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spk04: Good day, and thank you for standing by. Welcome to the Q3 2023 Cardlytics, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a 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. Please be advised that today's conference is being recorded. I would now like to hand the call over to your speaker for today, Nick Linton, Chief Legal and Privacy Officer. Nick, please go ahead.
spk07: Good evening, and welcome to the Cardlytics third quarter 2023 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, including for the fourth quarter and full year 2023, adding new partners to the network, our partners' transition to the new ad server and user experience, the growth of Ripple, improvements to our operations, our platform, and our UK business, international expansion, the bridge earn-out payments, and our liquidity. 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, 2023, 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 Cardblitz 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 our CEO, Kareem Timsamani, and our CFO, Alexis DiCieno. Following their prepared remarks, we'll open the call to your questions. With that said, let me turn the call over to Kareem.
spk02: Good evening, and thank you for joining our Q3 2023 earnings call. To start the call, I'd like to provide some context to this quarter, now that I've spent a year in the business. When I arrived last year, our finances needed to improve. Before I started, our Q2 2022 adjusted EBITDA annual run rate was worth the negative $55 million and adding to the difficulty our teams were facing. My immediate priority was to right-size our cost structure and reinvest in building the foundations of our business, starting with our financial institution relationships. While we have much left to accomplish, I am proud of the work our teams have done so far. The financial foundations of our business is stronger and our banking relationships are in a much better place. We can now think longer term about our growth prospects. Our results this quarter match this sentiment. We were in line with guidance on our top line metrics and better than expected on our profitability metrics. Of note, adjusted contribution grew 22% year over year, and our adjusted EBITDA was positive for the first time in 2023 at $3.9 million. We also had positive operating cash flow for the second straight quarter. Alexis will provide more details later on on our full financial results. Our solid financial performance this quarter points back to our underlying value proposition. For example, gas, grocery, and convenience grew more than 65% this quarter year over year. We saw success because we helped brands target shoppers who buy competing brands. We deliver strong ROI for them, which helps us succeed in this category. Another vertical that saw success was travel entertainment, which grew more than 20% in the quarter year over year. While consumer spend in travel entertainment has softened in the back half of the year, our clients are still leaning into budgets. Our platform helps them reward loyalty and acquire new customers, particularly in environments where spending is volatile. These positive results were balanced by subpar performance in restaurant and retail. We believe these verticals can and should be significant contributors to our business, and we are aiming to drive high growth moving forward by reinvesting in our teams in this category. As we saw with our vertical performance in the quarter, underlying fundamentals were mixed. Unique consumers activating offers decreased 7% year over year in Q3, driven by the loss of the previously mentioned large restaurant clients. That said, unique customers with a reduction or spend per serve in the quarter saw a 13% increase, which indicates we're serving relevant and engaging offers to consumers. Where there will be quarter to quarter variation in activations, we expect unique customers activating to increase over time as we continue to evolve our platform. As we mentioned last quarter, our expectation was to sign one new bank partner by the end of 2023. We are excited to announce that our UK team signed Monzo, one of the fastest growing banks in the UK. We can't wait to launch in 2024 to help their customers save money on the brands that they love. And the teams aren't stopping there. Our partner pipeline remains strong, and we believe we will sign at least one more major bank partner in the U.S. over the next few months. Let's move to our strategic initiative. In the quarter, we spent a considerable amount of time on strategic planning. While I expect an investor day at a later date, I do want to provide initial color on how I see our strategy evolving over the next four years. Our vision for the future of Cardlytics is aligned around four strategic pillars. One, strengthening our core product by driving user engagement and building out demand, supply and marketplace liquidity while simultaneously expanding the core business globally outside of the UK. scaling bridge and repo, and connecting it with the core to unlock a unique data and measurement ecosystem. Three, broadening our reach to non-FIs to diversify supply and access the broader merchant ecosystem. This is a large growth vector for our business, but will require further exploration in the new year. And last, but also most importantly, embedding insights into everything we do, internally and externally, to become the most trusted commerce partner. As a data company, this builds our credibility to reinforce our core and tap into new revenue streams. I'm excited about the future and potential of Cardlytics and can't wait to discuss the detailed initiatives behind our strategy with all of you. And while I could spend most of the call discussing a strategic plan, I do want to move to our near-term initiatives that are critical to realizing many elements of this vision. So first, let's discuss the key initiatives for our bank partners and advertisers. On the bank front, like last quarter, all our major US banks have data in AWS, and most have systems in AWS. In the quarter, a large UK bank completed the immigration, moving us closer to 100% completion. We still expect nearly all our major banks to migrate to AWS and the new user experience by the middle of 2024. We continue to have constructive conversations with our partners, and we want to drive to full adoption as soon as possible. One bank-focused area that saw significant progress with adoption of our Ad Decisioning Engine, or ADE. If you recall, ADE drives higher monetization and offer relevancy for the business through improved targeting. This quarter, two of our largest banks fully adopted ADE. We're excited about the increases in overall engagement we see with ADE and can't wait for all of our banks to adopt these new products. We continue to scale our advertising product to provide our partners and advertisers new ways to drive engagement and return on ad spend. Multi-tier offers, which provide variable incentives based on objectives, are seeing rapid adoption and have shown two times better performance than our baseline offering in some campaigns. For example, a customer came to us with an ask to increase premium membership purchases. Historically, this customer saw a split of 50% premium membership to 50% basic memberships. Our multi-tier offers were able to drive consumers to an 80% premium membership split, providing additional value for its advertisers and its consumers. We are also continuing to make improvements to our operations. Several key items were completed in the quarter that we expect to significantly improve our execution, including transitioning legacy processes to our data lake and facilitating new interfaces for onboarding new publishers such as Monzo. We are also continuing to make improvements to our operations. Several key items were completed in the quarter that we expect to significantly improve our execution. including transitioning legacy processors to our data lake and facilitating new interfaces for onboarding new publishers such as Monzo. We've also made process improvements that have significantly reduced the time to onboard a merchant from two weeks to just two days. Moving to Bridge and Ripple. For our customer data platform or CDP product, We re-signed a national retailer to a large, long-term contract. This is a great win for us and evidence that the CDP product can deliver the data enrichment that larger retailers need. Earlier this quarter, we launched Ripple, a retail media network. To remind you, we believe Ripple will provide CPG brand flexibility in building sophisticated audiences, seamless access to a national footprint, and user-friendly tools that empower them to gain valuable insights, drive substantial incremental sales, and accurately measure the impact of their campaigns. While the lumpiness we expected in growth for the platform is materializing, we are making solid progress in transforming the business. We have 33 million profiles live on Ripple, and the initial feedback is strong. We also recently hired a chief revenue officer for the business to help increase our growth. We expect to announce some big wins in the coming quarters, and we see strong potential for repo to scale in 2024 and beyond. Let's move to the global business. While Monzo is the big news, I do have another important update. Please join me in welcoming Ian Carrington, who will serve in a newly created general manager of international roles. Ian helped build several billion dollar global businesses from scratch at Google and has over 25 years of experience in global markets. At Cardlytics, he will be charged with leading a global expansion and strategic business development. We're extremely excited to have attracted him to Cardlytics and I look forward to providing more updates around our global business plans in the near future. Moving to Outlook, on the surface, consumer spend looks solid this quarter with a 5.6% increase year over year, largely driven by gas prices. But despite this persistent spending, inflation is still higher than normal, and some of our financial institutions' partners highlighted elevated interest rates, lower deposits, and higher credit card charges as negative indicators. In our conversations with advertisers, we are seeing elevated cautions around commitments, and the size of advertising budgets given trends that they are seeing in Q4. It appears that some of the moderate optimism in Q2 has sitted ground to renewed recessionary concerns. Economic volatility will impact our Q4 billings and revenue, where our adjusted EBITDA should still be positive in Q4. We can also reach positive adjusted EBITDA for the full year if we execute on our plan. We remain highly focused on our cash flow and profitability as we navigate this choppy environment. The trajectory of our adjusted EBITDA and operating cash flow since Q1 of 2022 is reflective of the incredible efforts and dedication from our team to right-size our business, and I think a great predictor of our future success. And like we've discussed, There are many exciting developments coming over the next few quarters that will drive growth for us in the coming years. By the end of 2024, we expect our platform to look completely different with new large bank partners, a broader and deeper data set, more sophisticated audience targeting, better analytics and reporting, and a variety of ad formats that will drive increased engagement. We're confident in our strategy for the next four years, and our belief in a long-term growth prospect has never been stronger. Now, I will turn it over to Alexis to discuss our financial results.
spk05: Thank you, Karim. I'm thrilled to be addressing all of you today on my first earnings call. I spent my first 80 days as CFO meeting the teams, evaluating next steps for our capital structure, and beginning to optimize our finance processes and systems. I also helped lead the four-year strategic planning process that Karim mentioned. There is room to expand our addressable market and diversify our revenue streams while maintaining a focus on profitability and cash flow to strengthen our balance sheet. I am excited to be joining at this time in our trajectory. We are positioned to be the leader in providing trusted and intelligent business insights And there are a few other platforms that have the level of data and reach that we do. This gives us the right to compete with any platform in our space. And in the post-cookie landscape, the trends align with our strengths. In the near term, I have three major priorities. First, driving incremental revenue through pricing improvements and monetization of our assets, which will ultimately allow us to deliver more insights to our partners. Second, continuing to embrace automation and data analytics across the organization to allow us to make more informed decisions more quickly and more nimbly. Third and most importantly, being hyper-focused on profitability and improving our balance sheet and capital structure. This will allow us to deliver our goals and our promise to investors. Now, let's move to our results and guidance. As Kareem mentioned, we delivered solid third quarter results with billings, revenue, and adjusted contribution consistent with our Q3 guidance and adjusted EBITDA exceeding our Q3 guidance. We had our second consecutive quarter of positive operating cash flow at $1.2 million and our first quarter in 2023 of positive adjusted EBITDA of $3.9 million. We are showing sequential improvements and momentum on profitability. My comments will be year-over-year comparisons for the third quarter unless I state otherwise. Billings increased 5 percent to $116.4 million, primarily due to sales to new advertisers. Revenue increased 9 percent to $79 million, primarily due to a decrease in consumer incentives as a result of changes in our mix of financial institutions and pricing. Our top five customers accounted for 22 percent of revenue this quarter compared to 19 percent last year. Adjusted contribution increased 22% to $42.9 million. Geographically, U.S. revenue increased 10%. For our top advertisers across both years, revenue increased 30%. These increases were driven by higher brand spend and pricing improvements. U.K. revenue decreased 12% due mainly to the loss of a major bank partner last year. For the UK, this is a sequential improvement over Q2, which we expect to continue in the next several quarters due to the additional supply from signing Monzo and from auto-enrollment launching with another large bank partner set to begin in the next several months. For Bridge, revenue increased 10% driven by contract expansion of existing clients. As Karim said, we launched Ripple in August and have added 33 million profiles to our database with the line of sight to adding additional profiles in the near term, which enables us to scale and drive network effects. Adjusted contribution grew 22%, with the margin calculated off of revenue of 54% compared to 48% one year ago. We are seeing the benefits of our partner share renegotiation with JPMorgan Chase, as well as product improvements. Adjusted EBITDA exceeded the high end of guidance and was positive for the first time in 2023 at $3.9 million, which is $16.7 million better than Q3 of 2022. Bridge was profitable for the second quarter in a row. Operating cash flow was $1.2 million and positive for the second consecutive quarter. While operating expenses excluding stock-based compensation came in lower than expected at $38.9 million, we still expect the run rate to be in the low $40 million range per quarter. Our focus is on improving our profitability and cash flow, and the expectation moving forward is to be operating cash flow positive and adjusted EBITDA positive on an annual basis in 2024. On the contingent consideration for the second anniversary earn-out payment related to our acquisition of Bridge, we continue to believe the payment amount to be $0. However, SRS, the group representing the former bridge shareholders, submitted a notice in Q3 objecting to our calculations. We continue to believe our calculations are correct and are fully prepared to defend our position of $0. On the balance sheet, we ended Q3 with $90.1 million in cash and cash equivalents, and we had $4 million of unused available borrowings under our line of credit. We still believe that our available liquidity is sufficient to support our long-term plans. However, capital structure is top of mind for me, and we plan to address our upcoming debt maturities on an appropriate timeline. Before I turn to guidance, I want to note that we changed the definition on how we report our MAUs to reflect unique users within each bank, regardless of the number of cards or accounts that they have at that bank. We believe this changes a more accurate view of our region monetization ability. Under the new definition, MAUs were 162.5 million, an increase of 4%. Also based on this new definition, ARPU during Q3 was 49 cents compared to 47 cents last year. Now turning to Q4 guidance. For most of the year, we have discussed the macro trends and dynamics that are causing uncertainty and mixed results in the advertising market. Our advertisers have shown renewed caution around budgets. However, we expect a strong adjusted EBITDA result given the work we've done on our cost structure. With that in mind, for Q4, we expect billings of between $122 and $133 million, revenue of between $82 and $90 million, adjusted contribution of between $44 and $50 million, and adjusted EBITDA between positive $4 million and positive $8 million. Billings are primarily driven by growth in travel and continued success in our everyday spend categories. This growth is partially offset by weakness in restaurant and retail. Despite the mixed trends, we are seeing our largest clients spend more with us. Advertisers spending more than $1 million per year are up 15%. For example, We closed the deal in October with one of the largest retailers in the United States. That should push them to over eight figures in billings in 2023 and around 20 times their spend from 2022. This is a solid demonstration of how we can grow budgets with our existing clients as they get comfortable with the value proposition of our platform, particularly around our ability to drive incremental loyalty spend. And in most years prior to 2022, we saw unplanned holiday budgets materialize in the fourth quarter. We have not assumed these budgets in our forecast, so they could provide additional upside given the large number of days between Thanksgiving and Christmas this year. While Q4 and full-year billings growth is mixed, we are on track for a second consecutive quarter of positive adjusted EBITDA. The midpoint of our Q4 adjusted EBITDA guidance implies we will be close to break-even for the full year 2023. Our annual adjusted EBITDA can be over $40 million better than 2022. These are incredible achievements by the teams. Like Karim said, we are bullish on the long term. We've added more supply in the UK. We expect to find another bank partner in our core business. And nearly all of our banks should be on our new systems by the middle of 2024. We are adding profiles to the Bridge Retail Media Network and revenue should follow as we continue to scale the business. We have identified our strategic path and our teams are hard at work on turning these initiatives into real growth. While we expect some bumpiness given the seasonality of our business, we are on a path to sustain positive operating cash flow and positive adjusted EBITDA on an annual basis. And with that, I will turn it back over to Karim.
spk02: As you know, I am extremely happy with the progress we've made on our financial structure. The trajectory of our profitability has dramatically improved over our run rate in Q2 of 2022. We are gathering speed with each passing quarter. Our platform is starting to look different, and the collective improvements we are making to our product and operations are far exceeding our pace from prior years. And we can back this up with recent feedback from our banks, who have told us we are moving at a much better pace than in prior years. Our dedication to product leadership, financial health, and strategic growth is setting us on a promising course, and I'm looking forward to the future.
spk04: At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.
spk03: Your first question comes from the line of Kyle Peterson from Needham.
spk04: Kyle, please go ahead.
spk06: Great. Thanks, and good afternoon, guys. You know, I wanted to start off on the outlook, Chika, and, you know, billings and revenue. I guess a lot of the commentary sounds, you know, pretty positive in terms of feedback you guys are getting from what are your larger clients, but I guess the numbers looked a little light, so... Just wanted to see what is driving that. Is this more of a consumer spending headwind, kind of the other side of the funnel, or is this just broader pressure, especially with some clients that maybe aren't some of the larger advertisers, or is there something else at play here?
spk02: Thanks, Kyle, for the question. Just to step back first, As you know, Kyle, our priority has been to put this company back on the right financial footing, while obviously at the same time rebuilding many parts of our operations. I think we've demonstrated that we've made very large progress, going from a run rate of close to 55 million in EBITDA losses to a breakeven situation. So what's really critical here is that we now believe that we can run the company profitably on a much lower cost base. This will allow us to concentrate on growing our revenues going forward. But going back to the gist of your question, it's clear that our revenue guidance is lower than we had hoped for, for a couple of reasons. One, there are macro factors at play. I mentioned some of that on the call. We're seeing that inflation is still high, interest rates And we're definitely seeing some points to weakening consumer demand and signals are pointing to that. And obviously, there's a lot of additional feedback that you're hearing in the market with regards to weakening consumer signals. We're also seeing some weakness in some of the sectors, which we are addressing internally. There's definitely an opportunity for us to do better. with our sales drive in some of our teams, given that we're seeing inconsistency in delivery between some high growth sectors and some much lower and even declining sectors. So there's definitely work that we want to do internally. And then I would say there's also a few areas that we've wanted to be cautious around in the guidance we've provided, but that could provide additional benefits in the quarter. The longer the normal holiday sale cycle this year could potentially help us. And we're still hoping that there will be unplanned budgets that do come at this time of the year that we could have last minute. So overall, we're very positive about the future. We're cautious about Q4, but we're very positive about the future. We see a positive EBITDA for Q4 and possibly for the whole year, as we said. We see that some categories are growing very well and that we're continuing to grow large accounts that are spending a lot more with us. We want to emulate that more consistently across the business. We see that we're winning most supply, and we see that new art formats and art tech and AD will soon be at scale and will help us continue to improve our monetization potential. So definitely not where we want to be in Q4, but some very good opportunities So, at loop for us longer term.
spk06: Got it. That's helpful. And then, you know, maybe if I could, you know, follow up on, you know, some of the newer products. You know, it seems like there's some good traction there, I guess. Any metrics, you know, you might be able to share or whether it's, you know, qualitative or quantitative on some of the adoption of these products, you know, our clients, that are using these? Are some of these new logo wins that are interested in these? Or is this expansion with existing clients? Or is there some pure substitution, but happier clients or kind of all of the above?
spk02: Yeah, I mean, I think there's two parts to your question. The first one is that the adoption of our tech at scale is a great benefit for us longer term. So In the call, I mentioned that ADE drives higher monetization and offers relevancy for the business so that we can improve targeting. Now that we have two of our largest banks that have fully adopted ADE, we can see that there will be further benefits for us going forward. And then certainly the adoption of new product features like multi-tier offers, which I also talked about in the call, definitely enables us to have different discussions with clients and bring new clients as well to the ecosystem. And I've been talking over the last few quarters about new pricing models. We're trialing some of these now. And obviously, there's no numbers that we want to share yet until some of these things are at scale. But there are many elements of a co-offering where we really see potential growth going forward.
spk06: Got it. That makes sense and it's helpful. And Maybe if I could just squeeze one more modeling question in. Nice to see the adjusted contribution margin move up nicely in the third quarter and the 4Q guide kind of implies that seems like it's going to continue. Is there any mix with whether it's types of offers or anything in the pipeline or is this kind of 54-ish percent run rate for you know, just contribution. Is that a good run rate to use moving forward in our models?
spk05: Hi, this is Alexis. I can take this one. So the benefit you're seeing in adjusted contribution is primarily due to the renegotiation of the major bank contract. as well as a small mix shift from our financial institutions. So we do have different agreements with each one, which does drive some of the changes there. You're also seeing that impact in revenue, so changes to partner mix, and as I said on the call, also improvements in pricing. So I do think that Q3 is a more normalized state going forward, and so that would be a good thing to continue. Got it.
spk06: That makes sense, and it's really helpful. Thanks, guys.
spk03: One moment for your next question. The next question comes from the line of Jason Cryer from Craig Hallam.
spk04: Jason, please go ahead.
spk08: Terrific. Thank you. Kareem, just wondering if you can talk about, you indicated things are getting a little bit less stable as we get into Q4. What are you hearing from advertisers? Like, are you seeing campaigns get paused? Are you seeing those get terminated? Or are you getting any transparency around, you know, things are being paused in the short term, but, you know, some indications that those may come online at some point in the future? Just trying to get some more detail there.
spk02: Thanks. What we're seeing is that there's no uniformity across the various verticals. There's definitely a number of verticals where we're seeing very strong growth, as we've mentioned on the call as well. Some of our everyday spend categories like grocery, gas and convenience are really growing very, very strongly year on year. Travel and entertainment also is doing well. We are definitely seeing that in other industries like retail and restaurants, for instance, there's a lot more caution and some of the budgets that you would see normally at this time of the year really come up, particularly in retail, are a lot softer than we expected. Some of that is definitely driven by sort of a caution around the economy and the ability for consumers to spend. We know that there's definitely a lot of issues around this period for many retailers as consumers just get further into debt. But there's also things that we're looking at ourselves because we definitely want to drive more consistency in how we are driving the business across all our verticals, and we think we have opportunities to ourselves improve the performance of our business. So, yeah, does that answer your question, Jason?
spk08: That's very helpful. Thank you. I also just wanted to see if we can step back and talk a little bit about what you view as the market opportunity for Ripple and then the go to market for you guys on if you expect to do a lot of that independently or if there's partnerships you're looking to pursue to kind of strengthen that or broaden that go to market approach.
spk02: Yeah. Well, so as a reminder, Ripple really provides a single point of access to anonymized shopper profiles, which we enrich with skew level data. So advertisers that are using Ripple will have an ability to have transparent shopper data that they can use to drive additional spend and a better shopping experience for consumers. We expect that there's going to be choppiness in how Bridge and Ripple scale. It's very new businesses, and obviously we are in very early stages of talking to many of our customers there. And I would say as well that the timelines for getting customers to join the Ripple network is longer than our core product as well. But having said that, we're thrilled with the progress we're making. We're getting a lot of positive feedback from discussions we're having with both retailers and CPG brands. We have promising pilots in progress, and we have a number of discussions with large clients that are going well. And on top of that, we've just hired a new CRO for Bridge who will help us scale the Bridge and report business, and we expect that to contribute meaningfully in 2024. So we're very excited about the prospects, but expect some choppiness as we build that business.
spk08: Thank you. Last one for me. I wanted to just maybe double click on the multi-tier offers, which sounds like a really interesting opportunity. What is the gating factor to that growing more rapidly? Is there like, did you need more banks on the ADE or the user experience or is it just take more time to get advertisers on there?
spk02: Yeah, it depends on sort of the, uh, the goals that advertisers have and their ability to have differentiated type pricing or offering for their customers. So multi-tier offer is going to be a very successful product for us that's going to be relevant for many of our customers, but not for all of our customers. We're certainly having a number of discussions about multi-tier offers with customers right now, and we're planning to scale it as fast as we can. One of the things that I would mention, though, is that having more of these type of products to sell also opens up discussion for the core product. So as you have more products to sell and can have new discussions with others, often you see them seeing that maybe the multi-GT offer is not relevant for them right now or even in the future, but they end up spending on the normal rewards offers that we have. So it's relevant in many different areas. As we have these products at scale, and again, I appreciate you all asking for numbers, but we want to see them at scale so that we can provide more meaningful data with regards to the impact that they're having on our network, and we certainly plan to do that in the future.
spk08: Got it. All right. Thanks, Karim. Thanks, everyone.
spk02: Thank you, Jason.
spk04: Thank you. At this time, I would now like to turn it back over to the speaker for any further comments. So back to you, Karan.
spk02: Thank you very much, Felicia. That brings the call to a close. As mentioned, we remain committed to positioning the business for future success. Thank you for your continued support, and I look forward to speaking to you all soon.
spk03: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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