Quotient Technology Inc.
Q3 2014 Earnings Call Transcript

Published: 4 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Coupons.com Incorporated Third Quarter 2014 Financial Results 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). Please note that this call is being recorded today, Tuesday, November 4, 2014 at 4

[Stacie Clements:]

Hello, and welcome to our third quarter 2014 earnings call. Please note that slides to accompany the remarks on today’s call are available on the IR section of our website. 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 financial benefits from Retailer iQ 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 certainties 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 quarterly report on form 10-Q filed with the SEC on August 7. 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. Now, I will turn the call over to Steven for a summary of our business in the quarter.

[Steven Boal:]

Thank you Stacie and thank you everyone for joining us this afternoon. We’ve had a great third quarter across all areas of our business with year-over-year revenue growth of more than 47% and significant margin expansion on the bottom line. We continue to lead the market as the industry shifts from traditional offline promotions to digital. We believe this shift will be ongoing for quite some time given that only a small portion of the $3.5 billion CPG paper coupon market is in the form of digital and that too has primarily been driven by us. With our digital coupon technology and platform, CPGs and retailers can reach tens of millions of shoppers quickly and effectively, creating an opportunity to capture more of their household shopping budgets. Another dynamic at play that’s enabling our growth is our network effect. As we add products, distribution capabilities, customers and traffic, the network value grows. We are starting to leverage the way all of our products work together to offer the most comprehensive set of promotional and media services to consumer package goods manufacturers, retailers and shoppers. As you know, a major focus for us has been Retailer iQ. We are now live with several retailers covering a broad and feral footprint across the country. As a reminder, Retailer iQ is our Digital Coupon platform that integrates into retailers’ point of sale system to deliver digital paperless coupons to shoppers. It is built with the mobile user in mind making the user experience around the clipping and redeeming coupons simple for shoppers. Most importantly, this platform allows for personalization and targeting at an individual shopper level based on real-time and historical shopper data. Personalization and mobile engagement capabilities across the platform include digital receipts, integrated mail e-mail management, geofencing and notifications. In Q3, we started to see volume ramp up as retailers went live and others began the first phases of marketing the program with positive early results. As we’ve said, Retailer iQ is designed as a mobile first solution and we are already seeing almost 70% of the usage of the platform through mobile devices. As a reminder, coupon transactions through mobile have exact same economics to us as those that take place on other devices. Moreover, the mobile experience enables a richer set of consumer data, geolocation capabilities and real-time savings, all of which improved our overall targeting capability resulting in a better consumer shopping experience. Even though early in the adoption curve, we are very excited to report that retailers using the Retailer iQ platform are already seeing greater engagement and increased spend from shoppers, with basket sizes increasing more than 50% versus shoppers who have not yet enrolled in the program. Additionally, our media business continuous to demonstrate strength, up more than 100% from Q3 of last year as CPGs and retailers see positive results from integrating display and video ads with their Digital Coupon campaigns. As our network continues to grow, we’re seeing media offerings become even more valuable to our customers. With the addition of our Retailer iQ platform, we can now leverage in-store shopper data to create more targeted, web, mobile and video ads for our clients. We have also recently brought our media capabilities on to the Retailer iQ platform with the goal of increasing foot traffic into stores. This allows us to use real-time shopper transaction data to deliver advertising and trade supported programs directly to shoppers on the retailers’ digital and mobile properties and across the Coupons.com network of publishers and affiliates. In addition to Retailer iQ driving mobile paperless coupons in grocery retail, we are also making strides with our mobile efforts across all of our products to better help shoppers save money in physical stores where more than 90% of all shopping takes place in the United States. Just yesterday, we released the latest version of our popular Coupons.com app, which includes both personalized push notifications and our proprietary geofencing notification system. These notifications will be sent to shoppers based on their locations, their personal preferences and based on their prior shopping behavior. We believe this feature will be very effective in driving shoppers into physical stores and restaurants and we’re excited to add it in time for this holiday season. Also, we recently announced a new version of Brandcaster, our self-service publishing platform that third-party publishers use to offer coupons to their visitors. Our partners can now offer CardLink offers, which primarily cater to the mobile shopper directly from Brandcaster to our distribution network of over 3,000 publishing affiliates. While card linked offer is a still young product for us, this is an example of how we’re leveraging our broad distribution network to bring another product to market. For more than 40 years, CPGs and retailers have turned to coupons to drive sales and traffic for their businesses. For context, last year CPGs distributed 315 billion coupons in the United States with 99% of those still distributed in paper form primarily to the Sunday newspaper. However, although only 1% were distributed in digital form, a full 10% of total industry redemptions were from digital coupons. With newspaper circulations continuing to decline and 90% remaining to shift, we’re clearly at the very beginning of a large and growing secular change. By being at the center of these three constituents, CPGs; retailers and shoppers were able to create a digital coupon ecosystem that is far more effective and efficient and with ever possible on the offline world. I will now turn the call over to Mir who will take you through the financial details.

[Mir Aamir:]

Thank you, Steven, and welcome everyone. I will first review our financial results and key metrics for the third quarter, and then provide financial guidance for the full year 2014. We are very pleased with our financial results in the third quarter which significantly exceeded both our revenue and adjusted EBITDA guidance. Total revenue for the third quarter was $58.5 million, up 47% year-over-year and exceeding the top-end of our guidance of $54 million. Revenues from digital promotions increased 35% over last year, driven in part by a strong back-to-school season in September as CPGs ran more coupon campaigns to drive sales to families, returning from summer break and getting back into their school routines. Also in this quarter, we had several retailers live on the Retailer iQ platform which began to contribute revenue. We’re pleased with the initial results from this platform and we’re seeing positive momentum across our retail customers. Revenues from media and advertising increased 105% from a year ago. Retailers and CPGs are seeing stronger ROI on marketing investments by wrapping digital offers with brand equity advertisements across our web and mobile properties as well as our network of publishers, affiliates and retailers. Total digital promotion transactions in the third quarter were $440 million, up from $313 million in the same period a year ago, driven by the launch of Retailer iQ as well as strong September back-to-school budget deployments by CPGs. Gross margin was 61% in the third quarter, as anticipated and reflects a slight uptick from last quarter. As revenues grow, we expect to see continued leverage in gross margins. Now moving down to P&L, as expected, we continue to see operating leverage this quarter. Operating expense in Q3 of this year was $35 million compared to $29 million in Q3 last year. Excluding stock-based compensation and the favorable impact from the change in fair value of contingent consideration related to the Eckim acquisition, operating expense was $31.8 million or 54% of revenue in the quarter. This is a significant improvement over Q3 last year when operating expense, excluding stock-based compensation was 71% of revenue. As a result, adjusted EBITDA in Q3 2014 was $8.1 million or 14% of revenue, which represents another significant improvement over the 3% adjusted EBITDA margin in Q3 of last year. We expect to continue to see operating leverage in our business as more retailers go live on the Retailer iQ platform and revenues begin to ramp further. Net loss in the quarter was $782,000. Excluding stock-based compensation, we generated net income of $5.7 million. Net cash used in operations was $700,000 in the third quarter of 2014 compared to $200,000 in the same period last year. As of September 30, 2014, we had $193 million in cash and cash equivalents. Now, before I turn to guidance, I’d like to give some additional color on how to think about our business going forward. Although, we delivered strong revenue growth in the third quarter over a year ago, a better way to understand our growth is to look at the trend over several quarters and ideally on a full year basis. For example, our revenues in quarter one increased 41% followed by 32% in Q2 and now 47% in Q3, bringing the year-to-date revenue growth at 40% over last year. While CPGs plan their budgets and allocations on an annual basis, the budget deployments by quarter vary from year-to-year. Now many factors play into this. For example, CPGs’ overall performance in a quarter, their volume objectives and new brand introductions. Given this dynamic and the flexibility that our platform offers CPGs to initiate promotions with very little lead time, in Q3, several CPGs shifted some budget from Q4 into Q3 to bolster the back to school sales. Therefore as I’ve said before, looking at the trend line on semi-annual or an annual basis is more reflective of our overall business trends. With this context, we expect revenues in the fourth quarter to be between $62 million and $64 million, reflecting a second half 2014 revenue growth rate of approximately 32% at the midpoint of our guidance over the same period in 2013. We expect adjusted EBITDA in Q4 to be between $6 million and $8 million reflecting continued operating expense leverage in our business driven from our growing Digital Coupon business specially through Retailer iQ, as well as our growing digital media business. For the full year 2014, we are raising guidance from what we had shared in our previous earnings call. We now expect full year 2014 revenue to be between $224 million and $226 million reflecting an annual year-over-year growth rate of 34% at the midpoint of the range. We expect adjusted EBITDA to between $22 million and $24 million suggesting an adjusted EBITDA margin of 10% to 11% for the year as compared with 1% in 2013. To close, we are excited about our business performance this year, having delivered sustained growth again after four years of more than 30% CAGR. As Steven mentioned, we are at the very beginning of our large and growing industry shift with less than 1% of the 315 billion CPG paper coupon market in the form of digital primarily driven by us, we believe there is significant potential for growth over many years. We’re in the business of helping our CPG and retail partners grow sales through efficient promotions and media spend, which supports the continued shift of budgets on to our platform. Our technology built over many years with significant investment in security, scale, point of sale integration and mobile delivery of digital coupons together with our growing network of CPGs, retailers and publishers is very difficult to replicate at scale. And we believe provides a sustainable competitive advantage. And now with our Retailer iQ platform live at several retailers and generating revenue, we are confident about our ability to maintain a leading share of this growing digital space. We will now open up the call for questions. Operator?

[Operator:]

(Operator Instructions). Your first question comes from the line of Mark Mahaney with RBC Capital Markets. Your line is open.

[Brian Peak:]

Hey guys. This is Brian on for Mark. Thank you for taking my question. In terms of driving Retailer iQ adoption, are there any early learnings that can be applied to subsequent retailer additions to platform? And then also, when you talk about incorporating Retailer iQ data into your media solutions, when could we expect that to have a material impact on media revenue growth we haven’t seen that already? Thank you.

[Steven Boal:]

So, this is Steven, let me take the first part, early leanings. So, the answer is definitely yes. From the first retailer we’ve rolled out through the others that are in the process of going live. We’re certainly learning from the consumer experience, we’re learning from the in-store cashier experience and we’re learning from the integration of how the retailers market through their in-store vehicles their online vehicles into our platform. And we’re able to very quickly leverage those from one retailer to the next. So, we’re already seeing the gains there and we continue to expect that as we roll out additional retailers.

[Mir Aamir:]

And Brian on your second question, we are just beginning the data, Retailer iQ data leverage for media and we expect to continue rolling that out as we roll out the platform to retailers. So, as far as revenue impact, probably best to think about that specific aspect on media revenues in the back half of next year.

[Brian Peak:]

Okay. Thank you very much.

[Steven Boal:]

Sure. Let me just add one point there. So, we’ve been in the business for a long time now of taking shopper data, whether it’d be through coupon use or activation of coupon redemption data. And using that to decide how we display media in addition to interactions on our website. So, this is just a whole new data set for us to ingest, a very large one, a whole new data set for us to ingest, but we have been doing for a long time taking shopper data and using that to deliver targeted advertising to people.

[Brian Peak:]

What inning would you say you’re in, in terms of targeted capability?

[Steven Boal:]

I would say that we’re in the early innings from a capability perspective, we’re very early from a data perspective. So, we’ve gone through the process of building out the targeting platforms and the cohorts and all that data and things of that nature already. But getting the data in, we’re very early. As we bring these retailers out getting that data into the system, we’re very early there.

[Brian Peak:]

Thanks again guys.

[Scott Boal:]

Yes. Thank you.

[Operator:]

Your next question comes from the line of Jason Mitchell with Bank of America Merrill Lynch. Your line is open.

[Jason Mitchell:]

Hi guys, great quarter, care for next. So, I was looking at your new app yesterday and your Brandcaster seems lot more focused on specialty retailer coupons. Can you just kind of given us a sense of where that business is right now and kind of where you see that growing long-term?

[Steven Boal:]

Sure. So, as we’ve talked about earlier, if you recall, we acquired a company called (inaudible), which really gave us an expanded set of capabilities by allowing us to take primarily specialty retail offers and putting them on MasterCard, Visa, American Express. And so, what you are seeing in the app for example is the full integration of that platform into a unified application. And if you look carefully, when you open up the app, you’ll see that it’s not just specialty retail, but we’ve interleaved specialty retail grocery, in-store, online altogether with a high degree now of personalization geolocation. And so what we’re doing is we’re providing a unified experience for a consumer and very, very click, one click access to get to a section of the app that they’re looking to be in. Whereas before, you launched the app and there was a menu system and you would choose, I want to go to this section or this section or this section. Now, it’s more intuitive and we’re guiding the user to the experience of the section that they want to be in based on that moment in time shopping. So you’re just seeing us and as we said before, you’re seeing us bring all of these products together and start to leverage each other, so that we really understand what the consumer is looking for at that moment in time as opposed to trying to drive them into a specific section of our platform.

[Jason Mitchell:]

Alright, great, thanks. Just a quick follow-up. Your growth on the coupons really reaccelerated this quarter. How much of that would you say was from Retailer iQ starting to go versus increased couponing campaign from the CPGs? Was that majority of just dollar shift from the CPGs or how should we think about that exactly?

[Mir Aamir:]

Sure. Let me address that. So a few factors, one is Retailer iQ is definitely helping. So you see the impacts of that in quarter four -- quarter three. Some of that of quarter three had to do with budget shift from quarter four into quarter three, a small portion of that. And then along those lines, when you talk about CPGs, the Retailer iQ is also CPG budget deployments of digital coupons. So just to be clear that that is all -- it’s all part of the same platform and coupon system and trust and budget from CPGs. And even though CPGs plan annually in terms of their coupon budgets, their deployment by quarter varies from year-to-year. So, there is as you saw in quarter one, as you saw in quarter two and three and now at the end of the three into four, there is some shifting of budget that happens between quarters. But outside of that, quarter three was great and the growth continued based on our platform driving more coupon transactions, Retailer iQ coming on live and adding on to growth and then of course our media business growing as well in quarter three.

[Jason Mitchell:]

Okay, great guys. Thanks.

[Steven Boal:]

Thank you.

[Operator:]

(Operator Instructions). Your next question comes from the line of Debra Schwartz with Goldman Sachs. Your line is open.

[Debra Schwartz:]

Great, thanks. A couple of quick questions. First in terms of the CPG budget shift that you mentioned. Can you give us a sense of whether or not that impacts the media business differently from the digital promotions business and if there is similarly any impact differently between printed home and digital safety card? And then also just wondering if you could quantify a little bit more the impact from Retailer iQ. Can you give us a sense of how much it contributed in the quarter? How many Retailer iQ customers you have live? How many are signed up will be great?

[Steven Boal:]

Sure, sure. Thanks Deb. So, let me talk a little bit about the shifting. So, just to give you some context again to describe it a little bit differently, when we go to the annual planning process with our clients ahead of their fiscal even starting, they lay out their minimum spend for their fiscal. They don’t necessarily lay it out by quarters and often times there will be a media component and a promotions component to that annual plan. And so, when you see shifting moving around quarter-to-quarter and because we are starting to see the effect of having media associated with promotional campaigns, which our clients are finding or amplifying their ROI, you will see some media shift as well. And so, again as Mir said before, thinking about us on a semi-annual or better on an annual basis because we have some visibility into how our clients are thinking about how their entire fiscal lays out is probably the way to think about the business and there will be some inter-quarter shifting back and forth. Also remember, it’s an important point as you say it here, not all of our clients are on annual fiscals. And so, we have several clients that their fiscal start in the middle of the year and we have large clients their fiscal start at odd months during the year as well. And so, it’s not completely predictable on a quarter-by-quarter basis and on annual basis it’s pretty predictable.

[Operator:]

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

[Steven Boal:]

Thank you everybody for joining us this afternoon. We had a great quarter. We really appreciate your questions and interest in our business. And if you have any further questions I encourage you to reach out directly to ask through our corporate website. Thanks again, have a great day.

[Operator:]

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