Quotient Technology Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Welcome to the First Quarter 2015 Coupons 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 been recorded and we will be available for replay from the investor relation section at Coupons.com's Website following this call. I would now like to turn the call over to Stacie Clements, Vice President of Investor Relations. Thank you. Ms. Clements you may begin.

[Stacie Clements:]

Hello, and welcome everyone to our first quarter 2015 earnings call. Please note that slides to accompany the remarks on today’s call are available on IR section of our corporate website couponsinc.com. And I urge everyone to take a moment to download them, along with our financial results press release. On the call and here with me today are Steven Boal, our Founder, President and CEO; and Mir Aamir, CFO and COO. Before we begin, please note that during this call, you will hear forward-looking statements. These forward-looking statements include our projections regarding future financial performance, our ability to grow our business, a continued shift in our industry, our expectations regarding the continued lot of Retailer iQ platform and bringing new Retailers live on it as well as the anticipated financial benefit based on and our expectations to successfully leverage our investment in operating expenses. Forward-looking statements are based on information available to and the good faith beliefs of our management team as of the time of this call and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed. 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 March 19. 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, financial measures discussed today are on 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 website. And with that, I’ll now turn the call over to Steven.

[Steven Boal:]

Thank you. Good afternoon, everyone, and thank you for joining us today. We had a good start to the year with both revenue and adjusted EBITDA above our guidance. Revenue came in at $55.6 million with adjusted EBITDA of $4 million. As a reminder our business is best measured on a full year basis rather than quarter by quarter as our pipeline give CPGs the flexibility to shift budgets between quarters. Given this; and the way we manage our business on an annual business, we'll be aligning our guidance going forward accordingly. Our promotions business continued to grow this quarter and as expected we saw a growth in digital paperless primarily due to mobile and Retailer iQ. We now have a total of nine retailer banners live on Retailer iQ. Two of which rolled out within the past few weeks. We also have a full schedule of roll outs between now and the end of Q3, as we expect to go live during that time with an average of 1 banner every three weeks to the platform. Keep in mind that we don’t begin to feel meaningful transaction revenue effects of our banner going live until they begin marketing their digital Coupon Program to shoppers. The timing of this is driven by the retailer and can take up to several months to start after Retailer iQ initially goes live. As of today, four retailers have started marketing the program in some form. We've also continue to develop our pipeline for additional retailers with the focus on continuing to build the broadest reach with more retailers on the platform live or signed we now have full U.S. geographic and trade channel coverage including grocery, drug, dollar and mass merchandise retailers. In terms of market coverage we've added over $30 billion of retailer grocery and drug sales, represented on our platform bringing the total to approximately $230 billion which is estimated to be about one-third of the total U.S. market. We are encouraged by the early and consistent Retailer iQ results. We continue to see over 70% of Retailer iQ usage on mobile. Additionally mobile users engaged nearly 40% more frequently than desktop users. We are also seen early encouraging results from our CPG targeting campaign based on shopper data. Our technology platform allows retailers and CPGs to target specific shoppers and segments at scale providing the right digital offers to the right consumers at the right moment. The targeting capability and leverage data from across our network including shopper behavior and web and mobile usage from our approximately 30,000 publishers. Targeting campaigns allow CPGs and Retailers to reach any number of small shopper segments at scale, something that isn’t possible in the offline world. For example, in the first quarter we ran a few targeted programs for a large CPG with the overall goal of targeting consumers with the propensity to buyer category but who haven’t purchased their brands. We delivered targeted offers to these select shoppers of the optimal time with communication across mobile, email and digital receipt. The results were strong with actual redemption rate on average five points higher than expected. These are just a first of many more programs to come as consumer adoption continues to build. This quarter we saw continued strength in our media business. CPGs and other advertisers want an integrated approach to promotion and media as they look to build their digital media strategies which deliver against maximum ROI. The scale and high quality audience of our network is a key differentiator for us and our advertisers. Coupons.com users are highly valuable. They are typically the primary decision makers for grocery and home related purchases and engage in our properties when they are preparing to shop, with over half headed to the store within the next 48 hours of engagement. Consumers are visiting our sites, our mobile application and our publishers with purpose and serving them relevant targeted add and half of their experience. As our network continues to expand so should our media business. With the strong start to the year our roadmap and developing pipeline and the secular shift from offline to digital; we are excited by what we are seeing across the business. We are working hard to deploy more retailers on to Retailer iQ and supporting their marketing initiatives design to speed consumer adoption. As we continue working with our retail partners there maybe some slight shifting around on live or marketing days but we still expect over 18 retail banners to be live by the end of the third quarter and most if not all starting to market by the end of the year. Our platform was built to enable the shift for the promotions industry from offline to digital. It's a large market with 310 billion Coupons distributed annually and we're in the early stages of that shift. We believe no other company has the digital reach and scale to do this, with approximately 2,000 brands and 700 CPGs working across our network. There is also another dynamic within the market place and that's digital print and paperless. During this quarter, we saw periods where more than 50% of transactions were paperless meaning not digital print. Remember this as an expected transition and when that we look forward to driving over the next few years. We monetize both digital print and digital paperless the same way and expect that over time increased frequency primarily due to mobile usage, will drive transactions volumes in digital paperless faster than digital print. Looking ahead I'm excited about the growth opportunities across the entire business as we continue to connect CPGs, retailers and consumers. We believe Coupons.com is laying the foundation now for what we expect will become the digital standard in the promotions industry for the next several decades just as legacy offline vehicles such as the freestanding insert and in store offerings like point of sales printed Coupon did for prior decades. I'll now turn the call over to Mir for a review of our financials.

[Mir Aamir:]

Thank you, Steven, and welcome, everyone. I will review our financial results for the first quarter and then provide financial guidance for the second quarter and full year 2015. Total revenue for the first quarter was $55.6 million, up 8% year-over-year and above our guidance for the quarter. Revenues from digital promotions increased 5% over last year, while revenues from media and advertising increased 20% from a year-ago, as we continued to see demand by CPGs and retailers for integrating digital coupons campaigns with brand ads on our web and mobile properties in across our network. Revenues from digital paperless coupons continue to build in quarter one driven primarily by our Retailer iQ platform deployments and major retailers in the U.S. Of the nine retailer companies representing 18 banners, signed on to the platform as of yearend 2014, five banners were live as of December 31 and two have started marketing. In the first quarter an additional two went live and another two delayed their deployment into Q2. These two retailers are now live, the remaining signed retailers are scheduled to go live by Q3 of 2015 with marketing activities expected to gain momentum in Q4. Any delays by retailers from the current schedule may push some deployment into the fourth quarter thereby impacting our estimated revenue for 2015. As we've discussed before we believe that the compound effect of the Retailer iQ deployment schedule and subsequent marketing by retailers suggest a stronger back half of 2015 with an even greater inflection point in the fourth quarter. As you also referenced earlier, we have been sharing these forecasts with our CPG clients to help them better plan their digital Coupon budgets for 2015 and encourage a higher budget availability in the second half of this year to meet the growing shopper demand for digital paperless coupon through our platform. As a reminder, an additional factor related to our Q1 revenue comparison versus the year ago, is the unexpectedly high quarter end budget deployment by a few large CPGs that we experienced in March of 2014. We had referenced this during our Q1 Earnings Call last year and again during our Q4 earnings call when we suggested that we didn’t know if such quarter end budget deployments will repeat this year. Net we are pleased with the performance of Retailer iQ post implementation in marketing. Early results continue to be encouraging in terms of consumer adoption, transaction volume and positive sales impact to retailers and CPGs. We are confident that the shift from offline to digital is likely to continue at a healthy annual rate going forward. With about 90% of grocery coupons still redeemed in paper form sourced from offline print vehicle, we believe there is significant potential for growth in the market. A key catalyst for this shift in the coming months and years is the increasing number of shoppers who are interested in digital paperless coupons primarily downloaded through mobile. Moving down to P&L, gross margin was 61% in the first quarter as compared with 60% in the first quarter of 2014. As revenues grow we expect to see continued leverage in gross margins given that more than half of our cost revenue is fixed expense and is not expected to grow in line with revenue. We also continue to see operating expense leverage in the business. Operating expense in Q1 of this year was $42.5 million, compared to $44.8 million in Q1 last year excluding the favorable impact from the change in fair value of contingent consideration related to the Eckim acquisition. Excluding stock-based compensation and the impact of this contingent consideration, operating expense was $34 million, or 61% of revenue in Q1 2015, as compared with 62% of revenue in Q1 2014. Adjusted EBITDA in Q1 was $4 million beating our guidance for the quarter. As a percent of revenue, adjusted EBITDA was 7% in the quarter, as compared with 8% in Q1 of 2014. As we scaled up our operation we've increased headcount by a modest amount especially in the area of retailer services and data analytics to position us well as we continue to innovate and introduce new products related to Retailer iQ, such as our new digital circular as well as data analytics services. We expect to see continued operating expense leverage reflecting growth in adjusted-EBITDA as revenues build through the year. Moving to cash flow, we used $852,000 in cash from operations in Q1 2015, this was driven primarily by the timing of cash receipts and payments including the payout of annual bonuses and sales commissions in quarter one. Normalizing for these payments we would have generated positive cash flow from operations adjusting a consistent relationship between cash generated from operation and a positive adjusted-EBITDA. During the quarter we purchased 209,000 shares for $2.1 million consistent with the approved stock repurchase plan we announced during our Quarter 4 earnings call in February. We believe this demonstrates our continued confidence in the business and commitment to our shareholders. I would now like to provide guidance for the second quarter and full year 2015. For the second quarter we expect revenues to be between $54 and $56 million and adjusted-EBITDA to be between $2 million and $4 million. For the full year 2015 we expect revenues to be between $270 million and $280 million and adjusted-EBITDA could be between $35 million and $45 million. This reflects the impact of delayed implementation of the two retailer banners in the quarter one and our best estimate based on the schedule of Retailer iQ deployments and marketing launches through this year. Additionally from the third quarter onwards we will not be providing quarterly guidance but we’ll continue to provide annual guidance. As we've experienced and discussed several times in the past our business is best evaluated on an annual basis, given the variations in quarterly deployments of the annual budget by CPGs, which makes it difficult to forecast on a quarterly basis. Along these lines, to reiterate - this year we expect revenues to ramp through the year with stronger growth in the second half of this year and especially in Q4 due to the compounding effect of Retailer iQ as more retailers go live and start marketing the program. To summarize we’re pleased with the early results from Retailer iQ implementations which is providing us a solid foundation for continued growth through digital paperless coupons at a sustainable competitive advantage. With this platform largely enabling coupon usage through mobile and driving CPG and retailer sales, we believe we’re in the early stages of digitization of the promotions industry. As Steven mentioned we aim to have this platform and the resulting personalization and targeting of coupons based on shopper data to become the market standard for digital shopper relationship management for the foreseeable future. We will now open up the call for questions. Operator?

[Operator:]

(Operator Instructions). Your first question is from Nat Schindler with Bank of America Merrill Lynch. Your line is open.

[Nat Schindler:]

You said that you, I might have missed this, but you said that you now are have signed Retailer iQ clients equaling 230 billion in annual revenue. Before you had said 200 billion, does that mean you signed a new retailer? Or is it still the original nine?

[Steven Boal:]

That correct. We've continued to sign.

[Nat Schindler:]

Okay, you have signed additional retailers, great. Secondly I would love to ask can you just help us out and give -- how significant a retailer is Walmart for both redemption of coupons from your network and as a distribution hub for coupons you distribute?

[Steven Boal:]

So as you know we power the digital print coupons on walmart.com we don't breakout distribution by partner whether it would be publisher or retailer but broadly speaking I think there some industry stats that you could draw on, I think there is some published data about the percentage of all coupons redeemed by Walmart and I don't have that on my fingertips. But I believe that is available publically.

[Nat Schindler:]

But it should be somewhere similar to what Walmart is as respect to the entire grocery industry and I know you go beyond the grocery industry but that’s the largest user of coupons.

[Steven Boal:]

I am not sure you could draw a direct correlation because it would be a combination of how much traffic would be driven from a particular publisher retailers website and then also what percentage of total coupons are redeemed at that retailer they may have come from different publishers websites as well.

[Nat Schindler:]

And finally on your guidance, I understand it's really difficult for you guys to give quarterly projections but taking this quarter and next quarter's guidance combined you got a first half is looking at something around 8% growth year-over-year, your second half has to look like something on the order of the high-30% growth in order to make your annual guidance. What gives you that confidence of the CPGs will create their campaigns in the second half?

[Mir Aamir:]

And actually consistent with our earlier conversations we’re sharing detailed forecast with CPG clients especially on Retailer iQ because it is important for them to understand how this builds. And so we can forecast demand based on what we’re seeing so far, it's still early but we've some data that we used to project out. And we’re sharing those forecasts with the information in forming how they are thinking about their budget deployment this year to make sure that there is enough budget availability in the back half of the year. Like we've talked earlier we don't want to be in a situation where CPGs run out of budget midstream and aren't able to fulfill that demand in the back half of the year, especially since the demand is coming from digital paperless and is coming through mobile, they are very interested in making sure that they meet that demand. And secondly again we talked earlier about CPGs do annual planning, right? So they look at annual planning so we've some visibility into that and so if the quarterly deployments that vary that gets harder to predict. But we’re sharing those forecasts with the CPGs.

[Nat Schindler:]

And can you just help me out on trying to understand what drives the revenue in the end? If Retailer iQ is a great distribution platform to get more coupons to people but it's getting the coupon to people once you got it from the CPG the driver of revenue or is it getting the supply from the CPG that decides revenue? I think the better way to ask this is if you look at what drives your revenue is it coupons that sell out, or is it coupons that are constantly running, and that you could just get through as many people possible.

[Steven Boal:]

It's a classic supply and demand. And so if the orders from the promotion provider CPGs primarily to reach as many consumers as possible some with targeting some without targeting like we talked about and then express throughput in the platform whether it's Retailer iQ or digital printer to, or to other mobile or desktop applications or websites. So it's really a combination of the two or three actually. And it's really about keeping balance across the whole network. So going back to that point that Mir made, the annual planning process is done in advance of fiscals and we talked a lot about this. And so manufacturer CPGs already have a very good idea of what their fiscal deployment looks like, the baseline or the minimum of their fiscal deployment looks like. When we talk about the volume picking up in the back half we’re being very specific with our clients and we’re saying you have an annual commitment you have an annual plan to the extent possible think about having a lot of this capability available to you in the back half. As we go forward through this year into next year with all of these retailers live and marketing and the benchmarking behind us the annual planning for '16 becomes a lot easier because we have actual data to draw upon to say this is a volume increase that you saw, this is the rate of increase that you saw, this is what it looks like as we add new retailers.

[Operator:]

Your next question is from Mitch Bartlett with Craig-Hallum Capital. Your line is open.

[Mitch Bartlett:]

I just wanted to check something you said in the script or at least what I perceived you saying as that you had in Q1 over 50% of your transaction volume was digital paperless, is that correct? And if that’s true what would it been in Q4 or Q1 a year ago?

[Steven Boal:]

So specifically what I said was in Q1 there were periods in time when we saw greater than 50% of transaction volume coming from digital paperless, pure digital. And I reiterated that, that is an expected transition that will take place over the next few years and we’re driving that, we’re driving that with additional Retailer iQ and mobile usage. And on our platform we monetize digital print and digital paperless the same way. And so the transition to paperless is expected in good and we think -- and we’re seeing now with mobile usage higher frequency will translate into higher transaction volumes as well. So that will continue to accelerate.

[Mitch Bartlett:]

With only four retailers marketing on Retailer iQ that’s a fairly outstanding growth in digital paperless. I am sure you have volume in other places from digital paperless but that is primarily where that growth is coming from I perceive. So is that true I mean just a few retailers are driving an enormous amount of volume in digital?

[Steven Boal:]

In addition to Retailer iQ we also have our legacy load to card business and so when we talk about pure digital or paperless it would include Retailer iQ and our legacy load to card business. But your overall assumption about volume growing faster in Retailer iQ is a good one.

[Mitch Bartlett:]

Do you have separate contracts or agreements or whatever is the norm with CPGs on Retailer iQ volume versus their overall supply of coupons whether it's a print or digital paperless? You have separate agreements for them to supply within the Retailer iQ?

[Mir Aamir:]

Mitch, most of our CPG contracts and relationships are one, and it's not separate so from a supply and a pricing standpoint. And then -- so there is a certain amount of budget and it gets distributed to all of our platforms print and paperless and then shoppers consume the way they prefer to. In some cases with some CPGs we do have separate contracts that specify different budgets and sometimes pricing, but those budgets all rollup into a macro budgets on the CPGs end. And we do have situations where some of them actually shift from one versus the other.

[Mitch Bartlett:]

And it sounds like you added a couple maybe multiple maybe you could specify more retailers onto the Retailer iQ platform including a mass merchants which is the first time perhaps you talked about that, could you be more precise on how many guys you have signed or?

[Steven Boal:]

Yes I know, we want to be able to demonstrate that we’re continuing to grow the platform, but more precision right now is going to be a challenge for us. As things rollout publically into the market we will be able to talk about them further.

[Operator:]

And there are no further questions at this time. I will turn the call back over to Ms. Clements for any closing remarks.

[Stacie Clements:]

Thank you everyone for joining us this afternoon. If you have any further questions please reach out to me directly through our corporate website. Thanks again. And have a great day.

[Operator:]

Ladies and gentlemen this concludes today's conference call. You may now disconnect.