Good afternoon, everyone, and welcome to the Fluent, Inc. Q4 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I like to turn the conference call over to Ryan McCarthy. Sir, please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our fourth quarter and full year 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, everyone, and thanks for joining us today. Our strong Q4 results confirm the improvements in our core operating performance that I noted in mid-November, and which further strengthened in the back half of the quarter. Mid-January, we announced preliminary results for full year 2019 in Q4. Our press release today confirms that our final results came in at higher ends of the preliminary ranges for revenue and media margin. We delivered approximately $80 million of revenue, $26.3 million of media margin and $11.5 million of adjusted EBITDA, representing year-over-year growth of 13%, 5% and 4% for revenue, media margin and adjusted EBITDA, respectively. The strong sequential uptick in our business in Q4 demonstrates the resilience of both our business model and our team, and fundamentally endorses the market’s demand for our performance marketing services. Before we dig into the key drivers of our rebound, I’d like to take this opportunity to offer greater transparency in 3 key elements of the Fluent business model, that are working in concert to distinguish us in the market today. Number one, we’re a pure-play performance marketing company. This means that we’re working with advertisers on mutually agreed upon consumer actions tied to specific transactional payouts, when driven by Fluent. In order to execute on this model, it means that Fluent and our partners have server-to-server integrations, so we can record which consumers are taking those actions in real time, both for the purposes of revenue recognition and quality control. The end product our clients receive varies based upon the nature of the vertical and client themselves. Examples of our most sought out product executions range from driving trial subscriptions, mobile app installs, inbound phone calls and lead generation and recruitment campaigns. Delivering these products to market requires custom technical integrations,…

Thanks, Ryan, and good afternoon. As our numbers for the quarter point to, and as Ryan spoke to, we experienced a solid uptick in the business in Q4. Revenue of $80 million for the quarter and $281.6 million for the year, both represented year-over-year growth of 13%. Driving Q4 top-line, Ryan referenced our clients in the media and entertainment and financial services verticals. As one example, the marketplace for video and music streaming services offered significant demand, deriving from new product launches and competitive playing fields. We are well positioned to serve market leaders there, given the fit of our audiences with our clients’ products. We also experienced strength serving health insurance clients during the national open enrollment period, which takes place during the fourth quarter. Our team lined up strategically to address this market opportunity and improve performance considerably year-over-year. And in so doing, we proved to our clients that they can count on Fluent, which we plan to further leverage in the next open enrollment period later this year. Beyond these examples, more broadly, we had clients with particularly strong seasonal budgets, for whom scale was their primary imperative, and they expanded pricing to achieve that objective. With that demand profile, we were able to access supply profitably. Our media margin of $26.3 million for the fourth quarter and $93.6 million for the full year, both represented margin profiles of approximately 33%. Ryan spoke of a continued leveling up of our client base to include leading global brands along with disruptive innovators. And we have been increasingly focused are not just driving in period volume, but developing strategic relationships that will embed Fluent more deeply in our clients’ marketing mix. Developing these relationships requires a careful balancing of investment and profitability of the relationship life cycle. We are…

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jim Goss from Barrington Research. Please go ahead with your question.

Thanks. Just looking at the numbers here, I think they were pretty much in line with our expectations. And you got there in a different way with revenue gain, that cost gain offsetting it, so the gross margin was sort of level with year ago. Is this how you think you can go forward with a higher level of investment? And that you might put up with a margin squeeze for a while as you do step up the investments in key verticals?

Yeah, Jim, and thanks for calling in. It’s exactly what we’re looking at here is we sort of invest into larger client relationships, strategic verticals. If we had to come in at slightly lower margins to begin with, our expectation is that we’ll be able to build that over time as we show improve, and that’s really been the story of Fluent over time. So you’re head-on there. Margin is not coming along for the ride as quick as top line, but that’s the typical story when we’re building into new and strategic areas. So that’s what we’re seeing. And our expectation is that we will be able to build those margins over time.

Well, one comment you made I thought it was interesting. With the health insurance doing well in the open enrollment period, is that sort of a one-off-type project or is that an area you think you’ll get more involved in?

It happens every season. I think we took more note of it in this past year, and we will more so even in the future. We’re just in a position where we’re in front of Americans every single day, many of whom need to be better informed on options within the healthcare system and as things change we’re able to go out, not only educate them, but introduce them to potential options. So it’s something that we see as a good opportunity for the business. It’s not by any means something that we’re riding on to make the quarter, for instance. But it’s something that we certainly can play into, given where we sit today.

So we’re thinking about this with [map] [ph] issue with all of our companies, in terms of the Coronavirus issue in raised? I’m wondering does Fluent fare better or worse than sort of physical marketing in a situation where, I guess, your distribution or access is going to be online, not in a physical way. So maybe relative to some of these companies, you might have an advantage? Or do you get more competition and do you wind up getting further down the food-chain in this crisis, the event that we’re dealing with right now?

Yeah, Jim. Great question and something that’s been asked across the board. We want to be respectful of this situation and what’s going on. And obviously, everybody affected by it. But Fluent is a digital company, we service our model through the delivery of media, in which we’re engaging with consumers everyday through our digital media environments and sound performance marketing services on top of it. So when we look at our client base, when we look at our core, in terms of how we go out engaging consumers, we’re very much likely to be less impacted than other companies that may be closer to this situation and impacted by things that are going on. But that being said, it’s – there is just so much moving on right now. We don’t want to make any specific comments regarding how will it affect our business. It will affect some of our customers for certain, and something that we’re paying very close attention to. But as being a digitally-born company, we do think that we’re prepared to deal with this. The situation is as awful as it is right now. And again, our thoughts go out to everybody close to it and it’s something that we’re trying to be sensitive to.

Okay. But the initial impact doesn’t – appears to be muted relative to [our] [ph] expectations you might have had, according to that one comment I think you made. Is that a fair read?

I don’t think we made any comment.

I think you said something [like 10%] [ph].

I’m sorry.

No, I thought. Just earlier you said at the outset of the quarter, since we’re in the new quarter. You haven’t, to this point, seen a significant trend, but even though you’re not making projections?

Right. Hi, it’s Alex. I mentioned that as of this point, since the outbreak of the virus, we have not seen a material change to our business, and it’s following seasonal patterns at this time similar to what we saw last year.

Okay. I’ll leave it [indiscernible]. I appreciate it and good luck.

Thanks, Jim.

Our next question comes from Ben Rubenstein from Robotti. Please go ahead with your question.

Hey, Ryan. Are the new media relationships, are those uncapped?

Hey, Ben. Good to hear from you. And in terms of the media side, if you’re speaking to the vertical, on the demand side, media and entertainment, specifically, music and video streaming services, a lot of our mobile gaming clients, I would say, 90%-plus of that is uncapped. These guys are in all-you-can-eat mode. We’re priced right. In terms of quality, we’re able to ID the traffic that we’re sending into them, so they can right price it. It’s a very dynamic model, in which we have really, really great communication with the client on the long-term value of what we’re delivering. So everybody in terms of both the client side as well as Fluent, we’re in concert with one another and working toward the goal of being at a transactional payout where they can be uncapped, so vast majority is uncapped.

And does this help you really get deeper relationships, when you talk about like some of the marketing services, or – I don’t know, is it a consulting role that you ultimately want to play with some of these companies?

Yeah, absolutely. You, obviously, when you’re working with the client in such a situation where we only eat if both sides are really benefiting. There’s a level of trust that’s garnered, and it helps us really go out and develop a more strategic relationship within that client. So whether it’s consulting, data services, insights, things like that, it gives us more opportunities to work with the client on a variety of levels.

That’s great to hear. And then just lastly, just can you talk a little bit about capital allocation. I saw you – I mean, you repurchased some stock in the quarter. But just in terms of what you want to do with the debt and then is it M&A? Are there more buybacks coming? Just kind of how do you think about capital allocation?

Hi, Ben, it’s Alex. In terms of what we’ve been doing, you noted that correctly, it’s consistent with what we spoke to on the call, which is that our primary uses have been reducing the credit facility and repurchasing our shares, with some investment into the business in terms of initiatives and so forth. And as we grow, obviously, we’re investing into the working capital cycle of the business. That continues to be our primary set of priorities at the moment. As is natural over the course of operating our business, we look at all kinds of opportunities, but there’s nothing imminent that we have on the cusp of announcing.

Great. It sounds good. Thanks, guys.

And our next question comes from Bill [Donohue] [ph] from Teton Capital. Please go ahead with your question.

Thank you. I have a couple of questions. First of all, what indications have you had from your existing clients about changes that they may or may not make going forward relative to COVID-19? And then secondarily on the IT front, could you please detail what you did from an IT perspective and systems upgrade in 2019? And what the plans are for major changes in 2020?

Hi, Bill. Good to hear from you, and I’ll speak to both of your questions. And I might need a point of clarification on the second one, your line chopped up a little bit. With respects to our own client base, we’re into them every single day. We’re – again, I mentioned it on the call were direct sold. So we know exactly who our clients are, what their goals are, what their expectations are affluent and how they’re going about marketing to what we deliver to them. So at this point in time, we have not received any major indicators that our clients wish to slowdown their marketing activities with Fluent or that their capabilities or capacity to market or go out and acquire new customers is going to be impacted by the outbreak. Now do we have an ancillary situation where a client may have been manufacturing out of China, and they don’t have enough product and they don’t want new customers, right now. And they’re going to prioritize existing customers. There could be those situations here and there. But I would say that’s, by far, the minority by what we’ve heard so far, and the majority of our client base continues to be interested in investing the Fluent. Again, as I mentioned on the call, because we are probably their most predictable ROI source of marketing investment. So at this point in time, we don’t have any reason to give guidance otherwise and really create a framework, but we’re being sensitive to it. Again, this thing is moving. As everybody knows, everybody sits close to this. I mean, that was down close to 10% today. So we’re all keeping our head on a scribble over here. But a lot of our clients are continuing to be bullish in terms of at least their spend with Fluent. In terms of your second question, and that was relative to – Alex, remind me…

Technology infrastructure there.

So investment in technology, it’s obviously an ongoing thing, but this has been upgraded over time as we’ve recognized opportunities to go out and enhance and really create a means of going out and syndicating components of our business to scale it further. We really wanted to make sure that our data infrastructure was tight being in the public markets, it’s an area of sensitivity. You’re seeing things in the news and what’s going on with Facebook, Google and the like. So we’re making sure that everything is tight there in terms of how we’re collecting data, our usage of it, our clients, usage of it. But also at large, we’ve built a business that we feel is very powerful and we’re demonstrating the ability to go out and execute performance buys. We buy media. We go out and generate profit on it, very predictably. We’re working with direct end clients on all of that. So we get the feedback that what our clients spend with us is profitable, and what we spend therein on paid media is profitable. So our technology infrastructure, we believe is a core pillar of the business. It’s really something that’s special and something that needs to be evaluated as a pillar and also an independent roadmap potentially for the future. So that’s some of the things that we’re evaluating and why we’re investing deeply into our technology and analytics infrastructure.

Thank you for the comments and the candidness relative to COVID-19. I appreciate it.

Thank you.

And ladies and gentlemen, with that, we’ve reached the end of today’s question-and-answer session and today’s conference call. We’d like to thank you for attending today’s presentation. You may now disconnect your lines.