Ibotta, Inc.

Welcome to Ibotta's Q4 2024 earnings conference call. With us today are Brian Leach, founder and CEO, and Sunith Patel, CFO. Today's press release and this call may contain forward-looking statements, including our future operating results, guidance for Q1 2025, our ability to grow our revenue and factors contributing to such potential revenue growth, our ability to realize cost efficiencies, our ability to improve the forecastability of our business, our ability to increase our sales to existing and new customers, our future opportunities in the performance, functionality, and potential impact of our product development efforts that are subject to inherent risks, uncertainties, and changes, and reflect our current expectations and information currently available to us, and our actual results could differ materially. For more information, please refer to the risk factors in our recent SEC filings. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures and should be considered in addition to and not as a substitute for our GAAP results. Reconciliations to the most comparable GAAP measures are available in today's earnings press release and our 10-K, which are available on our investor relations website at investors.ibata.com. Also, during the call today, we'll be referring to the slide deck posted on our website. Unless otherwise noted, revenue and adjusted EBITDA comparisons to prior periods are provided on a year-over-year basis. Lastly, references to non-GAAP revenue growth reflect the exclusion of one-time breakage revenue benefits in 2023. This is due to an update we made in 2023 to fix a software error to correctly charge maintenance fees to inactive direct-to-consumer redeemers, which resulted in a short-term benefit to GAAP revenue last year. Please see slide 33 in the appendix for more detail. With that, I'll turn it over to Brian.

Thanks, Sean. Good afternoon, everyone. Thank you for joining us to discuss our fourth quarter results. We reported revenue and adjusted EBITDA below the guidance range we provided on our third quarter earnings call. We're also guiding to a softer than anticipated outlook in the first quarter. We are disappointed in this performance. We believe we've taken steps to improve our near-term execution, and we're beginning to see evidence that our key initiatives are bearing fruit. The current softness in our business is attributable to the fact that we have not secured enough offer supply from CPG brands relative to the rapid growth of redeemers across our network. As a result, our redemptions per redeemer are lower than anticipated, and that is flowing through to lower redemption revenue. Through the end of 4Q, we continued to face the same challenge we discussed on our last earnings call relating to the depletion of offer budgets over the course of 2024. Entering 2025, as expected, many of our top clients increased their Ibotta budgets to take advantage of our larger audience of redeemers. Others continued to have always-on content with us. Nonetheless, we have still yet to see the overall increase in spending that we anticipated. And in this economic climate, our growing redeemer base remains hungry for additional offers that remain live longer on our network. We attribute this to three main factors. First, at the higher levels of investment we're now seeking, CPG brands increasingly expect a greater level of rigor when it comes to measuring the ROI of our campaigns. This is especially true in an environment where downward pressure on top-line sales has caused some CPG companies to reflexively cut or pause growth in marketing spend across the board. As I mentioned on our last call, we're in the process of overhauling and upgrading our approach to both measurement and targeting. And as you'll hear, we've made significant progress on both fronts. But we are only just now taking these exciting new solutions to market, and we haven't had them in time to materially affect Q1. Second, we fell short of our expectations when it comes to sales execution, plain and simple. As we've been upgrading our sales organization, at times there was an inadequate account coverage and there were account handoffs that could have been crisper. This disrupted our ability to secure offer supply in the short term. At the end of December, we announced the hiring of Chris Reedy as our new chief revenue officer. Chris spent 11 years at Twitter, ultimately overseeing all global revenue. More recently, he was chief revenue officer at TV Scientific, which is a leader in the connected television space. Chris's deep experience running a larger sales organization, combined with his ability to move quickly in a smaller and more nimble startup environment, are exactly what Ibotta needs for the next stage of our growth. Chris's onboarding has highlighted additional opportunities to improve our sales operations, sales enablement, and account prioritization, as well as continuing to streamline our offer setup process. Despite the disruptions we've seen, I'm confident that Chris's arrival and the changes he is already bringing about are positioning us for long-term success. Finally, we're not yet fully on cycle with certain CPG clients. In some cases, we've been unable to persuade our clients to set aside budgets in anticipation of our redeemer growth rather than a full planning cycle after they have seen it. Compounding that challenge, some clients have separate e-commerce budgets that we anticipate tapping into, but which were finalized prior to our announcement of Instacart and DoorDash joining our publisher network. These considerations inform our broader strategy of moving beyond traditional promotions budgets, which are annually allocated. I'll say more on this in a moment. Let me take a moment to address the cost side of our business. As we look at our strategic priorities for 2025, we have identified several opportunities to streamline our operations and better allocate our resources to align with our key initiatives. As part of this effort, last week we reduced the size of our workforce by 8%. This decision was necessary to maximize our potential and advance our mission. For the employees who were impacted, however, it was difficult news to receive. And I want to take this opportunity to thank them and all our employees for their tireless effort on behalf of Ibotta. To be clear, we are not implementing a hiring freeze. We will continue hiring and investing heavily in R&D and sales. Soon it will discuss what we're expecting for our full year operating expenses later. What we've heard from top clients is remarkably consistent. Our clients are happy with the service Ibotta provides, and we are seen as a leader within the promotions industry. We continue to see very high rates of client retention overall. That said, to unlock the much higher levels of investment from our clients that we aspire to, it has become clear that we need to bring to market a more rigorous form of measurement that goes beyond the industry standard return on ad spend or ROAS framework. With this in mind, we're pursuing two main strategic goals. Goal number one, establish the unrivaled value of what we sell. Last quarter, we began unveiling a new framework for measuring incremental sales lift. This framework will allow us to demonstrate that targeted promotions drive profitable revenue growth and close key sales gaps. Goal number two, change the way clients buy on our network. This means getting away from annual promotions budgets and evolving our network into a more programmatic interface for buying performance-based media through our campaign manager product. On goal number one, Our approach looks at millions of shopping trips and takes into account the actual incremental dollars generated by a campaign relative to an otherwise statistically identical population of consumers who are not exposed to our campaign. We've begun shifting our product and go-to-market toward the concept of cost per incremental dollar, which I will refer to as CPID for simplicity. We then calculate a CPID using the fully loaded cost of the campaign, inclusive of our fees, any consumer rewards, and any setup costs. If a campaign costs $3 million to run and generates $9 million of incremental revenue for the client, the CPID would be $0.33. This is a simple concept, but in the offline world, CPG brands have generally been unable to measure true sales lift in near real time. For the first time, CPG brands will be able to log into a dashboard and track the volume of incremental revenue they have generated, the CPID, and decide how to optimize their campaigns. We believe we're in a unique position to be able to bring this important new capability to market due to our data and large network of publishers. With regard to goal number two, we're also in the process of upgrading campaign manager to support a more rich programmatic buying experience, including the automatic configuration of offers and more self-service features. In the future, we anticipate that our clients will be able to more easily sign up, fund, set up, measure, and optimize campaigns with us, all without needing the same level of time intensive back and forth with our sellers and account managers. Over the course of the year, our progress against these goals will allow us to tap into budgets that are much larger than what we have today and move us to an always-on performance marketing model. We believe this will improve the forecastability of our business and protect us from the challenges associated with annual promotional budget planning cycles. So far, we've only implemented our new go-to-market strategy with two CPG companies, which happen to be among the largest food and beverage companies in the world. We're pleased to announce that within just the last week, based on the success of pilots completed during the fourth quarter, both clients have decided to green light campaigns. By measuring incremental sales and tracking CPID with our latest technology, we're helping these partners drive profitable revenue growth and close key sales gaps with optimized promotional strategies, all at a scale we believe will move the needle for their brands. These two programs represent exactly the kind of performance advertising model we're moving towards. These dollars are being sourced from a purpose-dedicated Ibotta budget that has been created at the direction of senior executives within each company, executives who share our broader vision. To give you a sense for the potential we see here, the amount of money that is being invested by these two companies is several times higher on an average daily basis than what we observed last year. In the coming months, we plan to build on our early success with these two large CPG clients by bringing our new measurement and targeting capabilities to all our remaining clients. Lastly, let me touch briefly on D2C ads. While we saw seasonal strength in Q4, we expect some ongoing weakness in the first half of this year. Let me talk about why we're seeing this and what we're doing about it. Our D2C ads functionality has not historically been a priority area of investment, given that one, it functioned well for many years, and two, was not a core focus of growth for the business. That being said, given the deterioration we observed in the ads business in 2024, we believe we have opportunities to improve performance meaningfully. For example, today our ads business is only capable of flat fee pricing, meaning it's not CPM based. Over the course of 2025, we intend to serve display ads through a new third-party ad server and use CPM pricing for banners while making it easier for advertisers to tap into run-of-site and remnant inventory. We believe this will allow our clients to buy ads on our D2C platform similarly to how they buy media elsewhere, which should result in much higher fill rates. We'll have more to say on this topic later this year as we make progress on this initiative. Although the focus of my remarks has been on how we unlock greater offer supply, we continue to make progress in terms of adding new publishers. In January, we announced that DoorDash will be going live on our network later this year. We also introduced alcoholic beverage offers on Instacart in February, which we believe will help us attract greater investments from beer, wine, and spirits companies over time. To wrap up, let me clearly say that I recognize it's been a bumpy couple of quarters for Ibotta and our investors. We know we need to deliver consistent results in the near term to get investor confidence back, and we anticipate being able to do so. The way we will get there is through remaining focused on innovation and improved execution. In terms of innovation, we believe we're on the cusp of reshaping our industry and breaking out of the promotions category. As our new measurement tools allow us to demonstrate that we're delivering incremental revenue growth that is also contribution margin positive on every transaction, we believe our clients will grow their investments on the platform. In this way, we believe our company can follow a similar trajectory to other performance marketing platforms that have taken off once credible measurement has been established. By introducing a more programmatic media buying interface, we will also make it easier for brands and their agencies to invest on our network. And that in turn should help us get better at forecasting our business. As I mentioned, we've begun to see clear validation of our newer go-to-market strategy, and we look forward to keeping you updated on our progress. In terms of execution, we brought in a new chief revenue officer, and he's helping us upgrade our sales execution and better position ourselves for long-term success. With that, I'll hand the call over to Sunit to discuss our fourth quarter results and first quarter guidance in greater detail.

Sunit. Thank you, Brian, and good afternoon, everyone. We delivered revenue and adjusted EBITDA 4% and 13% below the midpoint of the guidance range we provided on our third quarter earnings call, respectively. Our revenue was below our guidance range as a result of a shortfall in redemption revenue driven by a lack of sufficient offer supply. Adjusted EBITDA fell below our guidance range as our expenses were largely as we forecasted, but the revenue shortfall fell almost entirely to our bottom line. We generated free cash flow of $19.4 million in the quarter, which brings our full year 2024 to $105.7 million. We saw healthy growth in third-party redeemers across the IPN on both a year-over-year and quarter-over-quarter basis, highlighting the continued strength of the demand side of our network. Revenue in the fourth quarter was $98.4 million, representing a non-gap revenue decline of 0.5% year-over-year, exclusive of $0.8 million in one-time breakage revenue in the prior year period. we delivered Q4 adjusted EBITDA of $27.8 million, representing an adjusted EBITDA margin of 28%. Adjusting for the $0.8 million in one-time breakage revenue, this compares to 33% in Q4 of 2023 and represents a 14% decline in adjusted EBITDA. In Q4, our redemption revenue was $82.4 million, up 7% year-over-year on a non-GAAP basis. Add in other revenues, now 16% of our revenue, we're $16 million, down 27% year-over-year. Our total redeemer growth continues to be healthy, and we continue to see strong growth in our third-party publisher business, offset by softer performance in our D2C segment. Third-party publisher redemption revenue was $52.3 million, up 39% year-over-year, while D2C redemption revenue was $30.1 million, down 24% on a non-GAAP basis, excluding the one-time breakage benefit in Q4 last year. Turning to our key performance metrics, total redeemers was $17.2 million in the quarter, up 27% year-over-year and 13% quarter-over-quarter. The year-over-year growth was driven by the launch of Instacart during the fourth quarter, like-for-like growth of Walmart's audience, and the launch of Family Dollar in Q2. Redemptions per redeemer were 5.5, down 20% year-over-year, driven by the growth in third-party redeemers, which have a significantly lower redemption frequency as compared to our D2C redeemers, in addition to a lack of sufficient offer supply, which impacted both D2C and third-party. Redemption revenue per redemption was 87 cents, up 6% year-over-year on a non-GAAP basis, primarily reflecting a mixed shift within our CPG portfolio and a growing contribution from higher MSRP general merchandise. As a reminder, redemption revenue per redemption can vary quarter-to-quarter based on seasonal patterns, but also due to variations in offer mix. Q4 non-GAAP gross margin was 85%. Adjusting for the one-time breakage revenue benefit in Q4 of 2023, non-GAAP gross margin would have been down by approximately 260 basis points year-over-year. Non-GAAP gross margins were down approximately 300 basis points sequentially, driven by a $3 million sequential increase in cost of revenue, which, as we discussed last quarter, was a function of both the Instacart contract going live for a partial quarter, as well as increased technology-related personnel costs. Non-GAAP operating expenses of percent of revenue was 58%. Adjusting for the one-time breakage revenue benefit in the prior year period, non-GAAP operating expenses as a percent of revenue would have increased by approximately 250 basis points. Within that, non-GAAP sales and marketing increased by 1%. Non-GAAP research and development expenses increased by 3%. Lastly, non-GAAP general and administrative expenses increased by 11%. We delivered adjusted net income of $22.4 million and adjusted diluted net income per share of $0.67. Our adjusted net income excludes $12.9 million in stock-based compensation and has a $66.7 million adjustment for income taxes. As I previewed in our third quarter earnings call, During the fourth quarter, we recognized a one-time GAAP tax benefit of $58.6 million, reflecting the release of our valuation allowance against deferred tax assets. We ended the quarter with $349.3 million of cash and cash equivalents. In Q4, we spent approximately $15.6 million repurchasing approximately 244,000 shares of our stock at an average price of $64.12. In Q4, our weighted average fully diluted shares outstanding were $33.6 million. We have $68.8 million remaining under our current authorizations. Turning to our Q Outlook, we currently expect revenue in the range of 80 to 84 million, representing flat revenue growth. We expect Q1 adjusted EBITDA in the range of 10 to 14 million, representing about a 15% adjusted EBITDA margin at the midpoint. I'd like to provide you a little more color on our Q1 Outlook, as well as some thoughts on 2025 as a whole. We continue to face near-term supply constraints impacting our revenue growth in Q1. We believe that this is driven by the factors Brian discussed earlier, including sales execution and the fact that we are still early in bringing our new measurement breakthroughs and the CPIT framework to our clients. We believe our guidance for Q1 captures the headwinds we have described. We expect add another revenue of about 10 million in Q1, However, we expect the year-over-year rate of decline to moderate as we roll out our ad infrastructure improvements in the middle of the year. Underlying D2C ad revenue trends are expected to improve when we see improvement in D2C redeemer trends, which itself is a function of offer supply. Our total year-over-year revenue growth dipped into negative territory in the second half of the fourth quarter before troughing in January. The year-over-year growth rate is improving sequentially in February and is positive, and we anticipate further sequential improvement in March. We're expecting overall revenue growth rates to continue to gradually improve over the course of the year, driven by better execution, driving offer supply recovery, the ramp of Instacart and DoorDash, the launch of alcoholic beverage campaigns at our third-party publishers, and continued progress in winning more CPIT-based campaigns with our clients. As it relates to total redeemers, we are expecting a small seasonal decline from Q4 to Q1. But we expect this decline to be smaller than last year, given the ongoing ramp of Instacart, which was only live for a portion of Q4. Compared to Q4, our adjusted EBITDA outlook in Q1 is principally driven by a sequential decline in revenue, as well as an increase in cost of revenue. Separately, and excluded from adjusted EBITDA, we anticipate taking a small one-time gap restructuring cost of less than $2 million in conjunction with our efficiency efforts that Brian discussed. In Q1, we are expecting non-GAAP cost of revenue to increase by $2 million sequentially from Q4, primarily reflecting a full quarter of Instacart-related costs. That should be a decent quarterly run rate to model for the rest of the year, with very slight sequential increases driven by revenue growth. Total non-GAAP operating expense, excluding any restructuring charges in Q1, should decline sequentially from Q4 by $3 million, driven by a decline in sales and marketing, partially offset by growth in R&D and G&A. Non-GAAP operating expenses should be flattish from Q1 levels through the course of the year. Our adjusted EBITDA margin should show improvement every quarter as we grow revenue, given our flattish expense guidance for the rest of the year. We anticipate our gap income taxes to be de minimis in Q1 and our gap income tax rate to be in the high teens for the full year. We expect our adjusted tax rate to be in the low teens in Q1 and mid-teens for the full year. With regards to free cash flow, we anticipate a step up in cash taxes in 2025. We paid approximately 13 million in cash taxes in 2024, which represented 12% of 2024 adjusted EBITDA. In 2025, we expect that cash tax rate to be in the mid to high teens as a percentage of adjusted EBITDA. We also expect a one-time cash outflow of approximately $6 million related to our new office space. This will show up as a $20 million increase in capital expenditures, offset by approximately $14 million of tenant improvement allowance that will flow through working capital. Working capital, excluding the tenant improvement allowance, will also be a use of cash in 2025. In summary, we expect free cash flow as a percent of adjusted EBITDA in the 60% to 65% range. Lastly, on stock-based comp, for the full year 2025, we are now expecting stock-based comp between $50 and $60 million, which captures both the cost of the Walmart warrants and employee-based stock comp expense. The end of 2024 and the start to 2025 has been challenging on several fronts, including offer supply and add another revenue. That being said, we are focused on improving near-term sales execution, and we are seeing early signs of success in our CPIT-based sales effort, which should drive a recovery in our offer supply. We expect to see good margin expansion sequentially over the balance of the year, driven by revenue growth and flattish expenses. With that, operator, let's open up the call for Q&A.