Quotient Technology Inc.
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Welcome to the First Quarter 2018 Quotient Earnings Conference Call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section of Quotient's website following this call. I will now turn the call over to Stacie Clements, Vice President of Investor Relations. Ms. Clements, you may now begin.

[Stacie Clements:]

Thank you. Hello everyone and welcome to our first quarter 2018 earnings call. Please note that slides to accompany the remarks on today's call are available on the IR section of our corporate website. On the call with me here today are Mir Aamir, our President and CEO; and Ron Fior, our CFO. Steven Boal, our Executive Chairman, is here as well and available for questions after our prepared remarks. Before we begin, please note that during this call, you will hear forward-looking statements. These forward-looking statements include projections for our second quarter and full year 2018, our expectations for our Retailer iQ platform and consumer and CPG patterns, the success of expanding our shopper marketing and media business, the company's expectations regarding Quotient Analytics and the use of shopper data for its solutions, the company's expectations regarding its new pricing strategies as well as the expected growth and investments in our business generally. Forward-looking statements are based on information available to and the good faith belief of our management team as of the time of this call and are subject to known and unknown risks and uncertainties that could cause actual performances or results to differ materially. Additional information about factors that could potentially impact our financial results can be found in today's press release and in the risk factors identified in our quarterly report on Form 10-K filed with the SEC on February 16th, 2018. We disclaim any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. Please note that with the exception of revenues, operating expenses, gross margins, and net loss, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain expenses. A reconciliation between GAAP and non-GAAP measures can be found in the financial results press release issued today and on the slide deck in the -- slide deck posted on the company's website. Before we get started, I'd like to briefly mention that approximately 15 minutes before the market closed today, we saw some of our results show up on Twitter. We informed the New York Stock Exchange, who halted our stock, after which we released our earnings results. I will now turn the call over to Mir.

[Mir Aamir:]

Thank you, Stacie and welcome everyone. We had a great start to the year, delivering revenue of $86.8 million in the first quarter, up 20% from last year and at the high end of our guidance. Revenue from Retailer iQ and media combined grew 36% compared with a year ago and represented 73% of total revenue. We also delivered adjusted EBITDA of $11.9 million, a 55% increase over last year. I'm thrilled to announce today that we crossed an exciting milestone in Q1, delivering more than 1 billion transactions, a 29% increase over Q1 of last year. Such transaction growth underscores the power of the network effect on our Retailer iQ platform. As the user base and shopper demand grows, it enables consumer packaged goods or CPG brands to spend more on digital promotions and media. All that activity further enhances shopper data on the platform, which strengthens all our solutions and creates more opportunities to grow business and shareholder value. For example, we just announced the release of Quotient Analytics, which I will talk more about in a moment. Put simply, data is at the core of everything we do. As the leading provider of digital marketing solutions to CPGs and retailers, we help them deliver personalized digital coupons and media at scale, driving in-store and online sales. Just this week, we helped another retail partner relaunch their e-commerce site with integrated digital coupons powered by Retailer iQ. Through the years, our opportunity has expanded beyond the approximately $3 billion that brands spend annually in paper coupons. The larger opportunity is the $225 billion that CPGs spend annually on all marketing. With the shift to digital, marketing strategies around promotions and media enabled by data are starting to converge and Quotient is at the center of this significant transformation. I will now review the quarterly highlights and then provide color on some exciting announcements. Revenue from promotions grew 11% year-over-year driven by digital paperless coupons. Excluding specialty retail, revenue from CPGs grew 19% in the quarter. We now have more than 60 million shoppers registered to savings programs powered by Retailer iQ, the equivalent of half of all U.S. households. With the shopper base at scale and growing, we continue to work with our clients to help them shift their promotion spending from offline to digital to meet their growing shopper demand. Another key factor fueling our growth is our continued work with retailers to incorporate digital coupons into their merchandising and marketing programs. This includes annual and quarterly planning with CPGs and retail teams to deliver strategies and tactics such as personalized messaging, coupons featured in circulars, and in-store communication. Clients and partners are increasingly taking advantage of our innovation, whether that's personalized e-mails with coupons and media, targeted offers, or digital circulars, which are all based in shopper data, proprietary algorithms, and, increasingly, machine learning. In Q1, another major client went live with our Digital Circular solution as we work to capture a share of the more than $5 billion that grocery retailers spend annually on paper circulars. Our Digital Circular solution, also built on Retailer iQ, uses shopper data to make the stores' offers relevant and personalized, which we believe is what will make digital circulars more compelling than paper. We are also seeing greater momentum with targeted offers as brands achieve strong results. More than three times the number of brands ran five times the number of targeted campaigns on our platform in Q1 this year versus Q1 of last year. As we have mentioned before, targeted offers are priced to the premium versus national digital coupons, which we believe will help grow revenue. One area we're seeing brands adopt targeted strategies is to sample and promote new products. For example, a frozen food brand recently launched a new product and ran targeted digital coupons focused on driving incremental sales as well as incremental buyers. The campaign was a huge success, driving 40% increases on both incremental sales and buyers. Another application of targeted digital coupons is to improve the efficiency of thrift spend, which is the in-store discounts on shelves that CPGs and retailers spend more than $100 billion on each year. We've initiated pilot programs on this starting with two large CPGs to deliver digital coupons using trade budget more efficiently. We also continue to enhance and grow our popular coupon -- consumer property, Coupons.com. As we mentioned, we redesigned and relaunched our mobile app with Retailer iQ capabilities last year. We also enhanced our mobile web experience earlier this year. As of March, we had 20 million monthly unique visitors on mobile, providing scale for CPGs to reach consumers. Throughout this year, we expect to launch additional functionality to further grow both our app and Coupons.com to expand our set of actionable first party consumer data. Turning to media. Media revenue in the first quarter grew 51% over Q1 last year, driven by our continued growth in shopper marketing, where CPG spend is estimated to reach $19 billion annually in the next few years. A growing proportion of that spend is expected to go into digital programs. We're also excited to announce that in Q1, we signed another Retailer iQ partner to our media platform, whereby Quotient is now their exclusive digital media partner for shopper marketing. As with our exclusive media partnership with Albertsons Companies that formally launched in January, Quotient's end-to-end media solution helps brands reach millions of shop -- retailer shoppers by targeting audience segments using purchase data and creating relevant ads with an integrated call-to-action such as digital coupons or in-store specials to drive sales. Our technology also provides analytics to measure media outcomes by linking ad views to a shopper's verified purchase, a long-held ambition by marketers. Our Retail Media solutions, as part of our Quotient Media Exchange or QMX platform, are well-positioned as media buyers today are focused on delivering top-quality digital creative to the right shopper at the right moment on the path-to-purchase. As mentioned earlier, we have a verified buyer audience of more than 100 million, delivering significant reach and spend efficiency for CPG brands. And the results have been strong. For example, in the quarter, we delivered a successful Super Bowl-themed campaign for a large CPG. The CPG was looking to drive sales across multiple brands within a specific retail partner. Using our media platform, we targeted the right shopper audience, delivered the campaign across our publishing network, and generated an average of $5 return on every $1 of advertising spend. Additionally, the campaign drove sales and brand awareness for the retailer. We also continue to innovate and bring new media technology to further our clients' objectives of delivering performance driving digital media and to further differentiate our offerings in the marketplace. For example, we are now adding solutions for e-commerce media to our platform, specifically search and sponsored product campaigns on our retail partners' e-commerce properties. I look forward to sharing more details on this exciting new capability in future quarters. In addition to market-leading media technology, our focus has been to provide industry-leading analytics and measurement of sales impact of media and promotions. As I mentioned, we recently launched a client portal called Quotient Analytics, adding to our already rich suite of data analytics and insights capabilities. This self-service solution lets our clients monitor their campaigns in near real time, giving them the ability to evaluate and measure performance so they can make changes mid-flight. We are in the process of rolling Quotient Analytics out to hundreds of CPG brands and believe that this will help further demonstrate the power of our platform, leading to increased growth. In summary, I'm very excited about our strong start to the year and believe the opportunity ahead of us is tremendous. With CPG brands under pressure to drive efficiency from their $225 billion in marketing spend annually and retailers relentlessly focused on engaging shoppers digitally to drive sales in-store and online, we provide the technology, data, and analytics all in one platform to drive the transformation of this industry. I'll now turn the call over to Ron.

[Ronald Fior:]

Thank you, Mir and welcome everyone. We had a strong first quarter driven by continued year-on-year growth in Media and Retailer iQ promotions. Total revenues in Q1 were $86.8 million, up 20% over Q1 of 2017. Transactions in the first quarter were a record $1 billion, up 29% over Q1 of last year. We recorded a first quarter GAAP net loss of $11.4 million compared to a GAAP net loss of $2.7 million in Q1 of 2017. The GAAP net loss in the quarter was primarily due to a $7.4 million net charge related to the change in the fair value of escrowed shares and contingent consideration. Adjusted EBITDA, which excludes the net change in fair value of escrowed shares and contingent consideration, stock-based comp, restructuring charges, ERP implementation costs, and certain acquisition-related costs was up 55% at $11.9 million versus $7.7 million in Q1 of 2017. We ended the year with a cash and short-term investment balance of $381.3 million, down from Q4, primarily due to the payment of typical year end accruals and the net settlement of vested RSUs. We used $6.3 million in cash from operations in the first quarter 2018 compared to $233,000 in Q1 of 2017. In summary, we're very pleased with our performance in the first quarter. Looking at revenues. Drilling down into our $86.8 million Q1 revenues, promotions revenue came in at $63.8 million, an 11% increase over last year, which included 19% revenue growth from CPGs, offset by an expected 31% decline in specialty retail. Revenue from Media in the quarter was $23 million, a 51% increase over last year, reflecting increased contribution from shopper media and our acquisition of Crisp. Here are some other insights into our first quarter revenues. One, Retailer iQ revenue in the first quarter 2018 grew 29% year-on-year; two, Retailer iQ and Media combined in the first quarter grew 36% over last year and accounted for approximately 73% of our total revenue; and three, our top 10 CPGs grew their proportion of promotion revenues by approximately 50% over Q1 of last year. Let's look at transactions. Total transactions in the first quarter were $1 billion, up 29% from a year ago and up slightly sequentially. Retailer iQ transactions grew 40% from a year ago, representing 85% of total transactions in the first quarter. Digital print transactions decreased 10% from the same period last year and 6% sequentially. Moving on to the P&L. GAAP gross margin in the first quarter was 53.4% and reflected the continuing change in mix between media and promotion revenues. This compares to a gross margin of 52.7% in Q4 of 2017 and 59.8% in Q1 of 2017. Non-GAAP gross margin, which excludes amortization of acquired intangible assets, stock-based compensation expense, and restructuring charges, came in at 57.1%. This was down from Q1 of 2017 and up slightly from last quarter, primarily a function of product -- of the product mix changes I described previously. Let's look at operating expenses. For the first quarter, GAAP operating expenses were $55.2 million, which included a $7.4 million charge for the net change in the fair value of escrowed shares and contingent consideration and about $1 million in restructuring charges. Non-GAAP operating expenses in Q1 were $39.4 million, which excludes stock-based compensation, the net change in fair value of escrowed shares, and contingent consideration, amortization of acquired intangible assets, our ERP implementation costs, and restructuring charges. Continuing our efforts to be more operationally efficient, Q1 operating expenses were slightly lower sequentially even while absorbing the annual FICA reset for 2018. In fact, non-GAAP Q1 operating expenses were also slightly lower than Q1 a year ago even after absorbing Crisp expenses due to these continued operating efficiencies and cost management. In percentage terms, non-GAAP operating costs were 45% of revenues in Q1 of 2018, up slightly from last quarter's 43% level and a significant improvement over last year's 56% level, reflecting a combination of revenue growth and leverage in our overall operating expenses. Adjusted EBITDA, in the first quarter, adjusted EBITDA came in at $11.9 million, up 55% over last year and representing a 14% margin, slightly down from last quarter, but up nicely from 11% a year ago. As our business evolves, we continue to focus on improving EBITDA margins, with continuing revenue growth in digital promotions and media, and a balanced approach between investments and operational efficiencies. Moving on to cash. We ended the quarter with $381.3 million, down $13.2 million from the prior quarter. The primary causes for the reduction from year end were related to accompany year-end bonus and commission payments, the impact of net settlement of RSUs and year end revenue share payments. In the quarter, we used $6.3 million in cash from operations. Historically, Q1 bears the brunt of timing as it relates to cash, coming off a seasonally strong Q4. Free cash flow, defined as GAAP cash flows from operations less capital expenditures for the quarter, was a negative $8 million. Stock buyback. Our previously announced $50 million buyback expires May 4th. So, today, we're announcing a new one-year stock buyback program of up to $100 million through a combination of a new 10B5-1 plan and an open-windowed 10B-18 plan effective May 5th for the next 12 months. Our goals are twofold; one, to offset some of the dilutive impact of ongoing stock grants; and two, to provide more flexibility should the market continue to misunderstand our potential and undervalue our shares. We're excited about our future and we believe having these tools available is prudent. Let's now talk about guidance. For the second quarter 2018, we expect revenue to be in the range of $87 million to $90 million. We expect adjusted EBITDA to be in the range of $12 million to $14 million. For the full year 2018, we are reiterating our guidance. We continue to expect revenue in the range of $379 million to $394 million or approximately 20% growth at the midpoint. We expect the media growth rate to be somewhat higher than Retailer iQ, given we have the full year impact of our QMX product as well as the Crisp acquisition. We also expect revenue in the fourth quarter to be significantly stronger, given our strength in media and the stronger seasonality patterns of that portion of the business. Adjusted EBITDA for the full year 2018 is expected to be in the range of $65 million to $73 million or approximately 17% to 19% of revenue, a solid increase over 2017's margin of 15%. We'll continue to balance between driving for growth while tightly managing expenses towards improving margins and building shareholder value. We believe we have a large opportunity in front of us as retailers and CPGs continue to reach and engage shoppers through digital channels. This quarter, we will be attending the Bank of America Merrill Lynch Tech Conference in San Francisco and the Needham Emerging Tech Conference in New York and look forward to seeing you there. We will now open the call for questions. Operator?

[Operator:]

[Operator Instructions] Your first question comes from Mark Mahaney with RBC Capital Markets. Your line is open.

[Mark Mahaney:]

Thanks. Two questions please. First, Mir, you talked about rolling out some app functionality improvements later this year. Could you just maybe talk a little bit more about those? What sort of improvements or maybe what issues or problems they are looking to address? And then, secondly, you talked about the targeted offers. And could you just quantify that a little bit or give us some sense of how -- of the migration or the adoption of targeted offers? And just talk about, in a significant period of time, a couple of years, what the implications of broad adoption of targeted offers -- broad distribution of targeted offers would mean to the Quotient business model? Thank you.

[Mir Aamir:]

Sure, Mark. Let me address the first one and then the second one. So, app functionality, I'm assuming you are referring to Coupons.com app functionality in the latter part of the year. There's a number of very exciting things we're working on in terms of being able to provide value to consumers in the grocery space. And you can imagine that coupon is one big piece of it, but if you look at the $225 billion that CPGs spend on marketing and other consumer promotions in there like trade, for example, that shows up in in-store discounts, and therefore, in the retailers' circular and thinking about bringing that and putting that together will give you a sense of the kind of things that we're thinking about on the consumer app or Coupons.com. On the targeted offers, look, the growth rate is great. We have a competitive advantage in there. We have scale of shoppers now as we talked about last year. We started piloting last year and that momentum is building. It's still a small base, but the rate of growth is very, very good. The results are really good. In terms of magnitude, right now, you can think of it in terms of hundreds of brands running targeted offers on our platform in quarter one of this year. And again, their ROI is looking really good. As it relates to how big is big, there are -- you can look at some offline spend that happens in the marketplace for targeted coupons for CPGs and that's a very big number in the hundreds of millions of dollars. So, we are very excited to be able to have -- and that as our market size as well to go after.

[Mark Mahaney:]

Thank you, Mir.

[Operator:]

Your next question comes from Jason Helfstein with Oppenheimer. Your line is open.

[Jason Helfstein:]

Thanks. A few questions. Can you help us understand the trajectory of the media business? If we kind of guess the organic growth, it did look like it slowed. Just help us think about how you think that trends over the rest of the year and then whether that -- how that impacts second quarter margin guidance? I think second quarter margin guidance did look a bit weaker. Maybe you can kind of share something on that. And then, just one question on the buyback authorization. Does this take acquisitions off the table or you're basically saying anything could happen and you just want maximum flexibility? Thanks.

[Mir Aamir:]

Let me take the first two. So, the media trajectory, media is very strong in quarter four and you can expect us to be strong in quarter four of this year as well. So, generally, there's a seasonality to it, which is, in some way, similar to the seasonal patterns in shopping and within grocery shopping. So, what you saw in Q1 versus Q4 was more seasonal than an inherent trend in there. Overall, our year-over-year trend is very strong and will continue to be strong for the back half of the year. And then, seasonally, and this is not -- applies not just to media, but to promotions as well. We've said this before, Q2 and the back half of Q2 is seasonally soft because of summer and the grocery shopping and the CPG spend on coupons and marketing and media, and then Q3 picks back up by the end of July. So, when we -- as we enter into the back-to-school season, which, as you've seen in the last few years, not just for us but for the industry, has been an area where CPGs spend a lot, especially in August and September. And then, of course, quarter four is a seasonally strong quarter. So, you can think of it that way in terms of spreading it out for the year. As it relates to margin guidance, again, we have -- we've talked about this before. The reasons for the margin change year-over-year has to do with mix. Mix effect in terms of media being a bigger portion of the mix effect, but also within media off property being a bigger portion of that mix effect as we're growing very rapidly. So, we factored that in compared -- and combined with seasonally soft quarter two, you can think about us factoring the margin guidance accordingly for the quarter and for the year. You want to address pipeline?

[Steven Boal:]

Yes. This is Steven. So, the answer to your question is no, M&A is not off the table. The buyback is up to $100 million. We have over $380 million in cash on hand at the end of the quarter. And as we said last time, we're not going to sit on that cash for too long. We're being opportunistic and our pipeline is pretty robust on opportunities.

[Jason Helfstein:]

Thank you.

[Steven Boal:]

Thank you.

[Operator:]

Your next question comes from Matt Yamamoto with D.A. Davidson. Your line is open.

[Matthew Yamamoto:]

Hi, thanks for taking my question. How should we think about the impact of your Quotient Analytics effort that was launched in April on the full year guidance?

[Mir Aamir:]

So, Matt, Quotient Analytics officially just got launched. It's very exciting, it's a very robust product. I think we mentioned it last time that its monetization happens through media in a large way, and of course, some large promotion campaigns where we would incorporate in that and then, for other campaigns, we do charge for it. But it's early and any incremental revenues from Quotient Analytics has been factored into our guidance.

[Matthew Yamamoto:]

Thanks. I'll slip back.

[Operator:]

Your next question comes from Ralph Schackart with William Blair. Your line is open.

[Ralph Schackart:]

Good afternoon. Just looking at the average promotion revenue per transaction metric, I know you don't run the business on this metric, but just in terms of the reported basis. It's been fairly stable, around $0.06 or so the last three quarters. Just curious how you see that metric trending going forward is the first question. And then just to bolt-on to that, digital print, I know it's not a huge focus of the business, but it was up 3% year-over-year in revenue. Just anything that you'd call out within sort of that product category? Thanks.

[Mir Aamir:]

So, promo revenue per transaction, you're right, we -- it's a calculated metric. Look, I think all the changes in the last few quarters, you've seen for many, many quarters, it's all been mix effects. And you're seeing the same in this quarter. Hard to say in terms of what to model it at. Best is, again, looking at total revenues and modeling total revenue growth. Print at home, again, we saw a little bit of -- this quarter versus a year ago in revenue. We're hoping -- there is demand for print at home by a section of the population. We like that. We're going to cater to that. We'll see how the trending goes in the future quarters.

[Ralph Schackart:]

Great. Thank you.

[Operator:]

Your next question comes from Christian Sidak with Bank of America. Your line is open.

[Christian Sidak:]

Hi, good afternoon. I just wanted to ask. Last quarter, we had seen some overhang from specialty retail depressing Retailer iQ, could you comment or give any color on the impact of that in 1Q?

[Ronald Fior:]

So, in specialty retail, as we indicated at the end of last year, last year it went down and it's expected to go down roughly a third and we saw that this first quarter. It was down, I think, 31% or 32%. And that will continue -- we expect that to continue most of the year.

[Christian Sidak:]

Thank you.

[Operator:]

[Operator Instructions] Your next question comes from Steven Frankel with Dougherty. Your line is open.

[Steven Frankel:]

Good afternoon. I wonder if we might talk a little bit about ROI-based pricing and kind of how are you doing in marketing that? And where are you in the adoption curve? I know it's early days, but maybe an update from the last time you talked about it.

[Mir Aamir:]

Sure. I would say that most large CPGs were engaged in conversations. And those that are in the planning phase, it's the right time to engage in those conversations. It's a very effective idea in the marketplace as you would imagine. Of course, we did -- we do require that there's something that come with that like, for example, as we mentioned last time, an always-on budget for the coupons. And so working through that for the CPGs and the planning, that's ongoing right now. And as we go through the year, we'll keep you updated on the progress on that.

[Steven Frankel:]

Okay. And how many Retailer iQ customers have yet to launch?

[Mir Aamir:]

Well, most of them are live. We last talked about that there would be -- there's a couple that should get launched very soon and that's still the case.

[Steven Frankel:]

Okay. And then, you seem to have a pretty special Media business. How much has that been adopted by your major CPGs? Kind of where are you -- I guess, where are you in penetrating that opportunity across the customer base, not in terms of dollars, but just in terms of awareness and people that have decided to go on to your platform over time?

[Mir Aamir:]

Sure. It's across the Board. Most of our large CPGs have done media with us. The growth opportunity now stems from more brands within those CPGs and larger campaign sizes per brand and more frequency of campaigns in the year as we're seeing and we're seeing that happen. And then, we have started to see some midsized brands also started to do -- start to do media on the new media platform. And then, we expect and hope that more of those brands also come in. Keep in mind, we -- our platform does give -- does have an inherent advantage for even the small-sized brands. They might have been scaled out of other opportunities to be able to actually do media tied to a shopper program or customer data and really drive sales.

[Steven Frankel:]

Great. Thank you.

[Operator:]

This concludes the Q&A session for the conference. I'd now like to turn it back to Mir Aamir for closing remarks.

[Mir Aamir:]

Thank you all for joining us today. This is an exciting year for us. We have differentiated technology, CPG and retailer relationships, proprietary data and scale. We believe this provides us a sustainable competitive advantage, helping to drive the overall growth of our business. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.