Quotient Technology Inc.
Q4 2018 Earnings Call Transcript

Published: 13 Feb 2019

[Operator:]

Welcome to the Fourth Quarter 2018 Quotient Earnings Conference Call. During the call, all participants will be in 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. Thank you. Ms. Clements, you may now begin.

[Stacie Clements:]

Thank you, operator. Hello everyone, and welcome to our fourth quarter and full-year 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 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 first quarter and full-year 2019; our expectations for solution, partnership, pricing strategies, growth drivers and platform; as well as the expected growth of and investments in our business generally. Forward-looking statements are based on information available to you and the good faith beliefs 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-Q filed with the SEC on November 9, 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 margin 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 result press release issued today and in the slide deck posted on the Company's website. And with that, I'll now turn the call over to Mir.

[Mir Aamir:]

Thanks, Stacie, and welcome, everyone. 2018 was an exciting year. We delivered accelerated revenue growth up 20% over 2017 as compared with 17% growth in 2017 over 2016. Adjusted EBITDA dollars in 2018 were up 22% over last year. We generated $22 million in cash from operations and ended the year with a strong balance sheet over $320 million in cash and short-term investments. During the year, we repurchased shares of our common stock for $16 million. We significantly expanded our solutions with the launch of Retail Performance Media and we enhanced our marketing technology platform with the strategic acquisitions of Ahalogy, Savingstar and Elevaate. We entered 2019 on solid footing and are excited about continuing to grow the business at a strong pace this year. Let's start with the fourth quarter. Revenue in the fourth quarter was a record $107 million, up 15% over Q4 last year, despite softer than anticipated CPG customers spend in December of last year. Adjusted EBITDA for the quarter was a record $16.5 million and 18% increase over Q4 last year. As we mentioned in our preannouncement, Q4 was impacted by unexpected softness at some CPGs cut their marketing spend in December. Promotions revenue was impacted the most, declining 9% over Q4 2017. Media revenues grew 67% over last year, driven by our data enabled media solutions as well as social and influencer marketing through our newly acquired Ahalogy business. We believe the lower CPG spend was attributable to end of quarter and fiscal year end spending reductions as the CPG industry faces commodity cost increases, pressuring margins, and uncertain macroeconomic environment, including tariffs and a rapidly changing retail environment, including the proliferation of private label products. Digital marketing requires little lead time and by default is easier to cut during the quarter. On the flip side, we've also seen this dynamic play out in our favor, where brands have excess budget and can deploy it quickly to digital. Quarterly timing is sometimes hard to predict, but looking at our business on an annual basis, the expected shift of marketing dollars to digital is continuing, and as a result, our business continues to exhibit strong growth on an annual basis. Brands are shifting marketing dollars to digital to gain efficiencies from the $225 billion they spend each year, most of which are still offline. According to eMarketer, CPGs are expected to spend about $11 billion in 2019 on digital advertising alone, a quarter of it on search and the balance on display and social media ads. I'll come back to search in a few minutes. These trends suggest significant opportunity for our integrated marketing technology platform that brings together promotions, media, social and e-commerce, or driven by data and analytics. That's why we are seeing strong receptivity from CPGs to our packet solution campaigns that include digital promotions, media and data, and we expect it to be a catalyst for growth in 2019. In 2018, we launched Retail Performance Media or RPM, built on the foundation of Retailer iQ, our digital coupon platform. RPM is our ad tech solution that powers the digital media platforms of retailers and enabled CPG brands to deliver ads to shoppers with data use for targeting and measurement. As Amazon media has demonstrated that a strong demand for brands to align digital ad spend with retail partners who have scaled and digital solutions that can combine data, personalized content, and frictionless commerce experiences. Albertsons Companies, the second largest U.S. grocer launched on RPM early last year, followed by Dollar General in Q4. Since our last earnings call, we've also launched Ahold Delhaize, the third largest supermarket chain in the U.S., and signed another large retailer, all exclusive relationships. Quotient is now the digital media partner for six retailers, which together represent almost $150 billion in U.S. sales. Quotient RPM is connected to actual shopper transaction data through retailer's loyalty programs already making us one of the largest U.S. retailer digital media platforms in the CPG grocery landscape. We also recently added Sponsored Search Technology to our media platform with our acquisition of Elevaate. CPGs spend about $2.8 billion in digital search with Google, Amazon, and other search platforms. CPGs can now also spend that budget through Quotient on our retailer partner properties and elsewhere on the web to drive measurable ecommerce sales. In 2018, we also became a data powerhouse. We have over 85 million shoppers registered on programs powered by Retailer iQ, a verified buyer audience of over 100 million and approximately 20 million monthly mobile unique visitors on coupons.com properties. Earlier in 2018, we launched Quotient Analytics, our on-demand data analytics platform that measures campaigns in near real time. We've seen strong client adoption serving as a catalyst for revenue growth. We've also created new audience segments based on shopper data, enabling brands to reach specific consumers with relevant ads to efficiently drive sales. We now have over 1,000 audience segments based on actual transaction data and we develop custom audience segments for clients at a premium price. Additionally, we've modeled this rich data to significantly expand the scale of our targetable audience with the potential reach of almost 100% of U.S. adults. As we head into 2019, we are excited about our many growth drivers. RPM is just a year-end market with additional retailers yet to launch. We are integrating our ecommerce sponsored search technology into our media platform and expect to launch our first retailer this quarter with other soon following. We have started to monetize our significant audience segments for media targeting and plan to do more with our clients. Use of Quotient Analytics continues to build, helping customers measure and optimize campaigns. We have great traction with our social influencer media solution through Ahalogy, which uses a proprietary platform to bring best-in-class CPG and retail micro-influencer content into targeted, measurable social media campaigns. We've recently launched a CRM solution for CPGs to build loyalty by rewarding shoppers for repeat purchase of a brand across retailers over time. Additionally, targeted digital coupons on our Retailer iQ platform continue to grow with a 137% increase in the number of offers launched by CPGs in 2018 versus 2017 and 4x increase in activation. I'm excited to announce that we are extending this capability to deliver targeted coupons printed at checkout, immediately expanding our reach to all shoppers that a retailer. This unifies the shopper experience and data across all targeted promotions, whether digital or printed at checkout and gives retailers are fully integrated marketing solution. We recently signed Albertsons to also be their exclusive provider of coupons, printed at checkout. With our expanded and integrated set of digital marketing solutions, we've updated a brand positioning to better reflect our value proposition to CPGs and retailers. A new brand narrative describes caution as a connective technology engine with consumer intelligence and broad shopper reach, bringing unparallel industry expertise and creative content that converts to incremental brand sales. We focused our solutions around four cloud platforms, Promotions Cloud, Media Cloud, Analytics Cloud, and Audience Cloud. This positioning ties more directly with our integrated solutions and reflects the leadership position we have established over the past year. Last year, we laid the foundation for this go-to-market strategy with pilot campaigns around ROI-based pricing and package solutions that include digital coupons, media and data. Campaign results have been positive and we have several more such campaigns this quarter in time for our mid-year end customers that as they enter their fiscal cycle budgeting cycle. Lastly, another growth avenue for promotions in 2019 is our focus on coupons.com, our flagship consumer property that brings relevant content and great consumer experiences. With approximately $20 million monthly mobile unique visitors, we have great insight into consumer behavior and purchase intent within grocery. We have very excited about our growth potential in 2019 and now investing in the strategic initiatives I just outlined such as sponsored search and coupons printed at checkout. We are investing in our growth. In summary, 2018 was a year of many accomplishments for us. CPGs spend about $225 million annually in marketing including promotions, media, social and search with an increasing focus on digital. The next few years will be transformational and I'm very confident in our business and future growth opportunities. I will now turn the call over to Ron.

[Ronald Fior:]

Thank you, Mir, and welcome, everyone. 2018 was a great year with the record full-year revenues at $387 million up 20% year-on-year, while full-year EBITDA was $57.6 million representing a 15% margin and 22% growth over 2017. These results were fueled by our topline growth and reduce non-GAAP operating expenses while absorbing the impact of reduced gross margin primarily due to a shift in product mix. Three strategic acquisitions that expanded our capabilities and influencer marketing, sponsored search and CRM increased total headcount by over 165 employees, investment in several retailers exclusivity agreements and investment in new software and technology to handle growth and drive efficiencies in all areas of our business. We recorded a fourth quarter GAAP net loss of $4.5 million compared to a GAAP net profit of $4.2 million in Q4 2017. But GAAP net loss in the fourth quarter was primarily driven by interest expense on our convertible debt, including a full quarter’s amortization of debt discount and net expense related to the change in the fair value of contingent consideration in escrowed shares. GAAP, cash flow from operations for the fourth quarter was $13.8 million and $22 million for the full-year 2018. Net of cash used for the M&A payments, Crisp burnout, investments in retailer partnerships and stock buyback program. We ended the year with a cash and short-term investment balance of $323 million. In summary, we continued to grow revenue and adjusted EBITDA despite the fourth quarter softness Mir described earlier. Revenues, total revenues in Q4 were $107.1 million of 15% over Q4 2017. Drilling down, promotions revenue came in at $57.5 million, a 9% reduction from last year. These revenues were impacted by a 5% decline in Retailer iQ, our digital paperless coupons on top of the expected decline and specialty retail is 16% and a 28% decline in digital print. The majority of the decline, approximately $5 million in promotions was attributable to three of our larger CPGs and without their softness; the quarter would have grown 20% versus Q4 2017. Total revenue for the year was $387 million, up 20% over 2017. Promotions revenue grew 4% over 2017 and included just over 7% revenue growth from CPGs, partially offset by a decline in specialty retail. Media revenue grew 67% over 2017 driven by retail performance media, shopper marketing, and Ahalogy social influencer marketing. Retailer iQ or digital paperless coupon offering and media combined grew 35% over 2017 and accounted for approximately 75% of our total revenue. Revenue from our top 10 paperless customers grew 18% over 2017. While on the media side, our top 10 customers grew their spend with us by over 100% in 2018 compared to 2017. Our business solutions are tightly integrated, reflecting the growing trend within CPG budgets to converge marketing dollars between marketing departments. As we have set, our focus continues to be on total revenue growth from our customer base. For the next quarter, we'll continue to separate customer growth by Retailer iQ promotions and media after which we will only report total customer revenue. Looking at total customer revenue growth amongst CPGs, which include promotions and media, our top 20 customers in 2018 grew their spend with us by 13% over 2017. Those same customers grew their total media spend with us by 35% over 2017. Excluding the three companies that cut back significantly in Q4 of the remaining 17 companies grew their spend with us by over 25%. Let's look at transactions. Given our focus around growth in total dollars across our customer base, we plan to discontinue providing the number of transactions after our Q1 2019 report. As we no longer believe it is indicative of the health of the business. Total transactions in the fourth quarter were $869 million down 11% from a year-ago and down 15% sequentially. For the year, total transactions were a record $3.9 billion, up 9% over 2017. Digital paperless transactions grew 16% from a year-ago and represented 86% of total transactions for the full-year. Digital print transactions decreased 21% from a year-ago. Moving on to the P&L. In the interest of time, I'll focus most of my remarks around the color behind the result and less about the actual numbers in year-over-year comparisons, which you can find in our press release tables and accompanying earning presentation. Gross margin, gross margins in the fourth quarter continued to be impacted by the ongoing shift in product mix. We continue to make strategic investments in multiyear retail partnerships, data relationships, technology solutions and services which will impact gross margins. We expect these investments will drive long-term growth in revenues and gross margin dollars. We believe total non-GAAP gross margin in 2019 will be impacted by another couple of percentage points as the result of the continued shift to media in our revenue mix. There is opportunity for additional optimization around delivery and operations and Q4 benefited from some of that. However, over the next 12 months to 18 months, the impact from the shift in product mix is expected to be greater than the benefit from our optimization. Operating expenses, as we continue to grow the business, we actively continue to manage our costs and leverage operating expenses with significant improvement over 2017. Full-year GAAP operating expenses were slightly up in absolute dollars compared to 2017, primarily due to an increase in restructuring charges including facility exit costs, severance for impacted employees, acquisition related costs, and the net change in the fair value of escrowed shares and contingent consideration. Partially offset by other operating expense efficiencies, but still down as a percentage of revenue. Non-GAAP operating expenses for the full-year were down slightly and absolute dollars compared to 2017. As a percentage of revenues non-GAAP operating expenses continue to show leverage declining from 48% of revenues to 39% of revenues. Non-GAAP operating expenses exclude stock-based compensation, the net change in fair value of escrowed shares and contingent consideration. Amortization of acquired intangible assets, our ERP implementation costs, certain acquisition related costs and restructuring charges. Adjusted EBITDA, adjusted EBITDA was $16.5 million up 18% from $13.9 million in Q4 2017. Adjusted EBITDA excludes interest expense, income taxes, depreciation and amortization, the net change in fair value of escrowed shares and contingent consideration, stock-based compensations, restructuring charges, ERP implementation costs, other income and expense and certain acquisition-related costs. For the year, we delivered a record $57.6 million of adjusted EBITDA, up approximately 22% from 2017. This represents a 15% margin, essentially flat as compared to 2017 and reflects the impacts of growing revenue and a decrease in non-GAAP operating expenses offset by the pressure on gross margin due to the shift in product mix. Stock buyback. In May of 2018, we announced a one-year stock buyback program of up to $100 million through a combination of 10b5-1 plan and an open window 10b-18 plan. As of February, we have bought back approximately 2.7 million shares and used approximately $30 million of the approved $100 million program. We will continue to be opportunistic on this front and are looking at ways we might be more aggressive. Moving to cash. We ended the year with $322.8 million in cash and short-term investments, down $5.9 million from the prior quarter and down from the $394.5 million at the end of 2017. The full-year reduction can be attributed to the acquisition of three companies, payment of the burnout on the successful Crisp acquisition, investments in certain retailer partnerships, and our stock repurchase program partially offset by cash generated from operations. GAAP cash flow from operations for the year was $22 million. During the year, excluding the cash used for our portion of the Crisp burnout that was included in operating activities, we generated cash from operations up $31.7 million, down from last years $48.5 million with the decline primarily attributable to increase receivable balance corresponding to the higher revenues in the back half of the year. Let's now talk about guidance. Some color first. We expect revenue to be stronger in the back half of the year due to one, seasonality. Remember media is stronger than promotions towards the end of the year; and two, we plan to launch a number of growth drivers throughout the year starting in Q2, including sponsored search, targeted coupons printed at checkout, and more retailers on RPM or Retail Performance Media. Investments towards these solutions will also impact adjusted EBITDA this year as we focus on our growth drivers for 2019. In addition, we plan to invest in enhancing our technology to be ready for the privacy regulations expected to go into effect in 2020 in the U.S. We are estimating the impact of these investments at approximately $6 million in operating expenses. For the first quarter 2019, we expect to be in the range of $94 million to $98 million as we continue to see softness and lower promotion spending. In particular, with three of our CPG clients where we expect promotion spending to be down over $5 million from Q1 of 2018, we expect adjusted EBITDA to be in the range of $6 million to $8 million. First quarter adjusted EBITDA is being negatively impacted by the annual FICA reset, annual sales meeting and the cost of our investment in sponsored search where revenues are expected in early Q2 with the new solution launch. For the full-year 2019, we expect revenue in the range of $460 million to $470 million or approximately 20% of growth at the midpoint. Adjusted EBITDA for the full-year 2019 is expected to be in the range of $66 million to $71 million, or approximately 15% of revenue at the midpoint. We expect stock-based compensation to be approximately flat to modestly up over 2018. We will continue to balance between driving revenue for growth while diligently managing expenses 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 Morgan Stanley and JMP Investor Conferences in San Francisco and look forward to seeing you there. We will also be on the road with First Analysis and RBC. We will now open the call for questions. Operator?

[Operator:]

[Operator Instructions] And your first question comes from Mark Mahaney from RBC Capital Markets.

[Shweta Khajuria:]

Great. Thanks. This is Shweta for Mark. Could you please talk about RPM as a growth driver specifically now partnering with six retailers? What have you learned so far, post the year of its launch? How has it improved and what are some of your key strategic focus areas for this year and next? Thank you.

[Mir Aamir:]

Sure. RPM is – we're very happy with the performance and so are our CPG partners. So just in a nutshell, RPM is when we use retailer data and a lot of media technology like mobile ad units that are interactive and then data for measurement to deliver CPG brand ads, right. So Albertsons was the first retailer to launch a year-ago and then we've had new retailers like I talked about. Our basic – our learning is overall that the ROI on these campaigns is very good for brands and we've been sharing that with brands and therefore the repeat business is very good and the growth is very good. And most importantly is – and your question on what enhancements in here. We have added more media technology on the platform to take for the branch to take advantage off. For example, in the last quarter, we started adding social influencer media campaign, the technology that we acquired as part of the Ahalogy acquisition. And that's been a very, very, [indiscernible] for the great degree of success, and now we're incorporating sponsored search. So very happy with that program in that platform so far.

[Shweta Khajuria:]

Thank you.

[Operator:]

And your next question comes from Jason Helfstein from Oppenheimer.

[Jason Helfstein:]

Hey, thanks. Three questions. So first question, just you talked about kind of some of the modeling around the revenue and the seasonality. Just help us understand the cadence with the guidance. I mean, is it equally backend loaded? We obviously could see that the first quarter, but just how we think about that? The second question, one question we get from investors relate to the distribution fee and cost of goods sold, and how much that relates to Retailer iQ versus Media and the right way to think about the increase in that expense line versus revenue? And obviously you're going to change the way you report, so we won't have Retailer iQ anymore after the first quarter. But just overall, how do you think about how distribution fee should grow relative to revenue over time and kind of when and if there's operating leverage in that line? And then lastly, given the underperformance of the stock versus what is basically reasonably healthy revenue in EBITDA growth, would you and the Board consider bringing in some outside consultants or advisors to assess why there is, I guess a disconnect in the way investors look at the stock and how you can improve shareholder value? Thanks.

[Ronald Fior:]

Okay, first thing on seasonality. We're looking at – if you look at last year versus this year, we're essentially moving 1 percentage point into the back half of the year. So I think we're at about 45%, 55% or 46%, 54% over last year. And this year we're looking at 45%, 55%. That's really the change with 1 percentage point, that's all.

[Mir Aamir:]

And remember this year – so seasonality is there, especially media doing the holiday time, but there's also the initiatives that are launching revenue from which meaningful revenues in the back half of the year. So that's the timing of those initiatives. Your second question on distribution fee just to touch upon and Ron can add more here if needed. But essentially our distribution fee on our retailer partnership is fixed as a percentage of revenue and it's very similar for promotions or media. The difference obviously in media is that when we do have to go and buy media off-property, there is [attack] there and then the distribution fee gets calculated after the fact. But you can think of all of that as being a relatively fixed percentage of revenue for the revenue that goes through a retailer platforms. That doesn't apply to revenue that goes through Coupons.com and other platforms, but for the retailer platforms, and that continues to be at – we’re forecasting it to be as relatively the same percentage of revenue going forward. The piece of cost of goods that actually does get leveraged is the fixed cost of goods. And you're right, that does get leveraged as we grow revenue. Now that fixed cost of goods did take an uptick a little bit. Last year, we talked about it in our prior few calls because we're adding more ad tech operations, technology and investments. So that's going up. But the good news is we've added those and we're adding a little bit more this quarter. But then after that as revenue grow that gets leveraged.

[Steven Boal:]

Yes. Hi, this is Steven. Your question on the disconnect and shareholder return is a good one, and candidly a bit frustrating for us as well. We did solicit a quite a bit of feedback over the quarter actually, and if you listened carefully to our prepared remarks, you'll see that some of the messaging is changing a little bit or providing a little bit more clarity on what the growth engines are and what percentage of the businesses are growing at what rates. And again on segment reporting verses [non-transaction reporting versus non], a lot of the feedback that we've been receiving is that although we've been reporting those metrics because we had for some time. They're really confusing people more than they're adding value, and given that as a business, we're focusing on total revenue growth. As you said, it’s a pretty healthy return at this revenue level, 20% growth year-on-year, which accelerated from the year before, and at the high-end of our guidance range, accelerates from there, cash flow being generated and a healthy EBITDA, it's really about I think two things, messaging and expectation management and we're taking both of those into very careful consideration going forward.

[Jason Helfstein:]

Thank you.

[Steven Boal:]

Thank you.

[Operator:]

And our next question comes from Ralph Schackart from William Blair.

[Ralph Schackart:]

Good afternoon. A couple of questions, if I could. First, I think on the 2019 guidance and prepared remarks, you talked about having some new growth drivers and the 2019 outlook. First question is can you maybe get some color on this, perhaps quantify it? And then as a follow-up to that, I think you talked about a new targeted digital coupon at checkout offering. Any chance you could provide some more color on this and how significant this could be? And then I have a follow-up.

[Mir Aamir:]

Sure. On the targeted coupons printed at checkout, just to describe what that is, we have Retailer iQ, which is our digital platform. It has a lot of customer data. We have campaigns that run that targeted digital coupons. We’re extending that to actually print at checkout on the bottom of the receipt. Individual unique coupons to every shopper, this significantly expands our reach to every single shopper right, not just the ones that have been registered on digital programs and happened to see the digital site in that particular point in time. So think of this as expanding the reach of that targeted coupon capability pretty significantly to every shopper in the store for all the brands. And secondly, RPM, so you asked about other growth drivers. So RPM is another significant growth driver. So I'm going to reiterate what I mentioned is only one retailer is really fully on it yet and even that retailer is growing pretty significantly from a media standpoint. Again, Amazon media has proven it more and more in the marketplace even for CPGs that don't sell as much in Amazon. It’s just the ability to reach customers with data and measurement in an environment that includes display and search. Every contextual environment is very, very powerful. So RPM brings that to light for retailers that collectively account for a lot of sales for these CPGs. So we have some retailers that just went live and more that are going to go live. So we’re very excited about that growth driver as well.

[Steven Boal:]

Hey Ralph. It’s Steven. Just going back to the first thing that Mir just talked about, printed targeted coupons at point of sale. Well, you've been following this space for a while, as have a number of people on the call. There are a lot of changes going on in the industry right now. And traditionally you walked into a grocery store, there's been a coupon or two that gets generated when you checkout during your checkout process. Well, that's generated really for every single shopper, every lane. And so if you just take numbers like, at some level of maturity, 25% of the shoppers have a store are registered and operating it digital, 75% are not. So it's really a 4x multipliers. It’s a 4x opportunity on volume to be able to reach shoppers. And that's a new opportunity for us. And we did say Albertsons is going live on that. Obviously that's a growth driver for us. So you should infer that. We're focusing on that for additional growth across retailers there as well. And just think about for the first time, shoppers now get a fully integrated solution. So they get digital, they get it in mobile, they get it in their e-circulars, all the things that we've been doing that have been growing quite strongly. You heard some of the other numbers that Ron spoke about before, things like our RiQ and media combined growing at 35% over 2017 and 75% of total revenue is growing at that rate. This multiplies by four the reach and scale of the opportunity with the same messaging. So our shopper gets the same messaging, whether it's printed on a receipt or whether it's given to them digitally. And that's quite a unique opportunity for the industry. And there's a unique moment in time right now when we can kind of take advantage of that and start to roll that out.

[Ralph Schackart:]

Maybe a follow-up to that, Steven or Mir. I guess, I'm just trying to square, all the pieces seem to be coming together for Quotient as you set up into 2019 and yet three of your larger CPGs are cutting budget both in your sort of historic promotion business as well as the new growth engine for media. A couple of reasons [indiscernible] margin pressure tariffs and shift to private label. I would think maybe two of those your platform would help solve. So I'm just kind of trying to square why some of your larger customers are cutting spend when seemingly your solutions are there to help them.

[Mir Aamir:]

Sure. Let me provide some color on that. So when we say the three of them have – they cut spend, the information that we have is that they cut spend across the Board, not just with us, not just on digital, but just across the Board. And as a result of that, spend reduction, expense reductions perhaps they did well on volume in the previous quarters, especially helped by us actually also, that as they approached – two of them approached the year-end and December. They needed more profit than volume and across the board they cut spend to increase their margins, okay. The other thing to keep in mind is that the media side – this is on promotions. Their spend with us on media did not go down, it actually went up, right. So keep that in mind that that collectively this was a promotions effect and the numbers that Ron described was a promotion decline effect, right. And keep in mind, going forward, that's one of the reasons why we're looking at more packet solutions overall that provide overall ROI and their marketing spend. And then lastly, a thing to keep in mind that despite these overall cuts, if you take it over a period of time, multiple quarters or a year, their spend shift overall from offline to digital is increasing. And we keep doing analysis for our CPG clients, not just these three, but everybody, and even in these three. The ROI on their programs is really good. So it's not that they would make a decision on something that they think does not work. It appears to be a macro decision they've made in terms of cutting spending. And really a lot of it was concentrated in December and came in – it came in at very late cuts towards the end of the quarter.

[Ralph Schackart:]

Okay. Maybe just one more and make sure I understand this. So if you look in 2019 with these three largest customers, would you expect their total spend on your platform to be increasing flat or decreasing relative to 2018?

[Mir Aamir:]

So hard to predict. But I tell you the macro trend, right. So the reason I'm saying that is that softness is – some of that softness is continuing with these three in quarter one, like Ron mentioned. Okay. So that's why I'm being a little cautious in terms of prediction. But one of them, the larger one of the three, they have the fiscal year-end in middle of the year, right. So the hope is that that resets and they're able to then increase spending because overall they are moving more from offline to digital and growing media with us. And they are the ones that have been experimenting most aggressively with packet solutions with us, right. So we're going in with an overall value proposition for them to spend both media and promotions overall marketing with us and also with data, right. So there's value and data also I mean package that in that too. And again, the ROI on those programs are good. So I don't see any reason for them to continue to cut spending in the long run if we look at multiple quarters and years at a time.

[Steven Boal:]

Hey, Ralph just to add 17 of the top 20 customers, if you just extract those – if you can remove those three, grew over 25% with us. So it’s really kind of an effect of this. And just lastly, and I know we got to get to other questions, remember we do annual planning with our customers, but our customers always spent over their annual plans. And so this would be a case where they're already over their annual plans and we're kind of forecasting what we expect them to do. And so have they grown at kind of the average rate that the rest of the customers grew at? The quarter would have come in over 22% at – the year would have come in over 22%.

[Ralph Schackart:]

Okay. Thanks, Steven.

[Steven Boal:]

For Q4 would have come in over 22%.

[Ronald Fior:]

Maybe really clear, even better, Q4 would have come in over 22% Ralph.

[Operator:]

And your next question comes from Tom Forte from D.A. Davidson.

[Thomas Forte:]

So I apologize if I sound like I'm beating a dead horse, but I wanted to ask kind of the same question that everyone else is asking. So to what extent do you feel like you control your own destiny? Meaning you've come up with all these innovative ways for consumer packaged companies to market digitally, we believe in the secular shift from the free-standing inserts to digital. But at the same time, it seems like you're highly dependent on either the marketing buyer for a large consumer packaged goods companies or some time-ago you’re dependent on the large retailers integrating Retailer iQ into their point of sale system. So what gives you confidence that as you continue to innovate, you'll be able to essentially control your own destiny and not be dependent on some of those fluctuations? Thanks.

[Steven Boal:]

Sure. Hey, Tom, it’s Steven. So two things. One, annually the growth is very strong, right. And so, you're talking about quarterly fluctuations here and we're dependent on one or the other, but annually, again, 20% accelerated over the last year at the midpoint of our guide we’re at 20%, at the higher end of our guide. We're north of that. The second thing is this industry has always been subject to macroeconomic changes to consumer pressure to recessionary things that happened to commodity price changes and competitive pressures, always decades of this. And it's just showing up in a much slower way because offline vehicles require a lot more planning time and commitment. And so that's why you're seeing more frequent fluctuations that show up in quarter here. But again, just look at the results on an annual basis, and I think that you probably could conclude that we’re in the middle of a pretty significant shift from offline to online, which every single industry has gone through. This is almost the last one to do it. And it feels like we're sort of in control of that now.

[Thomas Forte:]

As a quick follow-up to that, what if any adjustments can you make to your Coupons.com consumer-facing app that may or may not increase your influence at the CPG and marketing level?

[Steven Boal:]

That's a really good question. And there are things now that we've gotten established mobile audience and mobiles where it's at right, now that we have an established mobile audience, you should assume that we're hard at work in that area. I just I don't want to say anymore right now.

[Thomas Forte:]

Okay. Thank you very much.

[Steven Boal:]

Thank you.

[Operator:]

Your next question comes from the line of Steven Frankel from Dougherty.

[Steven Frankel:]

Good afternoon. I think we're all struggling with the issue of how do you get more visibility into your business and hopefully minimize the kind of issues you had in Q4. If you get more customers shifting to RPM, these package offerings, does that have more of a lock in effect because of the media spend and therefore more visibility?

[Mir Aamir:]

Yes, it does. We believe so, because two reasons, one is with the reason you just described the lock in effect. The second reason is that these are all media is on viewed as working media dollars, working dollars, right? And it's not a separation between the coupon discount and our fees associated with that discount, right. So that has a lot to do with it and what obviously playing into that efficiency theory off the CPGs for afforded to be working media dollars. Thirdly, these campaigns often have retail merchandising and retail support tied into it, and that gives us some more stickiness and longevity that they can gang a promotion out in December because retailers have got some support behind it.

[Steven Frankel:]

Okay. And how should we think about the business shifting to media in 2019? Is there going to be a significant shift given the weaker start on the promotion side?

[Steven Boal:]

So I think, this is really drives itself towards the gross margin question. I mean that's where you're really heading here, I believe. And so if you think about that, we would – we looked and what I've said in my remarks is that we would expect a couple of points, a reduction in the overall gross margin. And we also though – I would also say that Q4, if you look at the percentage that you can look at the breakdown of media versus promotion into Q4 and that's probably reasonably representative of what might happen or what we expect to happen in 2019. And that kind of gives you also a basis for the thought process on gross margin.

[Ronald Fior:]

Just to add to that, we're actually exacerbating it, we're making amplifying the way that looks because as we package solutions together, we're using our promotion platform and capabilities. And as Mir said, the data, powerhouse that we built here can drive more of that spend and a lot of that through RPM. And so you would naturally see a transaction number that would decline over time at our hands as we're driving more and more of the dollars through the RPM or media and data side of the business by packaging them together. That's why the distinction between the two is becoming a lot less relevant.

[Steven Frankel:]

And would you expect to have all six RPM customers live by the end of this year?

[Mir Aamir:]

Yes.

[Ronald Fior:]

Can you tighten that up, Mir?

[Mir Aamir:]

Two of the six, probably back half of the year, okay. Four of the six live by the middle of the year, okay.

[Ronald Fior:]

Thank you.

[Mir Aamir:]

So give you some sense of that timing.

[Steven Frankel:]

Great. Thank you.

[Operator:]

And your next question comes from the line of Nat Schindler from Bank of America Merrill Lynch.

[Nathaniel Schindler:]

Yes. Hi, guys. I just wanted to understanding you're 2019 guidance. You said that in 2018 in which you grew 20%, the same amount you're expecting in 2019 at the midpoint, that your core Retailer iQ business promotions grew at 35%. Obviously the non-core businesses are shrinking as a percentage of total. So that wouldn't be the same, I would expect in 2019. But how much do you think you will see in growth from these core businesses in 2019?

[Ronald Fior:]

Well I take that, without being specific, if you just look at the trailing percentages of growth of the growth businesses, RiQ and media grew at 35% last quarter that was wrong.

[Nathaniel Schindler:]

It was around the same.

[Ronald Fior:]

It’s around the same, right, around 35%. So this goes back to Nat when we were saying earlier, if you just draw straight lines, where the growth numbers end up. We had some softness in the promotion spending CPGs which impacted the straight lines obviously. History is not always the best predictor of the future. But you should expect more of the same. And so at the midpoint we're saying 20% and if you – the question I got asked before and I forgot who asked it, but the question I got asked before was would we consider a soliciting some feedback on where the disconnect is between the shareholder base investors and obviously that clear growth rate, success of the business and the two things that we heard loud and clear, where that the segments and the transactions, some of the KPIs were reporting or confusing people because they're not as relevant and that's causing some confusion and consternation. And the other thing is expectation management and so we're trying to balance a healthy between the two on a go forward basis. And that's why at the midpoint, it's still really strong growth on a business this size, but we're trying to be measured.

[Nathaniel Schindler:]

Okay, great. Thank you.

[Mir Aamir:]

Thank you.

[Operator:]

And there are no further questions at this time. I'll turn the call back over to management.

[Mir Aamir:]

Thank you all for joining us today. Just by way of summary, we had a strong 2018 with 20% of revenue growth, 22% EBITDA dollar growth, 67% growth in media revenue and then solid innovation in a marketing platform. Again, we're very excited about our four cloud platforms and are many growth drivers in 2019, including RPM, sponsored search and Quotient audiences and targeted promotions including coupons, printed at checkout. Thank you again.

[Operator:]

Thank you for joining. This does conclude today's call. You may now disconnect.