Digital Media Solutions, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Digital Media Solutions third quarter 2020 earnings conference call. At this time, all participants are in 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Edward Parker, Head of Investor Relations. Thank you. Please go ahead.

Thank you for joining us to discuss EMS's financial results for the third quarter of 2020. With me on the call are Joe Maranucci, co-founder and CEO, and Randy Kubik, CFO. By now, everyone should have access to our earnings announcement. This announcement may also be found on our Investor Relations website. Before we begin, I would like to call your attention to our safe harbor provision for forward-looking statements in our financial results press release. The Safe Harbor version identifies risk factors that may cause actual results to differ materially from the contents of our forward-looking statements. For a more detailed description of the risk factors that may affect our results, including disclosure about the effects of the coronavirus outbreak, please refer to our financial results press release and our SEC filings, including the registration statement filed on Form S-1 in August. Also during this call, management's commentary will include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures for our reported results can be found in the tables of our financial results press release, which have been posted to our investor relations website at investors.digitalmediasolutions.com. The additional financial and other information to be discussed on this call can also be found on our investor relations website. Now, I'd like to turn the call over to Joe.

Thank you, Edward, and good afternoon. And thanks to everyone for joining us today on our second earnings call as a publicly traded company. We are happy to report another quarter of strong growth as we execute on our proven strategy of providing digital performance advertising solutions that connect digital advertising clients with their prospective customers. During Q3, we saw significant expansion in our insurance vertical, and we reached a meaningful volume milestone as we grew both our client base and the revenue from existing clients. More to come on that ahead. Because our digital performance advertising solutions effectively de-risk ad spend while helping our advertiser clients connect with more consumers to expand the number of customers to whom they deliver products and services, we are anticipating over-index growth in Q4 as the digital advertising transformation intersects with an anticipated record-setting OEP and holiday season. Execution continues to be strong, delivering robust sequential growth with particular strength in auto insurance, health insurance, including Medicare and private insurance, and e-commerce, with the pandemic proving to be an accelerator for our business. With that said, coronavirus continues to be a health challenge for the United States, and our thoughts continue to be with everyone who has been impacted. Turning back to our results, as we near the end of 2020, we're seeing many encouraging trends, including consumer shopping for more products online, which has hastened the ongoing shift from offline to online advertising, continued and growing strength in many of our core verticals, and the resumption and acceleration of ad budgets that were delayed and deferred earlier in the year as a result of COVID-19. We experienced strong results as we closed Q3 in September and have continued to see additional linear expansion in October and into November and are expecting a very strong finish to the year. I'll expand on this in a moment. We're clearly excited about BMS's strong position to serve the large and growing digital advertising market, with U.S. digital ad spend expected to reach $130 billion in 2020. By leveraging our proprietary advertising technology and first-party data assets, we help our advertiser clients efficiently deploy ad dollars that result in them interacting and engaging with new customers. Let me begin with some third quarter highlights. In the face of unprecedented volatility and uncertainty, we're pleased with our execution in the quarter, as our business benefited from sustained secular demand from digital performance advertising solutions. Our Q3 adjusted revenue finished at $85 million, representing growth of 11% quarter over quarter and 43% year over year. Specifically, we've seen outpaced growth within the insurance segment of our business. Again, we'll touch on this a bit more later in the call. Our adjusted EBITDA for Q3 totaled $14 million, representing growth of 8% quarter-over-quarter and an adjusted EBITDA margin of approximately 16.5%. Randy Kubik, our CFO, will provide more detail on Q3 2020 financial results in a moment. Now, I will drill down a bit more into our third quarter results. As I mentioned, we are pleased with our strong sequential growth. Against the backdrop of an accelerating shift from offline to online advertising, marketers are increasingly demanding partners that can prove clear ROI on ad spend. Because DMS works on a pay-for-performance model, our digital performance advertising solutions provide a transparent ROI measurement and predictive capabilities for our advertiser clients. As a result, there is clear attribution with regard to media dollars spent on consumer engagement and customers acquired, and we continue to see these trends play out in our favor. The more success advertiser clients have with a DMS solution, the more ad budget they shift to DMS to scale their campaigns. In fact, our top 20 advertiser clients scaled their ad spend by 4% quarter over quarter and our top 10 insurance advertiser clients increased their spending with us eight percent from q2 to q3 additionally many of our verticals such as insurance financial services healthcare and automotive are still in the early stages of a transition away from advertising on traditional media channels like tv to advertising on digital media channels that we utilize to better illustrate this point the auto insurance industry is projected to invest 72% of its advertising budget in digital by 2024. For example, during Q3, we saw continued strong momentum in our auto insurance vertical. Using numbers to quantify this momentum, On our Quotes of Marketplace, we saw quote request volume scale 52.3% from Q2 to Q3 2020. This increase in quote requests resulted in quotes of related revenue climbing by 88.3% during the same period. During Q3, we surpassed a meaningful milestone for the number of consumer insurance quote requests provided by ZipQuote, our insurance agent platform. As of July, 6 million consumers have been connected with auto insurance carriers through ZipQuote. Our insurance vertical exists across both brand direct and marketplace solutions. The stats previously mentioned are with regard to our marketplace insurance business. For our brand direct solutions, Business serving the auto insurance market increased by 48% in Q3, a $3.9 million increase over Q2, with major insurers who leverage our digital media platform, engaging more consumers across a wide range of digital channels at scale to increase their quote requests. Shifting away from auto insurance, our business also serves the life insurance, health insurance, and Medicare categories. and for the last two categories we've made necessary investments in q3 which set us up for the aep and oep period happening this quarter more to come on that later Across our entire business, we signed on 33 new advertising clients in Q3, including two Fortune 100 insurance providers and other leading brands across insurance, home services, e-commerce, consumer finance, education, nonprofit, and other verticals. While we experienced revenue growth during Q3 as a result of this new business, we anticipate that much of the benefit of those new advertiser clients will be recognized in Q4 and beyond. In addition to being in the midst of their transition to digital advertising, these verticals I just mentioned are highly competitive verticals because of their significant ad spend. As we continue to expand our wallet share in these areas, we sometimes must do so at lower margins for a period of time. This is the result of expanding existing distribution channels like search, social, display, and native, while at the same time adding new media channels like connected TV. Moving on to Q4, the SmarterCAS acquisition has been integrated and harmonized into the broader DMS ecosystem, and one of our new e-commerce advertiser clients is a global platform for custom tech accessories, delivering high-quality products to millions of consumers around the world. Their latest collection is benefiting from alignment with the recent iPhone 12 launch. On behalf of this advertiser client, we are leveraging digital performance advertising to promote their iPhone 12, iPhone 12 Mini, iPhone 12 Pro, iPhone 12 Pro Max accessories for which sales are currently at escalated levels. In addition, this e-commerce brand has recently launched mobile phone accessories made from and packaged within recycled materials. and they also have a new anti-microbial phone case product line. We expect demand for the mobile handset accessories, including the iPhone 12, to continue throughout the holiday season. The DMS advertiser client roster also includes many well-known and trusted nonprofit organizations who work with DMS to recruit sustained donors. Sustained donors are donors who make recurring monthly donations, like subscriptions. Compared to 2019, we've added four new nonprofit advertiser clients, and we have grown sustained donor volume by more than 60% over 2019 for our core nonprofit advertiser clients. This sustained donor growth is very important this year as the pandemic has forced nonprofits to suspend their face-to-face canvassing and other in-person fundraising efforts. As a result, many nonprofit organizations have shifted large portions of their donor recruitment budgets to digital performance advertising, which delivers results while de-risking media spend. Previously in this call, I mentioned the positive impact digital advertising has experienced as a result of COVID-19. During the early days of the pandemic, we saw major brands pulling and deferring ad budgets while prioritizing resources for a work-from-home transition. Starting in late April and through the summer, coronavirus has been an accelerator for digital ad spending. Advertisers within our core verticals are now spending more to leverage our audience reach and achieve significant impression volume across digital media channels, including social, search, display, and native to target, connect with, and convert high intent consumers. COVID has hastened the adoption of online shopping across all generations, and we believe this is a trend that will continue for the long term, with people prioritizing online shopping for all products and services even once life returns to normal in a post-COVID environment. As a result of consumers shopping more online and advertisers continuing to transition their advertising spend to digital channels, we've experienced linear month-over-month revenue growth since the end of Q2. We've expected and planned for advertisers to defer a significant amount of ad spend to the second half of 2020, and this has come true as advertisers continue to increase digital ad spending to achieve their 2020 business goals. Already, we are seeing early signs of a super seasonality bump that will lead to Q4 over-indexing in comparison to prior years. As a result, we believe that our full-year revenue will be weighted more towards the fourth quarter than we previously expected. We expect an approximate 50% increase in Q4 2020 versus the prior year. As we look ahead to Q4, I want to spend a minute digging into the dynamics that underpin our confidence in what we believe will be a very strong end to our fiscal year. The fourth quarter is our seasonally strongest quarter of the year, as Medicare annual open enrollment and the broader open enrollment are both housed in Q4. Holiday-related e-commerce spending drives a significant quarter-over-quarter increase in demand for digital performance advertising. First, with regards to the holidays, it's an understatement to say that 2020 is not a typical year. As a result of the pandemic, we expect the surge across the e-commerce landscape throughout the summer to continue, driving a record holiday spending season. While in-store retail overall is expected to be soft this year, e-commerce holiday sales are projected to be up 35.8%, or $50 billion, to $190.47 billion, according to eMarketer data. Holiday season e-commerce has been steadily rising in the past decade, but this year's projected holiday season increase is more than double last year's growth. Second, we are expecting momentum in our insurance vertical to continue with rapid growth in the fourth quarter. Specifically, we expect the significant growth in Medicare Advantage plans and the corresponding decrease in premiums will drive more online applications as consumers look to price shop for the right coverage. And due to coronavirus concerns, only 9% of Medicare recipients said they plan to meet with a broker in person this year, which means the digital ad spend against online Medicare Advantage enrollment is expected to be up substantially. Shopping online for health insurance during open enrollment has also been predicted to be high this year, which is the result of more health plan choices in 2020 compared to prior years, plus anticipated modest cost increases and the increased desire of consumers to shop online. we have prepared for a record-setting AEP and OEP season internally by leveraging our brand direct and marketplace solutions. To provide some context to these health insurance drivers, as of September 30th, we had matched 1 million consumers with health insurance providers that meet their specific needs. And we are seeing data which supports our expected 165% growth in revenue in AEP and OEP in 2020 versus the $3.9 million in revenue in 2019 across both our marketplace and brand direct solutions. Furthermore, we've had a strong start to the current quarter as we are seeing continued acceleration led by super seasonal ad spend and brand direct and marketplace solutions in excess of our initial forecast. We particularly expect to see over-indexing inside of the insurance and e-commerce categories. As a result, we believe we are in a good position to deliver strong results in Q4 as the extended digital advertising transformation intersects with COVID-driven online shopping growth during the open enrollment and holiday shopping seasons. Plus, we believe the current environment is adding pressure for advertisers to spend their dollars as effectively as possible. And even the largest brands have shown a need to quickly pivot to optimize advertising spend and performance to match audience mindsets and preferences. Only digital performance advertising offers this type of agility and ROI transparency. I'd now like to take a quick moment to present a new scorecard concept we are preparing to launch for Q4. As previously mentioned, through our sequential and long-term growth performance, we continue to scale the breadth of our consumer engagement as we connect our advertiser clients with consumers across the country. Our reach was approximately 70% of the U.S. adult population in Q3. And across this audience, our campaigns tallied approximately 10 engagements per consumer, gathering more than 6 billion data points. This expansive reach and frequency puts us in a unique position to measure the efficacy of digital advertising spend. With the amount of time Americans spend online, and especially on social media continuing to grow, consumers are increasingly researching products and services, shopping and spending online. Advertisers are following the consumers. hastening the transition of their advertising spend to digital channels to connect with consumers where they are. BMS digital performance advertising solutions provide linear ROI calculations, but not all digital advertising allows for the same transparency. Leveraging our sophisticated proprietary advertising technology, Beginning with our Q4 earnings report, we plan to share our new benchmarks, what we will call the DMS Consumer Engagement Score, or CES. The DMS Consumer Engagement Score will precisely define and demonstrate our total engagement by solution and vertical. The CES will also report on the directly correlated efficacy and ROI of engagements in the form of numerical KPIs. Our objective with the DMS consumer engagement score is twofold. First, we plan to quantifiably demonstrate the increasing scale of our digital performance advertising solutions, the acceleration of our consumer reach, and the ROI impact of our solutions. And second, due to our expansive reach and the scale of our business, We believe the DMS Consumer Engagement Score will serve as a benchmark for the digital advertising industry, providing metrics related to conversion rates and ROI. In summary, I'm proud of the results we posted during Q3, including record quarterly revenue and meaningfully scaled insurance growth. We're excited about the breadth of opportunities that our large and growing addressable market strong competitive position diverse client base and robust suite of differentiated services and solutions provide us for what we anticipate to be over index growth in q4 and we look forward to continuing to drive long-term shareholder value with that let me turn it over to randy kubek good afternoon everyone we hope that you're all keeping safe and healthy