Q2 2023 Digital Media Solutions Inc Earnings Call

Speaker 1: If you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Tony Saldana, DMS General Counsel. So please go ahead, Sarah.

Speaker 2: Thank you for joining us to discuss our financial results for the second quarter of 2023. With me on the call are Joe Maronucci, co-founder and CEO , and Vanessa Guzman Clark, our interim CFO .

Speaker 2: Earlier this afternoon, we posted our earnings announcement in a press release and on our investor relations website.

Speaker 2: Before we begin, I would like to call your attention to our safe harbor provision for forward-looking statements in our earnings release.

Speaker 2: The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements.

Speaker 2: For a more detailed description of the risk factors that may affect our results, please refer to our earnings release and our SEC filings.

Speaker 2: In addition, management's commentary will include non-GAAP financial measures. Reconciliation between GAAP and non-GAAP financial measures can be found in the tables of our earnings relief.

Speaker 2: Now, I'd like to turn the call over to Gio Maranucci, our CEO . Thank you, Tony, and good afternoon, everyone. Welcome to our second quarter of 2023 earnings call. Our second quarter results are as follows.

Speaker 2: Second quarter net revenue was $82.6 million down 9.5% year over year. Our gross margin and variable marketing margin came in at 23.3% and 27.4% respectively. Adjusted even at 10 minute 902,000, which was down 3 million from last year.

Speaker 2: Vanessa is going to add more details, dig deeper into the numbers, and go over guidance for the third quarter of 2023 later in the call.

Speaker 2: In Q2, we continue to navigate market challenges by prioritizing progress and growth within areas we control. While our actions will not fully show their impact within the Q2 results, they're aligned with our long-term strategy, which is gonna create durable, scalable, and sustainable growth across both our marketplace and brand direct solutions.

Speaker 2: Our second quarter results were discussing today reflect continued market challenges we're experiencing.

Speaker 2: Despite a decrease in that revenue adjusted EBITDA due to the challenging business cycle, Gross Profit March in Procute 2020-23 was within our guidance range.

Speaker 2: We're continuing to face pressure in our insurance vertical as P&C carrier loss ratios persist. This is an impact we're seeing across agent counts, bid prices, and overall advertides are spent. That said, we do see positive trends here inside the P&C segment in Q3 and therefore,

Speaker 2: We maintain a positive long-term outlook and expect P&C carrier spend to start to recover in 2024. We believe that recover should ultimately result in P&C advertising spend surpassing previous peak levels. And since DMS has continued to invest in our core solutions in this category, and since we maintain strong relationships with the major carriers,

Speaker 2: We believe we're well positioned to capture our share of the spend. And other segments of our business we remain optimistic. We're encouraged by growth in our home services vertical stemming from our recent quick dealer acquisition. We also have the health insurance enrollment periods opening again in Q4 where we expect to see an increase in revenue pull through from carrier marketing spend.

Speaker 2: As we've discussed in the past, we monitor both our enterprise customers and our SMBs. The SMBs include the insurance agents we serve. For Q2, we close with a significant enterprise customer count of 379 including the click dealer acquisition, which is up from 291 last quarter.

Speaker 2: As a reminder, our significant enterprise customers or advertisers spending an excess of $100,000 annually with DMS.

Speaker 2: For Q2, ARPU, per significant enterprise customer, was $1.1 million down from $1.3 million last quarter.

Speaker 2: For Q2, SMVs on the DMS platform total 4406 active insurance agents down from 6,477 agents in Q1, 2023. Most of this reduction in active SMVs in the quarters tied to volatility and insurance.

Speaker 2: and various state pauses at the carrier level. We do expect our SMB count to remain stable at or above these levels and then to recover once stability returns to insurance.

Speaker 2: The breakout of vertical revenue for Q2 is as follows. The breakout of vertical revenue for Q2 is as follows.

Speaker 2: Insurance, which includes property and casualty along with health, 21 million in Q2 revenue, which was 25% of total revenue for the quarter.

Speaker 2: Consumer finance, 14 million and Q2 revenue, which was 17% of total revenue for the quarter.

Speaker 2: International revenue, 14 million and Q2 revenue, which was 17% of total revenue for the quarter, and e-commerce, 12 million and Q2 revenue, which was 15% of total revenue for the quarter.

Speaker 2: Outside of insurance, diversity in our customer mix and our verticals is what continues to develop and initiate DMS.

Speaker 2: We did see growth in consumer finance over the comparable period, the prior year, and we also see home services as an emerging category for us.

Speaker 2: So to summarize, for our Go Forward 2003 plan, the main objective is to foster business growth and our core business by executing on the following strategies.

Speaker 2: prioritizing our significant enterprise customers in key verticals as we head into our seasonal high point of the year here in Q4.

Speaker 2: Marketplace diversification. Here our focus will be on enhancing and existing marketplaces and the ONN operator websites and PNC insurance, education, home services, consumer finance, and health insurance.

Speaker 2: Brand Direct Insolidation and Unification.

Speaker 2: This is where we're going to focus on enhanced advertiser integrations leveraging DMS on denobrated assets to build exclusive campaigns that create strong value for both the consumer and the advertiser.

Speaker 2: And finally, continuing to streamline our operations and enhancing efficiency.

Speaker 2: So far in 2023, our team has commissioned $10.3 million in annualized cost savings across operating expenses.

Speaker 2: As a final note, we also announced today that we've reached an agreement in principle with a substantial majority of our bank group to amend the company's credit agreement.

Speaker 2: This agreement will provide flexibility to the business while we navigate the challenging business conditions that we've discussed. We're currently in the process of finalizing this amendment which is subject to unanimous lender consent.

Speaker 2: We'd like to thank our lender group for their continued confidence and support as we position the company for future growth.

Speaker 2: Now the pleasure of turning the call over to Vanessa will provide more details on our financial results and also give an update on guidance.

Speaker 3: Thank you, Joe, and good afternoon, everyone.

Speaker 3: At the end, by discussing our financial results for the second quarter and conclude with our guidance for the third quarter, all comparisons are on a year over year basis unless otherwise noted.

Speaker 3: Ned Revenue was $82.6 million down 9.5% year over year.

Speaker 3: The breakdown of the insurance business was as follows. Auto contributed 62% of total insurance, while health was 27%, followed by life at 4% and home at 7%. The declining revenue reflects the impact of lower carrier demand while this industry destabilizes. BMS continues to be a diversified digital performance advertising business.

Speaker 3: Career and education, which was approximately 16% of our total revenue in Q2, was down 6%. E-commerce represented 15% of our total revenue and what's last year over year.

Speaker 3: Cross-profit was $19.2 million for Q2, equating to a 23.3 margin versus a 25.7 margin in Q2 of 2022. The decline was driven by continued margin compression within the insurance across both auto and health. Variable marketing margin was 27.4% compared to 35.5 in Q2 of 2022. Moving on to our segment results, which is net of intercompany revenue, for the three-month end of June 30th, 2023.

Speaker 3: Brand-to-Ret Solutions Growth Margin was 20.2% up from 19.3% in YouTube of 2022. Marketplace Solutions Growth Margin was 21.6% down from 23.3 in YouTube of 2022.

Speaker 3: and technology solutions, cross margin, what's 77.1% down from 83.7% in Q2 of 2022.

Speaker 3: Now, looking at operating expenses, we continue to focus on driving efficiency in our business through consolidation and reduction of operating expenses.

Speaker 3: During Q2, operating expenses were $71.6 million, an increase of $38.6 million when compared to the second quarter in the prior year.

Speaker 3: with the increase largely driven by the goodwill and intangible impairments. When excluding non-cash items, operating expenses were $24.3 million, representing a drop of $1.7 million when compared to Q2 of last year.

Speaker 3: which is the direct result of our continued focus on cost reduction and business optimization. Moving on to business profitability.

Speaker 3: or adjusted eGDA for the $900,000.

Speaker 3: down 2.1 million driven primarily by lower native adjustments to adjusted net income.

Speaker 3: Our net loss was $47.5 million versus a net loss of $11.9 million for the same quarter. Driven by the impairment of goodwill, increased interest expense from the impact of rising interest rates.

Speaker 3: and expenses related to the discontinuation of our DMS voice operations offset by the warrants expense as a result of the share price volatility.

Speaker 3: Chasing our focus to the balance sheet and liquidity. We enter the quarter with 25.2 million in cash and cash equivalent.

Speaker 3: which was down approximately 1.2 million compared to the same quarter last year.

Speaker 3: As a reminder, we take close and found the most recent acquisition, which was click dealer, the crash from Arbanshee on March 30th, 2023.

Speaker 3: A quarter in, our total debt was 277.5 million.

Speaker 3: under the senior secure credit facility to amend certain provisions of that facility, including among other things, the total net and labor trade show covenants, and the addition of agreement in kind option for the next four calendar course.

Speaker 3: We are currently in the process of finalizing the amendment with the lenders and appending the necessary unanimous consent of the lenders to affect the amendment.

Speaker 3: We currently anticipate obtaining the amendment and filing our Form 10-Q by August 21st, 2023. Turning over to our outlook. For Q3 of 2023, we expect net revenue in the range of 70 to 72 million and adjusted EBITDA of 500,000 to a million. Our guidance range for gross margin is 23 to 26% and variable marketing margin

between 29% and 34%. When we come back in November for a Q3 earnings, we will provide guidance for Q4 and full year 2023.

In summary, as Joe noted, we remain head, sound, and focus on our strategic growth initiative.

along with the associated positive trends. Still, we believe we will continue to face headwinds in the coming quarters with an unsettled insurance market and further shifts in consumer behavior. Despite these headwinds, we are confident we have the right people, processes and technology in place to be agile and successfully navigate our company through these volatile times and execute our growth initiatives.

We ask, we thank you for your interest in the MS, and I'll turn the call over to the operator for Q&A. Thank you. Ladies and gentlemen, once again, as a reminder, if you have a question at this time, simply press star 11 on your telephone. One moment for our first question.

And our first question comes from the line of Maria Rips from Canaccord. Your question, please. Great. Good afternoon. And thanks so much for taking my questions. First, it's sort of, it seems like trends continue to be challenged here in the near term. Do you think we may sort of start seeing any early signs of recovery as we head into seasonally stronger Q4?

Hi Maria. This is Joe speaking good to have you.

So with regards to trends being challenged, I'll take that inside of property and casualty first. And we will try to reveal a fond flow of background and show it... ... um...

We do see some positive trends here in Q3, although it's hard to extrapolate what that will mean.

As we head out into Q4, I think it's more of a 2024 recovery in PNC insurance. The trends we're seeing would be more agent reactivations across the major carriers in states as rate increases go into effect and marketing spend starts to open back up.

So these are early stage green shoots that we're seeing overall, the category is still challenged. Generally, positive trends, what I could say is the Q4 look forward for us. We've got the holiday e-commerce season. We've got our expected bump that we get as result of holiday e-commerce, which...

We've historically seen domestically and now we'll see some of that internationally as well on both brand direct businesses with domestic and international business. And then we also the open enrollment periods that would be opening in Q4 and health insurance and we would expect to see increased marketing spend there by the carriers. That's how we're looking at the remainder to about

Got it that's very helpful. And then secondly, a few competitors in the health, vertical, exited the space recently. Can you maybe talk about any implications that you expect for the business given sort of the shifting competitive landscape across that vertical?

In terms of...

How that might advantage us, or maybe you could just rephrase the question there slightly.

Yeah, just kind of what does the shift in the competitive landscape mean for your business there? And I guess how are you, especially positioned in over 65 segments, sort of heading into kind of this is not a stronger Q4?

Well, we're focused on the significant enterprise customers we have. So that would be the customers that we've served in that segment of the market for the last.

few enrollment periods that we've been active. We're engaged with them. We expect based on the preliminary indications that we've received and some of the feedback that's come through as a result of CMS. We expect to see an open enrollment period, marketing spend, that's at least equal to what we saw last year. And we're positive.

They were actually writing policies and

in the various segments of the health insurance business and that doesn't have an impact on our business. We don't see that as comparable to what we're doing on the marketing side in those two segments.

That's very helpful. Thank you.

Thank you one moment for our next question.

And as a reminder, if you have a question at this time, please press star 11. Our next question comes from the line of David Marsh from Singular Research. Your question, please.

Hey guys, thanks for taking the questions. I'm sorry, I jumped on a bit late. Maybe you could just go, if I apologize by asking if you've already commented on. But my question specifically related to auto, could you just talk about, you know, are you seeing any stabilization when the auto insurance side and?

If not, we think it would take to get us there, Joe. Well, as compared to Q2, as we just discussed with Maria, we do believe that their stability in the agent count, although it's down substantially for us as a result of the reasons cited.

We are seeing in Q3 more agent reactivations across the major carriers this quarter, as rate increases go into effect in various states.

Marketing spend starts to open back up. We've seen compression there as state markets.

are closed for both the enterprise and the agent customers. Thus...

So we do think we're stable at this count, as noted, it was just over 4,400 active agents. We're seeing more agent activations across that network this quarter, although I can't give one a site into how that material increases right now because it's too early. I appreciate that color. Just shifting a bit to the quick dealer acquisition, seems like things are going reasonably okay there. Could you just talk about efficiencies gained and...

You know, if there are any further opportunities to maybe bring out a little bit of expense there as you continue to integrate that acquisition. Yes, so I mean, that's an international business for the most part. They do have the home services business, which is a domestic marketplace. There was not a tremendous amount of overlap in their business and our business.

The acquisition was really focused on growth over the longer term as opposed to cost takeout. So to the extent that there was or is an opportunity to be more efficient, look, we're generally focused on efficiency at this point, as most others are, which is why the team was able to take out.

on an annualized basis, nine figures of cost. But our main focus there is integrating our core assets.

technology, media, helping grow the home services business on the marketplace side. And then engaging our current enterprise customers here domestically that have an international presence to leverage their international distribution network. And that's really where the growth is gonna come from. And that's what excites us. But we just closed this acquisition.

A little over 90 days ago, so we're still early days. Our integration is well underway. We're excited about the team. We're seeing good momentum in the business. However, we've got quite a ways to go here, only being less than not.

a little over 90 days ago, so we're still early days. Our integration is well underway. We're excited about the team. We're seeing good momentum in the business. However, we've got quite a ways to go here, only being less than 120 days into this thing.

Right, right, understood. All right guys, well, good luck with the back after the year and keep marching forward.

Thanks, David.

Thank you. This does conclude the question and answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day. Thank you.