Quotient Technology Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Welcome to the Second 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 Relations section of Coupons.com'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 Ian. Hello, and welcome everyone to our second quarter 2015 earnings call. Please note that slides to accompany the remarks on today’s call are available on the IR section of our corporate website investors.coupons.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 and CEO; and Mir Aamir, our 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, the continued shift in our industry, our expectations regarding the continued rollout of Retailer iQ platform and bringing new retailers live on it, as well as the anticipated financial benefits there from. And our expectation regarding our targeted digital circular product, our digital print initiative, and our efforts with respect to attract additional retailers 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 the quarterly report on Form 10-Q filed with the SEC on May 14th. 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 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 website. With that, I’ll now turn the call over to Steven.

[Steven Boal:]

Thank you Stacie and welcome everyone. As you can see from our results, we have had another solid quarter as we continued to build strength across our network. In Q2 revenue was $55.9 million at the high-end of our guidance. And adjusted EBITDA came in above our guidance at $4.6 million. Before I walk through the business highlights I want to take a minute to make an important announcement. Mir Amir, our CFO and COO is being promoted to President and COO. Mir is an outstanding leader and I am thrilled that he would be able to commit his full attention to an operating and strategic role. At the same time we have been conducting a CFO search and expect to announce a new CFO soon. Until then Mir will continue as CFO. We have spent years building a leading digital promotions platform that connect CPG and retailers to millions of shoppers. And our business continued to scale across specialty retail, grocery, drug, mass, dollar, and now club retailers. To date we have nine retailer banners live on the Retailer iQ platform. Several have been marketing for a few months now and we anticipate the remaining retailers to ramp up their marketing efforts in the coming months. A few weeks ago we went live in digital print with a large mass retailer. It is a great consumer experience and we expect as a digital paperless solution we will soon be live. I am also pleased to announce that we have recently signed our first club retailer on to our digital promotions platform. Our media business this quarter grew 14% year-over-year. Advertisers recognized the value of our audience, our data, and the strength of our entire network to deliver high ROI digital media for their brands. As the network expands so do opportunities for media. Now I would like to share more information on the progress we are making with Retailer iQ. Shopper adoption is growing, and the platform is demonstrating significant ROI compared with traditional offline promotions. CPGs and retailers are seeing the benefit in the form of growing sales and indications are they are eager to do more with us. Engagement levels on Retailer iQ are remaining high. Monthly unique users puts an average of 12 coupons with the top 20% of users clipping an average of 46 coupons per month. Keep in mind that the majority of usage over 70% is through mobile devices and the frequency of mobile usage is significantly higher than desktop usage. Please remember we monetized mobile exactly the same way we do desktop. We are also excited about the growth in a number of registered shoppers. Registrations increased 70% in the first half of this year from the end of 2014. We believe retailers have a big opportunity to turn their registered shoppers into heavy users by delivering more personalised offers which is something shoppers say they want and exactly what we do. CPGs and retailers are starting to use our network to deliver targeted digital offers based on shopper data. Last quarter we mentioned a few pilot targeting programs and their positive results. That success allowed us to roll targeting out to our entire sales organization. Momentum is building with targeted campaigns scheduled to run this year starting with the current back to school season. Through our platform and network, CPGs and retailers can now target more than 12 million households with digital offers based on shopper data. A reach and capability that we believe is significantly higher than any other alternative in the grocery digital coupon space. As we launched additional retailers we are also bringing innovations to market. Earlier this year, we mentioned our personalized and targeted digital circular product. We now believe the first major retailer will be live this year adding yet another digital vehicle to drive personalization and media across our shopper base. This is designed to speed the migration of the approximately $200 billion U.S. annual trade spend to digital. While two retailers went live this quarter, a few banners scheduled to launch in Q2 pushed their live dates to later this year. In most cases to line up with their internal release schedules. This has an effect on our forecast for the platform for the remainder of this year which Mir will talk about in greater detail in a few minutes. Turning to digital print, our print business has been impacted, we believe primarily due to an increase in mobile usage. To better serve mobile users, we recently began piloting a new, enhanced printing solution that we believe makes printing for mobile devices a seamless experience. We have two additional initiatives that we believe will drive increased print volumes this year as well. This month we will begin rolling out a consumer marketing and branding campaign and we recently released the latest version of Brandcaster which better automates the system for delivery of coupons to our nearly 30,000 publishers. We believe that digital print has plenty of room to grow. As a reminder, approximately 90% of grocery coupons redeemed in this country, roughly 2.4 billion coupons per year are still cut from a newspaper or other paper source. This is a multibillion dollar industry and we believe this shift to digital is inevitable and we are uniquely positioned to take advantage of it. As we look to the rest of the year, in addition to growing our media, digital SSI [ph] and specialty retail businesses, we are focused on two things. The first is getting Retailer iQ live and marketing with our signed partners. The second is continuing to enhance our overall platform for greater partner and consumer experiences. As we scale, our business model will continue to evolve. Retailers are now starting to implement their own offers that indirectly increase revenue to Coupons.com. For example, when the retailer uses the platform to market their own offers, shoppers often select additional offers that we monetize directly. And as targeted campaigns become a greater portion of our business, commanding a premium price per transaction, we anticipate an impact in transaction volumes offset by a higher revenue per transaction with increased margins. Additionally pricing on the platform may become more dynamic, for example, option based. In the past quarter we started experimenting with alternative pricing models while keeping a sharp focus on revenue and margin growth. For the foregoing reasons we believe transaction volume will become a less predictive indicator of future operating performance. In summary we have had another solid quarter. We continued to see momentum in media, specialty retail, Retailer iQ, and other products and we are rolling out new initiatives to roll -- to grow digital print. Our platform supports a large market where CPGs and retailers spend hundreds of billions of dollars on coupons, media, and trade promotion. These dollars have primarily been spent in offline vehicles that we expect will inevitably shift to digital. We are using exciting, leading edge technology such as machine learning to digitally connect CPG's retailers and shoppers, which we believe gives us a unique competitive advantage. 100% of the Fortune 500 CPGs are our customers. And we provide digital coupons to over 80% of the Fortune 500 grocery, drug, mass, and dollar retailers. With the contracts we have signed, the roll out scheduled for the next several quarters, our product pipeline, and our fantastic team since founding this company, I have never been more excited about our growth prospects than I am today. And with that I will turn the call over to Mir.

[Mir Aamir:]

Thanks Steven and welcome everyone. I will review our financial results for the second quarter and then provide financial guidance for the full year 2015. Total revenue for the second quarter was $55.9 million at the top end of our guidance and up 8% year-over-year. Revenues from digital promotions increased 6% over last year while revenues from media and advertising increased 14% from a year ago as our CPG and retail partners increasingly want to reach our valuable audience across our network. Revenues from digital paperless coupons continued to build in the quarter. Digital transactions through Retailer iQ increased almost 70% in the first half of 2015 as compared with the second half of 2014. Transactions for the second quarter were 372 million as compared with 384 million in Q2 of last year. Three retailer banners that were scheduled to go live in Q2 were delayed and this impacted transactions during the quarter versus earlier forecast. These delays primarily resulted from shifts and POS related release schedules by the retailers. Additionally as we mentioned earlier we expected first half of this year to be less strong than the second half due to the launch schedules of retailers and then subsequent marketing. Of the more than 18 retailer banners signed on the platform, 9 are live to date, and 6 have begun marketing, 2 of them very recently. In addition to the three retailers that delayed launches originally scheduled for Q2, a few other bannered live dates have also moved from Q3 into Q4 for similar reasons resulting in a larger than anticipated number of launches now targeted for the last quarter. As we discussed before we continue to share these forecast with our CPG clients. They help them better plan digital coupon budgets for this year and encourage sufficient budget availability in the later part of this year to meet the growth and demand of digital paperless coupons. Next, the performance of Retailer iQ post implementation in marketing is strong as expected. Retailers seem eager to launch and drive sales and therefore we are confident of launching all signed retailers thereby driving revenue growth. Moving down the P&L, gross margin was 60% in the second quarter flat from a year ago. As a reminder as revenues grow, we expect to see continued leverage in gross margins given that more than half of our cost of revenue is fixed expense and is not expected to grow in line with revenue. Operating expense in Q2 of this year was $41.5 million compared with $37.5 million in Q2 last year excluding the 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 $33.5 million or 60% of revenue in Q2 2015, as compared with 61% of revenue in Q2 2014, and 62% in Q1 2014. We believe this continues to demonstrate our ability to leverage operating expenses as we grow our revenue. Adjusted EBITDA in Q2 was $4.6 million beating our guidance for the quarter. As a percent of revenue, adjusted EBITDA was 8% in the quarter, as compared with 7% in Q2 of 2014. Now moving to cash flow we generated $6.9 million in cash from operations in Q2 2015. This reflects our growing ability to generate free cash flow as we built our business and leveraged our past investments and fixed expenses. During the quarter we repurchased additional shares of our common stock bringing the year-to-date share repurchase level through the end of Q2 at 212,300 shares for $2.1 million. This is based on the approved stock repurchase plan we announced during our Q4 earnings call in February and demonstrates our confidence in our business growth potential and commitment to our shareholders. Now before I turn to guidance for the year, I would like to provide some color on our exciting growth prospects for the business that will also inform our financial performance for the rest of this year and beyond. First, Retailer iQ platform performance at launched retailers is solid. Especially with the retailers who are marketing the program. The network effect of more retailers on the platform enabled by shopper data is getting to be significant. With the majority of usage through mobile devices and double-digit increases in baskets and shoppers sales by retailers, the platform is truly becoming a foundation for our clients to connect with consumers at scale with data driven personalization. Second, we continued to bring platform enhancements and innovations to market. We believe this will further grow revenue and increase average revenue per transaction. One such program that we are very excited about is targeted digital coupons to more than 12 million households. Additionally we recently launched our first Retailer iQ media campaign, leveraging our platforms capability to do targeted media across retailer and other web and mobile properties based on data, on shopper transactions, as well as online behaviour. Third, we have a healthy pipeline of additional retailers in active discussion who are close to signing on the Retailer iQ platform likely for 2016 implementations. Fourth, we are working on initiatives to grow our digital print business. One example is the new branding and marketing campaign for Coupons.com that we are launching this month. This we believe will have a sustainable impact on converting the estimated 45 million exclusively offline paper coupon households into digital coupon users as well as increasing the frequency of existing users. And finally with the innovations and evolution of our business model, we believe that digital coupon transactions as reported are beginning to become less accurate reflection of our revenues. For example, as Steven mentioned we started to experiment with alternate pricing models like fees for redemption and combining media with promotion campaigns. Another example is a launch of targeted digital offers which are priced at a premium with the effect of increasing revenues at lower transaction levels especially when committed CPG budgets are used for such offers. We believe all these factors will positively impact and accelerate the growth in our business later this year and laid the foundation for growth in 2016 and beyond. Now turning to guidance for the year, for the full year of 2015 we forecast revenues to be between $255 million and $270 million, adjusted EBITDA to be between $30 million and $40 million. This primarily reflects the impact of delayed rollouts of a few signed retailer banners. In this estimate we have also assumed that two small to mid-sized retailer banners launched in Q1 of 2016 versus their original schedule of Q4 2015. To summarize, we are pleased with the results from our retailer platform implementations driving sales growth for our retail and CPG partners. These results are also becoming more visible in the market and reinforcing us as a key enabler for Retailers digital personalization strategies. This gives us very high confidence that although we are facing launch delays, many more retailers will be live in the coming months and year with millions more shoppers adopting and driving sales for brands and retailers. We believe that our sizeable network for digital coupons, our mobile focused platform capabilities based on shopper data and personalization, digital receipts and new innovations like personalized digital circulars provide us with a significant competitive advantage as we are still in the very early stages of a sizable secular shift from offline to digital. We believe we are best positioned to maintain significant market share and achieve our long-term growth objectives. We will now open up the call for questions. Operator?

[Operator:]

[Operator Instructions]. And our first question comes from Jason Mitchell with Bank of America Merrill Lynch. Your line is open.

[Jason Mitchell:]

Hey guys, I guess my first question is transactions came in a bit softer this quarter and you kind of mentioned mobile impacting the printer home business. I have also seen some passing paperless industry in general coupons are kind of doing twice the distribution that Print at Home is. How is the Print at Home business trending and how do you kind of see that mix with your Retailer iQ platform going over time?

[Steven Boal:]

Sure, thanks this is Steven. Look we said before, overtime we expect that digital paperless volume will be greater than digital print volume. And in fact we said in quarter past I believe that there were periods in which we saw up to 50% of our volume coming from digital paperless we certainly expect that to be the case overtime. The digital print platform -- look two things, one your mobile growth we all are aware is growing. We have been working on a program that we just rolled out in pilot now that makes mobile printing seamless. So visitors on mobile phones that visit our platform be able to print directly from mobile web without having to install anything special and not have to run any specific new application. The other thing that may have impacted digital print in this quarter but we can’t be sure is that we’ve had very open dialog with our CPG partners about Retailer iQ volumes in the back half of the year. And we’ve asked our clients to think about reserving budget and volume to be able to meet those demands and those demands are still there. And so that certainly could have had an effect on a digital print volume in the quarter, having said all that the digital print volume we believe has got plenty of room to grow. We have got three specific initiatives we just mentioned to drive digital print forward and we expect that digital print will continue to grow and return to growth in the quarters ahead.

[Jason Mitchell:]

Okay and just kind of as a follow up, so when you think about how the remainder of the year is kind of going to go with transaction growth, is it going to be pretty heavily weighted towards Q4 versus 3Q and then just on Retailer iQ, I think you mentioned last quarter you were shooting for a retailer rollout every three weeks through end of 3Q are you still trying to keep that schedule this quarter or is it going to be a bit more delayed than that? Thanks.

[Mir Aamir:]

Your first question on transaction yes, I think you can expect Q4 to be heavier in terms of transaction and revenue than Q3 because of the rollout schedule that we just talked about. Resulting in Q4 growth being much better than the Q3 growth factor and that’s exiting the year on a very nice growth level. On the scheduled rollouts, the last time when we gave you the estimate that was the scheduled average estimate at that time. Right now because of the schedules and what I mentioned just to be clear and reiterate that again, we did have three move out of Q2 into Q4 launches. We had a few move out of Q3 into Q4 launches. So now we have a number of those retailers scheduled to go live in Q4. Now it’s not that the work for those launches has not begun. The work has begun much earlier on, so we are all gearing up for that. It is just retailers had some upgrades and things they wanted to schedule in before this launch and that’s what starts to delay this by x number of months. So you can expect a lot more retailer launches in quarter four than earlier quarters.

[Jason Mitchell:]

Okay, thanks a lot guys. Appreciate it.

[Steven Boal:]

Thank you.

[Operator:]

Thanks. Your next question comes from the line of Mark Mahaney from RBC Capital Markets. Your line is open.

[Unidentified Analyst:]

Hi, this Joel on behalf of Mark. We just had a question on transaction sales so wondering if you can provide a little bit more detail on the guidance. You mentioned the Retailer iQ rollout and I know you have been discussing this but any other color you can provide would be great? Thank you very much.

[Steven Boal:]

You know not to provide guidance on transaction but you can imagine and forecast in from the dollar revenue guidance that we’ve given and back into your estimates for transactions. I would point back to one of the things we did mention and you should factor that in, that we are implementing programs that we expect will start to increase average revenue per transaction, right. So if you want to look at that for your model historically we have been $0.10, we’ve forecasted our $0.10, now we are looking at forecasting to $0.11 with higher being in quarter four also due to seasonality. But if you want to keep -- put that in your model to get an estimate for transactions for the year I -- we would recommend using the reten [ph] $0.11.

[Unidentified Analyst:]

Thank you.

[Operator:]

Our next question comes from the line of Mitch Bartlett with Craig-Hallum. Your line is now open.

[Mitch Bartlett:]

Hi Steven, I am wondering if you could just walk us down the path of the CPG thinking about targeting and the trade off between the way they did business a year ago and they way might do business next year?

[Steven Boal:]

Sure, when you say trade off means you are talking about year ago versus this year, is that what you mean by trade off?

[Mitch Bartlett:]

When you talk about targeting, you are talking about volumes coming down but prices going up. They have an ROI associated with that, what are they looking at as far as the trade off between the way they did business a year ago and the way they might do business under a targeting umbrella a year from now?

[Mir Aamir:]

Sure, there is a lot of factors that sort of benefit that quite a bit. Just to give you a sort of a sense of targeting so we’re referring to over here is the CPG’s ability now for the first time at scale in a digital world, to be able to take a targeted offer and deliver it to specific shopper segments, for example pet owners, organic buyers, what have you. And what happens in that cases that the resulting ROI, the resulting redemption and the ensuing sales from repeat purchase is very significant such that it allows just like it allows in any other marketing medium for targeting for premium pricing. And what we meant by that is by the effect of that needing that for the same number of transactions premium price and when it gets added into our transaction count it has a net effect of increasing our average revenue per transaction. And we have talked in our earlier calls that we will be doing it this year, at that time we were piloting and we had talked in our earlier earnings call that the results were good. We just now rolled it out nationally across our organization and across all of our customers. So now we are expecting to see those campaigns come in the rest of this year and impact -- positively impact our revenue per transaction.

[Mitch Bartlett:]

Got it, second question would be I wonder if we could somehow put a little more meat on the 70% increase in the transaction volumes on Retailer iQ between the second half of last year and the first half of this year, just you have six retailers marketing actively right now and in the second half of last year I think it was probably one or two at the most. Does that 70% seem meaningful, I know in your script you talked about everybody is very happy with the returns but maybe you could talk about that 70%, what is that volume increase?

[Mir Aamir:]

Sure, the 70% you could think about that as being driven a lot more by retailers that had already started marketing earlier part of the year or came into this year marketing, right. Two retailers at the end of December had been marketing for our earlier conversations and then six now but six now is as of today. One of them in fact this week and one of them earlier in this quarter, so the end of quarter four you could think of it as four instead of six. And again a few of those four were in the second quarter. So you can think about the 70% as a ramp that is driven a lot more by retailers that had started marketing earlier and the effect of the more recent retailer marketing will be solved in quarter three and quarter four. That sort of put some dimension on to those numbers.

[Mitch Bartlett:]

The last question would be –

[Mir Aamir:]

Mitch, sorry, one more thing just the second part of your question about enthusiasm. So one factor I do want to share was in our release is the sales increase from shoppers that shop in two timeframes a year ago and this year for retailers that were in the program but also shopped last year when there was no program those sales increase when we are seeing early numbers right, based on shopper data because we can measure shopper data going back over a year was north of 20%. So, that’s very significant for retailers that are really struggling hard to get comp store sales of 1% or 2%. So that’s really exciting and that’s what fueling the enthusiasm for them to go live.

[Mitch Bartlett:]

Got it. Last question is I believe you said you had a mass merchant go live on digital print with you or at least signup and I think it’s live at this point and which will affect your print volumes. I wonder you also last quarter mentioned that a retailer -- a mass merchant has signed up for Retailer iQ for 2016 launch, I wonder if they are one and the same, can you comment on that?

[Steven Boal:]

Yes, they are the same.

[Mitch Bartlett:]

Perfect. Thank you.

[Steven Boal:]

Thank you.

[Operator:]

And our next question comes from the line of Debbie [ph] at Goldman Sachs. Your line is open.

[Unidentified Analyst:]

Great, thanks I have two quick questions. First, in the Print at Home business you mentioned the category shift to mobile, just curious if you are seeing an impact from any recent Google algorithm changes on traffic? And then second within your lowered guidance, is that fully due to the delayed roll out of those retailers on Retailer iQ or do you expect continued weakness in the Print at Home business?

[Steven Boal:]

Sure, thanks Deb it is Steven. On the SCO question, we don’t believe we have seen any negative impact from any Google algorithmic changes in any parts of our business whether it be in the specialty retail or in a bigger part of our business which is the [indiscernible]. Now I don’t think we have seen any negative effect from any Google algorithm changes.

[Mir Aamir:]

And Deb on your second question on guidance, the primary effect is the delay that we just talked about and the compounded effect of that as you can imagine. The Print at Home impact that we saw in Q2 and what Steven talked about in mobile, continuing a little bit in the early part of Q3 or the initiatives that we just talked about to grow that, it is hard -- we are optimistic about the growth of that business, for in fact for the rest of the year also and has a lot of room to grow.

[Unidentified Analyst:]

That's helpful, thanks.

[Operator:]

As there are not further questions I would like to turn the call back over to Stacie Clements.

[Stacie Clements:]

Thank you everyone for joining us this afternoon. If you have any further questions please free to ask me directly or through our Investor Relations website. Thanks again and have a great day.