Q3 2021 Fluent Inc Earnings Call

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Hello, and welcome to the fluent Inc. Q3, 2021 earnings call. My name is Robin and I'll be coordinating your call today, if you would like to ask a question. During the presentation. You may do you save by pressing star one on your telephone keypad I will now hand, you over to your highest vine the coffee from fluid Ryan. Please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our third quarter 2021 earnings results. Joining me on today's call are fluent as interim CEO, Dan Patrick and CFO Alex Mandel.

Our call will begin with comments from Don Patrick and Alex Mandel, followed by a question and answer session I.

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.

The webcast. Please visit our Investor Relations page on our website Www Dot 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 995.

Any forward looking statements made during this call speak only as of today 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 maybe identified by words, such as expects plans.

Jack.

Good.

Well 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 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 management evaluates the financial performance of our business on a variety of indicators, including media margin adjusted EBITDA and adjusted net income the definitions of these metrics and reconciliations to the most directly comparable GAAP financial.

Measures are provided in the earnings press release issued earlier today with that I'm pleased to introduce Gluons interim CEO Don Patrick.

Thank you Ryan and good afternoon, Thanks to all of you for joining our call today I.

I'm here together with Ryan Schulke, our Chief strategy Officer, Chairman of the Board and company founder and Alex Mandel, Chief Financial Officer.

Our results in Q3 speak to the importance of our moves in Q2 to position our founding team fully on the front lines of our business in order to drive our strategic agenda forward.

Our long term strategic growth plans remain squarely focused on building higher quality digital experiences for consumers, while creating effective and sustainable customer acquisition solutions for marketers and total alignment our traffic quality initiative for <unk> is foundational to filling in growing that higher quality demand.

In our earnings release today, we reported Q3 revenue of $85 9 million up 10% year over year media margin down 19% year over year at 28% of revenue, reflecting ongoing media and strategic investments and adjusted EBITDA of $6 4 million or 7% of revenue.

In the quarter, we continued to drive meaningful transition of our business is TQ I and our investment in quality have strategic relevancy across its entire performance marketplace. When we're making notable progress against the Angola. These efforts are delivering clients, our ROI goals, thereby enhancing fluids brand equity with our client partners, but ultimately build.

The enterprise value for our stakeholders, we remain focused on three strategic growth pillars, our media footprint our platform.

Performance Mark Capone part as we've consistently stated we believe these pillars, providing during relevancy in a highly dynamic and rapidly evolving industry marketplace in which fluid operator.

Leading off today, our media footprint as I mentioned in the Q2 call through our Tiki why operating focus we are seeking to expand the volume of consumers, we engage with higher quality content, while presenting our advertisers offers and as we consistently maintain we are confident that quality grounded experiences will lead to quality outcomes.

Which will fundamentally create higher value equation for consumers, who are our partners for evolving fluids business model.

In Q2, the separate manifested in growing our media spend on digital platforms like Facebook, Google Snap and Tic Toc ahead of expectation, albeit as one might expect had lower margins with these major platforms and our total traffic as we develop our business overtime, we do anticipate optimizing these platforms.

<unk> fleet expanding our margins.

In Q3, we were able to expand our platform you get spent over 20% compared to Q2, while achieving higher margins, while the profitability on the spend is still below the more established side of our traffic mix. We demonstrated the sequential progress that we were looking for we also began testing connected television and are in the planning stages for additional media invest.

Since with sizable media companies and technology platforms, well relatively more expensive. We believe traffic from these digital media technology platform is carries higher quality and higher value representing a significant growth opportunity.

Importantly, our perspective on the traffic quality initiative has evolved to include two other dimensions first the strategic notion of value is interconnected with volume and quality, we reiterate our commitment to quality not simply because we believe the market is demanding it but because we also believe it is a key pathway to expanding our client roster.

While improving their ROI and concurrently enhancing fluids enterprise value in turn we're able to capture significant Q3 unit increases in revenue per user.

Through client demand in certain verticals into our CRM efforts to engage consumers beyond their initial visit to our website, which I will speak to shortly.

As you might imagine these demonstrated outcomes that motivated us to more keenly expand our focus on value and the total marketing equation.

And driving additional revenue per user we are better positioned to acquire higher quality higher cost media strategies, we are employing.

So while we continue to pursue multiple volume initiatives. We also believe that getting the value equation right will enable us to grow volume in a more strategic and sustainable manner offsetting the margin we prudently invest against in these core initiatives in the intermediate term.

The second additional dimension of our T K Y while still in early stages.

And then identifying sizable audience marketplace opportunities that we may not bring to our own media properties, where we can still digitally connect with the consumers to capitalize on these opportunities we've developed new products and exploring strategic partnerships.

It was to bring our advertiser offers to the consumers and new packaging configurations and on third party media properties. These types of opportunities don't necessarily involve a traditional registration based experience like our own media properties and make us less dependent on traditional traffic volume. They do however offer incremental audience revenue.

And profitability opportunities for Claude.

Last quarter, I mentioned that there were strategically relevant yet smaller business units that performed notably well during the quarter, particularly our jobs business and are adding parlor agency business, both which roughly doubled their revenue year over year in Q3 were energized by the fact, because these businesses continued to perform strongly again, achieving nearly two X year.

Over year growth, we are quite bullish regarding the long term growth implications here as these green shoots are clearly generating strategic dividend and we are also seeing continued success expanding our international footprint. In Q3, we continued to scale profitably in Canada, where we're seeing performance exceed our U K market launch metrics than that.

October we launched in Australia, where we're also seeing early promise.

S growth strategy is a reflection of our U S learnings, which allow us to plug and play more intelligently and with the value of our experience as we expand fluids business model to serve a world class global brands outside of the U S. We're looking to gain market share we remain optimistic about our continued international expansion.

Shifting to the second growth pillar, our platform, where we've made further strides on increasing monetization.

Previously mentioned, having approximately doubled monetization in Q4 2020 versus Q1, 2020 and sustaining those increases in 'twenty 'twenty. One in Q3. We continued this trend would you see as sustainable going forward part of this lift resulted from strong client demand of our jobs business in certain verticals within our rewards business.

The streaming services and mobile apps in gaming.

We continue to invest in <unk>. Another important initiative on our expanding CRM agenda, which I spoke to last quarter was the buildout of our internal email capability, which we had previously activated solely through partnerships. This effort was nascent in mid Q2 since scaled quickly exceeded our expectation now driving cigna.

Michigan, consistent and high margin revenue by re engaging consumers after their initial visit to our owned and operated media properties. We are increasing our focus here as we see significant market played before us to further create meaningful experiences for consumers downstream, while expanding our relationship with world class brands in key industry verticals.

More to follow as we continue to learn develop our capabilities and grow.

Regarding our third pillar our performance marketplace.

Key initiatives has been investing in and what was formerly referred to as or whatnot believe it which we fully acquired on September one and rebranded as fluid sales solutions fluid sales solution connects consumers with marketers and high consideration high value categories, including insurance home financial and legal services.

Now fully integrated we anticipate being able to play more strategically into various seasonal patterns in these verticals.

Summarizing as I began today, we are committed to building higher quality digital experiences for consumers or creating more effective and sustainable customer acquisition solutions for our marketing partners in lock step with this we continue to see world class brands leaning in for strong demand that well exceeds our available supply yes fluids.

Grand and client partners remain a clear validation TQ I need the at the forefront of our growth strategy as we redefined our marketing footprint and enhance our marketing platform and the industry is acknowledging our growth agenda as well recently fluid was again recognized as mobile gaming leader 2021 apps fire performance index across.

Five categories exemplifying, our ability to drive engage users with strong lifetime value core mobile gaming clients.

Headlining our performance we are encouraged by our progress against a very thoughtful and deliberate strategic course, we continue to learn and evolve consistent with the consumer and regulatory market dynamics that provide us with a much needed clarity. We then prioritized and lean in based on strategic size of the prize of the marketplace and our ability to differentiate.

Our offerings in turn we believe fluent has delivered results in Q2, and Q3 that validates our design path and remain confident that we'll do so again in Q4 consistent with our initial roadmap we laid out regarding our strategic course earlier this year.

Investments, we made in the business are setting us up for a solid 2022, and a sustainable growth trajectory beyond while our industry remains dynamic and rapidly evolving we believe staying grounded and timeless operating principle and clearly defined strategic growth pillars will enable us to meet the challenges in the marketplace. We're moving full speed ahead on it.

The agenda.

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

Thanks, Don and good afternoon.

Spoke to during the quarter, we progressed, our strategic investment in quality across our marketplace and expanded our focus on revenue streams that are beneficiaries of these initiatives on our Q2 earnings call. We indicated an outlook for Q3 of a year over year topline growth with sequential improvement in profitability relative to Q2.

Our revenue for the quarter came in at $85 9 million up 10% year over year, while our media margin came in at $24 2 million, representing 28, 1% of revenue.

Revenue growth of 10% or $7 6 million year over year drive from three primary areas. The first is the significant growth of the business, we formerly referred to as monopoly, which following our acquisition of the remaining 50% interest at the beginning of September has been rebranded as fluent sale solutions. This live agent capability.

Our focus on high consideration categories was an early innings in last year's Q3 and has scaled significantly since we have considerably expanded our capacity, enabling higher volumes of outbound consumer contacts, including consumers who have registered an influence owned media properties as well as consumer leads that sourced from third parties.

A second key revenue driver with strong client demand for our established performance marketing executions in certain key verticals, particularly staffing and recruitment, resulting in improvements in both client pricing and volume year over year.

The third area of revenue growth came from an internally developed email capability, enabling us to reengage consumers, who have already registered on our owned media properties. This revenue stream, which carries high margins was nascent in the second quarter of this year and not existent in the third quarter of last year.

As it relates to media margin the primary driver of our margin trend and continued to be the mix of our media spend has between traditional affiliate traffic sources and the Biddable platform as we discussed on last quarter's call for context, we spent nearly 62 million unpaid media in the quarter, representing our largest cost component of.

On last quarter's call, we noted the opportunity to drive high quality traffic from the Biddable platforms, albeit at lower margins, which we are seeking to optimize into higher profitability over time and.

In the third quarter, we increased our biddable media spend and profitability sequentially over the second quarter, albeit still at margin levels below the affiliate side of our media mix. We also increased our affiliate media spend and profitability sequentially.

On a blended basis, the relatively larger increase in variable spend you did our overall margin improvement sequentially.

Our operating expenses on a GAAP basis for Q3, comprising sales and marketing product development and G&A grew in aggregate by $1 7 million or 9% year over year to $20 8 million.

Of note the cost of the forward Napoli acquisition through which we acquired the remaining 50% interest effective September one was accounted for through our income statement as we have previously recorded 100% equity ownership for GAAP purposes in connection with the initial purchase of a 50% interest in April 2020.

The consideration for the full acquisition was $7 8 million consisting of a $3 4 million of cash at closing two.

$2 million of cash due on January 31, 2022, and 500000 deferred payments due at both the first and second anniversaries of the closing.

We also issued 500000 shares of stock valued at $1 4 million.

Offsetting this expense the contingent put and call consideration arising from the initial acquisition, which represented noncash accrued compensation expense was terminated resulting in a 5 million reversal of that accrual and thereby resulting in a net overall transaction expense of $2 8 million in the quarter.

This expense comprised the primary source of increase in our GAAP operating expenses year over year.

Of this $2 8 million point 6 million was recorded in product development with the remaining $2 2 million recorded in G&A.

Adjusted EBITDA of $6 4 million in the quarter represented 7% of revenue implying that all of the sequential increase in media margin flowed through to EBITDA as well as some operating expense benefits in.

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

Q3, we continued to be a noncash federal taxpayer due to the pretax loss, we reported GAAP net loss of $2 5 million in the quarter and adjusted net income a non-GAAP measure of $2 8 million.

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 $17 1 million of cash and restricted cash. While this represents a decline year over year and sequentially, it's largely attributable to the normal course timing of receivables collections.

Working capital defined as current assets minus current liabilities ended the quarter at $41 4 million up $6 9 million year over year.

Total gross debt at June 30th of $47 5 million consisted of the funded term loan under the new credit facility.

The remaining 1.25 million note payable in connection with the 2019 add parlor acquisition was funded on July 1st completing our payment obligations.

The quarter marked a return to double digit revenue growth as our strategic investment in quality, providing a return in the form of growing new revenue streams and supporting pricing strength on our marketplace. Our outlook for the balance of the year reflects continued progress operationally and financially with a continued focus on.

Building long term value for consumers clients and fluent stakeholders, we're glad to field questions at this time.

Okay.

Thanks, Kate if he would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind I would like to withdraw your question. Please press star furnish My case when preparing to ask your question. Please be sure you'll sign is that my team they play off.

First question is from the Rev. Rec from Canaccord Maria Please go ahead.

Great Thanks, and congrats on strong results.

First just wanted to ask about your traffic quality initiatives can you maybe just comment on sort of traffic trends in Q3, and maybe what you've seen so far in Q4, and then what's been sort of a feedback from from advertisers is here.

Instead of high quality traffic here and are you able to generate higher CPM on your platform.

Hi, Maria Thanks for the question.

So regarding the traffic quality initiatives I think you know we've talked about how we're encouraged we are with the progress and that we're continuing to aggressively pursue testing and media platforms and partnerships.

Much of this as you know, it's like like a weighting of bringing world class advertisers. The sales cycle takes a little time to test and innovate and learn so from a standpoint of our of our quality and our volume we've seen our volume basically move up quarter over quarter between Q2 and Q3, although the mix is Alex I'd highlight it has changed a little bit more.

A bit of a size in the affiliate side.

In Q4, we're seeing similar trends.

But what we're really seeing is the quality of that traffic is significant and which is really driving significant monetization results for us which gets to your second question around the advertisers. So we're able to provide advertisers two things one is the stronger ROI that can lead to better pricing.

I was hoping you can lead to more volume increases from them. So we're seeing two fantastic.

Input from our clients around the traffic quality initiatives and the quality that's grown.

Got it that's that's very helpful.

And then my second question is set up as the company emerges from this traffic quality initiatives can you, maybe just talk about fluence ability to grow relative to the digital advertising market over the next year Tim.

Sure.

So I think our stated.

I've stated position Larry as you know is when we started the traffic quality initiatives to return to sort of our historical traffic or historical growth.

Year over year that we had before the traffic quality initiative, and then get to the point, where we're at the market or beating the market.

In a consistent way.

The really interesting about the model that the business model and how it's changed is as you know we were very supply focused and now. We're also now we have the value equation, which also allows us to have a multiplier effect to that volume. So as we as we accelerate the volume it is shifting and we get higher value. It's a flywheel that allows.

As to buy media at higher cost and higher and higher channels that allow us to then also grows. So we were very optimistic about the long term ability to leverage the model around quality and around value that we just put them together.

Got it thank you Don and that's very helpful. I'll I'll get back in the queue.

Thanks Maria.

Thank you Maria our next question comes from Bill Sutherland from Titan Bell. Please go ahead.

Thank you I had two questions first of all what led to the monetization increase in the third quarter versus the second quarter and I asked the question in this spirit that I believe in Q2.

The press release referenced in anticipation that you would that you would be flat. So that was a nice improvement from what what are you were thinking three months ago.

Sure Hey, Bill Thanks for the question.

Regarding the monetization there's two major factors that are playing a role there because of the higher quality traffic.

Creating more value for those for advertisers and that's leading to to either more volume from them or a higher price that they're willing to pay because the ROI is more significant on there and so that's the that's the first part of the value equation. The second piece is around the CRM capabilities and us growing out that email.

Capability so.

We've always had an email capabilities around CRM, but we outsource that to partners.

Any of that in house, we were able to leverage our technology platform and our data.

Analytics.

And take a much more holistic and strategic approach to our consumer journey.

CRM efforts, it's very exciting in terms of being able to really bring consumer journeys in a more of a lifetime value to our to our consumers. So those are the two major factors driving the monetization.

Okay, and Don I actually it was really interested in taking that one step further which is quite improved in the third quarter versus the second quarter that maybe you were not anticipating when.

At least I interpreted your comments to be that you thought monetization would be flat.

Yep, well both sides bill on the value side and we.

We saw that the traffic call. It as you know we took a lot of traffic off in Q1 and.

And we started building back that quality traffic and we the value that the traffic was driving for for our clients. It was bigger than we thought and and greatly exceeds their demand greatly exceeds the supply that we currently have so that was able to that was a pleasant surprise and the second is email capabilities.

It is a harder a slightly harder CRM capability to build.

We were building it in a very conservative way and we were able to.

Be more aggressive in Q3 in terms of how to how to build that in and leverage the platform that we put in place earlier.

Great. Thank you I appreciate that extra color and then secondarily the Apple privacy changes have received a lot of commentary in the press would you talk to us about the impact to that that that has on you all.

Sure sure.

I'll give you a direct and sort of indirectly answer because there's sort of two two pieces I directly as you know fluent engages our consumers and we do most of our identification and audience segmentation targeting leveraging our first party data analytics on our own media properties. So for the most part the challenge.

That's an outside two other large media platforms [noise].

Generally speaking Bill you know.

Eventually Google is the lemonade and cookies and Apple is most likely released additional updates now. This is something we're gonna have to be constantly working on with our advertisers and with our with our clients to make sure. We're prepared for these changes.

And and then following up on that is is longer term do you see this as a has ultimately added a competitive advantage for fluent because you are.

Operating the the way that you do and not under quite the direct impact of those ecosystems that maybe some of the other message that your customers and or potential customers would be accustomed to using.

Absolutely, Yes, you think it's a big competitive advantage for us.