Cardlytics, Inc.

Good evening and welcome to Cardlytics' second quarter 2021 financial results call. Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations, and beliefs, including expectations about future financial performance or results, our financial guidance and cash position for the third quarter of 2021, our ability to achieve long-term initiatives to drive long-term growth, growth in MAUs or monthly active users, launches by new partners in the coming quarters, the increase in ARPU, or average revenue per user, the impact of COVID-19 on our business and the economy as a whole, including the uneven recovery and volatility of the economy, Q4 being a seasonal high period for ad spending and consumer spending, the increase in stock-based compensation next quarter, continued pressure on our UK results, and the anticipated benefits and expectations and goals related to the integration of our acquisitions of Dosh Holdings Inc. and Bridge Inc. For discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion, please refer to the risk factors section of the company's 10Q for the quarter ended June 30, 2021, and in subsequent periodic reports that we filed with the Securities and Exchange Commission. Also during this call, we will discuss non-GAAP measures of our performance. GATT financial reconciliations and supplemental financial information are provided in the press release issued today in the 8K that has been filed with the SEC. Today's call is available via webcast, and a replay will be available for one week. You can find all of the information I've just described on the investor relations section of Cardlytics' website. Please note that a supplemental presentation to our first quarter results has also been posted to our investor relations website. Joining us on the call today is Cardlytics' leadership team, including CEO and co-founder Lynn Lobey and CFO Andy Christensen. Following their prepared remarks, we'll open the call to your questions. With that, let me turn the call over to Lynn. Lynn?

Good evening, and thank you for joining our Q2 2021 earnings call. While we grew Cardlytics platform billings 111% and adjusted contribution 123% from Q2 2020, we fell below our guidance. This was driven by us forecasting a faster recovery than we realized in travel, retail, and restaurants. Here are the numbers. Cardlytics platform billings were $83.2 million, up 111% year-over-year. Cardlytics platform revenue, which is equal to billings net of consumer incentives, was $56.8 million, an increase of 101% from Q2 2020. And Cardlytics platform adjusted contribution was $27.6 million, up 123% year over year. To provide investors with more transparency into the quarter, we're providing advertisers spending concentration and growth rates for each of our key verticals. We're also reporting bridge results as a separate segment to help investors better understand performance and our investments in this business. I want to reiterate that while we're disappointed in the miss, our business is performing well. We believe advertisers spent less than we forecasted for three reasons. First, there were labor shortages. Second, retailers and restaurants had supply chain issues. And third, there was an increase in consumer demand, reducing the need for advertising with several key clients. For example, several of our key client restaurants paused their marketing because they couldn't purchase enough critical ingredients. A men's clothing client halted all of their marketing spend when they realized their supply chain couldn't deliver the inventory they needed to maintain customer selection. As a result, some marketing budgets across our client base were actually paused in Q2 something we rarely see in our business, and or push to Q3. Additionally, as you can see from the new supplemental information, travel and entertainment advertising spend are still down about 75% from Q2 2019, and the UK is still down about 23% from Q2 2019. Our Q3 guidance acknowledges the reality that the pandemic is still affecting our business. Additionally, we're not providing Q4 or full-year guidance at this time as we continue to see volatility. Importantly, we're not reducing internal targets or quotas. While our advertising clients remain committed to the platform, they are telling us that marketing budgets continue to be uncertain due to macroeconomic events. As we have discussed in the past, much of our billings are concentrated with large advertisers in verticals most impacted by COVID, highlighting the importance of self-service capabilities to expand our advertising base. Our team is facing the market's challenges head-on and focused on achieving the goals we laid out at the beginning of the year. With that said, I'm pleased with the progress we've made against the initiatives that will drive our long-term growth. We are ahead of plan on every single initiative that we have discussed for the last several quarters. Let me highlight some of the key integration, product, and client accomplishments. DOSH integration continues to go exceedingly well. By realizing synergies that we planned during the acquisition and post-acquisition integration process, we're executing against our plan to eliminate the EBITDA loss by the first half of 2022. We are now live with eight neobanks and fintech platforms, including Venmo. Additionally, we have another 14 neobank and fintech platforms coming online over the following quarters. The new partners include a contract with one of the most innovative fintechs in the U.S. This company selected Cardlytics and Dosh as its strategic loyalty partner to enhance customer adoption, retention, and card use by rewarding cardholders for everyday spend. With the addition of Dosh, we have positioned Cardlytics to be the platform of choice for fast-growing fintech and neobank sectors. Bridge integration, while much lighter than DOSH, is also progressing as planned. We have begun integrating staff functions such as HR, finance, and legal, and we are investing resource and capital to accelerate their efforts to achieve significant scale. Recently, we closed a large home improvement client, and the business has a strong pipeline with many leading retailers and restaurants. Client feedback on Bridge has been impressive. One of their key partners had this to say about their product. Quote, understanding all of our customers and their engagement levels allows us to deliver a differentiated customer experience. Bridge has enabled us to complement the deep insights we have around our loyalty members with an understanding of our unknown in-store customer purchase behavior, along with the ability to reach these individuals to develop an optimal customer relationship. We now have a true holistic view into our customer base that was not possible before. Our Cardlytics platform sales strategy is paying dividends. We continue to see strong year-over-year growth from new industries like D2C, which was up over 120% in Q2 2021 compared with Q2 2019. In the UK, we soft launch Nectar Connect to their online and mobile customers. As a reminder, Nectar is one of the largest loyalty programs in the UK and is run by the grocer Sainsbury's. The next step is a phased promotional campaign to all of Nectar's members. Our focus on open banking is showing positive results as enrollment rates and customer engagement are extremely encouraging and have already outstripped initial expectations. We hired Peter Chan from Amazon as our CTO. Peter's impact on migrating to the new self-service platform is already evident. We are making great strides in partnering closely with agencies leveraging our platform. We now have 27 agencies spending money on behalf of 43 clients on the Cardlytics platform. While not all of the agency clients are using our self-service yet, those that aren't are migrating to the new platform. We have created this momentum as agencies understand the capabilities that we will enable over time. As a reminder, we will break out agency spend starting in Q3 of this year. And finally, we continue to invest to further strengthen our bank relationships. We are working with each of our bank partners to find more ways to deliver content to their customers and improve overall value delivered through their programs. For example, we've established a clear linkage of the program engagement to increases in overall spend, habitual card use, and now even increases in savings and investment rates are creating even more support and excitement for our program across our bank partners. Before I hand it over to Andy, I just want to say that despite the headwinds in the quarter, the entire CDLX team is committed to executing against our initiative. We're leaving no stone unturned to make sure that we finish the year strong and continue to become a leading advertising platform for our customers and partners.

Thank you, Lynn. As Lynn mentioned, our financial results continue to be impacted by the pandemic. But I also share Lynn's excitement about the immense progress we've made on our longer-term product and technology initiatives. So let me review our Q2 financial results. Total billings increased 116% year-over-year to $85.3 million. Carmelitics platform billings with $83.2 million, an increase of 111%. Total revenue increased 109% year-over-year to $58.9 million. Cardlytics platform revenue was $56.8 million, an increase of 101%. Our Cardlytics US revenue increased 95% year-over-year, and our Cardlytics UK revenue increased 220%. In the US, we saw significant year-over-year growth in each of our industry verticals. When compared to 2019, however, it is clear that we are still being affected by an uneven recovery with lingering challenges across travel, and in some cases, retail and restaurant. Our UK business continues to be more severely impacted by the pandemic, as lockdowns and restrictions are still unwinding. Consumer spending and ad budgets have rebounded significantly from last year. We anticipate some continued pressure on UK results in the next few quarters. As Lynn mentioned, we have provided new information on ad spending on the Carmelix platform by industry. both retail and restaurant spending grew in excess of 110% year-over-year. But we expected both of these industries to rebound at an even faster pace when forecasting at the beginning of the year. Our stronger-than-expected results in March reinforced this expectation. Specifically, our Crowlix platform revenue was $16 million in January, $15 million in February, and $22 million in March. During Q2, our Crowlix platform revenue was $17 million in April, 20 million in May, and 20 million in June. These monthly fluctuations reflect the volatility of consumer spending and ad budgets in our key verticals, and it presents us with some challenges in accurately forecasting short-term results. Adjusted contribution was 29.6 million, an increase of 139% year-over-year. Part of this platform adjusted contribution was 27.6 million, an increase of 123%. Adjusted EBITDA was a loss of $5.7 million compared to a loss of $7.7 million in Q2 of 2020. Our adjusted EBITDA loss includes an incremental $10 million of operating expenses related to our recent acquisitions. As mentioned last quarter, we expected a larger EBITDA loss in Q2 than in Q1 as our investment in DOSH is reflected for a full quarter and bridge is included for roughly half of the quarter. As Lynn mentioned earlier, we have begun executing on a plan to integrate and rationalize the DOSH operations. And representing Bridge is a separate segment within our external reports. Bridge operated at nearly break-even adjusted EBITDA in Q2, but we have an investment plan to support the expected growth in that business. Here are a few other items outside our EBITDA results that are worth mentioning. First, in Q2, we incurred $14 million of acquisition and integration costs, and these costs are excluded from adjusted EBITDA. A significant portion of this relates to diligence and transaction costs. We're incurring a small amount of post-acquisition integration costs, so we expect to incur some additional costs throughout the rest of the year. Second, our stock-based compensation increased from $7 million in Q1 to $13 million in Q2. About half of the increased rates are awards issued in connection with the DOSH acquisition, an assumption of options originally issued by DOSH. The other half predominantly relates to our annual retention grants to employees. We expect stock-based compensation to go up a couple million dollars next quarter, driven by the bridge acquisition, the DOSH integration, and a few new hires. We ended Q2 with $251 million in cash and cash equivalents compared to $614 million at the end of Q1. The change in cash is largely due to the bridge acquisition, which closed in May. Minimum cash earnouts for bridge shareholders are expected to total $48 million in May of 2022 and $19 million in May of 2023. In addition, we have another $50 million still available to us under our loan facility at this time. Our balance sheet and liquidity remain strong. And while we're always evaluating our capital structure, we see no immediate need to raise additional funds. NAUs increased 7% year-over-year and were flat sequentially. As Lynn mentioned earlier, we have great momentum with neobanks and fintechs through DOSH, including a very innovative client that we just recently signed. We expect many new partners to launch over the next few quarters. ARPU during the second quarter was $0.34, compared to $0.18 in the prior year. We expect ARPU to increase on a sequential and year-over-year basis throughout the rest of the year as we continue to grow our revenue at a faster rate than our MAUs. We had 32.9 million shares outstanding at the end of Q2, compared with 31.8 million at the end of Q1. Weighted average shares outstanding during the quarter was 33 million, compared to 27.1 million during Q2 of 2020. This largely reflects the equity issuance last March and the shares issued in the DOSH acquisition. Now turning to guidance. In Q3, we expect total billings of between $85 and $95 million. Total revenue of between $57 and $66 million, and adjusted contribution of between $27 and $32 million. This is below our prior expectations, as we believe we'll still be dealing with an uneven recovery in Q3. We've also lowered our expectations for ad spending for return within travel this year. Given the volatility we expect in our key industry verticals, we've decided to wait to provide Q4 guidance until we have more visibility. Based on the current macroeconomic climate, we expect Q4 to continue being a seasonal high point for most HUD spending and consumer spending. However, we expect a high level of variability of these market dynamics, and each industry we operate in is still working through unique challenges of varying degrees that may result in later decision-making on campaign launches. Additionally, several of our largest clients develop their marketing plans during Q3, so we expect to gain more clarity in the next two months. We remain very excited about the long-term potential of Cardlytics and the combined value with DOSH and Bridge. Our focus is squarely on execution and making sure we have sufficient resources and investments to achieve near-term results and continue our progress on our important long-term initiatives. And with that, I'll turn it back over to Lynn.