Q3 2021 Quotient Technology Inc Earnings Call
Good afternoon, everyone and welcome to quotients third quarter 2021 earnings conference call. During the conference call all participants will be in a listen only mode. After the presentation. We will conduct a question and answer session at that time anyone with a question should lift their phone receiver and <unk>.
Subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements.
These forward looking statements and the related risks and uncertainty are set forth in the earnings presentation slides located on our Investor Relations website at.
Additional information about factors that could potentially impact our financial results can be found in our stockholder letter issued today and the risk factors identified in our annual report on Form 10-K filed with the SEC on February 23rd 2021, and quarterly reports on Form 10-Q filed on May 10, and August six 2021 and in future file.
<unk> with the SEC.
We disclaim any obligation to update information contained in these forward looking statements, whether as a result of new information future events or otherwise.
Please note that operating expenses gross margins and net loss financial measures discussed today are on a non-GAAP basis, each having been adjusted from the corresponding GAAP measure to exclude certain expenses.
A reconciliation between GAAP and non-GAAP measures can be found in the financial results section of the stockholder letter issued today and in the earnings presentation slides posted on the website.
With that.
Let me turn it over to Steven Steven.
Thank you Mark.
Hello, everyone and welcome to our Q3 2021 earnings call as.
As you've seen from our release and stockholder letter, we had an outstanding Q3, delivering revenue of $135 $9 million and adjusted EBITDA of $17 3 million, which is starting to demonstrate the leverage in our business as we scale up our platform migrate away from lower margin higher cost to deliver.
Her services and keep our continued focus on reducing operating expenses.
We also started to scale up our national Cashback rebate platform, which is providing an exciting opportunity for both retailer and non retailer network partners delivering the largest set of national offers in the industry.
Turning to retail network growth. We are pleased to share that Autozone has now live on the quotient network as his total wine and more the largest adult beverage retailer in the U S and another new vertical for quotient.
Additionally, we are very excited to announce that we have launched promo amplification with rite aid and have additional retailers in the pipeline, we expect to launch over the coming months.
Network growth outside of retailers continues to expand and we have several partners in various stages of integration currently underway that we expect will also be live over the coming months.
One Great example is our partnership with Red box Redbox has 40000 kiosks at the entrance of major retailers and other high traffic areas.
They have a very loyal fan base, which frequently visits these kiosks, which makes them a perfect partner for quotient, we look forward to being able to offer more savings value to more shoppers as they start their shopping trips.
At the same time, we're hearing about supply chain issues and some out of stock situations in parts of the country not as severe as during the peak of the pandemic, but impacting CPG spending to a degree.
Last quarter, we highlighted that we had to retailer renewals underway and that we expected to have closure on both by end of year.
We have renewed our partnership with dollar general and we are winding down our long term partnership with Albertsons.
As of now we expect to wind down that relationship over the next few months and are taking actions to remove costs in this quarter and decommissioning systems in areas of operations that supported this account.
We believe the exiting of this business will have a positive effect on our long term margins and on our network performance overall.
Pam will get into more of the details, but our continued attention on moving from managed services to self service is starting to produce the desired outcomes, we expected and broadly speaking, we now expect to see gross margins in the neighborhood of 55% in Q1 with growth up from there over 2022.
As I mentioned last quarter as we continue to grow our network and with our business shifting to deliver promotions on a fixed calendar rather than on a volume basis brands can more accurately align with their overall merchandising schedules and budgets paving the way for the remainder of the offline <unk> dollars to move to digital.
This new way of engaging with quotient is being endorsed by Cpg's and we look forward to steady growth in this business over 2022.
Smaller CPG has continued to be a growth driver for us with revenue in this area of 109% up over Q3 of 2020.
The recent launch of our cash back rebates platform enables these smaller cpg's to offer this exciting alternative way of rewarding shoppers.
As I mentioned earlier, our rebates platform continues to be met with strong demand. We are implementing cash back rebates with both retailers and with non retailer network partners.
Quotient has the largest number of national promotions and now that cash back rebates are being added as another shopper option. Our network partners have the widest possible number of available offers to engage with their shoppers.
With regard to national promotions, although we are seeing some slowdown due to increasing supply chain and some out of stock situations. We continue to expect the bulk of the offline primarily freestanding insert spend will move to digital over the course of 2022, and we believe quotient will be a primary beneficiary.
Three of the transition.
Periods of price increases for consumer goods, and overall inflationary pressures tend to be higher promotion spending environments, and we expect to see the swing back early in 2022.
In retail performance media or RPM, we saw growth of approximately 59% in bookings dollars from our CPG customers in the third quarter over last year.
Additionally, RPM retailers saw approximately 9% increase in alternative revenue streams on pure play retail media delivered through this platform.
Looking at our digital out of home business at the end of Q3, we had inventory of over 287000 screens nationwide up over 45000 screens from Q3 and access to over 75000 in store screens, we continue to see momentum for this product, which levers at leverage.
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In sponsored search at the end of Q3, we had over 344 Cpg's UD using quotient sponsored search up from 325 last quarter, we continue to experience consistent sequential quarters of growth and Cpg's and bookings on this platform.
Moving onto our outlook for Q4, while we are seeing strong bookings in most of our business and have a robust pipeline for the rest of the year at the same time. We are also seeing some pullback on national promotions due to some of the out of stock situations and supply chain pressures.
Due to these potential impacts and with some uncertainty around how the Albertsons wind down will transpire, we're taking a slightly cautious approach to Q4, which should be a minimal approximately $5 million of revenue impact.
As we head into the final months of the year and turn our attention to 2022 I'd like to thank our team our network partners and our advertisers for their part in helping to deliver essential services to shoppers over the course of the pandemic.
We have done our part to help shoppers save when they need it most and continued to be a key strategic partner to advertisers and retailers, helping them reach shoppers at scale in an increasingly efficient way and with that I'll now turn the call over to Pam.
Pam.
Thank you Steven and good afternoon, everyone.
Remarks will be focused on our financial highlights I encourage you all to read the full prepared financial results in our stockholder letter posted on the Investor Relations page of our website.
We delivered strong financial results in Q3 and made good progress on changing our business model to rely more heavily on technology for delivering our solutions.
Revenue came in at $135 $9 million up 12% over the prior year and up 10% over last quarter.
Media revenue in Q3 was approximately 52% of total revenue, increasing 20% year over year with strength in sponsored search and digital out of home offerings span.
Sponsored search revenues grew two five times the prior year quarter, and our digital out of home revenues were more than three times. The prior year quarter as advertisers are seeing compelling results from these channels.
Promotion revenue increased 5% year over year, primarily driven by digital paperless, which was up 12% over Q3 2020.
GAAP gross margin for Q3 was 36, 3% down 290 basis points compared to the same quarter last year non.
Non-GAAP gross margin in the quarter was 44, 7% down 150 basis points over last year, but up 440 basis points from Q2 2021.
GAAP and non-GAAP gross margin sequential increases were primarily due to product mix with Q3, improving due to higher margin media revenues generated from sponsored search and digital out of home.
As we discussed in our August 2021 earnings release changes week nature of the business resulted in our sponsored search revenue.
Recorded net of third party costs beginning July one 2021, if we had not made a change to the business and accounting revenue reported for the quarter would've been approximately $4 million higher and year over year revenue growth would have been 16%.
The decreases in GAAP and non-GAAP gross margin compared to the prior year were partly offset by improvement in operating leverage. Additionally, GAAP gross margin was negatively impacted by the impairment of certain intangible assets and partly offset by lower amortization of intangibles.
We delivered $17 $3 million of adjusted EBITDA in the third quarter of 2021 up $13 million from the prior quarter and above our expectations for the quarter.
Product mix improved with higher margin revenue recorded for sponsored search and digital out of home.
Q3, non-GAAP operating expenses came in at $45 5 million down $1 7 million from the prior quarter as a result of cost controls and a reduction of head count in the quarter.
Looking at cash we delivered cash flow from operations of $12 $2 million in the quarter. This was driven primarily by strong collections and the timing of vendor payables.
We ended the third quarter with approximately $245 million in cash and cash equivalents up $6.6 million from the prior quarter.
Now turning to guidance, we experienced strong bookings momentum during Q3, however supply chain disruptions are causing a slowdown in national promotions bookings for Q4. In addition, we anticipate some revenue risk as albertsons transitioned off the platform.
As a result, when compared to our guidance issued last quarter that did not contemplate. These accounting changes we were slightly lowering our revenue guidance for the year and EBITDA guidance.
It has come down to the product mix and lower revenue for the fourth quarter.
The changes, we are making to our business and the resulting accounting impact of moving this part of our business from gross revenue recognition to net revenue recognition reduces topline revenue and cost of revenues by approximately $20 million in our Q4 forecast and reduces revenue and cost of revenues for the full year of 2021 by approximately <unk> <unk>.
$4 million.
After adjusting for these accounting changes, we currently expect fourth quarter revenue in the range of 114 million to $124 million.
Revenue for the full year of 2021 is expected to be in the range of 490 million to $500 million.
The revenue forecast represents our best estimate of GAAP revenues.
To a product mix of promo and media offerings as well as the mix of revenues recognized under a gross or a net basis can have a significant impact on our gross margins as a percentage of revenue and is difficult to forecast.
We expect our margins to improve over the long term as we continue to work on technology investments and changes to our operations to improve efficiencies.
As highlighted in the past the mix of revenue between media and promotions as well as retailer specific campaigns versus national campaigns is impactful because retailers specific campaigns come with higher distribution fees paid to our retailer partners, while national budgets generally have lower distribution fees, which results in lower cost and higher margins.
Specifically for our Q4 outlook, we expect to see gross margins up approximately 41% to 42% as a result of continued high proportion of retailer specific media campaigns.
For our remaining guidance metrics, we expect non-GAAP operating expenses to be approximately 43 million to $44 million for the fourth quarter of 2021.
Adjusted EBITDA is expected to be in the range of 7 million to $12 million for Q4.
For the full year 2021.
Adjusted EBITDA is expected to be in the range of 35 million to $40 million.
We expect operating cash flow of zero to $6 million in Q4, due to lower EBITDA as well as severance payments related to the head count reduction expected.
For weighted average basic shares outstanding we expect approximately $93 8 million for 2021.
Turning to fiscal year 2022 we expect that the wind down of Albertsons business will have a negative impact on revenues in 2022, but once transitioned out will allow us to focus on technology investment in growing our business profitably over the long term.
As we think about the impact to our topline revenues based on the last two years of our partnership we estimate that between 15 and 28% of quarterly revenue may come off our network.
However, these revenues are below the average variable margin rates at the gross margin level.
As a result of this and other business changes quotient has taken action in Q3 and plans to take additional action in Q4 to reduce this expense and better align costs with forecasted revenues.
Between the Q3 actions and the forecasted impact of Q4 cost reductions we expect to have an estimated annual savings of approximately $40 million that will benefit 2022 profitability.
We remain focused on building toward greater profitability and maximizing future value for our shareholders.
We look forward to sharing our progress with you as we move through these changes and with that we will now take your questions operator.
We will now begin the question and answer session.
To ask a question press Star then one on a touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Steve Frankel with Colliers. Please go ahead.
Alright, good afternoon, Stephen so there.
There is a material reduction in the EBITDA expectations relative to the last time.
You were talking about the end of the year.
Would you kind of walk us through what the material factors are there and whether opex in Q4.
He is coming in where you thought it was worth taking a little longer to take those costs out.
It was at last quarters.
Hi, Steve This is Dan Yeah, I can answer that question so regarding our Q4 EBITDA.
Ed.
It did come down a bit from.
What our original forecast was.
Really that's primarily a story around gross margins the revenues that we're expecting to come in in Q4.
We when you asked about Opex, we were able to take nearly all of this spend out that we wanted to get to.
And where might be off by about $1 million. What we said last quarter was that we expected a 5 million dollar drop in Opex from Q3 to Q4, but we had forecast to kind of flat in Q3. So we ended up coming in better on cost savings in Q3, bringing opex down quarter over quarter by $2 million we.
We expect to take another 2 million out two to 3 million out between now and Q4 so.
So that would get us close to that $5 million that were we were assuming between Q2 and Q4. So we nearly hit all of our cost savings.
The revenue number is coming in good if you look through the accounting changes.
So it's really a question about the margin mix of the revenues that came in is having a negative impact on EBITDA the primary.
Reason for that is just the slowdown in national promotions that we talked about a little bit.
And there was a lot of anticipation about launching network partners like Microsoft.
Has the timing though.
Those partner launches being delayed at all.
No in fact.
We are we've locked we announced two or three.
Our onboarding others as well as we said in our prepared remarks in our shareholder letter, but its also a function of the fact that national promotions strong bookings heading right into the quarter and then.
Slowed down quite a bit youre hearing all the noise about supply chain and a little bit of out of stock in some of the areas in the U S. So could that could that just be a momentary pause and then a spring back in another month, it's possible, but to be cautious based on what we saw in the first month.
We just took it down a bit.
Okay, and then just one clarification on Albertsons I think there was some expectation.
That it was really the media business the RPM business that.
Potentially would go away, but I think I read from your comments that the entire albertson relationship gets wound down between now and the end of the year.
Well, we didn't say between now and the end of the year, we said over the next few months, but but that's correct we will be winding down.
All current agreements with Albertsons over the next few months.
And when is the next significant retailer renewal.
But we can't be specific other than to say not until.
Hi.
Q4 of next year.
So not until Q4 of 2022.
Okay.
Thank you Steven.
Thank you.
Again, if he would like to ask a question press Star then one to join the queue.
The next question comes from Chad Bennett with Craig Hallum. Please go ahead.
Great. Thanks for taking my question so.
Just trying to.
Connect the dots on the Albertsons impact.
Pam I think you gave a range of 15% to 28%.
In early fiscal year 'twenty two comes off network and so on.
<unk> network does that I don't know how that correlates with slip as a percentage of your your overall business or revenue is there any other any kind of indication on.
What that means.
Yeah, So I guess, how I would explain it.
A look back at history to see how much albertsons one of our business, we didn't want to try and forecast what the going forward growth path looks like because that's outside of our control, but looking back.
It does vary a bit from 15% of our revenues to 28% of our revenues. We were trying to give you a kind of a guidepost to size it.
So yeah it is sizable.
And if you look back over history.
That's what we're using to try and estimate what the forward looking impact is going to be.
Okay. So at the top client top line revenue on a gross basis.
Yep.
And so.
The other thing just.
To make sure we're thinking about things correct your $17 million EBITDA.
Non-GAAP EBITDA. This quarter included six happened in a $6 $5 million of a charge related to pulling out of the albertsons contract.
So you added that back into that EBITDA dollar figure and then I think it was $9 1 million for the year because you had some in the last quarter.
No.
The run rate EBITDA.
It would've been closer to 11 for the quarter is that correct.
The intangible impairment of $6 5 million as a noncash charge. So yes. We don't include that in our EBITDA calculation.
Okay.
Not in there.
Yes, just about their anatomy.
It's a noncash charge related to the Albertsons contract.
Situations.
That's right. It was an intangible asset that was set up when the contract was originally signed now being written off it's noncash.
So when youre calculating EBITDA.
It gets added back as an as a noncash charge. Okay. And then just curious in terms of where we are in the gross to net transition in the business and if.
If you have any insight of kind of where we're going to be whether it's exiting the year early next year in that transition and I guess the other question related to that what would be the $20 million impact in the quarter.
In the fourth quarter.
And that was just relating to related to the accounting change right that isn't albertsons winding down impact is that correct right. Yeah, that's correct no.
That is entirely related to the accounting change from gross to net.
So where are we talking about.
On your question on timing and where are we.
We are largely through it at the end of Q4, there will be some little bit to the business left.
But we'll be largely through the transition as we exit 2021, as we had expected.
On the media and promo side of the business.
On all of it.
On the promo side I E.
There is there is a portion of promo that stays on a gross basis. So it's not going to impact all of our promo revenue that's national promo right. So there is no.
There's no impact there.
Got it okay.
Thanks for taking my questions.
You got it thank you.
This concludes our question and answer session I'll now turn the conference back over to management for any closing remarks.
Thanks, operator, and thank you all for joining US today as a result of Q3 demonstrated we are beginning to see the results of the past two years focus on streamlining our business and executing on our strategy of growing our reach and scale, which in turn allows us to exit our lower margin high cost areas of the business the launch of our cashback rebate.
Platform and upgrades, we've made to our network are allowing us to onboard more partners over shorter periods of time as you heard in our prepared remarks, we look forward to seeing you all over the next several weeks and months and to our next quarterly earnings call. Thank you.
Goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
Yes.
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