Quotient Technology Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Feb 2021

[Operator:]

Good afternoon, everyone and welcome to the Quotient Fourth Quarter and Full Year 2020 Earnings Conference Call. During the conference call, all participants will be in a listen-only mode. After the presentation, we will conduct the question-and-answer session As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of the Quotient's website following the call. At this time, I would like to turn the call over to Christine Marchuska, Director of Investor Relations. Miss, you may begin.

[Christine Marchuska:]

Great. Thank you, operator. Hello, everyone and welcome to our fourth quarter and full year 2020 earnings call. On the call with me today are; CEO, Steven Boal; Pam Strayer, our CFO; and Scott Raskin, our President. The company's Stockholder Letter was posted almost an hour ago on the IR section of our corporate website, investors.quotient.com, alongside our press release and earnings presentation.

[Steven Boal:]

Thank you, Christine. Hello, everyone and welcome to our Q4 and full year 2020 earnings call. As we reflect on the past year, 2020 has been a year unlike any other, and we are thankful for our customers and partners who relied on us to help them navigate this challenging and shifting landscape. And I would like to thank our world-class team who rose to the occasion. On that note, I would like to start with an example that I think demonstrates the collaboration between Quotient, our customers, retail partners and ultimately, consumers. Back in March, when stay at home orders began, many of our CPG customers reduced budgets on Promotions due to the unpredictability of the growing pandemic. We all witnessed consumers stockpiling groceries, and shifting to make more meals at home. Items like cleaning products, paper goods and cereal started flying off the shelves as people generally stayed at home except for grocery and drugstore runs. Beverage manufacturers and beauty companies started making in-demand health care items. The challenges grew greater almost every day.

[Pam Strayer:]

Thank you, Steven and good afternoon, everyone. I'll keep my remarks brief and focused on our financial highlights. I encourage you all to read the full prepared financial results in our Stockholder Letter posted on the Investor Relations page of our website. Because of the record high revenue results for Q4 as our customers start to deploy effective marketing budgets to generate high ROI for their brands, strengthen Media and new Media offerings such as Digital Out-of-Home and Sponsored Search experienced significant quarter-over-quarter growth, highlighting their rapid acceptance in the market as solutions that offer closed-loop measurement and impactful results. There was very little pullback in CPG spending during the quarter as we had initially thought possible. As a result, we exceeded our guidance and delivered revenue of $142.5 million, 20% growth over the prior year and 18% over the prior quarter. If you exclude approximately $10 million from a portion of our Media business that we exited in Q3 2020, Q4 2020 revenue would have been up 31% compared to the prior year. We ended 2020 with annual revenues of $445.9 million or 2% growth rate over the prior year. Our second quarter of 2020 revenues were hit particularly hard as CPGs pull back on marketing spend to just due to supply chain disruptions in COVID. The revenue in Q2 fell below levels we haven't seen since 2017. However, with supply chains repo CPGs return to more normalized marketing spend in the second half of the year, with a focus on the best ways to deploy their budgets in light of extended quarantines, and the cancellation of large advertising events such as the Olympics. Our revenue in the second half of the year increased by 45% over the first half of 2020.

[Operator:]

We will now begin the question-and-answer session. And our first question today will come from Chad Bennett with Craig-Hallum. Please go ahead.

[Chad Bennett:]

Great. Thanks for taking my question. Great job on the quarter, it's good to see things accelerate significantly on both sides of the business. I guess in terms of how you think about the TAM or Steven, for that matter, just the kind of magnitude so to speak of the Promotions business coming back, you know, everything we look at out there, you know, whether it's CPG commentary or just independent work we do is, you know, you saw a significant pickup, you know, in the year-end kind of month-to-month, month and I don't know, if Steven chatted about that on the prepared remarks. But, you know, the commentary is, you're going to continue to see kind of a more normalization in the first half of the year, assuming, you know, everything opens up. And you know, second half, you know you could actually see a real kind of pre-COVID acceleration on that side of the business. I guess how are you kind of viewing that for the year? And what's implied in your guidance in kind of the relative comeback with the Promotions business to pre-COVID levels?

[Pam Strayer:]

Yeah, this is Pam I'll take that one. Steven can chime in with additional commentary if he has it. I would say that - generally speaking, we do expect the Promotions business to get back to pre-pandemic level certainly by the second half of the year. The Promotions business is good. And we can see that it's strong in Q1 from our January bookings. I would say, you know you look at our revenue mix from Q4, Media is growing really, really rapidly. And as we said, Q4 revenue mix was heading towards Media, Media being 52% of total revenues for the first time, above 50%. I think the highest we've had in the past, Media has done like 48% of revenues. So it was a real strong mix for Media. I think that speaks to a couple of things. Number one, you heard us talk in the Investor Day about the collaborative spend program, a lot of that's happening on RPM. And RPM is a very popular solution right now. So that's growing really rapidly. We have a couple of CPGs that, you know, they're spending especially around Promotions are not going to be back to pre-pandemic levels until the second half of the year. But I think that's just a couple other CPGs who were really negatively impacted, you know, cleaning supplies and paper products and the like. You know, I think that Q1 is just from seasonality, Media tends to be much slower in the first quarter. Promotions is a lot more steady throughout the year and consistent, so I would expect a stronger mix towards Promotion in our Q1 solution. But I think generally speaking, it's going to be back to pre-pandemic levels for the most part. If not in - it's not in the first half and certainly by the second half.

[Steven Boal:]

Right. Yeah, let me just add in there, you know that's exactly right. And the other piece is that, you know, with scale continuing to grow on our platform, which it clearly has been, there is, you know, there is the accelerated move of dollars out of the FSI. And so, and to echo what Pam said, I think in the back half of this year, you're going to see a much stronger move out of the analog products into Digital, that's a pretty big driver of the growth for us. And in addition, we've reformatted and refactored the way our go-to market team is structured, and we have separate teams against separate parts of the industry now. And the focus on smaller CPGs, as I said in my prepared remarks, is also a big growth driver for us this year, particularly in the back half, because those CPGs could never participate in Promotions before, they couldn't get into vehicles like the freestanding inserts. And they can freely operate on our platform. And so, I would expect more significant growth from that group as well.

[Chad Bennett:]

Yeah, you know that's great color. And then just maybe one quick follow-up for me, just, you know, I mean, the guide looks good, you know, on the top line and you know, especially considering the beat you just put up in the fourth quarter. But if I kind of dig into it, and look at it, especially in the first half, right, you're going against the Media comp that is pretty sure was down year-over-year, first half of 2020 versus first half of '19. And in terms of dollars of revenue, you know, I mean, that business, you know, again, Chad's words, right. I mean, that should be up significantly year-over-year in the first half of the year, your Promotion business was also down year-over-year in the first half of '20. And so, you know, I appreciate, you know, we obviously, you know, we're getting back to normal here from kind of an execution and just overall world's standpoint. But, I mean, it just seems like a scenario where, you know, 20% plus top line growth at a minimum for the first half of the year should be feasible. And, you know, even into the third quarter and second half with the momentum you have in terms of partners and in traction and within your RPM partners and national budgets and Sponsored Search, you know, I don't want to get the cart in front of the horse, but, you know, do you believe there's, you know, kind of, you know, potential to outperform maybe is the best way to put it on the outlook you put out there?

[Pam Strayer:]

Yeah, I would say there's a potential to outperform. I would say, you know, your comments on the first half are true, although just to refine that a little bit. I think our Q1, although it was negatively impacted by COVID, it wasn't impacted as tremendous amount, Q2 was really that was really painful.

[Chad Bennett:]

Hello?

[Steven Boal:]

I think it sounds like Pam may have dropped off.

[Chad Bennett:]

Okay -

[Steven Boal:]

Yeah, I think she may have to redial. And so, just to pick up what she was saying.

[Chad Bennett:]

Yeah.

[Steven Boal:]

Look, the potential is there to outperform. Look Chad you noticed for a while, we've spent the last 16 months since I've been back and Scott's been there and Pam's been there for - been with us now for a year, just getting everything in shape so that we could forecast with rigor. And we could, you know, we could set ourselves and you know everybody else up to expect us to deliver and then, you know, give us an opportunity that to do a better job. So there is certainly an element of conservatism given our historical you know, performance record.

[Chad Bennett:]

Fair enough. Thanks so much. Nice job.

[Steven Boal:]

Thank you.

[Operator:]

And our next question will come from Jed Kelly with Oppenheimer. Please go ahead.

[Jed Kelly:]

Hey, great. Steve thanks for taking my questions. Just, Steve, just back on that last comment around guidance. I mean, it is sort of the magnitude that we had here in 4Q and given the environment, I mean, are you baking in an extra amount of conservatism, just given the 1Q guide where we are seeing some decel and then maybe even in the back half? I mean, I think it's sort of in-linish with what you called out at your Investor Day relative to your longer-term growth rates. Just are you taking a different approach to guidance this year?

[Steven Boal:]

Yeah, look Pam is having some technical trouble dialing in with the, you know, the product of everybody working from home. But the answer to that question is yes. You know, we've taken a different approach to, you know, to guiding than we have in the past, it's now fact-based and gives us some, you know, gives us a little bit of room to, you know, to do a better job than we had expected to. So no material changes from our Analyst Day, you're absolutely right, the back half, you know, is in line with what we talked about at our Analyst Day. And but you remember we did say at the Analyst Day, if things materially change, you know, if we add something special to the platform, we would go ahead and revise those numbers out. But yeah, we're taking a different approach, we're, you know, we're trying to be as conservative and responsible as possible so that we can deliver on what we say we're going to do.

[Jed Kelly:]

Got it. And then in your Shareholder Letter, I think you called out, there's 250 billion of groceries that are expected to be delivered to US households by 2025. I mean, just how should we frame your opportunity in that sort of like what's the revenue opportunity there for Quotient?

[Steven Boal:]

Sure, absolutely. So, if you recall what we've said in the past, every eCommerce experience is a digitally engaged experience. And so, you know, while we certainly are benefiting from a shift to Digital, and engagement with shoppers digitally, as shoppers move to an eCommerce model or an omnichannel model, every one of those experiences tied to a credential, a user identification, a logged in state, and an opportunity to put Sponsored Search in front of the Media, recommended products, promotional opportunities, both on a national level and also on a shopper level or retailer level. So, you know, for us, the more eCommerce the better, you know, the pandemic accelerated eCommerce engagement by shoppers much faster than it has been anticipated, we should stabilize sort of 9% to 12%. And then, you know, post-pandemic, the natural rise that we were on before. And just to be clear, when I say and it doesn't mean 9% to 12% of households are doing eCommerce shopping, it means that, in most cases now, it's an eCommerce plus physical commerce experience. And so it's omnichannel per household. And that's even better for us, because we tie those two experiences together. And so now it's a completely, you know, well rounded view of what that shopping household looks like both online and in-store. And that just makes the modeling better, the targeting better and the connectedness and Media better.

[Jed Kelly:]

Got it. And then just one more question just on Pam's comment on gross margins. I mean where should we see the net revenue benefit margins start to kick in? Do you have any idea will we see that more in the second half of the year?

[Pam Strayer:]

Yeah, can you hear me now? Am I back on? Okay, looks like I'm back on. So, yeah, it's going to kick in - it's going to be gradually over time. So, you know, I would say, for this Q4 we had, you know, a small portion of our revenue from a net revenue recognition basis. So it was about 2%. And we expect that to grow over time as more of our customers do self-service. And, you know, we improved some of the functionality there, we go after customers who prefer self-service approach to things. So it'll grow gradually over time. I do think that second half of this year we'll have even more net revenue recognition, but then in the 2022, we'll continue to grow.

[Jed Kelly:]

And that's 2% on Media or is that 2% of total?

[Pam Strayer:]

2% of total.

[Jed Kelly:]

Thank you.

[Operator:]

And our next question will come from Steve Frankel with Colliers. Please go ahead.

[Steve Frankel:]

Good afternoon. Steven, you provided the new metrics on this new National Rebate platform in terms of monthly average users or downloads, just how should we judge the progress today?

[Steven Boal:]

Well, I guess the progress by engagement. And so we did a lot of user group and vocal testing going into the process. We have over 70 CPGs that have signed out for the platform at this point. And I would say, from a progress and acceptability perspective, I feel like we're doing better than we had anticipated from a CPG engagement and a shopper engagement. So I'm happy with the progress of the product. I think it's an example of something that we've done very, very well, as a company and looking forward to that becoming a very big part of our National platform in the very near future. We have some additional experiences that we're bringing to bear on that some partnerships that we'll be announcing those in the near future. But I think very highly of that platform right now.

[Steve Frankel:]

Okay, and then one big picture question. How should investors think about Walmart's digital advertising strategy that was announced a week or so ago? What does that mean to you? What does that mean to the industry?

[Steven Boal:]

You know, it's a great question. And I think you probably come to the same conclusion that many people in the industry have reached out to us, but it's clearly validation of our strategy. You know, it's very difficult to do these things alone. It's even harder if, you know, if you've got a strategy that aligns with your on-site property and your off-site property and you've got to deliver one, one way and deliver on the other way. And so just generally speaking, and not talking about Walmart specifically, but the notion of their announcement, it just validates what we've been saying all along. And that's that CPGs want access to a broad platform of capabilities across retailers and retailers need to extend beyond their four walls in order to get out to all the shoppers. And retailers are very good at reaching their shoppers. But if they want to reach shoppers outside of their four corners, it really requires a partnership to do that.

[Steve Frankel:]

Okay. And then one more big picture question. All the upcoming changes in tracking cookies and the like, is that industry change that Quotient can use to its advantage, given the reliance on more first-party data? And do CPGs get over it?

[Steven Boal:]

Yeah, absolutely. So we're a first-party and second-party data company. And so, to the extent CPGs need to reach shoppers and reach them in a, you know, in a defined narrow segment way, first-party and second-party data carriers today. And so, to the extent that the industry moves away from third-party cookies, and IDFA tracking and things of that nature, that's actually a benefit to Quotient.

[Steve Frankel:]

Great, thank you.

[Steven Boal:]

Thank you, Steve.

[Operator:]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

[Steven Boal:]

Thank you, operator and thank you all for joining us today. We are very pleased with the strong close to 2020. And we look forward to continuing to capture our share of the large and growing opportunity in front of us. In closing, we look forward to what 2021 brings and providing you with continued proof points of our progress in this dynamic business and space. Thank you, again. Stay safe. We'll see you all soon.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.