Fluent, Inc. (FLNT) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon everyone, and welcome to Fluent, Inc. Q4 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note that today’s event is being recorded. At this time I’d like to turn conference call over to Mr. Ryan McCarthy. Mr. McCarthy, please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our fourth quarter and full year 2018 earnings results. With me today are Ryan Schulke, CEO; and Alex Mandel, CFO. Our call today will begin with comments from Ryan Schulke and Alex Mandel, 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, investors.fluentco.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date here of. 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 the 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 Company’s most recent annual report on Form 10-K and the quarterly reports on Form 10-Q. During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of our business on a variety of key indicators, including media margin, adjusted EBITDA and adjusted net income. The definitions of these metrics and the reconciliation to most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I am pleased to introduce Fluent’s CEO, Ryan Schulke.

Thanks, Ryan, and good afternoon, everyone. Thank you, for joining as we announce our fourth quarter and full year 2018 results. We’re again pleased with the progress Fluent has been making with our fourth quarter producing $70.8 million, $25.1 million and $11.1 million in revenue, media margin and adjusted EBITDA respectively. Media margin is a new non-GAAP metric that’s detailed in our earnings release. For the fourth quarter this represented 25% growth in revenue year-over-year, 27% growth in media margin, and 4% growth in adjusted EBITDA. For the full year, we saw 18% growth in revenue, 34% growth in media margin, and 35% growth in adjusted EBITDA. Much of the top line growth we saw in Q4 was directly on the back of Fluent’s core business. We made a decision to test the throttle on our traffic acquisition efforts with the goal of scaling key client campaigns and driving them more customers. This was largely successful, though it slightly compressed margins against the backdrop of seasonal media pricing. It was an important opportunity for Fluent to demonstrate our unique value proposition to clients by meeting, and in many instances, exceeding their customer acquisition goals with predictable return on investment. 2018 was somewhat of a landmark year for Fluent. And I’d like to take a moment to highlight some of what we accomplished. First, on March 27, we completed the spin-off of our former sister company, IDI, and are now refocused as a pure-play digital marketing company. Second, we’ve onboarded a significant number of new leaders to enable a more scalable infrastructure for growth, including our COO, Don Patrick; our CFO, Alex Mandel; and our SVP of Sales, Andrea Haldeman. Talent acquisition was a large focus for us throughout 2018 across the organization. Third, we announced the launch of Fluent Health, which is our entree into the programmatic marketplace as a first-party data supplier. The feedback on our data quality has been positive and we anticipate that this will be a profitable business line for us in 2019 that has the potential to scale into verticals beyond health. Fourth, we profitably activated the UK market. We will continue to evaluate going deeper into the UK as well as other international markets. However, the success we’ve been enjoying on the back of our core U.S. business and our belief in its growth potential has rightfully taken priority at the moment. Last, advancements in our machine learning algorithms and lifecycle marketing capabilities, clear points of Fluent differentiation helped to strengthen our core. Looking ahead, we believe we’ll be able to automate certain business functions and processes that have historically been very people intensive. This will afford us the ability to spend more time expanding as opposed to optimizing our performance marketplace. It’s important to remember in the backdrop of all this progress that every day Fluent is gathering millions of self-declared survey responses, opt-in marketing permissions, and one-to-one conversion data feedback on the consumers that we are engaging across our marketplace. With every week, our database grows in depth and breadth and with our knowledge of consumer engagement mechanisms across a variety of digital channels and numerous industry verticals. We’re actively making investments to institutionalize this proprietary capability in order to maximize value for our clients, for Fluent, and for our shareholders. So 2018 was much about focusing our leadership team and colleague based on Fluent’s core business, extending our lead on the industry competitive set by more fully leveraging what we’re great at. We’re are now better prepared in 2019 to more fully integrate the leadership talent we’ve onboarded to help us organically expand our core, as well as driving into adjacent businesses that leverage our inherent strengths. Our 2019 strategy is two-pronged. Number one, invest in growth at the core, create more supply and drive more outcomes for existing transactional client base, who are looking to expand their customer acquisition efforts at Fluent. We’ll do this by developing new media properties and establishing new channels and formats in which we can deliver content and advertising on behalf of ourselves and our clients. Two, continue diversifying our solution sets, developing solution to support our clients above and beyond their existing customer acquisition programs. We’ll do this by harnessing our always-on consumer engagement and surveying capabilities to develop insights that can support our clients with research on their customers or potential customers, which can in turn support programs for loyalty and retention, as well as brand strategy. With these themes in mind, we’re introducing guidance for 2019 as reflected in today’s earnings press release. On a full-year basis, we anticipate revenue of $285 million to $293 million or 14% to 17% growth over 2018; media margin of $100 million to $106 million as compared to $92.2 million in 2018; and adjusted EBITDA of 40 to – $46 million to $50 million as compared with $44.1 million in 2018. Thematically, this top line outlook reflects a renewed focus on driving growth in the business, whereas for a period of time last year, our results reflected margin expansion gains relative to growth that we’re now reinvesting. We continue to keep a sharp eye on efficiencies and profitability, but have set our 2019 goals to fortify our platform for further expansion in 2020. As I mentioned, we’re not just investing into our growth strategy, but we’re also investing into our leadership team and those responsible for execution, while remaining committed to the training and development of our talented colleague base. We’re confident that these investments will help support our 2019 growth agenda and beyond, and that will begin to see operating leverage by 2020. In conjunction and relative to our Q4 results, we do see a tempered cadence for Q1, that’s consistent with historical norms for both the digital and traditional marketing in advertising space. Our full year guidance is reflective of our Q1 outlook and we continue to be optimistic and excited about the year ahead. I’d now like to turn to our new CFO, Alex Mandel, for a deeper dive into our Q4 and full year 2018 results. Alex formally joined us at the beginning of February, although he had been consulting with the business for seven months leading up to that. We’re glad to have him on board. His prior experiences as the CFO at IAC Applications, one of the business units of IAC, and as a CFO at Lending Tree, who is publicly traded on NASDAQ, are a strong fit for Fluent. Besides finance chops and a successful public company experience, Alex has considerable experience in our industry and brings valuable strategic perspective and insights to our business. And with that, I’ll turn the discussion to Alex.

Thanks, Ryan. It’s great to join you today on the call and to be part of the Fluent team. And hello and good afternoon to those on the conference line. As Ryan mentioned, from my prior experiences leading the finance functions at two consumer-facing digital media companies, I’ve seen a number of relevant business models that had a common framework. On the one hand, attracting consumers on digital platforms, primarily through paid marketing and offering them engaging and valuable experiences, which engendered trust and loyalty with brands. On the other hand, delivering the advertisers the benefits of Performance Marketing services in the form of targeted customer acquisition programs add scale and with more predictable outcomes in terms of cost and ROI and traditional forms of advertising. And I can see the ways in which Fluent is executing on these market opportunities today and the opportunities ahead to further scale and optimize. My impression early on was that Fluent’s core competitive strengths included the ingenuity and entrepreneurial DNA of its team, a deep understanding of promotional media, and unique approach to data-driven performance marketing. These core strengths suggest that there was a meaningful opportunity to build value and drive growth. I learn more about the company’s history and the corporate transitions that have navigated, which necessitated considerable management bandwidth. This further suggested to me that following the spinoff, there would be an opportunity for the company to increase its focus on its core business strengths and to leverage its cash flow for future growth, specifically of the Fluent business. The company’s results in Q4 and for the full year 2018 are reflective of capitalizing on these strengths and opportunities. In discussing these results, I’d like to provide some context. We’ve made several changes to the company’s financial presentation that can be seen in the earnings press release today. With regard to GAAP financial presentation of the income statement, we reclassified certain expenses. We believe that recasting of expenses is more reflective of how the business is currently operated and managed. For example, the addition of a product development line item is informative in light of the company’s increased focus on enhancing its suite of digital consumer experiences and client solutions, as well as the company’s purposeful investment into driving innovation. The reclassifications had no effect on its net income or loss from operations, its net income or loss from continuing operations or its net loss. And the expense line items reclassified with the current periods have also been reclassified for historical periods. With regard to non-GAAP measures, we have introduced a measure of media margin, we have continued the existing adjusted EBITDA measure and we have updated the definition of adjusted net income. We believe these non-GAAP measures are relevant to how management operates the business and is compensated and facilitate analysis of the company’s performance. I would also note that we have posted the Fluent’s IR website and filed in an 8-K along with the earnings release, a package of supplemental financial information and operating metrics, presenting quarterly and annual information for each of the quarters in 2017 and 2018 to provide transparency and facilitate analysis of the Company’s historical performance. I’ll now speak further to the company’s results. As Ryan noted, Q4 was a strong quarter for the company, capping off a banner year. In the quarter, the company generated a record $70.8 million of revenue, representing 25% growth year-over-year. The company produced media margin of $25.1 million, representing 35% of revenue and growth of 27% year-over-year. Media margin is a non-GAAP metric, which is reconciled on the earnings release and which is the primary metric we use to measure the return on our media spend and related expenses. Adjusted EBITDA of $11.1 million in the quarter represents 15.7% of revenue and growth of 4% year-over-year. Implicit in the Q4 EBITDA result, our operating expenses grew in the quarter. Growth in expenses derived primarily from additional personnel we have brought into the organization to support our future growth plans. During the year, we expanded our headcount by approximately a third. While we anticipate some continued expansion in 2019, we also anticipate achieving operating leverage from this investment in 2020 and beyond. In addition, performance based compensation increased some of which was triggered and recognized in Q4. Provision for income taxes for the quarter was minor at $46,000, while in the prior year period, the provision was zero. We recorded a full valuation allowance against our deferred tax assets for both periods and intend to maintain it until there are sufficient evidence to support a release of all or some portion. Relative to the company’s NOL position, we don’t anticipate being a cash taxpayer in 2019. Adjusted net income, a non-GAAP metric that excludes from net income from continuing operations, certain non-recurring and non-cash items was $6 million in the quarter or $0.08 per share. As this previously been disclosed following the spin off of Red Violet in Q1 of 2018, the historical results of the now-spun entity and certain costs associated with the transaction are reflected in Fluent’s consolidated financial statements as discontinued operations. Turning now to a full-year view. For the full year 2018, Fluent generated a record revenue of just over $250 million, media margin of $92.2 million, representing 36.8% of revenue, adjusted EBITDA of $44.1 million, representing 17.6% of revenue, and adjusted net income of $22.7 million or $0.30 per share. From a year-over-year growth perspective, revenue grew by 18%, while media margin grew by 34%, and adjusted EBITDA grew by 35%. Moving on to the balance sheet. Cash and equivalents were $17.8 million at December 31, while working capital, defined as current assets minus current liabilities was $35 million. Total debt under the credit facility was $55.5 million, which reflects a reduction of $8.6 million compared with March 31, shortly following the spin-off. This reduction was achieved through quarterly amortization payments and a sweep of excess cash flow as defined under the credit agreement. In conclusion, we are fully focused on the Fluent business. The spin-off is behind us. We see opportunity in front of us, and we are resourced to pursue it. Should you have questions. We’re glad to take them now. For inquiries beyond this call, we provided updated contact info for our IR personnel on the earnings release. Thank you for your interest.

[Operator Instructions] Our first question today comes from James Goss from Barrington Research. Please go ahead with your question.

Hi, this is Pat on for Jim. I was wondering if you could provide a little bit more detail on kind of the key drivers on the low – the lower media margin that you guys expect in 2019?

Yes. Hey Pat, good to hear from you. And really as – we’re always taking a long view in terms of our investments into media and partnerships to go out and access supply and this is a range of different types of media initiatives that we have in place from new social channels, technologies that we’re utilizing to interact with consumers, you’ve got a lot going on within messaging apps and things like that. So it’s pretty spread across all addressable channels, we’re able to access the right audiences. There is not any one particular, but thematically certainly thinking about the newer technologies that we’re seeing consumers adopting at more rapid pace.

Okay. And with regard to the UK business, how much of a impact is that on the overall company at this point?

At this point, it’s still relatively immaterial given the size of the U.S. business, though it is growing at a decent clip. Right now, it just hasn’t been a huge focus due to some of the traction that we’ve been getting in the U.S. We do believe there is more to talk about there. It could be something that we look at a lot closer in the back half of the year.

Okay. Thank you.

Thank you.

Our next question comes from Bill Gibson from ROTH Capital Partners. Please go ahead with your question.

Thank you. My main question revolves and you answered it in part around what Pat was talking about. And if it’s going to be, what’s the timeframe for the added cost to accelerate the growth rate? Does there come a point and I think you might have said 2020, where we start to reap the benefit of the investment on the media spend side improved margins?

Yes. Absolutely and really, it’s a lot of our core strategy, Bill, and our culture is around test and learn. Rapidly, we’re incredibly data driven. So, we’ll accelerate as quickly as we’re able from a margin expansion by developing some of these new channels is really important to us. It’s critical to be able to go out and create a mode, so to speak, in our understanding on how to access them and go out and engage audiences across these channels as they’re adopting. So, we do think there will be much greater operating leverage against both our media spend and our SG&A and personnel cost in 2020.

Okay, that’s good. What I’d like to do is, possibly follow-up in a little bit after I’ve had a chance to get the new numbers from last year.

Sure thing.

Thanks.

And ladies and gentlemen, with that, we’re going to conclude today’s question-and-answer session. I’d like to turn the conference call back over to management for any closing remarks.

Yes. thank you and thanks for everybody joining today. We’re really eager to continue to progress across 2019 and beyond, and update you as we go. We’re feeling really optimistic about Fluent’s future and I think some of the 2018 highlights here are really just a starting point for us. So again, thanks for joining, and we’ll look forward to updating soon.

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.