Fluent, Inc. (FLNT) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Fluent, Inc’s. Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn -- to introduce your host for today’s conference, Jordyn Tarazi, Investor Relations. Please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our second quarter 2018 earnings results. 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 provisions 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-Qs. During the call, we may present certain non-GAAP financial information relating to adjusted gross profit, adjusted EBITDA and adjusted earnings. Management evaluates the financial performance of our business on a variety of key indicators, including adjusted gross profit, adjusted EBITDA and adjusted earnings. The definitions of adjusted gross profit, adjusted EBITDA and adjusted earnings and the reconciliation to 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. Having completed our first quarter as a standalone public company, we’re enthusiastic about our progress revolving the Fluent’s strategic plan while focusing on future growth opportunities. And we’re pleased with our second quarter financial results highlighted by 12% revenue growth on a year-over-year basis, 42% adjusted gross profit increase and 53% adjusted EBITDA growth as we focus against more profitable strategies and strengthen our core partnerships. On our Q1 earnings call, we spoke about Fluent’s performance-based business model, the Fluent’s Identity Graph, which is our proprietary first party data asset and the Company’s profitability profile. These pillars offer a sturdy foundation that is enabling a confluence of organic growth and margin expansion. That execution will continue as we believe there’re further upside market share opportunities in the digital marketing and media sectors. Importantly, our 53% growth rate in adjusted EBITDA is providing runway to more rapidly invest into our strategic initiatives. Much of our margin expansion can be credited to several factors. One, growing demand from our advertising partners as we deepen relationships, given our ability to scorecard performance and further align with their business objectives; two, more effective ad targeting and delivery across channels; and third investments into strategic media partnerships which align with key advertising verticals where we’re placing bets. I want to describe Fluent’s business model and fundamental terms, providing an orientation on where we currently reside in industry and how we’re thinking about future adjacencies and expansion that represent additional growth potential. At a high level, Fluent connects people with products and services based upon their self-declared lifestyles, interest and needs. We own and operate a portfolio of media assets, primarily websites and apps, which feature compelling promotional opportunities across the broad variety of advertiser verticals and where we attract consumers through paid marketing programs. The scale on which we do this is material. On a daily basis, we average over 800,000 consumer registrations and over 8.8 million survey responses, largely on mobile centric platform. Over the last several years, Fluent has amassed a proprietary owned database of over 150 million unique U.S. consumers who have provided us permission to deliver them ongoing marketing communications across multiple digital channels, not just during the initial registration and survey experience where we originate our relationship with them. We develop and operate programs for advertising clients based on their marketing objectives and strategies and in accordance with their technical capabilities. The deeper our relationship, the more our partners provide Fluent greater visibility into which consumers are completing specific actions through server to server tracking integrations. In turn, we learn and become more effective and efficient at what we do and our partnership strengthens through the process. So, the way we think about our business revolves around the consumer, the products and services we have in our managed service marketplace to promote to those consumers and the outcomes we are trying to produce for our partners. Consequently, the revenue per user in our Identity Graph and the number of conversions we generate are important metrics for us as a business. In our core performance marketing business, our growth strategy includes developing new and engaging content to connect our advertisers with consumers on a pay-for-performance basis. We are continuing to find innovative approaches to support the cost effective engagement of consumers on their favorite social media apps, mobile games, and other immersive content platforms, such as music and video. Our proven ability to develop engaging snackable content and experiences where we can simultaneously immerse our partners’ ad campaigns to support highly scalable performance marketing execution is critical to our long-term success. Next quarter, we will share more about future bets, including our plan to further leverage our first party, self-declared privacy safe data as we launch new products and services to meet the demand of leading brands, across several verticals and our international expansion, as we are very encouraged by the results of our beta program which launched in UK toward the middle of Q1. We have already generated more than 1 million user registrations over the course of the test and are optimistic about the prospects of global expansion. We hope we can better comprehend why we remain bullish on the Fluent brand and see our growth potential based upon the credibility we are earning in our industry and the results we are delivering for advertising partners. We continue to be disciplined about executing our current strategy while consistently measuring against our operating plan targets. Our leadership team is excited and energized by this new chapter in Fluent’s evolution and our entire colleague base is working hard to create shareholder value by driving sustainable and profitable growth. We thank you for your interest and support. I’ll now turn things over to our Interim CFO, Ryan Perfit to report on the financial results.

Thanks, Ryan, and good afternoon. Thanks everyone for joining us for our Q2 2018 earnings call. Compared to second quarter of 2017, Fluent delivered double-digit growth on all three of our key financial operating metrics. We drove 12% topline revenue growth, 42% growth in adjusted gross profit, and 53% growth in adjusted EBITDA. We also generated $2.6 million in net income from continuing operations, representing earnings per share of $0.04, that’s up from a loss of $0.15 per share for the second quarter of last year. I’ll now dig into the P&L in a little more detail. Unless otherwise noted, I’ll be comparing second quarter of 2018 to second quarter of 2017. Revenue growth of $5.9 million, up to $56.9 million was driven by increased adoption of our core performance-based marketing products across multiple advertiser verticals and media channels. Adjusted gross profit increased $6.8 million to $23 million with gross margin increasing to 40%, that represents an 800 basis-point increase in margin over Q2 2017 and our highest ever reported. We increased our gross margins through better ad targeting and expanded distribution by leveraging Fluent’s unique first party data asset. Selling and marketing expenses declined 21% to $3.7 million, mainly due to a decrease in the provision for bad debt. Compensation, including share-based compensation represented 69% of selling and marketing expenses in Q2. General and administrative expenses dropped 19% to $11.4 million in the second quarter, largely result of decreased share-based compensation expense to former executives; again compensation, our core operating expense accounted for 59% of general and administrative expenses in Q2. Provision for income taxes for the quarter was zero consistent with the prior year. We recorded a full valuation allowance against our deferred tax assets for both periods and intend to continue to maintain a full valuation allowance until there is sufficient evidence to support a reversal of all or some portion of the allowance. Income from continuing operations was $2.6 million, that represents a $10.9 million increase from an $8.3 million loss in the same quarter last year, that was largely driven by increased adjusted gross profit and decreases in selling and marketing expenses, and general and administrative expenses. As you all know, we spun off Red Violet in Q1. The results of spun-off entity and the costs associated to the transactions are now reflected in Fluent’s consolidated financial statements as discontinued operations. The total net loss from discontinued operations for the second quarter was zero but was $12.1 million for the same period in prior year. Net income for the quarter was $2.6 million compared to a loss of $20.4 million prior year. For profitability, the Fluent management team focuses principally on the metric adjusted EBITDA. In the second quarter 2018, adjusted EBITDA increased 53% to $10.9 million, and adjusted EBITDA margin expanded to 19%, a 500 basis-point increase over the same period in prior year. Moving on to the balance sheet. Cash and cash equivalents were $10.1 million as of June 30th. Debt, including the current portion of long-term debt and net of capitalized debt costs was $63.5 million. For the six months ended June 30th, cash provided by operating activities from continuing operations was $10.4 million compared to $6.6 million for the same period in 2017. The $10.4 million generated from operating activities was primarily the result of the year to date loss from continuing operations of $2.9 million, adjusted for $16.8 million of non-cash items and an increase in assets and liabilities of $3.4 million. Cash used in investing activities was $21.7 million for the six months ended June 30, 2018, mainly the result of the $19.7 million contributed to Red Violet on the spin and $1.4 million associated with Red Violet’s discontinued operations. Cash provided by financing activities was $10.6 million for the six months ended June 30, primarily the result of the net proceeds from issuance of 2.7 million shares of common stock used to help fund the contribution of Red Violet and offset by repayment of the term loan principal and cash paid to take shares related to vested RSUs into treasury. We are pleased with our financial performance in Q2 and confident we will continue to achieve its goals in 2018. That concludes our prepared remarks on the second quarter financial results. Our operator will now open the line for Q&A.

[Operator Instructions] The first question comes from William Gibson of Roth Capital Partners. Please go ahead.

First question is on operating metrics. Specifically, is the gross margin, G&A, sales and marketing lines we see in the second quarter, is it a good base to model off of going forward?

Yes. I’ll take this question. Those are good bases. There is nothing extraneous in there other than what you’re seeing in the EBITDA add backs.

Thank you. And then, in terms of the guidance that was given in February, full-year guidance, it seems like we’re running a little behind that. Is that still a good guidance for the year or should that be adjusted?

In terms of the guidance, this was put out by the previous management team, and as you know, this business has shuffled around little bit with respect to Board construct and the management team. We are still bullish on what we are going to track against for the full-year, and working hard to just make sure we have a healthy foundation to continue growing the business organically here. So, we are still feeling pretty good about what’s out there.

And then, just one last question. I think, I heard you say you would address it on the third quarter call. But, I know you’ve opened up a new business Audience Now to the healthcare sector. What other verticals are going to be targeted with that?

Yes. So, we actually did just launch that business. We have been getting positive feedback from the market on it. And we are actually making that assessment right now in terms of the additional verticals we will look at. As you can imagine there’s a number of verticals in the programmatic ecosystem that are investing heavily into data strategies, on targeting the right audiences. I think, the e-marketer status in programmatic, there will be about $40 billion in spending in calendar year 2019. And in and about 10% to 20% of that is spent on data for the purposes of targeting. So, it’s a sizable market at large. We are making assessments on a vertical basis. As you can imagine, health is going to be really important because we’re one of the few providers of first party self-declared data on health interest. That can lend itself well into other verticals. Take for example, consumer package goods where a lot of brands are focused on launching, healthy new products. But we’re still making those assessments, and there are quite a few verticals that should be interesting for us.

The next question comes from Jim Goss of Barrington Research. Please go ahead.

As long as you are talking about some of the business approaches, I wonder in terms of the healthcare vertical and some others that might be available, how wide should the net be cast? And how much do the verticals sort of interrelate with one another, where individuals who might be providing information in one aspects of their lives might be suitable for something else, and how complicated does that get to be?

So, it’s a great question, Jim. And really the way I think about Fluent’s data capability and asset against short of your standard market where they’re dealing with a lot of behavioral data sets and more off of how those users are behaving in different types of data against that where Fluent’s collecting in the moment insights real-time and more attitudinal data, that’s really what’s going to steer our roadmap on the Audience Now product line. Can we discover those real-time insights that you might not be able to get from other resources and being at their self-declared are typically of higher quality because this is first party data that the user gave us themselves. So, a lot of that is what’s driving these decisions more than even necessarily a vertical, it’s more of thinking through a consumer’s life cycle and their actual intent and what they’re in market for, which is driving those decisions. Again, health made the most sense out of the gates. And really you have a bunch of verticals that play into more health focused consumers and where the trends are going. But, we definitely understand that just because somebody is health conscious or has an interest in a specific condition, that doesn’t preclude them from maybe being interested in certain financial services, or other factors, facets of their life that really don’t have as much to do with their health decisions. So, we’re in deep on that with respect to understanding our audience and where we have the most scale and most -- the best chance to go out and deliver profitably and really high quality products.

And in terms of current operating priorities, are you getting a better feel for what you think you should be focusing on? And may be this ties into the Fluent Identity Graph. Could you talk a little more about what we should take that to mean, and how you would be using it?

In terms of our Identity Graph and it is a bit different than how other companies in the space are describing their own data assets. Ours is a first party self-declared data set provided by the consumer themselves, they’re inputting their contact information with us and we’re fluently surveying them as we interact with them over time and see them again and again. So, we have very high refresh rate. We’re able to pivot the asset to collect information about many different product and service categories and really where our consumer interests lie. And it’s really fueling our entire business. When we talk about our performance marketing suite, all of the decisions that we make are fueled by the insights that we’re collecting from the data that consumers are inputting on our site. So, it gives us great organic runway on our performance marketing business, which is a huge focus for us. We still think there’s a ton of upside on that within U.S. but also additional products and services that we may deliver to market such as insights and analytics, market research and even products around loyalty and retention as we do see a wide abundance of Americans on a daily, monthly and quarterly basis and have those real-time insights around them.

And maybe one last thing. The stock-based comp figure, which is quite a bit lower I guess than we were thinking about and might reflect the change in management. But, how do you go about calculating that or how should we think about that? And is the latest quarter sort of a relevant run rate for the next quarters?

So, it is a normalized run rate for the next couple of quarters. Obviously, based on vesting and when the shares were issued or when the RSUs were issued, it will change the calculation. But, they’re all valued over the life and you should see that normal run rate for the near future. And then it will probably change in January for the better.

And any of these other variance elements between the net income or loss and EBITDA calculation repeatable? I know there were like acquisition or litigation costs and some other things. Are these going to be taken out of that difference to get from one figure to another?

I’m not sure I understand your question.

Well, just the calculation of EBITDA had number of elements getting you from net income to the EBITDA. The stock-based comp was one, but there were some other smaller items like the litigation costs, which I assume that would be this quarter and at the subsequent quarters.

Yes. We don’t expect any additional add backs going forward. Obviously, as things come up, they will be added. But, we haven’t budgeted for any additional add backs, if that’s the question. All of the costs related to the spin-out have been recognized at this point. Anything going forward would be related to disc ops would be tax related.

The next question comes from Larry Berlin of First Analysis. Please go ahead.

One of the Ryans, first Ryan Schulke. In your remarks you were talking about other important metrics like revenue per user and things. I was curious if you could give us some idea of where they stand right now and where they have gone or where you expect them to go in the future? Obviously up, but a little bit more detail than that.

Yes, absolutely. And good to hear from you, Larry. So, on a full-year and we do a full-year audit, so full-year 2017, we were $1.40 per user. And really as we dig in, we expect that number to grow as we continue to remarket to our audience across new channels and interact with them and drive more outcomes on behalf of our partners. Where we think it really gets interesting down the line is the additional products and services we can layer on top of our core transactional business. And really what that means in terms of implications on that overall revenue per user that we can tie back on some of those new components that we bring to the table. So, without going into too much detail, we certainly anticipate it to increase as we get more intelligent with what we deliver and our clients’ demands increase. And we’re working really hard to make sure that that’s in lockstep with also driving more conversions and outcomes and consequently growing the Identity Graph itself. We will grow it at a more modest clip than revenue against it will grow. But, if you have both those things happening in tandem, we are in a really good place as we look towards ‘19 and beyond.

Of course like all good deeds will pay back, right, because you just said, new products, I suppose come in and can increase your revenue per user. What are you seeing out there now or what products are you -- have see demand for in the market at this moment, that you’re ready to offer?

Our clients are more and more starting to understand that we have a very in depth knowledge of specific audience segments and their own customer segments in many instances as we work with them over time. So, the types of insights that we’re bringing to the table at this point are leading to greater discussions around strategy work, how do we get involved with them at an earlier stage in their planning cycle, for new product rollout, and how do we greater enhance and create more efficiency around the customer acquisition strategies. So, as we’re seeing that in many different verticals we’re operating in, it’s given us the runway to go allow higher industry experts in certain verticals to help us drive more deeply into them, folks in the more data analytics and data science fields to help us constitute some of the data and understand the trends behind it that we can then work with our partners in tandem to design strategies around and in personalization and things of that nature. So, really that personal nature of what we can bring to the table and custom insights are leading to a lot more conversation around overall strategy as opposed to just customer acquisition campaigns, which has traditionally been Fluent’s core revenue stream.

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

Thanks again for everybody joining the call today. And we’re certainly very bullish on the Fluent brand and what we’re delivering for shareholders and our partners and are eager to get in front of you in future calls to give updates as we progress and advance on our roadmap.

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