Q2 2022 Digital Media Solutions Inc Earnings Call

Because of this we project many carriers will remain cautious throughout 2022 with a modest recovery now expected to push into 2023 as the industry continues to experience unprecedented factors at this time, we do not have the ability to accurately predict exactly when market conditions will return to norm.

Across the health insurance industry lockup period spend continues to be down from prior comparable periods as providers reserve marketing spend for the open enrollment periods. We're cautiously optimistic about AD spend in Q4, when the AEP OAP period is expected to significantly drive our performance.

Overall, we're optimistic that the volatility we are seeing should decline sometime in 2023 for the remainder of this year. Our team will continue to focus on execution against our strategic initiatives and opportunities.

So yes, there are headwinds, especially within the auto and health insurance verticals that said, let's shift focus to review our next phases of diversification and growth in our largest vertical insurance.

As noted we see volatility in a lot of this is at the enterprise level.

Rollout to our enterprise clients will be our independent agents. We currently have over 7000 agents across major clients, such as Allstate State farm and others over the last quarter, we have made significant investments into our leadership and agent success teams who support. These agents. We've also invested in our.

Platforms, specifically <unk> ZIP quote these investments are leading our agent growth as we aim to expand our agent base by as much as 40% over the next 12 months.

This expansion not only helps to drive revenue growth through BMS, but also helps give us more diversity in our revenue mix between enterprise and SMB.

We also continue to invest in our core assets data technology and media.

Identity is at the core of our data platform and with the traverse acquisition, our actionable intelligence from data signals are increasing to deliver more of what consumers are looking for at the right time and the right channel.

With traverse Dms is developing commercialized.

Any channel audience activation engagement and re engagement data signals platform.

The integration of its current base is already elevated the power of Dms first party data and signals. This is exciting for us as we believe we are still in the early innings of this growth curve.

And this is the cornerstone to our future growth as the unique strength of our data platform or real time intelligence signals are what helps dms sufficiently and effectively use omni channel activation to connect high intent consumers and advertisers. This is a dynamic capability for dms to competitively differentiate us and can be seen.

Our earlier announcement of our multiyear partnership with Ctrip.

As reported in our press release earlier global Omnichannel audience activation and engagement campaigns with seeker are currently underway.

Overall, we see the Q2 2022 period is trough level performance for BMS. So far in Q3, we are seeing good initial indicators for the period.

Also early positivity for the Q4 period, which has been historically and seasonally strong for us.

As a result, we believe we will return to growth in 2023, as we exit 2022 with noted momentum as a result of our investments in our strategy.

I summarized our strategy as follows continuing to leverage our data first technology, driven approach, which allows for the diversification of our business inclusive of verticals and media channels Dill.

Delivering for top advertising clients, which has led to retention rates for our top customers remains strong with our top 10 growth clients showing revenue increases of 26% quarter over quarter.

The commitment to continue investing in our people process and technology to support initiatives like the growth of our independent insurance agents and.

And finally, our continued focus on driving efficiency in our business through consolidation and reduction in operating expenses.

Lastly, I'd like to offer a quick update on our strategic review.

As previously discussed in August of last year, we announced plans to evaluate strategic alternatives for Dms to further maximize shareholder value and we were hoping to have an update for you. Today. However, we are still not finished with this process. So I have nothing to share other than to state that we are working towards the best possible result.

We appreciate your patience and as soon as we're able we will provide updates.

I have the pleasure of turning the call over to Rick <unk>, who joined us as our new CFO back in July .

His depth of experience across financial reporting financial planning and analysis Investor Relations and acquisition valuation makes him. An invaluable addition to the BMS leadership team so with that I'll pass it to Rick dig deeper into our second quarter financial results over to you Rick.

Thanks, Joe it's great to be on my first call as the Dms, Chief Financial officer, and like to thank the entire team for the warm welcome I've received since joining the company in July what I've seen since joining Gms is only made me more excited about the opportunities for our clients partners and employees.

Q2 was a challenging quarter as we continue to see headwinds and macro challenges inside of insurance, which represents the majority of our business. These headwinds and macro challenges impacted both property and casualty along with health insurance and can be seen across both the brand direct and marketplace segments of our business.

Net revenue was $91 million down 13% versus same quarter last year as a result of these trends.

Insurance, which account for approximately 57% of our total revenue in the second quarter was down 18% compared to the same period last year.

The breakdown of insurance business was as follows.

Auto made up 69% of total insurance.

<unk> was 20% followed by life of 8% and home at 3%.

Joe said dynamic diversification is remain important to us as Dms remain vertical agnostic, here's an overview of the performance of some of our other verticals.

Greer and education, which was approximately 14% of our total revenues in Q2 grew 16% year over year driven by strong demand for our services as we continue to win wallet share.

Commerce, which represents 12% of our total revenues was down 50% compared to the same period in 2021 fluff.

Fluctuations like this are why we remain a dynamically diversified company. So we can quickly pivot with our advertising clients and publisher partners towards the best opportunities.

Consumer finance accounted for 11% of our total revenue grew 37% in Q2 over the prior year's quarter.

Our agility enabled us to capitalize on market trends, despite rising interest rates impacting mortgage growth.

Important to note that typically higher mortgage rates trigger increased demand from lenders as they seek to expand their buyer databases.

For the second quarter, we reported gross profit of $23 million.

Waiting to 26% margin versus a 32% margin in Q2, 2021, driven by margin compression within auto insurance and consumer pathways.

Variable marketing margin was 33% compared to 38% in Q2 2021.

On a reported segment basis, excluding intra company revenue.

Q2 brand direct solutions gross margin was 21% compared to 26% in Q2 2021.

And the Q2 marketplace solutions gross margin was 24% compared to 29% in Q2 'twenty one.

Technology solutions, which was formerly called other solution.

As primarily included our SaaS business Q2 margin for this segment was 84%.

Gross margins continued to be negatively impacted by media costs wage inflation and the tight labor market, especially for our call centers.

Now moving on to operating expenses, our total operating expenses amounted to 35 million in the second quarter, an increase of $7 million year over year, driven primarily by the change in fair value warrant liabilities.

Higher costs due to acquisitions and public company costs.

However, we are continuing to stay focused on driving efficiency in our business through consolidation and reduction of operating expenses.

To this point, we've been successful in reducing our operating expenses for the second consecutive quarter.

This trend to continue as ended the year.

We ended the quarter with corporate head count of 308, FTE down from 344 FTE at the end of Q1 2022.

Finally on profitability, our adjusted EBITDA for the quarter was $3 million or a margin of 3% down $13 million compared to the same quarter last year, driven primarily by lower revenues and mix.

Our net loss was $12 million versus net income of $5 million for the same quarter last year.

Earnings per share for the quarter was a loss of <unk> 18.

Compared to seven positive earnings per share in Q2 2021.

Lastly, turning to the balance sheet and liquidity, we ended the quarter with $26 million in cash and cash equivalents, which was flat with December 31, 2021, driven by our strong cash collection at.

At quarter end, our total debt was $217 million and as of quarter end, our $50 million revolving facility remained undrawn as of June 30, our net leverage was four seven times as a reminder, our credit facility includes a leverage covenant of five times, we believe with sufficient liquidity under our facility.

We remain mindful of our obligations given current economic volatility.

As we look to 2022, despite a number of macro headwinds our people processes and technologies remain key for us.

We remain focused on execution and data driven opportunities as such.

We remain comfortable with maintaining our previously discussed gross margin guidance of 28% to 31%.

And variable marketing margin range of 32% to 36% for both the third quarter and full year 2022.

We expect third quarter net revenue to be in the range of $87 million to $90 million, we expect adjusted EBITDA to be between 4 million and $6 million again as Joe noted we are seeing good initial indicators for the Q3 and also the Q4 period, the latter of which has been historically and seasonally strong.

We would expect our full year net revenue to be in the range of $390 million to $400 million and full year adjusted EBITDA guidance to be between 30 and $35 million overall with the investments we're making in the various components of our business. What we believe to be a modest recovery in property and casualty insurance next year, we're excited about 2023.

The year, where we returned to growth.

And this time, we expect a continued high rate of free cash flow conversion to EBITDA.

With that we thank you for your interest in Dms and we now open the line for questions.

Operator, please provide our listeners with instructions on how to submit questions.

At this time I would like to remind everyone and I wanted to ask a question. Please press star and the number one on your telephone keypad.

We will pause for a moment to compile the Q&A.

We have a first question on the line from Rob Shapiro.

Okay.

Cingular Research your line is thank you Bob.

Hello, Sorry, Yes, you did just forecast that your gross margin should be between 28 and 31% from the third quarter.

And you just have it so the second quarter had a gross margin of 25.

So I wanted to know is it hasn't been something that changed in the environment, where you feel like you can move that gross margin up to around 28% to 31%.

Hey, Rob Good afternoon. This is Jeremy Richie speaking good to speak to you again.

So yes gross margin.

Yes, Hey, gross margin for the period.

Good move below our range and as Rick during his segment properly called out.

Margin takes into account other factors outside of just your media spend so specifically with.

The call center component of our business, which plays a pretty critical role and delivery for us.

We're dealing with some volatility there with we.

Each and support service cost switch during the period as I mentioned and Rick mentioned, we're mindful of driving operating efficiency to make sure that we're removing unnecessary costs throughout the business. So we've been able to recalibrate here in the third quarter to adjust for some of those inflationary pressures.

It came through at the end of Q1, it really started to.

Gain momentum in Q2, so we do believe that we will come back in range.

On gross margin during the Q3 and Q4 periods some of that also.

It also ties back into our growth initiatives.

We did see considerable growth in our agent base from Q1. This is our independent insurance agent base, which Diversifies us.

From the enterprise level clients spend so we have the two the two tracks there where the enterprise spend in the independent agent. So we saw agent growth in the Q2 period as we noted we're investing behind that and we saw our agent base grow by about 10% from about 6400 to just over 7000.

And because of how agents spend as opposed to how carriers spend there is more stability there.

<unk> us with our Vms.

Which post directly through the gross margin. So as we see that trend continue as we continue to see growth in the independent agent base, which gives us stability in insurance that also helps to lift the BMO.

Which lifts the gross margin and we have cost controls coming in underneath that which again leads us back to to belief that we come back in line for gross margin for Q3, and Q4 periods and DMM is already in line. So hopefully that answers your question.

Yes.

Okay. Thank you.

Thank you Rob as a reminder, if you'd like to ask any questions. Please press star followed by the number one on your telephone keypad.

M&A side the questions at this time.

This concludes today's conference call.

You may now disconnect your lines.

And enjoy the rest of your day.

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