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spk01: Good afternoon. Thank you for attending today's quotient Q3 2022 earnings call. My name is Tamia and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. It is now my pleasure to pass the conference over to your host, Mark Griffin, Investor Relations. Please proceed.
spk02: Thank you, Operator, and to everyone listening today, apologies for the delay. Good afternoon, and welcome to our second quarter 2022 earnings call. With me on the call today are the company's CEO, Matt Crespo, and Unibcom, our CFO. The company's press release and earnings presentation have been posted to the IR section of the company's corporate website, investors.quotient.com. Before we begin, please note that during this call, you will hear forward-looking statements, including the guidance we will be providing for the company's fourth quarter and full year. These forward-looking statements are based on information available to and the good faith beliefs of the company's 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 the company's investor relations website. Additional information about factors that could potentially impact the company's financial results can be found in the risk factors identified in our annual report on Form 10-K, filed with the SEC on March 1, 2022, as amended by Form 10-K-A, Amendment 1, filed with the SEC on April 29, 2022, our quarterly report on Form 10-Q, filed on May 5, 2022, our quarterly report filed on Form 10-Q, again, filed on August 9, 2022, and the company's 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. Reconciliation of GAAP and non-GAAP measures can be found in the financial results section of the press release and earnings presentation released. put out today on the company's website. With that, let me turn the call over to Matt.
spk04: Good afternoon. Thank you for joining us today for Quotient's third quarter 2022 earnings goal.
spk03: I'm here with our CFO, Yaneeb Khan. Everything we do at Quotient is built around the scale of our platform, the software, data, and network that our customers leverage to drive their promotions and media efforts. Our platform has terrific scale. consisting of over 900-plus CPGs and representing over 2,500 brands. And from that scale, our network continues to grow as we add more partners. In the third quarter, we delivered more than $2.8 billion of savings to the American consumer, compared to $2.6 billion last quarter. As consumers seek more ways to save, and retailers look to take ownership of their retail media networks, we are successfully evolving to a leading consumer promotions network and data-driven retail media platform. Our business has changed from a managed service company and outsourced agency for retailers to a higher margin provider of data-driven software and technology for our partners to the scale of our platform. We believe our network, data, and software position us to be the provider of choice to enable digital promotions across the industry. On top of that platform, we are developing new products for the future needs of a rapidly evolving programmatic marketplace. Undertaking this change with our partners is creating a more durable P&L. We have significantly improved our capital structure, realigned our cost base, and solidified our balance sheet while positioning the company to unlock growth potential in consumer promotions and more broadly, retail media. We believe we are exiting the third quarter with much of the internal work behind us and look forward to discussing several software and technology-focused platform wins in the future. Turning to third quarter highlights, we were particularly pleased with the outperformance of our promotions business in the quarter as we increased revenue 5% sequentially versus a broader market decline. We believe this is a clear proof point that despite the overall macro headwinds impacting promotional spend from CPGs, we are growing market share. Overall, our Q3 results landed in a revenue guidance range, achieving revenue of $70.3 million. This was driven in part by outperformance within the promotions business and partially offset by a decline in our media business. As I discussed at the start, due to the focus on evolving our business model, in Q3, we delivered non-GAAP gross profit of $36.4 million. non-GAAP adjusted EBITDA of $10 million and operating cash flow close to breakeven. We will continue to optimize our business model and our scaled technology platform to best serve our retail and CPG partners. We exit the quarter with roughly 52% non-GAAP gross margins. While this was certainly driven by cost efficiency, we expect to continue to drive net revenue improvement with superior margins as we evolve our retail relationships and deliver our platform-centric solutions. From a cost perspective, we continue to enhance our operational efficiencies and reduce our overhead to better align our organization as a consumer promotions network and retail media technology platform. Looking ahead, we see near-term opportunities to further our efficiency through vendor consolidation, cloud migration, and other operational shifts that are more in line with our focus on delivering our platform's data and scale to our customers. We believe we have line of sight on an additional $30 million of run rate cost adjustments in these areas. Delving deeper into our capital structure improvement, we have entered into binding commitments for a $55 million term loan and a $50 million revolving credit facility and will retire our outstanding convertible debt with no dilution to our shareholders. This strengthening of our capital structure alongside our EBITDA performance and strategic focus on higher margin products puts the company in a much stronger position moving forward in our view. Now taking a step back from our performance this quarter, I'd like to discuss the market more broadly and how we're leveraging the power of our platform, our software, data, and network and the developments underway across our business to win in the market. Consumer promotions is our core business. And as you've heard from CPGs this earnings season, brands are able to hold or increase price with minimal impact on volume. This has resulted in an overall decline of retail sales on promotion by 5%, according to Nielsen IQ. However, in our promotion segment, We saw our revenue increase by 5% as we achieved savings growth of 9% sequentially and a 20% increase in content compared to last quarter. We believe these are clear proof points that despite the overall macro headwinds impacting promotion spend from CPGs, we are winning market share. We strongly believe the future precaution lies and are becoming a preeminent platform provider for the digital delivery of promotions. The broader consumer promotions addressable market is estimated to represent over $200 billion of spend by CPGs in the US. What we offer is a programmatic platform to more efficiently and effectively deliver targeted promotions to reach the right consumer at the right moment and across the right touchpoints to deliver the virtuous cycle savings for the consumer, sales for the brand, and trips for our retail partners. As I said at the start of the call, our promotions business has retained terrific scale, consisting of 900-plus CPGs representing over 2,500 brands, and our network continues to grow as we add more partners. Again, in the third quarter, we delivered more than $2.8 billion of savings to the American consumer, We have seen that it's our network of partners, our data, and our targeted promotional advertising that drives units moved and a higher ROI for CPGs and retailers. This maximizes activations and redemptions and delivers true cost savings for the consumer. We are also continuing to scale up existing and newly announced partnerships as we grow our platform and offer consumers more ways to save across multiple touch points. For example, We recently renewed our promotions partnership with Ajo Del Haze USA, one of the largest supermarket operators in the United States, to continue to provide digital promotions. This is just one instance of our ability to evolve and grow our platform. We are working on a variety of other partnerships, but we are looking forward to announcing in the future. Building on the foundation of promotions, we also are evolving retail media. into a data-driven technology platform that supports retailers as many start to bring capabilities in-house and to support brands as they look to invest in retail media. We have been working with our large retail customers that are undergoing this transition and positioning our platform to be the technology underpinning the shift. Retailers are moving in-house and we are going with them. We believe our platform strategy, built on our software, data, and network, enables us to be a critical high margin software and technology provider. Executing a retail media campaign is a highly complex and costly process for brands and retailers. Our platform is able to simplify that process by enabling brands to create tens of thousands of ads dynamically off of one piece of creative leveraging AI capabilities built into our system. This technology will become critical for advertisers, enabling them to improve efficiency and returns as they reach their audience of buyers across multiple consumer touch points. We aim to be the easy button, enabling retailers to monetize their network and CPGs to simplify their buying. Retail media is becoming a major driver of digital advertising spend due to the ability to target high intent consumers and drive performance. We are on a mission to ensure every dollar of investment drives outcomes, sales, and trips for our advertising and retail partners. We are currently working to implement our data-driven retail media platform with four CPGs across a diverse set of categories as this evolution of retail media continues. With over 90% of retail sales occurring in a physical store, programmatic digital out of home is one of the rapidly growing media channels. We have a powerful demand-side platform designed to leverage proprietary location-based technology, as well as exclusive data. This allows for planning, customized audience building, and targeting to programmatically reach consumers on digital screens. Our platform is also integrated with all key supply partners to enable what we believe to be the largest access to digital out-of-home inventory in the US. Furthermore, we're able to close the loop to enable brands to measure the impact on performance, whether it be via sales, foot traffic, or even viewership. To illustrate our scale, we traffic more than 20 billion weekly impressions across over 500,000 screens and over 150 million mobile devices. While CPGs remain cautious with media spending, we believe in the long-term value of this offering, and we intend to continue to invest in the business to capture market opportunities and gain market share. In addition, we see digital out-of-home changing from a linear and analog market to more of a programmatic market. Quotient represents nearly a third of the total addressable market for programmatic digital out-of-home, putting us on the leading edge of the strong and growing segment. Moving to our direct-to-consumer relationships, which we consider a hidden gem in our product portfolio. At the end of October, we officially launched Shopmium in the United States, which is an important milestone for Quotient. As you know, we've been delivering savings to consumers for decades through our original Coupons.com platform, and we are excited about this next evolution in our direct-to-consumer journey. Shopmeme is a trusted brand in Europe and is the leading grocery savings app in France, where the product originated. It's also available in the United Kingdom and Belgium. Shopmeme appeals to the next generation of shoppers. With this launch, we will now be able to offer American consumers an interactive platform to discover products and earn cash back without a minimum threshold. In addition, brands and retailers can grow their consumer relationships through new revenue-driving touchpoints and powerful audience insights. We are currently transitioning users from Coupons.com to Shopmium and have been extremely encouraged by our initial results, which have exceeded our expectations in terms of user experience usability, retention, and engagement. We are in the process of launching our marketing program to further grow our universe of shop medium users. So when you put it all together, we believe our new strategy better positions Quotient to capitalize on an evolving landscape. We are focused on building out our promotions and media networks around a strong base of CPG brands and retail partners on a platform built on software, data, and our network that has proven scale. And that platform has enabled us to take significant cost reductions and realign our business around our technology, reflecting both the changed economic landscape and, in our view, the durability of our business to execute against our strategy. The market remains choppy as consumers and CPGs navigate inflationary pressure and economic uncertainty. However, if the current market persists, we expect there will be more opportunities for us to work with CPGs and deliver savings to consumers. We believe this quarter's results in our promotions business point to our ability to gain share even in these challenging times. With that, I will turn it over to Yenid.
spk06: Thank you, Matt, and good afternoon, everyone. My remarks today will be focused on our financial highlights. And I encourage everyone to visit our investor relations page for all the relevant documents, including our gap to non-gap reconciliation. As we stated last quarter, we were looking to address our convertible debt in a way that does not overburden our P&L or cash position, and also took into account critical factors such as equity dilution. And as Matt highlighted, we did just that. On November 2nd, we entered into separate binding commitment letters with Blue Torch Capital and PNC Bank. Under the commitment letters, Blue Torch Capital will provide the company with $55 million in term financing over four years, and PNC will provide $50 million under an asset-based revolving credit facility. This new capital structure allows us to successfully pay off the existing convertible notes, and to continue advancing our transformation journey. Further, it provides us with an optimized cash position to fulfill all our business needs. Most importantly, it does not dilute shareholders at all. Moving on to our results for the quarter, our third quarter revenue was 70.3 million within our guidance range of 70 to 80 million. As Matt stated, our Q3 revenue was impacted by the ongoing macroeconomic challenges affecting CPG businesses, which are resulting in lower than expected promotions and retail media spend. Despite these headwinds, our promotions revenue increased 5% sequentially versus a market decline of 5% as measured by Nielsen IQ. Our non-GAAP gross profit was $36.4 million Our non-GAAP gross margin was 52%, roughly in line with our expectations, and up 710 basis points year over year. Our gross margin was positively impacted by our focus on high-margin products, as well as the steps we continue to take to reduce costs throughout the business. Q3 non-GAAP operating expenses were $29 million, down $17 million from the prior years, and down $11 million sequentially. The year-over-year decline in spending was primarily due to previously announced cost actions we have taken as well as our discipline office management. Our non-GAAP adjusted EBITDA was $10 million, marginally beating our guidance range of $5 to $10 million. Turning to cash, we had an operating cash flow close to breakeven in the quarter at the upper end of our guidance range. As we mentioned last quarter, as part of our transformation journey, we intend to continue to optimize that expense structure to drive further efficiencies and profitability. The approximately 30 million of run rate cost reduction that Matt mentioned is part of those efforts. We'll communicate our plans appropriately as we make progress on this initiative. Additionally, we are laser focused on improving our working capital and have made significant progress during the quarter, especially around our DSOs, which have improved by 13 days sequentially. We believe that our focus on cash flow combined with our available liquidity and our improved capital structure put us in a strong position to meet all our business requirements. Our EBITDA and cash flow performance demonstrates our continuous focus on financial fundamentals driving what we believe is a durable P&L with healthy revenues that turn into sustainable profits that convert into cash. Moving on to our fourth quarter and full year 2022 guidance. As I said last quarter, we are committed to sharing an outlook that is fact-based and built on data and the market dynamics we have today. Our revenue guidance reflect our anticipation of continued macro condition headwinds in the fourth quarter. Our expense guidance reflect ongoing cost benefits from last quarter's cost actions, as well as additional cost reductions that we anticipate implementing. Given our product diversity, as well as our belief in the strength of our promotions business, we are maintaining our revenue guidance for the year. We're also reiterating our EBITDA and operating cash flow guidance for the year, given our focus on gross margins and our continuous cost and cash flow management. For the fourth quarter of 2022, we expect revenue to be in the range of 76 million to 91 million non-GAAP gross profit to be in the range of 42 million to 55 million, adjusted EBITDA in the range of 13 million to 18 million, and operating cash flow to be in the range of 6 million to 11 million. For the full year 2022, we are maintaining our guidance for revenue to be in the range of 295 million to 310 million, non-GAAP gross profits to be in the range of 147 million to 160 million, adjusted EBITDA guidance in the range of $15 million to $20 million, and operating cash flow to be in the range of $0 to $5 million. We estimate weighted average basic shares outstanding to be approximately $95.9 million, in line with our previous XMS. Let me turn it back to Matt for a few closing remarks.
spk03: Thanks, Yenid. In summary, we are confident in the strong foundation we've established, which we believe positions us well as a more stable and durable business. We believe our strengthened operational and financial position, along with our differentiated products, will enable us to successfully manage through the near-term macro challenges. With that, we will now turn the call over to the operator to begin the Q&A session.
spk01: If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Nick Mariachi with Craig Hallam. Please proceed.
spk00: Hi, this is Nick on for Chad Bennett. Thanks for taking our questions. Can you hear me all right?
spk04: Hey, Nick. Yeah, we can hear you.
spk00: Awesome. So I just want to start on the media side of the business. Maybe if you could just take us back and kind of expand on how the strategy has changed there. I know in the past, the company had talked about, you know, adding RPM partners, being a primary driver for the business. And now that we are seeing more and more retailers in-house or partners with others for their ad tech stack, including a whole little haze recently, I guess, can you just expand on how that strategy has evolved for the media business to the point today? And if the uniqueness or value of the data you receive from retail partners has changed at all?
spk04: Yeah, Nick, thanks for joining. That's a good question and a deep question. I would say for us, as we look at the retail media space, and I think you guys have heard me talk about this before, the evolution of retail media going from retail media 1.0 as an outsourced agency model. We see retail media 2.0 more of that in-housing and then retail media 3.0 really being that true marketplace model. When we look at our strategy on the retail side, we do have several unique assets, whether that's our digital out-of-home DSP, our overall influencer network, our ability to be an ad network, so to speak, with some of the audience data. Those are really key kind of technology areas where we can play an active role in partnering with retailers as they look to kind of bring the sell side and bring that in-house. We also see opportunities on the demand side. And what I mentioned on the call earlier is working with a few CBGs right now to implement the demand side buying platform to make it easier for them to access and invest in retail media across the overall retail media networks. So in a macro standpoint, I would say we really see the industry evolving quite quickly and really becoming very mature, both on the retail side and on the demand side. And we see our role evolving to be more of a technology partner in that ecosystem, both with our retailers and with our CPGs.
spk00: Got it. And then maybe if you could speak to how spend with quotient from maybe like the 20 biggest CPGs has changed year over year, and how is that trended relative to smaller CPGs? And then maybe if you could disaggregate the change in spend between changes in overall spend versus changes in your market share with these clients.
spk04: Yeah, taking a step back, I would say we still remain strong relationships with a lot of our top CPG partners. I think we've certainly seen more diversification in terms of adding net new brands and net new manufacturers to the overall platform. So we feel like we've retained a fairly robust relationship with a lot of our major CPG partners. Where we're seeing our revenue growth, especially in the most recent quarter, has been on the promotion side, specifically around national promotions. So given our platform, our ability to programmatically deliver an offer to unique consumers, it's a much more efficient way to deliver promotions. And so in a marketplace where CPGs can take price and maintain volume, we become a useful tool and a useful distribution channel or marketing channel to reach a consumer, to keep a consumer in the basket, to keep a consumer in the category, to keep that brand relevant, especially as consumers see pressure on their wallets.
spk00: And then the last one for me is just a question on visibility in the business. And given it looks like the Q4 guidance range for revenue is, I guess, wider than expected, previously guided to? I know visibility has been kind of an area of focus for improvement for the company, but can you just expand on some of your efforts to improve visibility and afford revenue? And can you just talk about visibility, I guess, and do the Q4 guide with some of the macro pressures that you spoke about in your prepared remarks?
spk04: Yeah, absolutely. So let me start and then I'll pass it to you, Niamh. As we look at Q4, Q4 is a media quarter, and Q4 is also unique in the sense that the holidays fall in the back half or the end of the quarter. So where we look at the quarter right now, we do see healthy pipelines. We believe I think it's going to be a shorter holiday season so that we expect to see more of that booking late into the quarter versus some of the other quarters throughout the year. But, you know, I would say the team has been doing a good job under Yaniv's leadership kind of driving some, some discipline both on the P&L as well as managing our forecast and our guidance. But yeah, I'll let you dive in a little bit there.
spk06: Thank you, Matt. And thanks for the question. So firstly, I would like to reiterate that our guidance for revenue is based on facts and takes into account the market dynamics of today. That has been our philosophy right from the very beginning. Now, when it comes to the guidance range, why have we kept it wide? There are a few reasons for that. First of all, We have a diverse portfolio of products with their own specific market dynamics and different visibility associated with it. Our promo business outperformed in the market in the third quarter, and we are optimistic that the trend will continue. And that is where the pipeline has built up pretty nicely. Fourth quarter, like Matt said, is a big media quarter with a lot of media spending happening towards the later part of the quarter. and a lot of sales execution also happening towards the later part of the quarter. Their pipeline is building up. It's going per plan. But a lot of stuff happens towards the later half of the quarter, given the timing of the holiday season. So given these trends, we feel that our revenue guidance range is a good representation of the reality of today and a good reflection of our projections for fourth quarter.
spk00: Awesome. Thanks much for taking the questions.
spk04: Thanks, Nick. Thank you.
spk01: Thank you. Our next question comes from Steve Frankel with Rosenblatt. You may proceed.
spk05: Good afternoon. So to go into that promotional and media mix, traditionally in quarters where it tilts more to media, we'd expect gross margin pressure, and your guidance implies the opposite. So maybe give us some high-level commentary on that.
spk04: why you expect material sequential gross margin improvement yeah so steve thanks for joining and good to hear from you um i would say i'll start and then i'll pass it back to you need here to to give you guys some details but you know overall we've taken a philosophy of looking at driving operational efficiencies across the company and so really separating out uh how we execute and how we operate at quotient uh independent of the the mix of revenue streams that we generate And so as we look, as we continue to kind of like look at Q4, even as we look progressively into 2023, where you continue to kind of stay laser focused on driving a more efficient software and technology platform for our customers and across our product lines. Specific to Q4, I'll let Yenib chime in a little bit here on the mix.
spk06: Yeah, so, you know, as I mentioned in my remarks, our company is laser focused. on gross margin. We have seen gross margin in the 50s in two quarters back-to-back, and we expect that gross margin trend to continue to improve progressively as our mix improves, as we gain more volume in the top line, and most importantly, as we keep optimizing our cost structure. Fourth quarter is the highest revenue quarter. The mix is made up of products which are higher in margin. Yes, there is a lot of media content in it, But you're talking about products like digital out of home and the part of media that comes with high gross margin. Secondarily, as I said before, we have seen strength in our promotions business. We are very optimistic that that strength is going to continue in the fourth quarter as well. And that also brings pretty high margin calories with it. So when you combine all of these together, the margin profile that you see in our guidance range is a true reflection of what we could expect coming in the fourth quarter.
spk05: Okay, and then another guidance question. In terms of, you gave us the add-backs that get to a non-GAAP gross margin, but in terms of the add-backs at the operating line, are there any material differences between the dollar amount that you saw in Q3 and the dollar amount embedded in your Q4 forecast?
spk06: not in terms of ad backs now in in q3 the ad backs have been disclosed or will be disclosed in the queue and those ad backs are not as material in nature as we saw in the second quarter fourth quarter for uh for all practical purposes is a very clean quarter when it comes to the ad backs okay and uh congratulations on the debt refinancing uh could you tell us
spk05: what the balance sheet is likely to look like in Q4. So how much cash are you using to repay the converts versus reliance on the debt?
spk06: Right. So one of the reasons, let me give you a little elaborated answer. So first of all, the capital structure that we have right now is an outcome of pretty detailed diligence that we did. We ran the evaluation process with our advisors and experts in the debt market. And this is the right capital structure because It does not overburden our P&L and cash flow. This kind of like, you know, creates an optimized cash position for us. And most importantly, it does not dilute the shareholders at all. The cash number that we will have after we have settled the entirety of our convertible notes is going to be in the range of $50 to $60 million. And as the company grows and it continues on its path of operating cash flow, that balance is progressively going to improve. That balance is the right balance that we have. It basically allows us to meet all our working capital requirements, to manage our business in a very smooth way, and also it allows us to keep investing in the business in terms of capital expenditure and in our transformation. So we are actually very, very happy with this capital structure, and we think that the cash balance that will come out of it once the notes have been retired is going to be the optimized cash balance that the company needs to not just operate, but also to continue this path of transformation.
spk05: Okay, great. Thank you. Thank you, Steve.
spk01: Thank you. There are currently no further questions in the queue, so I will pass it back to Matt Krepsik for any closing remarks.
spk04: We want to thank you all again for joining us today, and we look forward to continuing to update you all on our progress in the near future. Thank you.
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