelines and the arc of our traffic quality initiative as Directionally similar to the industry precedence as we've alluded to previously by leading public companies that preceded the rebuild volume profitability and substantial enterprise value.

Certain strategically relevant yet smaller business units performed notably well and Q2.

Our job is business was up 2 times year over year. This proliferation of vaccine spurned recruitment spend.

And our AD parlor agency business enjoyed similar growth.

Our content site branded the smart wallet of.

Along with our programmatic data sales business were both up 3 times year over year.

We foresee continued growth from these businesses and the second half of the year.

We also expanded our international media footprint by launching in Canada, where we have already validated market viability and are working to scale.

We remain optimistic about our growth prospects here and are targeting further international expansion net.

Back half of the year.

Regarding our second growth pillar and our platform. We've mentioned for several quarters that monetization has increased significantly over the course of 2020 and.

Approximately doubling from Q1 to Q4.

And I'm glad to share that our monetization remains robust, which we believe will continue through the second half.

These results validate substantial return on investments, we made and our technology and analytics over the last couple of years.

Another aspect of our platform, where we continue to invest as expansion of our CRM efforts.

And which we've increased lifetime value of consumers and our properties by re engaging and beyond what we call day zero or the initial visit to our website.

A key initiative on this front has been our investment and the win Napoli business, which.

Which provides live agent telephony activations for fluent leads and has grown considerably beyond initial expectations.

And this platform enables us to take the consumer from digital experience to alive call interaction through which we can connect them to higher consideration higher value transactions with top tier brand and senior insurance financial services and home services.

Regarding our third pillar our performance marketplace.

We continue to see world class brands, leading and with strong demand and that well exceeds our available supply of these critical and valuable relationships to enable our efforts and not only redefine our media footprint.

The drive the establishment of new media partnerships.

In turn this will drive margin expansion.

Greater predictability of earnings and.

Of our longer term growth opportunities.

In some of our growth strategy remains well grounded and intact, we are well positioned and our dynamic marketplace and.

And our investment and traffic quality and it is on track.

As Ryan as previously noted our approach to running the business is grounded and timeless principle.

Good sustainable growth strategy.

Leading edge operating protocols and.

And best in class code of contact.

Our recent management shift further concentrates the operating focus of our organization to accelerate our strategic roadmap and growth agenda, leveraging the industry Renault and talents of our founders and lead innovators and operators.

Thank you for your support as we continue to move full speed ahead on our mission.

And with that I'll turn it over to Alex to cover our financial results.

Thanks, Don and good afternoon.

John spoke to our team led by fluent founding executives has been positioned on the front lines driving of strategic transition of our business. The foundation of which is a focus on quality across fluids performance marketplace.

At the time of our last earnings call in early May we were coming off the lowest month of consumer traffic volume this year, having cut back significantly in the preceding couple of quarters and traffic sources of that didn't meet our requirements.

At the time of that call, we were already hard at work rebuilding our supply base with sustainable sources of traffic that meet our protocols and the anticipated of reasonable timeframe will be needed to build our volumes back up in the.

That context, we anticipated Q2 revenue would be down year over year.

And the course of Q2 as Don mentioned, our team found opportunities to deploy media spend beyond what we had anticipated to accelerate our test and learn approach to supply of discovery.

This incremental volume of sourced primarily from the major digital media platforms, and we understood. It would carry a lower margin profile, but viewed this discovery is on point with our rebuild efforts.

As such our revenue for the quarter of $73.4 million represented growth of 3% year over year exceeding prior guidance, while our media margin came in at 27, 4% of revenue, reflecting the effect of lower margin media spend to accelerate our supply of discovery.

And of course of deploying this additional spend in Q2, we've found success with new promotional campaigns, which expanded our addressable audience and new means of cross promoting our programs across fluent owned media properties.

Spoken over the last few quarters about testing enhancements to the design of our rewards programs, which had elevated the cost of fulfilling rewards earned by consumers.

For the outlook, we indicated on our last earnings call fulfillment expense did moderate sequentially in Q2, benefiting our non media cost of revenue.

Our operating expenses on a GAAP basis for Q2, comprising sales and marketing product development and G&A grew in aggregate by $2 million or 12% year over year to $18 million. This increase primarily derived from the growth of the monopoly business, which was nascent and Q2 of last year.

Adjusted EBITDA of 1.9 million and the quarter represented 2.5% of revenue generally following the trend line of our media margin and the quarter.

Interest expense declined by 900000 year over year benefiting from the lower cost of debt under our new credit facility.

And Q2, we continued to be of noncash federal taxpayer due to the pretax loss.

We reported GAAP net loss of $5.2 million and the quarter and adjusted net loss and non-GAAP measure of $1.9 million or 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 $26.6 million of cash and restricted cash working capital defined as current assets minus current liabilities ended the quarter at $44.4 million up $13.9 million year over year.

Total gross debt at June 30 of $50 million included the funded term loan balance of $48.75 million and the remaining $1.2.5 million note payable in connection with the 2019 add parlor acquisition, which was subsequently funded on July 1.

As we continue on our journey to strategically invest into quality across our business to attract and retain the consumers clients and brands that we believe represent the future of our sustainable growth strategy, we recognize that our financial results reflect the transition.

Our outlook for the balance of the year reflects continued progress operationally and financially and we are motivated to achieve results that will convey meaningful value to the multitude of fluent stakeholders, we're glad to field questions at this time.

Thank you.

If you would like to ask the question. Please press star 1 on your telephone keypad if the.

You changed your mind, Please press star followed by <unk>.

And preparing to ask your question, please and shall we say is on the pitch lightly.

Our first question comes from Michael Graham from Canaccord, Michael Your line is not of light plan.

Great. Thank you for taking the questions guys and <unk>.

Congrats on the on the progress with traffic growth.

Definitely good to see that that expanding after kind of expecting a decline from the from the guidance previously so that's great and then.

It's really kind of the cornerstone of my question.

You mentioned that you found some sort of rich veins.

And some of the bigger social media platforms.

Do you think that that's sort of going to be the profile of your media mix going forward like how for how far afield from those platforms are you are you going to be taking youre testing.

And.

Can you just talk about any signs that you have that the quality of that traffic is actually better than what you had.

And then getting before.

And Michael Thanks for the question.

I'll put the traffic quality initiatives, a little bit and sort of a framework and and what kind of answer specific questions. So the b.

Kind of break it into 3 phases. The first 1 was the cutbacks right.

Getting rid of traffic that was lower quality of with partners that would not meet our quality.

The second and sort of building back which was primarily the easier part was going the current partners that we have are current platforms or or or.

Or strategies that we currently can lean more heavily into and that's pretty much what we did in Q2 around the physical platform. So we've been on the platforms for a long time, we've been buying there, but we just really accelerated our testing and learning and how those properties and the creative and the offers would work across those.

So specifically, we did lean heavily into that they were as we did lean heavily into the current affiliate partners of Rehabs that second piece of that.

Building back because thats, the new partners and new strategies New channels. We've also we're doing that and heavily into Q2, but those take a little bit longer timeframe and a little bit longer of a of a <unk>.

Cycle in terms of testing and learning so because we got to look at the fit of our platforms is critical to us.

The monetization across those you can imagine are more variable than you would see and the affiliates or with our strategic partners because of the CPM and how they move around so when you see the Cpm's go down and it's it's.

And it's attractive and we lean heavily into it when we see some of the seasonality of some of the things that come up on some of the platforms like we saw and Facebook with.

And some of the iOS changes, you're kind of lean back and go into the end of the affiliate side some of it more so.

And.

Does that answer your question Michael.

It does and.

The profit.

Thank you for that and the follow on was just what signs do you have that.

The <unk>.

Traffic is higher quality.

Yeah. Our main metric is really around the monetization and monetization by that traffic source towards the audience and towards the brand. So we sort of track those and are very very granular level.

We've talked in aggregate about of the monetization has more than doubled over over a year and has held steady.

And as Brian has indicated some of the traffic sources that we took off the board.

Because of quality, obviously had a little bit heavier.

Monetization and so the fact that we hit that Mark.

From the from a portfolio of perspective was positive growth.

Okay and thank you for that and then maybe just last follow up and I'll go back and the queue is just can you.

Can you just sort of refresh us on how to think about the the roadmap from here with respect to timing like.

And youre going into the third phase of sort of the rebuilding where youre going to be leaning into new partners and new sources now like any thoughts on how long that takes and.

Is there any sort of updated view on when you think the traffic quality initiative is sort of done and and you sort of back to business more or less as normal.

Yes, great Great question, Michael because while we've been the.

Really.

And really pushing internally here is that the traffic all the initiatives as part of our DNA going forward will never go away right, but the key part is the is that third phase, which will be more around how do you optimize and how do you accelerate and how do you.

The strengthening the quality.

Every single day basis, but specifically the phase III.

We have leaned into the into the existing partners and platforms.

The 1 is the new partners and the new channels that we've been going after we've seen some nice.

The nice acceleration, we've also seen some long dated sales cycles. So admittedly there is some variability here as we establish those news new relationships.

And we raised the bar on the occurred current partners, but we look at we look at it from the overall perspective is we do see sort of sequential growth and Q3, and Q4 and improving our margin.

Which we believe will continue to accelerate that pace.

Okay. Thanks, so much.

As a reminder to ask any follow up questions. Please press star followed by 1 on your telephone keypad.

Our next question comes from Jim Goss from Barrington Jin. Please go ahead.

Thank you.

The first question.

Partly reflects 2 relate to the last question. The you mentioned that there were you had sort of some new business from these large digital providers, but at lower margins and I'm wondering.

And what level of margin that was that.

And does not reflect the.

And the benefits you got from the higher quality of traffic and what does the margin where the margin was lower because they have the upper hand, and those negotiations or was there some of the reason and I've got a couple of others.

Yeah, Hi, Jim Thanks for the question.

Okay.

And the bottom line.

And sort of put and 1 thing 1 framework here is that obviously, we do not and we have a baseline of profitability that we have to hit.

And and regardless of the sources and how much of investing there's the profitability threshold that we make across all of our media sources.

Did we.

And as we lean in and we try and tests and things, we know that we might lose money and the like breakeven the beginning but that has the scale and scale aggressive of your timeframe and we monitor that by source and buy traffic. So the only thing thats different and as mentioned is the biddable tends to have some variability and pricing that is beyond the us it's a mark.

Place and we know the things that happened on those channels could be could move the pricing 1 way or another and we are we are.

We watch it like a mid.

Amid a 5 minute basis to make sure we make the changes.

Okay, a couple of others that might sort of the group.

I know Ryan Schulke and is 1 of the funding and executives of course involved and this you mentioned that there were several others and I Wonder if you might say, who is who is and that mix and this strategic process.

How do you move from testing of the strategies to executing them.

And how is their process of coordinated between the strategic team and the new executive team.

And.

And out of their relative impacts plus or minus and certain key verticals or is it pretty much across the board.

Yep.

So just when we talked about the founders Jim.

A couple of releases that we had there's really 4 key ones there was the Ryan.

As the Chief strategy Officer, There was Matt Conlan, who is chief customer officer.

Shawn Collin as EVP of insights.

Looks at the data and see the insights across the various properties and then <unk>.

<unk>, who is president of the performance media group so.

When we talk about them being down into the into the into the business, it's really around them connecting that strategy to the execution. So.

We are hands on and they were detailed into the into the mix and looking at the numbers along with our teams to make sure that we're interpreting it the right way and moving and.

And making the right moves to support that so you can imagine the industry's rapidly developing it has lots of changes to it and having that type of ex.

Experience in the mix that has over 10 years plus of seeing how the performance marketplace works really accelerates or decelerates at learning and accelerates at.

And that ability to scale or realize that that new traffic sources.

And move onto the next 1.

Yes.

Okay, and then the coordinating what theyre doing and the strategic front versus what you were doing.

And the execution front.

And how does that work exactly.

So Jim just a question of how do we connect strategy the execution or.

Yeah basically.

No. There are some things you are trying and the train and I was trying to determine the best ways of doing things with them.

There has to be of control.

Element to them.

The company's so you're probably talking every day with each other and it sort of just.

And pleasure might touch all of their process.

So obviously, what you're really pointing towards the given in my mind is how does the team working and how effective is it and how.

Yes of granular are we getting.

1 of the real strength of fluent has been our reporting and our numbers and and how we look at things so 1 of them.

And a minute by minute basis, you can see how things are performing how the consumers are acting heavy.

Media is working and how it's connecting to the advertisers. So what we really have done it and just brought more experience to the to the current operating systems and numbers that we have.

So the connection there has been.

The senior team as that team along with me and Alex and a couple of others in terms of how we run the business on the day rate Dave.

Day by day basis, and then the execution side and the.

Those 4 getting in with the teams on operating basis to move those basically course strategic growth initiatives forward.

Okay and does not really change the.

Key vertical orientation and developed in recent years.

No Matt.

And we.

You'd talked a little bit about the.

When Apple the call center and how we've started to.

Connect the higher consideration of higher value of transactions with brands and insurance and financial services home services. It has great growth possibilities from a vertical Jim but as we as in Q2.

Our vertical mix.

What was the strong as it was in Q1.

Alright, Thank you Dan.

Thanks, Jim.

Has the final reminder, to ask any follow up questions. Please press star 1 on your telephone keypad.

And we currently have now used to ask the questions. So I will now hand back weighted to the highest for any closing remarks.

Okay. Thank you everyone for joining with US today and for Q2 earnings script.

We are committed to moving forward with our mission.

And then I appreciate all of your support and thank you.

This concludes today's call. Thank you for joining and I hope you'll have a lovely rest of your day you may now disconnect your line.

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