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.
spk00: Good morning. Welcome to Noggin, Inc.' 's first quarter 2023 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. As a reminder, this call is being recorded. Joining us today from Noggin are Jonathan Huberman, President and CEO, and Shariar Ramati, COO and CFO. Before we begin, Noggin's management team would like to remind everyone that statements made and or answers that may be given to questions asked on this call are or may contain forward-looking statements that are subject to risk and uncertainties related to future events and or the future financial or business performance of Noggin. Actual results could differ materially from those anticipated in the forward-looking statements. Forward-looking statements include but are not limited to Noggin's expectation or prediction of financial and business performance and conditions. the development and adoption of Noggin's platform and cost reduction measures, as well as competitive and industry outlook. Forward-looking statements are subject to risk uncertainties and assumptions, and they are not guarantees of performance. Noggin is not under any obligation to, and expressly disclaims any obligation to, update, alter, or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. In addition, a description of some of the risks and certainties that could cause actual results to differ materially from those indicated by the four looking statements on this call can be found in the risk factors section of our annual report on Form 10-K for the year ended December 31st, 2022, filed on March 23rd, 2023. On today's call, we will also refer to certain non-GAAP measures, including non-GAAP revenue and adjusted EBITDA that we view as important in assessing the performance of our business. These metrics exclude certain items as discussed in the release under the heading non-GAAP financial measures. Therefore, these measures should not be considered in isolation or as an alternative to operating income, net income, cash flows from operations or any other profitability, liquidity, or performance measures derived in accordance with the GAAP. You should be aware that the company's presentation of these measures may not be comparable to similarly titled measures used by other companies. A reconciliation of each historical non-GAAP measure to the comparable GAAP measure is available in our earnings release on Noggin's investor relations page at www.ir.noggin.com. Finally, I would like to remind everyone that a webcast replay of this call will be available via the link provided in today's earnings release, as well as our company's website at www.noggin.com. Now, I would like to turn the call over to Noggin President and CEO, Jonathan Huberman.
spk03: Welcome, thank you for joining us this morning for our earnings call. To begin today's discussion, I'd like to provide a quick overview of our business and review this quarter's highlights before turning the call over to our COO and CFO, Shahar Rahmadi, to discuss our financial results for the quarter. After that, I'll share some closing remarks before opening the call for questions. At Noggin, we believe that as e-commerce continues to grow and becomes more sophisticated, there is a large market opportunity to help merchants who aim to execute at the level of customer expectations yet face a common dilemma of increasing complexity as they aim to grow and grow profitably. Intelligent Commerce, Nugget's commerce as a service platform, provides a headless end-to-end technology platform that merchants can plug into instead of paying to integrate multiple technologies, develop complex and difficult to execute capabilities, and have the ability to augment any capability required to enable the success of their digital commerce channel. This allows Noggin to deliver advanced capabilities that are generally too complex and costly for many brands to buy, build, or manage on their own, and will allow them to avoid the distraction these efforts require and instead focus on their core mission with Noggin acting as their trusted partner. These capabilities include full customer data platform, social commerce abilities, AI and ML technologies, and the ability to integrate with a wide variety of systems, including legacy platforms or environments with multiple platforms. Also, Noggin's leading-edge R&D and innovation is built in as a service so that clients are never required to build development or technology resources on their own. Finally, Noggin eliminates the need to re-platform because as we build features and tools, they are immediately available to our clients. Thus, the platform is inherently future-proof. At Noggin, our revenue model is a percentage rate against e-commerce sales conducted through our CAS platform, which ensures complete alignment between ourselves and our clients. Further, our onboarding methodology includes understanding our clients' strategic and financial objectives, and thus our corresponding efforts are aligned and transparent. Our growth strategy is rooted in three key pillars. One, to develop and continuously advance our innovative and scalable commerce as a service platform, that makes enterprise digital commerce accessible to the mid-market and lower mid-market. Two, to increase sales and marketing efforts to drive our pipeline, including efforts in B2B in addition to our focus on D2C. And three, to expand our client base into new markets and products throughout e-commerce, increasing the ability to execute industry-specific expertise in addition to the set of value-added horizontal services we offer, inclusive data analytics and consumer insights. We continue to make progress on all these fronts as we look to the rest of 2023. Looking back, we have three primary goals for our first quarter. First, with the consistent significant demand we've been seeing for our solutions, we believe it crucial for us to convert our sales funnel and expand our customer base. We continue to ramp up our sales efforts in the first quarter, signing seven new clients, a record business development quarter for Noggin. We will carry this momentum into the second half of the year and expect to see this trend accelerating further as we continue throughout the year. We firmly believe that we are just scratching the surface of our overall market opportunity. Many of our new customers specifically chose our solution because of the combination of our technology platform and our digital marketing expertise. A testament to our businesses ability to provide both a turnkey solution, including creative fulfillment and customer experience for some customers and fit for purpose configured solution for others. all while driving underlying attractive unit economics. We believe that this mix of services is key to our long-term growth as we're able to combine our suite of features and the analytical capabilities bound within our platform to provide an unmatched user experience for our customers. Second, we've made it our mission to enhance efficiency through a myriad of cost optimization initiatives. When Sharder and I inherited Noggin's customer base, We began reevaluating Naga's obligations as laid out in some of our legacy customer contracts and quickly realized that a few customers had structures that hampered our profitability. We've worked over the last several months to recalibrate, prioritizing health, profitable revenue growth. As Sharia will discuss further, this recalibration effort has required us to terminate or wind down a few legacy customer contracts, which may cause some revenue headwinds in the short term, and cost full year 2023 revenue to come in lower than full year 2022 revenue. However, we are confident that revenue will accelerate rapidly in 2024 given recent customer wins and our robust business development pipeline. We believe that Q1 was a period in which we needed to take these decisions so we can focus on profitable growth ahead. Even though we've only realized a portion of the benefits of the cost optimization so far, we are already seeing significant benefits to our gross margin, which we expect to allow us to be cash flow positive beginning in Q2 and to be adjusted EBITDA positive for the second half of the year. As discussed last quarter, we expect our initial cost and performance improvement program to drive $15 to $20 million cost impact for the full year 2023, and we believe we're positioned well to solidify that impact over the next few quarters while realizing further opportunities as well. And third, it was an important goal of ours in the first quarter to execute a capital raise in order to comfortably manage our business into 2024 and beyond. We successfully completed an oversubscribed $22 million raise last month, which included material participation from management. In total, we expect that our efforts over the last few months will have us on the right path to drive our preferred long-term operating model, which we believe will help us generate healthy, sustainable revenue growth moving forward. especially in the current economic environment. Brands are searching for ways to reduce costs while driving improved results, and our platform is uniquely positioned to help customers do just that. With Noggin, high performance and cost effectiveness are never mutually exclusive choices. We are confident in our technology, our team, and our strategy, and look forward to capitalizing on our strong momentum over the rest of 2023. With that, I will turn the call over to our COO and CFO, Shariar Rahmadi, to discuss the first quarter financial results in greater detail. Shariar.
spk04: Thank you, John. Turning now to our financial results for the first quarter ended March 31st, 2023. As noted last quarter, our net revenue includes product-related revenue that stems from two previous deals that involve sales-related to first-party inventory purchases. If that inventory is sold, generated revenue appears within net revenue. in our GAAP results. Our non-GAAP revenue, however, is revenue generated by the core commerce as a service platform and associated services. We typically view non-GAAP revenue as a more accurate indicator of the business and expect our GAAP and non-GAAP revenues to converge over time. GAAP net revenue in the first quarter of 2020 decreased 34% to $16.7 million from $25.2 million in the first quarter of 2022. The decrease in net revenue was primarily due to a decrease in product revenue and net revenue from related parties. As John noted previously, much of this impact comes from our revenue recalibration efforts, which have involved scaling back from several legacy customers while we prioritize opportunities that will help us drive our profitability metrics moving forward. We believe these adverse revenue impacts to be short term in nature and are confident that our expected long term profitability will benefit necessitated these initiatives. For the first quarter of 2023, non-GAAP revenue, a non-GAAP measurement of operating performance, decreased 25% to $13.9 million from $18.5 million in the comparable year-ago period. The decrease in non-GAAP revenues was primarily due to decreases in cash and marketing revenues. Operating loss in the first quarter increased to $12 million compared to an operating loss of $10.1 million in the comparable year-ago period. The increase in operating loss was primarily due to restructuring charges and other one-time items. The expected impact of the company's cost and performance improvement program, based on initiatives already implemented thus far in 2023, is expected to be between $15 and $20 million. Further, we expect that these activities will be achieved to their full run rate impact before the end of Q2 2023. Adjusted EBITDA loss decreased to $5.9 million compared to an adjusted EBITDA loss of $8.9 million in the comparable year-ago period. The decrease in adjusted EBITDA loss was driven by our cost optimization efforts as well as the partial period impact of the aforementioned commercial decisions that we expect to continue to materialize throughout the balance of the year and beyond. Moving to our outlook for 2023. As of today, and based on our progress here today, we expect to drive growth via both existing customer sales as well as new customer agreements, both of which will have a positive impact on our ability to increase revenue over time. Additionally, based on the initial results of our cost reduction and performance improvement program, we expect to improve our operational efficiency, increase adjusted EBITDA, and generate significantly increased operating leverage in the future. Therefore, we're providing the following financial outlook for a full year 2023. We expect net revenue to range between $70 million and $75 million, and expect non-GAAP revenue to range between $60 million and $65 million. We're also setting our financial forecast for the 2024 calendar year for non-GAAP revenue and adjusted EBITDA margins. For the full year 2024, we expect non-GAAP revenue growth to be greater than 40% compared to our full year 2023 results and adjusted EBITDA margin to be greater than 10%. Our margins are expected to continue to improve as we realize the benefits of the aforementioned initiatives, realize operating leverage associated with the revenue growth, and favorable mix driven by certain key customer wins that will have larger components of technology revenue. As we execute against our strategy over the course of this year, we expect to drive improved results and look forward to providing incremental updates going forward. That completes my summary. I'd now like to turn the call back over to John.
spk03: Thanks, Sharder. As we grow and continue to scale our product and service offerings, our clients' e-commerce operations will scale in parallel. Our modern approach to commerce allows brands and sellers to grow more profitably and without upfront costs, while still focusing their efforts on their core businesses instead of the resource-intensive nuances of e-commerce. With our focus on cost optimization over the past few months, we believe we've positioned ourselves to grow profitably as well. Here at Noggin, we are excited about the future and confident in our ability to execute against our growth strategy moving forward. Our traditional commerce as a service business is strong, and with our expanding pipeline of business across a number of industries that are interested in our solution, we are confident in our roadmap for sustainable growth in the coming quarters. Operator, please open the call for Q&A.
spk00: Thank you. At this time, we'll open the line for questions. The company requests that each participant limit their comments to one question and one follow-up. 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. Now, our first question will come from Jeff Van Zenderen with B Raleigh.
spk01: Hi, good morning, everyone. Um, wonder if you can speak a little bit more about, and I know you had a record number of new, uh, new customer wins this quarter, but maybe just talk a little bit more about the pipeline of that new business. Um, maybe what it looks like in terms of concentration of various components that you offer. How much is the full CAS service? And perhaps, you know, variation thereof. And then maybe you could give us a little more on the timing of when those new clients that have signed will convert to meaningful contribution to revenues.
spk03: Sure, I'll take the first part, and, Char, you take the second. So in terms of the pipeline, it's a very strong pipeline we have currently. The coverage of our forecast is pretty significant and a lot of near-term opportunities to give us the confidence and the projections we've made. In terms of concentration on two fronts, one, industries and two, product. So on the industry side, historically, we've been fashion apparel dominant. of that is changing it's not that we're not being successful there we are and a big a sizable portion of our pipeline is in that space but we've diversified out dramatically from just that space uh fashion apparel into both d to c as you've seen with some of our recent wins uh like giordano's heartbrand beef and in the food industry um but also into plays into B2B, which you'll see, you've seen some deals that we've discussed and others that are being signed soon. On the B2B side, we're a little bit more, it's more difficult for us to get our customers to help to allow us to put up press releases on those because they see it as a competitive differentiation. And so they prefer to keep it quiet who they are and what they're doing. but we're seeing a tremendous amount of opportunity and closing rate is pretty high on the B2B side. In terms of the suite of products that we offer, all of our customers going forward are buying at least a cast. And historically, for those who don't understand, we had one set of offerings that was combined between our commerce as a service the technology platform that is the marketing services and fulfillment services historically you had to buy all of it we've disassociated that where you we will allow people to buy to of course buy our past software all of our deals come with the cast and then the marketing fulfillment most people are buying the vast majority of buying marketing and And most are buying fulfillment. The ones who aren't buying fulfillment come in two flavors. One, the B2B guys who have very strong fulfillment arms, but also places where they have fulfillment needs that are somewhat specialized. So, for instance, Giordano's Pizza, they use co-packers in the cold chain space to do the fulfillment, which clearly is not something we want to invest behind. So, Shari, do you want to answer the second half of the question?
spk04: Sure. So, with respect to the customers that we signed, there are a group of them that will begin to contribute to revenue in Q2 because, you know, meaningfully at close to full run rate, if not full run rate, because of the nature of those agreements. and the time to onboard them and have them running on our platform. And another group of those customers are nearly evenly split in terms of number that will be onboarding throughout Q2, but whose revenues will be more material in Q3 and in Q4. And the customers that fall into that category have disproportionately large revenue potential even relative to many of our existing customers.
spk03: One thing I'd like to add, especially for those who don't understand how we take people live, we generally take them alive within 60 days of signing. In contrast to typical e-commerce solutions, if someone's looking to do something on their own, which can take one to two years. That said, this quarter, Q2, that we're in, you'll be reading shortly about a customer we've won that is a very large, sophisticated omni-channel customer that we managed to take live in less than two weeks. I think it was 10 days from start to finish. So, you know, I think our ability to get someone up and running is frankly unparalleled in the industry.
spk04: Maybe just one last point there, if I may, John, is just, you know, along the lines of the question there, Jeff, with respect to pipeline is that, you know, in previous calls, we mentioned a partnership that we were working on with a global technology consulting firm. And we're happy to say that we have signed that agreement. And again, expect to be, and did so just days ago, and expect to be able to announce that in the near term. And I think you'll have a good sense of how that partnership connects with advancement in the marketplace.
spk01: Okay, great to hear. And then just as a follow-up to that, since you mentioned the digital marketing component, maybe you can just touch on the new partnership with Hawk and the benefits of that going forward.
spk03: Sorry, you want to take that?
spk01: Sure.
spk04: So as we have a platform that has incredibly robust analytical insights and consumer insights around what our both visitors and returning customers are doing on-site, We've really been seeking the best set of tools to magnify and monetize the value of those and the related investments in those. And we've had familiarity with Hawk and known them and worked with them in various capacities in the past and sat down to discuss a more strategic approach. They're working together to really maximize the acquisition marketing side of efforts, given the combination of their scale and capabilities and team in that regard, and the leverage they can provide with respect to the size of their platform to the efforts that we're conducting there. You know, we have our team, which was transferred over to their business, so it's the same group of people. that we're working with in Noggin previously. However, that's just been augmented tremendously by additional expertise and staff and scale within their organization, which has come to us with nominal incremental costs and actually expect that that potential even is at no incremental cost over time. The other thing that that partnership gives us is the ability to demonstrate working with a top-tier digital agency whereby Noggin's offering the platform that we have and the data that we make available for acquisition and retention marketing creates a new channel for us whereby we can work very closely with the strategic partner to prove the thesis and get the plumbing of those dynamics worked out and then scale that to the dozens of other large national agencies that operate potentially as channel partners for non.
spk03: Yeah, just to add one more thing, as we discussed in the prepared remarks, we expect we're going to be growing pretty dramatically. And a lot of that growth is driven by our pipeline that you asked about. On the performance marketing side where Hawk helps us out, that requires scale, and they can provide the scale very quickly. And as they need to hire more people, it's, I think, more effective for them to do it, given that's their core business, and for us to try to build that up as sort of an ancillary piece of our business. And so I think that was one of the concerns we had is, are we able to keep up with our growth if we don't do something like this? And so, hence, we did.
spk01: Okay, great. Thanks for taking my questions. I'll take the rest of them.
spk03: Thank you very much.
spk00: Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your touchstone telephone. Our next question comes from the line of Brian Kintzlinger with Alliance Global Partners. Your line is now open.
spk02: Hi there. This is Shervin on for Brian. Thanks for taking my questions. Thank you. So congratulations on adding those seven new brands. That's really great to hear. Could you quantify your total customer count and where you expect it to be at your end?
spk03: Yeah. So our customer count, we don't normally give exact numbers to the fluctuates here and there, but you know, we're, when we inherited the business, we're at about two dozen. We are now roughly double that. And if you look at the number of deals, as we discussed in our previous call, we expected to sign eight new deals between mid-March and early April. Obviously, we talked about the seven we signed in mid-March because that's when the quarter ended. We did sign at least one more past that in that timeframe. You know, I expect if you look at the quantification doing eight to 10 new deals, a quarter new brands is probably a good way to look at it. So basically keeping up the pace we're on, if not accelerating, as Char mentioned, we literally over the weekend signed the relationship with the large consulting company. that we've previously discussed and the name and our relationship will be coming public shortly, more public. We honestly, with the pipeline we have talked to you about, doesn't include anything from them. So I expect that's what we've been doing organically and our organics accelerating. Whatever they bring is incremental that and obviously we have pretty high expectations from them, otherwise we wouldn't have spent as much effort getting them signed. That's sort of where we are today. If you ask me in another quarter, hopefully it'll be an even bigger number.
spk04: I think also to add to that, as you see us going throughout the year, I think you'll see that some of the brands that we'll be signing and some of the relationships that we'll be developing will be larger in size and scale than some of the
spk03: clients that we've had historically so in addition to the ordinal uh numeral value of the clients um where where we can we'll give as much color as to some of those uh larger relationships and one space that i mentioned earlier talking about you know we branched out of food and b2b uh another space that we've signed but have not announced yet is um in consumer electronics as well which could be a very interesting channel for us
spk02: Great. Thank you so much, guys. One other question. In the challenging economy, are customers generally reluctant to move forward with a direct-to-consumer strategy? Do you see pressure from that area? Or is the prospect of a high-margin direct channel appealing to help offset likely pressured sales?
spk03: Well, it's the latter, not the former. Yes. Obviously, in a market like this where our clients are challenged, the retail segment having high profit easy to target direct to consumer and easy because they outsource to us and we do it for them so you don't have to it's completely op-ed it's all op-ex there's no capex it's scalable so as we take as mentioned we take a percentage of revenue so it's of just of the e-commerce that we do so it's all incremental to them there's huge demand and as people look to cut costs and, but on OpEx on their side, in terms of headcount, you know, this is a way for them to drive a revenue stream. That's again, inexpensive for them to do and very additive to their top and bottom line. So I think it's X or the market. And we talked about this, I think six months ago. We said if we head into a recession or a recession-like environment, that we believe it's going to be positive for us overall, even though, you know, at some level, if overall consumer spending comes down, that may hit individual customers at, you know, at each individual level, but it'll bring so many more customers to us that additive nature is going to, you know, help us dramatically. I think we're seeing that. Shari, do you have anything to add?
spk04: I think one of the customers that we – that we signed this quarter actually became profitable by virtue of the agreement with us. And so the amount of cost savings that they were able to realize in their brand not only would bring them revenue growth, but would actually bring them immediate profitability. And when I say immediate, I mean that within a 60-day time frame, so perhaps short term. And the other channel to think about is one that, as we've mentioned B2B briefly, to unpack that for a quick second here is manufacturers, distributors, companies that have not a first party relationship to their end customer are ones where the incrementality of the profit and the margin associated with the revenue stream that is created and the nuances that they're able to execute, whether it's E&O disposition, whether it's new product launch acceleration, or frankly, whether it's just without one or two more parties in the chain consuming margin, those companies in an economically challenging environment or volatile environment C, D to C, as we've explained and shared with them as an attractive hedge or an additive vector to their aggregate profitability. And we've had that conversation directly with companies. That conversation has also resonated profoundly and rapidly with private equity firms as a channel who viscerally understand all dimensions of that equation.
spk03: I didn't mention this earlier. You may just want to talk about the success we're having in private equity.
spk04: Some of the customers that we've signed this quarter have come from the private equity channel. In addition, we have a material number of opportunities in the pipeline that are coming from private equity, both mid-market firms as well as some larger firms where they seek to build a digital commerce channel within their portfolio companies but don't want to incur the one-time cost the management distraction the uncertainty around success frankly not have the best practices and all of the associated things that come with that coupled within a obviously a time constrained holding period um And so, at the moment, we've reached out to a small group of firms to be able to scale and test and hone our strategy there. The results have been fantastic, near overwhelming, and we've built and are building the ability to really scale there because, honestly, we see no ceiling. in what's available in that channel and we see incredibly rational, incredibly sophisticated folks in that industry that by virtue of their ownership and engagement with the C-suite and ourselves also have a very short time to revenue in building D2C or B2B commerce.
spk03: And one of the beauties of the private equity channel is because of the tight relationship between ownership and management, our sales cycle is an order of magnitude shorter.
spk02: All right. Thank you so much, guys. Really excited to see the progress moving forward. Thank you.
spk00: At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Huberman for closing remarks.
spk03: Okay. Well, thanks, everyone, for joining us. I appreciate it and look forward to talking again soon. Have a good day.
spk00: Thank you for joining us today for Noggin's first quarter 2023 earnings conference call. You may now disconnect.
Disclaimer