Good day, ladies and gentlemen, and welcome to Fluent's Third Quarter 2019 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, today's event is being recorded. At this time, I'd like to introduce your host for today's conference, Ryan McCarthy. Please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our third quarter 2019 earnings results. With me today are Fluent's CEO, Ryan Schulke; and CFO, Alex Mandel. 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, anticipates, believes, should, intends, estimates and other words of similar meaning. 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, we 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 indicators, including media margin, adjusted EBITDA and adjusted net income. The definitions of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent's CEO, Ryan Schulke.

Thanks, Ryan. Good afternoon to everybody in attendance. Q3 marked a challenging quarter for Fluent with $64.6 million in revenue, $21.3 million in media margin and $4.3 million in adjusted EBITDA, which represents declines of 3%, 17% and 65% for those key metrics against the previous year. I'll note that Q3 of 2018 did come in well beyond the analyst expectations, however, this quarter's results are below what we anticipated delivering. Back half of 2018 through the first half of fiscal 2019 marked a steep investment period for Fluent. We added personnel at all levels, including experienced senior management as we steered towards enabling growth into adjacent markets by leveraging our core more strategically. We saw these as calculated bets and anticipated, like any venture investment, we might have a low hit rate with ultimately one or two having significant potential. We knew we had to allow these venture teams some runway to flesh out the viability of their opportunities, also maintaining discipline around the dollars and time invested. Accordingly, we evaluate the progress on ventures and determined that it was timely to pull back on bets that weren't hitting milestones we needed to see. Compounding this increase in operating expense were two separate nonrecurring issues with payment collection, one pertaining to an outage with an ad feed that we used to monetize portions of our job-search portal. While we were able to replace the monetization of the inventory where this feed was placed, the outage has resulted in revenue that was generated being deemed as uncollectible. The second event was the result of longtime partners in a legacy area of our core business being impacted by policy changes within their industry. The overall impact of these events resulted in approximately $1.9 million reflected in G&A and approximately $500,000 in…

Thanks, Ryan, and good afternoon. In the third quarter, the company generated $64.6 million of revenue, representing a 3% decline year over year. While this was below our expectations, we take solace from the belief that our roster of active clients with whom we are building strategic partnerships is robust, and leaning in with demand for our Performance Marketing services that exceeds our available volumes. We perceive the demand from our clients to be an important point of validation during the quarter and continuing onward, with the constraining factor to our reported revenue being our ability to fulfill that demand at appropriate media margins for Fluent. The company produced media margin of $21.3 million, representing a decline of 17% year-over-year and a margin of 33% of revenue, tying into the supply considerations I referenced and which were addressed by Ryan. In terms of operating expenses, we realized some efficiencies in sales and marketing while continuing to invest into product development. More notably from the face of the income statement is that G&A increased by $4.3 million year-over-year to $14 million in Q3. As Ryan mentioned, we had several unrelated events that rendered a total of $1.9 million of revenue to be deemed uncollectible and bad debt is captured in our G&A line. In addition, this is the first quarter of inclusion of results of the AdParlor business, which we acquired on July 1. AdParlor's operating expenses are primarily captured in G&A and account for the majority of the balance of the $4.3 million variance beyond the bad debt. Adjusted EBITDA of $4.3 million in the quarter represents 7% of revenue. Subsequent to the quarter's end, as Ryan alluded to in his commentary regarding pruning investments and organizational realignment, we undertook some staffing reductions that going forward are anticipated to provide…

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

Hey, thanks. I've got several. One, you mentioned earlier on Ryan, the pullback in certain areas, and I was wondering if you could talk about what sort of areas you were backing away from?

Hi, Jim. Good to hear from you. And yes, in terms of some of the investments we were making relative to supply side and I think that – is that what your question is about?

Yes. I believe so. You were backing away from certain areas that was part of the challenge, and you were also – you said there was some longtime partners that were impacted by changes in their industries, so maybe they're sort of one and the same, but maybe not. So I'd like to clarify that.

Yes. So actually two completely different areas of the business. One, we are referring to some of the more ventures-related initiatives. Fluent's constantly incubating new types of products and solutions with respects to how we go out and either generate more supply, bring new products to market and things of that nature. So we had a few investments that we had been making, some of which were trailing behind in terms of their key metrics, and those were some of the things we pulled back on. So more of your future bets that wouldn't have impacted overall revenue, but operating expenses. On the other hand, the legacy partners, this was just an area of the business that had kind of been on cruise control for a bit, but you had a couple of our clients run into some issues with policymakers within their own industry and really that's what created some of the issues surrounding bad debt.

If there were certain areas, maybe, it might give us a better flavor of which of the areas you thought would be more successful that are not. And you might also talk on the flip side of which verticals you may feel you can best target. I think you mentioned media streaming as one thing, there may be others as well. Just to give us a better feel for what type of partners you're looking at and which types of verticals you were trying to pursue?

Yes. We're still working across pretty much every major consumer vertical, certainly seeing more progress in specific verticals, such as media and entertainment. Consumer goods and retail remains a strong vertical for us, and we'll constantly see some seasonality. We did see some trouble in the health vertical. You do see some changes there with respect to – as different policies change within that industry, as they tend to be fairly erratic. That particular category for us saw a little bit of volatility, but we still remain very strong in a lot of the verticals that you would imagine where you have innovators coming in, trying to disrupt, so customer acquisition is constantly a focus. And you also have some of the larger enterprises, Fortune 500s, who want to be innovated, but want to get stronger on the digital front in order to retain and also grow customers. So those are some of the arenas where we're continuing to see a lot of buy in, some of the world's biggest companies, again, as well as some of the most reported on in the public markets as of recent. So those are the areas where we're really feeling strong, and where the appropriate types of investments and strategies are being flushed out on the go forward.

Okay. Maybe one last one. So the third-quarter adjusted EBITDA was about half what we thought it might be. And I think you probably explained it was the G&A increasing bad-debt and some other – couple of other issues. And then you maintained a full-year guidance of $37 million to $42 million, which suggests a very strong fourth quarter on an EBITDA basis. That would put it in the $50 million, perhaps more category. Is that a new run rate? Are you getting past the point of where you were and that you can accelerate this to a higher sustainable level?

I'm going to have Alex clarify a point there, Jim.

Hi, Jim. Just to clarify on the business outlook for 2019, on the front of our earnings press release we indicate that our current outlook is $28 million to $30 million of EBITDA for the full-year, noting that compares with $37 million to $42 million previously.

Okay. $28 million to $30 million, so I guess I misread the one. Okay. Thank you very much.

Thank you.

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

Thank you. Was the industry with policy changes, was that related to subscription revenue?

It was not. It was not related to subscription revenue. This fell a bit more into the health vertical for us and again, some pretty legacy business that was not a huge focus from a growth perspective, but had been just short of running for us across a couple of our product lines, Bill.

Thank you. And did you say something about a mid-August to mid-October slow down? And would that be related to changes at Google?

It was not related to changes at Google per se, but we did see a slowdown with respect to our capacity operated at certain margins within some of our supply channels and that's where we pulled back some of our spend. So we did see that from mid-August to mid-October, which is why you're seeing some of the softness on the top line. A little less so from a margin percentage perspective, we actually sequentially increased from 32% media margin in Q2 to 33%. So we maintained our margins really held the line there with the notion that we believe going forward that gives us the right amount of leverage to push back in as we see monetization come back on those channels.

Thank you.

Thank you.

And ladies and gentlemen, at this point we've reached the end of today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Yes. Thanks very much for joining today. Obviously, we've had a challenging Q3, but again, Fluent's leadership remains optimistic about the road forward and certainly anticipate getting in front of everyone on our Q4 and full-year 2019 call in Q1. So thank you very much.

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