Cardlytics Inc. Q1 2023 Earnings Call
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Good day, and thank you for standing by welcome.
On to the Q1 2023 Heartland Ex Inc earnings Conference call.
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Chief legal and privacy officer, Nick Linton. Please go ahead.
Good evening and welcome to the card Lytic first quarter 2023 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 believe.
Yes.
Leading expectations about our future financial performance and results, including for the second quarter of 2023, the bridge earn out payments, including the second anniversary earn out payment.
Financial impacts from various cost savings initiatives or plans for adding new partners to the network and expanding our monthly active user base in the U S and the UK.
One for our existing partners to transition to our new AD server user experience and AD Decisioning engine and the financial impacts of these initiatives the rollout of our new offer construct the growth of the bridge retail media network, our plans and timeline for achieving positive free cash flow, our liquidity and cash position.
And the growth and expansion of our Advertiser base.
For a discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion. Please refer to the risk factors section of the company's 10-Q for the quarter ended March 31, 2023, 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.
The call is available via webcast and a replay will be available for one week.
Finally information I have just described in the Investor Relations section of <unk> website.
Please note that a supplemental presentation to our first quarter results has also been posted on our Investor Relations website.
Joining us on the call today is card lytic, CEO Karim can somebody and CFO Andy Christiansen.
Following their prepared remarks, we will open the call to your questions with that said, let me turn the call over to Korea Korean.
Good evening and thank you for joining our Q1 2023 earnings call.
Today, I will share highlights of our product journey and explain how these foundational changes set a stronger roadmap and direction for the company.
But first given its importance to our business.
I'd like to discuss the determination of the breach first anniversary payout the important changes to the second anniversary earn outs and our Q1 results.
As you read in the 8-K earlier this week and independent accountant made a determination on the first anniversary payouts.
Finding the payout to be $208 $1 million inclusive of fees.
Potently based on this determination, we anticipate that the second anniversary payment will be $0. Given is based on the growth of its first anniversary clients.
The outcome for the total earn out and the total cash portion of the earn out is in line with our expectation.
And we believe the monetary shifts to the first anniversary is highly beneficial to our stockholders.
Here are the key considerations.
The total cash for both earn outs inclusive of fees is expected to be $72 6 million.
$3 4 million shares expected to be delivered for the equity portion of the earn outs.
Notably, we expect to be able to rely on the favorable $40 15 V. Wap to deliver the full equity portion for the earn outs, regardless of the current trading price of the stock.
Under this determination, we now expect shareholder dilution to be reduced by nearly half of our original expectation based off our current shares outstanding and we expect the risk of any additional cash outflow.
Due to the ownership cap provision in the merger agreement to be eliminated.
We are thrilled to move fastest roadblock, which will allow us to continue to focus our energy and attention on becoming a product led organization.
We appreciate your patience and support throughout this process and look forward to move ahead with renewed vigour and determination.
Now onto our results.
Ceded external expectations in Q1.
<unk> decreased two 6% year over year to $95 6 million.
Revenue decreased five 3% year over year to $64 3 million.
Adjusted contribution decreased five 6% year over year to $30 9 million.
<unk> revenue grew 34% year over year to $5 3 million.
Excluding the large client that existed at channel last year.
Total billings growth.
Kris 10% year over year, and our U S billings growth increased 21%.
Of the year.
Our focus on product and operational initiatives led us to exceed expectations. Despite real difficulties in the economy and advertising market.
Top line performance benefited from a strong March and better billings efficiency by the product optimizations, we have made as a company.
We saw particularly solid results in travel and entertainment and gas and grocery.
That said the economic outlook is GL challenging and we are continuing to make prudent financial decisions for the business.
Over the past few months, we have improved our cost base immediately and in the long term.
Including a $3 9 million onetime reversal of a bonus accrual and renegotiating the lease on office space in Atlanta.
We expect the amended lease to save us $400000 in total over the next three quarters and $1 9 million in total from January 2024 through April 2025.
Even though the economy climate is tough the metrics underlying our business are strong.
I'd like to specifically focus on several key metrics and operational initiatives that show these foundational improvements evident in our business.
Unique consumers activating offers increased four 4% year over year in Q1, even with the impact of the large restaurant clients exiting the channel.
Adjusting for this context that we saw total activations increased greater than 19% year over year, and total redemptions increased greater than 74% year over year.
This is great news, we're increasing the number of active users and our current users are engaging more often.
Historically Q1 is our seasonal low, but we increased the number of advertisers spending more than $50000 in the channel during Q1 by 8% year over year.
Advertisers with billings between $500000 and $5 million increased by 11%.
We are focused on increasing IMA you base by signing new partners our progress in our pipeline of our Q4 is solid we are in discussions with multiple top 20 U S banks and several high upside Fintech and we believe we will sign at least one of these major partners by the end of 2020.
Three.
We will continue to update you as we make progress on these potential partnerships.
Now I want to move to a strategy product initiatives.
When I joined Calix, It was clear that the company had solid foundations.
We have a unique and scaled platform that drive significant value for our banking partners provides great outcomes for consumers with highly relevant offers and delivers high our ROI for marketers.
Since I joined we have been congenitally working to improve every aspect of our foundation.
We are becoming partner obsessed and better supporting their needs.
Fueling advertising innovation and ultimately stronger consumer engagement in the program.
And combining that with greater control of our expenses and operational processes. So that we become a strong and profitable business.
Got less of the economy conditions.
All this work is centered around our operating thesis.
If we could accelerate and optimize our product teams to drive our strategy. While also meeting the needs of bank partners and advertisers than we could drive long term growth and profitability for the company.
Now just eight months later, we are already benefiting from the speed of change.
<unk> is transforming into a product led company.
We are enabling product to sit at the forefront of every aspect of our operations and our teams are aligned and working collaboratively towards common goals.
It's allowing us to have clear focus.
At faster pace and creates a better experience for our partners and customers.
We believe the benefits will combine with each passing quarter.
But we're already seeing results.
On our last several calls we have consistently talked about progress on three important product initiatives for our bank partners and advertisers.
<unk> server.
Our new user experience and cloud migration.
Each of these initiatives complements the other.
And we are making great progress on all.
So the cloud all of our major U S banks have data in that in the U S and full systems in AWS.
We expect nearly all of our major banking partners to move to the new AD server and user experience by the end of 2023.
I'd like to highlight progress on the new UI.
All in EUR creates a superior looking feel for offers it is more about creating new functionality for both advertisers and bank partners.
For example, we can provide more detailed descriptions of office.
Riccio imagery and categorized offers.
The results.
More customer engagements, which we're already seeing in our early data.
One of our largest bank partners has rolled out the new UI to more than 25% of its users. While early we have seen around a 50% increase in impressions on the rewards summary.
We believe this is only the beginning as.
As the new U R has rolled out we've observed other engagement metrics on the new UI that are equally promising and we intend to disclose some of these statistics why do we have scale data across more bank partners.
On our last call I mentioned that we expect upgraded AD decisioning engine to drive higher monetization and offer relevancy for the business.
Most of our smaller banks have not migrated to <unk> and we expect nearly all of our banks to migrate by the end of Q2.
Banks that have upgraded to the AD decisioning engine are seeing around a 6% increase in activations.
Even better we estimate the Q2 lift from a ranking and budget basing optimization to be around $2 $2 million for the quarter.
To give you a better idea of how this works.
Two new targeting features we released its.
The manager.
First share of wallet of.
Functionality that allows advertisers to target audiences, who shop and spend our competitive brands.
Great example is a large restaurant customer that wants to increase breakfast traffic could target only customers of breakfast brands.
Seven min Max targeting or the ability to let advertisers target based on minimum or maximum amounts of spend during a certain period.
This gives advertisers a tool to drive elevated spend from the current customers.
Improved targeting is not the only area that is showing progress.
Here are a few examples of the new offer developments we are most excited about.
We expect to launch an alpha version in Q2 of the spend stretch offers that we discussed on the prior call.
As a reminder expense stretch allows advertisers to incentivize a set of customers spending in a certain range to increase their spending on their next visit.
For example, customers who spent $20 on average could receive a $5 cash discount if they spend $40 or more.
This offer concept pairs well with mid Max targeting.
We also expect to launch an alpha version of multi tier offers in Q2.
These offers allow flexibility for advertisers to provide variable incentives based on their objectives.
The steering structure also gives customers more choice for.
For example, a trouble clients can reward 10% on all stays in Los Angeles.
And 5% on all other states in the U S.
Our subscription provider could reward 10% back on annual subscriptions and 5% back on all other purchases.
Our bridge, our retail media network product is progressing nicely.
We have secured proof of concepts with several large restaurants and convenience clients, which we hope to convert to full scale relationships later this year.
This is important as it is the first step to building a base of smaller retailers on the retail media network.
And as a reminder by building scale for these retailers, we can create a compelling new product for cpg's to gain insights drive incremental sales and measure campaigns.
Turning to market trends.
There is no denying that Q1 was a difficult quarter for the economy.
Overall year over year spend grew only 1% versus 10% in Q1 of 2022.
Restaurant and retail spend both struggled in the quarter growing 5% and minus 2% year over year, respectively.
Travel spend which enjoyed a post panamax boost in 2021, and 2022 is showing signs of more normalized growth, where the growth rates of 12% year over year.
Given the challenging economy.
Our focus remains squarely on growing the business responsibly as evidenced by our actions since Q3 of 2022.
We have decreased our expenses linearly in each quarter since has started.
And we will continue to monitor them.
Our adjusted EBITDA in Q1, 2023 is better by $4 5 million year over year, despite lower revenue.
And we expect a similar or better trend with our adjusted EBITDA in Q2.
Given the challenging advertising market, we may be slightly off our free cash flow goal of breakeven in Q3 of 2023.
But we remain focused on getting to positive free cash flow as soon as possible.
As I have said in prior quarters success hinges on our ability to execute with a disciplined approach.
It also hinges on our teams being laser focused on how they can support our product initiatives.
And most importantly, we remain partner obsessed.
Our relationships with our banks are improved as evidenced by the uptake of our strategy initiatives.
Transforming <unk> into a product led company.
A clear focus and faster pace.
Which will translate into long term results.
I remain confident that our strategy and priorities are propelling the company towards achieving growth and profitability.
Thank you Karim.
Our results this quarter exceeded expectations, we were still in a very uncertain economy as.
As Karim said there are positive signs within our business.
Inflation and high interest rates are still pressuring the consumer there.
Still an elevated chance of a recession in the near term so advertisers are being cautious with their budgets.
Actually with smaller advertising platforms.
Here are the numbers for Q1.
Billings decreased two 6% year over year to $95 6 million Rev.
Revenue decreased five 3% year over year to $64 3 million.
The contribution decreased five 6% year over year to $30 9 million.
<unk> revenue grew 34% year over year, while strong growth rates quarter over quarter decreased due to longer conversion cycles for proof of concepts.
Our opportunities within the CDP and Standalone RM and markets are substantial.
As we continue to grow our land business, we expect some fluctuation in our growth rates quarter to quarter.
Geographically U S revenue decreased 9% year over year.
UK revenue, which comprises approximately 5% of total revenue decreased 48, 2% in U S dollars.
The decrease in UK revenue is primarily due to the loss of a bank partner in the channel.
We've continued to make progress reducing our customer concentration.
Our top five customers accounted for 16, 1% of revenue this quarter.
3rd% to 25% in Q1 of 2022.
This will remain a key focus as we continue to grow and expand our advertiser base.
Adjusted EBITDA was a loss of $6 1 million this quarter compared to a loss of $10 5 million in Q1 of 2022.
Despite the seasonal decline in adjusted contribution from Q4 of 2022 to Q1 of 2023, our adjusted EBITDA loss was $6 1 million in both quarters, which highlights our cost discipline and the actions we've taken to rightsize our cost base.
As Chris mentioned, while we may not reach our goal of being free cash flow positive in Q3.
We remain in control of our costs and are extremely focused on achieving positive free cash flow as soon as possible.
Moving to our balance sheet.
We ended Q1 with $139 $2 million in cash and cash equivalents compared to $121 9 million at the end of Q4 of 2022.
During Q1, we used $10 1 million of cash in operating activities and used $2 8 million for software development and capital expenditures.
During Q1, we also with $30 million against our line of credit and realized a $176000 favorable impact from a strengthening U S. Dollar.
As of the end of Q1, we had $5 5 million of unused available borrowings under our line of credit.
Despite this period of economic uncertainty, we believe that our available liquidity, even after the grids panels is sufficient to run the business.
We continue to focus on cost discipline as well as initiatives to grow our topline and enhance our operational efficiency.
Well, we don't have immediate plans for raising additional capital we are constantly assessing ways to optimize our capital structure in accordance with proper corporate governance.
We had $33 7 million shares outstanding at the end of Q1.
Compared with $33 5 million at the end of Q4 of 2022.
Diluted weighted average shares outstanding during the quarter was $33 7 million compared to $37 2 million for Q1 of 2022.
As mentioned earlier, we expect to issue less than three 4 million shares in connection with the bridge earn out which represents approximately 10% dilution based on outstanding shares at the end of Q1.
And they used for $188 8 million, an increase of five 8% year over year.
During the second quarter was 34.
It was down five six year over year.
Now turning to guidance.
There is still a large amount of caution among our advertising clients and the reductions and delays when committing to AD spending.
Discuss our last few quarters still exists today.
We believe this uncertainty is disproportionately affecting smaller advertising platforms.
With that in mind for Q2, we expect billings of between 98 and 109 million revs.
Revenue of between 65 $74 million.
Adjusted contribution of between 32 and $38 million.
And an adjusted EBITDA loss of.
So between $6 million and $10 million.
A key driver in our guidance as the decline in our U K business, which is a negative mid single digit impact on our growth rates.
While the performance is disappointing we are optimistic that we can recover over the next nine months.
There are several new initiatives that we expect to increase our <unk> base, including enhancement by one of our large UK partners that will result in users and auto enrolled into our program.
And the launch of New Bank partners that we expect to occur in late 2023.
We do not have a lack of advertising demand in the UK.
These growth initiatives are expected to result in positive returns shortly after implementation.
As Craig said were Madison the business responsibly in this difficult economic environment.
We are committed to achieving a profile of consistent profitability and looking forward to the second half.
Additionally, the British earn out results, both reduces dilution for shareholders and makes us comfortable that our available liquidity will support the business in the near term during this challenging economic period.
On a personal note I expect this will be my last earnings call with Cartland X before my planned exit.
I have thoroughly enjoyed working with all of you and I'm confident that this leadership team is moving the business forward in the right direction.
I can't wait to see the positive impacts from all of the exciting developments we have in the works.
With that I'll turn it back over to Craig.
Thank you to everyone listening.
First I want to thank Andy for his service to cosmetics.
We all sincerely appreciate his contributions to the company and wish him the best moving forward.
We are excited to move past one of our largest short term issues and to continue focusing on product at the central driver of our strategy.
While the economy is still uncertain, we are confident that our unique scale platform drives value swap partners and deliver high ROI for marketed.
We are excited about the tremendous opportunity that lies ahead of us.
By prioritizing our goals and positioning the company for long term success, we are setting ourselves up for a bright future.
Now I will open the call to questions.
Thank you at this time, we will conduct a question and answer session.
Reminder, to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one one again.
Please standby, while we compile the question and answer roster.
One moment please for our first question.
Our first question comes from the line of Kyle Peterson of Needham. Your line is now open.
Great. Thanks, Good afternoon, guys I appreciate you taking the question.
Just wanted to see if you guys could give a little more color on some of the spending at some of our clients on kind of the same store sales basis, no. There's a lot of moving pieces in between.
The migration of the large restaurant client and then you're also onboarding, some new logos, but maybe.
Maybe if you could just dive into a little bit.
In terms of whether it's an average or kind of a cross sectional view.
Kind of on a same store sales basis, how is spending with some of your key clients right now on the platform.
Hey, this is Andy.
Yes, great Great question, and we really felt in Q1, a lot of the headwind there from the loss of the large restaurant client that was there was quite a drag I mean, certainly when you remove the impact of that we actually had a pretty a pretty nice quarter. There I mean, the U S business grew over 20%.
So we're seeing some really nice results in Q1, it's just it's still a very choppy market.
And the longer that we see some of the headwinds for the consumer around interest rates.
Persistent inflation persists.
We just see an environment, where it's going to get increasingly difficult and I think marketers are generally feeling that as well and so we're certainly guiding towards a bit of a choppy market here, but certainly in Q1, removing outside the impacts of the large restaurant.
Customer.
Have a nice a nice quarter across the board.
Got it.
Really helpful. And then just kind of a follow up as a housekeeping item here. So you guys drew down it looks like about $30 million.
The line of credit this quarter could.
Could you just confirm you're aware that's being held I know theres been a lot of concern given some of the headlines about Pac west, but I just want to see like where you guys are kind of holding that cash and how you feel about the security of that.
That brought out at this time.
Yes, that's a good question.
So I think we mentioned this here recently in a press release in March we keep.
Majority of our cash.
At <unk> west, but we use a product that they have where we're utilizing a multi bank deposit program and so that really applies to all of our accounts $30 million that we drew is actually part of that program as well and so we think that we've really taken a conservative appropriate view as to how we're kind of managing that risk.
And so all of that cash is really sitting in that program.
Alright.
Thanks, guys.
Thank you.
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