Fluent, Inc.

Good afternoon and welcome. Thank you for joining us to discuss Fluent's third quarter 2024 earnings results. With me today are Fluent's Chief Executive Officer, Don Patrick, Chief Financial Officer, Ryan Perfit, and Chief Strategy Officer, Ryan Shulke. Our call today will begin with comments from Don and Ryan Perfit, 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 Fluent's website. To access the webcast, please visit the Investor Relations page at 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 only speak as of the date hereof. Actual results could differ materially from those stated or implied by such 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, 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 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, management will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA, and adjusted net income. Management evaluates the financial performance of the company's business on a variety of indicators, including these non-GAAP metrics. 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, Don Patrick.

Good afternoon. Thank you all for joining our call today. I'm here together with Ryan Shulke, our Chief Strategy Officer and Company Co-Founder, and Ryan Perfitt, our Chief Financial Officer. I will start with some brief comments regarding our strategic repositioning of our business and progress against our initiatives in the third quarter. On the strategic front, we've been clear regarding the business pivot we are making in our growth strategies that is grounded in leveraging our leadership position and competitive advantage in our owned and operated marketplaces as a springboard into new high volume high-growth syndicated performance marketplaces. We are highly energized by the progress we continue to make, and we are rebranding our syndicated marketplaces as commerce media solutions to better reflect our broad-based marketplace solutions that represent long-term growth opportunities for Fluent and for the industry as a whole. As a result of our repositioning, Fluent is organized around three synergistic business solutions that we will use to strategically frame our business moving forward. Our commerce media solutions enables and empowers businesses to monetize consumers on their commerce website maps by connecting advertisers to their most relevant customers. This includes our post-event and post-transaction offerings, including Fluent's AdFlows brand. We continue to see strong growth here, and margins that are accretive to the core. Owned and operated marketplaces is our performance marketplace focused on customer acquisition for world class brands. This is our legacy business where we've built valuable consumer acquisition, engagement and monetization expertise, along with proprietary first party data, technology and AI. Our leadership position in this marketplace provides us a distinct competitive advantage as we continue to pivot into commerce media solutions. Our goal here remains to financially stabilize this business, focus exclusively on the core assets that provide proprietary capabilities and competitive advantage for long-term growth. Additionally, we have our call solutions business and ad parlor agency business that provide performance marketing and agency services for health, retail, and direct-to-consumer verticals. These businesses strategically enhance both our media capabilities and our customer expertise, while deepening our relationship with critical industry verticals. Our commerce media solution represents the tip of the spear in our strategic growth agenda. as we accelerate Fluent's brand in very large, high-growth, dynamic markets, where we can unleash our core owned and operated grounded capabilities, providing us with a unique competitive advantage in the marketplace and our broader industry. In the earnings release today, we reported quarterly results that continue to demonstrate the meaningful progress in our new commerce media solutions that has delivered triple-digit, year-over-year revenue growth every quarter this year. while also reflecting some cyclical advertising headwinds in our owned and operated marketplace related to the presidential elections that had an effect on our ability to acquire media at acceptable margins. Our third quarter financial results were as follows as we continue to deliver sequential trend line improvement via our strategic growth agenda. Revenue of $64.5 million, representing a 9.9% increase versus Q2 2024. Our median margin of $18.2 million was an increase of 15.9% versus Q2 2024. Adjusted EBITDA of negative $0.1 million represents a negative 0.1% of revenue. Our Q3 quarter results were primarily driven by two major business and industry trends. Our commerce media solutions continues to accelerate, adding 15 new partners in Q3 and growing revenue aggressively by triple digits year over year, while also expanding margins as we scale. This year over year growth continues to shift the mix, consistent with our strategic and financial growth agenda, as we continue to establish fluent differentiated marketplace position in the market. In Q3 2023, commerce media accounted for 3% of our revenue compared to 16% in Q3 2024. And we expect this percent of revenue to continue to increase going forward. Our owned and operated marketplace revenue and media margins were negatively impacted by the enormous social media advertising spend driven by the US presidential election. Starting in late August, media costs on the biddable platforms increased significantly, which affected our ability to buy media at acceptable margins. Given our long-term commitment to further establish our equity and more rapidly grow our commerce media solutions business, we consciously chose not to chase this volume at unacceptable margins. Over the past week, we have seen media pricing start to come back to a more traditional levels after the election. So our momentum continues to accelerate. We remain confident that we've reached the initial stage of Fluent's financial rebound, given the foundational elements that we've established in the consumer media solutions. As a result of the business and industry trends outlined above, we expect continued strong quarter over quarter revenue growth in Q4. And in 2025, As our business mix continues to shift into our commerce media solutions, our momentum will build. We anticipate a strong year-over-year consolidated double-digit revenue growth. Let me step back and provide investors with more context around the opportunity in front of us in the commerce media front. According to Boston Consulting Group, The commerce media industry is currently estimated over $50 billion annually, is expected to reach over $100 billion, and predicts that it will account for over 25% of the digital media spend by 2026 as the market continues to evolve both traditional and digital advertising. Fluent's commerce media solutions both enables and empowers our commerce partners to participate in the large and rapidly growing commerce media market. a transformative advertising channel that has exploded over the last three years. We continue to align our strategic priorities and tactical execution with the definitive goal to capture an expanding share of this critical and vibrant market. Fluent's commerce media solutions are designed to provide advertiser and media partners with high ROI marketing solutions while enhancing the quality of our revenue base. Our proprietary first-party data and embedded AI-powered technology allow us to establish long-term contracts and mutually beneficial revenue share agreements with our media partners. Our commerce media solutions leverage our established owned and operated marketplaces, where over 14 years of expertise in customer acquisition and performance marketing experience provide us consumer access and insights that give us a distinct competitive advantage in the market. As part of the company's strategic pivot in 2023, the Commerce Media Solutions business continues to exhibit long-term growth potential and generated revenue of $10.4 million in Q3, and as I stated earlier, represents triple-digit growth over the same period last year. Importantly, with the partners that we've added throughout the year, we've also surpassed a $50 million annual revenue run rate as of September 30, 2024. More detail on how we calculate the annual revenue run rate operating metric is in today's earnings release. And we continue to accelerate our momentum with adding additional five new partners being added in Q4. It is also important to note that we're seeing higher gross margins in our commerce media business with gross margins in Q3 at 33% versus consolidated gross margins at 24% in the quarter. One of the key reasons we remain strategically and financially enthusiastic about our ongoing path is that we've established beachheads for growth in multiple verticals, including retail, ticketing, quick serve restaurant, and grocery, to name several. And in 2025, our plans are for continued expansion into additional verticals where we see strategic partnership growth opportunities with our clients, including entertainment, travel, and finance. As a reminder, and as we've discussed in previous earnings releases, as we are rapidly growing our commerce media solutions business, the fundamental business model includes a longer sales cycle that can affect our quarterly trajectory based on the enterprise sales process, priority of the partner's technology integration, and seasonality of certain verticals. And we're looking forward with the strategic intent to broaden our position in the commerce media solutions marketplace. In 2025, we'll be updating you further regarding our additional growth and expansion plans for a new loyalty solution. This is an exciting adjacent marketplace where we believe we can play a highly differentiated industry leading role with our clients beyond post-transaction that enhances the consumer engagement experience, increases retention, and builds loyalty across our partners' commerce platforms. We continue to work with select partners on this innovative loyalty solution to further validate our proof of concept. We have leading edge industry capabilities that provide a next generation loyalty solution with what we believe is especially compelling economic value proposition to advertisers and partners alike. This is a powerful and unique strategic combination. a marriage of our owned and operated leadership position, coupled with insights that are proprietary to Fluent, while leveraging the credibility we are earning with our commerce media platform as a launching point into relevant early-stage marketplaces. Based on our partners' robust feedback, we believe this is another large growth opportunity that is right in our sweet spot. So stay tuned on this. So hopefully you can now better understand why we're energized by the early performance of our commerce media solutions business and look forward to driving aggressive, profitable growth and value for advertisers and for 80 plus media partners as we continue to prioritize and scale the strategic segment of our business. Bottom line, we have major brands enthusiastically endorsing our commerce media strategies. and those new partnerships will go live and contribute to revenue in subsequent quarters, Q4, and into fiscal year 2025, as we align against executional tactics and timelines. Our focus remains on expanding our market share through continued growth in our commerce media solutions business, while positioning Fluent Enterprise to return to consolidated year-over-year growth that we believe will accelerate sequentially throughout 2025. We are quite enthusiastic regarding the strategic and financial roles that our commerce media solutions business is playing, and we continue to shift our revenue and gross profit mix in delivering our long-term growth agenda. As we continue to expand our platform, we are strengthening Fluent's brand equity with our partners while delivering higher enterprise margins than our owned and operated marketplaces. And as the strategic trend line continues in 2025, we believe shareholder value will follow. And with that, I'll turn it to Ryan Perfect to provide more detail on our financial results.

Thank you, Don, and thanks to everyone who's joining us today. I'll now provide some additional details on our Q3 earnings. We generated revenue of $64.5 million in the third quarter of 2024, down 2.6% from prior year and up 9.9% sequentially compared with Q2. As Don mentioned in his remarks, we're intently focused on our strategic shift in revenue mix and higher gross margins related to commerce media. We believe this represents a significant opportunity for Fluent as more media partners and advertisers are turning to this dynamic advertising medium to maximize customer monetization and return on ad spend. Since its launch in Q1 2023, Commerce Media Solutions has demonstrated triple-digit year-over-year growth and driven this business to an increasingly larger part of our revenue and gross profit. Our sequential growth in revenue in the quarter was in part driven by Commerce Media Solutions, which increased to $10.4 million in the third quarter, compared with $7.3 in the second quarter and $2.3 million in the prior year period, thanks to new long-term contracts with media partners in the ticketing, retail, grocery, and QSR sectors. Owned and operated revenue was down 18% year-over-year, but we've begun to see some quarter-over-quarter stabilization in media supply in this marketplace. While we do expect these year-over-year declines in our owned and operated marketplace to continue into Q4, we believe this will be offset by the improving performance of our commerce media solutions as this business continues to scale. Media margin in the third quarter was $18.2 million, which represents 28.1% of revenue compared to 19.3 million and 29.2% of revenue last year and 15.7 million and 26.7% of revenue last quarter. As we've said in previous quarters, we expect media margin as a percentage of revenue to improve over time as we continue to scale commerce media solutions. During the third quarter, Our commerce media solutions business produced media margins of 33.7%, meaningfully higher than our consolidated media margins. On a gap basis, total operating expense in the third quarter of 2024 totaled $17.2 million, a decrease of $488,000 compared to the third quarter of 2023. G&A in the third quarter of the current year was $9.1 million, compared with $8.7 million prior year. The slight increase was due primarily to the absence of a $1.6 million credit for certain litigation and related costs due to an insurance reimbursement for previously incurred legal fees and an increase of $205,000 in restructuring and other settlement costs. Additionally, we recognize no goodwill and intangible asset impairment charges in the quarter, compared with goodwill and intangible asset impairment charges of $29.7 million in the third quarter of 2023. Adjusted EBITDA in the third quarter of 2024 was negative $71,000 compared with negative $1.7 million in Q3 2023, or an increase of approximately 94%. As stated in our second quarter call, we expect adjusted EBITDA margin to improve as our revenue mix continues to shift to commerce media solutions. The company cannot provide a reconciliation to expected net income or net loss as a percentage of revenue for 2024 due to the unknown effect, timing, and potential significance of certain operating costs and expenses, share-based compensation expense, and the provision for or benefit from income taxes. Interest expense in the third quarter increased to $1.3 million from $936,000, primarily due to a higher average interest rate on our term loan with SLR as compared to our term loan with Citizens Bank in the prior year period. For the quarter, our income tax benefit was $35,000, an effective tax rate of 0.4%, which differed from the statutory federal income tax rate of 21% primarily due to state and local tax expense and losses for which no tax benefit is recognized. This is compared to an income tax benefit of $1.2 million and an effective tax rate of 29.2% in the third quarter of 2023. In the quarter, we recognized a fair value adjustment of convertible notes entered into with related parties of $2.8 million. We reported a net loss of $7.9 million in the third quarter, compared with a net loss of $33.6 million in the prior year period, and an adjusted net loss, a non-GAAP measure, of $3.7 million, equivalent to a loss of $0.22 per share in Q3 of 2023, compared with an adjusted net loss of $4.1 million or a loss of $0.30 per share in Q3 of 2023. which excludes the previously mentioned impairment charge in the third quarter of 2023. Now turning to our balance sheet. We ended the quarter with $7.8 million in cash and cash equivalents, including restricted cash. Long-term debt, as reflected on the balance sheet as of September 30, 2024, was $33.1 million, an increase of approximately $2.6 million from $30.5 million at December 31, 2023. Additionally, the balance sheet reflects $2.1 million of convertible notes with related parties marked to fair value at $4.9 million. As of September 30, 2024, we had an outstanding principal balance of $32.5 million on our credit facility with SLR Credit Solutions. This facility provides us with a $20 million term loan and a revolving credit facility of up to $30 million that matures on April 2, 2029. In the third quarter, we invested $1.2 million into product development CapEx, largely to support the growth of Commerce Media Solutions as this business continues to scale. This compares to $1.7 million invested in Q3 of 2023. The decrease is primarily related to lower spend on IT-related vendors. Overall, we're encouraged by the ongoing growth of Commerce Media Solutions. and the opportunities that we're seeing in the market related to this business. Our 14 years of experience in customer acquisition through our owned and operated marketplaces differentiates us from our competitors, and we believe we're well-positioned to continue capturing market share in this new high-growth sector of digital advertising. We're happy to take questions at this time.