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spk05: 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.
spk04: 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.
spk01: 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.
spk05: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question is with Maria Ripp from Canaccord. Maria, your line is open.
spk06: Great. Thanks so much for taking my questions. First, so your guidance implies sort of continued revenue decline here in Q4, and sort of we understand all the uncertainty around the number of verticals. Can you maybe just talk about what's embedded in your outlook from the macro standpoint? Sort of what are you seeing so far in Q4? And then based on your conversations with advertisers, when do you think you may start sort of seeing some recovery?
spk04: Hi, Maria. Good afternoon. Joe speaking. Good to have you on the call. So the Q4 guidance takes into account the current trends that we see inside of insurance, specifically with property and casualty. Although I think carriers are generally making good progress on re-rating, we really don't expect to see any substantive recovery inside of property and casualty with auto until sometime in 2023 with early stage recovery starting right after the first of the year. Generally in Q4, we're looking at holiday e-commerce in the open enrollment periods as being the drivers of the increase in revenue and performance overall over the Q3 period. And the early trends we see are encouraging. We did highlight on the call growth in insurance marketplace revenue. And our agent initiatives. And although during the Q4 period, agent growth will slow slightly, we still anticipate adding more captive insurance agents and being able to drive growth inside of insurance marketplaces. So the current Q4 guidance takes into account what is known here. It also takes into account the current trends on operating expenses. With regard to what we see going forward, You know, there's a varying degree of opinions on when there's going to be, you know, a more broad-based recovery in insurance, specifically within auto, which insurance is the majority of our business. We're encouraged by some of the trends we're seeing. For instance, in the Q3 period, we saw quote request volume increase by 25%, which is indicative of consumers' price shopping increasing. and that is to be expected as they open up their wallets to spend more money on things like auto insurance. And when those costs go up, they shop more. We will not see a substantive recovery, though, in ad spend until the carriers have successfully re-rated and they've seen some of the pressure come off of their loss ratios, which I think generally that's expected to be sometime next year. So we're generally encouraged by this trend because consumers are – price shopping more and we're hopeful that after the first of the year the carriers are successfully re-rated and feel that loss ratios are under control and that advertising can advertising spend can return to more normalized levels which when that happens you'll get an inflection point and we'll see a broad-based recovery in property and casualty and automotive insurance
spk06: Got it. That's very helpful. Thank you, Joe. And then secondly, I just wanted to ask you about your media cost. Can you maybe talk about how increasing media costs impact your framework for deploying budgets? And then sort of given this environment, how are you thinking about sort of continuing to deploy spend at a lower margin versus perhaps pulling back on spend and prioritizing margins?
spk04: Right. So, I mean, generally we're not managing the business to, you know, finite margin numbers on the VMM, the variable marketing margin line, or on the gross margin line, you know, we're sitting in the middle of the consumer and the advertiser, and we're looking to create value on both sides. So as we're navigating, you know, complex environments like the one we're in right now, you know, moving our guidance down on margin, both at the variable line and the gross margin line, is reflective of current trends that we're seeing. And Part of that comes into play with our ability to retain market share and deliver for the advertiser because the ad demand is there. If we're managing to finite levels of margin, it could have a negative impact on the business. We did take the guidance down a little bit, which is reflective of the current trend. That could potentially change next year, although we're probably going to guide this range until we see a change. It's not really indicative of anything other than us managing the expectations of the advertiser and the consumer and thus moving the ranges down slightly.
spk06: Got it. That's very helpful. Thank you so much.
spk05: You're welcome. Our next question is with David Marsh from Singular Research. David, your line is open.
spk02: Hey, thank you so much for taking the question. Guys, you did a nice job with regard to expense control with regard to G&A in particular. In terms of margin going forward, should we expect you guys to be able to continue to maintain that type of margin versus sales in terms of G&A expense, or is that just indicative of a soft quarter and we're going to see a pretty significant rebound.
spk04: Hey, David, this is Joe speaking. So it sounds like there's really two questions there, one at the gross line and then one at the net line. So I'll take the gross margin first, which ties the variable marketing margin. I mean, generally, as I said to Maria, you know, we give these ranges and we generally look to be in range, uh, preferably towards the top of the range, which historically, especially with variable marketing margin, we've been able to do that. And that's off the back of media efficiencies, which tie directly back to our data first approach and how we generally, um, look at engaging the consumers, um, relevant ads, consumers with intent, um, they behave accordingly and conversion rates are higher and it drives more media efficiency. You know, with regard to, you know, the SG&A and the reduction, you know, we're generally looking at this as a trend that continues into 2023. So, you know, Rick and I, you know, we look at the items we control and, you know, expenses are one of those items. There's plenty of things we don't control in the macro environment, but specifically inside of VMS, we certainly control our expenses. So, you know, as noted on the call, we have successfully reduced SG&A meaningfully during the period. And we believe that that's a trend that continues. So if you look at 2022 and then you look at 2023, we think we're on track to have an overall reduction in operating expenses of approximately $8 to $10 million. So we're hopeful that this is a trend that continues and it gives us more leverage at the net operating line of the business.
spk02: Yeah, that's great.
spk03: I guess just to follow up, I guess the question, my next question is really can you support a higher level of revenues, and if so, like how much meaningfully higher at the reduced level of SG&A that you're running coming out of the third quarter?
spk04: So we started an efficiency technology initiative about a year ago, which was designed first to create efficiencies in the business. We have done a number of acquisitions over the years, and we've liked to say that we don't integrate for the sake of integrating. We integrate when it's appropriate, and we integrate to drive efficiency. So with some of the headwinds that have continued to persist in the business, management has taken it as an opportunity to look at some of these integrations in a more holistic sense to see where there were opportunities to create deeper efficiencies in the business so we feel that we've taken costs out of the business that can be sustained at these levels meaning that the cost reductions are permanent and the business has now created efficiencies you know through the through the use of people processing technology so we do not have to add these costs back so over time as the business recovers cost should remain in line with the trend that we currently see. So if the business recovers, we should get leverage at the EBITDA line to our benefit. So we're pretty encouraged by that, but obviously we need to see a more broad-based recovery and revenue growth, margin expansion for that to pull through to EBITDA. But generally, we do not, to specifically answer your question, we do not anticipate having to add back a meaningful cost load to grow the business from here.
spk02: Perfect. Thanks so much. Appreciate that.
spk05: There are no further questions at this time. So that concludes today's conference call. You may now disconnect.
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