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spk03: Hello, good afternoon everyone, and welcome to Quotient's fourth quarter and fall year 2021 earnings conference call. During the conference call, all participants will be on listen-only mode. After the presentation, we'll conduct a question and answer session, and at that time, anyone with a question should lift their phone receiver and press the star key, followed by one on their telephone keypad. To cancel a question, you may press star, followed by two. If at any time during the conference you need to reach an operator, please press star, followed by zero. And 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'd like to hand the call over to Maria Sims, Marla Sims, sorry, Vice President of Investor Relations. You may now begin.
spk04: Thank you. Thank you, Operator.
spk01: Good afternoon and welcome to our fourth quarter and full year 2021 earnings call. I'm Marla Sims, the new Vice President of Investor Relations for Quotient Technology, and on the call with me today are our CEO, Stephen Bohl, Pam Strayer, our CFO, as well as Scott Raskin, our President, Matt Krepsik, our CTO, and John Kellerman, our Chief Accounting Officer. 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 first quarter and full year 2022. 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 in 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 filed with the SEC on February 23rd, 2021, and quarterly reports on Form 10-Q filed on May 10th, 2021, August 6th, 2021, and November 5th, 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 to discuss 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 stockholders' 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. Stephen?
spk07: Thank you, Marla, and welcome to the team. You joined at a very exciting time. Hello, everyone, and welcome to our Q4 and full year 2021 earnings call. As you've seen from our release and stockholder letter, we ended the year with a solid Q4, delivering revenue of $146 million and adjusted EBITDA of $12 million. For the full year, we delivered $521 million in revenue and $41 million in EBITDA. As we look forward to 2022 and beyond, the quotient of today is a transformed company. Over the past two-plus years, since I returned to the company, we have significantly transformed our product portfolio, our business operations, and our network expansion model, which we believe positions us well to deliver sustainable and profitable growth. We have restructured our sales, operations, product, engineering, finance, customer success, and human resource organizations. We have decommissioned infrastructure and legacy systems and rolled out more modern, efficient ones, which include self-service capabilities that allow our partners to use the Quotient platforms on their own. This new structure provides for clear accountability, more transparency, and reduces manual work, which has re-energized our teams and aligned quotient behind a single culture and purpose. And while we have made tremendous strides to date, we plan to drive further efficiencies over the course of 2022. Turning to network growth, we are pleased to share that in addition to Microsoft, FIG, and Redbox, Amazon is the latest partner to join our national promotions network. And that's not all. We expect to announce and launch several exciting partnerships in the coming months and quarters. Supply chain issues continue to dominate the news and impact many of our customers. While we'd expect to see this abate over the next couple of quarters, we did see some impact in Q4 2021, and we continue to see some impact in CPG spending so far in Q1 2022. As you will hear shortly, and you can read in our financial release, our remaining support for Albertsons is scheduled to conclude by the 26th of this month. And several of our products are making their final way through the operational changes necessary for accounting transition from gross to net revenue recognition over the current quarter. As a result, and adjusting for these two items, we plan to exit Q1 with a non-GAAP gross margin run rate of between 50 and 55% of revenue and exit the year with non-GAAP Q4 gross margin in excess of 60% of revenue. I'll now go into some detail regarding our growth businesses and their respected forecasted growth rates over 2022. Promotions. In 2022, we expect our national promotions business to see revenue growth of 25% to 30% over 2021 on a like-for-like basis, excluding Albertsons. Over the past two years, we have focused intently on growing our promotions network, attracting valued partners like Microsoft, FIG, Redbox, and now Amazon, as well as on launching new products like cashback rebates, which expand our footprint in the industry. Moreover, as we've previously mentioned, over the last year, we implemented a business model change to better align our customers' promotions planning with in-store and online shopper marketing campaigns. Adoption of this new model has exceeded our expectations, and as of today, Over 75% of all national promotions programs are being booked under this new model, which we believe will unlock more ways for CPGs to drive higher ROIs across their promotions and media spending and providing a bigger opportunity to shift more dollars from legacy offline coupons into digital. Today, I'm also excited to share that we're bringing our Shopmium brand to the U.S. later this year to replace our consumer-facing brand, Coupons.com. Quotient has been running Shopmium in Europe for many years, and recently we have been meeting with our U.S. customers to share the rich set of features and capabilities launching in the U.S. Our national promotions business is a key pillar of our company strategy, and we are very pleased with the progress we have made over the past 24 months which we believe sets us up for strong growth going forward, even considering the impact from current supply chain constraints. Media. This is the part of our business that is often difficult to understand as we continue to move much of the business to net revenue recognition. We expect our media segment to deliver 15% to 20% revenue growth over 2021 on a like-for-like basis, excluding Albertsons, and reflecting adjustments for gross to net revenue recognition. We have made great strides in upgrading our technology and releasing self-service tools that we believe will allow us to achieve operating leverage as we continue to scale our business. Partners large and small can now connect directly to our platform, and we have had some recent wins with large CPGs that are using Quotient on a self-service basis to deploy their retail performance media campaigns. An example of Quotient's leading innovation and focus on operational efficiencies is a new feature we call dynamic price integration. We can now connect a retailer's sales pricing fee, also known as temporary price reductions, or TPRs, to their media creatives, automatically adjusting media in real time based on changing offer details. This sophisticated capability removes a significant amount of manual work normally associated with these types of integrated campaigns. And lastly, Quotient's promotion amplification continues to demonstrate strong sales lift and has expanded our opportunities with both existing partners and new ones. Digital out of home continues to be a shining star in the Quotient media portfolio and will see no impact from the loss of Albertsons. Quotient's proprietary technology allows advertisers to target very specific sets of shoppers, both in and out of stores, and then measure the direct impact on product sales. These capabilities, combined with our leading location-based DSP, are now fully self-service, and we have struck deals with some of the largest out-of-home agencies to integrate our technology directly into their offerings. Quotient's platform is built for the unique challenges of out-of-home advertising, and our agency clients use Quotient to identify valuable customer segments and determine how to reach them at the right moment to drive increased traffic, sales, and return on investment. Smaller CPGs. Another key pillar of our growth strategy is our engagement with smaller CPGs. In 2022, we expect this part of our business to deliver between 40% and 50% revenue growth over 2021 with no impact from the loss of Albertson. By opening our network to these customers, smaller CPGs can, for the first time, reach shoppers at scale alongside larger brands who have traditionally been the only ones who could participate in legacy offline coupon vehicles like freestanding inserts in the Sunday newspaper. We believe that the growth of our network, along with our focus on servicing this segment of the market, creates a multi-year runway for strong, continued growth. I'd like to once again thank our teams. our partners and our advertisers for doing their part to help make sure that shoppers have access to essential products over the course of the pandemic. We will continue to do our part to help shoppers save when they need it most and continue to be a key partner to our advertisers, retailers and network partners. And with that, I will now turn the call over to Pam. Pam.
spk02: Thank you, Steven, 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 solid financial results in Q4 with revenue at $146.4 million, up 3% over the prior year. Media revenue in Q4 was approximately 60% of total revenue, increasing 20% year over year with strength in sponsored search and digital out-of-home offerings. Promotion revenue decreased 15% year over year on difficult compares. We had expected declines in digital print and specialty retail driving 10 points of the decline, with the remainder of the decline in revenue from digital paperless, which was driven primarily by lower national promotions revenues as supply chain issues led CPGs to pull back on national campaigns. Compared to our guidance range of $114 to $124 million, Revenues were higher primarily due to the difference in the amount of revenue that was actually recognized under net revenue recognition compared to our forecast. Our guidance for Q4 21 revenue included an estimated $20 million reduction related to moving a portion of our revenues from gross revenue recognition to net revenue recognition as a result of changes we were making to our commercial terms and operations. These changes took longer to implement than originally expected, which delayed and reduced the impact of the accounting change. The impact of moving from gross to net revenue recognition has no impact on gross margin dollars or adjusted EBITDA. Adjusting for these differences, we exceeded our revenue forecast by approximately $3 million on a like-for-like basis. GAAP gross margin for Q4 was $54.4 million, up 8.5% over the prior year. As a percentage of revenue, gross margins improved by 210 basis points to 37.2% of revenue. Gross margin improved primarily due to lower costs. The prior Q4 was negatively impacted by $6.8 million charge taken to resolve a contract related dispute. In addition, the current quarter benefited from lower amortization of intangibles. These savings were partially offset by lower gross margins on our media business, as well as a higher mix of media revenues compared to the prior year. which carry lower margins than the promotions business. Non-GAAP gross margin was 39.3% down 580 basis points compared to 45.1% in Q4 of last year. This decrease was driven primarily by higher distribution fees paid on certain campaigns as well as a higher share of lower margin media in our total product mix. Gross margins on the promotions business also declined compared to the prior year due to expected lower contributions from higher margin digital print and specialty retail, the latter of which we exited as planned during the year. We delivered $12.1 million of adjusted EBITDA in the fourth quarter, down 32% from the prior year, primarily due to lower gross profit. As we continue to implement our business model changes and restructure our business terms and relationships, we expect non-GAAP gross margin as a percentage of revenue to improve throughout 2022. We expect the negative impact of higher distribution fees on margins to be more than offset by growth in high margin national promotions, as well as the move of gross revenue recognition to net revenue recognition. In particular, we believe strong growth from higher margin national promotions will drive operating leverage and positive mix. While the launch of new distribution partners on our platform will drive scale, and as the year progresses, an increasing portion of our shopper media and shopper promotion campaigns will be recognized net of third-party media and distribution fees. We believe the combination of these factors, along with continued cost controls, will more than offset the negative mixed impact from higher distribution fees, resulting in higher margins overall and higher adjusted EBITDA for the full year. Q4 non-GAAP operating expenses came in at $47.4 million, up $1.9 million from the prior quarter due primarily to higher professional services fees, commissions, and travel expenses, offset by lower headcount and marketing spend. Looking at cash, we had an operating cash flow usage of $3.7 million in the quarter, down from the prior quarter due primarily to an $8 million payment made to a customer that will be amortized against future revenue, as well as changes in working capital. We ended the fourth quarter with approximately $237.4 million in cash and cash equivalents, up $14.7 million from Q4 2020. Now turning to guidance. We believe the changes we have made to our business in 2021 provide a strong foundation from which to grow profitably in 2022. While the loss of a large retailer partner reduces our revenues by approximately 27% and is expected to result in difficult compares year over year, we are successfully executing on our new strategy, signing up exciting new network partners and making positive changes to our existing partner relationships that in our view show strong promise for the year ahead. In particular, we believe recently signed network partnerships combined with growth in high margin national promotions revenues will lead to incremental scale and operating leverage as the year progresses. Further, as most of our shopper promotions and shopper media revenue shifts to revenue recognition, net of third party costs, margins will improve, although the change in accounting treatment will have no impact on reported gross margin dollars or adjusted EBITDA. As a result, we expect to grow quarterly non-GAAP gross margin as a percentage of revenue from 40% in Q1 to over 60% for the fourth quarter. And we expected to deliver full-year adjusted EBITDA of $35 to $45 million, roughly in line with the prior year at the midpoint, despite losing one of our large retail partners. Now turning to the outlook. For the first quarter of 2022, we expect revenue to be in the range of $69 to $79 million, Non-GAAP gross margin to be in the range of $28 million to $32 million. Adjusted EBITDA to be in the range of a negative $8 million to negative $4 million. And operating cash flow is expected to be in the range of negative $3 million to positive $3 million. For the full year 2022, we expect revenue to be in the range of $330 million to $345 million. Non-GAAP gross margin to be in the range of $180 to $190 million. Adjusted EBITDA is expected to be in the range of $35 to $45 million. And operating cash flows to be in the range of $15 to $25 million. We expect weighted average basic shares outstanding for 2022 to be approximately $96.3 million. As always, predicting the mix of revenue between promotion and media, as well as the timing of accounting changes from gross to net, is difficult, which could lead to variations in our gross margins. With that, we'll now take your questions.
spk04: Operator?
spk03: Thank you. And if you would like to ask a question, please press star followed by one in the telephone keypad. And if you change your mind, please press star followed by two. Our first question today comes from Steven Frankel of Collier Securities. Steven, your line is open. Please go ahead with your question.
spk06: Good afternoon. A lot to digest here. But one of the consistent messages for the last couple of quarters was all these changes were going to lead to a material reduction in hot packs. So we didn't see that in Q4. Pam, maybe you could give us some thoughts around what the OpEx run rate looks like in Q1 and then how that changes when all these transitions get behind you by the end of the first quarter.
spk02: Yeah, so we have been very focused on doing a full review of our operations and reducing costs where we can. You know, we said about mid-year that we were going to do a couple, well, we said in our last earnings call, we did a couple of risks. We did one in Q3 where we reduced costs as a result of automating a process. And we did another one in Q4 as a result of the expectation of the loss of the Albertsons business. The guidance we had given was that we had expected our OPEX to drop by about 5 million from the high point at Q2 by the end of the year. We took about 2 million out in Q3. Q4, we were gonna take out more. The delay in the transition of Albertsons caused us to not cut as much in Q4 as we originally hoped. So those original cost cuts will come in 2022. We've got Albertsons on our platform until February. So we need to transition out of that business and then we've got the support costs that we can work on pulling out of business.
spk06: Okay. And then just a big picture back of the envelope question. Kind of what's the go forward base business X all these changes? What was it in 2021 and what do you think the growth rate of that quote unquote good business is in 22? You've given us a couple of pieces, but maybe what's implied in your guidance in terms of a growth rate for the go forward business?
spk02: Yeah, the growth rate that's implied, if you work with the math of Albertsons coming out about 27%, we're projecting growth in the baseline in roughly the mid thirties.
spk06: Okay. And what's your visibility on that? You guys talked a lot, use that word a lot in 2021. So, uh, what's your visibility around that mid thirties growth?
spk02: Pretty good visibility. Uh, you know, we've, We've got a lot of good bookings information and bookings are strong that I think, you know, one of the big changes that is happening in the business right now is a shift and a focus on new network partnerships. So we're expecting, you know, we've got some big exciting new partners that we've announced today. We've got some new partnerships that we're expecting and these partners are technology savvy partners, they can get onto our platform quickly with APIs and they can start being productive very quickly. You know, contrast that to a grocery retail partner, which generally takes a little bit more time to see revenues.
spk07: Yes, Steve, let me just add that the new way we're selling national promotions is done on a date basis. You know, we've talked a lot about this. And so that actually gives us more predictability and more visibility as well. And so historically, we didn't have as good visibility into those programs. But at this point, already 75% of national promotions programs are booked on the new model. And that gives us certainty around dates.
spk06: Okay, just a couple more questions. You mentioned Amazon, maybe you could kind of tell us what that relationship looks like, at least initially, and maybe some hints on where it goes over time.
spk07: Yeah, we're not going to drop hints. What we'll say is that, you know, what we said already is that Amazon is the latest partner of scale to join our national promotions network. And we're going to wait until Amazon's ready to, you know, to sort of announce what they're up to.
spk06: Okay, then the last big picture question. You know, the world's changed a lot, you know, in the last year with tracking cookies going away and Apple making its, changes along those lines. So what does that mean about the value of your data and how do you make sure that customers understand that value equation?
spk07: The way customers understand the value equation is when we put audience estimates and delivery estimates in front of them. And remember, we are primarily a first party and second party data company. And so I know that there have been some large companies that have announced, you know, significant impact from things like IDFA, but that's not the space that quotient operates in. We've got a leading location based DSP that contributes an awful lot of actual first and second, you know, second party data to our platform. almost all of the users that are engaged with our services need to be in a logged-in state in order to take advantage of value delivery. And so we just don't see the impact that other companies do that are purely ad delivery to matched audience type of businesses from IDFA and third-party cookies and all the other sort of technology things that are going on. So that continues to be the case. We don't see any change there.
spk06: Okay, great. I'll jump back into the queue.
spk04: All right. Thank you.
spk03: Our next question on the line comes from Chad Bennett of Craig Hallam. Please go ahead with your question, Chad. Your line is open.
spk05: Great. Thanks for taking my question. So maybe, Pam, just make sure I understand this correctly on the Albertsons impact. So on the third quarter call, you talked about a 15% to 28% coming off the network from Albertsons. And then I think you just indicated 27% impact, so at the high end of that range. But if I look at the guide, your REVs are down mid-30s year over year. And I think Albertsons is probably staying on longer, so kind of maybe a benefit, so to speak, for the first couple of months of the year than maybe you originally expected on the Q3 call. Can you help me understand the delta there?
spk02: Yeah, let me just talk about big moves annually first, just so we level set, and then I can talk about Q1 in particular. But if you take a look at what we actually reported for our full year 2021 in revenues, 521 million. You know, if you take 27% and back that out, you get to about 381. But the other thing that's going on is the gross to net changes. And what we've shared in our materials is that we're forecasting about $130 million of revenue to switch to net next year. So that's a direct reduction from the as reported guidance that we're giving you. So the 330 to 345, to compare that on kind of a like for like basis, you'd add back 130 million. So, the impact in Q1 that you're seeing there is not only the, you know, there is some reduction from the Albertsons business. We're supporting them through February. So, we do have some revenues in there, but March is a big quarter generally. And so, there is a negative impact there. So, that brings on Q1. And then, you know, we've got some other gross to net adjustments that are impacting that number. That brings us down to a decline year over year of over 36%.
spk05: Wouldn't the Albertsons going away in gross, wouldn't those be duplicative? Meaning, was Albertsons largely on a gross basis also? I mean, are we... Are those separate items? I assume Albertsons was recognizing revenue. You guys were recognizing revenue on a gross basis for the vast majority of Albertsons.
spk02: Yeah. So historically, our business has been recognizing revenue on a gross basis. There's been some small streams that we've switched to net, but the vast majority of our business is all recognized on a gross basis, and that includes... vast majority of the Albertsons business. So, yeah, when you look at their share of our revenues, it's 27%. It's distinct from additional gross net changes that we're going to make in our business.
spk07: Hey, Chad, just to add, you know, the fact that we're supporting Albertsons students to the end of Feb doesn't mean that we're supporting them at the same revenue level that they would have had, let's say, last year or had we continued on for the remainder of the year with them. But yet we still have a bunch of the support infrastructure required to support them. So it's not quite as beneficial on the revenue line as you might think it was.
spk05: Got it. Nope, I understand. And then maybe just in terms of your guide and how you're looking at the outlook, or even maybe for the fourth quarter, Other than Albertsons, did we lose any other retail partners? No. Okay. And then just in terms of the promotions business, just remind me again, I know you talked about, I think it was Pam again, talking about the growth of your expected kind of like-for-like growth of the national promo business. Remind me again, How do you think about that this year in terms of percentage of overall promo revenue and what you expect from the other parts of the promo revenue from a growth rate standpoint?
spk07: Sure. So we don't break out the – we haven't historically, let me say, a broken out national promo from the other components of it. However, what we have said, just to be clear, is that we've now exited specialty retail. That was in the promo business. And the print coupons part of our business is really sort of rounding down to almost nothing at this point. We're watching that one trickle down as well. And that's by design, because digital is a more effective mechanism. So what does that leave? In the promotions business, that leaves our national promotions. And you know this, but for the benefit of everybody, that just means it's not retailer specific. It can be regional, it can be targeted, but they're available to anybody who fits that criteria. The other component to that is shopper or retailer promotions, and those are largely moved to a net-based recognition at this point. And so from a mix of the two, although we haven't broken out specifically, moving to net recognition on the shopper piece and having really great growth on the national promotion side, which is that's our core competency as a business. We've been doing it for the longest. We are the market leader here. that would lead you to expect that that part of the promotions business is the bigger part. Again, on a gross margin basis, with Shopper Promo being on a net basis, the gross margin is nearly 100%. But on the national side, it's an extremely high gross margin business, and we expect that to grow a lot faster because of the partners we're bringing on and because of the business model change we made to sell. The other thing I'll say is that we've been talking about large CPGs who lead the industry and then next sizes and next sizes down. We've already talked about some large CPGs that have told folks in the industry they're coming out of the FSI. Well, another one is doing the same thing. And so another very, very large top CPGs coming out of printed coupons in the relatively near future. And so that just continues to happen, and that drives even more opportunity for us to grow national. And that's why over the past year plus, myself and Matt Krepsik, who's in the room with us since he's joined, has put a very sharp focus on growing our network outside of just retail. And that's why you heard today, in addition to Microsoft and others, We've added Amazon to the platform. And there are more coming, and they're coming in short order. So I think you'll see the pathway there to that growth line.
spk05: And then maybe last one for me, and this is just kind of your view, Stephen. I mean, of the just whole retail performance media space in the industry, obviously you and Albertsons are parting ways, but you have added AutoZone and whatnot in the past. and Albertson's going to kind of do its own thing. What's your view of the next 12 to 24 months? Is it as big of an opportunity as you thought it was, once was, or has something changed where retailers are more in-housing that capability now, or maybe it's just not as an attractive of a margin business as maybe you thought it was before? Any commentary there?
spk07: Sure. I actually think the opportunity is a bit larger. Some of this has been shaped since Matt Krebsik joined the team. When you think about the largest pure grocers in the U.S. and you think about their share of market or all commodity volume, it's single digits. The largest pure grocer in the U.S. has got less than 10% share. The next tier down of retailers together as a network represents much larger segment of the market than any of the individual larger retailers. CPGs are starting to get a little frustrated having to load up media campaigns on an individual retailer basis. And this is, I mean, this is all publicly available, lots of articles. In fact, an article came out this week, I think it was Business Insider that talks specifically about this topic. And so the natural place for quotient continues to be the demand aggregator for retailers, call it tier two or retailers below the top four across the industry for media. And that's what our QMP platform is designed for. It's multi-retailer ad ordering and distribution targeting and measurement. And really Quotient is the leader in the industry for promotions for all retailers. It's not limited to below the top four or five retailers. So I think actually the opportunity is quite a bit larger now that we've implemented a multi-retailer platform in our industry. in our application world. So I don't think anything's changed there at all. We've been saying for a long time that the top one, two, three, four retailers are gonna try and go off and do their own things. They have the resources to go out and try and do it. But it's an evolving business and we've seen some of those retailers reach out to other partners to try and extend the length of their network off property. So like I said, it's an evolving industry. I actually think the opportunity is quite a bit bigger. And our sweet spot is really being the demand aggregator for retail performance media for the next tier of retailers down, which together represent a larger opportunity than any of the individual larger ones.
spk05: Got it. I appreciate the color. Thank you.
spk07: Sure. Thank you.
spk03: As a reminder, if you would like to ask a question, please press star followed by one in your telephone keypad.
spk04: We have no further questions registered on the line, so I'll hand back to the management team.
spk07: Thank you, Operator. As you all heard today, we've made tremendous progress transforming our business over the past two plus years. And after all the heavy lifting we've done, we believe Quotient is now well positioned to profitably grow and capture and capitalize on the opportunities in front of us. We look forward to speaking with many of you over the coming days and like to thank you all again for participating. Thank you, Operator.
spk03: Thank you very much. That concludes today's call. You may now disconnect your lines. Thank you.
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