Cardlytics, Inc.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Thank you for standing by and welcome to the third quarter 2022 Cardlytics and Earnings Conference call. I will now hand the conference over to Nick Clinton. Please go ahead.

Good evening and welcome to the Cardlytics third quarter 2022 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 our future financial performance and results, our ability to achieve our key long-term priorities, our future growth, adding new partners, advertisers, and content to the network, the timeline and benefits of our ad server and cloud migration initiatives, our timelines for achieving positive adjusted EBITDA and positive free cash flow, our cost reduction initiatives, and the bridge earn-out payments. For a 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 September 30, 2022, which has been filed with the SEC. Also during this call, we will discuss non-GAAP measures of our performance. GAAP financial reconciliations and supplemental financial information are provided in the press release issued today and 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 the information I have just described in the Investor Relations section of the Carlytics website. Please note that a supplemental presentation to our third quarter results has also been posted on our Investor Relations website. Joining us on the call today is Carlytics CEO Karim Timsahmani and CFO Andy Christensen. Following their prepared remarks, we'll open the call to your questions. With that said, let me turn the call over to Karim. Karim?

Good evening, and thank you for joining our Q3 2022 earnings call. I'm excited to have joined Catalytics after spending 12 years at Google and nearly four years at Stripe. I spent my first 60 days in the business with our leaders, team members, and banks, and I feel energized about the clear and large opportunity to build a scaled and financially robust business. The strength of our data through partnerships with leading banks and fintechs, combined with a growing customer base of advertisers and agencies, leads me to believe that Cardlytics can become the leading purchase intelligence and incentives platform with the right vision and execution. Later in the call, I will expand on these observations and the state of our business. First though, Let's go through the Q3 results and key highlights. We delivered double-digit growth despite the serious challenges present in the economy. This growth was fueled by solid performance in travel and entertainment, where we grew greater than 100%, and retail, which was supported by both new and existing client growth. Here are the numbers. Billings increased 12% year-over-year to $110.4 million. Revenue increased 12% year-over-year to $72.7 million. Adjusted contribution increased 11% year-over-year to $35.1 million. Bridge revenues increased 86% year-over-year to $5.4 million. Agency grew greater than 85% this quarter year-over-year. And excluding the large client mentioned over the past two quarters, our core Catalytics revenue growth was 30% year over year. I'm also excited to say that we've made significant progress on our key platform enhancement initiatives this quarter. We are proud to announce that four banks are connected to our ad server, including one of our largest banks. we now have connected greater than 50% of our MAUs to the newer server, which surfaces the goal we set for the year. We expect to connect more partners in the coming months, and our goal is to help all our bank partners upgrade to a newer server by the end of 2023. We are also rapidly migrating our bank partners to the cloud and made significant progress in the quarter. We believe we can migrate nearly all of our banks by Q1 of next year, which places us well ahead of our Q3 2023 goal. I personally want to congratulate our team on their progress in delivering the ad server and cloud migration to our partners. Both are important initiatives in realizing our long-term strategic goals. The next step for the banks that have moved is to launch the new user experience, and we have already received a firm commitment from one of our largest bank to do this by Q1 of 2023. As a reminder, banks do have to incorporate the new capabilities into the UX upgrade cycles, but we are working harder than ever to influence this timing to increase the value of their program. This will allow us to enable new capabilities such as enhanced imagery, as well as new product offerings for our partners and advertisers. Additionally, these enhancements lay the foundation to optimize campaign performance, pricing, and ultimately provide the differentiation our partners need to better serve their customers. We view these developments as strong signals that our bank partners are committed and truly value our relationships. I look forward to providing more positive updates from our bank team in the coming quarters. On a related note, we are taking steps to increase our MAU base by signing new partners. We are in discussions with multiple top 20 US banks and several high upside fintechs. While these conversations are early, our pipeline to increase MAUs over the next two years is strong. Expanding these relationships will further diversify our partner concentration while providing advertisers with further scale to accomplish their marketing goals. We will continue to update you as we make progress on these potential partnerships. We've also made enhancements to advertising content. As we've mentioned in prior quarters, the team has been hard at work in bringing third-party content to our platform through various pilots and proof of concepts. In Q3, We fully enabled the ability to bring in external content to our platform and delivered over 600 local offers across the United States. We're expecting to scale to thousands of local offers with our banking partners over the coming quarters. Let me turn to market trends. This should be no surprise, but consumers are increasingly being impacted by high inflation and rising interest rates. For the first time since Q4 of 2020, the year-over-year growth in basket size exceeded the growth of transaction frequency. We saw higher basket size across all key verticals, but the highest increases were within gas and travel. While household spending increased 9% year-over-year, it decreased 2% from Q2 2022. The sequential quarterly decline in household spending was seen across all our key verticals. Gas and travel were both down 6%. Entertainment was down 3%. Retail was down 2%. And restaurants and grocery were both down 1%. This data matches what we're hearing from our clients across all our verticals and is consistent with trends we identified last quarter. Outside of the impact of the large restaurant clients exiting our channel, the primary reason we saw reduced budget in Q3 was due to fears of a recessionary environment impacting consumer demand. While we have performed well year to date, we believe these trends will impact our business moving forward. In response, we are cautiously guiding Q4 billings to be between $120 and $132 million. With this in mind, we are doing everything in our power to exceed this range. We are also highly encouraged by the strong pipeline we have for 2023. Our goals of delivering sustainable positive adjusted EBITDA by Q2 2023 And positive free cash flow by Q3 2023 will be more challenging in a difficult art market. But we are committed to remain on track by making the necessary steps to lower our cost. A key priority in my first two months has been to evaluate the status of our current cost structure in a challenging environment. And we have already identified several areas of additional cost savings. Andy will provide more details in his remarks. Now that we've discussed our results and the macroeconomic environment, I want to lay out key learnings from my first 60 days at Carlytics. It's very clear to me, Carlytics achieves what many thought impossible, an advertising platform that delivers positive outcomes for consumers, banks, and advertisers. Since the IPO, We've extended our reach to include the three largest banks in the U.S., increased customer loyalty and value for our bank partners, and improved our ad sales while diversifying our customer base. And we are well on our way to delivering the new ad server to our largest bank partners, which will provide better offers for consumers, more engagement for our partners, and unlock broader advertising opportunities. We truly have a large opportunity in front of us. That said, I've identified several areas that we must improve to successfully execute on this next phase of the business. First, we are good partners to banks, but we must obsess over achieving their goals and providing value to their customers. Banks are the most important assets of our business. The only way to create strong outcomes for Cardlytics is to create stronger outcomes for our partners. Second, I believe Cardlytics can better optimize the monetization of its assets to support long-term profitable growth across the business. We are already thinking about various revenue models that better leverage our capabilities analytics, and the idiosyncrasies of the verticals we serve. Third, bridge, DOSH, and attainment are great assets, and we must integrate, invest, and scale them faster. A combined value proposition is much more powerful than just showing up at Cardlytics alone. By doing this, we'll become more important to current and future bank partners open the doors to new offer constructs, enhance the measurement capabilities, and deliver more content from the longer tail of advertisers. Fourth, to maintain a competitive position and drive long-term value, we must continue to upgrade our tech stack and be relentlessly focused on operational excellence. The ad server and cloud migration progress reflect this. But our operational processes are overly time consuming. Improvement, efficiency, and automation will unlock the vast opportunity ahead of us and allow us to profitably grow the business. Fifth, we must remain hyper-focused on profitability to deliver on the goals with promise to our investors. The ability to control our destiny will fuel our growth strategy and ultimately be a key step in becoming the leading purchase intelligence and incentives platform. I see tremendous opportunity to scale Cardlytics profitably by layering in best-in-class systems, technologies and processes. We'll be faster and more agile, data-driven, ambitious and accountable. In turn, we can make commerce smarter and more relevant for everyone. My number one priority in the short term is to protect our balance sheet against the possibility of a long-term recession. With a more resilient expense base and responsible internal investments, the good news is that through hard work, these key areas are firmly within our control to change. With that, I will hand it over to Andy to provide more details on our results and financial strategies.

Thank you, Karim. Our results this quarter were in line with our expectations, given our clients' growing concerns about the economy. High inflation and rising interest rates are still pressuring the consumer, and the lack of consensus around the length and severity of recession has advertisers the most uncertain we've seen since the onset of the pandemic. Even with these issues, we deliver double-digit year-over-year growth. Billings grew 12% to $110.4 million, revenue grew 12% to $72.7 million, and adjusted contribution grew 11% to $35.1 million. Bridge revenue grew 86% year-over-year. Geographically, U.S. revenue grew 13% year-over-year, and U.K. revenue decreased 1% in U.S. dollars, but increased 3% on a constant currency basis. Customer concentration has improved dramatically over the past year, as our top five customers accounted for 20% of revenue this quarter compared to 35% in Q3 of 2021. This will remain a key focus as we continue to grow and expand our advertiser base. Before we dive into adjusted EBITDA, I want to provide an update on our profitability goals and balance sheet. Like Crim said, given the weakening digital advertising market, we have been evaluating areas of additional cost savings beyond the $15 million of annualized savings we discussed last quarter. We've expanded this program to reduce annualized operating expenses by at least an additional $20 million. We are moving rapidly to realize these savings and expect them to begin positively impacting results early next year. Moving to our balance sheet, we ended Q3 with $138.6 million in cash and cash equivalents, compared to $157.1 million at the end of Q2. During Q2, we used $14.4 million of cash in operating activities, used $3.3 million for software development and capital expenditures, and realized an $800,000 unfavorable impact from a strengthening U.S. dollar. Our $50 million loan facility still remains undrawn. Regarding the bridge earn-out, the amount for 2022 is being disputed. It is currently in the resolution process outlined in the merger agreement, and it will remain unpaid until it's resolved. While the dispute is unfortunate, we are confident in our position and will vigorously defend it. We still expect the first earn-out, inclusive of broker fees and transaction bonuses, to be $126.4 million, requiring a minimum cash payment of $43.5 million. We expect the second earn-out, inclusive of fees and bonuses, to be $69.5 million, requiring a minimum cash payment of $24.9 million in 2023. Adjusted EBITDA was a loss of $12.7 million this quarter, compared to a loss of $5.2 million in Q3 of 2021. As we mentioned last quarter, we did not expect the cost savings announced last quarter to have an immediate impact on adjusted EBITDA. We're able to realize some of our cost savings in Q3, and we'll be able to fully realize the benefits by Q1 of 2023. As Trim mentioned earlier, we have begun our migration to the cloud. We continue to estimate total incremental hosting costs of $7 to $10 million during the migration, of which we've incurred over $2 million so far. We've made great progress on the migration and expect to be fully migrated ahead of our goal of Q3 of 2023. MAUs were $184.7 million, an increase of 8% year-over-year. Our organic growth rate was slightly above our long-term expectations of low- to mid-single-digit growth. Our coup during the second quarter was 36 cents, which is flat year over year. Additionally, I want to briefly comment on our engagement rates in the U.S. Just like last quarter, our activations have increased meaningfully, up 72% year over year. However, our serves have increased 82% year over year, slightly pressuring activation rates across the majority of our key verticals. We had 33.1 million shares outstanding at the end of Q3, compared with 32.9 million at the end of Q2. Weight average shares outstanding during the quarter were 33 million for both Q3 of 2022 and 2021. Now turning to guidance. As Trieu mentioned earlier, uncertainty among our advertising clients increased in Q3. We're seeing even more reductions in delays in overall ad spending so far in October. The large restaurant client mentioned in prior quarters exited the platform in Q4. With that in mind, for Q4, we expect billings of between 120 and 132 million, revenue of between 80 and 90 million, adjusted contribution of between 38 and 44 million, and a low to mid-single-digit adjusted EBITDA loss. As I mentioned previously, the cost savings we announced last quarter have just started impacting our results. We're prepared to expand this program in order to further lower our operating costs and reach our financial goals in 2023. Additionally, we expect Bridge to continue growing at a faster rate than the core Cardlytics business, which will have a favorable impact on the overall margin profile of the company. The current environment presents many challenges to advertising platforms, but I believe there are also opportunities. Q4 is a seasonal high point due to the importance of the holiday season to marketers, and in most years, we see unplanned budgets materialize within the quarter. We are concerned this dynamic may not exist this year, given the current market headwinds. As a result, we have not accounted for any unplanned ad budgets in our guidance. On a positive note, our pipeline for 2023 is the largest it has ever been at this time of year. There's a wide range of outcomes for Q4, but our highest priority is meeting our profitability and cash flow goals next year. Additionally, CRIMS plans for the business will focus on profitable growth and will position us to maximize the value of our assets. With that, I'll turn it back over to Karim.

To everyone listening, thank you for your support. I believe Cardlytics can drive better business outcomes for partners and advertisers while making every transaction a delightful and rewarding experience for consumers. We are already making headway on improvements in the key areas identified, and I am looking forward to iterating on this improvement quarter after quarter. While the economy may be uncertain, I believe there is inherent resiliency in platforms that prove return on ad spend, and I am positive that we can grow profitably. There is a large opportunity ahead of us, and we will be disciplined in Q4 and beyond as we prioritize our goals and position the company well for the next 10 years. With that, I will open the call to questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1 1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kyle Peterson with Needham & Co. Your line is open.

I know there's some moving pieces, you know, with that large restaurant client, but especially we think about, you know, the puts and takes between, you know, call it, you know, breadth versus depth of kind of where you guys are seeing the ad budgets are a lot of your kind of usual suspects still. in the platform just at reduced levels and more stop and go? Or have some guys exited full on together and what is left is still spending at a normal pace? Just trying to piece together the mix of breadth versus depth here.

This is Andy. I think we're actually seeing several marketers pull back in budgets. Not everybody is, you know, we're not seeing an influx of customers leaving the channel, but there's a lot of pressure out there on signing larger deals, long-term deals. And we see that pretty widely. Now, there is some additional churn this quarter that we're planning on just because of the market headwinds that we see. You know, one thing I will say, though, is that we do have a very strong pipeline, both for Q4 and for next year. I think what we're seeing is advertisers really kind of taking a pause and reevaluating things in this current economic environment. And when we look at our pipeline and see a very healthy pipeline, we fully expect to see a reduction of our growth over the next couple of quarters. But we are seeing kind of a combination of some going back and some leaving the channel.

Got it. That's helpful. Maybe just trying to think through some of your expense run rate here and how we should think about it in the current environment. Second quarter in a row, you guys have called out some cost-saving initiatives here. How should we think about where your cash expenses should be over the next couple quarters here? Just so we can kind of think about, you know, use of cash and the balance sheet here over the next handful of quarters.

Yeah, so like we said, we implemented our cost savings last quarter, annualized savings of $15 million. We're evaluating further savings on top of that. The actions that we decide to take will be made to ensure that we have solid liquidity and reach profitability aligned with our goals of being even a positive in Q2, positive cash flow in Q3, and so we can control our own destiny. So certainly there's a lot of uncertainty of what the growth rates will be over the next several quarters, but that's why we're taking the steps that we're taking now to make sure that we are really mindful of expenses because ultimately that is what we have full control over.

All right. That's good to hear.

Thanks, guys.

Your next question comes from the line of Doug. I'm listening with JP Morgan. Your line is now open.

Hi, this is Wesley for Doug. Thanks for taking my questions. I'm just kind of thinking back to last quarter when you guys guided, you know, 10 to 15% second half growth. I believe you had contemplated a deteriorating macro environment. So I guess just if it'd be helpful if you kind of walk us through the quarter and kind of what you saw and that kind of, you know, it seems like it's a bit lower in the second half now based on three key results and, you know, four key guide. So just wondering what you're seeing there and I guess just a sort of a follow-up. You know, I believe there was a proposal laid out by Chase and Bank of America for the large advertising partner and just wanted to know if there had been any progress on that front. Thanks.

Hey, thanks. Excuse me, I'm dealing with a little cold here. So from a growth perspective, the largest headwind that we're facing is certainly the loss of the large restaurant client going off the platform. But there's a lot of disruption in the ad market. Excuse me. There's a lot of disruption in the ad market. And we're just not immune to that. We need to normalize for the loss of that large client. We grew 30% this quarter. And I think we're dealing with here in Q4 is a pretty significant pause by advertisers pretty broadly that was not expected. We knew from all the way from Q1 of this year that that large client was going to be exiting the channel. And I don't think we anticipated the broad slowdown that was going to occur in Q4. So that is something that did actually, was certainly worse than what we expected. But again, I feel really good about the size of the pipeline that we have. And when we're trying to guide for the quarter, it's awfully difficult to be able to anticipate some of the positive seasonality things that we see in the quarter. We typically see budgets materialize unplanned in quarter, in Q4. And with the current headwinds, it's not prudent for us to say that those types of things are going to show up. So that's really the largest delta, if you will, of our expectations versus the how kind of Q4 is shaping up, if that answers your question there.

Yes, I know.

Thank you.

Your next question comes from the line of Jason Cryer with Craig Hellam. Your line is now open.

Hey, this is Cal. I'm here for Jason. So, first, just wanted to ask, you know, You kind of talked about these MAUs ramping up. Just wondering if you could talk about the learning through that process and how, you know, kind of coming ahead of schedule, how that kind of enhances the long-term opportunity here for Cardlytics.

Yeah, no, we're really happy to report that we've got over 50% of the MAUs connected to the new ad server. I mean, certainly when you look into next year, we anticipate that, you know, by the end of 2023, pretty late in the year, that we'll see some some positive momentum. I mean, it's been a number of years since we've launched something really significant for our bank partners, and we're really excited to be able to do this. It's going to take, obviously, a couple quarters because not only once you get the ad server installed, right, there's additional steps that are needed. And the banks need to actually evolve their user experience, incorporate the capabilities that we unlock to be able to actually bring those new things to their bank customers. So it will take a couple quarters for those things to bear fruit, but we're really happy to see that progression. We do expect that all of our bank partners will have the new ads that were adopted next year, and that we'll be able to show an impact as a result.

Perfect. Thanks. And then just real quick, you know, Kareem, coming in here, just kind of wondering on your thoughts on the progression towards profitability. I know you guys kind of talked about implementing further cost-cutting measures, but I'm just kind of curious how that's kind of tracking so far and what you think the potential is that moving forward.

Thanks for the question. It's pretty clear to me that we have a very large opportunity with this company. As I mentioned in my opening remarks, I think there's a number of areas where we can continue to invest into and a long-term profitable business. I mentioned the fact that we need to obsess about our banking partners and make sure that we have the right level of relationship and the right level of product offering with them. Obviously, as Andy just mentioned, our service is one of the key components of that. I think we have an opportunity to better optimize the monetization of our assets and capabilities We are undergoing a strategy process at the moment to enable us to unlock the power of analytics and analytics with our clients. I believe that we have a better way and opportunity to integrate, scale and invest our acquisitions that we've made in recent years, and I'm focused on that as well. as well as upgrading our tech stack and focusing on operational excellence. All of these things are really critical for Catalytics, but they need to be underpinned by an ability for this business to turn on a profit, and therefore I have been very much focused over the last two months in discussing with the teams how we create a further scale to our operation and how we rationalize areas where we are spending more money than we should to ensure that we have the foundation to continue to invest in the future of the business on the areas that I mentioned above.

Perfect. Thank you.

Again, in order to ask a question, please press TAR11 on your telephone. Our next question comes from the line of Aaron Kessler with Raymond James. Your line is now open.

Great. Thanks, guys. A couple questions. Can you quantify maybe some of the ad server benefits you're seeing thus far? I know it's still early. Second, just on the consumer incentive fees, those are a little bit higher than we expected in the quarter as percentage of billings. And third, just any – can you quantify any of the agency spend?

I know you've done that the last couple quarters as well. Thank you.

Sure. Let me start off with the margins. So we do have some customer mix here this quarter. Obviously, the exit of a large restaurant client will have an impact. Our margins within restaurants are typically a bit higher than they are in some other areas. We're having a lot of success. We talked about travel in the past being slightly lower margins. And so there is some mix there. There's nothing fundamental driving some of those things. But you will see also, I will refer back to the enhanced consumer incentives. where at times we may have a bank partner who's investing in the program. So actually when you normalize adjusted contribution for some of the accrual that we have for the shortfall, if you remember that from last quarter, our adjusted contribution margins are very healthy and fairly steady over time. So we actually are fairly happy there. In terms of the as server. It's a bit early, right? I think we'll probably have a lot more to talk about as we get a little closer to it. Working with the bank partners around the timing at which that actually may hit market and some of those things that we expect in the back half of 2023 to occur. We're just not quite at the point to talk deeply about 2023 at the moment. We'll have more for you there.

Great. And probably in the agency center, any updates there?

Sorry, the last one.

Say that again. Advertising agency spend levels.

Yeah, I mean, agencies continues to be a real source of growth for us, right? We started that up last year, middle of last year. Grew 85% here this quarter, year over year. We're continuing to see a lot of good momentum there. Yeah, we're greater than 85% year over year. And so we just have really good momentum there. I mean, one of the things that we continue to talk about, right, is that some of the other advertising channels, right, where you had kind of an established measurement, you know, ability to measure that media, those tools have been taken away from these other platforms, right? And so we are a performance channel that has first-party data, right, that's not relying on cookies and IDFA and the like. So we continue to be a a good place for folks to come and have reliable returns on ad spend.

Great. Thank you.

We have no further questions at the queue. This concludes today's conference call. Thank you for your participation. You may now disconnect.

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