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spk02: Good afternoon, everyone, and welcome to Quotient's third quarter 2021 earnings conference call. During the conference call, all participants will be in 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, then 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 Mark Griffin, investor relations. You may now begin.
spk01: Thank you, operator. Good afternoon and welcome to our third quarter 2021 earnings call. I am Mark Rippon, investor relations for Quotient Technology. And on the call with me today are our CEO, Steve Ball, Pam Strayer, our CFO, as well as 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 the call, you'll hear forward-looking statements, including the guidance we will be providing for the fourth 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 their related risks and uncertainty are set forth in the earnings presentation slides located on our Investor Relations website. Additional information about factors that could potentially impact our financial results can be found in our stockholder letter issued today and the risk factors identified in our annual report on Form 10-K filed with the SEC on February 23, 2021, and quarterly reports on Form 10-Q filed on May 10 and August 6, 2021, and in future files with the SEC. We may 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. The reconciliation between GAAP and non-GAAP measures can be found in the financial results section of the stockholder letter issued today and in the earnings presentation slides posted on the website. With that, let me turn it over to Stephen. Stephen?
spk02: Thank you, Mark. Hello, everyone, and welcome to our Q3 2021 earnings call. As you've seen from our release and stockholder letter, we had an outstanding Q3, delivering revenue of $135.9 million and adjusted EBITDA of $17.3 million which is starting to demonstrate the leverage in our business as we scale up our platform, migrate away from lower margin, higher cost to deliver services, and keep our continued focus on reducing operating expenses. We also started to scale up our national cashback rebate platform, which is providing an exciting opportunity for both retailer and non-retailer network partners, delivering the largest set of national offers in the industry. Turning to retail network growth, we are pleased to share that AutoZone is now live on the Quotient network, as is Total Wine & More, the largest adult beverage retailer in the U.S., and another new vertical for Quotient. Additionally, we are very excited to announce that we have launched promo amplification with Rite Aid and have additional retailers in the pipeline we expect to launch over the coming months. Network growth outside of retailers continues to expand, and we have several partners in various stages of integration currently underway that we expect will also be live over the coming months. One great example is our partnership with Redbox. Redbox has 40,000 kiosks at the entrance of major retailers and other high-traffic areas. They have a very loyal fan base which frequently visits these kiosks, which makes them a perfect partner for Quotient. we look forward to being able to offer more savings value to more shoppers as they start their shopping trips. At the same time, we're hearing about supply chain issues and some out-of-stock situations in parts of the country, not as severe as during the peak of the pandemic, but impacting CPG spending to a degree. Last quarter, we highlighted that we had two retailer renewals underway and that we expected to have closure on both by end of year. We have renewed our partnership with Dollar General, and we are winding down our long-term partnership with Albertsons. As of now, we expect to wind down that relationship over the next few months and are taking actions to remove costs in this quarter and decommissioning systems in areas of operations that supported this account. We believe the exiting of this business will have a positive effect on our long-term margins and on our network performance overall. Pam will get into more of the details, but our continued attention on moving from managed services to self-service is starting to produce the desired outcomes we expected. And broadly speaking, we now expect to see gross margins in the neighborhood of 55% in Q1, with growth up from there over 2022. As I mentioned last quarter, as we continue to grow our network and with our business shifting to deliver promotions on a fixed calendar rather than on a volume basis, brands can more accurately align with their overall merchandising schedules and budgets, paving the way for the remainder of the offline FSI dollars to move to digital. This new way of engaging with quotient is being endorsed by CPGs, and we look forward to steady growth in this business over 2022. Smaller CPGs continue to be a growth driver for us, with revenue in this area 109% up over Q3 of 2020. The recent launch of our cashback rebates platform enables these smaller CPGs to offer this exciting alternative way of rewarding shoppers. As I mentioned earlier, our rebates platform continues to be met with strong demand. We are implementing cashback rebates with both retailers and with non-retailer network partners. Quotient has the largest number of national promotions, and now that cashback rebates are being added as another shopper option, our network partners have the widest possible number of available offers to engage with their shoppers. With regard to national promotions, although we are seeing some slowdown due to increasing supply chain and some out-of-stock situations, we continue to expect the bulk of the offline, primarily freestanding insert spend, will move to digital over the course of 2022, and we believe Quotient will be a primary beneficiary of the transition. Periods of price increases for consumer goods and overall inflationary pressures tend to be higher promotion spending environments, and we expect to see this swing back early in 2022. In retail performance media, or RPM, we saw growth of approximately 59% in bookings dollars from our CPG customers in the third quarter over last year. Additionally, RPM retailers saw approximately 9% increase in alternative revenue streams on pure play retail media delivered through this platform. Looking at our digital out-of-home business, at the end of Q3, we had inventory of over 287,000 screens nationwide, up over 45,000 screens from Q3, and access to over 75,000 in-store screens. We continue to see momentum for this product, which leverages our proprietary shopper data and measurement capabilities. In sponsored search at the end of Q3, we had over 344 CPGs using quotient sponsored search, up from 325 last quarter. We continue to experience consistent sequential quarters of growth in CPGs and bookings on this platform. Moving on to our outlook for Q4. While we are seeing strong bookings in most of our business and have a robust pipeline for the rest of the year, at the same time, we are also seeing some pullback on national promotions due to some of the out-of-stock situations and supply chain pressures. Due to these potential impacts and with some uncertainty around how the Albertsons' wind down will transpire, we're taking a slightly cautious approach to Q4, which should be a minimal approximately $5 million of revenue impact. As we head into the final months of the year and turn our attention to 2022, I'd like to thank our team, our network partners, and our advertisers for their part in helping to deliver essential services to shoppers over the course of the pandemic. We have done our part to help shoppers save when they need it most and continue to be a key strategic partner to advertisers and retailers, helping them reach shoppers at scale in an increasingly efficient way. And with that, I will now turn the call over to Pam. 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 strong financial results in Q3 and made good progress on changing our business model to rely more heavily on technology for delivering our solutions. Revenue came in at $135.9 million, up 12% over the prior year and up 10% over last quarter. Media revenue in Q3 was approximately 52% of total revenue, increasing 20% year-over-year with strength in sponsored search and digital out-of-home offerings. Sponsored search revenues grew 2.5 times the prior year quarter, And our digital out-of-home revenues were more than three times the prior year quarter, as advertisers are seeing compelling results from these channels. Promotion revenue increased 5% year over year, primarily driven by digital paperless, which was up 12% over Q3 2020. GAAP gross margin for Q3 was 36.3%, down 290 basis points compared to the same quarter last year. Non-GAAP gross margin in the quarter was 44.7%, down 150 basis points over last year, but up 440 basis points from Q2 2021. GAAP and non-GAAP gross margin sequential increases were primarily due to product mix, with Q3 improving due to higher margin media revenues generated from sponsored search and digital out-of-home. As we discussed in our August 2021 earnings release, changes we've made to the business resulted in all sponsored search revenue recorded net of third-party costs beginning July 1st, 2021. If we had not made a change to the business and accounting, revenue reported for the quarter would have been approximately $4 million higher, and year-over-year revenue growth would have been 16%. The decreases in GAAP and non-GAAP gross margin compared to the prior year were partly offset by improvement in operating leverage. Additionally, GAAP gross margin was negatively impacted by the impairment of certain intangible assets and partly offset by lower amortization of intangibles. We delivered $17.3 million of adjusted EBITDA in the third quarter of 2021, up $13 million from the prior quarter and above our expectations for the quarter. Product mix improved with higher margin revenue recorded for sponsored search and digital out-of-home. Q3 non-GAAP operating expenses came in at $45.5 million, down $1.7 million from the prior quarter as a result of cost controls and a reduction of headcount in the quarter. Looking at cash, we delivered cash flow from operations of $12.2 million in the quarter. This was driven primarily by strong collections and the timing of vendor payables. We ended the third quarter with approximately $245 million in cash and cash equivalents, up $6.6 million from the prior quarter. Now turning to guidance. We experienced strong bookings momentum during Q3. However, supply chain disruptions are causing a slowdown in national promotions bookings for Q4. In addition, we anticipate some revenue risk as Albertsons transitions off the platform. As a result, when compared to our guidance issued last quarter that did not contemplate these accounting changes, we were slightly lowering our revenue guidance for the year, and EBITDA guidance has come down to the product mix and lower revenue for the fourth quarter. The changes we are making to our business and the resulting accounting impact of moving this part of our business from gross revenue recognition to net revenue recognition reduces top-line revenue and cost of revenues by approximately $20 million in our Q4 forecast. reduces revenue and cost of revenues for the full year of 2021 by approximately $24 million. After adjusting for these accounting changes, we currently expect fourth quarter revenue in the range of $114 million to $124 million. Revenue for the full year of 2021 is expected to be in the range of $490 million to $500 million. The revenue forecast represents our best estimates of GAAP revenues. The actual product mix of promo and media offerings, as well as the mix of revenues recognized under a gross or a net basis, can have a significant impact on our gross margins as a percentage of revenue and is difficult to forecast. We expect our margins to improve over the long term as we continue to work on technology investments and changes to our operations to improve efficiencies. As highlighted in the past, the mix of revenue between media and promotions, as well as retailer-specific campaigns versus national campaigns, is impactful because retailer-specific campaigns come with higher distribution fees paid to our retailer partners, while national budgets generally have lower distribution fees, which results in lower costs and higher margins. Specifically for our Q4 outlook, we expect to see gross margins of approximately 41% to 42% as a result of continued high proportion of retailer-specific media campaigns. For our remaining guidance metrics, we expect non-GAAP operating expenses to be approximately $43 million to $44 million for the fourth quarter of 2021. Adjusted EBITDA is expected to be in the range of $7 million to $12 million for Q4. For the full year 2021, adjusted EBITDA is expected to be in the range of $35 million to $40 million. We expect operating cash flow of $0 to $6 million in Q4 due to lower EBITDA as well as severance payments related to the headcount reduction expected. For weighted average basic shares outstanding, we expect approximately $93.8 million for 2021. Turning to fiscal year 2022, we expect that the wind down of Albertson's business will have a negative impact on revenues in 2022, but once transitioned out, will allow us to focus on technology investment and growing our business profitably over the long term. As we think about the impact to our top line revenues, based on the last two years of our partnership, we estimate that between 15 and 28% of quarterly revenue may come off our network. However, these revenues are below the average variable margin rates at the gross margin level. As a result of this and other business changes, Quotient has taken action in Q3 and plans to take additional action in Q4 to reduce its expense and better align costs with forecasted revenues. Between the Q3 actions and the forecasted impact of Q4 cost reductions, we expect to have an estimated annual savings of approximately $40 million that will benefit 2022 profitability. we remain focused on building toward greater profitability and maximizing future value for our shareholders. We look forward to sharing our progress with you as we move through these changes. And with that, we will now take your questions. Operator?
spk02: We will now begin the question and answer session. To ask a question, press star then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Steve Frankel with Colliers. Please go ahead. Good afternoon, Stephen. So there's a material reduction in EBITDA expectations relative to the last time you were talking about the end of the year. Could you kind of walk us through what the material factors are there and whether OpEx in Q4 is coming in where you thought it was, or it's taking you a little longer to take those costs into that last course?
spk00: Hi, Steve. This is Pam. Yeah, I can answer that question. So regarding our Q4 EBITDA, It did come down a bit from what our original forecast was. Really, that's primarily a story around gross margins, the revenues that we're expecting to come in in Q4. When you asked about OPEX, we were able to take nearly all of this spend out that we wanted to get to. We might be off by about $1 million. What we said last quarter was that we expected a $5 million drop. drop in OpEx from Q3 to Q4, but we had forecasted kind of flat in Q3. So, we ended up coming in better on cost savings in Q3, bringing OpEx down quarter over quarter by $2 million. We expect to take another $2 million out, $2 to $3 million out between now and Q4. So, that would get us close to that $5 million that we were assuming between Q2 and Q4. So we nearly hit all of our cost savings. The revenue number is coming in good if you look through the accounting changes. So it's really a question about the margin mix of the revenues that came in, which is having a negative impact on EBITDA. The primary reason for that is just the slowdown in national promotions that we talked about a little bit.
spk02: And there was a lot of anticipation about launching network partners like Microsoft. Has the timing of those partner launches been delayed at all? No. In fact, we've announced two or three. We're onboarding others as well, as we said in our prepared remarks in our shareholder letter. But it's also a function of the fact that national promotions, strong bookings heading right into the quarter and then you know, slowed down quite a bit. You're hearing all the noise about supply chain and a little bit of out of stock in some of the areas in the U.S. So, you know, could that, you know, could that just be a momentary pause and then a spring back in another month? It's possible. But to be cautious based on what we saw in the first month, we just took it down a bit. Okay. And then just one clarification on Albertsons. I think there was some expectation that that it was really the media business, the RPM business, that potentially would go away. But I think I read from your comments that the entire Albertson relationship gets wound down between now and the end of the year. Well, we didn't say between now and the end of the year. We said over the next few months. But that's correct. We'll be winding down all current agreements with Albertsons over the next few months. And when is the next significant retailer renewal? Well, we can't be specific other than to say not until Q4 of next year. So not until Q4 of 2022. Thank you, Stephen. Thank you. Again, if you would like to ask a question, press star then 1 to join the queue. The next question comes from Chad Bennett with Craig Helen. Please go ahead. Great. Thanks for taking my question. Just trying to connect the dots on the Albertsons impact. Pam, I think you gave a range of 15 to 28%. In early fiscal year, 22 comes off network. And so off network, does that, I don't know how that correlates with as a percentage of your overall business or revenue. Is there any kind of indication on what that means?
spk00: Yeah, so I guess how I would explain it, you know, we took a look back at history to see how much Albertsons was of our business. We didn't want to try and forecast what the going forward growth pattern looks like because that's outside of our control. But looking back, you know, it does vary a bit from 15% of our revenues to 28% of our revenues. We were trying to give you kind of a guidepost to size it. So, yeah, it's sizable. And if you look back over history, that's what we're using to try and estimate what the forward-looking impact is going to be. Okay.
spk02: So it's a top-line revenue on a gross basis. Yep. And so the other thing, just, you know, to make sure we're thinking about things correct, your $17 million EBITDA, Non-GAAP EBITDA this quarter included six and a half million of a charge related to pulling out of the Albertsons contract. So you added that back into that EBITDA dollar figure. And then I think it was 9.1 million for the year because you had some in the last quarter. So the run rate EBITDA, you know, would have been closer to 11 for the quarter. Is that correct?
spk00: The intangible impairment of $6.5 million is a non-cash charge. So, yeah, we don't include that in our EBITDA calculation. Okay.
spk02: Not in there. Yeah, just to be clear, not in the... It's a non-cash charge related to the Albertsons contract situation?
spk00: That's right. It was an intangible asset that was set up when the contract was originally signed. It's now being written off. It's non-cash. So when you're calculating EBITDA, it gets added back as a non-cash charge.
spk02: Okay. And then just curious in terms of where we are in the gross to net transition in the business and if you have any insight of kind of where we're going to be, you know, whether it's exiting the year or early next year in that transition. And I guess the other question related to that would be the $20 million impact in the quarter, in the fourth quarter, And that was just related to the accounting change, right? That isn't Albertson's winding down impact. Is that correct?
spk00: Right. Yeah, that's correct. No, that is entirely related to the accounting change from gross to net.
spk02: Yeah, so where are we? On your question on timing and where are we, you know, we are largely through it at the end of Q4. There will be some little bits of the business left, but we'll be largely through the transition as we exit 2021 as we had expected. On the media and promo side of the business? On all of it.
spk00: On the promo side, you know, there's a portion of promo that stays on a gross basis, so it's not going to impact all of our promo revenue.
spk02: Yeah, but that's national promo. Right. Right. So there's no impact there. Okay. Thanks for taking my questions. You got it. Thank you. This concludes our question and answer session. I'll now turn the conference back over to management for any closing remarks. Thanks, Operator, and thank you all for joining us today. As the results of Q3 demonstrated, we are beginning to see the results of the past two years' focus on streamlining our business and executing on our strategy of growing our reach and scale, which in turn allows us to exit our lower-margin, high-cost areas of the business. The launch of our cashback rebate platform and upgrades we've made to our network are allowing us to onboard more partners over shorter periods of time, as you heard in our prepared remarks. We look forward to seeing you all over the next several weeks and months and to our next quarterly earnings call. Thank you.
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