Fluent, Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Mar 2021

[Operator:]

Good day and welcome to the Fluent Incorporated Fourth Quarter and Fiscal Year 2020 conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Ryan McCarthy of Fluent, Inc. Please go ahead.

[Ryan McCarthy:]

Good afternoon and welcome. Thank you for joining us to discuss our fourth quarter and full year 2020 earnings results. Joining me on today's call are Fluent's CEO, Ryan Schulke, and our CFO, Alex Mandel. Our call will begin with comments from Ryan Schulke 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.

[Ryan Schulke:]

Thank you, Ryan and good afternoon. Thanks to everyone for joining us today. Fiscal 2020 was a year unlike any other, and I'm extremely proud of our team and their execution against our strategic plan. This past year, our industry saw a significant acceleration in the adoption of digital marketing services. This shift has profound implications for consumers and advertisers, and we're pleased that so many entrusted us to provide innovative and valuable performance marketing solutions. Back in mid-January, we released preliminary metrics for Q4 and the full year 2020. Today we're providing final figures. And I'm pleased to report that we came in at the high end of the ranges across revenue, media margin, and adjusted EBITDA. For the full-year 2020, we delivered $310.7 million of revenue, $110.4 million of media margin, and $41.2 million of adjusted EBITDA, which represents top line growth of 10.3%, growth in media margin of 18%, and adjusted EBITDA of 18.7% over 2019. Adjusted EBITDA represents a margin of 13.3% of revenue. For the fourth quarter, revenue came in at $82 million. Media margin was $32 million, and adjusted EBITDA was $11.1 million.

[Alexander Mandel:]

Thanks, Ryan, and good afternoon. As Ryan noted, in our earnings release and 10-K filing today, we confirm final results for Q4 and the full-year 2020 at the top ends of the ranges we previously released. In Q4, the company generated $82 million of revenue, up 2.5% year-over-year and up 4.7% sequentially from Q3, in line with historical seasonal patterns. For context, on our last call in late October, we noted that in Q3, new consumer-facing promotions experienced favorable engagement, and coupled with enhanced ad serving logic, yielded strong monetization on our platform. We saw those trends continue in Q4 and they continue to benefit performance in Q1. For the full year, Fluent generated $310.7 million of revenue, up 10.3% year-over-year and in line with overall industry growth in digital advertising revenues. As Ryan spoke to, from the standpoint of volume versus monetization, our revenue profile began to shift more notably in Q4. As part of our traffic quality initiative, the business moved more aggressively in Q4 in focusing on higher-quality traffic while reducing the volume of lower quality traffic, which has continued in the first quarter of this year. During Q4, the increased monetization, which Ryan noted, was 2x that of Q1, offset the reduced volume, which supported year-over-year and sequential revenue growth. In Q1, while monetization is trending similar to Q4, the year-over-year improvements will not be sufficient to offset reduced traffic volume and we anticipate revenue will be down approximately 11% to 13% year-over-year. We see this period as a transition on the road to fundamentally improving the quality of our offering to advertisers. Strategically, higher quality traffic sourcing should yield higher engagement by consumers on our media properties, higher conversion rates, and more valuable customer acquisition outcomes for our clients. We believe this approach will thereby yield further increases in monetization, which we can then reinvest into higher quality media sourcing and product development, driving further client satisfaction and loyalty and turning the flywheel of our model. Our media margin in Q4 of $32 million representing 39% of revenue benefited from several factors. First, the enhanced monetization noted before; second was strength in our data sales, including notable progress on our programmatic offering, and third was progress on our CRM strategies, targeting increased lifetime value of consumer relationships. The benefit of these factors we see continuing in Q1 of this year and anticipate they will offset much of the reduction in revenue at the media margin level, such that Q1 media margin may be down 1% to 3% year-over-year. We noticed that in Q3, as we tested various enhancements to the design of our rewards programs, we incurred higher costs fulfilling rewards earned by consumers. Fulfillment cost is not captured in media margin, but is captured in our GAAP cost of revenue.

[Operator:]

We will now begin the question-and-answer session. Our first question will come from Maria Ripps with Canaccord. Please go ahead.

[Maria Ripps:]

Great. Thank you for taking my questions. I just wanted to follow-up on the traffic acquisition initiatives that you talked about. Any more sort of color you can share with us on specific steps that you're taking on that front? Are you working with new media sources? Or is it sort of different practices with your current media partners? And assuming that this was already launched, we're almost in the end of Q1, what kind of feedback are you seeing from advertisers on this? And then I have a quick follow-up.

[Ryan Schulke:]

Hi, Maria, good to hear from you. And yes, great question overall. So the implied impact of the traffic quality initiative with our monetization increasing by 2 times is, we have walked away from a decent amount of traffic which didn't fall into certain protocols that we set forth under new policies. A lot of what we're doing is going into new channels, investing into channels that we believe in, in terms of where consumer attention is being spent and time and energy. We really do believe that these advances are a positive direction for our business and we're starting to see a lot of that in terms of the feedback from our advertiser base. From a quality perspective, our unit economics are moving in the right direction. A lot of our top-tier clients are very responsive to this initiative thus far. Did I answer your question?

[Maria Ripps:]

Yes, yes. I think so. And if I could just follow up, sort of how should we think about your revenue and media margin progression sort of relative to the numbers for Q1 that you shared with us as you go through the year?

[Ryan Schulke:]

We'll continue managing to the spreads that we're comfortable with. I believe I've stated on calls previously that we're comfortable dropping to certain levels in terms of the spread on media margin. We look at that as a percentage of revenue. So the low bar historically for us really being 28, 29, recently more in that mid-30 range. So we'll test at different types of margin thresholds, but we tend to be in that 28 on the very low end, 40 on the high end when we're fully invested into a specific media channel. As we're seeing quality feedback and our advertisers leaning in, I don't expect that to change materially on the more sizable opportunities that we're pursuing right now. So those levels relative to spread on media margin should remain fairly consistent, but in times like this, we're testing new channels and really focused on quality over quantity at the onset, we will test at some lower-margin levels to get in the door and get the learnings that we need.

[Maria Ripps:]

Got it. Thank you for the color.

[Ryan Schulke:]

Thanks, Maria.

[Operator:]

Our next question will come from Jim Goss with Barrington Research. Please go ahead.

[James Goss:]

Thanks. Hi, Ryan. I was wondering -- you've mentioned quality several times. Could you help us understand what you mean by quality? What is the definition you are focusing on?

[Ryan Schulke:]

We're really looking at how consumers are interacting on our websites and with our brand partners when they reach our websites against the traffic that we're sourcing upstream, whether that be media buys with direct publishers, website owners, app owners, large platforms, and the ad creative and rendering that is driving that activity, so looking at our partners' data privacy policies, for instance, we're looking at how they render creative to the consumer, and is that aligning with the value proposition that we're really offering on our end of the equation. So the traffic quality initiative is really all about looking at yield when a consumer reaches one of our properties, that to us tells us, if a consumer is going out generating more activity when they'd reached one of our properties, they understood. When they clicked on an ad, wherever they were in the Internet, that when they landed on one of our properties, they understood what the value proposition was and they're interacting with our advertisers' offers and that's really something that we're most focused on. So albeit, you could go out and buy much lower quality traffic across the Internet at lower rates, those end results may, in the short term, give you some profit in revenue, but it's really not a great consumer experience and it's really not great quality for our advertisers on the other side of the spectrum. So we've made a decision to really move more aggressively in this direction towards higher quality based on our belief and really just my knowledge in operating in this space, running digital businesses since 2007 that it will yield much better longer term results.

[James Goss:]

So you mentioned that you're going into -- or you now have five of the largest companies in the world in your roster of clients and a couple of them are fairly new. And I wondered if -- do they fit into some of the verticals you've been dealing with? Or are those verticals changing dramatically? And is the reason margins will be compressed initially because of either securing other type of media, or what other factors are going in that would sort of eat into the first half at least from the way you're describing it?

[Ryan Schulke:]

It's a great question, Jim, and we referenced that we're now working with five of the 25 largest companies in the world. At the onset of this year, that number was two. I have all the data on the two and they made a meaningful difference in terms of Fluent's progress over the past four to five years in terms of our relationship with them and how that's progressed and what that's meant to our business. Upfront, on-boarding these types of clients and ensuring that we can have them really believe in what Fluent is able to deliver and invest alongside us with our growth initiatives, there is some cost to bear on that. That's resourced internally for us. That's some sacrifices like the ones we spoke about in terms of our traffic quality initiative and being able to level up to their standards. And overall, the longer-term profile is very positive. So we're very focused on not just those three, but the two that have been standing with us for longer periods of time out of the understanding that this could be extremely valuable for our business over the long term. However, in the short term, there are certain types of implications relative to on-boarding a large brand. As many of you on the call know, these are companies that -- they have certain types of processes and it's a bit more leg work to get those things going. In the long run, they do represent the opportunity to increase the overall monetization of the consumer experience on our media properties. Consumers see these brands, they trust them, they love them, and we're finding new ways to introduce offers on behalf of these brands to the consumer that are resonating very well. So the first year tends to be not exactly massive in terms of the overall revenue profile. However, over the long time -- long term, these things turn into material wins for the business, and that's our belief.

[James Goss:]

And just a couple of other things. First, with those larger companies, do they tend to be willing to pay more for the better experience, or do they expect to get a much better deal because of their size and scale?

[Ryan Schulke:]

The former. They tend to be able to pay more, not only for the stronger consumer experience, but a lot of the tools that Fluent brings to the table. And we've talked about this probably maybe many quarters ago in terms of my reflection on our business and some of the unique distinctions around it. Again, Fluent is surveying still hundreds of thousands of consumers every single day. We're able to collect unique and discrete insights on it. Some of these larger brands, they look at market share, for instance. So if we're able to go out and help them identify a competitor's -- a consumer that's currently using a competitor's product or service and convert them over, they ascribe a higher value to that, right? So they will go out. And for certain segments of Fluent's traffic, they're able to rationalize a premium against that because, for them at this moment in time, market share may be more important than simply profit through the door. Those unit economics and return on ad spend is consistent across all our clients, but some of these larger clients will take short-term point of view on if I can go out and conquest against the competitor through the Fluent platform, I'm willing to pay a premium for that. So they're utilizing those types of assets that we've brought to the table, has really been a key advantage for our business, no matter what type of client we're working with and really identify segments of traffic that they can pay a premium for.

[James Goss:]

Okay. And lastly, in terms of verticals, are the ones that -- were the leading verticals last quarter the same ones now, or has that shifted because of this change in your strategy?

[Ryan Schulke:]

No, we're still very much in line with things that we've previously presented from an overall, if you think about our business, you have the verticals that are more geared towards a web-based conversion. It's a simpler decision for the consumer to make, whether it's a purchase decision or engagement decision. So we have our media and entertainment category, for instance, which is dominated by music and video streaming apps as well as mobile gaming. So that's, if you think about it, higher frequency touch points, lower upfront cost to consumer, easy to convert through digital. CPG and retail kind of falls into the same boat for us in that area, where it's lower cost consideration, higher frequency, and those buckets remain consistent in areas where we're doing really well on one side of the house. The other side, you're looking at more financial services, home services, legal, things like that where our live agent capability and being able to have a consumer on the phone with us, talking about a more complex decision, and ultimately getting them to a good option within our advertiser base that continues to be strong and it is increasingly getting strong due to that live agent capability. So it's certainly starting to pick up some more momentum in the fourth quarter and we anticipate that to continue in 2021.

[James Goss:]

All right. Thank you very much.

[Ryan Schulke:]

Thanks a lot, Jim.

[Operator:]

Our next question will come from Bill Dezellem with Tieton Capital. Please go ahead.

[Bill Dezellem:]

Thank you. A croup of questions. First of all, with the fourth quarter revenues have been higher without the election and had we had a normal Christmas shopping pattern, or were those really not factors this year?

[Ryan Schulke:]

Hi, Bill, good to hear from you. I do believe it was a bit of a factor for us. Some of the areas, especially investment areas for us, in which we were pushing in to go acquire more traffic, we do understand it to be good quality traffic, was somewhat boxed out on the election cycle. That did have an effect on us in terms of, specifically October, leading up to the election. So that certainly was something that influenced some of the results on Q4. The irregular holiday season, I would say, I don't have data points specifically pointing to that. I don't think that disrupted us as much, disrupted maybe a few areas in terms of delayed shipping and things like that and the overall sort of chaos that was -- all that went on this year, but more the election than anything else, I believe.

[Bill Dezellem:]

Thanks, Ryan. And then I believe it may have been in your filings, but somewhere along the way my sense is that you think that mobile apps are a big opportunity. Would you talk about that opportunity? And if it, in any way, fits in with the traffic quality initiative, would you please link those in your answer?

[Ryan Schulke:]

Absolutely. So we've talked about mobile apps a lot. Fluent predominantly, our media properties are mobile web. We're a mobile web player. And when we sought out to go and play into the mobile app ecosystem back -- this is dating back four, five years now, we were one of the few mobile web players trying to really enter this space. Really, much of the ecosystem trades mobile apps to mobile apps. And as we've broken into that space, we've become very known and developed an excellent reputation as one of the top suppliers for user acquisition in the mobile app community and specifically the mobile gaming community. So on the advertiser side of our house, we've really established a strong reputation. We have many accolades that we've gotten around incrementality and growth for the mobile app ecosystem. We're a known player in this ecosystem. What I believe we've spoken more about on recent calls is we believe format expansion is another way that Fluent can expand its media footprint in a healthy way and go out and deliver more great outcomes for our advertising partners. We haven't talked about anything forward-looking at this point. However, just now, we have been actively looking at this specific area. We have a belief that we can go and play in this space, develop some of our own content in the way of apps, and do more great things for advertisers in the ecosystem. And that -- I do apologize. I believe you had to that question?

[Bill Dezellem:]

Yes, yes. I did. And that was just the traffic quality initiative and do they relate in any way?

[Ryan Schulke:]

They do. So this area, in terms of operating a website, which is predominantly mobile web in terms of interaction with the consumer and really the technologies in terms of how they work together and things like that. It's very different for the app ecosystem in terms of how you develop, how you iterate, optimize, and get things to a place where you essentially have a flywheel where you know if you can get consumers in at x amount of dollars, revenue of y is going to come out and it's going to be x percent more than you acquired the traffic at. So some of those learnings have been perhaps a little slower than we had initially assumed they would be. However, the data points we're looking at, we still do believe this is a really large opportunity for Fluent to get right and we're still steadfast on that mission.

[Bill Dezellem:]

Great, thank you. And then the last area I'd like to touch on is Winopoly. You mentioned in the release that it was exceeding expectations. Would you talk to really the fly and the cause of their success?

[Ryan Schulke:]

Absolutely. We really -- this is an area of the business that we always knew we can be taking greater advantage of. Historically, we had worked with third parties who would be interacting with our consumers on behalf of an end advertiser of theirs. There was always a lot of demand for this product in our ecosystem. So frankly said, we on-boarded a great team with a great entrepreneur who knows how to lead and drive the business forward, and in connection with our teams, how we productized around what was Winopoly, we're really referring to it as our live agent capability. And at this point, being fully integrated where we're looking at the same data sets together. We're going through audience segmentation schemes together and really Fluent being able to see end-to-end, the types of consumers that came from the top of the funnel interacted with us, agreed to receive a phone call from us about a particular product or service and who actually ends up being productive connecting with the advertiser and also being qualified for that product or service being completely connected there as opposed to arm's length with third-party partners, has just made a world of a difference. The data is just coming in in real time. We're able to optimize, our teams are coming together and developing new concepts new scripting themes and solving problems at just such a more rapid pace and that's really been a lot of the core tenants of the success of the live agent business. So that's something that we're really excited about.

[Bill Dezellem:]

Thank you for taking all the questions.

[Ryan Schulke:]

Thanks, Bill.

[Operator:]

This concludes our question-and-answer session as well as today's conference call. Thank you for attending today's presentation. You may now disconnect.