Fluent, Inc.
Q3 2021 Earnings Call Transcript

Published: 7 Nov 2021

[Operator:]

Hello, and welcome to the Fluent, Inc. Q3 2021 Earnings Call. My name is Robyn, and I'll be coordinating your call today. I will now hand you over to your host, Ryan McCarthy from Fluent. Ryan, please go ahead.

[Ryan McCarthy:]

Good afternoon, and welcome. Thank you for joining us to discuss our third 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, 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 measures 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:]

Thank you, Ryan, and good afternoon. Thanks to all of you for joining our call today. I'm here together with Ryan Schulke, our Chief Strategy Officer, Chairman of the Board and Company Founder; and Alex Mandel, our Chief Financial Officer. Our results in Q3 speak to the importance of our moves in Q2 to position our founding team fully on the front lines of our business in order to drive our strategic agenda forward. Our long-term strategic growth plans remain squarely focused on building higher quality digital experiences for consumers, while creating effective and sustainable customer acquisition solutions for marketers. In total alignment, our traffic quality initiative or TQI is foundational in fulfilling and growing that higher quality demand. In our earnings release today, we reported Q3 revenue of $85.9 million, up 10% year-over-year, media margin down 19% year-over-year at 28% of revenue, reflecting ongoing media and strategic investments, and adjusted EBITDA of $6.4 million or 7% of revenue. In the quarter, we continued to drive meaningful transition of our business as TQI and our investment in quality have strategic relevancy across Fluent's entire performance marketplace. And we are making notable progress against the end goal of these efforts by delivering clients' ROI goals, thereby enhancing Fluent's brand equity with our client partners, while ultimately building enterprise value for our stakeholders. We remain focused on three strategic growth pillars

[Alex Mandel:]

Thanks, Don, and good afternoon. As Don spoke to, during the quarter, we progressed our strategic investments in quality across our marketplace and expanded our focus on revenue streams that are beneficiaries of these initiatives. On our Q2 earnings call, we indicated an outlook for Q3 of year-over-year top line growth with sequential improvement in profitability relative to Q2. Our revenue for the quarter came in at $85.9 million, up 10% year-over-year, while our media margin came in at $24.2 million, representing 28.1% of revenue. Revenue growth of 10% or $7.6 million year-over-year derived from three primary areas. The first is the significant growth of the business we formerly referred to as Winopoly, which following our acquisition of the remaining 50% interest at the beginning of September, has been rebranded as Fluent Sales Solutions. This live agent capability, focused on high consideration categories, was in early innings in last year's Q3 and has scaled significantly since. We have considerably expanded our capacity, enabling higher volumes of outbound consumer contacts, including consumers who have registered on Fluent's owned media properties as well as consumer leads sourced from third parties. A second key revenue driver was strong client demand for our established performance marketing executions in certain key verticals, particularly staffing and recruitment, resulting in improvements in both client pricing and volume year-over-year. The third area of revenue growth came from an internally developed e-mail capability, enabling us to reengage consumers who have already registered on our owned media properties. This revenue stream, which carries high margins, was nascent in the second quarter of this year and not existed in the third quarter of last year. As it relates to media margin, the primary driver of our margin trending continued to be the mix of our media spend as between traditional affiliate traffic sources and the biddable platforms we discussed on last quarter's call. For context, we spent nearly $62 million on paid media in the quarter, representing our largest cost component. On last quarter's call, we noted the opportunity to drive high-quality traffic from the biddable platforms, albeit at lower margins, which we are seeking to optimize into higher profitability over time. In the third quarter, we increased our biddable media spend and profitability sequentially over the second quarter, albeit still at margin levels below the affiliate side of our media mix. We also increased our affiliate media spend and profitability sequentially. On a blended basis, the relatively larger increase in biddable spend muted our overall margin improvement sequentially. Our operating expenses on a GAAP basis for Q3, comprising sales and marketing, product development and G&A, grew in aggregate by $1.7 million or 9% year-over-year to $20.8 million. Of note, the cost of the full Winopoly acquisition, through which we acquired the remaining 50% interest effective September 1, was accounted for through our income statement as we have previously recorded 100% equity ownership for GAAP purposes in connection with the initial purchase of a 50% interest in April 2020. The consideration for the full acquisition was $7.8 million, consisting of a $3.4 million of cash at closing, $2 million of cash due on January 31, 2022, and $500,000 deferred payments due at both the first and second anniversaries of the closing. We also issued 500,000 shares of stock valued at $1.4 million. Offsetting this expense, the contingent put call consideration arising from the initial acquisition, which represented noncash accrued compensation expense, was terminated, resulting in a $5 million reversal of that accrual and thereby resulting in a net overall transaction expense of $2.8 million in the quarter. This expense comprised the primary source of increase in our GAAP operating expenses year-over-year. Of this $2.8 million, $0.6 million was recorded in product development, with the remaining $2.2 million recorded in G&A. Adjusted EBITDA of $6.4 million in the quarter represented 7% of revenue, implying that all of the sequential increase in media margin flowed through to EBITDA as well as some operating expense benefits. Interest expense declined by $900,000 year-over-year, benefiting from the lower cost of debt under our new credit facility. In Q3, we continued to be a noncash federal taxpayer due to the pretax loss. We reported GAAP net loss of $2.5 million in the quarter and adjusted net income, a non-GAAP measure, of $2.8 million. Our non-GAAP metrics are reconciled in today's earnings release and our 10-Q and 10-K filings. Turning to the balance sheet. We ended the quarter with $17.1 million of cash and restricted cash. While this represents a decline year-over-year and sequentially, it's largely attributable to the normal course timing of receivables collections. Working capital, defined as current assets minus current liabilities, ended the quarter at $41.4 million, up $6.9 million year-over-year. Total gross debt at June 30 of $47.5 million consisted of the funded term loan under the new credit facility. The remaining $1.25 million note payable in connection with the 2019 AdParlor acquisition was funded on July 1, completing our payment obligations. In sum, the quarter marked a return to double-digit revenue growth as our strategic investment in quality provided a return in the form of growing new revenue streams and supporting pricing strength on our marketplace. Our outlook for the balance of the year reflects continued progress operationally and financially with a continued focus on building long-term value for consumers, clients and Fluent's stakeholders. We're glad to field questions at this time.

[Operator:]

Our first question is from Maria Ripps from Canaccord. Maria, please go ahead.

[Maria Ripps:]

Congrats on strong results. First, just wanted to ask about your traffic quality initiatives. Can you maybe just comment on sort of traffic trends in Q3 and maybe what you've seen so far in Q4? And then what's been sort of the feedback from advertisers as you're driving sort of higher quality traffic here? And are you able to generate higher CPMs on your platform?

[DonPatrick:]

Maria, thanks for the question. So regarding the traffic quality initiative, I think we've talked about how we're encouraged we are with the progress and that we're continuing to aggressively pursue testing in the media platforms and partnerships. So much of this, as you know, is like winning and bringing a world-class advertiser, the sales cycle takes a little time to test and innovate and learn. So from a standpoint of our quality and our volume, we've seen our volume basically move up quarter-over-quarter from between Q2 and Q3. Although the mix, as Alex had highlighted, has changed a little bit more to the biddable size on the affiliate side. On Q4, we're seeing similar trends. But what we're really seeing is the quality of that traffic is significant and which is really driving significant monetization results for us, which gets to your second question around the advertisers. So we're able to provide advertisers two things. One is the stronger ROI that can lead to better pricing and also it can lead to more volume increases from them. So we're seeing two fantastic inputs from our clients around the traffic quality initiative and the quality that it's growing.

[Maria Ripps:]

And then my second question is sort of as the company emerges from this traffic quality initiatives, can you maybe just talk about Fluent's ability to grow relative to the digital advertising market over the next year or 2?

[DonPatrick:]

Sure. So I think our stated position, Maria, as you know, is when we started the traffic quality, this is to return to sort of our historical traffic or historical growth year-over-year that we had before the traffic quality initiative and then get to the point where we're at the market or beating the market in a consistent way. The really interesting thing about the model that we - the business model and how it's changed is, as you know, we were very supply focused. And now we're also - now we have the value equation, which also allows us to have a multiplier effect to that volume. So as we accelerate the volume as it should and we get higher value, it's a flywheel that allows us to buy immediate, higher cost and higher channels that allow us to then also grow. So we're very optimistic about the long-term ability to leverage the model around quality and around value that we just put in together.

[Operator:]

Our next question comes from Bill Dezellem from Tieton. Bill, please go ahead.

[William Dezellem:]

I had two questions. First of all, what led to the monetization increase in the third quarter versus the second quarter? And I asked the question in the spirit that I believe in Q2 that the press release referenced in anticipation that you would be flat. So that was a nice improvement from what you were thinking three months ago.

[DonPatrick:]

Sure, Bill. Thanks for the question. Regarding the monetization, there's two major factors that are playing a role there because of the higher quality traffic, where we're creating more value for those - for advertisers, and that's leading to either more volume from them or a higher price that they're willing to pay because the ROI is more significant on their end. So that's the first part of the value equation. The second piece is around the CRM capabilities and us growing out that e-mail capability. So we've always had e-mail capabilities around CRM, but we outsourced that to partners. By bringing that in-house, we're able to leverage our technology platform and our data and our analytics and take a much more holistic and strategic approach to our consumer journey. And that CRM efforts is very exciting in terms of being able to really bring consumer journeys and more of a lifetime value to our consumers. So those are the two major factors driving the monetization.

[William Dezellem:]

Okay. And Don, I actually was really interested in taking that one step further, which is what improved in the third quarter versus the second quarter that maybe you were not anticipating when at least I interpreted your comments to be that you thought monetization would be flat.

[DonPatrick:]

Yes. Well, both sides, Bill, on the value side, we saw that the traffic call - as you know, we took a lot of traffic off in Q1, and we started building back that quality traffic. And we - the value that the traffic was driving for our clients was bigger than we thought and greatly exceeds their demand and greatly exceeds the supply that we currently have. So that was able to - that was a pleasant surprise. And the second is e-mail capabilities. It is a harder - a slightly harder CRM capability to build. We were building it in a very conservative way, and we were able to be more aggressive in Q3 in terms of how to build that and leverage the platform that we put in place earlier.

[William Dezellem:]

And then secondarily, the Apple privacy changes have received a lot of commentary in the press. Would you talk to us about the impact that, that has on you all?

[DonPatrick:]

Sure, sure, Bill. There's - I'll give you a direct and sort of indirect answer to this sort of two pieces. Directly, as you know, Fluent engages our consumers, and we do most of our identification and audience segmentation, targeting, leveraging our first-party data analytics on our own media properties. So for the most part, the challenges that Apple is providing for others is around people that do that targeting or audience building within those large media platforms. So we take a much more wider net and bring the consumers in. And then we do the identification and segmentation and targeting on our media properties. So for the most part, the IDF privacy changes have had relatively little impact to us from a standpoint of building the audiences and identifying and allowing our tech platform to be successful. Indirectly though, there's a lot of changes going on and a lot of cost swings on those platforms as the big brand advertisers try to figure out how to measure and get their hands around this. And obviously, based on what we talked about on the biddable platforms, we have to play into those swings a little bit more than you would traditionally see from a seasonality perspective. So indirectly, it has had some impact to us. But directly, there's really no impact and sort of plays to the strength of the Fluent's model in terms of how we build things within - once they come to our media platforms rather than outside to other large media platforms. Generally speaking, Bill, eventually, Google is eliminating cookies and Apple is most likely releasing additional updates. This is something we're going to have to be constantly working on with our advertisers and with our clients to make sure we're prepared for these changes.

[William Dezellem:]

And then following up on that is, longer term, do you see this as a - as ultimately a competitive advantage for Fluent because you are operating the way that you do and not under quite the direct impact of those ecosystems that maybe some of the other methods that your customers and/or potential customers would be accustomed to using?

[DonPatrick:]

Absolutely, yes. We think it's a big competitive advantage for us. The first-party data aspect, right, long term, if you think about the first-party aspect, first-party data, our ability to use that data properly within our media property and platform. Bill, is a strategic advantage for us.

[William Dezellem:]

And so even though it may be creating some disruption in some media stories and commentary that a lot of us fret over, ultimately, this is playing right into your hands.

[DonPatrick:]

We feel very good about our positioning regarding to this piece, yes.

[Operator:]

This concludes our Q&A session. Thank you for joining the Fluent, Inc. Q3 2021 earnings call. You may now disconnect your lines. Thank you. Goodbye.