Q2 2019 Earnings Call
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As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section of quotient website. Following this call.
I will now turn the call over to Stacey DC Comics, Vice President of Investor Relations.
Thank you Ms. Clements you may now begin.
Thank you operator, Hello, everyone and welcome to our second quarter 2018 earnings call. Please note that slides to accompany the remarks on todays call are they'll go on the IR section of our corporate website on the call with me today are CEO and chairman Steven go and run Feeler CFO .
Before we begin please note that during this call you will hear forward looking statements. These forward looking statements include projections for our third quarter and full year 2018, our expectations first Elutions partnership chronic work this specialty respect and privacy regulations as well as the expected growth of an investment in our business. Generally are these statements are based on information available to you in a good faith beliefs of the management team at another time in this call and are subject to known and unknown risks risks and uncertainties that could cause actual performance or results to differ materially additional information about factors that could potentially impact our financial results can be found in today's press release and in the risk factors identified in our quarterly report on 10 on Form 10-Q filed with the FCC on May 10th 2018, we disclaim any obligation to update information contained in these forward looking statements whether as a result of new information pitcher unless or otherwise. Please note that the exception of revenues operating expenses gross margins and lots of financial measures discussed today are.
non-GAAP basis and have been adjusted to exclude certain expenses a reconciliation between non-GAAP and non-GAAP measures can be found in the financial results. The press release issued today and on the slide deck posted on the company's website and with that I'll now turn the call Silvercrest feeling.
Thank you Stacy and welcome everyone.
Before we get started as you've just seen from our press release, we announced some executive management changes.
I want to take a moment to thank MYR for his passion and dedication to quotient and for helping US chart. The strategic course for our continued growth and success.
Mir will continue on through a transition period as a strategic advisor to me and the company.
I'd also like to welcome Scott wrapped into the team as our President Scott has been on our board of directors for the past two years and we're thrilled to have them working without full time and ask for me I'm, even more thrilled to be back of caution CEO .
Now onto earnings.
Revenue in the second quarter was $104.7 million up 17% over Q2 last year and adjusted EBITDA came in at $11.7 million.
We also took down our second half guidance, primarily to account for two specific things. The first creating what we expect will be a one quarter shift in revenue. Our targeted offers printed a checkout will go live in Q4, instead of Q3, one quarter behind schedule, which has a meaningful impact in the back half of the year.
Reasons for this delay or unrelated to our technology or implementation.
The second relates to three of our large CPG customers.
Their decline in spend on national digital coupons in the second quarter was greater than anticipated and out of an abundance of caution we're taking down projections in the back half of the year to reflect this.
If we see a material upward change to spending levels by those three cpgs, we'll update our estimates at that time.
We're also seeing impact from a faster decline or specialty retail business, which we've said before we expect to decline over time and I'll say more about this later.
Outside of those specific items were seeing meaningful acceleration in all other strategic growth areas.
Driving this growth is our targeting and measurement platform. It connects purchase intent data across offline and online channels and reaches almost a 100% of U.S. adult customers consumers.
To put context around this each interaction between the shopper and a purchase delivers transaction data the trial targeting and measurement.
We are already capturing in using over 76 billion purchase events annually, representing $231 billion in sales.
As we bring more data onto the platform brands and retailers are scaling up their digital performance marketing.
We're delivering more integrated campaigns than ever before and driving results that are much stronger than industry averages.
I'll now walk through a few highlights from Q2 with some additional color around promotions and media.
One retail performance media, our RPM is proving to be a key catalyst for growth.
Not only does it drive an increase in targeted media, but the platform is also lifting promotion revenue across RPM partner networks as brands look to build a truly integrated campaigns.
Through RPM, we've created one of the largest CPG and grocery retail advertising networks for brands to drive targeted marketing campaigns with the retailers that generates significant sales for them.
Two.
Our social Influencer platform apology again delivered strong revenue across a growing number of CPG brands.
We are starting to engage with our clients in a much more meaningful and strategic way.
Three.
Sponsored product search where brands advertise directly on retailers E Commerce properties as shoppers search for products is live with Albertsons companies.
This better aligned brand search and ecommerce related media dollars to sales and provides an alternative to spending on Google and Amazon. We're a much smaller fraction of CPG sales occur.
Four we rolled out quotient audiences, where brand marketers and agencies use our audience segments, which include 2500, CPG buyer ready segments, such as carbonated beverage buyers for laughs brand buyers to deliver targeted ads through Dsps AD exchanges and publishers caution audiences now provides reach to over 100 million verified by our audience and almost 100% of U.S. adults with our modeled segment.
And just last week, we announced a strategic partnership with Nielsen to expand quotient audiences through Nielsen's marketing cloud.
In addition, quotient will conduct directly to their insights and measurement solution, bringing seamless third party validation to our clients.
These initiatives are the pillars of our digital media platform and helped fuel media revenue growth of 65% in Q2 over last year. We're very proud of the growth of this business and believe there continues to be a large opportunity as cpgs transition more of their $225 billion in annual spending marketing spending from offline to digital.
Well, we're doing an increasing number of campaigns that combine digital coupons and media, we continue to face headwinds in national coupon spend from three large CPG as we've mentioned before.
Had revenue from those Cpgs been flat with Q2 of last year total revenue would have grown 20%.
This is a larger decline than we were anticipating in the second quarter and impacted national coupons in both digital print and paperless as I mentioned before I learned about out of an abundance of caution we are going to forecast this rate of decline to continue through the remainder of the year.
In general these cpgs have decreased total promotion spend across offline and online channels as they follow a strategy of pricing up in the face of rising commodity cost and margin pressures.
Pricing up takes place when brands stopped discounting items effectively raising prices on products that consumers purchase.
Despite this headwind in national digital coupons promotions revenue from retailer specific CPG coupons, a key strategic and competitive advantage of ours increased 53% in Q2, driven by primarily by our integrated packages that combined media with promotions.
We started selling these package solutions last year and the 53% growth in this segment is a clear demonstration of the continuing success of this strategy.
Another headwind in promotions came from specialty retail, although we had been projecting declines in this business. It declined more than expected in Q2, 24% year over year. This business is mostly dependent on search engine traffic and to be cautious even though this is a Q4 seasonally strong business, we're going to flow a larger rate of decline through the back half of the year forecast.
Last quarter, we talked about our key growth drivers well two of these initiatives are delayed we don't see anything, causing us to be concerned about the fundamentals.
The first targeted offers printed at checkout remains an existing sizable revenue business that we are now entering for the first time.
Our solution unifies, the shopper experience between digital and print and give us retailers a fully integrated marketing solution, which we believe does not exist in the market today, and we will drive more coupons and integrated marketing campaigns on our platform. It's now lie and in test mode. It's several stores and expected to be fully rolled out in Q4 alongside retailer marketing support aimed directly at the brands already spending large budgets in this channel.
Second and as I mentioned earlier sponsored search is live at Albertsons. However, additional work is needed by them to build exposure and this delay is also expected to impact our forecast for the balance of the year. We look forward to expanding sponsored search to additional retailers throughout the remainder of the year.
I'm going to pause now and turn the call over to Ron and I'll be back with you shortly.
Thank you Steven and welcome everyone.
We delivered revenue of $104.7 million up 17% over Q2 2018, while adjusted EBITDA was $11.7 million, representing an 11% margin.
We recorded a GAAP net loss of $3.9 million, a slight improvement over Q2 2018.
GAAP cash flow from operations for the second quarter, 2019 was $14.1 million, enabling us to end the quarter with a cash and short term investment balance of $253.6 million.
In summary, we continue to grow revenue gain operating efficiencies and generate cash.
Revenues total revenue was up 17% over last year and reflected the positive impact of integrated campaigns from shopper marketing and as Stephen noted growth in retail performance media for RPM is proving to be a key catalyst for growth driving increased use of targeted retail specific offers and media.
Our social Influencer platform oncology again delivered strong revenue growth again across a growing number of CPG brands.
Against this positive background, we continue to see softness from the same three cpgs that impacted Q4 and Q1.
As they continued reducing their overall national coupon span in the market.
Had these three cpgs kept their spend with us flat compared to a year ago. We would have delivered 20% total revenue growth over Q2 of 2018.
For additional transparency this quarter, we're providing the following color.
[noise] benefiting from the strength in social and RPM media revenues were up 65% year on year for Q2.
Revenue from promotions declined 6%, primarily international coupons and primarily attributed to the three Cpgs just mentioned.
Specialty retail primarily related to coupon codes a business, we have projected steady declines in declined 24% over last year much higher than the rate of decline over the past four quarters.
Looking at growth by customer cohorts on a trailing 12 month basis, we continue to see growth across our portfolio of customers in spite of the three CPG headwinds.
Moving on to gross margin.
Gross margin in the second quarter declined due to continued product mix shift as media accounted for 45% of total revenue in the second quarter up from 35% in Q1.
This larger proportion of media revenue was above our internal expectations and was reflective of increased campaigns from shopper marketing, which typically have a greater proportion of media associated with it offset by the rate of decline by the three large cpgs and promotions revenue.
We expect to generate higher margin revenue from quotient audiences in Q3, and some targeted offers printed at checkout in Q4 balancing the margin impact of the higher proportion of media in the second half of the year.
We expect our strategic partnerships to drive long term growth in revenues over time and an increase in gross margin dollars.
Operating expenses as we grow the business, we continue to actively manage our costs and leverage operating expenses.
Q2, GAAP operating expenses were down 19% from Q1.
The decrease in GAAP operating expenses, primarily due to the net change in the fair value of escrowed shares and contingent consideration as well as lower R&D costs reduced sales spend and lower FICA costs overall.
non-GAAP operating expenses in Q2 were up just slightly in absolute dollars compared to a year ago. As we continue to invest in new products absorbed several acquisitions and increased our headcount by over 130 people during the year.
We benefited from lower R&D and sales costs as well as reduced bike overall.
As a percentage of revenues non-GAAP operating expenses continue to show leverage declining from 40% of revenues in Q2 last year to 35% of revenues in Q2 2019.
non-GAAP operating expenses exclude stock based compensation the net change in fair value of contingent consideration amortization of acquired intangible assets, our ERP implementation costs certain acquisition related costs and restructuring charges.
Adjusted EBITDA.
Adjusted EBITDA was $11.7 million as wasn't and was impacted by the product mix decline in gross margin offset by continued leverage in operating expenses.
Adjusted EBITDA excludes interest expense income taxes, depreciation and amortization the net change in the fair value of escrow chairs and contingent consideration stock based compensation restructuring charges other income expense and certain acquisition related costs.
Stock buyback in May of 2019, we announced a one year stock buyback program of up to $60 million. Our goal was to move more aggressively than the plan put in place last year and as of July 16th we have completed the program buying back approximately 5.5 million shares for $60.1 million, including transaction costs.
Moving on to cash.
We ended the quarter down $33 million from the end of Q1 of 2019.
The reduction can be attributed to approximately $43.7 million spent on our stock repurchase program interest paid on the convertible debt of 1.75 million and $1.8 million related to net share settlements upon vesting of restricted stock awards issued to our employees, which have the same effect of stock repurchase partially offset by cash generated from operations.
GAAP cash flow from operations for the period was $14.1 million.
Let's now talk about guidance.
We are lowering our full year revenue and EBITDA outlook based on the following.
One.
Retailer delays are sponsored product search was up and running almost a full quarter late and the full rollout of targeted offers printed at checkout has been delayed until Q4.
We expect the combination of these delays to impact full year guidance by approximately $15 million. We expect revenue from these new products to normalize in 2020.
To the softer promotion revenue from the three large cpgs impacted Q2 revenue to a greater degree than originally anticipated. We expect their continued decline in national couponing to impact our full year guidance by approximately $15 million.
We believe these three cpgs will resume spend to gradually as their integrated digital marketing strategies settle in.
Three.
The decline in specialty retail revenue was greater than expected in Q2 and much higher than the rate of decline over the last four quarters.
We expect this to impact full year guidance by approximately $5 million of specialty retail is more weighted to the back half of the year due to seasonality.
For.
Keep in mind that our revenue adjustments are for products that generally have higher gross margin and therefore impacts full year adjusted EBITDA expectations as well.
For the third quarter 2019, we expect revenue to be in the range of $108 million to $112 million.
We expect adjusted EBITDA to be in the range of $11 million to $13 million.
For the full year 2019, we expect revenue in the range of $422 million to $432 million or approximately 10.3% growth versus last year at the midpoint.
Adjusted EBITDA for the full year of 2019 is expected to be in the range of $42 million to $48 million or approximately 10.5% of revenue at the midpoint.
As Steven mentioned earlier, except for the timing shift in revenue associated with that with two of our products and the three cpgs, who have reduced their spending all our strategic growth businesses have demonstrated strong growth.
I will now turn the call back to Steven.
Thank you Ron.
I want to be clear about our conviction in the business as a market leader and the strength of our solutions and our strategy going forward.
Our large CPG customers and retailers are making transformational shifts in their businesses and we remain their trusted strategic partner of choice.
We believe our technology data and industry expertise sets us apart in the market and the fundamentals of our business remains sound and provide opportunity for growth over several years.
One we are the market leader in CPG digital coupons and built the largest platform for digital paperless delivery to we've built a fast growing approximately $200 million media business over the past two years to the expansion of our solutions strategic retail partnerships and all differentiated by data and three we have one of the largest data platform servicing our marketplace as I said earlier, we processed over 76 billion chopper shopper transactions annually and use that shopper data to drive targeted digital promotions and media and for measurement. We're also just starting to expand distribution of our consumer segments, giving brand marketers the option to use our rich shopper data outside of our advertising services network.
And lastly at a macro level brands and retailers continue to drive digital initiatives to meet increasing shopper demand for omni channel experiences the need to drive increased sales more efficiently has never been higher and at the center of these initiatives is data as a greater importance is placed on consumer insights one to one shopper relationships and greater marketing efficiency our platforms work in unison to bring all of this together and serve the needs of our brands and retailers partners.
I'd also like to announce that we will be holding our first investor day on November 13th in New York City details will be sent out shortly.
Thank you and I'll now open the call up for questions operator.
Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile kuni roster.
Your first question comes from Switchback CAD curious from RBC capital markets. Your line is open.
Thank you two questions. Please Steven will the strategic direction of the company be any different going forward with you as the CEO and if so how if not what are.
What changes do you expect.
Over the next six months or a year and second on the guide and the delay in product delays.
Could you talk a little bit on.
How big of a surprise that was in terms of the delay.
For both products and if it was not technologically related what was the what was the reason for the delay. Thank you.
Sure. Thanks for the question. So let me let me start with.
Start with the guidance and what strategy if thats okay. So.
If you recall back in 2015, or so we had an awful lot of implementation going on and.
We're working with a very large partners and they have their own implementation strategies as well and with regard to other products, but everything touches each other when you're working towards integration of point of sale and so we are subject to systemic delays that happened when our clients are in the middle of doing their own product rollouts and so that really is at the heart of what some of this was we actually got confirmation yesterday see questions, even even more timely that notice has gone out that we are in fact launching in Q4 at scale. We have thought with coupons and offers that are printed in store and so.
There is no there's no there's no change in our thinking around those products. They are existing markets. There are an awful lot of budget spent that way there are effective and I think that the way that we've implemented it is even going to be more effective because these things tied directly to their digital solutions.
Going back to your question about strategy.
The strategy that we're on is absolutely correct, we're being very well received in the marketplace.
We're we're scaling up the growth parts of our business am I going to take a look at everything we're doing of course, I am but I've been involved in the business all the way along and so you should not expect any material change the strategy I think that we're on the right course, and the feedback that we're getting from the marketplace would echo that back as well.
Thank you Stephen.
Thank you.
Your next question comes from Thomas Forte from D.A. Davidson Your line is open.
Great. Thanks for taking my question. So I have three quick ones. So the first one I had is to run on earnings visibility can you remind us when you head into a quarter how much visibility do you have in general on sales for both the current quarter and the next one and then for Stephen on privacy, how should investors think about increasing government regulation when it comes to protecting consumers privacy and how does this represents both a challenge and an opportunity for quotient and then lastly on capital allocation you ended the quarter with $250 million cash in the balance sheet, how should investors think about the potential for an accelerated repurchase program. Thanks.
Rob why don't you take the first question. So on the first question, we typically have between 70 and 80% of the current quarter booked and when we go into the conference call and we have our conversations with you.
The next quarter is a much smaller percentage.
We generally that's really what it is.
Okay.
Let me, let me talk about capital allocation and privacy. So on privacy, you're specifically I think referring at least I did.
At least top of mind here is the TCPA initiative in California, and you don't look the answer to that is the laws influx. There are a number of amendments that are pending in the state Senate.
Some of them are being revised Aviate 46 was recently revised.
Is there a risk of course, there is a risk we're working very closely with our retail partners again. This is California specific it is influx nothing has been settled yet but there is also an opportunity and that opportunity is that we're getting ahead of it and peak because of the way, we think about data and consumers and protecting privacy, we have an opportunity to have influence in into the discussion here. So that's that's what I would tell you. We're we're on top of it we're working very closely with our California retailers and it does present, a risk and it also presents an opportunity and when that settles, we'll be able to.
We'll be able to action it a little bit more clearly, but right now it hasnt settled.
On capital allocation.
We're really bullish on the business really bullish on the business that has not changed at all and.
And we we hit the limit of that last program and all I'll say is we're really bullish on the business hopefully that answers. The question for you if it doesn't tell me now but great. That's my.
No.
Thank you Stephen Thank you Ron.
Thank you.
Your next question comes from Chad Bennett from Craig Hallum. Your line is open.
Great. Thanks for taking my questions. So just questions on on the guide in the second half.
Bring down of the guide I guess.
So I am just curious.
Maybe this is a broader question when when we gave guidance for the year.
Quite frankly, the timing of the point of sale.
Targeted coupon point of sale stuff with Albertsons I think was.
Probably.
If he at best for mid year. So my guess is you would heavily discount or normally would that in a full year guide for sure starting the year and then secondly, sponsored search I think was equally as early.
And I don't I'm not sure I'd love to hear an elaboration on what the issue with that is inside albertsons scaling, but I'm just trying to understand kind of the logic behind guiding the way you did considering those variables coming into the year.
If it's a fair question, we've gotten we've gotten better over the years as we integrate with our clients in particular with the retailers, we've gotten better at predicting the outcomes.
Hi contracts are one thing and you cant bet on the timing of a contract but.
Financial commitments in the marketplace marketing commitments, all lined up to give us more confidence and like I said before it's a one quarter delay the opportunity is so large.
Again for example on the offers that are printed in store and particularly when tied to digital that a one quarter delay really does have that kind of impact. So we're disappointed that were delayed but.
Yeah, there's no change to the outlook of the business for us and like I said, just yesterday, we got confirmation that that we were on schedule for full release.
In Q4, and we already are like by the way just to be clear we are live in stores, but the way. These programs generally work and I'm not going to talk about albertsons, specifically, but generally the way. These programs work is you do one story do 10 stores to do 100 stores into a thousand stores and do the program and so those those are measured steps because these are very very high volume environments and so.
Disappointed if it's a quarter late in the Grand scheme of things. This is a fantastic business for us and it's been a lot of heavy lifting to get here. So I'm really excited to see it go lives actually.
I've actually seen that come out of the point of sale they look great.
It's a really really great shopper experience.
And Albert has done a really great job defining that shopper experience on paper, so and that was sponsored search you don't same thing. It's a great opportunity we have everything everything spinning in the right direction and then it takes.
Because these things are website based app based you have to then direct traffic in that direction and directing traffic in that direction takes a little bit of web work a little bit of mobile work so thats it.
Okay, and then maybe a couple other questions on audience cloud specifically so.
Just so again.
Nobody gets.
Out in front of something they should and from a material nature of from a revenue material nature. So what are the expectations for audience cloud.
Starting as soon as this quarter.
And kind of maybe give everybody an idea of.
Obviously, you announced the Nielsen partnership.
How kind of the economics behind that partnership at least structurally how they will work for quotient.
And maybe expectations, whether it's Nielsen or audience caught in general.
For the next six to 12 months.
Yes.
And this this is going to sound like a cop out but.
I don't have that information at my fingertips, and I need to 90 to 90 to drill into that but I will say this we don't expect material impact from audience cloud in 2019.
We have been working very hard to get this platform into the marketplace is in the marketplace. Now we gave some insight into it on the call today, we've never given before and this goes back to an earlier question about forecasting and predicting the future until we actually had the data we didnt projected but I think you heard today.
We are we are now processing 76 billion purchase events in an annual basis and we're using that data. It sounds like we're warehousing, we're using that data at ladders up to 230 something million dollars and purchases and that's informing the segmentation of the of of audience cloud. So between our relationship with Nielsen and others that will that will come out in the marketplace and our own work on it. We're really we're really excited this is one of the big growth pillars of our business and it doesn't just happen on our platform, but also as you would expect as we make these these products services segments available on Dsps on AD exchanges in private cloud.
That's where the real scale comes from and I, just don't believe and I'm, saying that.
I mean, there is a factor, but I just don't believe that there's anything like this in the marketplace and never has been and there isn't anything close to it in size and scale and so.
Yes, we will be able to give you more information on that we were going to be more transparent about this but it's going to be 2020, where you're going to feel the impact.
Great. Thanks for taking my questions.
Thank you.
Your next question comes from David David Gearhart from first analysis. Your line is open.
Hi, Good afternoon. Thank you for taking my questions. My first question I wanted to focus on gross margin for a minute.
You had mentioned on the previous quarter.
Mirror Mirror I believe.
On 48% plus or minus as a gross margin level, where things could settle out and build from.
Obviously, the mix has shifted a bit toward media just wondering if we could get your thoughts on on how gross margin should should kind of trend for the year in it and how we should be thinking about it especially from a mix perspective.
Sure. Thanks for asking look our gross margin story is all about product mix right now media represented 45% of revenues up from 35% in Q1, we do expect stability in gross margin for the remainder of the year and we expect gross margin to improve in 2020, what that specific number is right now I can't tell you, but but you will see gross margin improvement in 2020, and it's a focus of ours as a company so youre going to see us putting up.
Josh a shine China brighter light on gross margin on a go forward basis.
Okay, and then in terms of the Cpgs, you talked about that the sthree and as their digital strategies and things come together.
There is a possibility they return and ramp and have greater activity. Just wondering what is the conversations been like.
With these three companies.
Is there any additional color that you could provide on on some of those conversations if they've occurred.
I can't give you specifics, but what I can tell you.
Within with enough around it to give you. Some some directional information is that those three cpgs are cutting their national promotion spend across the board. It's not just digital so if it were the case that they were cutting digital and growing online that would be a different story and that will cost us.
A different a different kind of concern, but this isn't a across the board.
Decline in their spend in promotion, which really is a pricing strategy. So instead of raising price.
In store you raise price by cutting promotion and so is that sustainable we don't believe it is.
The rest of the market Isnt behaving that way and you know again, if we see a return to to national promotion spending by those Cpgs and it has an impact on us in the back half, we'll revise and we'll we'll we'll let everybody know.
On retailer specific promotions I mean, those numbers are way up across the board and Thats. The trade the trade and spend that were talking about the marketing spend that we talked about the $225 billion that that runs across all of that our strategy of building RPM and integrating with retailers and becoming a fabric between cpgs retailers and consumers that is proving to be very strong and that will continue to grow from here. So.
It's really just about national promotion spend and really in the hands of the three of our largest clients.
Got it and then lastly, I noticed that the breakout between the various revenue lines were not provided explicitly.
In the presentation, just wondering if we can expect a different reporting format going forward.
In terms of the complexion of the business on the top end.
That's a very fair question. So if you recall in the past, we said, we're not going to be breaking these things out anymore.
Given the fact that we're revising down in the back half and Weve had management changes, we decided to be more more transparent and give more information sell that.
There was no underlying concern about the health of the of the growth parts of the business. We are talking about CPI is metrics and visibility here and so we'll get back to you on the next call.
On the next earnings call, we are what we expect to be the.
The visibility on a go forward basis, we want to be consistent but we also didn't want to show up today and say here are the top line numbers were not giving any more data we revised downward we changed the management team.
So we thought that it was we thought that it was appropriate to try and give more data out.
All right. Thank you.
That's it for me thank you.
Thank you.
We have no further questions and this does conclude today's conference call you may now disconnect.