Q3 2022 Quotient Technology Inc Earnings Call
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Excuse me everyone. Please remain holding the conference will begin shortly again, please remain holding the conference will begin momentarily.
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Good afternoon. Thank you for attending today's quotient to Q3 2022 earnings call. My name is to me and I will be your moderator for today all lines will be needed during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad it isn't that my pleasure.
The conference over to your host Marc Griffin Investor Relations. Please proceed.
Thank you operator and to everyone listening today apologies for the delay.
Good afternoon, and welcome to our second quarter 2022 earnings call with me on the call today are the company's CEO that Christa and unique <unk> our CFO .
The company's press release and earnings presentation have been posted to the IR section of the Companys corporate website investors to ask questions.
Before we begin please note that during this call you will hear forward looking statements, including the guidance, we will be providing for the company's fourth quarter and full year.
These forward looking statements are based on information available to and the good faith beliefs of the company's management team as of the time of this call and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in the forward looking statements.
These forward looking statements and the related risks and uncertainties are set forth in the earnings presentation slides located on the company's Investor Relations website additional information.
Nation about factors that could potentially impact the companys financial results can be found in the risk factors identified in our annual report on Form 10-K filed with the SEC on March one 2022 as amended by Form 10-K, a amendment one filed with Jesse on April 29, 2019, our quarterly report on Form 10-Q.
On May five 2020 to our quarterly report filed on Form 10-Q again filed on August 19, 2022, and the company's future filings with the SEC.
We disclaim any obligation to update information contained in these forward looking statements, whether as a result of new information future events or otherwise.
Please note that operating expenses gross margins and net loss financial measures discussed today are on a non-GAAP basis.
Each has been adjusted to the corresponding GAAP measure to exclude certain expenses reconciliation of GAAP and non-GAAP measures can be found in the financial results section of the site.
Press release and earnings presentation.
We put out today on the company's website.
Let me turn the call over to Matt.
Good afternoon. Thank you for joining us today for <unk> third quarter 2022 earnings call I'm here with our CFO you need Cohen.
Everything we do our caution is built around the scale of our platform the software data and network that our customers leverage to drive their promotions and media efforts.
Our platform has terrific scale, consisting of over 900, plus cpg's and representing over 2500 brands and from that scale. Our network continues to grow as we add more partners.
In the third quarter, we delivered more than $2 $8 billion of savings to the American consumer compared to $2 $6 billion last quarter.
As consumers seek more ways to save and retailers look to take ownership of the retail media networks. We are successfully evolving to a leading consumer promotions network and data driven retail media platform.
Our business has changed from a managed service company and outsource agency for retailers to a higher margin provider of data driven software and technology for our partners.
The scale of our platform.
We believe our network data and software position us to be the provider of choice to enable digital promotions across the industry.
On top of that platform, we are developing new products for the future needs of a rapidly evolving programmatic marketplace.
Under taking this change with our partners is creating a more durable P&L, we have significantly improved our capital structure realigned our cost base and solidified our balance sheet, while positioning the company to unlock growth potential and consumer promotions and more broadly retail media we.
We believe we are exiting the third quarter with much of the internal work behind us and look forward to discussing several software and technology focus platform wins in the future.
Turning to third quarter highlights, we were particularly pleased with the outperformance of our promotions business in the quarter as we increased revenue, 5% sequentially versus the broader market decline.
We believe this is a clear proof point that despite the overall macro headwinds backing from a promotional spend from CPG, yes.
We're growing market share.
We're all.
Our Q3 results landed in our revenue guidance range, achieving revenue of $70 3 million. This was driven in part by outperformance within the promotions business, partially offset by a decline in our media business.
As I discussed at the start.
Due to the focus on evolving our business model in Q3, we delivered non-GAAP gross profit was $36 4 million non.
non-GAAP adjusted EBITDA of $10 million in operating cash flow close to breakeven.
We will continue to optimize our business model and our scale technology platform.
Best serve our retail and CPG partners.
We exited the quarter with roughly 52% non-GAAP gross margins. While this was certainly driven by cost efficiency.
We expect to continue to drive net revenue improvement with superior margins as we evolve our retail relationships and doing sir.
Our platform centric solutions.
From a cost perspective.
We continue to enhance our operational efficiencies and reduce our overhead to better align our organization as a consumer promotions network and retail media technology platform.
Looking ahead, we see near term opportunities.
Further our efficiency through vendor consolidation cloud migration and other operational shifts there are more in line with our focus on delivering our platforms data and scale to our customers.
We believe we have line of sight on an additional $30 million of run rate cost adjustments in these areas.
Building deeper into our capital structure improvement, we have entered into binding commitments for a $55 million term loan and a $50 million revolving credit facility and will retire our outstanding convertible debt with no dilution to our shareholders.
This strengthening of our capital structure, alongside our EBIT performance and strategic focus on higher margin products puts the company in a much.
Stronger position moving forward in our view.
Now taking a step back from our performance this quarter.
I'd like to discuss the market more broadly and how we're leveraging the power of our platform or.
Our software data and network and the developments underway across our business to win in the market.
Consumer promotions is our core business and as you've heard from CPG. This earning season rains are able to hold or increase price with minimal impact on volume.
This resulted in overall decline of retail sales on promotion by 5% According to Nielsen IQ.
However, our promotion segment, we saw a revenue increase by 5% as we achieved savings growth of 9% sequentially and a 20% increase in content compared to last quarter.
We believe these are clear proof points.
Despite the overall macro headwinds impacting promotion spend from Cpg's.
We are winning market share.
We strongly believe the future for quotient lies in our bid.
<unk>, a preeminent platform provider for the digital delivery of promotions.
The broader consumer promotions addressable market is estimated to represent over $200 billion of spend by <unk> in the U S.
What we offer is a programmatic platform to more efficiently and effectively deliver targeted promotions to reach the right consumer.
At the right moment and across the right touch points, which deliver the virtuous cycle.
Savings for the consumer say.
Sales for the brand and trips for our retail partners.
As I said at the start of the call.
Promotions business has retained terrific scale.
Consisting of 900, plus cpg's, representing over 2500 brands and our network continues to grow as we add more partners.
Again in the third quarter, we delivered more than $2 $8 billion of savings to the American consumer.
We have seen that as our network of partners, our data and our <unk>.
And promotional advertising the drive units moved and a higher ROI for Cpg's and retailers.
Maximizes Activations and redemptions and delivers true cost savings to the consumer.
We are also continuing to scale up existing and newly announced partnerships as.
As we grow our platform and offer consumers more ways to save across multiple touch points, where.
For example, we recently renewed our promotions partnership with a whole delhaize USA one of the largest supermarket operators in the United States to continue to provide digital promotions. This is just one instance of our ability to evolve and grow our platform.
We are working on a variety of other partnerships. We are looking forward to announcing in the future.
Building on the foundation of promotions, we also revolving retail media into a data driven technology platform that supports retailers as many start to bring capabilities in house and in support brands as they look to invest in retail media.
We have been working with our large retail customers that are undergoing this transition and positioning our platform to be the technology underpinning the shipped reached.
Retailers are moving in house, and we are going with them.
We believe our platform strategy built on our software.
And network enables us to be a critical high margin software and technology provider.
Executing our retail media campaign is a highly complex and costly process for brands and retailers.
Our platform is able to simplify that process by enabling brands to create tens of thousands of ads dynamically off of one piece of accretive leveraging AI capabilities built into our system.
This technology will become critical for advertisers, enabling them to improve efficiency and returns as they reach their audience of buyers across multiple consumer touch points.
We aim to be the easy button, enabling retailers to monetize their network and cpg's to simplify their buying.
Retail media is becoming a major driver of digital advertising spend due to the ability to target high intent consumers and drive performance.
We are on a mission to ensure every dollar of investment drives outcomes sales and trips for our advertising and retail partners.
We are currently working to implement our data driven retail media platform with four cpg's across a diverse set of categories. As this evolution of retail media continues.
With over 90% of retail sales occurring in a physical store programmatic digital out of home is one of the rapidly growing media channels.
We have a powerful demand side platform designed to leverage proprietary location based technology as well as exclusive data. This allows for planning.
<unk> volumes building and targeting to programmatically reach consumers on digital screens.
Our platform is also integrated with all key supply partners to enable what we believe to be the largest access to digital out of home inventory in the U S.
The more we're able to close the loop to enable brands to measure the impact on performance.
Whether it be via sales foot traffic or even viewership.
To illustrate our scale, we traffic more than $20 billion weakening impressions across over 500000 screens over 150 million mobile devices.
While CPG has remained cautious with media spending we believe in the long term value of this offering and we intend to continue to invest in the business to capture market opportunities and gain market share in.
In addition, we see digital out of home changing from a linear and analog market to more of a programmatic market.
Quotient represents nearly a third.
Total addressable market with programmatic digital out of home, putting us on the leading edge of the strong and growing segment.
Moving to our direct to consumer relationships, which we consider a hidden gem and our product portfolio.
At the end of October we officially launched Xiaomi in the United States, which is an important milestone for quotient.
As you know we've been delivering savings to consumers for decades through our original coupons Dot com platform and we are excited about this next evolution in our direct to consumer journey.
Xiaomi was a trusted brand in Europe and is the leading grocery savings app in France, where the product originated.
Also available in the <unk>.
The kingdom in Belgium.
<unk> appeals to the next generation of shoppers.
With this launch we will now be able to offer American consumers and interactive platform to discover products and earn cash back without a minimum threshold. In addition brands and retailers can grow their consumer relationships through new revenue driving touch points and powerful audience insights.
We are currently transitioning users from coupons dot com to shopping them and have been extremely encouraged by our initial results, which have exceeded our expectations in terms of user experience usability retention and engagement. We are in the process of launching a marketing program to further grow our universe of shopping and users.
So when you put it altogether.
We believe our new strategy better positions <unk> to capitalize on in an evolving landscape. We're focused on building out promotions and media networks around a strong base of CPG brands and retail partners on our platform built on software data and our network that has proven scale.
And that platform has enabled us to take significant cost reductions and realign our business around our technology, reflecting both the changed economic landscape and in our view and durability of our business.
Execute against our strategy.
The market remains choppy as consumers and cpg's navigate inflationary pressure and economic uncertainty.
However.
If the current market persists.
We expect there will be more opportunities for us to work with Cpg's and deliver savings to consumers.
We believe this quarter's results in our promotions business point to our ability to gain share even in these challenging times.
With that.
I will turn it over to you need.
Thank you, Matt and good afternoon, everyone.
<unk> today will be focused on our financial highlights and I encourage everyone to visit our Investor Relations page, but all of the relevant documents, including our GAAP to non-GAAP reconciliation.
As we stated last quarter, we were looking to address our convertible debt in a way that does not overburden not P&L, our gas position and also took into account critical factors such as equity dilution.
As Matt highlighted we did just that.
On November 2nd we entered into separate binding commitment letters with large capital and PNC Bank.
Okay.
Under the commitment letters low dose <unk> will provide the company with.
$55 million in term financing over four years.
And PMT will provide $50 million.
Asset based revolving credit facility.
This new governance structure allows us to successfully.
Existing convertible notes and to continue.
Advancing our transformation journey.
Further it provides us with an optimized scott's position to fulfill all our business needs.
Most importantly, it does not dilute shareholders at all.
Moving onto our results for the quarter our third.
Third quarter revenue was $70 3 million within our guidance range of $70 million to $80 million.
As Matt stated our Q3 revenue was impacted by the ongoing macroeconomic challenges affecting CPG businesses.
Resulting in lower than expected promotions and retail media spend.
Despite these headwinds our promotions revenue increased 5% sequentially versus a market decline of 5% as measured by Nielsen IQ.
Our non-GAAP gross profit was $36 4 million our non-GAAP gross margin was 52% roughly in line with our expectations and up 710 basis points year over year.
Gross margin was positively impacted by our focus on high margin products as well as the steps we continue to take to reduce costs throughout the business.
Q3, non-GAAP operating expenses were 29 million down $17 million from the prior years and down $11 million sequentially.
The year over year decline in spending was primarily due to previously announced cost actions, we have taken as well as our disciplined Opex management.
Our non-GAAP adjusted EBITDA was $10 million marginally, beating our guidance range of $5 million to $10 million.
Turning to cash we had an operating cash flow closer to breakeven in the quarter.
<unk> or end of our guidance range.
As we mentioned last quarter as part of our transformation journey, we intend to continue to optimize our expense structure to drive further efficiencies and profitability.
The approximately $30 million of run rate cost reduction that Matt mentioned as part of those efforts.
Communicate our plans appropriately as we make progress on this initiative.
Additionally, we are laser focused on improving our working capital and have made significant progress during the quarter.
Especially around our Dsos have improved by 13 days sequentially.
We believe that our focus on cash flow combined with our available liquidity and our improved capital structure.
In a strong position to meet all our business requirements.
EBITDA and cash flow performance demonstrates our continuous focus on financial fundamentals driving what we believe is a beautiful P&L with healthy revenues that turn into sustainable profits that converted into cash.
Moving on to our fourth quarter and full year 2022 guidance.
As I said last quarter, we are committed to sharing an outlook that is stock based and built on data and the market dynamics, we have today.
Our revenue guidance reflects our anticipation of continued macro condition headwinds in the fourth quarter.
Our expense guidance reflects ongoing cost benefits from last quarter's cost actions.
Well as additional cost reductions that we anticipate implementing.
Given our broader diversity as well as our belief in the strength of our promotions business, we are maintaining our revenue guidance for the year.
We're also reiterating our EBITDA and operating cash flow guidance for the year, given our focus on gross margins and continuous cost and cash flow management.
For the fourth quarter of 'twenty, two we expect revenue to be in the range of 76 million to $91 million.
non-GAAP gross profit to be in the range of 42 million to $55 million adjusted EBITDA in the range of $13 million to $18 billion and operating cash flow to be in the range of 6 million to $11 million.
For the full year 2022 we are maintaining our guidance for revenue to be in the range of 295 million to $310 million non-GAAP gross profit to be in the range of 147 million to $160 million.
Adjusted EBITDA guidance in the range of 15 million to $20 million in operating cash flow to be in the range of zero to $5 million.
We estimate weighted average basic shares outstanding to be approximately $95 9 million in line with our previous estimate.
Let me turn it back to Matt for a few closing remarks.
Thanks, you need in summary, we are confident in the strong foundation, we've established which we believe positions us well as a more stable and durable business.
We believe by strengthened operational and financial position, along with our differentiated products will enable us to successfully manage through the near term macro challenges.
With that we will now turn the call over to the operator to begin the Q&A session.
Okay.
If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question. Please press star followed by two again to ask a question press Star one.
Mind, you if youre using a speakerphone, please remember to pick up your handset before asking your question.
Our first question comes from Nick Mariachi with Craig Hallum. Please proceed.
Hi, This is Nick on for Chad Bennett, Thanks for taking our questions can you hear me all right.
Hey, Nick Yes, we can hear you.
Awesome.
So I just wanted to start on the media side of the business, maybe if you could just take us back in kind of expand on how the strategy has changed there.
Past the company had talked about adding RPM partners being a primary driver for the business.
We are seeing more and more retailers.
In house or partners with others further the AD tech stack, including whole delays recently I guess can you just expand on how that strategy has evolved for the media business.
To the point today, and if the uniqueness or value of the data that you receive from retail partners has changed at all.
Yes.
Thanks for joining us it's a good question and a deep question I would say for US as we look at the retail media space and I think you guys have heard me talk about this before the the evolution of retail media going from retail media. One Dano has an outsourced agency model, we see retail media to do more of that in housing and in retail media III really truly being that true marketplace model.
When we look at our strategy on the retail side, we do have several unique assets, whether thats, our digital out of home DSP. Our overall Influencer network, our ability to be an AD network. So to speak with some of the audience data those are really key technology areas, where we can play an active role in partnering with retailers.
As they look to kind of bring to the sell side.
In house.
We also see opportunities on the demand side, what I mentioned on the on the call earlier is working with a few CBD right now to implement the demand side buying platform to make it easier for them to access and invest in retail media.
Across the overall retail media networks so.
In a macro standpoint, I would say, we really see the industry evolving quite quickly and really becoming very mature both on the retail side and on the demand side and we see our role evolving to be more of a technology partner in that ecosystem, both with our retailers and their cpg's.
Got it and then maybe if you could speak to how spend with quotient from maybe like the 20 biggest CPG uses change year over year, and how has that trended relative to smaller cpg's.
Then.
Maybe if you could disaggregate the change in spend between changes in overall spend versus changes in your market share with these clients.
Yes.
Taking a step back I would say we still remain.
<unk> relationships with a lot of our top CPG partners I think we've certainly seen more diversification in terms of adding net new brands and net new manufacturers to the overall platform. So we feel like we retained a fairly robust relationship with a lot of our major CPG partners.
We're seeing our revenue growth, especially in the most recent quarter has been on the promotion spot side, specifically around national promotions. So.
Even our platform our ability to programmatically deliver an offer to unique consumers. It's a much more efficient way to deliver our promotions and so in a marketplace, where cpg's can take price and maintain volume we become a useful tool in a useful distribution channel were marketing channel to reach a consumer to keepers consumer in the basket to keep you could see marine.
The category to keep that brand relevant, especially as consumers see pressure on their wallets.
And then last one for me is just a question on visibility of the business and given it looks like the Q4 guidance range for revenue.
I guess wider than than previously guided too I know visibility has been kind of our area of focus for improvement for the company, but can you just expand on some of your efforts to improve visibility and forward revenue.
And can you just talk about visibility I guess into the Q4 guide with some of the macro pressures that you spoke about in our prepared remarks.
Yeah, absolutely. So let me start and then I'll pass it to you need as we look at Q4 Q4 is the media quarter and.
In Q4 is also <unk>.
<unk> in the sense that the holidays fall in the back half or the end of the quarter, So where we look at the quarter right now we do see healthy pipelines. We believe I think it's going to be a shorter holiday season. So that we expect to see more of that booking.
Into the quarter versus some of the other quarters throughout the year, but I would say.
Team has been doing a good job under under unique leadership kind of driving some some discipline both on the P&L as well as managing our forecast in our guidance, but I'll, let you dive in a little bit. Thanks.
Thank you Matt.
Thanks for the question. So firstly I would like to reiterate that our guidance for revenue is based on facts and takes into account. The market dynamics are today that has been our philosophy drive from the very beginning now when it comes to the guidance range <unk> kept it why there are few reasons for that first of all.
Have a diverse portfolio of products with their own specific market dynamics like different visibility associated with it.
Promo business outperformed in the market in the third quarter.
And we are optimistic that the trend will continue and that is where the pipeline has built up pretty nicely.
Quarter like Matt said is a big media quarter with a lot of media spending happening towards the later part of the quarter and a lot of sales execution also happening towards the later part of the quarter. Their pipeline is building up its going per plan, but a lot of stuff happens towards the later half of the quarter given the timing of the holiday season. So given these trends we feel that our revenue guidance.
This range is a good representation of the reality of today and a good reflection of our projections.
For the fourth quarter.
Awesome. Thanks, so much for taking the questions.
Thanks. Thank you. Thank you.
Our next question comes from Steve Frankel with Rosenblatt.
You May proceed.
Hey, good afternoon, so to go into that promotional and media mix traditionally in quarters, where it tilt more to media, we'd expect gross margin pressure in your guidance.
Implies the opposite so maybe give us some high level commentary on why you expect a material sequential gross margin improvement.
Yes, so Steve Thanks for joining and good to hear from you and I would say I'll start and then I'll pass it back to you need here to give you guys some details but.
Overall, we've taken a philosophy of looking at driving operational efficiencies across the company and so really separating out.
How we execute and how we operate at quotient independent of the mix of revenue streams that we generate and so as we look as we continue to kind of like look at Q4, even as we look progressively into 2023, where you continue to kind of stay laser focused on driving a more efficient.
Software and technology platform for our customers and across our product lines specific to Q4 ill, let you need chime in a little bit here on the mix, yes. So.
As I mentioned.
In my remarks, the company is laser focused on gross margin, we have seen gross margin in the in the.
<unk>.
And two quarters back to back and we expect that gross margin trend to to continue to improve progressively.
Our mix.
Improved as we gain more volume in the topline and most importantly, as we keep optimizing our cost structure.
Fourth quarter is the highest revenue quarter. The mix is made up of products, which are higher in margin. Yes. There is a lot of media content in it but you are talking about products like digital out of home and the part of media that comes with higher gross margin secondarily as I said before we have seen strength in our promotions business, we are very optimistic.
That that strength is going to continue in the fourth quarter as well and that also brings pretty high margin calories, but so when you combine all of these together the margin profile that you see in our guidance range is a true reflection of what we could expect coming into fourth quarter.
Okay, and then another guidance question.
In terms of you gave us the add backs that get to a non-GAAP gross margin, but in terms of.
The add backs in the operate at the operating line are there any material differences between the dollar amount that you saw in Q3 and the dollar amount embedded in your Q4 forecast.
Not in terms of add backs now in Q3, the add backs have been disclosed or will be disclosed in the Q and those add backs are not as material in nature as we saw in the second quarter fourth quarter four for all practical purposes, a very clean quarter when it comes to the add backs.
Okay and.
Congratulations on the debt refinancing could you tell us.
What's the balance sheet is likely to look like in Q4, so how much how much cash are you using to repay the converts versus reliance on the debt.
Alright so.
One of the reasons, let me give you a lagging a little elaborated answer so first of all the capital structure that we have right now is an outcome of pretty detailed diligence that we did with Randy evaluation process with our with our advisors and experts in the debt market and this is the right capital structure because it.
It does not overburden P&L and cash flow this kind of like clears and optimized cost position for us and most importantly, it does not dilute the shareholders at all the cash number that we will have after we have settled the entirety of our convertible notes, there's going to be in the range of $50 million to $60 million and as the company grows and it continues on its path of operating operating cash.
So that balance is progressively go to improve that balance is the right balance that we have that basically allows us to meet all our working capital requirement to manage our business in a very smooth way and also it allows us to keep investing in the business in terms of capital expenditure and in our cross formation. So we are actually very.
Very happy with this capital structure, and we think that the cash balance that will come out of it. Once the notes have been retired is going to be the optimized cash balance that the company needs to not just operate but also to continue its path of transformation.
Okay, great. Thank you.
Thank you Steve.
Thank you Kelly.
No further questions in the queue. So I'll pass it back to Matt <unk> for any closing remarks.
We want to thank you all again for joining us today, and we look forward to continuing to update you all on our progress in the near future.
Thank you.
Okay.
This.
The question on Q3 2022 earnings call. Thank you for your participation you may now disconnect your line.