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spk00: Good afternoon, everyone, and welcome to Quotient's second quarter 2021 earnings conference call. During the conference call, all participants will be on a listen-only mode. After the presentation, we will conduct a question and answer session. At that time, anyone with a question should lift their phone receiver and press the star key followed by 1 on their telephone keypad. To cancel a question, you may press star 2. If at any time during the conference you need to reach an operator, please press star followed by zero. As a reminder, this conference call is being recorded and will be available for replay from the investor relations section of Quotient's website following the call. At this time, I would like to hand the call over to Christine Marchuska, Vice President of Investor Relations. Miss, you may now begin. Great. Thank you, Operator. Hello, everyone, and welcome to our second quarter 2021 earnings call. I'm Christine Marczewska, Vice President of Investor Relations for Quotient Technology, and on the call with me today are our CEO, Stephen Bull, Pam Strayer, our CFO, and Scott Raskin, our President. The company's stockholder letter has been posted on the IR section of our corporate website, investors.quotient.com, alongside our press release and earnings presentation. Before we begin, please note that during this call, you will hear forward-looking statements, including the guidance we will be providing for our third quarter and full year 2021. These forward-looking statements are based on information available to and the good faith beliefs of our management team as of the time of this call and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These forward-looking statements and the related risks and uncertainties are set forth in the earnings presentation slides located on our investor relations site. Additional information about factors that could potentially impact our financial results can be found in our stockholder letter issued today and in the risk factors identified in our annual report on Form 10-K and our quarterly report on Form 10-Q, filed with the SEC on February 23, 2021, and May 10, 2021, respectively, and in our future filings with the SEC. We disclaim any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. Please note that operating expenses, gross margins, and net loss financial measures discussed today are on a non-GAAP basis, each having been adjusted from the corresponding GAAP measure to exclude certain expenses. A reconciliation between GAAP and non-GAAP measures can be found in the financial results section of the stockholder's letter issued today and in the earnings presentation slides posted on the company's website. With that, I will now turn it over to Stephen.
spk03: Thank you, Christine. Hello, everyone, and welcome to our Q2 2021 earnings call. This past quarter, we delivered strong top line results with revenue of $123.9 million due to a continued shift of dollars from offline spend to digital on our network. Revenue growth was up 48% over Q2 2020 and up 7% over Q1 2021. As we forecasted last quarter, we expected that Q2 would mark the bottom of our gross margins, and as you will hear from Pam, we believe that to be the case. Throughout the first half of the year, we executed on our planned investments to transform our platforms into self-service offerings, and we've made excellent progress to date. These investments, along with a strong media quarter, delivered bottom-line results that, while within our guidance range, was lower than we had anticipated. That being said, now that we are deploying our self-service capabilities and leveraging more automation, along with strong bookings and planned growth in our promotions business, we believe we will deliver improved profitability over the coming quarters. We now believe we've reached a tipping point in the industry, in particular with regards to the freestanding insert, or FSI, and retailers pay for circulars. In Q2, we reached an important milestone, and one that we've been working towards for the past several years. We demonstrated that, based on client feedback, our national promotion solution exceeded sales unit volumes, and more importantly, the results of the traditional FSIs. Now, having scaled our network and realigned our business to deliver promotions on a fixed calendar rather than a volume basis, where brands book time on our network for a specific duration to more accurately align with their merchandising schedules, we believe the remainder of the offline FSI dollars can finally justify and make the move to digital. Now I'd like to provide an example that I think demonstrates the successful outcomes we've been experiencing as a result of the transformation of our sales organization, specifically within one of our key growth areas. With focused sales teams where skill sets are aligned with roles, we're benefiting from strong momentum and performance, and this has been especially evident with our team that's focused on smaller CPGs. As noted in last November's Investment Investor Day, We believe our business that focuses on smaller CPGs is a growth driver for us with what we are seeing as a long runway of opportunity ahead. We have had a strong presence with Fortune 500 CPGs, but in our view, there are thousands of smaller CPGs composed of brands that can benefit by working with Quotient. Offline, these smaller CPGs do not have the same access to promotions or marketing channels as do the larger CPGs. Digital marketing allows for a more cost-efficient and even playing field, and smaller CPGs can utilize our promotions and media platforms to reach and expand their base of buyers. Pharmacare, well known for its Sambucol brand, is a prime success story of a smaller CPG. Last year, with most individuals quarantining and working from home, the country experienced a mild cold and flu season. Sambucol, which offers an array of cold and flu products and is one of the category creators for the elderberry product, experienced a drop in sales as the shutdown to cold. Witnessing these trends, Quotient's team proactively reached out to PharmaCare with a strategy to boost performance for PharmaCare's brands. PharmaCare was immediately responsive to our outreach and leveraged our expertise to execute integrated campaigns, including national promotions, shopper promotions, and media for targeted retailers and our social offerings, resulting in positive measurable outcomes for the brand and business. Smaller CPGs generally have one marketing budget, so precision with their marketing spend is key. Our performance-based marketing platform, focused on data, analytics, measurement, and most importantly, return on investment, is designed to make quotient solutions a desirable choice for CPG advertisers of all sizes. We look forward to continuing to deepen our relationship with PharmaCare, as well as other smaller CPGs, as they take advantage of the opportunities available to them through our digital solutions. Now I'd like to share some additional highlights from the quarter. smaller CPGs, as noted in the example I just discussed, this area of our business continues to thrive. We saw over 340% annual growth in bookings on a dollar basis in Q2 and believe growth will continue as we are maintaining longer-term engagements of brands who have a high retention rate with quotient and engaging new, smaller CPGs who are looking to work with quotient based on our scale and focus on this segment of the market. National promotions. This growing portion of our business continued its year-over-year bookings trend of the last two quarters with 40% growth in bookings on a dollar basis in Q2 2021 over the prior year. As brands continue to move their freestanding insert or FSI dollars to digital, we see momentum for our national promotions platform to continue to grow. Retailer performance media or RTM. we saw an increase of approximately 237% in bookings dollars from our CPG customers in the second quarter over the prior year. In turn, our RPM retailers saw an approximately 100% increase in alternative revenue streams on pure play retail media delivered through this platform. As inflationary pressures move from discussions to actual price increases, carried through to the retailer and consumer, and as retailers face potentially tough performance comps, we believe these additional revenue sources remain a valuable focus to retailers. Digital out of home, or DOOH. At the end of Q2, we had inventory of over 241,000 screens nationwide, with access to over 75,000 screens in stores. We see momentum for digital out as our proprietary shopper data and state-of-the-art technology tied to measurable results continues to drive demand for this solution. National rebates. Demand for this offering continues to grow, especially now with the availability of national rebates expanding from the Coupons.com app to the Coupons.com website and mobile web, sponsored search. At the end of Q2, we had over 325 CPGs using quotient sponsored search. Since adding this offering to our platform, we have seen consistent sequential bookings in growth. Finally, I'm excited to highlight examples of our efforts to increase our competitive advantages and expand our opportunity set. We recently launched our new sophisticated within Quotient Analytics platform. This advancement gives advertisers near real-time performance insights into omnichannel campaigns through to impact on sales. We believe that providing this solution will be tremendously useful to advertisers, and we also believe it will further differentiate our offerings and elevate Quotient's value proposition. We also announced our integration with Microsoft. Our digital coupon experience is now incorporated into the Microsoft environment, including the Bing app website and MSN.com. We continue to work to expand the channels through which we can reach shoppers with our advertisers national promotions, including building relationships with additional strategic partners. Turning to governance. I'm happy to share that we recently appointed Allison Hawkins to our board of directors. Allison brings to our board extensive executive experience financial and company operating skills, investment evaluation and capital raising, legal practice and risk management experience, and diversity, equity, and inclusion oversight experience, all of which will benefit Quotient as we continue to grow and evolve. At the same time, I would like to take a moment to thank Michelle McKenna, who recently stepped down from our board of directors for her service and contributions to Quotient and its stakeholders. Moving on to our outlook for Q3 and the rest of 2021, As I alluded to earlier, we are seeing strong bookings and a robust pipeline for the rest of the year. However, uncertainty around macroeconomic conditions and the potential for the resurgence of the pandemic in some geographic areas remains a concern for the back half of the year. Taking this into consideration, we believe we will deliver revenue growth on a gross basis of approximately 18% in the second half of 2021 over the first half of the year. Our updated annual revenue guidance on a gross basis for 2021 now represents 17% growth over 2020 at the midpoint, while our adjusted EBITDA guidance for the year remains at approximately 25% growth at the midpoint. I'm grateful to our global team, our customers, and our partners for coming together to deliver again in an ever-changing and challenging environment as we navigate through the for the back half of the year. And with that, I'll now turn the call over to Pam.
spk00: Thank you, Stephen, and good afternoon, everyone. My remarks will be focused on our financial highlights. I encourage you all to read the full prepared financial results in our stockholder letter posted on the investor relations page of our website. We delivered a strong revenue quarter in Q2 with revenue at $123.9 million, up 48% over the prior year and up 7% over last quarter. Media revenue increased by 75% over the prior year, fueled by continued success of collaborative spend programs. The media business growth was led by sponsored search, programmatic media, and our social solutions. We also saw an increase in demand for our digital out-of-home offering as advertisers were eager to reach shoppers as they began to spend more time outside their homes, resume their commutes, and visit newly reopened sports and concert venues. Promotion revenue increased 28% year-over-year, primarily driven by digital paperless, which was up 47% over Q2 2020. This was offset by expected continued declines in specialty retail and printed home revenues. Gap gross margin for Q2 was 33.7%, down 550 basis points compared to the same quarter last year. Non-gap gross margin in the quarter was 40.3%, down 690 basis points over last year. As we had indicated last quarter, gap and non-gap gross margins were expected to be lower, primarily due to product mix. We have experienced a significant increase in revenue from lower margin media solutions, a higher mix of revenue from shopper campaigns versus national campaigns, a one-time distribution fee charge, and higher employee-related expenses. As highlighted on our Q1 earnings call, the mix of revenue from shopper versus national spend is impactful because shopper budgets carry higher distribution fees paid to our retailer partners, while national budgets have lower distribution fees, which result in lower costs and higher margins. Additionally, GAAP gross margin was negatively impacted by the impairment of a promotion service right asset, partly offset by lower amortization of intangibles. we delivered $4.3 million of adjusted EBITDA in the second quarter of 2021, which was flat on a year-over-year basis and within our guidance range, but below our expectations for the quarter due to lower margins recorded in the quarter. Q2 non-GAAP operating expenses came in at $47.2 million. This is an increase of $10.4 million compared to last year due to increased headcount and increased variable compensation as a result of higher revenue. Looking at cash, we delivered cash flow from operations of $7 million in the second quarter, driven primarily by strong collections and the timing of vendor payments. We ended the second quarter with approximately $238 million in cash and cash equivalents, down $2.8 million from the prior quarter. Now turning to guidance. As we've shared in our prior commentary and in today's stockholder letter and press release, we are in the midst of contract renewals with certain retailers, which could have an impact on future results. We continue to see strong bookings in the early days of Q3 and expect demand to remain strong throughout the second half of 2021. Gross margin risk on these revenues remains our primary focus for the second half of the year due to the challenges in determining the timing and growth rates in the higher margin portion of our promotions business. we are actively taking steps to reduce our delivery cost structure and raise gross margins over the coming quarters. Due to improvements in self-service capabilities we've deployed, we will change the accounting for sponsored search revenue to net revenue recognition treatment for the second half of 2021. Beginning July 1st, all sponsored search revenue will be recognized net of third-party costs. This change in accounting treatment reduces revenue and cost of sales by the amount of third-party costs and results in no change to expected gross profit dollars reported. With sponsored search booked as net beginning July 1st, 2021, we expect revenue for the full year of 2021 to be in the range of $505 million to $522 million with third quarter net revenue in the range of $126 million to $133 million. we estimate the impact to revenue and cost of sales from the change of accounting for sponsored search to reduce Q3 and Q4 each by approximately $5 million to $6 million. Therefore, if the accounting for sponsored search was not changing, our revenue guide on a like-for-like or gross basis would have been approximately $10 million higher with a midpoint of approximately $524 million, representing growth of approximately 17% over the last year at the midpoint. In addition, a gross view of the Q3 revenue range would have been $5 million higher, representing growth of approximately 11% over Q3 of the prior year. As we noted last quarter, we believe Q2 represents a trough in our growth margin trajectory. And although revenue mix and gross margins remain difficult to predict, we believe gross margins will trend up slightly in the second half of 2021. In Q3, we expect to see non-GAAP gross margins increased by approximately 150 to 160 basis points over Q2 2021 as a result of the change in accounting for sponsored search revenue, with additional improvements expected in Q4. For our remaining guidance metrics, we expect non-GAAP operating expenses to be approximately $47 million to $48 million for the third quarter of 2021. adjusted EBITDA is expected to be in the range of $2 million to $12 million for Q3. For the full year 2021, adjusted EBITDA is expected to be in the range of $50 to $65 million. We expect continued positive cash flow in Q3 due to tailwinds from our adjusted EBITDA results in Q2. For weighted average basic shares outstanding, we expect approximately $95 million for 2021. We ended the first half of the year with strong momentum and notable new partnerships and innovation that we are proud of and believe will fuel our growth trajectory for the upcoming quarters. We remain focused on building toward greater profitability and maximizing future value for our stakeholders. We look forward to sharing our progress with you as we move through the back half of the year. And with that, we will now take your questions. Operator? Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Steve Frankel with Colliers. Please go ahead.
spk04: Good afternoon, and thanks for the opportunity. Stephen, there's a lot to unpack here, and despite significant EBITDA pressure in Q2 and, again, in your Q3 guidance, you're maintaining the full-year profit outlook. So maybe you could walk us through some of the events or potential partnerships that you have in your pipeline that you haven't talked about yet that give you the confidence to see that significant ramp, especially in Q4. Sure.
spk03: Sure, Steve, thanks. And you're right. You know, we're maintaining our confidence and our outlook here for a number of reasons. And I'll start with your first question on partnerships. Look, you know, in the past, we've pre-announced partnerships unnamed, and then we're beholden at the timing of the partners to make their own announcements. And we want to get out of that business. But you did ask a very specific question. Let me give you a specific answer, and it's timely because, actually, know we've got a pipeline of large partners that we're signing but actually earlier today we signed another so earlier today we signed a partner that uh have uh has over 100 million active shoppers uh that's implementing our promotion solution over the next uh relatively short period of time so again just an indication we're not going to tell you who i know i don't like to be in the business now of pre-announcing not giving names but You ask a specific question, I'll give you a specific answer. And there are more like this in the queue for early adoption. So that gives us confidence. That's number one. Number two, when you talk about a pressure on EBITDA on this quarter, we did say that our gross margin would drop in Q2. We forecasted that. Media business continues to be strong. There's a lot of demand for our services, which is a good problem to have. And that puts some pressure on our gross margin. And quite frankly, you know, we're still coming out of the COVID period. It took us a couple of months longer than we expected to, you know, to begin to get leverage out of some of the team restructurings we did and some of the technology we've deployed. And so as a distributed workforce, everybody, you know, primarily working from home, it just took us a couple of months longer than we expected to be able to make some of those changes. So that also gives us an awful lot of confidence.
spk04: Okay. And you've talked a lot about this national promotions platform and its ability to transform the business because it doesn't have distribution fees. But again, reading into your gross margin guidance, it sounds like that business is much more focused on Q4 and it won't have a material impact on Q3?
spk03: Well, our national promotions business is – I mean, it's a healthy business, and it's running today. The big ramp is going to come, you know, sort of the end of Q3 and all through Q4. There is a distribution fee or a share of that, but it's much, much smaller than the other share of distribution we have. And so that business rolls through somewhere in the range of about a 70%, 75% gross margin to us. And so – You know, we've got some really wonderful data points, and we put it in our shareholder letter, but it's just released, and so you probably don't have the time to look at it yet. But, you know, we've got some really good indications now. In fact, we've got client feedback that we've reached a tipping point. We're delivering scale and results that are beating the FSI for the first time. And so, you know, we've talked at length about how we've changed our go-to-market model to make our national promotions platform much more appealing to CPGs, and to our distribution partners, and ultimately to consumers, because there's a longer period of time when those offers are available on our network. And as a result of those changes, and look, this is many years in the works, right? But as a result of those changes, we're now delivering more scale than the FSI does, and we're delivering better results. And those two things combined make it, you know, that was sort of the final step, which we talked about last quarter, and we got there. So CPGs can now move, you know, really move all their dollars over to a digital platform and not give up any sales merchandising.
spk04: Okay, great. Thank you. Thank you.
spk00: Our next question comes from Chad Bennett with Craig Hallam. Please go ahead.
spk02: I just want to follow up on the EBITDA guidance and, you know, again, I just want to understand how the math can even work for the fourth quarter. You know, midpoint of your range is so effectively you're going to be at 17, 18 million through three quarters of the year. So to get to the midpoint of your range or bottom end, you know, we need to do upwards of, I don't know, almost 40 million in EBITDA in the fourth quarter. Gross margins are going to be lower year over year. Your OPEX is material higher year over year. How does the math even work on fourth quarter EBITDA?
spk00: Yeah, so I can go into that. You know, I've got slightly different numbers. I'm Q4, you know, it's more like the low 30s. And I can walk you through all of the expectations that I'll drive that. You know, as we talked about in our shareholder letter, there's a few different areas that we have to improve profits and that will increase EBITDA in Q3 and Q4. You know, the big items and I think most of these we've talked about. They include self-service, duration-based pricing on national promotions, new distribution partnerships, and general cost control. So going into each one of these a little bit, self-service, especially on sponsored search, we've got a lot of demand for that offering on our platform. The number of brands who've booked campaigns increased by 21% in Q2 compared to the prior quarter. We've made improvements in the offering, and these improvements we expect to see good growth in revenue, which is now high margin and low delivery overhead. On duration-based pricing, we talk about that as rates and dates on our national promotions. These pricing and delivery changes are resonating with advertisers, and we're moving campaigns to this approach. We talked in our earnings materials, and Stephen just mentioned it. exceeded those of the traditional FSI, and we expect continued success on these programs with our high margin revenue. In addition to that, you know, we're focused on controlling costs and reducing costs where we can. We're working to reduce costs in all areas of the company and are eliminating redundancies where we have recognized, where we've reorganized our teams and deployed these systems that are designed to make us much more efficient. So strong demand on our platform, continue with you know, continued focus on growing national promotions on our platform and reducing costs is how we get there.
spk02: And then, so I was under the impression, maybe I was the only one, that a healthy amount of sponsored search, if not all, was already recognized on a net basis. Was that not the case? Only a portion of it was or none of it was prior to July 1st?
spk03: Actually, what we said in the past was a very small percentage, and we characterized it at 2 percent, was recognized as net historically.
spk02: And so, um, 2 percent of revenue or 2 percent of sponsored search?
spk03: I believe, I believe it said 2 percent of revenue because, uh, was recognized as net revenue. And so, so does that, does that, uh, does that answer the question?
spk02: Yeah, I guess, you know, the question is, is sponsored search, you know, has it been much more than 2%, 3%, 4% of revenue of the company's revenue?
spk00: Yeah. Yeah, it has. And it's been growing really nicely really since last Q3. So the amount of sponsored search that we recognize on a net basis today is, I don't know, it varies quarter to quarter, but it's probably less than half of total sponsored search revenue. So yeah, it's a small portion today. We're still doing a lot of managed services on top of search.
spk02: Got it. And then last one for me, just on, on the, um, auto RPM retailer, uh, that you, I think at least talked about on the fourth quarter call, um, any update on when they're going to go live?
spk03: Uh, you know, I, I just did a check in on this, uh, earlier today. And the answer is, um, very soon, but I mean, that's all we're permitted to say is very soon. Right. We're, um, we're actually, uh, we're testing with them now, you know, and they're live in a, in a, uh, sort of a testing mode. And we've been really encouraged by the results, even calling it, you know, quasi live. So, uh, we actually are very, very excited about this. I just want to go back to one other thing. Um, a sponsored search. I just want to make an important point here because. We've talked about this in the past, and this is a lot of what people have been asking us now, right? When will we get there? And the big difference is from a managed service business that takes a lot of people to implement programs, manage programs, report on programs, and service our clients, we're moving much more towards a capability set where our platforms are used by our customers, right? And, you know, we're really here for help and tech support. And it's really more of a platform licensing style agreement where we're getting paid for the use of our platform. And so we're going to continue to move almost everything we do out of managed services and into more of a – think of it like a technology license, right? Even though the accounting is net, it's really being paid for the use of our platform and services and not really managed service, heavy human capital-based business. This is the transformation that I started when I got back two years ago. It's now been exactly two years. And we are right at the tail end of most of that. The rest of it will come in during the course of next year when all of our promotions platforms end up being moved over to self-service capabilities. But we are right at the two-year mark and really just at the end of the big part of that transformation. This is something we've been asked to do for a long time. And... You know, it's been a relatively interesting and challenging journey for the past two years during COVID doing it remotely, but we're there.
spk02: So what will the gross margin now be on that sponsored search business?
spk00: Yeah, it'll be very high, nearly 100%, because we'll be recognizing everything net of third-party costs on the top line revenue line. So it'll just be some internal costs, which are small.
spk02: Okay. Thanks much for taking my questions.
spk03: Sure. Again, also just remember the, you know, the national promotions platform, as that continues to scale up with our partners, that's a 70 plus 75% gross margin business.
spk02: Great. Thank you. Thank you.
spk00: Our next question comes from Samuel Nelson with Oppenheimer. Please go ahead.
spk01: Hey guys, it's Simon for Judd. Thanks for taking my question. On the gross margins, I'm just wondering what kind of factors do you think could lead to promotions or national media coming back maybe stronger than expected and potentially add upside to gross margins in the back half? And then how do you parse out the inflation benefit that we're perceived to maybe be getting in the back half of the year here in terms of promotions and media? Do you think that could add upside to national media and promotions in the back half?
spk03: Yeah, let me break those into two pieces, right? So national media, inflation and national media, I'm not sure those two fall into the same bucket together. Inflation and national promotions are very tightly aligned. And so there certainly is upside opportunity there as price increases start to take hold. CPGs are announcing price increases. Shoppers, you know, shoppers want to stay motivated and in-brand and CPGs want to keep their product moving off-shelf. So So there is an opportunity from an inflationary perspective, macroeconomically an inflationary perspective. On the national promotion side, what upside is there? We've got some really great partners in the queue, really great. And like I said today, we weren't going to do it, but Steve Frankel asked a very direct question, and that's, have we signed any? So the straight answer is yes. And if you missed that earlier today, we signed another partner with over 100 million engaged shoppers. So to the extent we continue to sign them and they go live quickly, that could be upside on that really high gross margin national promotions business.
spk01: Thank you.
spk03: Thank you.
spk00: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk03: Thank you, Operator. Thank you, everyone, who listened in and participated on today's call. As you heard, we delivered another strong quarter of revenue, and we believe we've laid the tracks for a return to profitable growth over the next few quarters. We continue to demonstrate that there is no shortage of demand for our services, and we look forward to seeing you all during the investor conferences coming up and at our next earnings release. Thank you all again.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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