Quotient Technology Inc.
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Welcome to the Second Quarter 2017 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 Web site following this call. I'll 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 second 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 Web site. 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 projections for our third quarter and full-year 2017, our expectations for our Retailer iQ platform and consumer and CPG patterns, innovation of Crisp Mobile and its financial and business impact, the Company's media platform, coupon.com mobile app as well as the expected growth curve and investments in our businesses generally. Forward-looking statements are based on information available to and a 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-Q filed with the SEC on May 6, 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. A 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 Web site. And with that, I’ll now turn the call over to Steven.

[Steven Boal:]

Thank you, Stacie, and welcome, everyone. First, I want to congratulate Mir on stepping into the CEO role on September 1. Mir and I worked side by side for nearly 4 years at Quotient and prior to that for another three years, while he was at Safeway. He is the perfect person to lead the Company as we continue to transform the industry and grow our business. Three years ago we launched Retailer iQ, and today its core to our business, delivering revenue growth in the second quarter of 69% over the last year and representing 41% of total company revenue and nearly all driven by mobile. I've never been more excited about our future. We have key partnerships and customers, proprietary shopper data, and a broad set of digital offerings to help brands and retailers navigate the demands of operating in an increasingly competitive and digital world. With Mir in his new role, I will continue to focus on key strategic initiatives and product [ph] direction, while taking a step back from day-to-day operations. Now on to the quarter. We had a great second quarter. We delivered revenue of $74.5 million at the top end of our guidance, and adjusted EBITDA of $13 million well above our guidance We are also raising our guidance for the full-year to incorporate Crisp Mobile, which Ron will talk about shortly. Transactions in the quarter grew 48% year-over-year to $793 million. Looking at the first half of 2017, transactions are already almost two-thirds of the total transactions in all of last year. CPGs and retailers are recognizing the growing importance of a digital strategy that reaches shoppers effectively, drives profitable sales and strengthen customer loyalty. The retail landscape is experiencing change faster than ever before. Many retailers are feeling increased pressure and a greater urgency to re-examine the status quo and to be able to make bold decisions about their businesses. The importance of digital is understood like never before, and we believe Quotient stands to benefit as retailers and CPGs speed up their efforts to embrace digital across their businesses. Our Retailer iQ media and data platform, RMR [ph] partners to better compete in this evolving landscape. Our retailer partners rely on us to deliver personalized and targeted promotions in media, which drive profitable sales and increased store traffic. In addition to campaign measurement analytics that guide how marketing dollars are spent. Asset core is something else of extreme value, a one-to-one digital relationship with shoppers. In addition to driving in-store sales, retailer can leverage these relationships to convert these shoppers into e-commerce customers including home delivery and click-and-collect. For CPG brands, the changing retail landscape directly affects them as well. We believe CPGs who do not have an action plan to exit the declining offline promotional vehicle over the next few years will be left behind. And those that move quickly will benefit disproportionately establishing a personalized digital relationship with shoppers and giving them first mover advantage over their competitors. An example of this disproportionate benefit, it have niche brands, where traditionally been locked out of offline promotional vehicles are gaining market share to digital only strategies. The brands, however, have an extremely powerful asset on their side. Data and partnership with large omni-channel retailers whose objectives are aligned with theirs to drive profitable sales, primarily with greater marketing efficiency. Quotient digitally connect to retailers and CPGs to help them do this, empowering them to leverage each other's digital strategies and the growing importance of shopper data. Our scale, focus, and vision is aligned with the business challenges of today. CPG's and retailers look to us, as they’re strategic partner with data playing an increasingly important role as we engage with them in their long-term planning. Our strategy is proving itself out. Our platform is scaled to meet the future volume demands of the industry and we continue to strengthen and expand our product. Based on the visibility and insights we have into what shoppers are interested in and where and when they purchase. When we ended 2016, we had 40 million shoppers registered on programs powered by Retailer iQ. That number has now spanned to almost 50 million, representing about 40% of all U.S households. As a market leader, our expertise scale and agility in a disruptive environment where we believe continue to serve often our partners well. I will now turn the call over to Mir for more color on the quarter.

[Mir Aamir:]

Thank you, Steven. Before I discuss the quarter, I want to say that I'm honored to become CEO of Quotient. 10 years ago, Steven and I set out to transform the offline promotions industry, recognizing early on the importance of shifting to digital, and a great opportunity that would bring. We began as business partners and then became colleagues when I joined Quotient almost 4 years ago. It's been exciting to bring our vision to reality, as we’ve led the industry shift to digital. I also want to thank our talented and dedicated employees. I’m proud to be part of such a world-class team. Now moving on to Q2, as Steven mentioned, we had a great quarter. Retailer iQ continue to scale and promotions revenue increased 15% year-over-year as brands and retailers look to reach shoppers and drive sales through digital. At the start of year, I outlined four focus areas, as we headed into 2017. To recap, they were

[Ron Fior:]

Thank you, Mir, and welcome, everyone. Driven by continued growth in the promotions revenue, Q2 finished strongly with revenues of $74.5 million, growing a 11% over Q2 of 2016, helping deliver a solid first half year-on-year growth rate of 10%. We recorded a second quarter GAAP net loss of $5.8 million compared to a GAAP net loss of $3.5 million in Q2 of 2016. The GAAP net loss increased quarter-on-quarter and year-on-year primarily due to a $3.9 million charge related to the change in the fair value of escrow shares. Adjusted EBITDA, which excludes the net change in fair value of escrow shares and contingent consideration, stock-based comp, restructuring charges, ERP implementation costs and certain acquisition related costs was a record $13 million, up from $8.1 million in Q2 of 2016. For the first half of 2017, we delivered an adjusted EBITDA margin of 14% compared to 9% a year-ago. The Crisp mobile acquisition closed on May 31 and their June results are included in our numbers. Our cash and short-term investment balance at the end of Q2 was $170 million, down $4.6 million from the end of Q1. In the quarter, we generated $15.3 million in cash from operations, a significant increase over Q1. During the quarter, we used approximately $21 million net for the Crisp acquisition. Excluding the impact of the Crisp acquisition, we would have added $16.4 million of cash to our balance sheet. We continue to deliver a balanced approach between revenue growth and investments, while driving operational efficiencies throughout the business. Drilling down into our $74.1 million Q2 revenues, digital promotions came in at $58.4 million, a 15% increase over last year, reflecting the growing demand on our platform and the increased dollars CPGs are spending on promotions. In the second quarter, revenue from our core business Retailer iQ grew 69% compared to a year-ago and represented 41% of total revenue generated. Revenue from media were $16.1 million, about flat compared to last year and up 6% from Q1 in the tough market. Let's look at transactions. Total transactions in the second quarter were $793 million, up 48% from a year-ago and about flat from last quarter. Q2 is typically a seasonally light quarter from a promotion point of view. Digital paperless transactions primarily Retailer iQ grew 84% from a year-ago. Digital print transactions declined 13% from the same period last year. The average promotion revenue per transaction in the second quarter was calculated at $0.074, primarily a reflection of customer mix with strong revenue growth among a broad group of CPG customers. Keep in mind that our pricing model is tiered giving lower prices for larger spend commitments and higher volumes creating a customer mix effect that can fluctuate by quarter. Let’s move on to the P&L. Gross margin. GAAP gross margin in the second quarter, which included an increase in distribution fees, offset by a decrease in depreciation and amortization expense related to Retailer iQ were 59.7% ,about flat with last quarter. Non-GAAP gross margin excluding amortization of acquired intangible assets, stock-based compensation expense and restructuring charges came in at 63.8%. This was effectively flat compared to last quarter and with a function of product mix as well as benefiting from the decrease in depreciation and amortization related to Retailer iQ. On a dollar basis, cost of goods sold increased slightly quarter-over-quarter primarily due to increased distribution fees. As we grow our revenue from QMX, we anticipate increased distribution fees associated with it. Our operating expenses. For the second quarter, which included a small amount of expense from Crisp, GAAP operating expenses were $50.1 million, up from $46.3 million in the last quarter. This was primarily driven by the higher charge for the net change in fair value of escrow shares and contingent consideration, restructuring charges of $1.3 million and acquisition related cost of approximately $800,000. Non-GAAP operating expenses, which excludes stock-based compensation, the change in fair value of escrow shares and contingent consideration, our ERP implementation costs, certain acquisition related costs and the restructuring charge were $36.3 million. This is a significant improvement over last quarter's $40.7 million. As we continue to benefit from operational efficiencies and expense management and the seasonal decrease in FICA expense as we began to hit the caps. In percentage terms, non-GAAP operating costs were 49% of revenues in Q2 of 2017, significantly down from last quarter's 56% level and a marked improvement over last year's 59% level, reflecting a combination of increased revenues and leveraging our overall operating expense. As our business evolves, we continue to find additionally ways to drive operational efficiencies and manage costs. As noted earlier, in the second quarter, adjusted EBITDA was a record $13 million, representing a 17% margin, a substantial increase over last quarter's 11% and 12% in Q2 of last year, driven by increased revenues and lower operating expenses. As a reminder, we are excluding our ERP implementation cost, restructuring charges as well as certain acquisition related costs from our adjusted EBITDA calculation. We anticipate ERP implementation costs in Q3 to be approximately $0.5 million 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 costs in Q2 associated with the Crisp acquisition were approximately $800,000. Before I turn to guidance, I'll give you a few details around our Crisp mobile acquisition, which closed on May 31. Total purchase price on a net basis was $34 million, including net cash paid and fair value of stock issued, not including any potential earn out payments. While we’ve already mostly integrated Crisp into our daily business, and will not be breaking out the results separately, we do expect Crisp to contribute approximately $10 million of revenue in the back half of this year. With that in mind, let me provide guidance. For the third quarter of 2017, we expect revenue to be in the range of $81 million to $84 million. We expect adjusted EBITDA to be in the range of $10 million to $12 million. We expect stock-based compensation to be flat to a slight increase over Q2. We are raising our full-year guidance range. Total revenue is now expected to be in the range of $317 million to $323 million, including Crisp or approximately 16% growth to midpoint. Adjusted EBITDA for the full-year 2017 is expected to be in the range of $45 million to $48 million or approximately 14% to 15% of revenue, an increase over the 2016 margin of 12%. We will 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. We will now open the call for questions. Operator?

[Operator:]

[Operator Instructions] And your first question comes from the line of Mark Mahaney with RBC Capital Markets. Mark, your line is now open. Please go ahead.

[Mark Mahaney:]

Great. I will limit myself to two questions, please. First, Steven, congratulations on the success in building the business to where it is today. The broad strategic question I want to ask you is in terms of industry events, is the pending acquisition of Whole Foods by Amazon, does that have a material interest in industry demand for Quotient's solutions? And then, Ron one specific question to you in terms of the guidance. I know you said Crisp was going to be contributing about $10 million a year in revenue. I see that you lowered -- I’m sorry, you raised the upper -- the lower end of your range by $10 million, but the upper end of your range by less than $10 million. So just walk through that. Why didn’t we -- why didn’t you just take up the bottom and upper end of the range by $10 million each? Thanks a lot.

[Steven Boal:]

Okay. Mark, its Steven. Thanks for the kind of words. The Amazon Whole Foods announcement will not completely be unexpected, certainly did get everybody's attention. And Amazon has been focusing on a grocery area for a while now and those of us in the industry are still expecting something like this to take place. So your question is an appropriate one and the answer is yes. Yes, it gets people's attention. Yes, it gets people's focus and yes people now recognize as one of the largest reasons for something like this to happen is really to get their arms around data, on data management, data analytics, and the predictive nature of [indiscernible] what shoppers do. So that we can say, that to be very beneficial.

[Ron Fior:]

And Mark on the guidance, as you noted we did raise the low end by $10 million and that’s effectively what we’re doing there is tightening the low end. On the high-end, the increase there is still it seems more opportunity relative to the midpoint within that -- versus our original guidance when you include add on top about the Crisp number, the $10 million for Crisp. So it's -- we are giving a little bit more narrowing the gap.

[Mark Mahaney:]

Okay. Thank you.

[Operator:]

The next question comes from line with Matt [indiscernible] with Bank of America. Matt your line is now open. Please go ahead.

[Unidentified Analyst:]

Yes. Hi, guys. Thanks for taking my question. So you now had 27 retailers signed up and using Retailer iQ and you’re still growing transactions on the digital basis of -- in the 84% level. But most of these 27 are not using it to the full extent, but maybe some of your earlier clients like Dollar General are. What can you do from here to really implement Retailer iQ within those clients and get it moving more and where do you think you are in the what -- you mean, do you think it is in the rollout of Retailer iQ within these businesses?

[Mir Aamir:]

Hey, Matt. Its Mir. I will take that. So you’re right that there is [indiscernible] off, level of adoption in marketing within those 27 and if you see the other step that we gave is 19 of them are actually marketing. So there is a few that have gone live, but have not started marketing yet. We anticipate that they will. And of the ones that are marketing, some are doing a much deeper more holistic jobs and so on, and we’re working with them. As we mentioned in our previous calls to -- the playbook -- with the playbook of to do it -- to do more and more marketing. So we do expect there to be more use of these growth based on retailer marketing, including the ones that are already marketing to more -- to do more and the ones that are not to start marketing and then go from there. I would say that we are probably in the first or second innings of this just in terms of if you look at the number of users on the platform already, which is great and growing, but how much more it could be given the shoppers that [indiscernible] these retailers every day.

[Unidentified Analyst:]

Great. Thank you, Mir.

[Operator:]

The next question comes the line of Ralph Schackart with William Blair. Ralph, your line is now open. Please go ahead.

[Ralph Schackart:]

Good afternoon. First question for Mir or Steven. Often times the CPG set by rigid cycles in sort of the June timeframe. Can you sort of walk us through how those conversations went this year now that you’re at significantly higher sales that last year? And then the second question just a follow-up on the guidance for EBITDA [indiscernible] question. How much of the EBITDA guide was a result of sort of the creative transaction? I think you had called up the four from Crisp versus just sort of the current business are performing better than originally expected? Thanks.

[Mir Aamir:]

Sure. Ralph, its Mir. Let me take your first one and Ron can tackle the second one. So the budget in any of planning process when we participate with CPGs, those discussions and that process is going really well and successively the discussion has been focused on and the planning has been focused on more and more from offline to digital, which is what we’ve been seeing. But it comes in year chunks as you can imagine, that's why you see the quarterly trends as they’re in the annual trends, right. Now as a reminder, not all CPGs are on a calendar fiscal, some are in media fiscal, some are in June first starts, some are at different times. So in each of their cycles we work, but what I can tell you is that the success of conversations have been deeper, broader with a very much bigger and much more serious focus of a roadmap of getting out of the offline type of promotion vehicles into more and more digital. And Ralph as you mentioned last time, we’re hearing more and more. Now it define sort of stated timeframe of two years or three years to be completely out of those vehicles.

[Ron Fior:]

And on the EBITDA, if you sharpen clearly it's actually a mix of both and the impact of Crisp, we did in the case that Crisp was going to be accretive. But if you look at the increase in the amount -- even in the low end of our EBITDA range and you think about how much revenue we’re actually talking about Crisp contributing, clearly that’s not all theirs. Does that make sense?

[Ralph Schackart:]

It does. And just a follow-up there, Ron. I think in the prepared remarks you talked about OpEx being a little better for seasonality and the FICO caps. Broader question, are you still sort of working through and seeing the impacts of the reduction that you talk about earlier? And then I think you talk about continuing to manage cost. Do you think you continue to have opportunities to sort of look at [indiscernible] OpEx line items going forward? Thank you.

[Ron Fior:]

Yes. The answer is yes to both of those. Yes, we’re continuing to see benefits of the restructuring that we did in the quarter and we will see more of that, but we also have a number of other ideas and action plan, actually under way to help us reduce costs.

[Ralph Schackart:]

Okay. Thank you.

[Operator:]

The next question comes from the line of Joe Maxa with Dougherty & Company. Joe, your line is now open. Please go ahead.

[Joe Maxa:]

Thank you. I wanted to follow-up on the move to offline from online, just sort of with stated timeframe of 2 to 3 years. Are you thinking a wide adoption of moving all programs digital or is that more of a starting few brands and type?

[Steven Boal:]

It's Steven. Its more widely discussed now than ever before. And one of the reasons is that it's starting to become pretty clear to the folks in the industry that have traditionally done a lot of work in the offline vehicle. Then once those degrade in effectiveness to a certain point, the snowball [indiscernible] gather speed downhill. And in my prepared remarks I made mention of this. If you’re -- if you don’t have an active plan now, at least we believe if you don’t have an active plan to move out of those vehicles, you’re almost holding the bag because you’re stocking there with commitments with other folks pulling out of them, which will reduce scale significantly and yet you’ve got spend commitments against them. So it's much more of a widely discussed 2 to 3 year planning out we’ve ever seen before.

[Joe Maxa:]

And give us a ballpark of how that -- the significance of what that could mean for you?

[Steven Boal:]

Well, if you just look at some of the public metrics, it was about 85% of just national promotion dollars still in offline vehicles or north of 85% -- really just its a straight line equation and then you can add into that the fact that there are brands that have never been able to operate in those vehicles before, because they couldn’t negotiate for effective rates and dates. They now can participate in digital. They may not be able to participate on a sustained basis, but they certainly can put their products up for promotion and get retailer credit and reach shoppers in real time now, and they can do it in cycles. It actually expands the marketplace for the very first time in almost 40 years.

[Joe Maxa:]

[Indiscernible] promising.

[Steven Boal:]

Thank you.

[Joe Maxa:]

One clarification -- just one quick clarification on your media business. I thought I heard you say you expect double-digit growth in the back half of the year. Did that include Crisp or was that more in the core business without Crisp?

[Steven Boal:]

When I was referring to I was including Crisp, but even if the numbers that Ron gave about some estimated attribution to Crisp, even if you exclude that it's still double-digit.

[Joe Maxa:]

Got it. Okay. Thank you.

[Operator:]

Your next question comes from the line of Aaron Turner with Wedbush Securities. Aaron, your line is now open. Please go ahead.

[Aaron Turner:]

Okay, great. Thanks for taking my questions and congratulations Mir on the promotion.

[Mir Aamir:]

Thank you.

[Aaron Turner:]

Couple of questions, if I may. One is on the online grocery and you touched on it on the prepared remarks. I was wondering if you could provide a little more color on Quotient can participate in that growth of [indiscernible] gains, widespread adoption? Second question is on the guidance on the take rate for this year has been very helpful and as we look further [indiscernible] just wondering if you foresee that $0.07 transaction rate as possibly the floor as we look beyond 2017? And then if I could slide a third one in, what was the Crisp revenue contribution for this quarter? Thanks.

[Steven Boal:]

Its Steven. Let me tackle the question about online e-commerce integration. Then Ron will answer your second question. So how can we help? There are already examples of the use of our platform integrated into a retailer's omni-channel experience. Not just the product that you can shop for in the store, but when you’re on their Web site or using their mobile app and buying products for home delivery. And this is the case for any retailer that wants to have an experience where a shoppers can fluidly move between an online e-commerce either home delivery or click and collect experience or shop in-store. The important point here is that you want to have parity. Shoppers want to be treated the same way regardless of where they want to shop and those shopping behaviors can move back and forth. Our platform was designed for omni-channel use. It's also designed for a multi currency, multi lingual use, but certainly designed for integration with a retailer's e-commerce experience as well as their in-store experience.

[Mir Aamir:]

Yes, just to add to that, as Steven mentioned in his prepared remarks also, one other way that our platform helps the situation is that this -- the retailers program is powered by Retailer iQ in our platform, resulting a lot of shoppers being digitally connected to the retailer. And there is a lot of relationship that gets build digitally, primarily through mobile for digital coupons, digital shopping list, digital circulars and [indiscernible] and that is a very frequent and deep relationship that for retailers who have an e-commerce business are getting into more and more of an e-commerce home delivery or click and collect. The conversion of those shoppers into e-commerce relationship online becomes much, much easier.

[Ron Fior:]

Okay. And on the Crisp revenue, so in the quarter we recognized approximately two quarter of a million of Crisp direct revenues.

[Aaron Turner:]

Got it. And then, the take rate -- the transaction rate question on that $0.07 floor, is that something we can expect going forward?

[Mir Aamir:]

So we’ve talk in the past about -- we expect it to be earlier on we said [indiscernible] 7 and 8 and then we said that better to look at least the way we are looking at it towards the bottom end of that. And I think that function from what we know so far is still holds true.

[Aaron Turner:]

Okay, great. Thank you very much.

[Operator:]

There are no further questions at this time. I will turn the call back over to management for closing remarks.

[Steven Boal:]

Thank you all for joining us today. As we said before, with over 85% of the market yet to shift and our leading position in digital, we believe we are ideally positioned to capitalize on its opportunity and help our partners for many years to come. Thank you again.

[Operator:]

Thank you. Ladies and gentlemen, this conclude today’s conference call. You may now disconnect.