This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good day and welcome to the Fluent, Inc. Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ryan McCarthy. Please go ahead.
spk07: Good afternoon and welcome. Thank you for joining us to discuss our third quarter 2020 earnings results. Joining me on today's call are Fluent CEO, Ryan Schuelke, and CFO, Alex Mandel. Our call will begin with comments from Ryan Schuelke and Alex Mandel, followed by a question and answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our investor relations page on our website, www.fluentco.com. Before we begin, I would like to advise listeners that certain information discussed by management during this conference call will contain forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date hereof. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These statements may be identified by words such as expects, plans, projects, could, will, may, anticipates, believes, should, intends, estimates, and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q. During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA, and adjusted net incomes. Management evaluates the financial performance of our business on a variety of indicators, including median margin, adjusted EBITDA, and adjusted net income. The definitions of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent CEO, Ryan Schulte.
spk06: Thanks, Ryan, and good afternoon, and thanks to everyone for joining us today. As we continue to navigate this challenging environment, I couldn't be more proud of our entire colleague base. As a leadership team, we're grateful for our team's resilience and perseverance now eight months into this remote work environment. The strength of Fluent is our culture, as once again, we were recognized as one of New York's best places to work. Such acknowledgement is a great source of pride, even more so during these difficult times. We also recently announced the launch of our business empowerment program, which will support minority and women-owned businesses with their direct-to-consumer digital marketing efforts. And as we continue to traverse a challenging regulatory environment with the heightened scrutiny by regulators and elected officials of some of the major players in the technology industry, Fluent remains diligent in enhancing our brand equity, improving our own standards for the benefit of our clients and consumers, as well as our shareholders. Today, we're pleased to share strong results for the third quarter, with year-over-year revenue growth of 21%, media margin growth of 39%, and adjusted EBITDA growth of 167%. We believe this performance is significant in that it reflects innovation and growth during this challenging macro environment, as well as the successful lapping of last year's challenging third quarter. For context, in thinking about the potential for Fluent's market opportunity, I've spoken about the notion of our flywheel. To the extent we can generate higher monetization or returns on media spend through leverage such as product innovation, analytics, and technology, we can then reinvest some of that upside into tapping incremental media supply and accessing new markets. This in turn can yield further growth, incremental profits, and additional investment capacity. During this quarter, through effective product innovation and advances in our analytics-driven ad serving, we were able to advance our flywheel. And now, as I've done in the past several calls, I'll further contextualize our results and forward-looking priorities around three strategic growth pillars. First, our performance marketplace. This refers to the demand or interactions between our advertising clients and consumers on our platform. Fluent advertiser solutions enable our clients to bid on down funnel outcomes rather than impressions or clicks at predictable pricing and scale. We continue to serve a vertically diversified client base, the benefit of which has been particularly evident during the pandemic in terms of providing continuity of demand on our marketplace. In addition, the breadth of offers from such a diversified client base enables us to profitably monetize a larger and broader audience on a daily basis, more than most companies in the performance marketing business. During the third quarter, we continued to see strong demand from our media and entertainment vertical, including gaming apps and streaming services. We also saw a lift from our financial products and services vertical, which earlier in the pandemic had seen softness. While these industries represent two of our largest verticals, I'll point out that Fluent continues to operate in a variety of additional verticals, such as health, recruitment, CPG, and retail. We diversify in this manner due to our consumer-first orientation, aligned against the fundamental thesis that our platform affords us the ability to engage consumers and extract practical insights about their needs and preferences with the goal of helping them discover new products and services that are right for them. Today, we work with hundreds of advertising partners that represent dozens of product or service categories. We're committed to expanding those relationships and into new industries and product categories in order to grow our marketplace. Second, fueling our marketplace growth is Fluent's media footprint. This pillar is backed by our portfolio of digital media properties and our ability to attract millions of engaged consumers to those properties every day. During the quarter, we were able to scale up several new promotions, which resonated well with consumers and yielded strong monetization on our marketplace. We were able to leverage these outcomes to go deeper in the major digital media platforms for additional supply and incremental audiences, both in the US and UK. This is, in essence, an example of the flywheel notion I noted earlier. Looking ahead, we anticipate these outcomes will support our efforts to further expand geographically with Canada already in testing and several other markets in our planning. Third, our platform represents the technology, analytics, and product innovation that wire the first two pillars together. I've spoken previously about our investments over the past year into our analytics capabilities and technology infrastructure. During the quarter, advances in our matching or ad-serving logic yielded improved monetization, which carries high incremental margins. In addition, we announced the launch of our enhanced performance marketing platform powered by AWS, upgrading our technology stack to drive value for clients, support market expansion, and enable the agility we desire in the quickly evolving digital landscape. Looking ahead, we continue to prioritize expanding the lifetime value of consumer relationships we establish on our platform. We're investing into additional CRM channels to reengage consumers with activation costs that are substantially lower than the initial paid media activation. There are several channels that we are building out that are on our roadmap for 2021. In closing, we're pleased with the third quarter results and the strategic value of the operational initiatives underpinning these results. We also recognize it was important to reestablish confidence in our ability to deliver a seasonal lift in the third quarter, as we did in 2017 and 2018. And all of this was achievable, of course, due to the value our clients place on the performance marketing services we provide. We believe the fundamental alignment of our clients' needs and objectives with our core competencies and providing them clarity on ROI and predictability that optimizes their marketing budgets continues to validate our market opportunity. Thanks for your support. Now Alex will review the numbers in further detail, and I'll return for Q&A afterwards.
spk03: Thanks, Ryan, and good afternoon. We're pleased to report our results for the third quarter today. As Ryan spoke about, the quarter was marked by innovation and efficiency-driven growth. New consumer-facing promotions experienced favorable engagement, which coupled with enhanced ad-serving logic, yielded strong monetization on that platform. The company generated 78.3 million revenue in the quarter, up 21% year-over-year, albeit in comparison with the challenging quarter last year. Revenue was also up 9% sequentially, The facts of underpinning revenue growth were amplified at the median margin level with $29.7 million and a quarter reflecting growth of 39% year-over-year and representing 37.9% of revenue. This relatively higher margin profile as a percent of revenue relates to the increased monetization or return on media spend that Ryan spoke to earlier. As a partial offset to the increased margin, we incurred higher costs fulfilling rewards earned by consumers. Fulfillment cost is not captured in median margin, but is captured in our GAAP gross cost of revenue. That said, the increased median efficiency outweighed the incremental fulfillment cost, and our cost of revenue as a percentage of revenue decreased in Q3 as compared with 69% in last year's Q3. Our operating expenses on a GAAP basis, comprising sales and marketing, product development, and G&A grew in aggregate by 1.3% or $250,000 over $0.1 million. Within that mix, we continued to invest in product development in support of innovation and efficiencies like those in the quarter. Our G&A line includes certain litigation-related costs of $2.7 million in the quarter, inclusive of a $1.5 million accrual established this quarter as a loss contingency in respect of the New York Attorney General matter, which we first disclosed in our Q1 2019 10Q. GMA also includes $650,000 of non-cash accrued compensation expense relating to the monopoly acquisition. Note, no cash amounts are anticipated to be incurred in connection with this prior to the fourth anniversary of the acquisition, which closed April 1st of this year. Adjusted EBITDA of $11.6 million in the quarter represented 14.8% of revenue and an increase of 167% year-over-year. Interest expense declined by $400,000 year-over-year to $1.3 million as we reduced our debt principle outstanding. In Q3, we continued to be a non-cash federal taxpayer due to the availability of NOF. We reported net income of $1.2 million per quarter, or $0.01 per share, and adjusted net income, a non-GAT measure, of $6.3 million, or $0.08 per share. Our non-GAT metrics are records filed in today's earnings release and our 10-Q and 10-K filings. Turning to the balance sheet, we ended the quarter with $16.9 million of cash and restricted cash. Working capital, defined as current assets minus current liabilities, ended the quarter at $34.5 million, Total debt, as reflected on the balance sheet, ended the quarter at $41.1 million, while including un-amortized discounts, yielded a closing balance of $43.9 million. Our debt balance has declined by $13.1 million as compared with year-on-year. Our team continues to operate seamlessly in a fully-focusing manner, anticipating the uncertainties associated with the upcoming election and potential effects on media supply. the unfortunate continuation of the pandemic, and the holiday shopping season that will likely have a different cadence and arc than any before. At the same time, we perceive that these factors even accelerate the ongoing shift to performance-based digital solutions for marketers and brands who seek measurable outcomes and greater accountability from their ad spend. We believe this plays squarely to fluent long-term market opportunities. We wish you and your families well and hope everyone takes proper precautions to stay safe. We're glad to field questions at this time.
spk02: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we will pause momentarily to assemble the rosters. And our first question today will come from Jim Goss with Barrington Research. Please go ahead.
spk05: Thank you. Several questions. First, given the steadily increasing number of streaming services, it seems, over the course of the year and before this year, does more and more entrance into that space provide you with more opportunity or more competition? I wonder if you could... Navigate that for us.
spk06: Yeah. Hi, Jim. It's good to hear from you. And as a performance marketing company, not an agency, the fact that more and more players are coming into this space is is a positive thing for us. It gives us more products and services to offer to our consumers, more options and choices, which is a good thing. And ultimately, it helps really flesh out that marketplace effect that we've spoken about. So it's a very positive thing for us.
spk05: Okay. And you also mentioned gaming, and you were referring more to apps. But what type of gaming are you referring to specifically? Is it non-betting gaming, or does it include that sort of thing as well?
spk06: There may be some of the game of skill type apps in there, but predominantly these are more social games. They're light, and we have a variety of different gaming apps that we're working with right now. So I think you may be referencing the more game skill type category. That's something that those guys are in customer acquisition mode and growth mode. So we see some of that in terms of our client base, but also a wide variety of gaming apps.
spk05: So it sounds like this would apply to anything that is subscription-based or transactional-based. No wonder it I wonder if there are a lot of other categories you could enter that would broaden your applications as well.
spk06: We absolutely believe that. And as we kind of expand the channels that we're operating in, some of the ad products we delivered, we spoke of our contact center capability, the ability to drive inbound calls, things like that. There are really many different types of product applications that you can apply a performance marketing model against. And that's really something that we're focused on at this point is expanding the amount of product and service categories that we're able to operate in and match our consumer base with.
spk05: Okay. Then the 5% of your business that's international, I think mainly UK, and what you might want to do in Canada, are they going to target the same sort of areas that you're already involved in in the United States?
spk06: Yeah, absolutely. In the UK, we've been able to demonstrate that the dog can hunt, so to speak. And it's something that we anticipate will be something we'll have success on. In other countries, there may be cultural differences here and there that we have to respond to in order to be successful at the type of scale we are here in the U.S., but we ultimately believe it's the same model that's driven all the growth and success we've seen here domestically.
spk05: Okay, and one last one for now. Should the targeted seasonal revenue pattern be one of sequential improvement over the course of the year? I was just looking at the last several years of patterns. And there wasn't a consistent pattern over them over the course of those years. And I'm wondering if that is really what you're seeking to generate.
spk06: Yeah, we're a growth company, and I can have Alex comment to some of the details. in the financials but you you will see some uh occasionally abnormal abnormal growth um from time to time with with the business we noted uh last q3 was a challenging quarter but in 2017 and 2018 q3 saw lift over q2 um generally the back half in q4 specifically tend to be strong for us. So you can, you know, see some macro patterns if you were to look across a longer timeframe than what we may have publicly available. But, you know, ultimately, you know, I can have Alex comment on any of the more specifics, but, you know, the business is a growth business, and we do tend to have certain periods that tend to be outsized a little bit in terms of the growth.
spk05: Okay. Okay. If Alex wants to, go ahead, or we can cover it in a subsequent discussion.
spk03: Sure. I was just going to share what you observed, which is that historically Q4 has been sequentially stronger than Q3. We simply noted on the earnings released up front some of the uncertainties that are present in this year's environment, which make this simply a different type of a year than other years. At the same time, we're cautiously optimistic at this point.
spk05: Okay. Thank you very much. Thanks, Jim.
spk02: And our next question will come from Maria Rips with Canaccord Genuity. Please go ahead.
spk01: Great. Thanks for taking my questions. I just wanted to follow up on your media and entertainment vertical. So it seems like you expect this vertical to remain your most significant growth driver sort of going forward, helped by streaming services and mobile gaming. I guess, how diverse is your revenue from these sources? And are there any sort of revenue concentration issues?
spk06: Hi, Maria. It's great to hear from you. To answer your question directly, no, we don't have any specific concentration issues. No one particular client north of 10%, to my knowledge. And, you know, really we have been enjoying the benefits of a vast array of products and services that our consumers are discovering on the platform and really enjoying. That's been a testament to where we're seeing a lot of growth. So no particular concentration issues at this time.
spk01: Got it. And just maybe another question here. Can you give us an update on your structural profitability? You had a really great flow through this quarter from revenue upside to EBITDA upside. Does this change how you think about the potential for margins over the next year or two?
spk06: Alex, I think you're on mute.
spk03: Hi, Maria. It's Alex. Thanks for the question. Great to hear from you as well. As we think about margin profile over the next year to two years, let's say, I don't think that the experience this quarter necessarily generally changes our outlook. We tested the new promotions that we spoke about that were effective, and at the same time, we're continuing to invest into areas that we see potential opportunity from. So I think there's no material change to our outlook at this point.
spk01: Got it. That's very helpful. Thank you both.
spk06: Thank you.
spk02: And our next question will come from Bill DeZellum with Titan Capital. Please go ahead.
spk04: Thank you. What would you like to share about your plans relative to the higher cost debt that you have on the balance sheet?
spk06: Hi, Bill. I'm going to let Alex field that one directly.
spk03: You bet. Thanks for the question. You know that our credit facility is currently priced at LIBOR plus seven. And suffice it to say that we continue to focus on opportunities available in the market and, you know, review them regularly. And we'll update publicly if there are any changes to that.
spk04: Great. Thank you. Ryan, would you please expand further on the comment you made in your opening remarks about the flywheel? And I know you did kind of give an example later in the discussion, but I want to give you the opportunity to really expand on that, if you would, please.
spk06: Yeah, absolutely. for lack of a better term, Fluent spends money to make money. We go out, partner with many of the major media owners, platforms to go out and traffic our properties. Our clients are on the other end of our digital media properties on a pay-per-performance basis, which makes their campaigns extremely scalable for us. So the flywheel really has to do with that pent-up demand, the fact that our clients want more of what we're delivering, you know, since they can see the ROI so predictably, and essentially really what all we need to do to grow is go out and find more channels in which to traffic those digital media properties and appropriately position our clients' offerings within them. So there's many ways to skin that cat, so to speak, and we're really focused on going out and ensuring we have a vast variety of products and services and clients that deliver those products and services that are, in essence, our demand side of our house. And in turn, that enables us to go out and access more supply, leapfrog competitors to go out and outbid for traffic on, you know, call it a major platform like Facebook or Google or any of our other media partnerships, websites and apps where we acquire audiences from. And in essence, that is the flywheel.
spk04: Great, thank you. And then lastly, the restructuring and severance cost that was referenced, I think $565,000. Would you please detail that?
spk05: Alex, are you on mute?
spk03: No. Okay, we got you. We can hear you now, Alex. Great. Could you please repeat the question, Bill, the $565 in relation to?
spk04: Restructuring and severance costs. What was it? And I'm really asking the question in the spirit that you had a great quarter, so congratulations. But it's a little unusual to have restructuring and or severance during a great quarter. Usually companies save that for a bad time.
spk03: Sure, of course. In the ordinary course, We have people that join the company and that depart the company in different circumstances. We have different agreements in terms of severance and so forth, but nothing major or material per se to discuss further on that one. Thank you for raising the question.
spk02: Thank you. This will conclude our question and answer session and also concluding today's call. We'd like to thank you for attending today's presentation. And at this time, you may now disconnect your lines and have a great day.
Disclaimer