Earnings Labs

Fluent, Inc. (FLNT)

Q2 2021 Earnings Call· Mon, Aug 9, 2021

$3.25

+3.74%

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Transcript

Operator

Operator

Hello and welcome to the Fluent, Inc. Second Quarter 2021 Earnings Results Call. My name is Laura, and I will be coordinating your call today. [Operator Instructions] I would now hand you over to your host to begin, Ryan McCarthy. Ryan, please go ahead.

Ryan McCarthy

Analyst

Good afternoon and welcome. Thank you for joining us to discuss our second quarter 2021 earnings results. Joining me on today's call are Fluent's Interim CEO, Don Patrick; and CFO, Alex Mandel. Our call will begin with comments from Don Patrick 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, intend, 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. 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 Interim CEO, Don Patrick.

Don Patrick

Analyst

Thank you, Ryan, and good afternoon. Thanks to everyone for joining us today. Joining me today is Ryan Schulke, now our Chief Strategy Officer, Chairman of the Board and Company Founder, as we recently transitioned our roles. The key motivator to our recent executive changes is to position our founding team full on the frontlines of our business in order to harness their deep expertise, better align executive team to drive our strategic agenda forward. On prior calls, Ryan has articulated Fluent's 3 strategic growth pillars: our media footprint, our performance marketplace and our platform. And how they best position us in this very dynamic and rapidly evolving marketplace in which Fluent operates. The success we reflected upon in 2020 and beyond, vis à vis onboarding and scaling larger, more sophisticated clients at our performance marketplace, while increasing and sustaining improved monetization on our platform, motivated us to further redesign our media footprint in the form of our traffic quality initiatives. We see higher quality as the road to sustainable long-term growth and are resolute in our belief, it will better position us as an industry leader. Even though through these more strategic media and client investments, we will knowingly forego some near-term margin. In our earnings release today, our numbers for Q2 reflect revenue being up 3% year-over-year, media margin being down 19% year-over-year, at 27% of revenue, reflecting investments in the quarter, which I'll discuss further and adjusted EBITDA representing 3% of revenue. We see our strategic North Star as capitalizing on the demand for higher quality digital experiences for consumers, and more effective and sustainable solutions for marketers. With quality as a foundational principle, we've been accelerating our strategic transition of our business, and unwavering commitment to and significant investment in quality across our performance marketplace. In…

Alex Mandel

Analyst

Thanks, Don, and good afternoon. As Don spoke to our team led by Fluent's founding executives has been positioned on the front lines driving a strategic transition of our business, the foundation of which is a focus on quality across Fluent's performance marketplace. At the time of our last earnings call in early May, we were coming off the lowest month of consumer traffic volume this year haven't cut back significantly in the preceding couple of quarters on traffic sources that didn't meet our requirements. At the time of that call, we were already hard at work, rebuilding our supply base with sustainable sources of traffic that meet our protocols, and anticipated a reasonable timeframe would be needed to build our volumes back up. In that context, we anticipated Q2 revenue would be down year-over-year. Through the course of Q2, as Don mentioned, our team found opportunities to deploy media spend beyond what we had anticipated to accelerate our test and learn approach to supply discovery. This incremental volume was sourced primarily from the major digital media platforms, and we understood it would carry a lower margin profile, but viewed this discovery as on point with our rebuild efforts. As such, our revenue for the quarter of $73.4 million represent the growth of 3% year-over-year, exceeding prior guidance, while our media margin came in at 27.4% of revenue, reflecting the effect of lower margin media spend to accelerate our supply discovery. In the course of deploying this additional spend in Q2, we found success with new promotional campaigns which expanded our addressable audience, and new means of cross promoting our programs across Fluent's own media properties. We've spoken over the last few quarters about testing enhancements to the design of our rewards programs, which had elevated the costs of fulfilling…

Operator

Operator

Thank you. [Operator Instructions] Our first question comes from Michael Graham from Canaccord. Michael, your line is now open.

Michael Graham

Analyst

Great, thank you for taking the questions, guys. And congrats on the progress with traffic growth. It's definitely good to see that expanding after kind of expecting a decline from the guidance previously. So that's great. And that's really kind of the cornerstone of my question. You mentioned that you found some sort of rich veins in some of the bigger social media platforms. Do you think that that's sort of going to be the profile of your media mix going forward? Like how far afield from those platforms are you going to be taking your testing? And, can you just talk about any signs that you have that the quality of that traffic is actually better than what you had been getting before?

Don Patrick

Analyst

Hi, Michael. Thanks for the question. I'll put the traffic quality initiative a little bit in sort of a framework, and then we kind of answer specific questions. So we kind of break it into 3 phases. The first one was the cutbacks, right, of getting rid of traffic that was lower quality or with partners that would not meet our quality. The second sort of building back, which was primarily the easier part was going with current partners that we have or current platforms or strategies that we currently can lean more heavily into. And that's pretty much what we did in Q2 around the physical platforms. We've been on the platforms for a long time. We've been buying there, but we just really accelerated our testing and learning, and how those properties and the creative and the offers would work across those. So specifically, we did lean heavily into that, as we did lean heavily into current affiliate partners that we have. That second piece of that building back is, obviously, new partners and new strategies, new channels. We've also were doing that heavily into Q2, but those take a little bit longer timeframe, a little bit longer of a cycle in terms of testing and learning. So, as we kind of look at the physical platforms, it's critical to us. The monetization across those, you can imagine are more variable than you would see in the affiliates or with our strategic partners, because of the CPMs and how they move around. So when you see the CPMs go down and it's attractive, we lean heavily into it. When we see some of the seasonality or some of the things that come up on some of the platforms like we saw on Facebook with some of the iOS changes, you kind of lean back and go into the affiliate side a little bit more. So did that answer your question, Michael?

Michael Graham

Analyst

It does. And, yeah, thank you for that. And the follow on was just, what signs do you have that the traffic is higher quality?

Don Patrick

Analyst

Yeah, our main metric is really around the monetization and monetization by that traffic source towards the audience and towards the brand. So we sort of track those in a very, very granular level. We talked in aggregate about the monetization has more than doubled over a year and has held steady. And as Ryan has indicated, some of the traffic sources that we took off the board, because of quality, obviously, had a little bit heavier monetization. So the fact that we had that monetization steady from a portfolio perspective is positive for us.

Michael Graham

Analyst

Okay, and thank you for that. And then, maybe just last follow-up and I'll go back in the queue, is just can you sort of refresh us on how to think about the roadmap from here with respect to timing, like, you're going into that third phase of sort of the rebuilding where you're going to be leaning into new partners and new sources now, like any thoughts on how long that takes and is there any sort of updated view on when you think the traffic quality initiative is sort of done and you're sort of back to business more or less as normal?

Don Patrick

Analyst

Oh, great, great [lead in] [ph], Michael, because our - well, we've been really pushing internally here, that the traffic quality initiatives is part of our DNA going forward, will never go away, right? But the key part is, is that third phase which will be more around how you optimize and how do you accelerate and how do you strengthen the quality on a every single day basis. But specifically, the phase 2, we have leaned into the existing partners and platforms. The one, the new partners and the new channel that we've been going after, we've seen some nice acceleration. We've also seen some elongated sales-cycle. So admittedly, there is some variability here as we establish those new relationships. And we raise the bar on our current partners, but we look at it from an overall perspective as we do see sequential growth in Q3 and Q4 on improving our margin, which we believe will continue to accelerate that phase.

Michael Graham

Analyst

Okay. Thanks so much.

Operator

Operator

[Operator Instructions] Our next question comes from Jim Goss from Barrington. Jim, please go ahead.

James Goss

Analyst

Thank you. This first question might probably reflect or relate to the last question that you mentioned that there were you had sourced some new business from these large digital providers, but at lower margins. And I'm wondering, what level of margin that was at and does not reflect the benefits you've got from the higher quality traffic? And was the margin - were the margins lower, because they held the upper hand in those negotiations? Or was there some other reason? And I've got a couple of others.

Don Patrick

Analyst

Hi, Jim, thanks for the question. The bottom line, I would put in one thing, one framework here is that obviously it's we do not - we have a baseline of profitability that we have to hit. And in regardless of the sources and how much we're investing, there's a profitability threshold that we make across all of our media sources. Did we - as we lean in and we try test some things, we know that we might lose money in the - we might breakeven at the beginning, but that has to scale and scale aggressively over timeframe and we monitor that by source and by traffic. So the only thing that's different as mentioned is the biddable tends to have some variability in pricing that's beyond us, it's a marketplace. And we know that things that happen on those channels could be - could move the pricing one way or another, and we are - we watch it like a minute by minute basis to make sure we make the changes.

James Goss

Analyst

Okay. A couple of others that might sort of be grouped. I know Ryan Schulke is one of the founding executives, of course, involved in this, you mentioned that there were several others. I'm wondered, you might say who is in that mix in this strategic process? How do you move from testing the strategies to executing them? And how is their process coordinated between the strategic team, the new executive team, and then out of their relative impacts plus or minus in certain key verticals? Or is it pretty much across the board?

Don Patrick

Analyst

Yeah. So just when we talked about the founders, Jim, we - in a couple releases that we had, there's really 4 key ones: there was Ryan, who is Chief Strategy Officer; there was Matt Conlin, who is Chief Customer Officer; Sean Cullen is EVP of insights, who looks at the data and see the insights across the various properties; and then Matt Koncz, who is President of the Performance Media Group. So when we talk about them being down into the business, it's really around them connecting that strategy to the execution. So they were hands on, they were detailed into the mix and looking at the numbers along with our teams to make sure that we're interpreting it the right way and moving in, and making the right moves to support that. So you can imagine, the industry is rapidly developing and has lots of changes to it. And having that type of experience in the mix that has over 10 years plus of seeing how the performance marketplace works really accelerates our - accelerates that learning, accelerates that that ability to scale or realize that that new traffic sources that we can and move on to the next one.

James Goss

Analyst

Okay. And then coordinating what they are doing on a strategic front versus what you are doing on the execution front. How does that work exactly?

Don Patrick

Analyst

So, Jim, just your question is on how do we connect strategy to execution or…?

James Goss

Analyst

Yeah, basically. I know there are some things you're trying and trying to determine the best ways of doing things. But then, there has to be a control element. And you're not a huge company, so you're probably talking every day with each other. But I just [might tell you might have] [ph] talked about their process.

Don Patrick

Analyst

Yeah. So obviously, what you're really pointing towards, even in my mind is how is the team working and how effective is it, and how granular we're getting. I mean, one of the real strengths of Fluent has been our reporting in our numbers and how we look at things. So on a minute-by-minute basis, you can see how things are performing, how the consumers are acting, how the media is working and how it's connecting to the advertisers. So what we really have done is just brought more experience to the current operating systems and numbers that we have. So the connection there has been the senior team is that team along with me and Alex and a couple others in terms of how we run the business on a day-by-day basis. And then, the execution side and then those 4 getting in with the teams on an operating basis to move those basically core strategic growth initiatives forward.

James Goss

Analyst

Okay, and it does not really change the key vertical orientation you developed in recent years?

Don Patrick

Analyst

No, we haven't.

James Goss

Analyst

Okay.

Don Patrick

Analyst

We did talk a little bit about the Winopoly call center and how we've started to connect to higher consideration, higher value transactions, with brands and insurance. And in financial services, home services, it has great growth possibilities from a vertical, Jim, but as in Q2 our vertical mix was as strong as it was in Q1.

James Goss

Analyst

Right, thank you, Don.

Don Patrick

Analyst

Thanks, Jim.

Operator

Operator

[Operator Instructions] Okay. We currently have no further questions. So I'll now hand it back over to the host for any closing remarks.

Don Patrick

Analyst

Okay. Thank you everyone for joining with us today for Q2 earnings script. We are committed to moving forward with our mission and then appreciate all your support. Thank you.

Operator

Operator

This concludes today's call. Thank you for joining and I hope you have a lovely rest of your day. You may now disconnect your lines.