Quotient Technology Inc.
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Welcome to the First Quarter 2017 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:]

Hello, everyone, and welcome to our first quarter 2017 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 and here with me today are Steven Boal, our Founder and CEO; Mir Aamir, our President and COO, and Ron Fior, our CFO. Before we begin, please note that during this call, you will hear forward-looking statements. These forward-looking statements include projects for our second quarter and full-year 2017, expectations for our Retailer iQ platform and consumer and CPG patterns, expectations regarding the acquisition of Crisp Media, expectations regarding its media platform, expectations for the coupon.com mobile app as well as the expected growth of investments in our business generally. Forward-looking statements are based on information available to and a good faith belief that 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 Annual Report on Form 10-K filed with the SEC on February 16, 2017. 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. Reconciliation between GAAP and non-GAAP measures can be found in the financial results press release issued today and on the slide deck posted on the company’s website. With that, I’ll now turn the call over to Steven.

[Steven Boal:]

Thank you, Stacie, and welcome, everyone. We had a strong start to 2017. We delivered revenue of $72.6 million at the high end of our guidance, and adjusted EBITDA came in above our guidance at $7.7 million. Transactions in the quarter grew 48% year-over-year to a record $795 million well on our way to 1 billion transactions per quarter, as retailers continued to market their digital coupon program and CPG shipped in more budget to digital which in turn grew sharper engagement. Digital paperless transactions grew a 100% over Q1 of last year, reflecting the accelerating industry shipped from offline to digital. Three years ago we embarked on our vision of moving the industry to pure digital with the introduction of retailer IQ. Today, more than 75% of our total transactions are digital paperless, with all of the advantages of digital from our ability to personalize and target offers and media to the overall ease [ph] for shoppers we believe the sheer volumes possible in digital will surpass the limitations in the offline world. Retailers and brands are embracing digital for the ability to influence shoppers often with short lead time’s not possible offline to help drive sales, critical in today’s competitive environment. Many of our partners have been talking publicly about their focus on digital strategies, keying in on the importance of driving sales through greater personalization and marketing efficiency. Additionally, retailers are looking for more out of their own legacy on-premise technologies. They are shifting towards technologies and services that can accommodate their needs in a faster pace omnichannel environment. With our increased scale and multi year history operating retailer IQ we are starting to think of retailer IQ like a fast based platform for retailers. Already, we started the pilot product that we will deliver to retailers on a fixed fee multiyear recurring revenue basis. And although still very early, this demonstrates the overall shift we are seeing from retailers as they start to appreciate all the benefits technology and data can bring. We believe increased scale on the platform will lead to growth in other areas. We have talked a lot about shopper marketing which is estimated to become a nearly $19 billion annual market over the next few years. We have expanded our products to meet the specific needs of retailers and shopper marketing teams and now have members of our sales team working from the headquarters of many of our retail partners giving us a seat at the table with retailers and CPG shopper teams as they build their marketing campaign. Today, I am thrilled to announce our intent to purchase Crisp Mobile, a mobile media company that accelerates our offers – our efforts in shopper marketing. Using shopper data, Crisp delivers a premium digital media experience to a targeted mobile audience. With over 70% of retailer IQ usage on mobile, Crisp’s mobile focus is a natural fit. You will recall we recently announced QMX, our data driven media solution where advertisers can leverage our audience reach and exclusive shopper data to serve targeted media across mobile and web. We believe our acquisition of Crisp, a proven mobile media platform will help accelerate our media growth. Crisp brings existing shopper marketing relationships with leading CPGs such as Coca Cola, Kellogg, Unilever and Clorox just to name a few, the same companies that we already work with across our digital platform. Crisp also works with many advertising agencies that manage large media and shopper marketing budgets for CPGs. The Crisp team brings to Quotient deep industry expertise and a unique improvement platform for growth. Crisp’s current CEO, Jason Young has two decades of media experience including three years as CEO of Ziff Davis. I am excited to welcome Jason and the Crisp team to Quotient. I will now turn the call over to Mir and Ron who will talk about some of the quarterly highlights and the financial results and guidance. Mir.

[Mir Aamir:]

Thank you, Steven and welcome everyone. As Steven mentioned we had a strong start to the year as retailers and brands continue to use retailer IQ for their digital marketing activities to engage shoppers and drive sales. The convergence of digital promotions, data and digital media is gaining momentum, enabling integrated targeted marketing programs for CPG brands and retailers to drive measurable sales growth. While brands have long shed their strategic objective, it is now made possible at scale through our retailer IQ promotions and our media platforms. We believe we have built a compelling competitive advantage in this space focussed on data, mobile and shopper marketing. This quarter many of our retail partners ran large marketing activities around their digital programs, some examples include marketing digital coupons in their printed weekly circulars offering specials to shoppers who register in their programs sending personalized emails to loyalty members and running targeted social media campaigns. This marketing leads to more registrants which in turn drives transaction and sales. Seven out of eight of our leading retailers on retailer IQ saw a transaction growth of more than 70% over Q1 of last year. And we are seeing strong momentum each quarter with six of those eight retailers delivering average transaction growth of 25% from the prior quarter. This momentum clearly demonstrates the importance of marketing in the overall secular shift to digital. This quarter we went live with another four retailers bringing the total to 25 live on retailer IQ. We anticipate rolling out another large retailer onto the platform with large scale digital marketing activities scheduled to ramp in the back half of the year. We are very excited to be their partner of choice helping CPG brands reach tens of millions of shoppers through their loyalty program. At their recent analyst day executive stress the importance of digital marketing as they look to further leverage data, efficiently drive sales through personalization. We continue to believe that CPGs are focussing on shifting away from paper to digital. The growing volumes on our platform are evidence of that and we are now engaged in many discussions with CPGs about their desire to move away from paper completely. As a reminder, paper coupon still represent about 90% of CPG brand coupons redeemed in the U.S. in each year out of more than 300 billion coupons distributed, suggesting significant upside potential for us. Turning to media and data. Media revenue rose slightly over last year as we delivered campaigns for both brands and retailers. QMX, our data driven media solution is also beginning to deliver revenues. I also want to welcome the Crisp team, their mobile media platform and CPG shopper marketing relationships complement our strategy and capabilities and fit well with our QMX solution. We will work closely to combine synergies across sales and operations as we look to expand mobile media opportunities across our business. For Crisp, that means leveraging QMX data and our retailer programs to deliver more mobile shopper marketing campaigns. For Quotient, we have an opportunity to leverage Crisp’s mobile media technology platform to deliver additional shopper engagement through enhanced mobile campaigns for our CPG brand and retail plans across our network. Additionally, our data analytics and media measurement efforts are encouraging. We are in the market with sizeable pilots to deliver analytics on the conversion of digital media to in store sales for brand and retailer campaigns. On the consumer front, we continue to enhance our platform for the benefit of our shoppers, CPG customers and retailer partners. In Q1, we rolled out a major update to our coupons.com app. Included in the update is a more retailer centric location based digital paperless experience where shoppers can download offers directly to their favourite stores. We are seeing organic user growth on the app and plan to shift marketing spend to accelerate user adoption. We’re also seeing momentum in cash back receipt scanning through our app. These offers expand our shopper reach into retailers that don’t yet have a paperless coupon program, including two newly added club retailers. Overall, we are excited by the growth and momentum we are seeing across the platform. We continue to build scale [ph] and the number of users as the number of users and transactions grow and with scale and data our ability to close the loop between digital marketing campaigns and sales increases. We believe this will increase our ability to grow revenue across promotions, media and data and analytics. I will now turn the call over to Ron for details on the financials.

[Ron Fior:]

Thank you Mir, and welcome everyone. 2017 started strongly with Q1 delivering 10% revenue growth and 79% growth in adjusted EBITDA over Q1 of 2016. I am going to start by reviewing the first quarter financials, then I’ll provide some financial color around our Crisp mobile acquisition and update our guidance for Q2 and the full year. Revenue in the first quarter was $72.6 million, up 10% over a year ago, reflecting strength and promotions, particularly in digital paperless. Transactions in the quarter were $795 million up 48% from Q1 of 2016 and up 15% from last quarter. In the first quarter, we recorded a GAAP net loss of $2.7 million, an improvement over the net loss of $8.2 million in Q1 of 2016. Adjusted EBITDA which excludes a net gain in fair value of escrowed shares and contingent consideration, stock based comp, ERP implementation cost and acquisition related costs were $7.7 million up from $4.3 million in Q1 of 2016. This is a result of our balanced approach between revenue growth and investments while driving operational efficiencies throughout the business. Our cash and short term investment balance at the end of Q1 was a $174.6 million above flat from the end of year 2016. This excludes the cash impact associated with the acquisition of Crisp. In the quarter, cash from operations was essentially flat as we paid out typical yearend bonus and commissions as well as incurred the substantial Q1 [Indiscernible] reset. All-in-all we are very pleased with our performance this quarter. Drilling down into our 72.6 million Q1 revenues, digital promotions came in at $57.4 million, a 13% increase over the last year reflecting our increase in transaction volumes across the platform. Revenue from media was $15.2 million up slightly from last year. Let’s look at transactions. Total transactions in the first quarter were 795 million up 48% from a year ago and up 15% on a sequential basis primarily due to continued strength in Retailer iQ. Digital paperless transactions grew 100% from a year ago and represented 79% of all transactions in the first quarter. Digital print transaction as expected decline 25% from last year as more promotions were delivered through digital paperless to meet the rapidly growing demands on Retailer iQ. Average promotion revenue per transaction in the first quarter was calculated at $0.072 primarily reflecting strong revenue growth among our Top 20 CPG customers. These customers typically have larger budget and can spend more to meet the accelerating demand from retailers. Keep in mind that our pricing model is tiered giving lower prices for larger spend commitments and higher volumes, creating a customer mix affect that can fluctuate by quarter. Our focus is on increasing volumes and associated revenues which we believe unlocks opportunity across the platform as CPGs and retailers shift more dollars from offline to digital. Moving on to the P&L. GAAP gross margin the first quarter was 59.8%, slightly down from 61.1% last quarter primarily due to an increase in distribution fees offset by a decrease in depreciation and amortization expense all related to Retailer iQ. Non-GAAP gross margin excludes amortization of acquired intangible assets and stock-based compensation expense. Q1 non-GAAP gross margin was 63.5%, down from 64.6% last quarter due to product mix both benefiting from a decrease in depreciation and amortization related to Retailer iQ. On a dollar basis cost of goods were flat quarter-over-quarter as we continue to manager fixed cost. Operating expense. For the first quarter GAAP operating expenses were $46.3 million, up from $42.5 million in the last quarter primarily driven by the lower net gain in fair value of escrow shares and contingent consideration. Non-GAAP operating expenses which include stock-based compensation, the net gain and fair value of escrow shares and contingent consideration, our ERP implementation cost and certain acquisition related costs were $40.7 million. This is a slight decrease from last quarter as we continue to benefit from operational efficiencies and expense management offset by over $2 million of incremental annual Q1 expenses such as the Q1 FICA reset. In percentage terms non-GAAP operating costs were 56% of revenues in Q1 of 2017, up one percentage point from last quarter and a marked improvement over last year's 64% level reflecting a combination of increased revenues and leveraging our overall operating expenses. As a business evolves we continue to find ways to drive operational efficiencies and managed cost. In April we reduced our worldwide staff by approximately 5%. On an annualized basis this represents potential savings of approximately $6 million. Some of these savings will flow through to our improving EBITDA margin, while a portion will be reinvested in our strategic focus on shopper marketing, media and data analytics. Adjusted EBITDA. In the first quarter adjusted was $7.7 million, representing an 11% margin as compared to a seasonally stronger Q4 margin of 15% and 7% in Q1 of last year driven by increased revenues and a balanced expense approach. As a reminder, we are excluding our ERP implementation costs as well as certain acquisition-related costs from our adjusted EBITDA calculation. In the first quarter the expense associated with implementation with the ERP implementation was about flat compared to Q4. We anticipate future spent on this of approximate $1 million spread across the next two quarters with a significant reduction in Q4 as the implementation nears completion. We are looking forward to its completion and the realization of important control and operational efficiencies. Acquisition related cost at Q1 associated with Crisp were approximately $700,000. Today, we also announced this new stock buyback program of up to $50 million effective May 5th for the next 12 months. Before I turn to guidance I'll give you a few details around the definitive agreement we announced today that acquire Crisp Mobile. The company will pay approximately $33 million in upfront consideration comprising cash and stock of $20 million and $30 million respectively subject to certain customary adjustment at closing. Additionally, contingent consideration is up to $24.5 million in cash may become payable upon the achievement of certain financial metrics over a period of one year after closing. We expect the deal to close for the end of Q2 and expected to have minimal impact on our Q2 results. Assuming a closing in Q2 we will incorporate the acquisition into our Q3 guidance. On an annualized basis we would expect Crisp to contribute around $20 million additional revenue while generating an accretive adjusted EBITDA margin. Let me move on to our outlook for Q2. For the second quarter 2017 we expect revenue to be in the range of $72 to $75 million. We expect adjusted EBITDA to be in the range of $9 million to $10 million. These numbers do not reflect any contribution from the Crisp acquisition. We expect stock-based compensation to be flat to slightly increase over Q1. Our outlook for the full year 2017 remains unchanged. Total revenue is expected to be in the range of $307 million to $317 million, adjusted EBITDA for the full year is expected to be in the range of $40 million to $45 million. Again these numbers do not reflect any contribution from the Crisp acquisition. We look forward to having Crisp contribute to our future growth and in the meantime we will continue to balance between driving for growth while tightly managing expenses towards improving margins. We will now open the call for questions. Operator?

[Operator:]

[Operator Instructions]. Your first question comes from the line of Mark Mahaney with RBC. Please go ahead.

[Mark Mahaney:]

Sorry about that. I was muted. Two things please, One, I think you talk about a large pharmaceutical retailer coming on. Can you just talk about the status of that and update on that. And then secondly, I think Ron, obviously you cutting in and out little or with maybe my phone here. Did you said, mentioned something about a reduction in force in April and just little more color, did you give you the numbers on that, but the rationale behind it? Thank you.

[Mir Aamir:]

Sure. I’ll take. This is Mir. Mark, I’ll take the first and let Ron answer the second one. So in the last earnings call we had talked about that we had sign a large drug retailer on the Retailer iQ platform. So, and you can expect that retailer to go live this year. This is what we expect and that’s still on track.

[Mark Mahaney:]

Okay.

[Ron Fior:]

On the second one, yes, we did talk about a 5% reduction in force worldwide. That represents roughly savings of approximately $6 million that we have and had anticipated. It also we’re going to move some of that to the bottom and EBITDA, you can see some of that bolster to the bottom line and the other parts are going to be reinvested, where we are now spending our focus on the shopper marketing, the media and the data analytic side of our business.

[Steven Boal:]

Mark, did you think that you’re shopping in and out a little bit.

[Mark Mahaney:]

Yes. I did. Thank you.

[Ron Fior:]

Okay.

[Mark Mahaney:]

Thank you.

[Steven Boal:]

Thanks Mark.

[Operator:]

Your next question comes from the line of Joe Maxa with Dougherty & Co. Your line is open.

[Joe Maxa:]

Yes. Hi, thank you. I just wonder if you talk a little bit more about Crisp acquisition, maybe some synergies and how you see that unfolding as you integrate the company?

[Steven Boal:]

Sure. Joe, Crisp Mobile fixed strategically very well with our strategy and our capabilities. As I mentioned on the call, so we’ve been focusing on as we’ve talked about in the past calls is on shopper marketing, digital promotions, media, there’s a conversions going on. And it’s all happening on mobile. So the accelerating of shift from offline to digital and the conversions that we’re talking about. Crisp Mobile, their focus is really – if there are mobile media solution and they’re been working in shopper marketing with CPGs and retailers, and really focused on delivering very rich interactive experiences in mobile, which you would think that by now we would be in a place that that would be very common place but it is not easy to do, it's technically something that is very -- something that they bring to third- party that they are able to deliver. So if you put these two things together that's a nice combination for us to be able to service our brands and our retailers with rich mobile media experiences that connect the conversions promotions and shopper marketing and deliver sales in store.

[Joe Maxa:]

Right. Okay. That’s helpful. So on the media segment obviously this we got to fall into, but you had talked about beyond your own and operated sites with your QMX and whatnot. What success you’ve seen outside your own and operated today?

[Steven Boal:]

Sure, it’s early, but we have seen good success. And you’re right; this is where it fits in very well. QMX like we mentioned in our last call we have just launch it in market. It is starting to generate revenues. It is backed by data, a lot of shopper data which enables targeting and then Crisp Mobile fits right in to be able to deliver those experiences on mobile device, fast device.

[Joe Maxa:]

All right. Thank you.

[Operator:]

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

[Ralph Schackart:]

Good afternoon. Historically you talked the average revenue per transaction be in the range about $0.07 to 0.08. I just want to see if that was still sort of a good metrics to think about it. And then Steven, I think on the call, I’m sorry, amount has been cut now, you talk about potential moving to SaaS model. Just curious what our sort of the revenue benefits to Quotient or that model outside of obviously that this build in forecasting? Thanks.

[Steven Boal:]

Sure. So just quick on the revenue per transaction. Just remember that its a calculate number and that our objective is and you heard it in the prepared remarks that we’re moving dollars from offline to online and the larger customers get great rate for band commitment larger band commitments and volume commitments. So we’re not focused on rate per transaction. I realize they use it as calculus in the model. So $0.07 to $0.08 is kind of the range you know at the low end of the range, I think your modelling purposes we just see seven will be conservative I think that’s probably reasonable. On the SaaS comments, look, we’re providing a service that it hosted by us and providing a lot of functionality to the retailers to allow and to engage with their shoppers. And as we grow the platform we’ll grow the data and analytics capability. It clearly retailers want to take advantage of some of those services that we were using ourselves to reach customer too, and so we’re bundling some of those services up and selling them on a recurring monthly basis on a long-term contract basis. And so we’ll see how that continues to progress over time, but I certainly see that developing.

[Ralph Schackart:]

Okay. Thank you.

[Steven Boal:]

Thank you.

[Operator:]

Our next question comes from Tom Forte with Maxim Group. Please go ahead

[Tom Forte:]

Great. Thanks for taking my questions. So, two things, one, on Retailer IQ it looks like the number of retailers marketing was 16, which is the same as last quarter. How should we think about that figure going forward in 2017? And then second, digital media return to revenue growth in the quarter, and how should we think about price increases flowing through as the year progresses? And then what the quarterly growth rate could look like for digital media for the remainder of 2017? Thank you.

[Steven Boal:]

Sure. So as far as retailer marketing is concern, you are right. Now when retailers do some minimal marketing we do not included in that 16, so I just want to remind you that, that includes retailers that are doing bigger marketing efforts. And even though that was flat we still saw our volumes grow quite a bit which is very encouraging because the retailers that are marketing are continuously sequentially doing really, really well. Having said that, we do expect the rest of them to start marketing in much bigger ways throughout this year such that you would see that number would be much higher towards the end of the year. I think that’s what we expect.

[Ron Fior:]

On the question of media, if you look at the historic trend, Q3 we had a .3% year-over-year growth, Q4 minus 7%, and now Q1 1.1%. And consistent with what we said over the past two quarters we expect our media business to reaccelerate through the back half of 2017. Remember the effect that cause that was largely due to the fact that our volumes grew so quickly in Q3 and Q4 that the media programs that were coupled with promotion design with the coterminous with their coupon offering. A coupon we’re running through to quick. And so we were shifting money away from a media business into the promotions business, but it’s not a one for one shift, because there’s redemption dollar that flow out of the system. And so that has an effective softening in the media business while supporting the continued rapid growth of our promotions business. As that affected some of our largest customers, CPG customers, don't reset their physical years until midyear. And so the benefit of the rapid increase in volume we saw on Q3 and Q4 and certainly as you’ve seen in Q1 for the record number of transactions, we really won’t see the full effective of that until Q3 and some of our largest customers change over the new fiscal year and start to cap new budget, so those are the effects, so that’s why you will see media continue inflate [ph] upwards to the back half of this year.

[Tom Forte:]

Great. Thank you.

[Operator:]

Your next question comes from Blake Harper with Loop Capital. Please go ahead.

[Blake Harper:]

Thanks. I wanted to ask about Crisp, it seems similar to the Shopmium acquisition that you did in some ways, and wanted to just see if you could revisit that now what you’ve got from that more from a business standpoint, obviously any other receipts again in technology now in the coupons.com, app, but if you could highlight where are you are as far as what from a business standpoint what we got from Shopmium and how are you been able to do with that since the acquisition?

[Steven Boal:]

Sure. We were very pleased with that acquisition. It did two things for us as we mentioned in the past, one it gave an increase input hole for us, although that business is still small in Europe where Shopmium is a leading brand in France and we launch like we mentioned earlier we launched it in UK in the back half of last year and that seems to be growing on a small base but its doing really well over there. And then the second reason for that acquisition and which is what we’ve brought on is for the technology and capabilities to be brought into the U.S. and we bundled that technology and capability into our own mobile app and the relaunch of our of our mobileappcoupons.com as you saw in quarter one, now has that in there and that allows the advantage to be able to have a paperless mobile offering off for coupons for retailers that don't yet have a Retailer iQ type paperless offering.

[Blake Harper:]

Got it. Okay. And then I could just follow-up again on the recurring revenues in the 50s that you're talking about in your comments, Steven, do you able to share maybe what percentage of your revenue that you would expect to get from that this year or next year?

[Steven Boal:]

Sure. It’s very early in the chapter on that for us. So it would be hard for me to project that. But we’ve long look at the ability to take the services that we use internally out for the marketplace. And just consistent with what I said before, as retailers recognized the need to adapt quicker to the evolving landscape and use technology that are lot more flexible, I think we’re perfectly situated to provided those types of services. Those are typically done on SaaS like basis.

[Blake Harper:]

Thanks.

[Operator:]

There are no further questions at this time. I’ll turn the call back over to the presenters.

[Steven Boal:]

Great. Thank you. Thank you all for joining us today. This is a very exciting time for us. With the breadth of our retailer distribution, our fast audience reach and our growing data and analytic capabilities, our momentum is continuing to build and with so much opportunity ahead we believe we’re in the perfect spot to lead the industry overall and their shift to digital. Thank you very one.

[Operator:]

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