Fluent, Inc. (FLNT) Q1 2017 Earnings Report, Transcript and Summary

But thank you again and good afternoon to all who are joining us today to discuss our first quarter results. We are pleased to report another strong quarter, and start to 2017. Revenue increased 29% over prior year to $50.8 million. Gross profit margin increased 300 basis points over prior year to 31% and adjusted EBITDA increased 111% over prior year, to $5 million. I would like to highlight two overarching industry trends that we believe will drive demand for our products and solutions, for the foreseeable future. First, as I have mentioned previously, there has been an explosive proliferation of data over the years from developments and technology, such as mobile, ecommerce, and social. Businesses and governments are inundated with disparate data, both structured and unstructured, and continue to struggle to glean intelligence in order to maximize efficiency and to increase [indiscernible]. Those that do this successfully will thrive. Those that don’t, will not. This challenge knows no bounds, affecting businesses of all sizes and in all industries. Cogint’s products and solutions play right into this trend, where we seek to serve this massive market by delivering clarity that organizations need for their decision making prophecies. Utilizing our technology, our data assets and our analytical capabilities, we are delivering intelligence applications to our customers, to enable better and faster decisions. The second overarching trend is the powerful movement of offline to digital, with respect to consumer consumption of content and purchasing. As you know, you cannot go about your day without observing the repercussions of this seismic shift. Just pick up a newspaper, or watch TV, or go to the mall, and you will see the impact of mobile and ecommerce. Lone standing prominently branded retail stores are shuttering in mass, while consumers are enjoying the benefits of priced shopping and purchasing on their mobile devices, while sitting in their living room. Marketers know that they must commit resources to digital marketing, and they will continue to do so for the foreseeable future. Especially devoting resources where they can obtain measurable results. Our unique ability to develop custom audience data and to activate it against an increasing amount of addressable media is a fundamental driver of our continued success and traction within the digital market [technical difficulty] drives our business as we roll out new products, further enhance existing products, and enter new markets. We see continued strong demands for our products. We know this multiple ways. Upon that first call by the sales team, we are increasingly seeing awareness by the prospect of who we are and our capabilities. We are receiving inbound interest from and are establishing key integrations with various industries specific platforms that offer a suite of third party products, including those of our more established competitors to their customers. By way of example, we announce the integration of the fluent acquisition application with the oracle marketing cloud. We have built out our sales team, traveling and visiting prospects around the country, where we are receiving significant interest in the products, excellent customer service and cost efficiencies that we can deliver. And we are seeing an increase in not only those customers that want to deploy our products more broadly across their organization, but also the scale of customer as we move up from smaller, early adopters to those customers that demand greater functionality to execute their daily workflow. In fact, today we now have 47 customers that spend over $1 million per year with us. There is heightened anticipation with regard to our product roadmap, and as a result we continue to see increased interest and uptake in our subscription products. Our team of data scientists and developers is working aggressively to meet this demand by executing upon a robust product roadmap that will take us well into the future. Our information services segment revenue increased 49% over prior year to $16.4 million. Our performance marketing segment revenue increased 21% over prior year to $34.4 million. Within our information services segment, healthcare revenue increased 85% over prior year to $2.7 million. Financial services revenue increased 40% over prior year to $2.6 million dollars. Media and entertainment revenue increased 98% over prior year to $1.8 million. Within our performance marketing segment, strategic growth verticals continued to show increasing demand and strong profitability, with continued focus on activation of our unique first party database across new channels. Mobile app revenue increased 517% over prior year to $7.5 million. Career and education revenue increased 74% over prior year to $2.5 million. And market research revenue increased 319% over prior year to $1.4 million. Now, I will turn it over to Dan who will discuss the financials.

Thank you Derek and good afternoon. The year has start well for us. I am pleased with our strong execution in the first quarter. While investing across the business, enhancing our technology platforms, operating infrastructure, and fully integrating the queue interactive business onto our marketing services platform, we were able to deliver strong revenue growth on expanded profitability. Our first quarter results, again, reaffirm the execution of our business model and pave the way for what we expect to be a very successful year for Cogint. Moving onto our first quarter results, revenues were $50.8 million, a 29% increase over first quarter 2016, driven by strong growth across both our segments. Adjusted EBITDA was $5 million, a 111% increase over first quarter 2016. Adjusted EBITDA margin expanded 385 basis points, to 10% at compare to first quarter of 2016. Continuing to the details of our PNL, as mentioned, revenues were $50.8 million for the first quarter. Our information services revenue increased 49% to 16.4 million, led to strong growth from our healthcare, financial services, and media and entertainment verticals. Our performance marketing revenue increased 21% to $34.4 million, driven by our strategic growth verticals of mobile app, career and education and market research. Cost of revenues were $35.2 million compared to $28.5 million for the first quarter 2016. A result of increased data and media costs associated with the increase in revenue, partially offset by savings attributed to the optimization of our consumer traffic through more efficient media lines. Gross margin was 31% for the first quarter 2017, A 300 basis point increase over first quarter 2016. SG&A was $19 million. A 15% increase over first quarter 2016, driven primarily by increased investment in the expansion of our sales, operation, infrastructure and technology teams. Partially offset by lower professional fees. The $19 million in SG&A for the first quarter consisted primarily of $7.3 million of non cash share based compensation. $6.9 million dollars in employee’s salaries and benefits, $1.1 million in accounting, legal and other professional fees, and $.7 million in restructuring costs related to the integration of the Q Interactive business. Depreciation and amortization was $3.4 million in the first quarter 2017, a 31% increase over first quarter 2016. The increase was primarily the result of the amortization of tangible assets from the acquisition of Q Interactive in the second quarter of 2016. As a result of the Q Interactive integration, we wrote off a total of $3.6 million in long lived assets for certain intangible and fixed assets, including trade names and proprietary technology acquired in the Q interactive acquisition. Net loss was $12.7 million for the quarter, largely a result of non cash share based payments of $7.3 million and the onetime non cash write off of long lived assets I just discussed. New loss for the quarter 2016 was $6.7 million, inclusive a tax benefit of $3.5 million. For the first quarter 2017, we recognize a full valuation allowance on our deferred tax assets, and as a result did not book nay tax benefit in the period. We expect to be in a full allowance position for the remainder of the year and do not expect to book a tax benefit in 2017. We reported a loss of $0.24 cents per share for the first quarter, based on a weighted average share count of 53.8 million shares. Moving on to the balance sheet; cash and cash equivalent were 22.1 million at March 31, 2017 compared to 10.1 million at December 31, 2016. Total debt, including the current portion of long term debt, which was used to finance a portion of the fluid acquisition, was 63 million at March 31, 2017, an increase of $13 million from December 31, 2016 a result of a conditional incremental term loan. Current assets were $52.4 million at March 31, 2017, compared to $43.1 million at December 31, 2016. Current liabilities exclusive of the current portion of long term debt were $19 million at March 31, 2017 compared to $22 million at December 31, 2016. Moving on to the statement of cash flows for the quarter ending March 31, 2017, cash provided by operating activities was $2.2 million compared to $0.5 million for the same period 2016. The $2.2 million provided by operating activities was primarily the result of generating current income of $2.3 million after adjustments for non cash items totaling $15.1 million. Cash used in investing activities was $2.3 million for the quarter ended March 31, 2017 mainly the result of $2.1 million used for software developed for internal use. Cash provided by financing activities was $12.1 million for the quarter ended March 31, 2017, a result of $14 million in net proceeds from the incremental term loan, partially offset by the repayment of $1.8 million in long term debt. For the trailing 12 months ending March 31, 2017, our leverage ratio was 2.3 times net debt to adjusted EBITDA. As we discussed, our [indiscernible] allocation strategy during our last call and our ability to extract tremendous operating leverage from the execution of our business model. We wanted to position the company in a manner so as to seize upon the abundance of opportunities we have on our product road map should we choose to from time to time. In that regard, we secured a $15 million term loan from our lending partner in the first quarter of 2017 on substantially the same terms as our existing debt. With our expanding margins and continued strong cash flows, we expect the leveraging throughout the year continuing to focus on strong organic growth. Also on our last earnings call or learning’s call, I took some time to reflect on and discuss our strategic acquisition of Q Interactive in 2016. Q Interactive provided an excellent strategic acquisition opportunity that allowed us to expand out data assets, customer base and thought leadership. After analyzing the synergies and identifying the capabilities that drive the greatest ROI within our marketing business, we commenced and completed in the first quarter 2017, the integration of the Q Interactive business. Leveraging the best capabilities across the organization and realizing cost, technology and resource synergy that will translate into material profitability. We expect little or no customer or revenue attrition associated with the integration. Incurred restructuring cost included in SG&A in the amount of $.7 million as a result of the integration during the period. Beginning in the second quarter 2017, we expect to realize approximately $4.5 million in annualized saving and SG&A as a result of the post integration cost synergies. \ I will now turn it over to Derek to conclude our prepared remarks.

Thanks Dan. In closing we are off to a great start to the year. We have demonstrated over the last couple of years that we are building a company for the long term. With a strong foundation comprised of next generation cloud based platforms, a massive data repository containing holistic views of over 95% of the U.S. consumer population, Intelligent applications and analytical applications, to drive products well into the future. We are driven by innovation and our customers. We are focused on AI implementation or artificial intelligence. Layering our platforms with machine learning, so as to extract knowledge otherwise unobtainable. And combined with the over-all themes that we discussed, we have tremendous opportunities that lie ahead. We are very well positioned for the rest of 2017 and thereafter. Our operator will now open the line for Q&A.

Thank you. [Operator Instructions] Our first question is from Jim McIlree with Chardan. Your line is now open.

Derek, I think in your remarks you talked about three verticals within both the performance marketing and information services businesses. And I’m curious, were those three just the largest three verticals in each of those groups or the ones with the greatest growth rate? Or the ones that you’re focusing on going forward? Or some or all or some combination of that?

Those are the verticals we’re focused on right now. As I mentioned on the last call, where we’re devoting our resources where we see we can get kind of exponential gain; those that we can make the most traction in and that we’re very excited about. And that’s why we’ve chosen those verticals to highlight. And of course, because of the progress in those verticals it’s because of the attention we’re giving them.

And as far as the size of those verticals relative to anything else? They could be random or they’re some of the bigger ones?

So when we looked at these verticals, we’ve called them out on the performance marketing side over the past few quarters. These are those strategic growth verticals where we see the most amount of strategic leverage if you will going into the next few quarters. We’ve put a lot of resource into growing these verticals. So as it relates to kind of historical growth, these are the verticals we see growing over the next few quarters. Relative to size of some of the other verticals, they’re more of the emerging side that are growing quickly. The other verticals are relatively stable in regards to kind of historical revenue.

And, Dan, every time we speak I think I ask you about seasonality so I don’t want to disappoint you this time. Was Q1 a seasonally weak quarter for information services and performance marketing? Or both?

So I would expect nothing less than to get the seasonality question. So we’ve discussed previously that the marketing side of the business performs well on the fourth and first calendar quarters and the risk management side of the business really performs well the first through third calendar quarters. Looking at the overall business, if the marketing business represents a substantial portion of our revenue we do still expect seasonal pressure as the result. However, we’re layered on multiple strategic growth initiatives into our business model, both on the performance and information services side, and fully expect to leverage that growth over the next two quarters.

And the last one; at the very end, Dan, you threw in a $4.5 million in annual SG&A savings beginning in Q2. I just want to make sure I’m understanding that correctly; so if I look at extra write off - let’s just do a SG&A and sales and marketing extra the write off. So you’re at, what, $19 million right now? So is it [fair] to say then, a year from now it will be $19 million less the $4.5 million plus whatever growth is required to support the business? Is my math kind of right?

Yes, that’s [the] way to look at it. As a growth company, we’ll continue to invest in the infrastructure, sales and technology teams from a headcount perspective. But [the] way to look over the normalized SG&A is to take out the $4.5 million on an annualized basis. So looking at where we’re at today at $19 million in SG&A, you can expect over the next year that $4.5 million would be removed from that number, offset by some initiatives to grow the business.

Our next is from Jim Goss with Barrington Research. Your line is open.

Following up a little bit on Mr. McIlree’s first question; the information services categories you highlighted don’t really match up with the areas I’d think you’d be going into with IDI CORE. So I gather they would relate more to the Fluent sort of a spin off, is you will. Is that correct or are some of the financial services areas primarily related to the IDI CORE operations?

Yes, when you look at the product suite and solutions that we have on the risk management side of the business, you’re going to see a tremendous amount of those solutions fall into the financial services bucket. You’ll also see a good portion of the solutions fall into healthcare. When you call out the media and entertainment as it sits today, a good portion of the marketing business will fall into that bucket.

Can you provide any update on the IDI CORE progress to this point? I know it was a smaller category, but a promising one. So where does that stand right now?

We’re doing great in that business. But, as I’ve mentioned previously and believe me I with could give more transparency than I am. It’s just highly competitive. And we know our competition feels us, we are testing head to head with them with customers and winning tests on our data and we’re growing the business. So I can’t give any metrics of on boarded users or customer adoption. But as I can tell you, that I mentioned in my notes, that we’re seeing continued growth in the subscription products; meaning the contractual revenue versus transactional. And again, just to highlight for you and anyone else who is unaware from previous calls; that’s a reverse of what we’ve experience in the industry given where we are in the early stages of development. We are getting customers that understand where we’re going in this product road map. And they’re wanting to lock-in in long term subscription contracts in order to lock in price and take advantage of the efficiencies that we’re bringing to them today. We are, I can say, in fact winning larger customers than we were in the smaller early adopters. And we’re very excited by that and we continue to make progress. As I mentioned in my notes, we built out our outside sales team and those are really a bit of a longer sales cycle but they’re knocking on doors of the bigger, larger companies. Again, it takes a little time to get that traction as opposed to a small business, but we’re very excited about that. And we’re not integrating with many of the platforms that are out there. By way of example, in the collections market there are platforms that offer their customers access to a variety of products and they might be competitive products, of course. But now when we get that phone call from them saying, "I’m being told by my customers they want access to you on my platform, so let’s bring you onboard," that tells us that we’re making traction in the market. And so that’s just one of those indicators that we follow and we’re very encouraged.

And with the groupings in the performance marketing segment, can you talk about which of those aggregate more to the traditional Fluent business versus the Q Interactive business? Or was there a lot overlap in each of those?

So when we look at the Q Interactive business, one of the things we looked at when we talked about kind of strategic acquisitions and we talked a little bit about it last quarter. It is from an acquisitions stand point we really looked at the opportunistically inquisitive, looking for those assets that ever have misplaced or underappreciated and that can synergistically expand our capabilities and exploit our business model, all while having an acquisition cost that is significantly lower than the targets extrinsic value. So when we looked at Q Interactive, we knew that we were one of the few potentially only strategic that could extract meaningful value from that asset. And as you know, Q Interactive revenue has been declining for several years, however, we saw tremendous value in the client relationships, data, and thought leadership, because of the already superior platform we had with the [indiscernible] asset. As we integrated the business, shared clients, and grew the customer base, we lost visibility in to the segregation if you will of the [Indiscernible] Q business verses the current overall business. However, what I will say is the growth of our marketing business came off the growth of our fluent platform. I would say very little growth, in those verticals, would be attributed to the Legacy Q Interactive business.

Okay, maybe that lastly are there any other small acquisitions you could make that would either be along the same lines or maybe adjacent to it so that it might extend that traditional business?

So Jim, we’ve made a policy on not to comment on any acquisitions in the likes. But I will reiterate my comment, that I have made many times, we are very intently focused on creating shareholder value and we will always be looking for opportunities if that expands the customer base, if that expands our technologies, or advances the road map. And we are especially interested in assets like you, where they might be mispriced or misunderstood, where we can make that acquisition that we know it significantly increases shareholder value and is synergistic with the business. So I will leave it at that.

Our next question is from Monish Bahl with MHB Capital. Your line is now open.

Thank you, and congratulations. Just a couple quick questions, with regard to the long term debt of the sequential basis its spiked up $15 million dollars, will you talk about that quickly?

Sure, so again, we talked a little bit about it on our last call but what we’ve seen over the last few quarters as we have initiated some of these strategic initiatives, is we saw a tremendous amount of opportunity in our products road map and our pipeline. And at any given time, we want to position ourselves well to basically act upon, when necessary, on those initiatives, to really drive the business. As a result of that, we reached out to our lending partner and in the first quarter of 2017, brought in an additional net proceeds of $14 million dollars from an additional term loan on substantially the same terms as our current debt.

Okay, got it. And then back to the health care vertical that showed very robust growth, can you talk about what is driving that growth and what sustainable growth rate you could achieve within that vertical? Thank you.

Sure, and we talk about these growth verticals either where we’re really putting our strategic initiative and see a tremendous amount of ability to leverage not only the data assets that we have on the information services side, but also leverage or ability to build custom audience on the marketing side so what that health care vertical really includes is hospitals and medical facilities that look for data validation, due diligence on the risk management side. We’ll also see on the marketing side, vitamin and health supplement marketing companies, durable medical equipment buyers, pharmacy saving cards and etcetera. I can think that market has plenty of room and opportunity for growth. We feel that is one of our potential strategic growth verticals. We initiated that in the third quarter of this past year and have seen a tremendous amount of capability to grow that vertical and see that to continue throughout 17 in to 18, leveraging our ability to build custom audiences that target the need of this particular vertical.

Our next question is from Sam Schaefer with Global Value Research. Your line is now open.

Derek, in the prepared remarks, you mentioned the product roadmap over the next several quarters. I was hoping you could expand on this and really when we’ll start to see this evolve.

Sure, Sam. Thanks for the question. What I can tell you today is that it is already evolving quite significantly. It has been over the last few quarters. We have these product enhancements within various solutions that we believe differentiate us from the market place quite significantly. And those are [indiscernible] well in to ‘18, where we have defined objectives that we are very excited about, that we will cross off one at a time, making our products better and better. So we have significant initiatives that we will roll out in the next two quarters, that we believe will have a very meaningful impact on revenue, and so that excites us. And then again, we have sort of these aspirations I’ll say but you know, aspirations makes me sound as if we will not accomplish, and we will, but their objectives, let’s say, that are better than what we see in the market and we are very excited about executing upon those, later in the year, after these first parts of the list are taken out.

All right, you cut out part of the ways through there so I hope I’ll be able to read the answer in the transcripts become available.

Sure, no, I apologize Sam. I mean in a nutshell, I guess I can tell you is that we’ve been executing for the last couple of quarters on that road map. Well we have been for a long time but we’ve really upped the technology team and our other developers and other locales have been executed upon that plan. We have released many of the initiatives. They are enhancements within our products that our customers are loving, in a nutshell, and we will continue to roll out very meaningful initiatives over the next couple of quarters that we believe with have a direct impact on revenue.

Great, and I know in the past, you were keeping fluent data separated from IDI, I believe in the last call that you mentioned that really the integration of Fluent date into IDI Core was going to start duly providing update on that integration.

Sure, I can tell you that fluent data is fully integrated in to IDI Core. And we are very excited about that. And our customers are all ...

I’m hoping to get an update on the multiple [trans] lawsuits. I believe the one was finalized. I was curious if we have provided them with the source code or if we’re still in possession of that.

Yeah, Sam, you know, I would point you to our legal proceeding section in the 10-Q that we just filed. I think that can give you all the [color] that you need and therefore I’m probably not going to address it today.

Ladies and gentlemen thank you for participating in today’s conference. You may all disconnect. Everyone have a good day.