Q2 2022 Cardlytics Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Hello, Thank you for standing by and welcome to the second quarter 2022 card lytic.
Inc Earnings Conference call at this time, all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone. Please be advised that today's conference maybe recorded I would now like to hand, the conference over to your speaker today, Nick Linton.
Legal officer.
Please go ahead.
Good evening and welcome to card limited second quarter 2020 financial results call before we begin let me remind everyone that today's discussion will contain forward looking statements.
On our current assumptions expectations and beliefs.
Expectations about the following.
Our future financial performance and results are.
Our growth expectations for the second half of 2022.
Upcoming changes to our management team.
Our ability to achieve our key long term priorities.
The increase in diversification of our <unk>.
They use our monthly active users as well as the increase in EMEA used connected to our add circa <unk>.
Kris and ARPA or average.
Revenue per user.
Performance in growth of bridge, the impact of inflation and other macroeconomic trends on our business and the economy as a whole.
<unk> of our capital structure.
Use of cash for the bridge earn out.
Our timeline for achieving positive adjusted EBITDA and positive free cash flow, adding.
Adding new financial institutions and banking partners, our continued partnership with Bank of America.
Implementation of our cost reduction initiatives and the anticipated benefits of our recent acquisition.
For a discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion. Please refer to the risk factors section of the company's 10-Q for the quarter ended June 32022, which has been filed with the Securities and Exchange Commission.
Also during this call we will discuss non-GAAP measures of our performance.
GAAP financial reconciliations and supplemental financial information.
In the press release issued today as well as the 8-K that has been filed with the SEC.
Today's call is available via webcast and a replay will be available for one week.
And finally information I have just described in the Investor Relations section of <unk> website.
Please note that a supplemental presentation to our second quarter results has also been posted to our Investor Relations website.
Joining us on the call today are <unk>, CEO and co founder Lynne, Bobby and CFO and Christian said.
Following their prepared remarks, we will open the call to your questions with that said let.
Let me turn the call over to Lynn Lynn.
Good evening and thank you for joining our Q2 2022 earnings call before I get to the numbers I wanted to say that <unk> is excited to have recruited our new CEO Karyn 10 ceremony.
<unk> conducted a thorough and comprehensive search process and interviewed many fantastic candidate <unk>.
By hiring Crim I truly believe we found an extremely capable leader with the right skill set to scale card links into the future.
Chris joins us on September 1st from stripe a market leader in payments infrastructure for the Internet at stripe Corinne served as head of global financial services partnerships as well as head of financial products.
<unk> also spent nearly 12 years at Google, where he oversaw all of Google sales and operations across the Asia Pacific Region, and also served as head of global Global where he was instrumental in the growth of the business worldwide.
His extensive financial services and advertising experience align closely with the needs of our company like myself currencies the tremendous potential of this business and he's excited to take the helm and build on the foundation we laid.
Moving onto our second quarter 2022 performance.
We delivered a 28% year over year revenue growth with solid performance in gas grocery and travel and entertainment. In addition, our agency business grew in excess of 50%.
Here are the numbers billings increased 26, 3% year over year to $107 7 million.
Revenue increased 28, 1% year over year to $75 4 million and adjusted contribution increased 18, 5% year over year to $35 1 million.
Moving on from results security updates on our key platform initiatives.
Our bank relationships continue to be strong we successfully signed a new three year contract with bank of America last month that contains benefits for both parties.
Bank of America is one of our longest standing and most important partners and we're excited to continue partnering with them for years to come.
More broadly across our bank partners were still on track to connect 50% of any use to the new AD server by the end of 2022, while we're dependent on banks sticking to agreed upon timelines. We are laser focused on supporting them and ramping up our new technology platform.
We remain focused on partnering with neo banks and Fintech and we're pleased to announce that we launched credit karma in the quarter.
Karma reaches 110 million members in the U S and is the largest partner we signed on the Das platform. We remain enthusiastic about the long term growth opportunities with Fintech partners as well as their ability to further diversify our bank base of it.
We are rapidly proving out the investment rationale of the bridge acquisition. We believe the combination of the branch and card Lytic dataset provides an unmatched and compelling solution that is beginning to gain traction with advertisers.
It is a true omnichannel view of consumer purchase behavior.
We closed two joint cartilage and bridge deals in the quarter, one is worth nearly $2 million and another is worth over $25 million and a two year period.
Let me turn to the market trends <unk> had a solid start to the year, but consumers are being impacted by persistently high inflation and rising interest rates.
When we entered Q2, we saw year over year growth and restaurant spend at 12% and we exited the quarter seeing 2% growth travel.
Travel and entertainment and retailer similar stories, we saw 39% growth year over year in travel and entertainment in the beginning of Q2, but it slowed to 6% by the end of the quarter retail spend with declining 2% year over year at the beginning of the quarter and fell to a 4% decline by the end of the quarter.
The effects of inflation are becoming very apparent when we look at transaction volume transactions.
Transactions declined in 10 of the 13 weeks in Q2 and transaction volumes at the end of Q2 or 3% less than before the pandemic started in 2019. These shifting trends created significant uncertainty for advertisers and caused some of them to reduce or even delay their advertising spend in the back half of Q2.
Like most digital AD platforms, we've made it easy for advertisers to increase spend but as we saw in both 2020 and 2021 advertisers can quickly decrease digital AD spending in difficult environments and response to their own cost pressures.
Because of these factors macro shifts can cause unpredictable topline reactions in our business, which makes forecasting challenging.
We are assuming the challenging macroeconomic conditions will put pressure on AD budgets through the rest of this year and potentially into next year. So we are lowering our expectations to 10% to 15% growth for the second half of 2022.
While this uncertainty does affect our top line, we can control our costs and work towards generating positive cash flow.
We are taking steps that will immediately reduce our cost structure and ensure our path to sustain positive adjusted EBITDA by Q2 of 2023.
And positive free cash flow by Q3 of 2023.
With that I will hand, it over to Andy to provide more detail on our results and our financial strategy.
Thank you Lynn we are pleased with our results this quarter in light of the persistently high inflation pressure on consumer spending.
Also face growing uncertainty in the market that started confronting digital AD budgets in the back half of the quarter.
These headwinds billings grew 26, 3% to $107 7 million.
Revenue grew 28, 1% to $75 4 million and adjusted contribution grew 18, 5% to $35 1 million.
<unk> revenue grew 55, 5% sequentially from Q1 to Q2, we recognized $800000 of revenue in Q2 from contracts with effective dates in Q1.
Excluding these adjustments bridge revenue grew 35, 2% quarter to quarter.
These adjustments are not included in bridge, which.
Which was $21 $8 million this quarter, a 55, 7% increase sequentially from Q1 with Q2.
Geographically U S revenue grew 27, 8% year over year.
<unk> revenue grew 32, 3% in U S dollars and 52, 8% on a constant currency basis.
There are a few minutes I want to share regarding industry level of AD spending cartilage platform.
All of our verticals outside of restaurant performed strongly, especially in grocery and gas and travel and entertainment.
We had a solid first half of the year and a lot of congrats.
Congratulate this team from executing our ambitious growth plans in a difficult environment.
Our success in these verticals was partially offset by a major restaurant clients decreasing their AD spending situation that we mentioned and planned for at the beginning of the year.
With client remains of a channel, but they scaled back the size of their campaigns in Q2, and we expect lower AD spending on our platform Q3 as well.
Excluding this client a restaurant vertical grew 31, 6% year over year, which is more in line with our expectations.
While certainly a headwind this decrease combined with our efforts to diversify our revenue will make the business much less susceptible to levy risks and individual customers in the future.
Concentration has improved dramatically over the past year.
Top five customers accounted for 17% of revenue this quarter, which was down from 26% in Q2 of 2021.
The gap between the growth rate adjusted contribution compared to revenue due to a few temporary factors, including unfavorable <unk> in advertiser mix elevated data hosting cost and accruals for potential shortfall to a minimum partnership guarantee.
The shortfall represents the majority of the Scout we are actively taking steps to mitigate this risk over the next few quarters until it expires.
Before we dive into adjusted EBITDA underscores our commitment to meeting our profitability goals, we're taking several proactive steps to reduce our cost structure and recognition of a low growth environment. We are at right first.
First we are pausing, our hiring activity, which will have a positive impact on the operating leverage in the back half of the year.
Second we're immediately act in a plan that contains 15 million annualized cost savings. This plan does not place our strategic goals at risk will allow us to achieve sustained positive adjusted EBITDA by Q2 of 2023 and positive free cash flow Q3 of 2023.
Adjusted EBITDA was a loss of $15 8 million this quarter compared to a loss of $10 5 million in Q1.
As I stated last quarter, we expect our adjusted EBITDA loss in Q2, we are larger than our loss in Q1 due to significant increases in cost to recruit attract and retain top talent.
During Q2, we began the migration of certain internal data and applications to the cloud we expect a fairly long migration given the need to work with them administrative and technical processes of our Si partners.
We continue to estimate total incremental cost of $710 million during the migration, which we expect to be completed by Q3 of 2023.
We ended Q2 with $157 million in cash and cash equivalents compared to $208 million gain with Q1.
During Q2, we used 40 million of cash to repurchase shares of our common stock.
$6 6 million in operating activities and used $4 3 million for capital expenditures.
We expect to pay $43 5 million in cash in Q3 for the first earn out related to the branch acquisition.
<unk> sheet and liquidity remain strong.
Also a $60 million loan facility available to us.
We see no immediate need to raise additional funds.
Stock buyback programs related to the bridge on all this.
This was initiated the capitalize on arbitrage opportunities created by the volume weighted average stock price for the V well, which fixed the value of our equity settled the earn out.
We purchased one 4 million shares of common stock for $28 per share below the $40 zero decreasing dilution for investors and saving nearly $17 million in capital.
Graham is now complete.
Assets to purchase additional shares on your future.
I also want to make investors aware of the necessity, regardless of our optimism for the $83 million goodwill impairment related to bridge.
The capitalization triggered the need for us to assess the fair value of our operating units.
We remain just as optimistic today about the combined offerings of permitted southbridge have not altered our plans or long term outlook of the business.
And they use were $179 9 million, an increase of seven 3% year over year.
Our organic growth rate was slightly above our long term expectations of low to mid single digit growth.
Also during the second quarter was 38.
An increase of 11, 8% year over year.
Arthur continuing to increase on a sequential and year over year basis.
First of the year as revenue continues to grow at a faster rate than our peers.
We had $32 9 million shares outstanding at the end of Q2 compared with $33 eight months out of Q1.
Weighted average shares outstanding during the quarter was $33 6 million compared to $33 million during Q2 2021.
Now turning to guidance.
As I mentioned earlier rapid change in purchase trends is creating significant uncertainty for advertising clients.
Causing them to reduce or even delay their ad spending.
With that in mind, we expect year over year growth of approximately 10% to 15% in the back half of 2022.
The loan growth, we expect a low single digit adjusted EBITDA loss in the second half.
We do expect positive adjusted EBITDA in the fourth quarter.
Cost reduction initiatives are fully implemented.
We remain focused on maintaining strong relationships with our partners expanding our offerings and developing technology platform will unlock the massive potential of our channels.
And believe we can navigate a low growth environment with minimal impact on the long term prospects of the business and with that I'll turn it back over to Juan.
Thank you Andy I am pleased with our growth in the first half of the year. Despite the macro conditions and I am confident that we will meet our adjusted EBITDA and free cash flow goes next year. We're also pleased with the progress we're seeing in the bridge acquisition and expect to see further proof points in future quarters.
Combination of the card lytic Enbridge datasets has us on the cusp of being able to scale up the business beyond our core platform, while our focus on financial goals will allow us to control our own destiny moving toward them.
I'm truly excited to have <unk> come on board his industry experience relationships and expertise are perfect for leading the <unk> business and I look forward to working with him on the board and as a strategic adviser in the months ahead.
It has been my honor to help build and lead this company for the past 15 years. Thank you to everyone for supporting our business with that I'll open the call up for your questions.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from Karl Peterson with Needham You May proceed.
Hey, good afternoon, guys. Thanks for taking my questions just.
I wanted to start with expenses, particularly some of the cost savings initiatives that you guys.
Outlined and still being pretty confident you guys can reaccelerate growth on the macro environment improves so I guess outside of pausing hiring what are some of the big areas that you guys.
We have outlined.
High level, where you think you can reduce the cost.
Cost structure without impacting our long term growth outlook here.
Yeah. Thank pilot plan I'll start and then I'll toss it over to Andy, but we looked everywhere and like any company with over 600 employees there.
There's opportunities for efficiency, there is opportunities to reduce vendor costs theres opportunities too.
Reduce the focus on some of the longer term growth initiatives things like open banking et cetera.
So we've we've identified we've already booked $15 million and there's more out there which is why we're confident yes, we're definitely seeing some macro tailwind.
Even if those persist well into 2023, we're confident that we can maintain the profitability and cash flow goals that we laid out.
But it's a little bit from everywhere is the way I would describe it and you'd be surprised how quickly that adds up.
Andy Andy I guess inside of that I think we've.
<unk> been careful not to <unk>.
Packed our gross initiatives, we've got a lot of really important things going on as everybody knows with the AWS transition.
AD server those things are still obviously very very top of mind.
This is about giving us flexibility right, we don't know what the future holds.
Quite a bit of headwinds out there right now we've got a bunch of very reasonable scenarios with lower growth. So we felt really comfortable operating in with those plans.
Okay.
Got it that makes sense and I guess, just a quick follow up I know there was.
Quite a few headlines following some news that you don't chase bought.
Peg, which I know.
Among other things has some card linked.
Offer capabilities just wanted to see.
There have been any changes in the near term or have your expectations based on your conversations with chase on how you see your partnership.
Evolving with them or changing at all moving forward.
Great question look we usually don't try to talk too much about individual bags, but change is actually approved to me, saying the following.
They remain focused on continuing our partnership period.
Nothing has changed at all there are a bunch of reasons why it makes sense for chase to own big and not impact our relationship with them primarily to go focus on the SMB space, but absolutely nothing has changed we maintain huge momentum with them like we always have they've always been a fantastic standout partner of ours and they continue to be.
I see no reason at all for the street to read anything into this other than chase wanted to focus on SMB.
Got it that's helpful. Thanks, guys.
Thank you one moment for questions.
Our next question comes from Doug Anmuth with Jpmorgan you May proceed.
Thanks for taking the questions.
Lynn was hoping you could just talk about you called out the words restaurant partner.
So if you could talk a little bit or thereabout and is there anything that you can do in terms of working with them more closely.
Showing them more data are there any steps.
Steps you can take so that's number one and then.
Two I.
I guess also just on the cost side can you just help us understand I know you've got the specification in the back half of this year.
Look forward.
More detail on kind of how you think the cost structure can play out going forward.
Yeah. So on the large restaurant client, Doug we've obviously done a lot.
I think many people probably know who it is but I wont call them out by name, but there's been a massive CEO change there and so there are reevaluating everything and their core strategy. We have with several of our bank partners, including Chase that Bank of America put it best set forth on a pretty meaningful proposal for them I don't know if we'll get that over the line.
But we certainly haven't given up.
We are however modeling absolute worst case scenario for that relationship. So I want to reiterate that we have taken into effect I mean, we're being hyper conservative in terms of modeling macroeconomic conditions that continue to get worse throughout the year and going into next year looking at worst case scenarios with particularly this climb.
<unk>.
And still controlling our own destiny with identifying the appropriate cost savings that are required to not materially impacted business, but to still get to profitability in Q2 and cash flow free cash flow in Q3. So.
I'm sure people don't like the 10% to 15% guide, but we really do believe that that assumes conditions conditions continue to deteriorate and we can still controller on destiny Andy.
And anything you would add to that about cost of next year, well get a couple of things one on the restaurants <unk>. Two I mean this is obviously a situation we've mentioned in the past I think we've been accounting for that the all year.
We understand where that's going into the back half that certainly.
Not the reason why we've changed our guide, but we already saw that it's really about the headwinds that we're seeing across the business.
The $15 million that is largely run rate costs.
Not going to be one time in the back half of this year, that's kind of an annualized number theres certainly a lot of other opportunities that we're exploring some of those might be.
Onetime in nature, but that largely as a run rate costs that will see overtime.
Okay. Thank you Bob.
Thank you and as a reminder to ask a question you will need to press star one one on your telephone.
Our next question comes from Jason <unk> with Craig Hallum, You May proceed.
Hey, Thanks for taking the questions I was wondering if you can elaborate on what youre seeing in the macro I mean, you delivered a Q2 that was within your guidance range and then.
Obviously, we're talking about the back half of the year and I think you've talked about the conservatism baked into that but quite a bit slower than what we were looking for so curious if there's a point in time in which things really started to slow and you saw this change in consumer spending or if all of that has kind of happened in July any more details there would be great or any commentary on.
Specific verticals outside of restaurant, which you called out.
Yeah no. Thanks, Jason Good question look I would describe Q2 is coming in like in like a lion and going out like a lamb.
Curated throughout the entire quarter and fairly rapidly I mean, some of the stats that I rattled off in the earnings script, I mean, G&A was up 39% at the start of the quarter and was almost down at the end of the quarter.
We saw it in just about every category and we saw kind of multiple dimensions, we saw consumer spend decline didn't necessarily flatten, but it declined in every category. We saw trips in most category also declined which kind of is the double whammy of the spend is declining and the trips are declining.
It means their average ticket is going way up.
As they're spending less.
And of course, that's impacting many of our clients. So it happened very rapidly in the quarter, but it happened very steadily as well and so I really want to reiterate we have modeled those conditions continued to deteriorate throughout the remainder of 2023. So we're not even modeling the same we're modeling more.
Deterioration in that guide that we're giving you hopefully we're wrong and that really is a worst case scenario, but that is that's what we're modeling right now.
Thank you and then on the Bofa extension you called out in the prepared remarks that there are benefits to both parties. So I was wondering if you can talk a little bit more about what those benefits are and then now that the contract has been signed are there any material changes or are there any particular reasons why it took so long to get there.
John .
So look I am I am.
I am not going to be in the business of talking about individual banks and individual bank contracts. It doesn't serve us any good and quite frankly, the banks don't like it either.
What I can tell you is first of all we've never had a bank contract signed on time. So this is not unusual I told you guys. It wasn't going to get done at the end of the year I told you, it's probably going to get done before the first half of the year and indeed it did it was exactly what we expected.
I talked about a lot of the things we're trying to get all of our banks to do not just bofa upgrade technology, AWS et cetera, but I can tell you is we're very pleased with that contract and that's all I can say and it is a I think it's a three year contract.
As you know very typical for us so we're very pleased.
Perfect. Thank you.
Yeah.
Yeah.
And the operators are still there.
Or are we still on the call.
Yeah.
Yeah.
Yes.
Okay I'm going to go ahead and close the call hopefully people can hear I'm not sure. If we have technology issues happening or not right now, but I do want to thank everyone for listening.
We're pleased with the quarter that we delivered and while we are certainly seeing economic tailwind.
We.
We can control our own destiny, I think thats, the big message that I want the street to understand we absolutely can control our destiny and we're going to add nothing has fundamentally changed about this business. It's still a core 30% year over year grower. We're just facing really uncertain times right now and I don't think its unique to us or to digital advertising I think it is.
The entire economy.
The other thing I would say I am really thrilled to welcome Coram I think he is going to be an awesome addition to this team.
He has so much he really I call them, our needle in the haystack. He has so much experience, both with banks and with advertisers.
Going to be really a good boost for what this company needs going into the future and I know he is really excited about the foundation that we built and about the fundamentals. So yes. There is some tailwind right now are excited to be headwinds, but.
But we still feel great about the foundation that we've laid in the company that we built so with that we will end the call. Thank you everyone for joining and listening.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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