Fluent, Inc. (FLNT) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Fluent’s Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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.

Good afternoon and welcome. Thank you for joining us to discuss our second quarter 2019 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, www.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 hereof. 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. These statements may be identified by words such as expects, plans, projects, could, will, may, anticipate, believes, should, intense, estimates, and other words of similar meaning. 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 Company's most recent annual report on Form 10-K, and 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 reconciliations to most directly comparable GAAP financial measure is provided an earnings press release issued earlier today. With that, I'm pleased to introduce Fluent’s CEO, Ryan Schulke.

Good afternoon, and thanks for joining our second quarter 2019 earnings call. We’re encouraged by our results from the period with 70.6 million, 22.9 million and 9.7 million in revenue, media margin and adjusted EBITDA respectively. This represents 24% and 4% growth in revenue and media margin and a 12% decline in adjusted EBITDA year-over-year. We’re quite pleased with our ability to scale business with our performance marketing client base, who continue to show high demand for Fluent’s primary offering, new customers at predictable pricing. With that said, as we apply greater focus to new supply channels and approaches to deliver those customers, we're seeing this growth come at higher costs. While acceptable now, we must be diligent in our test and learn approach in order to ensure that media we are acquiring will eventually be optimized to adequate margins for Fluent and its shareholders. Of course, this will take us some time, but it’s energy well invested based on our expected future returns. We’re quite encouraged that the growth we're experiencing is coming from verticals we believe are strategically sustainable, such as the media and entertainment sector, where we're partnered with some of the most prominent Fortune 500 brands in the world, in addition to fast growing disruptors who are emerging onto the scene. We’re incredibly proud of the company we keep and believe that growing share of wallet with these marquee clients will create opportunities for new product offerings, giving us the ability to expand more rapidly in the longer term. Our shareholders should understand that while every business model has its upside, there's also some downside that we need to continue to successfully navigate. Our performance marketing model affords our client base de-risked access to new customers, hence our ability to scale our own business with agility and greater margins in some of the more traditional marketing service models. That's part of the beauty of our business, completely aligned interests with our clients on the key metrics that drive growth for us both. Downside of course, which we have Fluent see as opportunity lies within our ability to access customers we deliver at the right price and scale. The ability to apply our approach to new channels is critical to our long term success, and is one of the more challenging initiatives we are taking on where we're playing key resources to drive growth. Our revenue outlook for the year places an emphasis on expanding to new channels, so the compression we saw on media margin this quarter will delay us in scaling further in Q3, and potentially into the beginning of Q4. To be specific, we're actively growing spend on new technology and media platforms that are not yet where we need to be from a margin perspective. These particular environments represent important battlegrounds for the Fluent business, as our customer acquisition strategies are largely non search based. In other words, brands can expect a specific type of cost and volume potential for consumers who are searching for their brand, or within their brand category. Search behavior is mother of all intent, and thus the channel has become somewhat commoditized by large agencies, as well as brands taking their search related customer acquisition efforts in house. We do believe that newer formats, such as voice search, are strategically compelling, and we are evaluating how to best approach in the near future. However, the majority of our efforts remain focused on driving customers through mediums outside of traditional search, by utilizing our proprietary, self-reported data on a large and addressable subset of the US population, which includes years of conversion behavior. We can broadly characterize these mediums as display, audio, video and messaging. This portion of the digital media ecosystem is much more nuanced when it comes to driving customers at a predictable cost and scale due to a variety of factors ranging from the ability to serve relevant ad content, understanding a consumer’s intent and qualification, and in tracking and optimizing conversion behavior. Winning here means winning big for our business and our shareholders. So we have some of our best and brightest minds charging at full force. And if you look at our history, we wouldn't weight more times than not when it comes down to driving results that demand economic efficiency. How we've successfully and profitably built the Fluent brand. The acquisition of AdParlor gets us much further down the strategic road from a technology and creative front, as we look to blend the best of first party data with dynamic creative optimization. They also bring much needed senior talent who have operated over $500 million of spend on Facebook alone. Combining AdParlor’s core capabilities with the near $1 billion that Fluent has spent on media since our inception, has provided us clear path and strong mandate to drive results for our clients at scale. We're excited by the prospects, as we believe we have the foundational elements needed to drive our business strategy over the next several years. So, our media margin contraction can largely be summarized by this top line progress, where we are still optimizing to improve our yields in a predictable, and sustainable way. Simultaneously, we did also proactively take some high margin revenue off the board, in response to the well documented shifts and regulators’ attitudes toward the broader digital media and marketing space, specifically directed towards those possessing powerful, first party data assets. While we're nowhere near the size and scope of those who made the front pages, we take our place in the ecosystem seriously, and are actively updating our own practices around data privacy and consumer experience to stay ahead of industry trends. This will not create long term negative impact to our business, and in fact, ought to have long term positive effects by the way of a more clear path forward. But it did result in about $700,000 direct decrease in media margin for the period. In terms of our adjusted EBITDA decline, this is all related to anticipated increases in OpEx, almost exclusively related to the personnel requirements to scale our business, or building a first class brand reputation. As a reminder, over the 18 months, leading up to the end of the period, we invested into a host of new roles that are key to our long term durability and scalability. This includes our COO, CFO, CTO, Chief Growth Officer, in addition to heads of sales, analytics, and people, all while retaining 100% of our key branding executive commercial leadership team. We've been putting a lot of work behind the scenes to ensure the formula that has brought us so much success is now protected and nurtured as team performance represents the cultural fiber that will continue to help us win new funds for our clients, consumers, our brand and our shareholders. With our bench fully loaded, we anticipate moving more expeditiously on key initiatives, which as stated on previous calls, are one optimizing and enhancing our performance marketing business. We're introducing new machine learning models to help drive more intelligence in our ad serving algorithms, and to automate certain business functions, something that is especially important for Fluent as we operate a managed service model. Two, expansions and extensions to our performance marketing business that enable us to access new media channels and formats on behalf of our clients. Again, this is where we are seeing great signs in revenue growth, but are also actively working on operating efficiencies to enhance margin. Three, a strategic approach to innovation through the recruitment of entrepreneurs and adjacent industries to support our overarching growth agenda. A programmatic business is beginning to gain momentum within the health vertical. And after the recently completed study by a third party measurement firm, we exceeded the benchmarks for data accuracy, and are very optimistic that we are establishing ourselves as a credible high quality source for first party data. This also supports our new dialog business, which is centered around our ability to rapidly survey specific audiences and perform rich analytics for the purpose of more informed, targeted campaign executions. We’ll be eager to talk about these business lines as they continue to develop. And fourth, acquisitions that can expand their strategic capabilities or drive us deeper into specific verticals. We spoke about the AdParlor business, which we believe gets us much further down the line and technology that enables creative and first party data to be leveraged for unparalleled results. We’ll continue to drive toward our [indiscernible] of connecting consumers with brands to deliver compelling products and services that meet their needs through technology and mediums of today and tomorrow. And each of these initiatives has a higher degree of connectivity with one another and ultimately act to further leverage our core business model and operating principles. With that said, execution is key. Given the shortfall we saw against our expectations, from a media margin perspective, we're adjusting our 2019 guidance as reflected in the earnings press release. With that said, I want to remind shareholders that the media platforms where we are attempting to gain greater share are large ones with varying levels of predictability that our model seeks to solve for that predictability quotient for our clients and Fluent. And while our confidence is high, there's a learning curve associated with it. Should we make any advancements more rapidly than anticipated, we’ll be sure to update on our next earnings call. In closing, the buy-in we're seeing from our clients is a true testament to the staying power of our core model and ability to expand upon this approach. We remain confident in our long term strategy and growth prospects for our business and I look forward to updating you on our progress in the near future. I'll now turn the discussion over to our CFO, Alex Mandel for the detailed financial results.

Thanks, Ryan, and good afternoon. In the second quarter, the company generated 70.6 million of revenue, representing 24% growth year-over-year. Our growth derived primarily from our performance campaigns, through which we deliver specific actions or outcomes specified by our clients, which in turn drive customer acquisition and growth for their businesses. As we experienced increased demand in the quarter from some of our highest profile clients, we leaned in to fulfill the volume and quality they saw. We saw this as an important opportunity to fortify strategic partnerships, capture share that we believe will be sustainable, and build Fluent’s brand equity in the marketplace. At the same time, satisfying our clients’ demand came at a relatively higher cost of media in the quarter. We went deeper into our traditional supply channels than we have historical from a seasonal standpoint, and experienced higher costs. Ironically, in our business, incremental volume often comes at incremental costs rather than volume discounts. And we continued to invest into newer supply channels to accelerate our learnings, which while profitable and strategic, produce lower margins as we test and learn and played a bigger role from a mix perspective. As a result, the company produced media margin of 22.9 million, representing growth of 4% year-over-year and a margin of 32% of revenue. Ryan also noted that we invested in the quarter into our compliance protocols relative to the dynamic regulatory environment we operate within to demonstrate our ongoing commitment to industry best practices. While we anticipate this investment will support our future growth ambitions, it did have an in quarter impact of approximately 700,000 of high margin revenue, and consequently media margin and adjusted EBITDA. This effect was specific to a limited period of time during the quarter, and we don't anticipate further costs at this time. Adjusted EBITDA of 9.7 million in the quarter, a decline of 12% year-over-year, represents 14% of revenue as compared with 19% of revenue in Q2 of 2018. As Ryan discussed, over the past 18 months, the company has invested in onboarding key senior personnel and critical capabilities that are essential to supporting future growth of the business, which is reflected in the operating cost structure and comparative year-over-year financial results. At the same time, we have held these costs relatively in check over recent quarters and don't anticipate meaningful increases in the near term. Provision for income taxes was zero, as we continue to maintain the full valuation allowance against our deferred tax assets for both periods. Adjusted net income, a non-GAAP metric, that excludes from net income from continuing operations, certain non-recurring and non-cash items is 4.6 million in the quarter or $0.06 per share, a reduction of 19% over 5.7 million or $0.07 per share in the prior year’s quarter. Moving on to the balance sheet, cash and equivalents were 21.8 million at June 30, while working capital defined as current assets minus current liabilities was 38.7 million. Total debt under the credit facility, including unamortized issuance costs, was 57.2 million, which reflects the reduction of 2.2 million as compared with March 31 and nearly 12 million year-over-year. The company continued to exhibit favorable cash flow dynamics, with 9.7 million of adjusted EBITDA converting into 7.9 million of cash flow from operations, with the primary use of operating cash being 1.4 million of interest expense. Cash used in investing activities consisted primarily of 500,000 of PP&E and 600,000 of capitalized software development, while cash used for financing activities of 3.7 million was comprised of our quarterly scheduled principal amortization in the credit facility of 875,000, a 1.3 million reduction to our debt balance through the excess cash flow sweep, and 1.5 million deployed for withholding taxes to net settle the vesting of RSUs, enabling us to take close to 231,000 shares into Treasury. Shifting to our updated full year outlook. While we continue to see strong demand from current and prospective clients, we are dynamically optimizing our supply as against monetization opportunities. Given recent conditions in our supply markets, which can and do change regularly, we felt it’s prudent to adjust our revenue guidance to take a more cautious outlook on top line pacing in the near term. A revised revenue outlook of 277 million to 285 million for the full year represents growth of 11% to 14% over full year 2018. As compared with our prior outlook, this reflects a reduction of 8 million at the respective mid points. I note that our revised business outlook includes the AdParlor acquisition from July 1 forward, the date the transaction closed, although its contribution is not anticipated to be material, relative to the Fluent business. Our revised media margin outlook of 93 million to 98 million represents a reduction of 7.5 million at the midpoint from our prior outlook and our revised adjusted EBITDA outlook of 37 million to 42 million reflects a reduction of 8.5 million at the midpoint from our prior outlook. In conclusion, we continue to be optimistic about our long term strategic roadmap and opportunity to build value for our stakeholders. Fundamentally, the market is confirming our core value proposition through the demand expressed by high quality, leading edge advertiser clients. To capitalize on this opportunity, we are working diligently to deepen, expand and diversify our supply channels and optimize them to appropriate profitability at scale. Throughout Fluent’s history, the team's ingenuity in effectively and efficiently accessing channels and sources of media has been a core and distinguishing capability of the organization. We are confident our team will navigate current market conditions and continue to innovate to enable our future growth and success. And now, we'll be glad to open the floor to questions.

[Operator Instructions] Mr. Goss, your line is open.

This is Pat on for Jim. I was just wondering if you could provide a little bit more information on the supply channels that you're pulling back on -- that are kind of hitting revenue growth.

Yeah, Pat. Just to give a little color there, we're actively driving into new types of channels where we've been historically a little less active. And, those range from social media channels, some of them being some of the more traditional social media, but that are opening up new inventory to us, like messaging apps and things like that. So we're really bullish on those areas, but just want to be disciplined and cautious in terms of how we're approaching it and making sure that the economics are a win-win for both Fluent and our clients.

Once again, you may disconnect your line. Thank you.