Good afternoon, and welcome. Thank you for joining us to discuss our Second Quarter 2023 Earnings Results. With me today are Fluent’s CEO, Don Patrick; Interim CFO, Ryan Perfit and Chief Strategy Officer, Ryan Schulke. Our call today will begin with comments from Don and Ryan Perfit, 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 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, 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 thefinancial performance of our business on a variety of indicators, including these non-GAAP metrics. 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, Don Patrick.

Good afternoon, and thank you all for joining our call today. I’m here together with Ryan Schulke, our Chief Strategy Officer; Chairman of the Board and company Founder; and Ryan Perfit, our Interim Chief Financial Officer. I’ll make some brief comments about our second quarter results that continue to reinforce the imperative behind our commitment to enhance the quality of our consumer engagements within our performance marketplace while also reflecting the more volatile macroeconomic and evolving regulatory environment we’re operating within. I’ll then update you on the meaningful progress we’re making in establishing Fluent as the industry leader relating to our previously announced FTC settlement. After 3-plus years of cooperating fully with the FTC and investing strategically and financially in the process, we are now establishing leading-edge protocols, which we believe will act as best-in-class model for our entire industry. This was the imperative we chose to improve consumer experience relative to engagement and satisfaction and drive higher quality outcomes for our advertisers while ultimately leveling the industry playing field that or less committed competitors have tilted against us. Our Q2 ’23 results reflect the current strong headwinds we continue to face and are consistent with the more cautious near-term business road map we laid out in previous earnings releases. Our focus is in sequentially rebuilding our base, consisting with the strategic pivots we are making and the new business ventures that we embarked upon, some of which we’ll explore with you today. Financial results were as follows, revenue of $82.1 million, representing a 6% increased sequentially over Q1. We continue to see the parallel levels of unpredictability as does the entire digital advertising industry with consumers and clients pausing to access the current economic uncertainty. Our media margin of $25.9 million was a 18% sequential increase over Q1. At…

Thank you, Don, and thank you for joining us today, everyone. I’ll now delve into our Q2 earnings performance, providing year-to-date comparisons where applicable. For the quarter, Fluent produced $82.1 million in revenue, down 16% from prior year but up 6% sequentially from Q1. Year-to-date, our total revenue stands at $159.4 million, reflecting a 15% decrease from the same period last year. Sequential growth was driven by the media and entertainment sector specifically gaming and streaming clients and offset by continued challenges within the financial services and staffing and recruitment sectors. While still hindered by the challenges of the macroeconomic environment, we were heartened by year-over-year and sequential growth of our strategic Influencer channel and year-over-year growth of the Call Solutions business. As mentioned previously by Don, prevailing economic headwinds, primarily stemming from shifts in our clients’ consumer acquisition strategies, including pricing pressures from certain sectors, along with our commitment to define and exemplify the evolving regulatory standards will continue to cause sequential growth challenges for the remainder of the year. Our media margin in Q2 of $25.9 million represents a 20% year-over-year decline and 31.5% of revenue, up from 28.4% in Q1. Year-to-date, our media margin of $47.9 million represents an 18% decline over the same period last year and 30% of revenue. The declines versus prior year periods were largely a factor of the previously mentioned client spend challenges not being offset by lower cost of media. The sequential improvement of media margin as a percentage of revenue can be attributed to a market correction in media pricing and efficient sourcing. On a GAAP basis, our aggregate operating expenses for Q2 were $16.8 million, marking a $4.2 million year-over-year decrease. For the 6 months ended June 30, our aggregate operating expenses were $38.9 million, a $1.8 million decrease…

Thank you [Operator Instructions] Our first question comes from Maria Ripps with Canaccord Genuity. You may proceed.

Great, good afternoon. And thanks for taking my questions. I hope everyone is doing well. So you mentioned the lack of predictability across the space. Can you maybe talk about what you’re seeing so far in Q3 relative to your expectations? And maybe broadly, how should we think about revenue trajectory in the second half given easier comps, but also some of the dynamics or some of the headwinds that you talked about?

Hi, Maria, thank you for the question. So I’ll break it into two pieces. One is the macroeconomic headwinds we talked about. And then the second is obviously the FTC related headwinds that we talked about. So from a macroeconomic perspective, our advertisers are certainly more bullish on budgets and spending in the second half. And into 2024, but we’ve not seen any specific change in sort of their spending. They certainly are talking about spending more in the second half, but we haven’t seen any real major change in actions. We have seen some things move between the verticals. We talked – Ryan talked about a media side of it going and even on the streaming side, although we’re watching that extremely close based on sort of the Hollywood strikes and would – might reduce spend and also might provide some consumer pullback based on the lack of inventory. So relatively speaking, we’re hearing more positively than we saw in the first half, but we’ve not seen that across our entire network. Regarding the FTC piece, and this is a little less clarity where we have great clarity in the medium term, but we have a little bit less clarity in the short term, Maria. So we’re pleased to have this behind us after 3.5 years, 95% of the settlement was already implemented by Fluent prior to the start of Q2, and we’ve implemented the remaining part before we signed the settlement in the end of May. In the medium term, this is a significant advantage to us. With our new compliance standards in the industry that others have to follow and we work on. We’ve worked on over 3-plus years to put into place and drive the quality of the consumer side of it. Our competitors are going…

Got it. That’ very helpful. And then just following up on the FTC stipulation order. I guess, from the company’s perspective, why did it make sense to enter into this arrangement instead of continuing to litigate? And then you touched on this a little bit, but to what extent does this impact any of your specific advertising verticals or which verticals are being impacted and maybe which properties are impacted the most?

Yes. I’m probably not allowed to say why we fail, Maria because obviously, you read a lot about the FTC in the paper and you talked about a lot of things about how they move the things beyond the letter of the current law. But obviously, after 3.5 years in evolving our business and our performance marketplace and knowing what we could do in terms of creating a competitive advantage against our competitors and really driving better quality for the client. We obviously thought that it would be better for us to resolve it, move forward and drive the business forward the way we – how to build the business rather than playing defense around how we’re in court with the FTC. So that was – it was a very – it was – obviously, it was a very tough decision that was made over a long period of time. But we feel good about that and how we move forward. We’ve been very vocal about how it affected our jobs business. We talked about that in the last couple of quarters about how the jobs business was affected in how we pivoted that business towards a different business model. That is the one that probably was the most impacted directly from a percentage perspective based on the FTC. And then just the core rewards business around just – more around certain consents and certain disclosures, obviously, that business has been changed. But most of that has been over sort of the last couple of years in terms of how we can follow that business.

Got it. Thank you so much for the color, Don.

Thanks, Maria.

Thank you. One moment for questions. Our next question comes from James Goss with Barrington Research. You may proceed.

Thank you. Well, over the past several years, you’ve talked about this quality initiative, and it appears that it overlaps this dialogue with the FTC. So is – was the strategy under development before this took place? Or were you just communicating that you had intended to do these things as you’re negotiating with the FTC, and they were sort of moving along it in pace?

Hi, Jim, thanks for the question. Ultimately, this is something which we’re most proud of, and you’ve been part of our ride for a long time, Jim, is we started winning world-class brands into our marketplace in ’17 and ’18. And like any great company, great brands push you in a different direction and the brands were asking us for higher quality, saying they’d be willing to pay for it more, offering to show more data back to us in terms of being able to form our marketplace, in terms of better purchasing. So for the most part, the main initiative was around us winning these brands and then these brands, quite honestly, pushing us to level up our business and level up the way we could work with them and how we could work broader with them across our entire suite of solutions. So that was really the initiative that started everything off and obviously was an exciting piece of the business. At the same time, the regulatory things – the regulatory environment changed and we saw that happening in ’19 and ’20. And obviously, the quality initiatives and the things that we kicked off were part of that. But for the most part, it was driven by our clients and the world-class brands that we work with.

Okay. Well, and you were also talking about getting others to adapt to your strategy or risk some potential regulatory risks. And I assume this all relates to the telemarketing consent practices, the stipulated order you were outlining on July 17. So is that the case? You’re expecting that whatever you were negotiating with them is going to apply to others and they have to take notice? And which types of competitors did you have in mind as potentially being commanded by these same issues?

Yes. Good question, Jim. So our consent order, and as I said, we had implemented 95% of these things beforehand, before the beginning of Q2 and mostly over the last couple of years, right? And what we – much of what the FTC incorporated into their consent order were policies and procedures that we had developed. So specifically, then the consent order coming out on the FTC is not – it’s specific to Fluent, but it’s also specific to the industry. So anyone who is buying media or interacting with the consumer or getting consent. They’ve clearly set out the standards that we currently have in our marketplace, and it’s not debatable that they should use it. They have clearly said this is a way we’re going to interpret the law, and this is the requirements that we’re going to ask everybody in the industry to go up against. So the enforcement of that is really sort of 3 ways for us. One, is we’ve been very vocal in the marketplace and the compliance groups and committees and things that are in the market in terms of how do we make it very clear about where we’re going and where we’re heading and how others should follow with us. The second one is obviously working with our brands and brand partners that we are in compliance. We have higher quality, and you should definitely make sure that the other partners that you have to have the same level of compliance, same level of quality as we do. And the third is that the FTC themselves have said that this is just the beginning, not the end, and we’ll be looking at others in our industry. So that’s how we kind of look at it. We compete, Jim, as you know, for our media from all sorts of different sources. We compete with our advertisers, obviously, specifically against a lot of different companies. But this is – this order and the compliance standards that we call the Fluent way, really are across multiple industries and across different type of competitors.

Okay. One last one, if I could. The gross profit was below expectations, but operating profit was actually a little better than expected. It seems like the accounts between the two are sales and marketing and G&A, and I was just wondering which – or if – or both are you pushing on?

Yes. We are obviously pushing on everything around that part of the mix you don’t see, Jim, is just the mix between the different businesses. So as we talked about, we’re investing aggressively into AdFlow, into Call Solutions and Influencer business. The other businesses were obviously we’re obviously getting more into a – we have operating leverage, and we can achieve that leverage. So it’s really the mix between the different business units. Some are at critical mass and we’re getting operating leverage out of it significantly. Some are investment, and we’re actually investing into that and some of the operating expenses are going up. So it’s really the mix of those – of the maturity of those different businesses.

Okay. Thank you very much. Appreciate it.

Thanks, Jim.

Thank you [Operator Instructions] Our next question comes from Bill Dezellem with Tieton Capital Management. You may proceed.

Thank you. A couple of questions here relative to the $150 million of growth potential that you referenced in your opening remarks. Would you please restate what the time frame was for that? I missed it.

Hi, Bill, thanks for the question. We believe there’s $150 million of incremental revenue available to us in those three businesses over the next 2 years, the calendar year ’24 and calendar year ’25.

And that would be the market and then you would have your market share on top of that, you’re not forecasting to garner an additional $150 million in that for yourself?

Yes. I’m sorry. I’m not sure I understand your question. We believe that we’ll be able to capture another $150 million of revenue across those three businesses for over the next – at the end of 2 years from now. It’ll be incremental to what we have today.

All right. My sincere apologies. So that is specific to the Fluent potential?

Yes.

And so that would be on top of, let’s say, $80 million a quarter of revenues and additional $35 million or so of revenue per quarter?

That’s right. The way you’re looking at it, yes.

Okay. Great. That is helpful. And then with those buckets of business, what’s the margin potential that you see relative to Fluent historical margins?

Yes. Great question. At scale, these will be – they will have larger margins, gross profit margins than what our traditional business has. Obviously, in the earlier stages, as we grow it, they have less but as we get to scale, they have – they run at a gross profit margins that are higher than the traditional core of Fluent.

And $150 million, that would be at scale. At the very beginning, you would not be. How much revenue brings you to a level of scale where you see your margins being above?

Around that level, Bill, the three opportunities that we outlined there has significant growth opportunities to us. And we are looking to scale those aggressively to take market share. So in that environment where we’re looking aggressively to go market share, we are going to be obviously spending a little bit more heavily. When we get to that $150 million of incremental, we’ll start, we believe we’ll hit above the margins that we currently have for our business.

All right. And then once those businesses are mature, what – how much higher margin do you anticipate relative to the current business?

Yes. Our current – as you guys know, our current – or as you know too well, Bill, our media margin, which is our core metric in our core business, tends to fluctuate between 28% and sort of 32% depending on traffic and depending on where we are in different investment scenarios, we see those 3 businesses being at the 35 to the high 30s as a percentage.

Congratulations, and good luck putting all that together. And then relative to seasonality of the existing business. The call center business is stronger in the second half. Does that strength begin into Q3? Or is that primarily a Q4 phenomenon?

Yes, it tends to hit very early in Q4 for the Call Solutions business, mostly around the health verticals, ACA and Medicare and things like that.

Excellent. And would you like to give some commentary about how you see the third quarter revenue playing out given that we’re halfway through the quarter, and you’ve kind of highlighted that you see opportunity and challenges with the FTC settlement?

Yes. The way we’ve outlined it, Bill, in the earnings is I think the clarity that we currently have now, we believe that we will be sequentially down in Q3 based on those headwinds and we look to good get back to growth in the early – we think it’s going to take a couple of quarters to work through the FTC headwinds and then we’ll see the growth returning as the FTC advantage that we have starts to kick in and also as these three growth – significant growth opportunities start to scale in 2024.

Thank you for taking all my questions.

Thank you. I’d now like to turn the call back over to Don Patrick for any closing remarks.

Well, thank you. Thanks for your time today. We’ve invested aggressively and prudently on our path forward. We feel great about the FTC settlement and the strategic clarity that it gives our business and clearly establishes ourselves as a leader in the business. Thank you for joining today, and thank you all for your continued support.

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.+