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spk01: Good afternoon. My name is Brika and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Digital Media Solutions second quarter financial results 2022 conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. Thank you. Now, I would like to pass the call over to Tony Saldana, DMS General Counsel.
spk05: Thank you for joining us to discuss DMS's financial results for the second quarter of 2022. With me on the call are Joe Maronucci, co-founder and CEO, and Richard Rodick, our new CFO. We posted our earnings announcement this afternoon in a press release and also on our investor relations website. By now, everyone should have access. 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 provision identifies risk factors that may cause actual results to defer materially from the contents of our forward-looking statements. For a more detailed description of the risk factors that may affect our results, please refer to our financial results press release and our SEC filings. 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 we have 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 Marinucci, our CEO. Thank you, Tony, and good afternoon, everyone. Welcome to our second quarter 2022 earnings call. We posted our press release earlier this afternoon. Our second quarter performance reflects many of the major challenges that resulted from significant market volatility and macroeconomic factors. Here's an overview of our second quarter performance. Our second quarter net revenue was $91 million, down 13% year over year. We generated gross margin of 26% and variable marketing margin of 33%. Adjusted EBITDA came in at 3 million or a margin of approximately 3%. Rick will add more details and dig deeper into the numbers and go over our guidance for the third quarter and full year 2022 later in the call. During Q2, our insurance vertical was significantly impacted by unparalleled market volatilities. Let's quickly discuss the factors leading to the volatility we're facing within auto and health insurance. Auto insurance industry challenges were evident in a significant year-over-year reduction in carrier revenue and pricing. This is due to exceptional inflation and supply chain issues continuing to prevent accelerated recovery as increased claims costs continue to suppress insurance carrier marketing spend. Because of this, we project many carriers will remain cautious throughout 2022 with a modest recovery now expected to push into 2023 as the industry continues to experience unprecedented factors. At this time, we do not have the ability to accurately predict exactly when market conditions will return to normal. Across the health insurance industry, lockup period spend continue to be down from prior comparable periods as providers reserve marketing spend for the open enrollment periods. We're cautiously optimistic about ad spend in Q4 when the AEP-OEP period is expected to significantly drive up performance. Overall, we're optimistic that the volatility we are seeing should decline sometime in 2023. For the remainder of this year, our team will continue to focus on execution against our strategic initiatives and opportunities. So yes, there are headwinds, especially within the auto and health insurance verticals. That said, let's shift focus to review our next phases of diversification growth in our largest vertical, insurance. As noted, we see volatility, and a lot of this is at the enterprise level. Parallel to our enterprise clients would be our independent agents. We currently have over 7,000 agents across major clients such as Allstate, State Farm, and others. Over the last quarter, we have made significant investments into our leadership and agent success teams who support these agents. We have also invested in our platforms, specifically ALM and ZipQuote. These investments are leading our agent growth as we aim to expand our agent base by as much as 40% over the next 12 months. This expansion not only helps to drive revenue growth for DMS, but also helps give us more diversity in our revenue mix between enterprise and SMBs. We also continue to invest in our core assets, data, technology, and media. Identity is at the core of our data platform. And with the Traverse acquisition, our actionable intelligence from data signals are increasing to deliver more of what consumers are looking for at the right time in the right channel. With Traverse, DMS is developing a commercialized, omni-channel, audience activation, engagement, and re-engagement data signals platform. The integration in its current base has already elevated the power of DMS first-party data and signals. This is exciting for us as we believe we're still in the early innings of this growth curve. And this is the cornerstone to our future growth as the unique strength of our data platform and real-time intelligence signals are what helps DMS efficiently and effectively use omnichannel activation to connect high-intent consumers and advertisers. This is a dynamic capability for DMS that competitively differentiates us and can be seen in our earlier announcement of our multi-year partnership with Seeker. As reported in our press release earlier, global omnichannel audience activation and engagement campaigns with Seeker are currently underway. Overall, we see the Q2 2022 period as track-level performance for DMS. So far in Q3, we are seeing good initial indicators for the period and also early positivity for the Q4 period, which has been historically and seasonally strong for us. As a result, we believe we will return to growth in 2023 as we exit 2022 with noted momentum as a result of our investments in our strategy. I summarize the strategy as follows. continuing to leverage our data-first, technology-driven approach, which allows for the diversification of our business, inclusive of verticals and media channels. Delivering for top advertising clients, which has led to retention rates for our top customers remaining strong, with our top 10 growth clients showing revenue increases of 26% quarter over quarter. The commitment to continue investing in our people, process, and technology to support initiatives like the growth of our independent insurance agents. And finally, a continued focus on driving efficiency in our business through consolidation and reduction in operating expenses. Lastly, I'd like to offer a quick update on our strategic review. As previously discussed, in August of last year, we announced plans to evaluate strategic alternatives for DMS to further maximize shareholder value, and we were hoping to have an update for you today. however we are still not finished with this process so i have nothing to share other than to state that we are working toward the best possible result and we appreciate your patience and as soon as we're able we will provide updates now i have the pleasure of turning the call over to rick rodick who joined us as our new cfo back in july his depth of experience across financial reporting financial planning and analysis investor relations and acquisition valuation makes him an invaluable addition to the DMS leadership team. So with that, I'll pass it to Rick to dig deeper into our second quarter of financial results. Over to you, Rick.
spk04: Thanks, Joe. It's great to be on my first call as the DMS Chief Financial Officer and like to thank the entire team for the warm welcome I've received since joining the company in July. What I've seen since joining DMS has only made me more excited about the opportunities for our clients, partners, and employees. Q2 was a challenging quarter as we continue to see headwinds and macro challenges inside of insurance, which represents the majority of our business. These headwinds and macro challenges impacted both property and casualty along with health insurance and can be seen across both the brand direct and marketplace segments of our business. Net revenue was $91 million, down 13% for the same quarter last year as a result of these trends. Insurance, which accounted for approximately 57% of our total revenue, in the second quarter was down 18% compared to the same period last year. The breakdown of insurance business was as follows. Auto made up 69% of total insurance. Health was 20%, followed by life at 8% and home at 3%. As Joe said, dynamic diversification has remained important to us. As DMS remains vertical agnostic, here's an overview of the performance of some of our other verticals. Career and education, which was approximately 14% of our total revenues in Q2, grew 16% year-over-year, driven by strong demand for our services as we continue to win wallet share. E-commerce, which represents 12% of our total revenues, was down 50% compared to the same period in 2021. Fluctuations like this are why we remain a dynamically diversified company, so we can quickly pivot with our advertiser clients and publisher partners towards the best opportunities. Consumer finance accounted for 11% of our total revenue grew 37% in Q2 over the prior year's quarter. Our agility enabled us to capitalize on market trends despite rising interest rates impacting mortgage growth. It's important to note that typically higher mortgage rates trigger increased demand from lenders as they seek to expand their buyer databases. For the second quarter, we reported gross profit of $23 million equating to 26% margin versus a 32% margin in Q2 2021, driven by margin compression within auto insurance and consumer pathways. Variable marketing margin was 33% compared to 38% in Q2 2021. On a reported segment basis, excluding intra-company revenue, the Q2 brand direct solutions gross margin was 21% compared to 26% in Q2 2021. And the Q2 marketplace solutions gross margin was 24% compared to 29% in Q2-21. Technology Solutions, which was formerly called Other Solutions, has primarily included our SaaS business. Q2 margin for this segment was 84%. Gross margins continue to be negatively impacted by media costs, wage inflation, and the tight labor market, especially for our call centers. Now moving on to operating expenses. Our total operating expenses amounted to $35 million in the second quarter, an increase of $7 million year over year, driven primarily by the change in fair value of warrant liabilities plus higher costs due to acquisitions and public company costs. However, we've continued to stay focused on driving efficiency in our business through consolidation and reduction of operating expenses. To this point, we've been successful in reducing our operating expenses for the second consecutive quarter and expect this trend to continue through the end of the year. We ended the quarter with corporate headcount of 308 FTEs, down from 344 FTEs at the end of Q1 2022. Finally, on profitability, our adjusted EBITDA for the quarter was $3 million, or a margin of 3%, down $13 million compared to the same quarter last year, driven primarily by lower revenues and NICs. Our net loss was $12 million versus net income of $5 million for the same quarter last year. Earnings per share for the quarter was a loss of 18 cents compared to 7 cents positive earnings per share in Q2 2021. Lastly, turn to the balance sheet and the liquidity. We entered the quarter with $26 million in cash and cash equivalents, which was flat with December 31, 2021, driven by our strong cash collections. At quarter end, our total debt was $217 million, and as of quarter end, our $50 million revolving facility remained undrawn. As of June 30, our net leverage was 4.7 times. As a reminder, our credit facility includes a leverage covenant of five times. We believe we have sufficient liquidity at our facility and remain mindful of our obligations given current economic volatilities. As we look to 2022, despite a number of macro headwinds, our people, processes, and technologies remain key for us. we remain focused on execution and data-driven opportunities. As such, we remain comfortable with maintaining our previously discussed gross margin guidance of 28 to 31% and variable marketing margin range of 32 to 36% for both the third quarter and full year 2022. We expect the third quarter net revenue to be in the range of $87 to $90 million. We expect Justin Ibida to be between $4 million and $6 million. Again, as Joe noted, we are seeing good initial indicators for the Q3 and also the Q4 period, the latter of which has been historically increasingly strong for us. We'd expect our full-year net revenue to be in the range of $390 to $400 million, and full-year adjusted EBITDA guidance to be between $30 and $35 million. Overall, with the investments we are making in the various components of our business, with what we believe to be a modest recovery in property and casualty insurance next year, We are excited about 2023 as a year where we return to growth. During this time, we expect a continued high rate of free cash flow conversion to EBITDA. With that, we thank you for your interest in DMS, and we now open the line for questions. Operator, please provide our listeners with instructions on how to submit questions.
spk01: At this time, I would like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. We'll pause for a moment to compile the Q&A voice down.
spk02: We have our first question on the line from Rob Shapiro of Singular Research.
spk01: Your line is open, Rob.
spk03: Hello. So, yeah, you did just forecast that your gross margin should be between 28% and 31% for the third quarter. And you just had it. So the second quarter had a gross margin of 25.7%. So I wanted to know if there hasn't been something that changed in the environment where you feel like you can move that growth margin up to around 28 to 31%.
spk05: Hey Rob, good afternoon. This is Joe Marinucci speaking. Good to speak to you again. So yes, gross margin. Yes. Hey, gross margin for the period did move below our range. And as Rick, during his segment, properly called out, the gross margin takes into account other factors outside of just pure media spend. So, you know, specifically with the call center component of our business, you know, which plays a pretty critical role in delivery for us. You know, we're dealing with some volatility there with wage and support service costs, which during the period is, you know, I mentioned and Rick mentioned we're mindful of driving operating efficiency to make sure that we're removing unnecessary costs throughout the business. So we've been able to recalibrate here in the third quarter to adjust for some of those inflationary pressures that came through at the end of Q1 and really started to gain momentum in Q2. So we do believe that we will come back in range on gross margin during the Q3 and Q4 periods. Some of that also ties back into our growth initiatives, and we did see considerable growth in our agent base from Q1. This is our independent insurance agent base, which diversifies us from the enterprise-level clients' spend. So we have the two tracks there. We have the enterprise spend and the independent agents. So we saw agent growth in the Q2 period. As we noted, we're investing behind that And we saw our agent base grow by about 10% from about $6,400 to just over $7,000. And because of how agents spend as opposed to how carriers spend, there's more stability there. It helps us with our VMM, which pulls directly through the gross margin. So as we see that trend continue, as we continue to see growth in the independent agent base, which gives us stability in insurance, that also helps to lift the VMM which lifts the gross margin, and we have cost controls coming in underneath that, which again leads us back to the belief that we come back in line for gross margin for the Q3 and Q4 periods, and BMM is already in line. So hopefully that answers your question.
spk03: Yeah, sounds good. Okay, thank you.
spk01: Thank you, Rob. As a reminder, if you'd like to ask any questions, please press star followed by the number one on your telephone keypad.
spk02: There are no further questions at this time. This concludes today's conference call. You may now disconnect your line and enjoy the rest of your day.
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