Cardlytics, Inc.

Hello, and thank you for standing by. Welcome to CollegeLitics' fourth quarter and four-year 2022 financial results conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Nick Linton, Chief Legal and Privacy Officer. Sir, you may begin.

Thanks for joining us, and welcome to the Cardlytics fourth quarter and full year 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, upgrades to our current products and processes, and our rollout of new products, the rollout of our new ad server and user experience, our transition to the cloud, and the deprecation of our on-premise data centers, our sales pipeline, our customer concentration and margin profiles, our timeline for achieving positive free cash flow, and our path to profitability, our cost reduction initiatives, and the bridge shareholder dispute and 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 10-K for the year ended December 31, 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 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 the information I have just described in the investor relations section of the Cardlytics website. Please note that a supplemental presentation to our fourth quarter and full year results has also been posted to our investor relations website. Joining us on the call today is Carlytics CEO, Karim Tensamani 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.

Thank you for joining us and welcome to our fourth quarter earnings call. It has been exactly six months since I joined Carlytics and while we still have some short-term issues to resolve, My belief in the incredible long-term potential of this business has only been strengthened. Carlytics is in a unique position at a unique time in the industry. The topics of both performance and brand safe online advertising are top of mind with many of our customers and partners, which align squarely with our value proposition. It is rare to see a model that has so many benefits to so many groups. Brands get to offer their customers ads that are relevant based on past purchases. Customers save on the brands they prefer, and financial institutions increase engagement and loyalty. The cycle is virtuous, but to realize the true potential as a business, we needed to improve our operational efficiency, reduce excess costs, and become a company that is led by the products that we are building. It's still early, but we are starting to see the results of these improvements. On the call, I'd like to highlight our financial results, focus on areas where we have demonstrated operational and cost discipline, and give insights into product enhancements that we expect to positively affect our growth for the year. First, some financial highlights. Our fourth quarter performance delivered billing, revenue, and adjusted contribution in line with our guidance. We navigated a challenging microenvironment where inflation and rising interest rates tampered budgets across the ad tech markets. Despite these headwinds, For the fourth year 2022, we once again delivered double-digit growth across billing, revenue, and adjusted contribution. Additionally, Bridge delivered triple-digit revenue growth. For the fourth year 2022, billings grew 12% to $442.5 million. Revenue grew 12% to $298.5 million. Bridge revenue grew 155% to 21.4 million, and adjusted contribution grew 10% to 143 million. Consumer engagement in the program grew in Q4. Users activating offers increased 8.6% year over year, even with the impact of the large restaurant clients exiting our channels. Our platform is creating an impact for our banking partners and for retailers too. In 2022, our data showed customers engaging with our program spent 1.2 times more on their card and made 1.3 times more shopping trips than unengaged customers. And clearly, it works well for advertisers. we increased the total number of advertisers in the channel by 8% in 2022. Not only that, but we also increased the number of advertisers with billings between 500,000 and 5 million by 17%. And we increased the number with billings greater than 5 million by 44%. We have a great business foundation despite the current state of the economy. In many ways, though, the economy is a good forcing mechanism to improve our business efficiencies even more. When you combine a more efficient business with the numerous product enhancements that we're putting into place, it's clear we are setting ourselves up for long-term success. As mentioned last quarter, we took action to control our costs in this difficult environment. We successfully implemented 35 million in cost reductions at the end of December. The full effect of these actions will appear in Q1 of this year. We're not stopping there. We're improving operational efficiency company-wide. And despite difficult economic conditions, we are focused on achieving positive free cash flow in Q3 of this year. Our team has seen significant changes through this process, and I would like to take a moment to thank all our leaders and team members for their focus, commitment, and hard work. We believe these changes will make us stronger as a team and as a business. I often talk internally about the importance of becoming a product-led company. And our teams are working tirelessly in every department to revamp and improve our workflows across product, engineering, sales, operations, and analytics. Let me give you a few examples to illustrate the impact of these changes. First, we are upgrading our ad decisioning engine to support modern ad ranking models to drive higher monetization and offer relevancy. Based on early results, we believe that these changes can drive a lift in RPMs of 10 to 15% in the back half of 2023. Second, we're exploring pricing models that are more tied to serve or impression events, while still optimizing for advertiser ROAS targets. This approach provides better balance between reach and performance goals. It also gives Cardlytics more control of budget management, delivery, and ad selection, which helps us capture more billing. Third, the processes we have put in place to allow us to better track product performance, averages, adjustments, and campaign launch delays not only allowed us to immediately save $350,000 on redundant tools, but also will increase our overall operational efficiency for the year. I expect the combined impact of the evolved improvements to positively impact our four-year billing margins by around 2%. These are the first of many initiatives that we're putting in place to improve our operations and products. I look forward to sharing more details in the coming months. Product improvements also help from a bank perspective. We created a dedicated operations group within a publisher engineering team that has implemented rigorous monitoring techniques, decreasing partner ticket creation by over 25% from November 2022 to February 2023. Not only does this make us more efficient and cost effective, it also improves our partner satisfaction. Three initiatives I highlighted last quarter are especially important in the product area. Our new ad server, our new user experience, and cloud migration. So let me give you some insights into progress in each of these areas. We have already connected more than 50% of our MAU base to our new ad server. completing one of our key objectives for the year. We remain on track to connect all of our partners to the newer server and user experience by the end of 2023. Regarding the new user experience, we're excited to announce that a major partner is launching a new user experience to its full user base, and it should roll out over the next month. As we mentioned in the past, The scale created by having a major bank partner on our new user experience and ad server will allow us to ship new products, which I will discuss in more detail shortly. We also have news to share on cloud migration. In Q4, we finished moving our core US platform to the cloud. We are now focused on duplicating our on-premise data centers. Deprecating at data centers will create cost savings of nearly $1 million in 2024. Our goal is to have all our banks move to the cloud by Q3 2023. Focusing on product makes us more than just efficient. It also unlocks new capabilities. Here are three specific examples of new offer constructs that we will better in Q1 and Q2. First, spend stretch offers, or the ability to incentivize a set of customers spending in a certain range to increase their spending on their next visit. An example would be a customer who spends $20 on average, receiving a $5 cash discount if they spent $40 or more. Second, merchant category code offers. which allow bank-funded campaigns that are targeted to specific types of transactions, such as gas or grocery purchases. In a test with a large bank partner, we saw around a two-times increase in redemption dollars of a standard campaign. Third, receipt-level offers, which are construct tailored to specific product categories or items. These are the offers we are most excited about, and for good reason. In an early test, 10% of activations came from customers who had never activated an offer before, and 19% of those customers had not shopped at that retailer in 12 months prior to the campaign. Growth isn't just coming from our core business. As many of you know, we hired Amit Gupta as our new COO of Cardlytics and General Manager of Bridge. we're extremely excited to have attracted such an incredible talent to the business. Amit is already hard at work, both on optimizing a long-term platform and on fully realizing the potential of Bridge and Catalytics. Relating to Bridge, Amit is accelerating the evolution of the business from a customer data platform to a retail media network for mid-market and regional retailers. We believe that most smaller retailers cannot build these platforms alone. While Bridge's capability allows us to work with larger retailers, the key to success for Bridge is building a collaborative, scaled data set for mid-market and regional grocery stores, convenience stores, and fuel providers, much in the same way that we built Cold Cardlytics. By building scale for these retailers, we can create a compelling new product for CPGs to get insights, drive incremental sales, and measure campaigns. Admitting the bridge seems hard at work on our go-to-market efforts that will enable this vision of providing a best-in-class retail media network for smaller retailers. And as bridge scales, we will also see improvement to our adjusted contribution margin due to its higher growth margin, which will positively affect our cash flow. Given the numerous improvements and innovative products that are on the horizon, I am incredibly excited for the future of Carlylex. Our move to being a product-led company is expanding our reach and enhancing our capabilities, which will continue to differentiate us in the market and provide better solutions for advertisers and partners. I'd like to close with some observation on consumer spend, the economy, and outlook for the year. For 2022, consumer spend grew 5% over 2021, outpacing transaction growth by over 3%. Inflation clearly affected the consumer in the second half of the year. Outside of travel and entertainment, which enjoyed recovery through 2022, Discretionary spending categories mostly finished down or flat for the year. For 2022, year-over-year, gas and grocery spend was up 9%. Travel and entertainment spend was up 25%. Retail was flat. And restaurant was up 9%. But more discretionary categories such as bars and nightclubs finished down 4% year-over-year. Leading indicators show that consumers remain resilient and inflation is receding from its highs, but the Fed has not yet backed away from its current monetary policy. The threat of an economic slowdown has stalled budgets in Q4 and Q1, much in the same way that we saw pause during the onset of the pandemic. Advertising clients were extremely cautious in Q4 and remained so in the early stages of Q1. That said, I am still encouraged by the continued strength of our new business pipeline, especially for the second half of the year. I believe that once advertisers reassess their cost structures and budgets, we will benefit from the ongoing move to brand-safe, performance-based advertising. We are building a business that is resilient in the long term, regardless of economic conditions. For 2023, we see a path to solid growth, especially after we pass the anniversary of a significant restaurant client exiting our channel in the second half of the year. Our product enhancements and optimization should provide us with around 2% of additional upside to billing margin for the rest of the year. And the growth of Bridge's higher margin business will benefit both our billings and cash flow as we move forward. Even with the muted economic conditions, we have room to get to profitability and control our cash flow by managing the business responsibly. We know our success is dependent on existing with a disciplined approach, and I'm confident that our strategy and priorities are positioning the company for liquidity, long-term growth, and profitability. And while the breach shareholder dispute has been a distraction to the business over the last few quarters, we remain confident in our position and are happy to report that we currently expect the matter to be resolved by the end of April. With that, I will hand over to Andy to provide more detail on our results and financial strategy. Thank you, Karim.

Our Q4 results were within our quarterly guidance ranges. And despite macroeconomic headwinds that impacted consumer spending and ad budgets, we delivered double-digit year-over-year growth in 2022. Let me walk through the numbers for Q4. Billings totaled 126.1 million, down 5.9% year-over-year. Revenue totaled 82.5 million, down 8.4% year-over-year. Adjusted contribution totaled 40 million, down 9.2% year-over-year, and adjusted EBITDA was a loss of 6.1 million compared to a gain of 2.6 million in Q4 of last year. Additionally, for Q4, year-over-year, bridge revenue grew 74.2%, and agency ad spending on the Carlyrics platform grew over 20%. It's also worth noting that core Carlyrics billings was flat year-over-year when excluding the large restaurant client that left the channel in 2022. For the quarter, billings margin was down 1.8% year-over-year. Part of this was driven by advertising mix. We typically generate a higher billings margin within the restaurant vertical compared to travel and entertainment. Restaurant ad spending on our channel declined 15% year-over-year compared to a 75% increase within travel and entertainment. Additionally, There's some temporary drags on billings margin that will phase out by the middle of the year as we transition our tech stack and automate our operations. Our expectations return to historical levels of billing margin over time. We also see opportunities to expand our margins as we grow and diversify our customer base and leverage higher margin revenues for our fast-growing bridge offerings. Customer concentration improved over the past year. as our top five customers accounted for 15% of revenue this quarter compared to 23% in Q4 of 2021. This remains a central focus as we continue to organically grow and expand the depth and breadth of our customer base. Moving to cost. We have completed the cost reduction initiatives we announced in 2022 and expect over 35 million in annualized savings compared to our annualized run rate in Q2 of 2022. As Kareem mentioned, we have more room to control costs in the event of further economic decline, but we believe we can reach our cash flow goals in 2023 with our current cost base. As a result of a sustained decline in our market cap and significant increases in interest rates and cost of capital, we recorded a $370 million non-cash impairment of goodwill and tangible assets this quarter. We remain excited about the prospects of Bridge and Carlitics. but the impairment was necessary given the fact that our goodwill and intangible assets were in excess of our market cap. Moving to our balance sheet and cash flow. We ended the year with $122 million in cash and cash equivalents compared to $138.6 million at the end of Q3. Our $60 million line of credit also remains undrawn. During Q4, we used $13.1 million of cash and operating activities used $3.2 million for software development and capital expenditures, realized a $200,000 unfavorable impact from a strengthening British pound, and used $200,000 of cash related to financing activities. MAUs were $182.7 million in Q4, an increase of 4.2% year-over-year. Our organic growth rate was in line with our long-term expectations of low to mid-single-digit growth. ARPU during the fourth quarter was 45 cents, which is a 7.8% decrease year-over-year. For the full year, MEUs increased 9.2% year-over-year, and ARPU increased 2.6%. We had 33.5 million shares outstanding at year-end, compared with 33.1 million at the end of Q3. Weighted average shares outstanding during the quarter were 33.4 million. which was unchanged from Q4 of 2021. Lastly, regarding the bridge earn out. The dispute is currently in the resolution process as outlined in the merger agreement. And we will provide timely updates to the public once the matter has been resolved. We remain confident in our position and expect the first earn out inclusive of broker fees and transaction bonuses to be 126.4 million with a minimum cash payment of 43.3 million. we expect the second earn out to be 67.8 million, with a minimum cash payment of 24 million. As outlined in the merger agreement, we may have to pay greater than the 30% minimum in cash, given the 19.9% equity and dilution cap in place on the shares issued. Now turning to guidance. The ad market challenges we faced in Q4 continued into Q1, but Q1 is also typically our annual low point due to seasonal consumer spending trends and decreased quarterly marketing budgets for most of our clients. For the first quarter of 2023, we expect billing between 84 and 93 million, revenue between 54 and 63 million, adjusted contribution of between 26 and 31 million, and an adjusted EVO loss of between 10 and 17 million. We expect cash operating expenses of approximately 42 million in Q1 We expect a slight increase in expenses in Q2 of 2023 due to our annual merit and promotion cycle, but our new expense run rate fully reflects the $35 million of annualized savings from Q2 of 2022. Excluding the loss of the large customer we mentioned earlier, we expect the core products business in the U.S. to go in the low to mid single digits year over year in Q1. A positive sign is that the sequential decline in our buildings from Q4 to Q1 is in line with historical trends from Q1 of 2020 and Q1 of 2022, signaling that the ad environment hasn't become maturely worse quarter to quarter. We're not providing formal guidance for the full year at this time, but as Karim mentioned earlier, we believe we will generate sufficient growth to reach positive free cash flow in Q3 of 2023 through product enhancements, optimizing our platform, growing our higher margin bridge business, and lapping the loss of the significant customer. With that, I'll turn it over to Karim.

We want to thank our shareholders, partners, employees, and customers for their ongoing support and trust in the company. We remain focused on driving product innovation and solutions for our partners and advertisers. This focus will create the expanded reach, revenue opportunities, and efficiency we need to meet that growth and profitability objective. We look forward to sharing more updates on our progress during the year. With that, I will open the call to questions.

Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kyle Peterson with Needleman Company. Your line is open.

Great. Good afternoon. Thanks, guys, for taking the questions. I just wanted to start off on the expenses. Helpful color you guys gave with kind of roughly $42 million in cash expenses for 1Q. And then I think there's a couple moving pieces you mentioned with the full kind of realization of some of those annualized cost savings probably offset by some merit increases or timing of some of that. So I guess, is that $42 million with some modest adjustments based on those factors, is that a good run rate to use moving forward? Or are there additional opportunities for efficiencies and savings without sacrificing your growth opportunities?

Hey, Kyle, this is Andy. You're exactly right. We wanted to give a little bit of color around the run rate. The run rate you see in Q1 does fully reflect the actions that we took in 2022, and that's a good number to kind of run going forward. Now, I understand, too, we may have a little bit of increases throughout the year, but that's kind of how we're modeling. Now, there's certainly opportunities that we have during the year to manage our costs further, but that kind of is, right now, kind of the run rate that we're seeing, so that's kind of a good number to model there.

Okay, that's really helpful. I wanted to touch on some of these newer products, whether it's some of the bank-funded category offers or some of the more incentivizing spending on future trips. How big of a growth opportunity do you guys see for these offers? Could these be a material boost to results in 2023, or is this more of you know, kind of a multi-year slowly getting there, but not a big contributor right out of the gate.

Yeah, sure. Let me take a swing at that, and Krim probably has some thoughts as well, but I think we've been a bit conservative as we think about these things rolling out this year. I think certainly next year it'll be a much bigger impact on the business, and I think it'll be one of those items where, you know, we're going to get going here in the next few quarters, we'll see it, and by the end of the year we'll probably start to feel it. But really, it's a big 2024 opportunity. But with upside, right, in 2023, if, you know, we were really able to pull that forward and execute.

Understood. Thanks, guys.

Yes, Kyle, I would echo Andy's sentiments. I think these are potential opportunities that give us confidence that we can get to some level of growth this year, some reasonable level of growth this year, but most of the benefits are going to come in in 2024.

That makes sense. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Douglas Armuth with JP Morgan. Your line is open.

Thanks for taking the questions. It looks like the two industries where activation rates increased year over year were entertainment and travel. Just curious how you're thinking about the shift of consumer spending from things to experiences and how does that impact your business and the go-to-market strategy going forward? And then separately, you talked about one major partner launching the new user experience. Can you just give us some more insight in terms of the benefits of the new user experience? How will that be better for users and for advertisers? Thanks. Thanks.

Sure, thanks for the questions. Hey, on your first point, we've talked a lot about some of the real momentum that we felt in Q4 around travel and entertainment. It's been a very, very strong industry vertical for us. In fact, Q4 of 22 compared to 21 was up 80%, right? And so I think we're obviously seeing a lot of engagement there and a lot of spend that's happening there. So I think it's top of mind for us as an active area where people are looking to save money as they're traveling. To your second point, I'll let maybe Karim chime in on that one, but I think the entertainment and travel is pretty self-explanatory given our spend trends.

Yeah, thanks Andy. I'll just add to that that essentially there's obviously a part where go-to-market is important with regards to getting us the right base of customers. But the other part that's really important is how we optimize for the right offers to be surfaced to the right customers. And that's where us becoming a much stronger product-led company With a modern ad server and the ability to be a lot smarter, how we purpose rewards to the right customers at the right time will make a vast difference to our business going forward, both in terms of the engagements that we will see from the ad, but also the revenue that we can derive from these rewards. So very important aspects of our business for us going forward.

Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star 1-1 to ask the question. Please stand by for our next question. Our next question comes from the line of Jason Crayer with Craig Hallam. Your line is open.

Great. Thank you, guys. Just wanted to see if you can help us bridge the gap from the guide that you gave for Q1 to the commentary on cash flow generation in Q3 to It doesn't seem like you're baking any other cost reduction in there, but just wondering if you can help fill in that gap over the next two quarters.

Yeah, sure. Happy to help you, right? So our expense runway, we've tried to give a little bit of color, right? It's kind of where we're at. There are certainly opportunities for us to continue to manage our costs. But that's one kind of anchor that we want people to think about. You know, as we get to break even here in Q3, from a cash flow perspective, right, you really need to make sure that you're considering our interest payments for the software development costs, right, to then be able to kind of back into the adjusted contribution numbers that we would expect, right, to reach break even. So, Karim spent a lot of time and prepared remarks talking about all the different vectors of growth. And I think when you put those all together, right, we feel really comfortable about being able to grow the business. You know, one of the pieces too that I think maybe is a bit underappreciated is is the growth in the Bridge business, which is a much higher margin business for us, where those dollars are flowing all the way down to adjusted contribution. So that, combined with many of the things in the Cartelytics platform that we're talking about, with the new user experience, new offers, new offer constructs, those are the things that are going to propel us to getting back to that double-digit growth rate in the core business, combined with some pretty impressive growth rates that we're experiencing here with Bridge.

Thanks, Andy. And you may have just answered my second question, but you guys were talking about, you know, updates to the product suite that are giving you confidence in that return to growth. I mean, what are the near-term product changes that can influence growth here in 23?

There's a lot of different angles here. Let me break down a couple different things, right? Product is certainly one of those things where a new user experience with new offer constructs is certainly on the horizon. Additionally, when you think about our transformation becoming a product-led organization, and what the benefits of that, even in how we do our business today, how we consume ad budgets, how we optimize campaigns, all those things are upside opportunities for us, that we've already seen at a small scale at some of our smaller banks, that we're now bringing some of those new capabilities and automation to our larger banks as well, right? So we certainly have an expectation of being able to more meaningfully move the needle doing those things, right? And as things like product level offers come online, where we expect those to become more meaningful towards the back half, there's an opportunity for us to accelerate those things and realize some of that growth earlier, if you will. So there's a couple of different things kind of all going on there that are all giving us, you know, some additional tailwinds.

Okay. And one last one, if I can squeeze one in. Karim, I think you did a great job talking about some new product changes and a bunch of different things. There were three product changes you highlighted, and I think the second one was more about kind of offers that were more tied to impression and expanding reach. Just wanted to see if you can give a little bit more clarity around that.

Are you talking about pricing models that are more tied to serves and impression events, or are you talking about the merchant category code offers? Those are two of our separate remarks.

The first one, the impression models.

Yeah, we essentially are currently, as you know, not necessarily optimizing properly with regards to the offers that we serve in customers. So what we want to make sure is that we are revisiting our pricing models so that while we are continuing to look for the right return on investment for our customers, we are understanding what impression events are driving those purchases and essentially better balancing the reach and performance that each advertiser gets so that we can surface more of the right ads to the right customers rather than continuously serving the same ads to the same customers. So we'll have much better control of budget management because of it. We'll have much better control of delivery. So instead of continuously serving the same ads to the same customers, the same rewards to the same customers, we'll be able to select the ads that are more likely to end in the right outcome for those customers. So a much better outcome, both in terms of the engagement and the experience that the customers will have within their banking app, but also a better leverage for us when it comes to the budgets that we can consume.

Okay, great. Thank you very much.

Thank you. I'm not showing any further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.