Cardlytics, Inc. Q2 FY2021 Earnings Call

Good evening, and welcome to the Cardlytics Second Quarter 2021 Financial Results Call. Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations and beliefs, including expectations about future financial performance or results, our financial guidance and cash position for the third quarter of 2021, our ability to achieve long-term initiatives to drive long-term growth, growth in MAUs or monthly active users, launches by new partners in the coming quarters, the increase in ARPU or average revenue per user, the impact of COVID-19 on our business and the economy as a whole, including the uneven recovery and volatility of the economy. Q4 being a seasonal high period of ad spending and consumer spending. The increase in stock-based compensation next quarter, continued pressure on our U.K. results and the anticipated benefits and expectations and goals related to the integration of our acquisition of Dosh Holdings, Inc. and Bridg Inc. For a discussion of this specific risk factors that could cause our actual results to differ materially from today's discussion, please refer to the Risk Factors section of the company's 10-Q for the quarter year ended June 30, 2020, and in the subsequent periodic reports that we file with the Securities and Exchange Commission. Also during this call, we will discuss non-GAAP measures of our performance. GAAP financial reconciliations and supplemental financial information are provided in the press release issued today and the 8-K that has been filed with the SEC. Today's call is available via webcast, and a replay will be available for one week. You can find all of the information I've just described on the Investor Relations section of the Cardlytics website. Please note that a supplemental presentation to our first-quarter results has also been posted to our Investor Relations website. Joining us on the call today is Cardlytics leadership team, including CEO and Co-Founder, Lynne Laube; and CFO, Andy Christiansen. Following their prepared remarks, we'll open the call to your questions. With that, let me turn the call over to Lynne. Lynne?

Good evening, and thank you for joining our Q2 2021 earnings call. While we grew Cardlytics platform billings to 111% and adjusted contribution 123% from Q2 2020, we fell below our guidance. This was driven by us forecasting a faster recovery than was realized in travel, retail, and restaurant. Here are the numbers. Cardlytics platform billings were $83.2 million, up 111% year-over-year. Cardlytics platform revenue, which is equal to billings, net of consumer incentives was $56.8 million, an increase of 101% from Q2 2020. And Cardlytics platform adjusted contribution was $27.6 million, up a 123% year-over-year. To provide investors with more transparency into the quarter, we're providing advertiser spending concentration and growth rates for each of our key verticals. We're also reporting Bridg results as a separate segment to help investors better understand performance and our investments in this business. I want to reiterate that while we're disappointed in the miss our business is performing well. We believe advertisers spent less than we forecasted for three reasons; First, there were labor shortages. Second, retailers and restaurants had supply chain issues. And third, there was an increase in consumer demand reducing the need for advertising with several key clients. For example, several of our key client restaurants paused their marketing because they couldn't purchase enough critical ingredients. A men's clothing client halted all of their marketing spend when they realized their supply chain couldn't deliver the inventory they needed to maintain customer selection. As a result, some marketing budgets across our client base were actually paused in Q2, something we rarely see in our business and/or pushed to Q3. Additionally, as you can see from the new supplemental information, travel and entertainment advertising spend are still down about 75% from Q2 2019, and the U.K. is still down about 23% from Q2 2019. Our Q3 guidance acknowledges the reality that the pandemic is still affecting our business. Additionally, we're not providing Q4 or full-year guidance at this time as we continue to see volatility. Importantly, we're not reducing internal targets or quotas. While our advertising clients remain committed to the platform. They are telling us that marketing budgets continue to be uncertain due to macroeconomic events. As we have discussed in the past, much of our billings are concentrated with large advertisers and verticals most impacted by COVID, highlighting the importance of self-service capabilities to expand our advertising base. Our team is facing the market challenges head-on and focused on achieving the goals we laid out at the beginning of the year. With that said, I'm pleased with the progress we've made against the initiatives that will drive our long-term growth. We are ahead of plan on every single initiative that we have discussed for the last several quarters. Let me highlight some of the key integration, product and client accomplishments. Dosh integration continues to go exceedingly well, by realizing synergies that we planned during the acquisition and post-acquisition integration process, we're executing against our plan to eliminate the EBITDA loss by the first half of 2022. We are now live with eight neo-banks and fintech platforms including Venmo. Additionally, we have another 14 neo-bank and fintech platforms coming online over the following quarters. The new partners include a contract with one of the most innovative fintechs in the U.S. This company selected Cardlytics and Dosh as a strategic loyalty partner to enhance customer adoption, retention and card use by rewarding card holders for everyday spending. With the addition of Dosh, we have positioned Cardlytics to be the platform of choice for fast-growing fintech and neo-bank sectors. Bridg integration while much lighter than Dosh is also progressing as planned. We have begun integrating staff functions such as HR, finance and legal. And we are investing resources and capital to accelerate their efforts to achieve significant scale. Recently we closed a large home improvement client and the business has a strong pipeline with many leading retailers and restaurants. Client feedback on Bridg has been impressive. One of their key partners had this to say about their product, quote, understanding all of our customers and their engagement levels allows us to deliver a differentiated customer experience. Bridg has enabled us to complement the deep insights we have around our loyalty members with an understanding of our unknown in-store customer purchase behavior, along with the ability to reach these individuals to develop an optimal customer relationship. We now have a true holistic view into our customer base that was not possible before. Our Cardlytics platform sales strategy is paying dividends. We continue to see strong year-over-year growth from new industries like D2C, which was up over 120% in Q2 2021 compared with Q2 2019. In the U.K., we soft-launched Nectar Connect to their online and mobile customers. As a reminder, Nectar is one of the largest loyalty programs in the U.K. and is run by the grocer Sainsbury. The next step is a phased promotional campaign to all of Nectar's members. Our focus on open banking is showing positive results as enrollment rates and customer engagement are extremely encouraging and have already outstripped initial expectations. We hired Peter Chan from Amazon as our CTO. Peter's impact on migrating to the new self-service platform is already evident. We are making great strides in partnering closely with agencies leveraging our platform. We now have 27 agencies spending money on behalf of 43 clients on the Cardlytics platform. While not all of the agency clients are using our self-service yet, those that aren't are migrating to the new platform. We have created this momentum as agencies understand the capabilities that we will enable over time. As a reminder, we will break out agency spend starting in Q3 of this year. And finally, we continue to invest to further strengthen our bank relationships. We are working with each of our bank partners to find more ways to deliver content to their customers and improve overall value delivering 3D programs. For example, we've established a clear linkage of the program engagement to increases in overall spend, habitual card use and now even increases in savings and investment rates are creating even more support and excitement for our program across our bank partners. Before I hand it over to Andy, I just want to say that despite the headwinds in the quarter, the entire Cardlytics team is committed to executing against our initiatives. We're leaving no stone unturned to make sure that we finish the year strong and continue to become a leading advertising platform for our customers and partners.

Thank you, Lynne. As Lynne mentioned, our financial results continue to be impacted by the pandemic. But I also share Lynne's excitement about the immense progress we've made on our longer term product and technology initiatives. So let me review our Q2 financial results. Total billings increased to 116% year-over-year to $85.3 million. Cardlytics platform billings was $83.2 million, an increase of 111%. Total revenue increased to 109% year-over-year to $58.9 million. Cardlytics' platform revenue was $56.8 million, an increase of 101%. Our Cardlytics U.S. revenue increased 95% year-over-year and our Cardlytics U.K. revenue increased 220%. In the U.S., we saw significant year-over-year growth in each of our industry verticals. When compared to 2019, however, it is clear that we are still being affected by an uneven recovery with lingering challenges across travel and in some cases retail and restaurant. Our U.K. business continues to be more severely impacted by the pandemic as lockdowns and restrictions are still unwinding. Consumer spending and ad budgets have rebounded significantly from last year We anticipate some continued pressure on our U.K. results over the next few quarters. As Lynne mentioned, we have provided new information on ad spending on the Cardlytics platform by industry, both retail and restaurant spending were in excess of 110% year-over-year. But we expected both of these industries to rebound at an even faster pace when forecasting at the beginning of the year. Our stronger than expected results in March reinforced this expectation, specifically our Cardlytics platform revenue with $16 million in January, $15 million in February and $22 million in March. During Q2, our Cardlytics' platform revenue was $17 million in April, $20 million in May and $20 million in June. These monthly fluctuations reflect the volatility of consumer spending and ad budgets in our key verticals and it presents us with some challenges in accurately forecasting short-term results. Adjusted contribution was $29.6 million, an increase of 139% year-over-year. Cardlytics platform adjusted contribution was $27.6 million, an increase of 123%. Adjusted EBITDA was a loss of $5.7 million compared to a loss of $7.7 million in Q2 of 2020. Our adjusted EBITDA loss includes an incremental $10 million of operating expenses related to our recent acquisitions. As mentioned last quarter, we expected a larger EBITDA loss in Q2 than Q1, as our investment in Dosh is reflected for a whole quarter and Bridg is included for roughly half of the quarter. As Lynne mentioned earlier, we have begun executing on a plan to integrate and rationalize the Dosh operations and representing Bridg as a separate segment within our external reports. Bridg operated at nearly break-even adjusted EBITDA in Q2. But we have an investment plan to support the expected growth in that business. Here are a few other items outside our EBITDA results that are worth mentioning. First, in Q2, we included $14 million of acquisition and innovation costs and these costs are excluded from adjusted EBITDA. A significant portion of this relates to diligence and transaction costs. We are incurring a small amount of post-acquisition integration costs. So we expect to incur some additional costs throughout the rest of the year. Second, our stock-based compensation increased from $7 million in Q1 to $13 million in Q2. About half of the increased rates were awarded in connection with the Dosh acquisition and the assumption of options originally issued by Dosh. The other half predominantly relates to our annual retention grants to employees. We expect stock-based compensation to go up a couple million dollars next quarter, driven by the Bridg acquisition, the Dosh integration and a few new hires. We ended Q2 with $251 million cash and cash equivalents compared to $614 million at the end of Q1. The change in cash is largely due to the Bridg acquisition, which closed in May. Minimum cash earnouts for Bridg shareholders are expected to total $48 million in May of 2022 and $19 million in May of 2023. In addition, we have another $50 million still available to us under our loan facility at this time. Our balance sheet and liquidity remain strong and while we're always evaluating our capital structure, we see no immediate need to raise additional funds. MAUs increased 7% year-over-year and were flat sequentially. As Lynne mentioned earlier, we have great momentum with neo-banks and fintechs to Dosh, including a very innovative client that we just recently signed. We expect many new partners to launch over the next two quarters. ARPU during the second quarter was $0.34 compared to $0.18 in the prior year. We expect ARPU to increase on a sequential and year-over-year basis throughout the rest of the year, as we continue to grow our revenue at a faster rate than our MAUs. We earned 32.9 million shares outstanding at the end of Q2 compared with 31.8 million at the end of Q1. Weighted average shares outstanding during the quarter was 33 million compared to 27.1 million during Q2 of 2020. This largely reflects the equity issuance last March and the shares issued in the Dosh acquisition. Now turning to guidance. In Q3 we expect total billings of between $85 and $95 million. Total revenue between $57 million and $66 million and adjusted contribution of between $27 million and $32 million. This is below our prior expectations as we believe we'll still be dealing with an uneven recovery in Q3. We've also lowered our expectations for ad spending to return within travel this year. Given the volatility we expect in our key industry verticals, we've decided to wait to provide Q4 guidance until we have more visibility. Based on the current macroeconomic climate, we expect Q4 to continue being a seasonal high point for both ad spending and consumer spending. However, we expect a high level of variability of these market dynamics and each industry we operate in is still working through unique challenges of varying degrees that may result in later decision-making on campaign launches. Additionally, several of our largest clients develop their marketing plans during Q3. So we expect to gain more clarity in the next two months. We remain very excited about the long-term potential of Cardlytics and the combined value with Dosh and Bridg. Our focus is squarely on execution and making sure we have sufficient resources and investments to achieve near-term results and continue our progress on important long-term initiatives. And with that, I'll turn it back over to Lynne.

Thanks Andy. There's still significant uncertainty in the market right now given COVID-19 trends. But we believe our business will continue trending towards a position of strength through this uneven recovery. We're looking forward to executing on our plan and acquisition integration for the second half of 2021. With that, I'll open up the call for your questions.

Thank you. Our first question comes from Jason Kreyer of Craig-Hallum. Your line is open.

All right. Thank you for taking my questions. Just a couple of clarification items if you don't mind. So, in terms of the metrics you provided, it looks like MAUs were down about a million quarter over quarter. Just wondering if there was an explanation on that. And then, when we look at the Q3 guide, obviously, you're providing a wide range of outcomes. But it looks like the low end of the Q3 guide would actually show a lower sequential movement from the Q2 level. So I'm just trying to understand the logic and kind of the puts and takes that would drive a sequential reduction there?

Thank you. This is Andy. Regarding MAUs, we added a few million with the launch of the U.S. bank, but we also saw a decline of a few million due to the planned winding down of a processor. Despite our efforts to work with them for a successful program, we generated less than $50,000 in revenue from that partner this year, making them unprofitable. As we've discussed about our direction as a platform, it didn’t make sense to continue that relationship. Concerning our Q3 guidance, you're right, there is a lot of uncertainty, which is why we kept the guide fairly broad. We are still navigating visibility issues, particularly with travel and ongoing challenges in the market regarding supply and demand. Our struggles continue in the U.K. Overall, when you consider the guidance and the midpoint we've indicated, we do expect progress, as we've experienced quarter-over-quarter increases and anticipate that trend will continue, hence the wide guide reflecting our current lack of visibility.

Got it. I appreciate the insight, Andy. I want to bring up one more point regarding the strategic aspect. Concerning the enhanced platform that U.S. Bank is rolling out, could you clarify the expectations for progress from this current point? Are there other financial institutions that you anticipate will join, and when do you think you will reach a critical mass with several institutions using that platform?

Yes. Thank you, Jason. It's Lynne. We have publicly stated that one very large bank will be launching this new platform and experience in the latter half of this year. Starting next year, we anticipate significant monthly active users on the platform. Additionally, we expect that most of the remaining monthly active users will transition to the platform throughout 2022, so by 2023, we expect to have the majority, though likely not all, of the monthly active users on the new version of the user experience. Furthermore, we are already seeing promising early results with a mid-sized U.S. bank, showing significantly higher click rates on ads featuring images, which is to be expected, as well as increased click rates on ads utilizing the new categorization features we've implemented. It’s still early, but this is very encouraging.

Perfect. Thank you. Appreciate the time.

Thank you. Our next question comes from Aaron Kessler of Raymond James. Your line is open.

Great. Thanks guys. Just a couple of questions. One, maybe you can just discuss the advertiser pipeline a little bit. And maybe specifically D2C trends looks like that may have flattened out, but it looks like they made them because of the recovery and some of the other verticals as a percentage of revenue basis. And just may quickly on that kind of the ARPU calculation. Just to clarify you excluding Bridg from that. I was off by a penny there just to clarify that? Thank you.

Yes. I was going to clarity that. Yes. The Bridg is not included in our ARPU calculations. The MAU number is really just a Cardlytics only platform number and then the revenue generated from the Cardlytics platform.

Got it.

Yes. Regarding the D2C question, it's more about what you noticed, Aaron, which is that other categories are beginning to recover. So while D2C is still experiencing growth, its share of the overall business appears to be stabilizing as other categories make a comeback. However, D2C remains a very rapidly growing segment for us.

Got it. And just how do you feel about the advertiser pipeline right now? Kind of with the salesforce, any further details there?

Yes. I mean, look, I know it sounds flipped because we did just have a miss. But we also grew adjusted contribution 123% year-over-year, which is higher than I think any other digital platform out there. So, we feel great about the pipeline. We talked about the momentum we're seeing with agencies, which are bringing in a lot of new logos and new clients. Our current clients are still very excited about the platform. The pipeline is robust. So, I know it sounds flipped, but there's nothing wrong with the core business. We just over forecasted recovery.

Got it. Great. Thank you guys.

Thank you. Our next question comes from Karl Peters from Needham. Your line is open.

Hey, good afternoon. Thanks for taking my questions guys. Just want to see some of the feedback you guys have been getting from some of your clients. Maybe how much of the shortfall this quarter is from some of these labor and supply chain issues? And how much of it is maybe from some of this pent-up demand kind of creating a little bit of narrow pocket? Just want to see from you guys, like, what you guys are hearing?

Yes, I can jump in and then Andy can add his thoughts. We would have likely been around the midpoint of our range if we hadn't experienced campaign pauses during the quarter. These pauses were due to significant issues like labor shortages and unavailability of chicken. I believe we would have exceeded the upper end of our guidance if some advertisers hadn't chosen to hold back on advertising due to these constraints. It's a combination of factors, but the unusual nature of paused campaigns with committed budgets is something we have rarely encountered. To be honest, I don't recall ever seeing it recently. It was definitely tied to these issues. As I mentioned, we would have comfortably exceeded our guidance, probably sitting above the midpoint, if those issues hadn't occurred.

Okay. That's helpful. And then, just a follow-up on Bridg, the ARR breakdown and the revenue breakout in the releases, super helpful. But just wondered if you could give us any additional color either on the bookings momentum that they're seeing or how we should think about how that ARR will kind of roll into revenue moving forward?

Yes. I mean, look, you will see a fairly standard I think relationship that is related to some of these other software platforms. We're going to continue to grow that ARR. And as those become realized, I will see that roll through revenue. But, I think we have quite a bit of good momentum on that side of the business. We talk a lot about really trying to drive that scale. And going into market and having conversations jointly has already begun.

Karl, just to give you some tangible numbers there. When we acquired Bridg they had one full-time sales person. They are now up to three. And we're investing heavily. So we are going to really blow out the pipeline. That's the goal. That's always been the objective. But obviously going from one sales person to three, and people take time to train, etc. So it's going to be a multi-quarter journey to really some material scale. But we're focused on that right now. And then the clients we're calling. We've identified 25 very high potential clients. These are clients both that could really benefit from Bridg, but also could benefit from Bridg and Cardlytics combined. And we're going after them pretty aggressively.

All right. That's great color. Thanks guys.

Thank you. Our next question comes from Doug Anmuth of JPMorgan. Your line is open.

Hey, this is David filling in for Doug Anmuth. I appreciate the opportunity to ask some questions. First, regarding the challenges you've been experiencing quarter-over-quarter, what do you believe these issues are, and do you feel like you're starting to turn a corner, or is it likely that conditions will remain difficult before they improve? Additionally, I noticed that adjusted contribution as a percentage of revenue dropped below 50% for the first time this quarter, and even excluding the Bridg contribution, it’s nearly 49%. It seems like you're guiding for that to be in the high 48% range. Could you elaborate on what caused this increase and how we should view this moving forward?

Yes. I'll take the first part and Andy, you can take the second part. I think, I mean, it's hard to predict the future. But I think the supply chain shortages that impacted a couple of clients, those seem to be going away. But I will say, the labor shortages are not. As an example, I tried to redeem a Burger King offer. I was really getting Onion Rings the last couple days. And I sent my daughter to go get the Onion Rings. Two days in a row I just went to Burger King and they were closed. They didn't have enough employees. So I'm still worried about labor shortages. Supply chain, it's hard to predict, but right now those seem to have gone away or at least dramatically declined.

Regarding your second point, we currently have a slightly improved incentive this quarter compared to recent periods. We’ve mentioned that neo-banks are contributing to funding and enhancing offers through the financial institution share. This will lead to a decrease in our GAAP revenue, but it does not affect adjusted contribution. If you assess adjusted contribution as a percentage of revenue, it might appear somewhat distorted during these times. However, if you consider adjusted contribution as a percentage of billings, which is likely a better approach, you’ll notice it is somewhat higher than usual. We do not anticipate maintaining this elevated level in the future. Historically, we’ve discussed this being around 30% to 32%, and that’s where we expect it to trend long-term. Although it was slightly lower this quarter, our guidance remains at 30% to 32%.

Got it. Thank you. Helpful.

Thank you. I'm showing no further questions. At this time, I'd like to turn the call back over to management for any closing remarks.

Thanks. So look, we had a miss. There's no questioning that. We're horribly disappointed. But at the same time, it was over forecasting in a very uncertain time. There is nothing wrong with the core business. We still grew adjusted contribution 123%. So we apologize for the miss. But we are heads down fully focused. If you invested in this business for the long term, all the long-term stuff is still here and even more robust than it was a quarter ago. Thanks everyone. We appreciate your time.

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.