Quotient Technology Inc.
Q4 2014 Earnings Call Transcript

Published: 10 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Coupons, Inc. Fourth 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, Monday, February 9, 2015 at 2

[Stacie Clements:]

Hello, and welcome to our fourth quarter and full-year 2014 earnings call. Please note that slides to accompany the remarks on today’s call are available on the 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 financial benefits from the Retailer iQ platform 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 November 6. 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 in the company’s website. And with that, I’ll now turn the call over to Steven.

[Steven Boal:]

Good afternoon, everyone, and thank you for joining us today. Coupons.com marked a very successful first-year as a public company. Revenues for the year grew 32% over last year to $221.8 million, and we generated $24 million of adjusted EBITDA over 13 times out of last year. We saw growth from all areas of our business, as we continue to lead the promotion industries transformational shift from offline to digital. We also had a very successful launch of Retailer iQ and continue to innovate around our platform with new products and enhancements. Revenue for the fourth quarter was $60 million, while adjusted EBITDA was $8.3 million. Our Q4 revenue was slightly below our guidance and was due primarily to a few December programs from large CPGs that were not repeated from 2013. However, adjusted EBITDA was above guidance, demonstrating the strength in our business model with continued operating leverage and strong cash generation as our business continues to scale. As we’ve mentioned before, it’s more meaningful to look at our business on an annual basis due to the quarterly budget fluctuations of CPGs. It’s also important to remember that the market opportunity itself is tens of billions of dollars. CPGs plan their promotions and marketing budget in three distinct areas; coupon promotions, trade promotions, and media and advertising. Our platform is designed to address all three of these. Over $300 billion coupons are issued each year in the United States and only a small percentage are issued digitally. These same CPGs spend about $34 billion a year in media and advertising and you’ve seen the effect of that shift to digital on our performance. And lastly, annual trade promotion spend is approximately $200 billion, primarily in the form of discounts funded by CPGs to retailers. We believe this is the next area for disruption and that is also what Retailer iQ is designed to deliver against. And on that note, I’m pleased to announce that Retailer iQ is performing in line with expectations and consumer adoption is building at a healthy pace. We currently see an inflection point coming in the back half of 2015, as retailers start to see the scale develop as a direct result of marketing the program to their shoppers. Mobile usage continues to exceed 70% and early results indicate that these mobile users are 60% more engaged than desktop users. As a reminder, we monetized mobile exactly the same way we do desktop. To give you a sense of the impact that marketing has on consumer adoption and volumes, the increase of coupon transactions per session at one of our live retailers has increased from an average of five coupons per user in the early days of launch to now an average of 14 coupons per user. At the same time, user registrations are growing, creating a compounding effect. Over the coming quarters, we expect to share more details with you. Continuing along that same theme as we work with our clients on their 2015 annual plans and based primarily on the strength of early Retailer iQ results, we are guiding CPGs to plan a higher proportion of their annual budgets to be deployed in Q3 and Q4 of this year, when we expect volumes will be several times higher than Q1 and Q2, and to consider shifting offline budgets even faster than historical trends during the back half of this year. We are also encouraging CPGs to plan for this type of growth throughout all of 2016. With several retailers now live, both consumer adoption and transaction volumes from Retailer iQ are ramping as expected. Also this year, we achieved great traction with our media business, seeing a growth 34% in the fourth quarter and 64% on a full-year basis. CPGs and other brand marketers are embracing the strategic value of fully integrated digital campaigns and really starting to leverage our extensive targeting and growing consumer audience. Now, before I turn the call over to Mir, there are three exciting announcements I would like to make, all of which support three of our key themes for 2015; data and analytics, expanding our network, and mobility. First, I’m happy to be able to announce that one week ago, we launched our CPG targeting solution. CPGs can now use our platform to reach specific members of our growing audience, providing the right offer to the right consumer at the right moment with measurable impact on their bottom line and ROI objectives. Our targeting solution leverages the data we collect across our entire network, including shopper behavior, web and mobile usage, and from our network of approximately 30,000 publishers. Second, we’ve developed a sophisticated e-circular product. It is, in effect, a digital version of the paper circular, but with all of the benefits we bring, the ability to personalize and target offers in real-time and to help our partners deliver those coupons right to their shoppers. We’ve talked a lot about trade and the $200 billion of annual spend through this channel. Our proprietary e-circular product is a key way we will efficiency to this large part of the promotions market. We are excited to offer digital circulars as part of our Retailer iQ platform to our retail partners. Lastly, as mobile becomes a central component of our growth strategy, Steve Horowitz, who recently joined Snapchat as Vice President of Engineering will be joining our Board of Directors in June. Many of you know Steve, who ran the Android development team at Google before joining Coupons.com as our Chief Technology Officer several years ago. When Motorola acquired - when Google acquired Motorola, Steve returned to run Motorola’s mobile software development organization through its sales to Lenovo. Earlier in his career, Steve worked at both Microsoft and Apple, and we are all thrilled that he is returning to Coupons.com. As you can see, we had an extremely busy fourth quarter and full-year and a great first year as a public company. We delivered several key milestones and have laid the foundation for continued future growth. As we look to 2015 and beyond, our focus is simple, continue executing on the path that we set forth in 2014, I’m very happy with our progress to-date. Our robust pipeline and our market leadership position as we lead the multi-billion dollar off-line coupon and trade promotions market through its digital transformation. I want to take a moment now to thank our outstanding team for their passion, hard work and dedication over the past very exciting year. I’ll now turn the call over to Amir for a review of the financials.

[Mir Aamir:]

Thank you, Steven, and welcome, everyone. I will first review our financial results for the fourth quarter and full-year 2014, and then provide financial guidance for the year 2015. Total revenue for the fourth quarter was $60 million, up 14% year-over-year and slightly below our guidance for the quarter. Revenues from digital promotions increased 9% over last year, while revenues from media and advertising increased 34% from a year-ago, as retailers and CPGs continue to see stronger ROI by wrapping digital coupons with brand advertisements across our web and mobile properties, as well as on our network. Q4 revenue was primarily impacted by promotions revenue in December, caused by a few large CPGs not repeating select digital print coupon holiday campaigns that they ran in December 2013. This appears to be primarily driven by these CPGs running through the annual budgets earlier than expected and holding up deploying additional dollars before year-end. The less than expected budget deployments by CPGs in December together with the budget shift from October into September back-to-school season that we have mentioned during our Q3 earnings call caused Q4 transaction growth to be even lower than we had anticipated. We do not believe this to be an indication of business trends in our digital print business, but rather a function of the quarterly variations in budget deployments by CPGs. It is therefore more meaningful to look at our revenue trend over several quarters, as we mentioned in the past. We’re confident that the shift from offline to digital will continue at a healthy annual rate going forward. Additionally, our digital paperless Coupon business driven primarily by our Retailer iQ platform experienced very strong growth in Q4 and is performing as expected. Coupon transactions from Retailer iQ increased 86% in Q4 compared to Q3 and are expected to increase at a healthy rate in Q1 over Q4. Of the already live retailers, some have already begun marketing. New retailers and additional banners of existing retailers are expected to go live in Q1 and Q2 of this year with marketing activities gaining momentum in Q3 and Q4. The compound effect of this suggests a stronger back-half of 2015 versus the first-half. As Steven mentioned, we are sharing these forecasts with our CPG clients to help them better plan their digital coupon budgets for 2015, and ensure a higher budget availability in the second-half of this year to meet the growing shopper demand for digital paperless coupons through our platform. For the full-year 2014, we are very pleased with our financial performance. Revenues for the year increased 32% to $221.8 million. We delivered over 1.6 billion digital coupon transactions, up 23% from 1.3 billion transactions in 2013. We increased revenues from media by 64%. We launched Retailer iQ with several large retailers and are very excited about the growth prospects that lie ahead. As it scales, Retailer iQ accessed by shoppers largely through mobile devices will continue to provide CPGs with the digital platform to accelerate their spend shift from offline into digital. Gross margin was 64% in the fourth quarter and as anticipated reflects a slight uptick from last quarter. As revenues grow, we expect to see continued leverage in gross margin. Now moving down to P&L. We continued to see operating expense leverage in the business. Operating expense in Q4 for this year was $41.8 million, compared to $36.5 million in Q4 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 $34.5 million, or 58% of revenue in Q4 2014, as compared with 66% of revenue in Q4 2013. As a result adjusted EBITDA in Q4 was $8.3 million beating our guidance for the quarter. As a percent of revenue, adjusted EBITDA was 14% in the quarter, as compared with 10% in Q4 of 2013. For the full-year 2014, adjusted EBITDA was $24 million, or 11% of revenue, compared to 1% of revenue in 2013. Moving to cash flow, we generated $6.2 million in cash from operations in Q4 2014, which reflects our ability to generate free cash flow as we grow our business and leverage our cash investments and fixed operating expenses. For the year, we generated $11.5 million in cash from operations. As of December 31, 2014, we had $201 million in cash and cash equivalents. Today, we announced that our Board of Directors has approved a stock repurchase plan of up to $50 million. We believe this demonstrates our continued confidence in the business and commitment to our shareholders. I would now like to provide guidance for 2015. For the full-year 2015, we anticipate revenues to be between $275 million and $290 million, and adjusted EBITDA to be between $40 million and $50 million. For the first quarter, we expect revenues to be between $52 million and $54 million and adjusted EBITDA to be between $1 million and $3 million. In 2015, we expect revenues to ramp through the year with stronger growth in the second-half of this year, due to the compounding effect of Retailer iQ as more retailers go live and start marketing their program. As we mentioned several times in the past, we believe this is more meaningful to look at our business growth trend on an annual basis due to the quarterly variations of CPG budget deployments. Over the last several years, we’ve delivered an annual average growth rate of over 30%, underscoring the continued shift of spending from offline to digital coupons driven primarily by us. Until recently, our digital print platform was the primary catalyst for this, providing CPGs within avenue to drive sales at a better return on investment driven by data, personalization, and a large network of affiliates. Last year, digital paperless coupons began to grow faster based initially on our load-to-cart platform with several large retailers, and then with the launch of Retailer iQ mid-last year. We believe this platform to be the primary catalyst for growth going forward, it allows CPGs and retailers to reach shoppers with digital paperless coupons primarily through mobile with personalization based in shoppers offline purchased data, as well as their online behavior. We are making great progress as we deliver on our promise to retailers in CPGs to help them grow their business through digital promotions, media and with personalization and targeting. We are pleased with Retailer iQ to-date, performance is meeting our expectations. With back-to-back retailer launches in the first-half of this year and the subsequent marketing by retailers to grow shopper adoption and engagement, we are very excited about the moment we are seeing. Additionally, with the launch of new capabilities in the platform like targeted digital coupons, which is now live, digital media tie-ins and personalized e-circular, we will continue to transform the industry and drive promotion, trading advertising efficiency for our CPG and retail clients. We will now open up the call for questions. Operator?

[Operator:]

[Operator Instructions] The first question is from Nat Schindler with Bank of America.

[Nat Schindler:]

Yes, hi, guys. So you guys said that the CPGs pulled their digital to print coupons that they ran last holiday. Did they run paperless offers either through Retailer iQ and do you believe they are running them on other platforms where there is more deployment at this point for paperless? And then also, can you just talk to us a little bit about the pricing for paperless versus digital to print coupons? I assume there is some difference in redemption rate and will the CPGs adjust pricing as they go?

[Mir Aamir:]

Sure, Nat, so let me address the first part of your question. The answer is no, they weren’t run elsewhere. These were large programs. If you recall Q4 and specifically December of 2013, we had a great quarter Q4 of 2013. And all indications throughout this year and even all the way through most of November, where that these few CPGs we’re going to relaunch the same programs based on the success of last year. It appears to us that their budgets just got dry a little bit earlier than they expected and they ended up not running those programs. It’s not that they shifted to paperless or that they were running elsewhere. The real scale today is in paper on our platform, and so had the budgets been there, they would have run them and that’s what was in our forecast.

[Steven Boal:]

And Nat, your question on pricing, pricing is similar. Remember, we talked about pricing on the platform is - on a per transaction basis, it really - the biggest factor that drives pricing is either rate card or for large CPGs that have volumes, volume discounts, that applies to digital print and to paperless.

[Nat Schindler:]

So right now, but if redemption rates are lower on paperless, which I think you have mentioned in the past and simply because it’s easier to add a paper coupon and there is less intent in the process, wouldn’t CPGs adjust their distribution fee based on the eventual take rate - eventual redemption?

[Mir Aamir:]

Nat, I think, fair question, but it’s too early in the paperless side to make that conclusion, because we see redemption rates growing very rapidly from deployment till now, right? So there are factors that would make digital paperless redemptions be lower than print, and there are factors that would make it higher? You mentioned one, which is easy to tap, tap, tap and download a whole bunch of coupons, which actually shoppers don’t do, they are actually browsing through it, and downloading what they want. But it is easier, but on the same - by the same token it is also easier to redeem it and remember what to redeem, because mobile interaction in the store facilities redemption quite a bit. So I think it’s early to tell that how that would take shape, but our forecast is eventually those redemption rates align.

[Steven Boal:]

And then, Nat, just to follow on that, your question on, ultimately on pricing, remember that with the Retailer iQ platform and the growth of our digital paperless volumes comes targeting and we just talked about launching our CPG targeting platform. And that that platform, that solution targeting typically commands a premium for delivery as well. So there are a numbers of factors that really would impact both redemption rates and pricing and we actually see the two platforms converging.

[Nat Schindler:]

Okay. Thank you.

[Steven Boal:]

Thank you.

[Operator:]

Next question is from Mark Mahaney with RBC Capital Markets.

[Mark Mahaney:]

Thanks, two questions please. Those CPGs, are there indications that they are back or continuing to spend with you going into 2015, what can you say about that? And then just on one of the metrics, this average promotions revenue per transaction and maybe you’ve touched on it and I missed it, but that kind of skewed up out of the norm this quarter up to $0.12 versus the extremely consistent $0.10. What’s the color around that and going forward should that kind of revert to that historical $0.10? Thanks.

[Steven Boal:]

Sure. So first part I’ll take and that’s - are those CPGs continuing to spend at 2015? The answer is yes. So, again, just to contrast Q4 and specifically December 2013 with 2014, those programs that ran in 2013, we had indication they were going to run and they did run, but they were sort of outside the annual planning process, they were in addition to what had already been planned. And if you recall, we talked about the annual planning process with our CPG clients, that’s basically their fiscal year commitment, minimum commitment over the course of their fiscal, but there can be incremental spending over that. And so the programs that we expected to run in December of 2014 didn’t run, those were largely outside of the annual plan commitments. And those same CPGs are already in full swing of spend with us on their 2015 annual plans.

[Mir Aamir:]

And Mark, your question on the price per - revenue per transaction, revenue per promotion - promotion revenue per transaction quarter four, it is higher. Now, normally if you look at quarter four of 2013, that was also higher than run rate a little bit at a $0.11, this was $0.12. The primary reason for that is mix. We did not - it’s not a function of us raising our prices and there are two factors within that mix. The first factor is that, specialty retail business, which has a card linked business or coupon codes business and also our site to store business has to do with their redemption –their pricing is cost per redemption. So that when the mix of that business skews up in quarter four because of the holidays which it does, that has a mix effect and you saw that mix effect in quarter four of 2013, as well we see it again in 2014. One more mix effect in this quarter is that, the December promotions that did not repeat were from very large CPGs that had volume discounts and therefore lower pricing, and because it did not happen, it took our average price up.

[Mark Mahaney:]

Thank you, Aamir. Thank you, Steve.

[Operator:]

The next question is from Debra Schwartz with Goldman Sachs.

[Debra Schwartz:]

Great, thanks. I have a couple of questions. First, can you quantify how much Retailer iQ impacted the quarter? And are you seeing, given the fact you’ve mentioned there was some softness in printed home. Are you seeing a shift from printed home to digital paperless coupons, and what’s embedded in terms of that type of shift in 2015 guidance? Two, you mentioned some volumes discounts from CPG companies, I’m curious that the volume discounts are greater this year than they were a year ago and how we should think about for 2015? And then third and final question is, are there minimum guarantees embedded with your Retailer iQ platform and how much transaction volume do we need to see for you to hit those guarantees? Thanks.

[Steven Boal:]

Okay, Deb, repeat the first one again, because I was writing down your second and third, first question.

[Debra Schwartz:]

So the first one is whether how much Retailer iQ contributed in the quarter and whether or not you are seeing a shift from printed home to digital paperless and how we should think about that for 2015?

[Mir Aamir:]

Sure, let me address the first one. So Retailer iQ is contributing to revenues starting quarter three like we mentioned in our quarter three earnings call. And there was an increase - a nice increase from - in quarter four versus quarter three as we shared. So it is contributing, but it is contributing from a lower base. We do expect that to ramp this year, quarter one will be much higher than quarter four for Retailer iQ and then it ramps on a compound basis for the rest of the year. We are not ready to break out the effect of Retailer iQ yet, but over the next few quarters when we have lot more retailers, so that when we break out data, it would not be attributed to few retailers, we will look to breaking out that information.

[Steven Boal:]

On the question of shift from paper to paperless or vice versa, so we work with our clients in almost all cases on a central budget. And then our platform decides for most part, in most cases, our platform decides how to issue the coupons. Remember, the objective here is to reach consumers, where they want to be met. And that may be digital print on a recipe website. It may be paperless on a mobile phone. And so the system will deliver the coupons for the consumers based on those touch points, but it comes out of a central budget. And so what we are seeing is - what we are seeing now is that, when we launch a retailer - the Retailer iQ, we are obviously seeing digital adoption grow faster than paper, and that’s as expected. And I think, if you recall back to the IPO, we said that in at most five years, at least, 50% of our volume will be digital paperless, that’s primarily on the strength of Retailer iQ. So fast forwarding a year, the dates have been changed, we’re still on schedule. And at most now four years, at least, 50% of our platform volume will be digital paperless. But again in almost all cases, that’s really coming from the centralized budget and our platform is deciding how to deliver those. And, again, both digital paper and digital paperless are coming out of a tam, an addressable market for us in the billions of dollars. And so small shifts between those two aren’t really going to have much of an impact on our platform.

[Operator:]

Next question is from Mitch Bartlett with Craig-Hallum.

[Mitch Bartlett:]

Yes. I think the answer to the last question is where I wanted to get to Retailer iQ then by that answer is 100% cannibalizes digital printed home, is that - I did not understand that? Was that the answer?

[Steven Boal:]

Yes, I know that’s not the case. In fact, we don’t have any reason to believe that today with only two of the retailers really marketing that we’re seeing much cannibalization at all. Now clearly, if over a long period of time, a majority of volume is coming from digital paperless, you would expect some cannibalization although I would characterize it a shift, not cannibalization, because a consumer is a consumer whether they are digital paper or digital paperless. But also remember, in this country every year on the order of 3 billion coupons that are redeemed, a vast majority of those are paper. So that means that those coupons required somebody to take a physical scissor to a physical piece of paper, cut them out and take them into a store. At only 10% into 90% of the offline digital promotions business, we’re just beginning the penetration there, which is why there is still considerable head room in the digital print business as well. It’s just that digital paperless will grow faster, because A, it’s off a smaller base; and B, it’s an experience that is driving consumers to a more frequent use and we are interfacing with them at point of sale where you can see 90% of U.S. households in a given month now in retailers that have signed up for our platform. So really cannibalization shift isn’t an impact issue for us right now. And over time, we’d love to see consumers go completely paperless, but that’s over many, many years.

[Mitch Bartlett:]

And then your Q1 guidance at the low-end assumes almost no growth whatsoever. And you gave the explanation, I was hoping maybe you could go back through it. On your guidance to your CPGs to shift those dollars later into the year when Retailer iQ is out, maybe you could go over that again, but that’s basically them deferring events in Q1 and Q2 to the latter half of the year, is that correct?

[Mir Aamir:]

Yes, that’s right. So remember what we said, we said that that we plan on an annual basis with most of our CPG clients, and many of them are on an annual fiscal. And so because of the strength of Retailer iQ and the volume growth we are seeing, we put up the slide during the earnings call that showed what the compounding effect of adding new registrants per day and the average number of coupons used per session per user per day. You see that the volume is going to grow quite rapidly, and that’s with only two retailers really marketing the platform. And so, as we see the rest of the retailers start to market through Q1 and Q2, you can imagine that Q3 and Q4 volumes will be many times those of Q1 and Q2. And so what we want is, we want our CPG clients to make sure they have budget available to be able to deploy that when the platform in the consumers and the retailers really want to see that volume there. And so that does create a shift from the first-half of the year into the second-half of the year.

[Steven Boal:]

And Mitch, one more factor was last year quarter one, and we mentioned this at our quarter one earnings call, quarter one came in for us unseasonably strong bit of a positive surprise in March, where we saw budget deployments by our few large CPGs for quarter-end what we estimated to be quarter end deployments to drive volume, right? That actually, I mean, our forecast for the quarter before we entered March was $2 million to $3 million lighter in revenue than what we ended up with. Now, it could happen again this year. We just wanted to be conservative and make sure that, we put a forecast out there that assumes that it doesn’t, and if it does, there will be upside. But if we wanted to look at apples to apples, we would want to look at that factor in our base adjusted and then look at our growth.

[Mitch Bartlett:]

And Amir, my last question is, I’ve heard you folks talk about growth rate well as past its prologue, basically that 30% to 35% growth going forward is a reasonable estimate of your growth, but at the midpoint here, we’re at 28%. Is this kind of a new revised thinking, kind of forward momentum in the business?

[Mir Aamir:]

No I think, Mitch, we still believe, if we look at our past trends, it has been this way, the available market is huge. It’s still 90% newspaper coupons and we’re confident that will shift to digital. We’re just - this is our first-year of - full-year of Retailer iQ. We have a lot going on this year, which is great. We’re excited with the momentum. We just wanted to be - make sure that we’re conservative and measured in our forecasting.

[Mitch Bartlett:]

Thank you.

[Operator:]

That was our last question. At this time, I will turn the call back over to you, Stacie Clements.

[Stacie Clements:]

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

[Operator:]

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