Q3 2022 Digital Media Solutions Inc Earnings Call

Okay.

Yes.

Good afternoon, My name is Austin, and I will be your conference operator today.

At this time I would like to welcome everyone to the digital media solutions third quarter financial results 2022 conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If he would like to withdraw that question press the pound key thank you now.

Now I would like to pass the call over to Tony saw Donna D. M. S. General count. Thank you for joining us to discuss the financial results for Dms for the third quarter of 2022.

With me on the call are Jo Mira <unk>, co founder and CEO and Rick <unk> our CFO .

We posted our earnings announcement. This afternoon in the press release and also on our Investor Relations website by now everyone should have access.

Before we begin I would like to call your attention to our safe Harbor provision for forward looking statements in our financial results press release.

The safe Harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward looking statements for a more detailed description of the risk factors that may affect our results. Please refer to our financial results press release, and our SEC filings.

During this call management's commentary will include non-GAAP financial measures reconciliations between GAAP and non-GAAP financial measures for our reported results can be found in the tables of our financial results press release, which we have posted to our Investor Relations website at investors <unk> digital media solutions Dotcom.

The additional financial and other information to be discussed on this call can also be found on our Investor Relations website now I'd like to turn the call over to Joe <unk> Our CEO .

Thank you Tony and good afternoon, everyone welcome to our third quarter 2022 earnings call.

Our third quarter results are as follows third quarter net revenue was $91 million, which while down 16% year over year beat our guidance of $87 million to $90 million, we generated gross margin of 26% in variable marketing margin of 32% adjusted EBITDA came in at $5 1 million.

Or a margin of approximately 6%.

Rick will add more details and dig deeper into the numbers and go over our guidance for the fourth quarter and full year 2022 later in the call.

Q3 performance faced complex and specific challenges throughout the quarter, regardless, we still saw growth in key areas of our business and we believe this growth is set up to continue here in Q4, and then into 2023.

In Q3 for the third consecutive quarter, we saw a linear growth in our auto insurance inside our marketplace segment.

In the quarter, we delivered auto insurance marketplace revenue of $38 5 million up from $37 3 million in Q2, and $35 5 million in Q1. This growth was underpinned by our strategic growth initiatives focused on agent expansion more on this in a minute.

As noted during the quarter, we faced complex issues those issues, mainly challenge the insurance verticals we serve.

Cause of this I'd like to mention that it is during periods like this when uncertainty and volatility arise that marketers reevaluate their budgets and are even more focused on finding the best performing advertising methods.

Digital performance marketing the primary solution for advertising clients partnered with BMS creates a linear and accountable connection between spend and ROI and because of this we expect to be resilient.

We're able to create this high accountability to our ROI for our clients through the use of our first party data asset our proprietary technology and our expansive media reach.

As we've said before DNS is committed to delivering on the horse right person right offer right place right time, providing consumers with strong value by serving relevant ads, while maintaining our focus on achieving our advertisers kpis and delivering ROI on their marketing spend.

On our last call I mentioned that we plan to focus on executing our strategic initiatives and opportunities in Q3.

Already previewed some progress against those initiatives, but I wanted to provide a more extensive update on this progress.

I'd first like to touch on our investments in people process and technology and how that led to growing our captive agent base, which delivered real impact as noted we saw our third consecutive quarter of growth inside of insurance marketplaces.

That is driven by growth of our captive insurance agents leveraging the Dms platform. In Q2 2022, we had 7026 captive insurance agents on our platform. During Q3, we were able to deliver on our growth strategy and we added 593, new agents, bringing our total active <unk>.

<unk> count to 7619 at the end of the Q3 period.

This eight 4% growth in agents translated into $3 1 million of growth in revenue from $26 9 million in Q2 to $30 million in Q3.

This is very exciting for us and continues to be an area with a lot of opportunity for us to scale our revenue.

We continue to leverage our data first technology, driven approach, which allows for the diversification of our business inclusive of verticals and media channels.

In Q3, we made investments to activate and diversify our media partners and channel mix as a result, the business built a stronger and more diversified foundation to drive scalable performance across our AD demand.

This was seen in the quarter on quarter growth in marketplace revenue inside of our insurance marketplaces.

We continue to deliver to our top advertising clients, which has led to strong retention rates for our top customers are top 10 growth clients continue to see revenue increases of 50% quarter on quarter.

In Q3, we successfully integrated traverse into the BMS ecosystem. The successful integration of the traversed acquisition elevated the power of the BMS first party data asset and signals program by enabling Dms to create a commercialized omnichannel audience activation.

Instrument and re engagement data signals platform to connect high intent consumers and advertisers.

And finally, we have continued to take costs out of our business to reduce our operating expenses during the quarter. We saw a decrease of $2 2 million in SG&A due to cost synergies and improved collections. We expect this will continue well into 2023, and therefore increase our EBITDA.

Going forward our strategy for the Q4 period is continuing our commitment to invest in our people process and technology by supporting our agent growth initiative, specifically scaling new agent Onboarding and improving our per agent revenue contribution as noted we now have 7609.

<unk> active captive agents on the Dms platform. Our goal is to grow this number to 10000 by the end of 2023 by doing this we believe this will add between 30 and $40 million in incremental annualized revenue once the school is achieved.

Delivering on seasonal execution during the annual enrollment period for health insurance and holiday ecommerce.

And driving efficiency in our business through the consolidation and reduction in operating expenses.

Additionally for our strategic review update please refer to the disclosure in our Q3 earnings press release.

And finally, although there's optimism on the growth inside of our business. There is little doubt our business is operating in a volatile market the macro economy and unpredictable weather events were just a few challenges we faced during the third quarter. While these factors were out of our control I'm pleased with the proactive action our talented teams.

Executed on inside of what we do control.

Our teams are acutely aware that we are now into the Q4 period, where we have the benefit of holiday E Commerce and the open enrollment periods.

Their focus is to execute on our key Q4 strategic growth initiatives to capitalize on the momentum we see building inside of key areas of our business now I have the pleasure of turning the call over to Rick who will provide more details on our financial results.

Thanks, Joe and good afternoon to everyone I'll begin by discussing our financial results the third quarter and conclude with our guidance for the fourth quarter and full year 2022 all.

All comparisons are on a year over year basis, unless otherwise noted.

Net revenue was $91 million down 16%.

Insurance, which accounted for approximately 53% of our total revenue in Q3 was down 33%.

Breakdown of the insurance business was as follows.

Auto contributed 76% total insurance.

With 16% followed by life at 5% and 3%.

The decline in overall insurance revenue within our brand direct segment is attributed to the continued volatile property and casualty market along with lower than expected lockup period spanned health insurance ahead of open enrollment in Q4.

On a positive note marketplace auto insurance was up for the third consecutive quarter.

We are encouraged by this trend and believe it is sustainable as we continue to deliver on the growth of our captive insurance agent base.

CMS continues to be a diversified digital performance advertising business.

Career, and education, which was approximately 14% of total revenue in Q3 was flat year over year.

E Commerce represented 14% of our total revenue and was down 30%.

Consumer finance accounted for 11% of our total revenue and was down 6%.

For the third quarter gross profit was $24 million equating to a 26% margin versus the 29% margin in Q3 2021.

The margin percentage decline was driven by continued margin compression within insurance across both auto and health.

Variable marketing margin was 32% compared with 35% in Q3 2021.

Moving now to our segment results.

Excluding intercompany revenue.

Q3 brand direct solutions gross margin was 22%.

3rd% to 23% in Q3 2021 Q.

Q3 marketplace solutions gross margin was 23% compared to 24% in Q3 2021.

Technology solutions Q3 margin was 86%.

Now looking at operating expenses.

As Joe mentioned, we continue to stay focused on driving efficiency in our business through consolidation and reduction of operating expenses.

During Q3, our SG&A expenses amounted to $20 $7 million down $2.2 million year over year, driven by cost synergies and continued strong collection.

We ended the quarter with corporate head count of 301, Ftes down from 344 at the end of Q3 2021.

Let's discuss profitability.

Our adjusted EBITDA for the quarter was $5 $1 million generating a margin of 6% down $6 million compared to the same quarter last year, driven primarily by lower revenue and mix.

Our net loss was $10 million versus net income of $5 million with the same quarter last year.

Earnings per share for the quarter was a loss of 15.

Compared to 10 positive to earnings per share in Q3 2021.

Now shifting our focus to the balance sheet liquidity.

We ended the quarter with $18 million in cash and cash equivalents, which was flat with December 31 2021.

At quarter end, our total debt was $217 million as of quarter end, our $50 million revolving facility remains undrawn.

As of September 30, our net leverage ratio was five times debt to EBITDA as a reminder, our credit facility includes a leverage covenant of five times.

We believe we have sufficient liquidity under our facility remain mindful of our obligations given current economic volatilities.

Turning now to our outlook, we expect fourth quarter net revenue to be in the range of $97 million to $102 million and we expect adjusted EBITDA to be between seven and $10 million.

We expect full year net revenue to be in the range of $385 million to $390 million in full year, adjusted EBITDA guidance to be between 26 and $29 million.

Given the complexities of the current environment and the challenges we see ahead with recovery auto insurance, we are revising our guidance on gross margin and variable marketing margin.

Our new guidance range on gross margin is 25% to 30%.

Variable marketing margin range is 30% to 35% for both Q4 and full year 2022.

In summary, as Joe noted, we remain heads down and focused on our strategic growth initiatives.

These are items, we feel we can control we are pleased with the progress, we're making along with the associated positive trends.

Still we believe we will continue to face headwinds in the coming quarters with inflation.

The insurance market labor shortages and supply chain challenges and further shifts in consumer behavior.

Despite these headwinds I'm confident we have the right people processes and technology in place to be agile and successfully navigate our company through these volatile time execute on our growth initiatives.

With that we thank you for your interest in BMS.

Turn the call over to the operator for Q&A.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

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

Our first question is with Maria <unk> from Canaccord.

Maria Your line is open.

Great. Thanks, so much for taking my questions first.

So your guidance implies sort of continued revenue decline in Q4, instead of we understand all the uncertainty around a number of verticals can you maybe just talk about what's embedded in your outlook from the macro standpoint.

What are you seeing so far in Q4, and then based on your conversations with advertisers. When do you think you may start sort of seeing some recovery.

Hi, Maria Good afternoon, Joe speaking good to have you on the call.

So the Q4 guidance takes into account the current trends that we see inside of insurance, specifically with property and casualty. Although I think carriers are generally making good progress on re rating, we really don't expect to see.

Any.

Substantive recovery inside of property and casualty with auto until sometime in 2023 with early stage recovery starting right. After the first of the year.

Generally in Q4, we're looking at.

Holiday E Commerce, and the open enrollment periods as being the drivers of the increase in revenue and performance overall over the Q3 period and the early trends. We see are encouraging we did highlight on the call growth in insurance marketplace revenue.

And our Asian initiatives and although during the Q4 period.

<unk> growth will slow slightly we still anticipate adding more captive insurance agents and being able to drive growth inside of insurance marketplaces.

So the the current Q4 guidance takes into account what is known here. It also takes into account the.

The current trends on operating expenses.

With regard to what we see going forward.

You know there is.

There is a varying degree of opinions on one theres going to be.

A more broad based recovery in insurance, specifically within auto which.

Insurance is the majority of our business.

We're encouraged by some of the trends we're seeing for instance in the Q3 period, we saw increase.

Quote quote request volume increased by 25%, which is indicative of consumers price shopping and that is to be expected as they open up their wallets to spend more money on things like auto insurance and when those costs go up they shop more we will not see a substantive.

Recovery, though in AD spend until the carriers have successfully re rated and they've seen some of the pressure come off of their loss ratios, which I think generally that's expected to be sometime next year. So we're generally encouraged by this trend because consumers or price shopping more and we're hopeful that after the first of the year the carriers our success.

Fully re rated and feel that loss ratios are under control and that advertising advertising spend can return to more normalized levels, which when that happens you'll get an inflection point and we will see a broad based recovery in property and casualty and automotive insurance.

Got it that's very helpful. Thank you Joe and then secondly, I just wanted to ask you about your media cost out can you maybe talk about how increasing media costs impact your framework for deploying budgets and then sort of given this environment. How are you thinking about sort of continuing to deploy spend at a lower margin wishes perhaps put.

Back on spend and prioritizing margins.

Right. So I mean generally we're not managing the business too.

Finite margin numbers on the V M M. The variable marketing margin line or on the gross margin line.

We're sitting in the middle.

Of the consumer and the advertiser and we're looking to create value on both sides. So as we're navigating complex environments like the one we're in right now.

Moving our guidance down on margin both of the variable on the gross margin line is reflective of current trends that we're seeing and.

Part of that.

It comes into play with our ability.

To retain market share and deliver for the advertiser because demand is there and if we're managing too finite levels of margin.

Could have a negative impact on the business. So we did take the guidance down a little bit which is reflective of the current trend and you know that.

Could it potentially change next year, although we're probably going to guide this range until we see a change so it's not really indicative of anything other than us managing the expectations of the advertiser and the consumer investment move in the range is down slightly.

Got it that's very helpful. Thank you so much.

Youre welcome.

Our next question is with David Marsh from singular research David Your line is open.

Hey, Thank you so much for taking the question does he did a nice job with regard to expense control.

The DNA in particular.

In terms of margin going forward.

Back to you guys to be able to continue to.

To maintain that type of margin versus sales in terms of G&A expense or.

Is that just indicative of a soft quarter and we're going to see a pretty.

Significant rebound.

Yeah.

Okay.

Hey, David This is Joe speaking so.

It sounds like Theres really two questions. There one at the gross line and then wanted to Medline.

So I'll take the gross margin.

First which ties the variable marketing margin I mean generally as I said, it's Maria.

We give these ranges and we generally look to be in range preferably towards the top of the range, which historically.

With variable marketing margin, we've been able to do that and that's off the back of media efficiencies, which tie directly back to our data first approach in how we generally.

Look at engaging with consumers.

Relevant ads.

Consumers with intent.

They behave accordingly, and conversion rates are higher it drives more media efficiency.

With regard to.

The SG&A and the reduction.

You know we're generally looking at this as a trend that continues into 2023 so.

Rick and I, we look at the items, we control and expenses are one of those items, there's plenty of things, we don't control the macro environment, but specifically in side of BMS, We certainly control our expenses so.

As noted on the call we have successfully reduced.

SG&A meaningfully during the period.

And we believe that that's a trend that continues so if you look at 2022.

And then you look at 2023, we think we're on track to have an overall reduction in operating expenses of approximately $8 million to $10 million. So we're hopeful that this is a trend that continues and it gives us more leverage at the net operating one of the business.

Yeah, that's great I guess just to follow up.

I guess the question.

My next question is really.

Can you support a higher level of revenues.

And if so like how much meaningfully higher.

At the reduced level of SG&A that you're running.

Coming out of the third quarter.

So we started an efficiency technology initiative about a year ago, which was design first to create efficiencies in the business.

<unk> done a number of acquisitions over the years and we'd like to say that we don't integrate for the sake of integrating we integrate when it's appropriate and we integrate to drive efficiency.

You know what.

Some of the headwinds that.

<unk> continued to persist in the business management has taken it as an opportunity.

To look at some of these integrations in a more holistic sense to see where there were opportunities to create deeper efficiencies in the business. So we feel that we've taken costs out of the business that.

Can be sustained at these levels, meaning that the cost reductions are permanent and the business has now created efficiencies through.

Through the through the use of <unk>.

People process and technology. So we do not have to add these costs back so over time as the business recovers cost should remain in line with the trend that we currently see so as the business recovers.

We should get leverage.

At the EBITDA line.

To our benefit so we're pretty encouraged by that but obviously, we need to see a more broad based recovery.

And revenue growth margin expansion for that the pull through to EBITDA, but generally we do not to specifically answer your question, we do not anticipate.

Having to add back.

A meaningful cost load to grow the business from here.

Perfect. Thanks, so much I appreciate that.

There are no further questions at this time so that concludes today's conference call you may now disconnect.