Digital Media Solutions, Inc.
Q3 2022 Earnings Call Transcript

Published: 12 Nov 2022

[Operator:]

Good afternoon. My name is Austin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital Media Solutions Third Quarter Financial Results 2022 Conference Call. [Operator Instructions] Now I would like to pass the call over to Tony Saldana, DMS General Counsel.

[Tony Saldana:]

Thank you for joining us to discuss financial results for DMS for the third quarter of 2022. With me on the call are Joe Marinucci, Co-Founder and CEO; and Rick Rodick, our CFO. We posted our earnings announcement this afternoon in the press release and also on our Investor Relations website. By now, everyone should have access. Before we begin, I would like to call your attention to our safe harbor provision for forward-looking statements in our financial results press release. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements. For a more detailed description of the risk factors that may affect our results, please refer to our financial results press release and our SEC filings. Also during this call, management's commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures for our reported results can be found in the tables of our financial results press release, which we have posted to our Investor Relations website at investors.digitalmediasolutions.com. The additional financial and other information to be discussed on this call can also be found on our Investor Relations website. Now I'd like to turn the call over to Joe Marinucci, our CEO.

[Joe Marinucci:]

Thank you, Tony, and good afternoon, everyone. Welcome to our third quarter 2022 earnings call. Our third quarter results are as follows

[Rick Rodick:]

Thanks, Joe, and good afternoon to everyone. I'll begin by discussing our financial results for the third quarter and conclude with our guidance for the fourth quarter and full year 2022. All comparisons are on a year-over-year basis, unless otherwise noted. Net revenue was $90.1 million, down 16%. Insurance, which accounted for approximately 53% of our total revenue in Q3, was down 33%. Breakdown of the insurance business was as follows

[Operator:]

[Operator Instructions] Our first question is with Maria Ripps from Canaccord.

[Maria Ripps:]

Great. First, so your guidance implies sort of continued revenue declines here in Q4 and sort of we understand all the uncertainty around the number of verticals. Can you maybe just talk about what's embedded in your outlook from the macro standpoint? Sort of what are you seeing so far in Q4? And then based on your conversations with advertisers, when do you think you may start to have seen some recovery?

[Joe Marinucci:]

Maria, Joe speaking. Good to have you on the call. So the Q4 guidance takes into account the current trends that we see inside of insurance, specifically with property and casualty. Although I think carriers are generally making good progress on rerating, we really don't expect to see any substantive recovery inside of property and casualty with auto until sometime in 2023, with early-stage recovery starting right after the first of the year. Generally, in Q4, we're looking at holiday e-commerce in the open enrollment periods as being the drivers of the increase in revenue and performance overall over the Q3 period, and the early trends we see are encouraging. We did highlight on the call growth in insurance marketplace revenue and our Asian initiatives. And although during the Q4 period, agent growth will slow slightly, we still anticipate adding more captive insurance agents and being able to drive growth inside of insurance marketplaces. So the current Q4 guidance takes into account what is known here. It also takes into account the current trends on operating expenses. With regard to what we see going forward, there's a varying degree of opinions on when there's going to be a more broad-based recovery in insurance, specifically within auto, which insurance is the majority of our business. We're encouraged by some of the trends we're seeing. For instance, in the Q3 period, we saw quote increase -- a quote request volume increased by 25%, which is indicative of consumers price shopping. And that is to be expected as they open up their wallets to spend more money on things like auto insurance. And when those costs go up, they shop more. We will not see a substantive recovery though in ad spend until the carriers have successfully rerated and they've seen some of the pressure come off of their loss ratios, which I think generally, that's expected to be sometime next year. So we're generally encouraged by this trend because consumers are price shopping more, and we're hopeful that after the first of the year, the carriers are successfully rerated and feel that loss ratios are under control and that advertising spend can return to more normalized levels, which when that happens, you'll get an inflection point and we'll see a broad-based recovery in property and casualty and automotive insurance.

[Maria Ripps:]

Got it. That's very helpful. And then secondly, I just wanted to ask you about your media costs. Can you maybe talk about how increase in media costs impact your framework for deploying budgets? And then sort of given this environment, how are you thinking about sort of continuing to deploy spend at a lower margin versus perhaps pulling back on spend and prioritizing the margins?

[Joe Marinucci:]

Right. So I mean, generally, we're not managing the business to finite margin numbers on the VMM, the variable marketing margin, line or on the gross margin line. We're sitting in the middle of the consumer and the advertiser and we're looking to create value on both sides. So as we're navigating complex environments like the one we're in right now, moving our guidance down on margin, both at the variable line and the gross margin line is reflective of current trends that we're seeing. And part of that comes into play with our ability to retain market share and deliver for the advertiser because the ad demand is there. And if we're managing to finite levels of margin, it could have a negative impact on the business. So we did take the guidance down a little bit, which is reflective of the current trend. And that could potentially change next year, although we're probably going to guide this range until we see a change. So it's not really indicative of anything other than us managing the expectations of the advertiser and the consumer and thus moving the ranges down slightly.

[Operator:]

Your next question is with David Marsh from Singular Research.

[David Marsh:]

Tony, you did a nice job with regard to expense control with regard to G&A in particular. In terms of margin going forward, should we expect you guys to be able to continue to maintain that type of margin versus sales in terms of G&A expense? Or is that just indicative of a soft quarter and we're going to see a pretty significant rebound?

[Joe Marinucci:]

David, this is Joe speaking. So it sounds like there's really 2 questions there. One at the gross line and then one at the net line. So I'll take the gross margin first, which ties the variable marketing margin. I mean, generally, as I said to Maria, we give these ranges and we generally look to be in range, preferably towards the top of the range, which historically, especially with variable marketing margin, we've been able to do that, and that's off the back of media efficiencies, which tie directly back to our data-first approach and how we generally look at engaging the consumers, relevant ads, consumers with intent. They behave accordingly and conversion rates are higher and it drives more media efficiency. With regard to the SG&A and the reduction, we're generally looking at this as a trend that continues into 2023. So Rick and I, we look at the items we control and expenses are one of those items. There's plenty of things we don't control in the macro environment, but specifically inside of DMS, we certainly control our expenses. So as noted on the call, we have successfully reduced SG&A meaningfully during the period. And we believe that, that's a trend that continues. So if you look at 2022 and then you look at 2023, we think we're on track to have an overall reduction in operating expenses of approximately $8 million to $10 million. So we're hopeful that this is a trend that continues and it gives us more leverage at the net operating line of the business.

[David Marsh:]

That's great. I guess just to follow up. I guess, the question -- my next question is really, can you support a higher level of revenues? And if so, like how much meaningfully higher at the reduced level of SG&A that you're running, coming out of the third quarter?

[Joe Marinucci:]

So we started an efficiency technology initiative about a year ago, which was designed first to create efficiencies in the business. We have done a number of acquisitions over the years. And we'd like to say that we don't integrate for the sake of integrating. We integrate when it's appropriate and we integrate to drive efficiency. So with some of the headwinds that have continued to persist in the business, management has taken it as an opportunity to look at some of these integrations in a more holistic sense to see where there were opportunities to create deeper efficiencies in the business. So we feel that we've taken costs out of the business that can be sustained at these levels, meaning that the cost reductions are permanent. And the business has now created efficiencies through the use of people, process and technology, so we do not have to add these costs back. So over time, as the business recovers, costs should remain in line with the trend that we currently see. So if business recovers, we should get leverage at the EBITDA line to our benefit. So we're pretty encouraged by that. But obviously, we need to see a more broad-based recovery and revenue growth, margin expansion for that to pull through to EBITDA. But generally, we do not -- to specifically answer your question, we do not anticipate having to add back a meaningful cost load to grow the business from here.

[Operator:]

There are no further questions at this time, so that concludes today's conference call. You may now disconnect.