Fluent, Inc. (FLNT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Fluent's First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Jordyn Tarazi, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome. Thank you for joining us to discuss our first quarter 2018 earnings result. With me today are Ryan Schulke, CEO; and Ryan Perfit, Interim CFO. Our call today will begin with comments from Ryan Schulke and Ryan Perfit, followed by a question-and-answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investor Relations page on our website, www.fluentco.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call are forward-looking statements, covered under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. The company undertakes no obligation to update the information provided on this call. For a discussion of risks and uncertainties associated with Fluent's business, I encourage you to review the company's filings with the Securities and Exchange Commission including the most recent annual report on Form 10-K and the company's 10-Q. During the call, we may also present certain non-GAAP financial information relating to adjusted EBITDA. Management evaluates the financial performance of our business on a variety of key indicators, including adjusted EBITDA. The definition of adjusted EBITDA and the reconciliation to the most directly comparable GAAP financial measure is provided in the earnings press release issued earlier today. With that, I am pleased to introduce Fluent's CEO, Ryan Schulke.

Thanks, Jordyn, and good afternoon everyone, very excited to be here for what is Fluent Inc.'s first earnings call. And I want to dive right into results with you. We're really pleased with the start of the year. In Q1, we saw a growth of 14%, and 42% for revenue and adjusted EBITDA respectively versus same period last year. We're also seeing some nice margin expansion. It's the result of enhancements to our ad targeting capabilities and growing demand from our advertising partners. This means we're becoming more profitable on our media spend and operating our core business with greater efficiency. On March 26, as many of you know, we announced that we successfully spun off our risk management division Red Violet and have restructured our Board of Directors and Executive Team to better represent Fluent as a digital marketing company. Importantly, the spinout also allows us to build cash and deploy it with greater precision. So really when I think about the net headlines for this quarter, we're running our core business more efficiently, we're more focused on it and we have more money to invest into our growth. Now since this is our first earnings call as a stand-alone company, let me walk you through a bit how we think about the core Fluent business and a few key elements that are enabling our success today. First, Fluent has always been a profitable company since day 1. It is now and was when we bootstrapped the business back in 2010. It's a cultural value for us that's become more of a structural value by nature. In turn, our teams earned a market position that enabled greater flexibility as to how we operate our business both in the day-to-day and as we invest in the long term. As a case of example, this year we were able to establish a beta program in the U.K, compiled meaningful commercial metrics to help us understand whether Fluent has the ability to launch and grow this market and we were able to accomplish that in under 60 days. And really when I think about it, this is a core staple of Fluent. We're able to work on initiatives like this, spin them up quickly on minimal resources and cost and look at the metrics, dive into the data and understand the scale behind opportunities. Really we're very active in incubating new initiatives like this and they often evolve into future business units that drive organic growth for us. Profitability is disruption insurance for Fluent. The market will change, we all know that and we have the ability and freedom to make investments and acquisitions whenever it does and as we see fit. The second piece I want to touch on is around our identity graph. We have and continue to build out one of the largest first-party databases in the marketing world. This is our Fluent identity graph and it's a proprietary asset that is the centerpiece of our business. 150 million Americans have given us opt-in permission to deliver marketing communications and we've received billions of custom responses about their lifestyle, interests and needs that we use to deliver them content and connect them with our advertising partners every day. We have the suite of surveys, polls and chat tools, along with other content to help us understand the people in our identity graph and we host these conversations with visitors on our web properties with a goal of connecting them to the products and services that delight them or will improve their life that are offered by our brand partners. Last year, we generated over $210 million in revenue that came almost exclusively due to permissions and insights we have within our identity graph. Now that's about $1.40 per person annually. While we aspire to grow the identity graph, we also believe that we will be able to improve the value per user that resides within the identity graph. My third and last point is really around our value proposition to our clients and that is what Fluent delivers, a performance-based model for our partners. We are the direct connection between our clients and the people in our identity graph. Our model eliminates many of the third-party layers that reside between brands and publishers today. So we're able to create the exposure and measure its value and then we can track the results in real time in conjunction with our clients. This has earned us trusted relationships with some of the largest and fastest growing brands in the world. A lot of our brands are looking to us for new customer acquisition today but we're going to look to evolve those use cases in the future. And as this market position, stretching from consumer to client is what has helped us to constantly learn, which just perpetuates our model, enables us to drive deeper into the verticals we already play in. If you think about how Fluent's compensated today as opposed to your traditional agency who is incentivized more around services, for instance, a media agency is compensated around a percentage on the advertising dollars they spend. Fluent is actually compensated on the outcomes we deliver. So our -- we are completely aligned with our partners with respect to how we operate our business model. Now, I spent today's time headlining the Fluent value proposition and why we feel our business model and culture are wired to win in a crowded and disruptive marketing space. On our next earnings call, I'll be spending more time outlining our key commercial initiatives that will drive our future revenue and profit growth into the back half of 2018 and into 2019 and beyond. At this point, I'll turn things to our Interim CFO, Ryan Perfit, to detail the financial results.

Thank you, Ryan, and good afternoon. Thanks everyone for joining us for our first earnings call as Fluent. Compared to first quarter last year, Fluent delivered double-digit growth on all 3 of our key financial operating metrics. We drove 14% top line revenue growth, 32% growth in gross profit and 42% growth in adjusted EBITDA. We also generated $2.2 million in adjusted net income, representing $0.03 per share of adjusted earnings. That's up from a loss of $0.18 per share for the first quarter of last year. We'll dig into these results but as you all know, we spun-off Red Violet in Q1. The result of the spun-out entity and the costs associated to the transaction are now reflected in Fluent's Q1 consolidated financial statements as discontinued operations. For comparative purposes, Red Violet's first quarter 2017 operations have also been reclassified as discontinued operations. The net loss from discontinued operations for the first quarter was $21.1 million and $2.9 million for the same period prior year. The loss from discontinued operations includes the onetime loss on disposal of discontinued operations of $19 million, which was primarily composed of noncash share-based compensation expense of $15 million -- $15.5 million related to accelerated vesting, and cash expenses of $3 million. The cash expenses included spinoff-related professional fees and employee compensation. The isolation of Red Violet's operations gives us, for the first time, a clean view of Fluent's financial operations. We're excited to present those stand-alone results. Unless otherwise noted, I'll be comparing first quarter of 2018 to the first quarter of 2017. Revenue growth across multiple advertiser verticals and media channels was driven by increased adoption of our core performance-based marketing products. The $6.8 million increase to $56 million represented the largest quarter over same quarter revenue growth since the second quarter of last year. Gross profit increased $4.9 million to $20.3 million, with the gross margin increasing to 36%. That represents a 500 basis point increase in margin over Q1 2017. Fluent defines gross profit as revenue less cost of revenue exclusive of depreciation and amortization. Our cost of revenue primarily consists of the cost to acquire media through the purchase of impressions or clicks from platforms and publishers. We increased our gross margin by expanding our advertiser diversity and as Ryan Schulke pointed out, with better ad targeting by leveraging Fluent's unique first-party data asset. Selling and marketing expenses increased 8% to $4 million. Compensation, including share-based compensation, represented 74% of those selling and marketing expenses in Q1. General and administrative expenses dropped 32% to $8.4 million due to decreases in noncash share-based compensation. Again, compensation, our core operating expense, accounted for 62% of general and administrative expenses in Q1. Adjusted income from continuing operations was $2.2 million, exclusive of spin-off transaction costs of $7.7 million, that was a $12 million increase from $9.8 million loss in the same quarter of last year. The increase was due to a $4.9 million increase in gross profit, a decrease in share-based compensation expense and a write-off in Q1 2017 of long-lived assets. That equals $0.03 per share of earnings from continued operations on a weighted average share count of 67.3 million shares. For the same period prior year, we reported a loss of $0.18 per share for continuing operations. Net loss for the quarter was $26.7 million, including the $21.1 million loss from discontinued operations attributable to the spun-off entity. For profitability, the Fluent management team focuses principally on the metric, adjusted EBITDA. In the first quarter of 2018, it increased 42% to $9.6 million. Adjusted EBITDA margin expanded 17%, a 300 basis point increase over the same period last year. Moving on to the balance sheet. Cash and cash equivalents were $5.4 million at March 31. Debt including the current portion of long-term debt was $64 million. That represents an increase of $1 million over year-end 2017, attributed to the refinance required for the spin-off. The refinance of the H.I.G Whitehorse debt and the shareholder note lowered our interest rate by 450 basis points and will equate to, minimally, $3.3 million in savings through 2020. The renegotiated terms allow for quarterly pay downs not subject to prepayment penalties, which will create additional short-term interest savings and potential long-term saving on fees. Moving on to the cash flow statement. For the 3 months ended March 31, cash provided by operating activities from continuing operations was $2.9 million compared with $3.8 million for the same period in 2017. The $2.9 million generated from operating activities was primarily the result of the operating loss from continuing operations of $5.6 million plus an adjustment for noncash items, totaling $8.4 million. Cash used in investing activities was $21.3 million for the 3 months ended March 31, 2018, mainly the result of $19.7 million contributed to Red Violet on the spin and $1.4 million associated with Red Violet's operations. Cash provided by financing activities was $13.1 million for the 3 months ended March 31, primarily a result of the net proceeds from the issuance of 2.7 million shares of common stock used to help fund the contribution to Red Violet. We're thrilled with our Q1 performance and believe the value of the company exceeds what's reflected in our current market cap. We're excited for what Fluent will accomplish in 2018 and are confident our business model will provide increased shareholder value in subsequent quarters. That concludes our prepared remarks on the first quarter financial results. Our operator will now open up the line for Q&A.

[Operator Instructions] The first question is from Jim Goss, Barrington Research.

Congratulations on making it as a public company. I want to start with asking about the contributing sectors or verticals that was involved in generating your revenue base.

Jim, good to hear from you. And can you just give me a little bit more detail in terms of the vertical break out?

Well, I'm just wondering are there -- I'm not quite sure how you plan to eventually, sort of, characterize this but are you looking at consumer products? Are you looking at other types of sectors that you plan to use as your clients that are generating the revenue base right now?

Yes. Absolutely, Jim. And it's something that we do plan to detail as we're now flushing out and we've sort of recharacterized the business as a stand-alone marketing company. So in terms of how we're thinking about verticals and vertical groupings, they're in line with industry standards but we do also want to be thoughtful about how we're publishing that and how it really implicates our strategies going forward. So we will be talking about that in the future. I know in the past through the Performance Marketing lens, we've talked about things like media and entertainment and financial services and things like that. We play in such a wide array of verticals that it's almost hard to get lost in it due to the nature of our business where we're looking at audience first and really doing the audience segmentation and matching them to the products and services that meet their needs, it results in us playing at material levels and a myriad of verticals. So we want to be thoughtful about that and how we group those and characterize those to the market so there will certainly be more to come on that and we're seeing really solid progress. I know we published at least 1 or 2 highlights in the earnings release today but there will be more to come on growth within those respective verticals.

All right. And -- just a couple of other things. The -- are you thinking in terms of the second-stage data use such as was reported in your prior life as information services, with some of the information you're gathering in the Performance Marketing core business? Or is that sort of a remnant of prior existence?

That's more remnant of prior existence. Really, all of our solutions are geared around some sort of performance metric and looking to work with our clients to help them generate ROI on their marketing activities. We certainly had a hand in what was previously characterized both info services and Performance Marketing but as Fluent thinks about our business, it's one segment and that's how we look at it. They're all a very wide range of Performance Marketing products that we deliver to market.

Okay. And the last thing I'd ask right now is while we can probably come reasonably close in characterizing what 2017 looked like by quarter, would it be reasonable to think that you might provide a restatement of 2017 by quarter as a basis for comparison for the new year as your report?

At this time, we don't foresee doing that. It's -- you can probably have a general sense in terms of what we were in terms of the overall percentage of the organization in previous -- in the previous year and year prior. But at this point, we're really looking forward and looking forward to driving the business in terms of 2018 and beyond.

The next question is from William Gibson of Roth Capital Partners.

Could you let us know what the terms of the new debt are? Floating, fixed or...

Yes. There -- this is actually the sixth amendment to the original agreement with H.I.G Whitehorse. It gets -- it's a -- with the amendment, it's a complicated way to look...

That's 7 over LIBOR basis.

Right. So the terms -- the interest rate is 7 over LIBOR. It is a 5-year term. Beyond that, if you have any more details that you'd like, we can take it off-line and I can fill you in.

No. That's good. And just from a bookkeeping point of view, what do you think the second quarter share count will be?

I believe the second quarter share count should be around 75 million, 76 million. I believe that's where we closed the quarter, it's right around 76 million. We took some into treasury in Q2 but other than that, it should remain fairly constant.

Okay. No, that's good. And I know, Ryan, you said you'd talk about the new initiatives on the next quarter call but can you give us some hints on what direction that may head?

Yes, William, and really we did speak a little bit and we have published a shareholder letter on our website if you'd like to take a look. I don't want to go too far into anything and I can tell you that we've been very active on the leadership front on on-boarding new senior talent that are going to be or are already driving new initiatives for us. The way we think about our business, we have the consumer lens and we're looking to find more ways to engage with them, expand our reach and expand the frequency in which we can have conversations with our consumers. On the other end of the spectrum, we want to be more ingrained into the workflow of our customers, of our advertising partners and providing more value across the ecosystem. So from a very high level, if you think about it, we want to be able to go out and generate more outcomes with our partners and the transactional part of our business will grow through that consumer lens and how we interact with them and the products that we develop on that side of the spectrum. And on the customer side, we're also able to come and roll out new types of products and services to deliver them, using our very unique and proprietary first-party data asset. So one part has to do with driving more on where we already have a lot of demand from our partners and how do we go about just creating more of those connections because they're already uncapped by nature with their budgets and looking to spend more with Fluent. And on the other end of the spectrum, it's how do we satiate some of their need beyond new customer acquisition whether it'd be retention and loyalty or other products and services that we can bring to the table. So from a very high level, that's what we're looking to do and I know we've alluded a little bit to international and other things but there'll be plenty more to come on the call to follow on that.

This concludes our question-and-answer session. I would like to turn the conference back over to Ryan Schulke for any closing remarks.

Yes. And again, thank you for everybody joining. We're incredibly excited about the newly -- the new Fluent and really looking to drive value for our shareholders long term. We realize this is a marathon, not a sprint and really Fluent has an incredible foundation which to build on. The culture here is outstanding and we're really excited about the prospects that we have to drive growth and value for our shareholders in the future. So we thank you all for joining and we're very excited about what's to come in the future.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.