Digital Media Solutions, Inc.
Q2 2023 Earnings Call Transcript

Published: 14 Aug 2023

[Operator:]

Thank you for standing by and welcome to the Digital Media Solutions, Inc. Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Tony Saldana, DMS General Counsel. Please go ahead, sir.

[Tony Saldana:]

Thank you for joining us to discuss our financial results for the second quarter of 2023. With me on the call are, Joe Marinucci, co-founder and CEO, and Vanessa Guzmán-Clark, our Interim CFO. Earlier this afternoon, we posted our earnings announcement in a press release and on our investor relations website. Before we begin, I would like to call your attention to our safe harbor provision for forward-looking statements and our earnings 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 earnings release and our SEC filings. In addition, management's commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures can be found in the tables of our earnings release. The additional financial and other information 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 second quarter of 2023 earnings call. Our second-quarter results are as follows. Second-quarter net revenue was $82.6 million, down 9.5% year over year. Our gross margin and variable marketing margin came in at 23.3% and 27.4%, respectively. Adjusted EBITDA came in at $902,000, which was down from $3 million from last year. Vanessa's going to add more details, dig deeper into the numbers, and go over guidance for the third quarter of 2023 later in the call. In Q2, we continue to navigate market challenges by prioritizing progress and growth within areas we control. While our actions will not fully show their impact within the Q2 results, they're aligned with our long-term strategy, which is going to create durable, scalable, and sustainable growth across both our marketplace and brand-direct solutions. Our second-quarter results we're discussing today reflect continued market challenges we're experiencing. Despite a decrease in net revenue and adjusted EBITDA due to the challenging business cycle, gross profit margin for Q2 2023 was within our guidance range. We're continuing to face pressure in our insurance vertical as P&C carrier loss ratios persist. This is an impact we're seeing across agent counts, bid prices, and overall advertiser sped. That said, we do see positive trends here inside the P&C segment in Q3, and therefore we maintain a positive long-term outlook and expect P&C carrier spend to start to recover in 2024. We believe that recover should ultimately result in P&C advertising spend surpassing previous peak levels, and since DMS has continued to invest in our core solutions in this category, and since we maintain strong relationships with the major carriers, we believe we're well-positioned to capture our share of this spend. In other segments of our business, we remain optimistic. We're encouraged by growth in our home services vertical stemming from our recent ClickDealer acquisition. We also have the health insurance enrollment periods opening again in Q4, where we expect to see an increase in revenue pull through from carrier marketing spend. As we've discussed in the past, we monitor both our enterprise customers and our SMBs. The SMBs include the insurance agents we serve. For Q2, we closed with a significant enterprise customer count of 379, including the ClickDealer acquisition, which is up from 291 last quarter. As a reminder, our significant enterprise customers are advertisers spending in excess of $100,000 annually with DMS. For Q2, ARPU per significant enterprise customer was $1.1 million, down from $1.3 million last quarter. For Q2, SMBs on the DMS platform totaled 4,406 active insurance agents, down from 6,477 agents in Q1 2023. Most of this reduction in active SMBs in the quarter is tied to volatility in insurance and various state pauses at the carrier level. We do expect our SMB count to remain stable at or above these levels and then to recover once stability returns to insurance. The breakout of vertical revenue for Q2 is as follows

[Vanessa Guzmán-Clark:]

Thank you, Joe, and good afternoon, everyone. I'll begin by discussing our financial results for the second quarter and conclude with our guidance for the third quarter. All comparisons are on a year-over-year basis unless otherwise noted. Net revenue was $82.6 million, down 9.5% year-over-year. Insurance accounted for approximately 28% of our total revenue in Q2, which was down 62%. The breakdown of the insurance business was as follows

[Operator:]

[Operator Instructions]. Our first question comes from the line of Maria Ripps from Canaccord.

[Maria Ripps:]

Great. Good afternoon, and thanks so much for taking my questions. First, it seems like trends continue to be challenged here in the near term. Do you think we may start seeing any early signs of recovery as we head into seasonally stronger Q4? And then any thoughts on the pace of recovery throughout 2024 based on what you are seeing today?

[Joe Marinucci:]

Hi, Maria. This is Joe speaking. Good to have you. So, with regards to trends being challenged, I'll take that inside of property and casualty first. We do see some positive trends here in Q3, although it's hard to extrapolate what that will mean as we head out into Q4. I think it's more of a 2024 recovery in P&C insurance. The trends we're seeing would be more agent reactivations across the major carriers and states as rate increases go into effect and marketing spend starts to open back up. So, these are early-stage green shoots that we're seeing. Overall, the category is still challenged. Generally, positive trends, what I could say is the Q4 look forward for us. We've got the holiday e-commerce season. We've got our expected bump that we get as a result of holiday e-commerce, which we've historically seen domestically. And now we'll see some of that internationally as well on both brand-direct businesses, the domestic and the international business. And then we also have the open enrollment periods that would be opening in Q4 in health insurance. And we would expect to see increased marketing spend there by the carriers. That's how we're looking at the remainder 2023 across the business and then broader recovery in P&C, hopefully in 2024.

[Maria Ripps:]

Got it. That's very helpful. And then secondly, a few competitors in the health vertical exited the space recently. Can you maybe talk about any implications that you expect for the business given sort of the shifting competitive landscape across that vertical?

[Joe Marinucci:]

In terms of how that might advantage us, or maybe you could just rephrase the question there slightly.

[Maria Ripps:]

Yeah, just kind of what does the shift in the competitive landscape mean for your business there? And I guess, how are you especially positioned in over 65 segments sort of heading into kind of seasonal stronger Q4?

[Joe Marinucci:]

Well, we're focused on the significant enterprise customers we have. So that would be the customers that we've served. And that's the customers that we've served in that segment of the market for the last few enrollment periods that we've been active. We're engaged with them. We expect, based on the preliminary indications that we've received and some of the feedback that's come through as a result of CMS, we expect to see an open enrollment period marketing spend that's at least equal to what we saw last year. And we're positively inclined to think that there's some upside there as a result of some competitors exiting the space. I think that they were in the premium commission segment where they were actually writing policies and in the various segments of the health insurance business. And that doesn't have an impact on our business. We don't see that as comparable to what we're doing on the marketing side in those two segments.

[Maria Ripps:]

Got it. That's very helpful. Thank you.

[Operator:]

[Operator Instructions]. The next question comes from the line of David Marsh from Singular Research.

[David Marsh:]

Hey, guys. Thanks for taking the questions. I'm sorry I jumped on a bit late. Maybe you could just, if I apologize by asking something you've already commented on. But my question is specifically related to auto. Could you just talk about, are you seeing any stabilization on the auto insurance side? And if not, what do you think it would take to get us there, Joe?

[Joe Marinucci:]

Well, as compared to Q2, as we just discussed with Maria, we do believe that there's stability in the agent count, although it's down substantially for us as a result of the reasons cited. We are seeing in Q3 more agent reactivations across the major carriers this quarter as rate increases go into effect in various states and marketing spend starts to open back up. We've seen compression there as state markets are closed for both the enterprise and the agent customers. Thus putting pressure on our agent counts as agents go. They're not off the platform. They're effectively dormant until those markets open back up, and then they would come back in as those markets open back up, become active again, and start spending. So we do think we're stable at this count. As noted, it was just over 4,400 active agents. We're seeing more agent activations across that network this quarter, although I can't give line of sight into how that materially increases right now because it's too early.

[David Marsh:]

Okay. I appreciate that color. Just shifting a bit to the ClickDealer acquisition, it seems like things are going reasonably okay there. Could you just talk about efficiencies gained and if there are any further opportunities to maybe wring out a little bit of expense there as you continue to integrate that acquisition?

[Joe Marinucci:]

So, I mean, that's an international business for the most part. They do have the home services business, which is a domestic marketplace. There was not a tremendous amount of overlap in their business and our business. The acquisition was really focused on growth over the longer term as opposed to cost takeout. So, to the extent that there was or is an opportunity to be more efficient, look, we're generally focused on efficiency at this point, as most others are, which is why the team was able to take out on an annualized basis nine figures of cost. But our main focus there is integrating our core assets, data, technology, media, helping grow the home services business on the marketplace side, and then engaging our current enterprise customers here domestically that have an international presence to leverage their international distribution network. And that's really where the growth is going to come from. And that's what excites us. But we just closed this acquisition a little over 90 days ago. So, we're still early days. Our integration is well underway. We're excited about the team, and we're seeing good momentum in the business. However, we've got quite a ways to go here, only being, less than 120 days into this thing.

[David Marsh:]

Right. Understood. All right, guys, well, good luck with the back half of the year and keep marching forward.

[Joe Marinucci:]

Thanks, David.

[Operator:]

Thank you. This does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.