Q3 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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Thank you for standing by and welcome to the third quarter 2022 Hard Lytic, Inc. Earnings Conference call I will now hand, the conference over to Nick Clinton. Please go ahead.
Good evening and welcome to the card Bolitics third quarter 2022 financial results call.
Before we begin let me remind everyone that today's discussion will contain forward looking statements based on our current assumptions expectations and beliefs.
Expectations about our future financial performance and the results are.
Our ability to achieve our key long term priorities our future growth.
Adding new partners advertisers and content to the network.
The timeline and benefits of our AD server and cloud migration initiatives.
Our timeline for achieving positive adjusted EBITDA and positive free cash flow.
Our cost reduction initiatives and the bridge earn out payments.
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 Companys 10-Q for the quarter ended September 32022, which has been filed with the SEC.
Also during this call we will discuss non-GAAP measures of our performance GAAP financial reconciliations and supplemental financial information are provided in the press release issued today and 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 you can find the information I've just described in the Investor Relations section of the <unk> website.
Please note that a supplemental presentation to our third quarter results has also been posted on our Investor Relations website.
Joining us on the call today is <unk>, CEO , <unk>, <unk> and CFO Andy Christiansen.
Following their prepared remarks, we'll open the call to your questions.
With that said, let me turn the call over to Karim Karim.
Good evening and thank you for joining our Q3 2022 earnings call I am excited to have John calculated after spending 12 user Google and nearly four years upfront.
I spent my first 60 days in the business without leaders team members and banks and us.
Energized about the clear and larger fleet to be able to scale and financially robust business.
The strength of our data through partnerships with leading banks and Fintech combined with a growing customer base.
And agency leads me to believe that <unk> can become the leading purchase intelligence and incentives platform with the right vision and execution.
Later in the call I will expand on these observations and the state of our business.
First though let's go through the Q3 results and key highlights.
We delivered double digit growth despite the serious challenges present in the economy.
This growth was fueled by solid performance in travel and entertainment.
We grew greater than 100%.
Retail, which was supported by both new and existing client growth.
Here are the numbers.
Billings increased 12% year over year to $110 4 million.
Revenue increased 12% year over year to $72 7 million.
Adjusted contribution increased 11% year over year to $35 1 million.
<unk> revenues increased 86% year over year to $5 4 million.
Agency grew greater than 85% this quarter year over year.
And excluding the large client mentioned over the past two quarters.
Our core <unk> revenue growth.
30% year over year.
I'm also excited to say that we've made significant progress on our key platform enhancement initiatives this quarter.
We are proud to announce that full banks are connected to setup.
Including one of our largest banks.
Ah connected greater than 50% of our EMEA used in USA.
Which surfaces the goal we set for the year.
We expect to connect more partners in the coming months and our goal is to help all of our bank partners are great to our news.
By the end of 2023.
We also rapidly migrating our bank partners to the cloud and made significant progress in the quarter we.
We believe we can migrate nearly all of our banks by Q1 of next year.
Which places US well ahead of our Q3 2023.
I personally want to congratulate our team on the progress in delivering yet.
Cloud migration to our partners.
Both are important initiatives in realizing our long term strategy goals.
The next step for the banks that have mood is to launch the new user experience and we have already received a firm commitment from one of our largest bank to do this by Q1 of 2023.
As a reminder.
<unk> do have to incorporate the new capabilities into the UX upgrade cycles.
We are working harder than ever to influence this timing to increase the value of that program.
This will allow us to enable new capabilities, such as enhanced imagery as well as new product offerings for our partners and advertisers.
Additionally.
These enhancements lay the foundation to optimize campaign performance pricing and ultimately provide the differentiation our partners need to better.
<unk> customers.
We view these developments as strong signals.
Our bank partners are committed and truly value our relationship.
I look forward to providing more positive updates from our bank team in the coming quarters.
On a related note we are taking steps to increase IMA you base by signing new partners.
We are in discussions with multiple top 20 U S banks and several high upside Fintech.
While these conversations are early.
Our client to increase they may use over the next two years it is strong.
Spending these relationships or further diversify our product concentration, while providing advertisers with further scale to accomplish their marketing goals.
We will continue to update you as we make progress on the potential partnerships.
We've also made enhancements to advertising content.
As we've mentioned in prior quarters. The team has been hard at work in bringing third party content to our platform through various pilots and proof of concepts.
In Q3, we fully enabled the ability to bringing external content through our platform and delivered over 600 local offers across the United States.
We are expecting to scale to thousands of local offers with our banking partners over the coming quarters.
Let me turn to market strength.
This should be no surprise, but consumers are increasingly being impacted by high inflation and rising interest rates.
For the first time since Q4 of 2020, the year over year growth in basket size exceeded the growth of transaction frequency.
We saw higher basket size across all key verticals.
But the highest increases were within gas and travel.
Household spending increased 9% year over year.
<unk>, 2% from Q2 2022.
The sequential quarterly decline in hospital spending.
All our key verticals Yadkin travel were both down 6% entertainment was down 3%.
Retail was down 2% and restaurants and grocery were both down 1%.
These days I'm not sure what we're hearing from our clients across all our verticals and is consistent with trends we identified last quarter.
I've thought of the impact of the large restaurant clients exiting that channel. The primary reason, we still reduced budget in Q3 was due to fears of a recessionary environment impacting consumer demand.
Why do we have performed well year to date, we believe this trend will impact our business moving forward in response.
We are cautiously guiding Q4 billings to be between 120 and $132 million.
With this in mind, we are.
Doing everything in our power to exceed this range.
We are also highly encouraged by the strong pipeline we have for 2023.
Our goals of delivering sustainable positive adjusted EBITDA by Q2, 2023 and positive free cash flow by Q3, 2023 will be more challenging in a difficult end markets.
But we are committed to remain on track by making the necessary steps to lower our cost.
A key priority in my first two months has been to evaluate the status of our current cost structure in a challenging environment and we have already identified several areas of additional cost savings.
Andy will provide more details in his remarks.
Now that we've discussed our results in the macroeconomic environment I want to lay out key learnings from my first 60 days I've colleagues.
It's very clear to me.
<unk> achieved what many thought impossible.
And advertising platform that delivers positive that comes for consumers bank.
Banks and advertisers.
Since the IPO, we've extended our reach to include the three largest banks in the U S increased customer loyalty and value for our bank partners and improve ourselves, while diversifying our customer base and.
And we are well on our way to delivering the new AD server to our largest bank partners, which will provide better offers for consumers more engagement for our partners and then look broader advertising opportunity.
We truly have a large opportunity in front of us.
That said I've only.
<unk> several areas that we must improve to successfully execute.
On this next phase of the business.
First.
We are good partners to banks.
But we must.
Achieving their goals and providing value to their customers.
Banks are the most important assets of our business.
The only way to create strong outcomes for cosmetics is to create stronger outcomes for our partners.
Second I believe cosmetics can better optimize the monetization of its assets to support long term profitable growth across the business.
We are already thinking about various revenue models.
Better leverage our capabilities analytics and the idiosyncrasies of the verticals we serve.
Third bridge Dos and its statements are great assets, and we now integrate invest and scale them faster.
Our combined value proposition is much more powerful than just showing up as Catholics alone.
By doing this will become more important to current and future Bank partners.
Putting the doors to new offer constructs and hence our measurement capabilities and deliver more content from the longer tail of advertisers.
Fourth to maintain our competitive position and drive long term value.
We must continue to have great at Txdot and be relentlessly focused on operational excellence.
The AD server and cloud migration progress reflect this.
Our operational processes overall.
Overly time consuming.
Improvement efficiency and automation will unlock the vast opportunity ahead of us and allow us to profitably grow the business.
Fifth we must remain hyper focused on profitability to deliver on the goals with promise to investors.
The ability to control our destiny will fuel our growth strategy and ultimately be a key step in becoming the leading purchase intelligence and incentives platform.
I see tremendous opportunity to scale cosmetics profitably by layering in best in class systems technologies and processes.
We will be faster and more agile data driven ambitious and accountable.
In turn we can make commerce smarter and more relevant for everyone.
My number one priority in the short term is to protect our balance sheet against the possibility of a long term recession.
With a more resilient the expense base and responsible internal investments. The good news is that through hard work. These key areas firmly within our control to change.
With that I will hand, it over to Andy to provide more details on our results and financial strategies.
Thank you Chris.
This quarter were in line with your expectation given our clients' growing concerns about the economy.
The inflation and rising interest rates are still pressuring the consumer and the lack of consensus around the length and severity of recession as advertisers. The most uncertainty we've seen since the onset of the pandemic.
Even with these issues, we delivered double digit year over year growth.
Billings grew 12% to $110 4 million revenue grew 12% to $72 7 million and adjusted contribution grew 11% to $35 1 million.
<unk> revenue grew 86% year over year.
Geographically U S revenue grew 13% year over year in U K revenue decreased 1% in U S dollars increased 3% on a constant currency basis.
Customer concentration has improved dramatically over the past year as our top five customers accounted for 20% of revenue this quarter compared to 35% in Q3 of 2021 thus.
This will remain a key focus as we continue to grow and expand our advertiser base.
Before we dive into adjusted EBITDA I want to provide an update on our profitability goals and balance sheet.
Like Chris said, given the weakening digital advertising market, we have been evaluating areas of additional cost savings beyond the $15 billion of annualized savings we discussed last quarter.
We've expanded this program to reduce annualized operating expenses by at least an additional $20 million yes.
We are moving rapidly to realize these savings and expect them to begin positively impacting our results at early next year.
Moving to our balance sheet.
We ended Q3 with $138 6 million in cash and cash equivalents compared to $157 1 million at the end of Q2.
During Q2, we used $14 $4 million of cash in operating activities.
$3 3 million for software development and capital expenditures and realized an $800000 unfavorable impact from a strengthening U S dollar.
Our $50 million loan facility still remains undrawn.
Regarding the bridge earn out about for 2022 is being disputed.
It is currently in the resolution process outlined in the merger agreement.
Remain unpaid until it's resolved.
While the field is unfortunate we are confident in our position and will vigorously defend it.
Still expect the first earn out inclusive of broker fees and transaction bonuses were $126 4 million acquired a minimum cash payment of $43 5 million.
We expect the second earn out inclusive of Stephen bonuses with $69 5 million.
Cash payments of $24 9 million in 2023.
Adjusted EBITDA was a loss of $12 7 million this quarter compared to a loss of $5 2 million in Q3 of 2021.
As we mentioned last quarter, we did not expect the cost savings announced last quarter to have an immediate impact on adjusted EBIT.
We're able to realize some of our cost savings in Q3, we will be able to fully realize the benefits by Q1 of 2023.
As Tim mentioned earlier, we have begun our migration to the cloud.
We continue to estimate total incremental hosting costs of $7 million to $10 million during the migration.
<unk> incurred over $2 million so far.
We made great progress on the migration and expect to be fully migrated ahead of our goal of Q3 of 2023.
And they use a $184 7 million an increase of 8% year over year.
Organic growth rate was slightly above our long term expectations of low to mid single digit growth.
Also during the second quarter was 36, which was flat year over year.
Additionally, I want to briefly comment on our adjacent rates in the U S.
Like last quarter, our Activations have increased meaningfully up 72% year over year.
Our service have increased 82% year over year slightly pressuring activation rates across the majority of our key verticals.
We had $33 1 million shares outstanding at the end of Q3, compared with $32 9 million at the end of Q2.
Weighted average shares outstanding during the quarter were $33 million above Q3 of 2022 and 2021.
Now turning to guidance.
As Tim mentioned earlier uncertainty among our advertising clients increased in Q3, we're seeing even more reductions and delays and overall AD spending so far in October .
The large restaurant client mentioned in prior quarters.
Platform in Q4.
With that in mind for Q4, we expect billings of between 120 and $132 million.
Revenue of between 80 and $90 million.
Adjusted contribution of between 38% and $44 million and a low to mid single digits adjusted for the loss.
As I mentioned previously the cost savings, we announced last quarter have just started impacting our results.
We are prepared to expand this program in order to further lower operating cost and reach our financial goals in 2023.
Additionally, we expect <unk> to continue growing at a faster rate than the core core Linux business.
Which will have a favorable impact on the overall margin profile of the company.
The current environment presents many challenges to advertising platforms, but I believe there are also opportunities Keith.
Q4 is our seasonal high point due to the importance of the holiday season, the marketers than most years, we see unplanned budgets materialize within the quarter.
We are concerned this dynamic may not exist this year given the current market headwinds.
As a result, we are not accounting for any AD budget guidance.
On a positive note our pipeline for 2023, the largest it has ever been at this time of year.
There's a wide range of outcomes for Q4, but our highest priority is meeting our profitability and cash flow growth next year. Additionally.
Additionally, kind of plans for the business will focus on profitable growth position.
Position us to maximize the value of our assets with that I'll turn it back over to Craig.
To everyone listening. Thank you for your support I.
I believe <unk> can drive better business outcomes for our partners and advertisers, while making every transaction and delightful and rewarding experience for consumers.
We are already making headway on improvements in the key areas identified.
Im looking forward to Iterating on this improvement quarter after quarter.
While the economy may be uncertain.
We believe there is inherent resiliency in platforms that proved return on that spend and I am positive that we can grow profitably.
There is a large opportunity ahead of us.
And we will be disciplined in Q4 and beyond as we prioritize our goals and position the company well for the next 10 years.
With that I will open the call to questions.
As a reminder to ask a question you will need.
Press Star one on your telephone again that is star one one on your telephone.
Please standby, while we compile the Q&A roster.
Okay.
Okay.
Okay.
Our first question comes from the line of Paul Peterson with Needham <unk> Co. Your line is open.
Yes, Sir.
Yes.
Billings and revenue.
I know, there's some moving pieces with that large restaurant client, but how should we think about that.
Puts and takes between call it breadth versus depth of.
Where you guys are seeing the budgets are a lot of your kind of usual suspects still.
In the platform just at reduced levels and more stop and go or.
Have some guys exited.
For full on together.
And what is left is still spending at a normal pace just trying to piece together the mix of breath first steps here.
Okay.
Randy.
I think.
We're actually seeing some marketing pullback in budgets.
Not everybody is well.
We're not seeing an influx of customers, leaving the channel, but theres a lot of pressure out there.
Larger deals long term deals.
We see that pretty pretty widely now there are there is some additional churn this quarter that we're planning on just because of the market headwinds that we see one thing I will say, though that we do have a very strong pipeline for Q4 and for next year I think what we're seeing as advertisers really start taking a pause and.
Are you, adding things in this current economic environment and when we look at our pipeline and see a very healthy pipeline, we fully expect to see a resumption of our growth over the next couple of quarters, but we are seeing kind of a combination so going back into lease in general.
Got it.
That's helpful. And then maybe just trying to think through some of your kind of expense run rate here and how we should think about it in the current environment kind of second quarter in a row you guys have.
Called out some cost saving initiatives here, how should we think about where your cash expenses should be over the next.
A couple of quarters here.
We can kind of think about use of cash in the balance sheet here over.
The next handful of quarters.
Yes, so like we said we implemented.
Our cost savings last quarter annualized savings of $15 million.
We are evaluating further savings on top of that.
The actions that we've decided to take.
Will be made to ensure that we have solid liquidity.
And reach profitability.
Aligned with our goals.
Being EBITDA positive in Q2 positive cash flow in Q3, so we can control our own destiny, So certainly theres.
A lot of uncertainty of what the growth rates will be up next several quarters.
That's why we're taking the steps that we're taking out to make sure that we.
Are really mindful of expenses because ultimately that is what we have full control over.
Alright, thats good to hear thanks, guys.
Yes.
Okay.
Your next question comes from the line of Doug Anmuth with Jpmorgan. Your line is now open.
Hi, This is westley for Doug Thanks for taking my questions.
Im just kind of thinking back to last quarter. When you guys guided 10% to 15% second half growth I believe you had contemplated a deteriorating macro environment. So I guess it would be helpful. As you kind of walk us through the quarter and kind of what you saw in that kind of it seems like it's a bit lower in the second half now based on three key results from the <unk> Guide. So just wondering what you.
We're seeing there I guess, just a sort of a follow up.
And I believe there was a proposal laid out by Chase and bank of America for the large advertising partner and just wanted to know if there had been any progress on that front.
Thanks.
Hey, thanks.
Okay.
Cold here.
So from a growth perspective.
The largest headwind that we're facing is certainly velocity.
Large restaurant correct.
Ron on the platform.
There's a lot of disruption on the AD market.
Excuse me.
Okay.
There's a lot of disruption on the AD market.
Okay.
We're just not immune to that but when you normalize for the loss of that large client. We grew 30% in this quarter, but I think we're dealing with here in Q4 is a pretty significant pause by advertisers pretty broadly that was not expected.
We knew from all the way from Q1 of this year.
That large client was going be exited a channel.
I don't think we anticipated the broad slowdown that was going to occur in Q4.
So that is something that.
It did actually.
Well it certainly worse than what we expected, but again I feel really good about the size of the pipeline that we have.
And we're trying to guide for the quarter.
Awfully difficult to be able to anticipate some of the positive seasonality things that we see in the quarter, we typically see budgets materialize unplanned.
In quarter in Q4, and with the current headwinds, it's not prudent for us to say that those types of things are going to show up. So that's really the largest delta if you will of our expectation versus how kind of Q4 is shaping up.
If that answers your question there.
Yes. Thank you.
Yes.
Your next question comes from the line of.
Jason <unk> with Craig Hallum. Your line is now open.
Hey, this is Cal on here for Jason So first I just wanted to add.
You kind of talked about this.
Just wondering if you could talk about the learnings of that process and how kind of coming ahead of schedule, how that kind of enhances the long term opportunity here for <unk>.
Yes, we're really happy to report.
Over 50% of the MAA is connected to the AD server when certainly when you look into next year.
<unk> that by the end of 2023 I'm pretty late in the year that we'll see some positive momentum I mean, it's been a number of years since we've launched something really significant for our bank partners, who are really excited to be able to do this.
Obviously, a couple of quarters, because not only once you get the AD server installed right theres additional steps that are needed and the banks need to actually evolve.
All of their user experience incorporated the capabilities that we unlock can be able to actually bring those new things to their bank customers.
It will take a couple of quarters for those things to bear fruit, but we're really happy to see that progression. We do expect that all of our bank partners.
As it were adopted next year and that will be able to show.
Show an impact as a result.
Perfect. Thanks, and then just real quick.
<unk> coming in here just kind of wondering on your thoughts on the progression towards profitability. I know you guys kind of talked about implementing further cost cutting measures, but I'm just kind of curious how that's kind of tracking so far and what you think the potential is that moving forward.
Thanks for the question.
It's pretty clear to me that we have a very large opportunity with this company.
As I mentioned in my opening remarks.
Number of areas where.
We can continue to invest in to ensure that we have a long term profitable business.
And the fact that we need to obsess about our banking partners and make sure that.
We have the <unk>.
What level of relationship and the right level of product offering with them, obviously as Andy just mentioned.
One of our key competence of that.
We have an opportunity to better optimize the monetization of assets and capabilities.
We are undergoing a strategic focus at the moment to enable us to unlock the power company and I think with our clients.
I believe that we havent better way and hopefully easy to integrate scaling invest our acquisitions that we've made in recent years and I'm focused on that as well as well.
Upgrading our tech stack and focusing on operational excellence all of these things are really critical for catalytic.
But they need to be underpinned by the ability for this business to turn a profit and therefore have been very much focused on the two months that you're discussing with the teams how it creates.
Further scale to our operation and how we rationalize areas, where we are spending more money than we should to ensure that we have the.
Foundation to continue to invest in the future of the business on the areas that I mentioned above.
Perfect. Thank you.
Again in order to ask a question. Please press star one on your telephone.
Our next question comes from the line.
Aaron Kessler with Raymond James Your line is now open.
Great. Thanks, guys couple of questions.
Quantify maybe some of the AD server benefits you are seeing thus far I know it's early.
Secondly, just on the consumer incentive fees those are a little bit higher than we expected in the quarter as a percentage of billings and then third just any.
Can you quantify any of the agency spend I know you've done that the last couple of quarters as well. Thank you.
Sure, let me start off with the margins. So we do have some customer mix.
Here this quarter, obviously, the exit of a large restaurant clients will have an impact our margins within.
Restaurant are typically a bit higher than they are in some other areas that we're having a lot of success right. We've talked about travel in the past being slightly lower margins until there is a mix of it there's nothing fundamental driving some of those things.
But you will see also I'll refer back to the enhanced consumer incentives.
At times, we May have a bank partner, who is investing in the program. So actually when you normalize adjusted contribution for some of the put the accrual that we have for the shortfall. If you remember that from last quarter.
Or actually are just the contribution margins are very healthy and fairly steady overtime.
So we actually are fairly happy there.
Terms of the AD server.
It's a bit early right I think we will probably have a lot more to talk about as we get a little closer to it working with the <unk>.
The bank partners around the timing of which actually may hit market.
And some of those things that we expect in the back half of 'twenty three to occur.
Quite.
Point to talk deeply about 2023 at the moment, we will have we'll have more for you there.
Great and probably in the agency spend any updates there.
The last one.
Agency advertising agency spend levels.
Yes, I mean agencies continues to be a real a real.
Source of growth for US right, we started that up last year middle of last year grew.
<unk> grew 85%.
This quarter year over year, we're continuing to see a lot of good momentum there.
Okay, great, yes, so greater.
Greater than 85% year over year.
We just have really good momentum there I mean, one of the things that we continue to talk about right is that some of the other advertising channels right, where you had to kind of an established.
Measurement.
Sure.
The ability to measure that media and those tools have been taken away from it to other platforms right. So we are a performance.
Channel It does not that first party data without relying on cookies and IFA and the like so we continue to be a.
Good place for folks to come in have reliable returns on ad spend.
Great. Thank you.
We have no further questions. Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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