Digital Media Solutions, Inc.

Good afternoon. My name is Austin and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital Media Solutions Third Quarter Financial Results 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw that question, press the pound key. Thank you. Now, I would like to pass a call over to Tony Saldana, DMS General Counsel.

Thank you for joining us to discuss financial results for DMS for the third quarter of 2022. With me on the call are Joe Maranucci, co-founder and CEO, and Rick Rodick, our 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 differ 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. 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 Maranucci, our CEO. Thank you, Tony, and good afternoon, everyone. Welcome to our third quarter 2022 earnings call. Our third quarter results are as follows. Third quarter net revenue was $90.1 million, which, while down 16% year over year, beat our guidance of $87 to $90 million. We generated a gross margin of 26% and variable marketing margin of 32%. Adjusted EBITDA came in at 5.1 million, or a margin of approximately 6%. Rick will add more details and dig deeper into the numbers and go over our guidance for the fourth quarter and full year of 2022 later in the call. Q3 performance faced complex and specific challenges throughout the quarter. Regardless, we still saw growth in key areas of our business, and we believe this growth is set up to continue here in Q4 and then into 2023. In Q3, for the third consecutive quarter, we saw linear growth in our auto insurance inside our marketplace segment. In the quarter, we delivered auto insurance marketplace revenue of $38.5 million, up from $37.3 million in Q2 and $35.5 million in Q1. This growth was underpinned by our strategic growth initiative focused on agent expansion. More on this in a minute. As noted, during the quarter, we faced complex issues. Those issues mainly challenge the insurance verticals we serve. Because of this, I'd like to mention that it is during periods like this when uncertainty and volatility arise that marketers reevaluate their budgets and are even more focused on finding the best performing advertising methods. Digital performance marketing, the primary solution for advertising clients partnered with DMS, creates a linear and accountable connection between spend and ROI And because of this, we expect to be resilient. We're able to create this high accountability to ROI for our clients through the use of our first-party data asset, our proprietary technology, and our expansive media reach. As we've said before, DMS is committed to delivering on the four R's, right person, right offer, right place, right time, providing consumers with strong value by serving relevant ads while maintaining our focus on achieving our advertisers' KPIs and delivering ROI on their marketing spend. On our last call, I mentioned that we plan to focus on executing our strategic initiatives and opportunities in Q3. I've already previewed some progress against those initiatives, but now I want to provide a more extensive update on this progress. I'd first like to touch on our investments in people, process, and technology and how that led to growing our captive agent base, which delivered real impact. As noted, we saw our third consecutive quarter of growth inside of insurance marketplaces. That is driven by growth of our captive insurance agents leveraging the DMS platform. In Q2 2022, we had 7,026 captive insurance agents on our platform. During Q3, we were able to deliver on our growth strategy, and we added 593 new agents, bringing our total active agent count to 7,619 at the end of the Q3 period. This 8.4% growth in agents translated into 3.1 million of growth in revenue from 26.9 million in Q2 to 30 million in Q3. This is very exciting for us and continues to be an area with a lot of opportunity for us to scale our revenue. We continue to leverage our data first technology driven approach, which allows for the diversification of our business, inclusive of verticals and media channels. In Q3, we made investments to activate and diversify our media partners and channel mix. As a result, the business built a stronger and more diversified foundation to drive scalable performance across our ad demand. This was seen in the quarter-on-quarter growth in marketplace revenue inside of our insurance marketplaces. We continue to deliver to our top advertising clients, which has led to strong retention rates for our top customers. Our top 10 growth clients continue to see revenue increases of 50% quarter-on-quarter. In Q3, we successfully integrated Traverse into the DMS ecosystem. The successful integration of the Traverse acquisition elevated the power of the DMS first-party data asset and signals program by enabling DMS to create a commercialized, omnichannel, audience activation engagement and re-engagement data signals platform to connect high-intent consumers and advertisers. And finally, we have continued to take costs out of our business to reduce our operating expenses. During the quarter, we saw a decrease of $2.2 million in SG&A due to cost synergies and improved collections. We expect this will continue well into 2023 and therefore increase our EBITDA. Going forward, our strategy for the Q4 period is continuing our commitment to invest in our people, process, and technology by supporting our agent growth initiatives specifically scaling new agent onboarding and improving our per-agent revenue contribution. As noted, we now have 7,619 active captive agents on the DMS platform. Our goal is to grow this number to 10,000 by the end of 2023. By doing this, we believe this will add between $30 and $40 million in incremental annualized revenue once this goal is achieved. delivering on seasonal execution during the annual enrollment periods for health insurance and holiday e-commerce, and driving efficiency in our business through the consolidation and reduction in operating expenses. Additionally, for our strategic review update, please refer to the disclosure in our Q3 earnings press release. And finally, although there's optimism on the growth inside of our business, there's little doubt our business is operating in a volatile market. The macro economy and unpredictable weather events were just a few challenges we faced during the third quarter. While these factors were out of our control, I'm pleased with the proactive action our talented teams executed on inside of what we do control. Our teams are acutely aware that we are now into the Q4 period where we have the benefit of holiday e-commerce and the open enrollment periods. Their focus is to execute on our key Q4 strategic growth initiatives to capitalize on the momentum we see building inside of key areas of our business. Now I have the pleasure of turning the call over to Rick, who will provide more details on our financial results.

Thanks, Joe, and good afternoon to everyone. I'll begin by discussing our financial results for the third quarter and conclude with our guidance for the fourth quarter and full year 2022. All comparisons are on a year-over-year basis unless otherwise noted. Net revenue was $90.1 million, down 16%. Insurance, which counted for approximately 53% of our total revenue in Q3, was down 33%. Breakdown of the insurance business was as follows. Auto contributed 76% of total insurance, health was 16%, followed by life at 5% and home at 3%. The decline in overall insurance revenue was in our brand direct segment and is attributed to the continued volatile property and casualty market, along with lower than expected lockup period spend and health insurance ahead of open enrollment in Q4. On a positive note, marketplace auto insurance was up to the third consecutive quarter. We are encouraged by this trend and believe it is sustainable as we continue to deliver on the growth of our captive insurance agent base. TMS continues to be a diversified digital performance advertising business. Career and education, which was approximately 14% of total revenue in Q3, was flat year over year. E-commerce represented 14% of our total revenue and was down 30%. Consumer finance accounted for 11% of our total revenue and was down 6%. For the third quarter, gross profit was $24 million, equating to a 26% margin versus a 29% margin in Q3 2021. The margin percentage decline was driven by continued margin compression within insurance across both auto and health. Variable marketing margin was 32% compared to 35% in Q3 2021. Moving now to our segment results. Excluding intra-company revenue, Q3 brand direct solutions gross margin was 22% compared to 23% in Q3 2021. Q3 Marketplace Solutions gross margin was 23% compared to 24% in Q3 2021. Technology Solutions Q3 margin was 86%. Now looking at operating expenses. As Joe mentioned, we continue to stay focused on driving efficiency in our business through consolidation and reduction of operating expenses. During Q3, our SG&A expenses amounted to $20.7 million, down $2.2 million year over year driven by cost synergies and continued strong collection. We ended the quarter with corporate headcount of 301 FTEs, down from 344 at the end of Q3 2021. Let's discuss profitability. Our adjusted EBITDA for the quarter was $5.1 million, generating a margin of 6%, down $6 million compared to the same quarter last year, driven primarily by lower revenue and mix. Our net loss was $10 million, versus an income of $5 million for the same quarter last year. Earnings per share for the quarter was a loss of 15 cents compared to 10 cents positive earnings per share in Q3 2021. Now, shifting our focus to the balance sheet and liquidity. We ended the quarter with $18 million in cash and cash record loans, which was flat with December 31st, 2021. At quarter end, our total debt was $217 million, And as of quarter end, our $50 million revolving facility remains undrawn. As of September 30th, our net leverage ratio was five times debt to EBITDA. As a reminder, our credit facility includes a leverage covenant of five times. We believe we have sufficient liquidity on our facility to remain mindful of our obligations given current economic volatilities. Turning now to our outlook. We expect fourth quarter net revenue to be in the range of $97 to $102 million, and we expect adjusted EBITDA to be between $7 and $10 million. We expect full year net revenue to be in the range of $385 to $390 million, and full year adjusted EBITDA guidance to be between $26 and $29 million. Given the complexities of the current environment and the challenges we see ahead with the recovery of auto insurance, we are revising our guidance on gross margin and variable marketing margin. Our new guidance range on gross margin is 25% to 30%, and variable marketing margin range is 30% to 35% for both Q4 and full year 2022. In summary, as Joe noted, we remain heads down and focused on our strategic growth initiatives. These are items we feel we can control. We are pleased with the progress we're making along with the associated positive trends. Still, we believe we will continue to face headwinds in the coming quarters with inflation, an unsettled insurance market, labor shortages, supply chain challenges, and further shifts in consumer behavior. Despite these headwinds, I'm confident we have the right people, processes, and technology in place to be agile and successfully navigate our company through these volatile times and execute on our growth initiatives. With that, we thank you for your interest in PMS, and I'll turn the call over to the operator for Q&A.