Cardlytics, Inc. Q4 FY2022 Earnings Call

Thanks for joining us and welcome to Cardlytics Fourth Quarter and Full Year 2022 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 our future financial performance and results, our ability to achieve our key long term priorities, upgrades to our current products and processes and our rollout of new products. The rollout of our new ad server and user experience; our transition of the cloud, and the deprecation of our on-premise data centers; our sales pipeline; our customer concentration and margin profiles; our timeline for achieving positive free cash flow and our path to profitability. Our cost reduction initiatives and the Bridg shareholder dispute and earn out payments. For a discussion of the 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-K for the year ended December 31, 2022 which has been filed with the SEC. 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 in 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 the information I have just described in the Investor Relations section of the Cardlytics website. Please note that a supplemental presentation to our fourth quarter and full year results has also been posted to our Investor Relations website. Joining us on the call today is Cardlytics’ CEO, Karim Temsamani and CFO, Andy Christiansen. Following their prepared remarks, we’ll open the call to your questions. With that said, let me turn the call over to Karim.

Thank you for joining us, and welcome to our fourth quarter earnings call. It has been exactly six months since I joined Cardlytics, and while I still have some short-term issues to resolve, my belief in the incredible long-term potential of this business has only been strengthened. Cardlytics is in a unique position at a unique time in the industry. The topics of both performance and brand safe online advertising are top of mind for many of our customers and partners, which aligns squarely with our value proposition. It is rare to see a model that has so many benefits for so many groups. Brands get to offer their customers ads that are relevant based on past purchases. Customers save on the brands they prefer, and financial institutions increase engagement and loyalty. The cycle is virtuous, but to realize the true potential as a business, we need to improve our operational efficiency, reduce excess costs, and become a company that is led by the products that we are building. It's still early, but we are starting to see the results of these improvements. On the call, I'd like to highlight our financial results; focus on areas where we have demonstrated operational and cost discipline, and give insights into product enhancements that we expect to positively affect our growth for the year. First, some financial highlights. Our fourth quarter performance delivered billings, revenue, and adjusted contribution in line with our guidance. We navigated a challenging macro environment where inflation and rising interest rates tempered budgets across the ad tech market. Despite these headwinds, for the full year 2022, we once again delivered double-digit growth across billings, revenue, and adjusted contribution. Additionally, Bridg delivered triple-digit revenue growth. For the full year 2022, billings grew 12% to $442.5 million. Revenue grew 12% to $298.5 million. Bridg revenue grew 155% to $21.4 million, and adjusted contribution grew 10% to $143 million. Consumer engagement in the program grew in Q4. Users activating offers increased 8.6% year-over-year, despite the impact of the large restaurant client exiting our channel. Our platform is making an impact for our banking partners and for retailers, too. In 2022, our data showed customers engaging with our program spent 1.2 times more on their card and made 1.3 times more shopping trips than unengaged customers. Clearly, it works well for advertisers. We increased the total number of advertisers in the channel by 8% in 2022. Not only that, but we also increased the number of advertisers with billings between $500,000 and $5 million by 17%, and we increased the number with billings greater than $5 million by 44%. We have a solid business foundation despite the current state of the economy. In many ways, though, the economy is a good forcing mechanism to improve our business efficiencies even more. When you combine a more efficient business with the numerous product enhancements that we are putting into place, it's clear we are setting ourselves up for long-term success. As mentioned last quarter, we took action to control our costs in this difficult environment. We successfully implemented $35 million in cost reductions at the end of December. The full effect of these actions will appear in Q1 of this year. We're not stopping there. We are improving operational efficiency company-wide, and despite challenging economic conditions, we are focused on achieving positive free cash flow in Q3 of this year. Our team has seen significant changes through this process, and I would like to take a moment to thank all our leaders and team members for their focus, commitment, and hard work. We believe these changes will make us strong as a team and as a business. I often talk internally about the importance of becoming a product-led company, and our teams are working tirelessly in every department to revamp and improve our workflow across product, engineering, sales, operations, and analytics. Let me give you a few examples to illustrate the impact of these changes. First, we are upgrading our ad decisioning engine to support modern ad ranking models to drive higher monetization and offer relevancy. Based on early results, we believe that these changes can drive a lift in RPMs of 10% to 15% in the second half of 2023. Second, we are exploring pricing models that are more tied to serve or impression events, while still optimizing for advertiser rollout targets. This approach provides a better balance between reach and performance goals. It also gives Cardlytics more control of budget management, delivery, and ad selection, which helps us capture revenue opportunities. Third, the processes we have implemented allow us to better track product performance, averages, adjustments, and company launch delays. This not only saved us $350,000 on redundant tools but also increased our overall operational efficiency for the year. I expect the combined impact of the above improvements to positively impact our full-year billing margins by around 2%. These are the first of many initiatives we are putting in place to improve our operations and products. I look forward to sharing more details in the coming months. Product improvements have also helped from a bank perspective. We created a dedicated operations group within our publisher engineering team that has implemented rigorous monitoring techniques, decreasing customer accretion by over 25% from November 2022 to February 2023. This not only makes us more efficient and cost-effective, but it also improves our partner satisfaction. Three initiatives I highlighted last quarter are especially important in the product area: our new Ad Server, our New User Experience, and Cloud Migration. Let's review progress in each of these areas. We have already connected more than 50% of our MAU base to our new Ad Server, completing one of our key objectives for the year. We remain on track to connect all of our partners to the new Ad Server and user experience by the end of 2023. Regarding the New User Experience, we're excited to announce that a major partner is launching the new user experience to its full user base, which should roll out over the next month. As we mentioned in the past, the scale created by having a major bank partner on our New User Experience and Ad Server will allow us to launch new products, which I will discuss in more detail shortly. We also have news on Cloud Migration. In Q4, we finished moving our core U.S. platform to the cloud. We are now focused on deprecating our on-premise data centers. This will create cost savings of nearly $1 million in 2024. Our goal is to have all our banking partners move to the cloud by Q3 2023. Focusing on product makes us more than just efficient. It also unlocks new capabilities. Here are three specific examples of new offer constructs that we will improve in Q1 and Q2. First, spend stretch offers, or the ability to incentivize a specific set of customers to increase their spending on their next visit. An example would be a customer who spends $20 on average, receiving a $5 cash discount if they spend $40 or more. Second, merchant category code offers, which allow for bank-funded campaigns that are targeted to specific transaction types, such as gas or grocery purchases. In a test with a large bank partner, we saw around a twofold increase in redemption dollars of a standard campaign. Third, receipt-level offers, which are tailored to specific product categories or items. These offers are among the ones we are most excited about for good reasons. In an early test, 10% of activations came from customers who had never activated an offer before, and 19% of those customers had not shopped at that retailer in the 12 months prior to the campaign. Growth isn't just coming from our core business. As many of you know, we hired Amit Gupta as our new COO of Cardlytics and General Manager of Bridg. We're extremely excited to have attracted such incredible talent for the business. Amit is already hard at work both on optimizing our long-term platform and on fully realizing the potential of Bridg and Cardlytics. Relating to Bridg, Amit is accelerating the evolution of the business from a customer data platform to a retail media network for mid-market and regional retailers. We believe that most smaller retailers cannot build these platforms alone. While Bridg's capability allows us to work with larger retailers, the key to success for Bridg is building a coverage team to scale data sets for mid-market and regional grocery stores, convenience stores, and fuel providers, much like we built for core Cardlytics. By building scale for these retailers, we can create a compelling new product for consumer packaged goods to gain insight, drive incremental sales, and measure campaigns. Amit and the Bridg teams are hard at work on our go-to-market efforts that will enable this vision of providing a best-in-class retail media network for smaller retailers. As Bridg scales, we will also see improvement to our adjusted contribution margin due to its higher growth margin, which will positively affect our cash flow. Given the numerous improvements and innovative products that are on the horizon, I am incredibly excited for the future of Cardlytics. Our move towards becoming a product-led company is expanding our reach and enhancing our capabilities, which will continue to differentiate us in the market and provide better solutions for our advertisers and partners. I'd like to close with some observations on consumer spend, the economy, and our outlook for the year. For 2022, consumer spend grew 5% over 2021, with transaction growth pacing over 3%. Inflation clearly impacted consumers in the second half of the year. Outside of travel and entertainment, which enjoyed recovery through 2022, discretionary spending categories mostly finished down or flat for the year. For 2022, year-over-year gas and grocery spend was up 9%. Travel and entertainment spend was up 25%. Retail was flat, and restaurant spending was up 9%, but more discretionary categories such as bars and nightclubs finished down 4% year-over-year. Leading indicators show that consumers remain resilient, and inflation is receding from its high, but the Federal Reserve has not yet backed away from its current monetary policy. The threat of an economic slowdown has slowed budgets in Q4 and Q1, much like the pause we saw during the onset of the pandemic. Advertising clients were extremely cautious in Q4 and remain so in the early stages of Q1. That said, I am still encouraged by the continued strength of our new business pipeline, especially for the second half of the year. I believe that once advertisers reassess their cost structures and budgets, we will benefit from the ongoing move to brand-safe, performance-based advertising. We are building a business that is resilient in the long term, regardless of economic conditions. For 2023, we see a path to solid growth, especially as we pass the anniversary of a significant restaurant client exiting our channel in the second half of the year. Our product enhancements and optimization should provide us with around 2% of additional upside to billings margin for the rest of the year. The growth of Bridg's higher-margin business will benefit both our billings and cash flow as we move forward. Even with the muted economic conditions, we have room to achieve profitability and control our cash flow by managing the business responsibly. We know our success is dependent on executing with a disciplined approach, and I'm confident that our strategy and priorities are positioning the company for liquidity, long-term growth, and profitability. And while the Bridg shareholder dispute has been a distraction to the business over the last few quarters, we remain confident in our position and are happy to report that we currently expect the matter to be resolved by the end of April. With that, I will hand it over to Andy to provide more detail on our results and financial strategy.

Thank you, Karim. Our Q4 results were within our quarterly guidance ranges, and despite macroeconomic headwinds that impacted consumer spending and ad budgets, we delivered double-digit year-over-year growth in 2022. Let me walk through the numbers for Q4. Billings totaled $126.1 million, down 5.9% year-over-year. Revenue totaled $82.5 million, down 8.4% year-over-year. Adjusted contribution totaled $40 million, down 9.2% year-over-year, and adjusted EBITDA was a loss of $6.1 million compared to a gain of $2.6 million in Q4 of last year. Additionally, for Q4, year-over-year Bridg revenue grew 74.2%, and agency ad spending on the Cardlytics platform grew over 20%. It's also worth noting that core Cardlytics billings were flat year-over-year when excluding the large restaurant clients that left the channel in 2022. For the quarter, billings margin was down 1.8% year-over-year. Part of this was driven by advertiser mix. We typically generate a higher billings margin within the restaurant vertical compared to travel and entertainment. Restaurant ad spending on our channel declined 15% year-over-year, compared to a 75% increase within travel and entertainment. Additionally, there are some temporary drags on billings margin that will phase out by the middle of the year as we transition our tech stack and automate operations. As our expectations return to historical levels of billing margin over time, we also see opportunities to expand our margins as we grow and diversify our customer base and leverage higher-margin revenues from our fast-growing Bridg offerings. Customer concentration improved over the past year as our top five customers accounted for 15% of revenue this quarter compared to 23% in Q4 of 2021. This remains a central focus as we continue to organically grow and expand the depth and breadth of our customer base. Moving to costs, we have completed the cost reduction initiatives we announced in 2022 and expect over $35 million in annualized savings compared to our annualized run rate in Q2 of 2022. As Karim mentioned, we have more room to control costs in the event of further economic decline, but we believe we can reach our cash flow goals in 2023 with our current cost base. As a result of a sustained decline in our market cap and significant increases in interest rates and cost of capital, we recorded a $370 million non-cash impairment of goodwill intangible assets this quarter. We remain excited about the prospects of Bridg and Cardlytics, but the impairment was necessary given that our goodwill and intangible assets were in excess of our market cap. Moving to our balance sheet and cash flow, we ended the year with $122 million in cash and cash equivalents compared to $138.6 million at the end of Q3. Our $60 million line of credit also remains undrawn. During Q4, we used $13.1 million of cash in operating activities, used $3.2 million for software development and capital expenditures, realized a $200,000 unfavorable impact from a strengthening British pound, and used $200,000 of cash related to financing activities. MAUs were $182.7 million in Q4, an increase of 4.2% year-over-year. Our organic growth rate was in line with our long-term expectations of low to mid-single-digit growth. ARPU during the fourth quarter was $0.45, which is a 7.8% decrease year-over-year. For the full year, MAUs increased 9.2% year-over-year, and ARPU increased 2.6%. We had 33.5 million shares outstanding at year-end compared with 33.1 million at the end of Q3. The weighted average shares outstanding during the quarter were 33.4 million, which was unchanged from Q4 of 2021. Lastly, regarding the Bridg earn-out. The dispute is currently in the resolution process as outlined in the merger agreement, and we will provide timely updates to the public once the matter has been resolved. We remain confident in our position and expect the first earn-out inclusive of broker fees and transaction bonuses to be $126.4 million, with a minimum cash payment of $43.3 million. We expect the second earn-out to be $67.8 million with a minimum cash payment of $24 million. As outlined in the merger agreement, we may have to pay more than the 30% minimum cash given the 19.9% equity dilution cap in place on the shares issued. Now, turning to guidance. The ad market challenges we faced in Q4 continued into Q1, but Q1 is also typically our annual low point due to seasonal consumer spending trends and decreased quarterly marketing budgets for most of our clients. For the first quarter of 2023, we expect billings between $84 million and $93 million, revenue between $54 million and $63 million, adjusted contribution of between $26 million and $31 million, and an adjusted EBITDA loss of between $10 million and $17 million. We expect cash operating expenses of approximately $42 million in Q1. We expect a slight increase in expenses in Q2 of 2023 due to our annual merit and promotion cycle, but our new expense run rate fully reflects the $35 million of annualized savings from Q2 2022. Excluding the loss of the large customer that we mentioned earlier, we expect the core Cardlytics business in the U.S. to grow in the low to mid-single digits year-over-year in Q1. A positive sign is that the sequential decline in our billings from Q4 to Q1 is in line with historical trends from Q1 of 2020 and Q1 of 2022, signaling that the ad environment hasn't become materially worse quarter-to-quarter. We're not providing formal guidance for the full year at this time, but as Karim mentioned earlier, we believe we will generate sufficient growth to reach positive free cash flow in Q3 of 2023 through product enhancements, optimizing our platform, growing our higher-margin Bridg business, and lapping the loss of the significant customer. With that, I'll turn it over to Karim.

We want to thank our shareholders, partners, employees, and customers for their ongoing support and trust in the company. We remain focused on driving innovation and solutions for our partners and advertisers. This focus will create expanded reach, revenue opportunities, and efficiency we need to meet our growth and profitability objectives. We look forward to sharing more updates on our progress during the year. With that, I will open the call to questions.

Thank you. Our first question comes from Kyle Peterson with Needham & Company. Your line is open.

Great! Good afternoon. Thanks, guys, for taking the questions. I just wanted to start off on the expenses, helpful color you guys gave with kind of roughly $42 million in cash expenses for Q1, and then there are a couple of moving pieces you mentioned with the full realization of some of those annualized cost savings partly offset by some merit increases or timing of some of that. So I guess, is that $42 million with some modest adjustments based on those factors. Is that a good run rate to use moving forward or are there additional opportunities for efficiencies and savings without sacrificing your growth opportunities?

Hey! This is Andy. I mean you're exactly right. We wanted to give a little bit of color around the run rate. I mean the run rate we see in Q1 does fully reflect the actions that we took in 2022, and that's a good number to kind of run going forward. Now, I understand we may have a little bit of increases throughout the year, but that is kind of how we're modeling. Now, there are certainly opportunities that we have during the year to manage our costs further. But, that right now is a good run rate that we're seeing. So that's a solid number to model.

Okay, that's really helpful. And then I wanted to touch on some of these newer products, whether it's some of the bank funded category offers or some of the more incentivizing spending on future trips. I guess how big of a growth opportunity do you guys see for these offers, and could these be a material boost to results in '23 or is this more of kind of a multiyear slowly getting there but not a big contributor right out of the gate?

Yes, sure. Let me take a swing at that, and Karim probably has some thoughts as well. But I think we've been a bit conservative as we think about these things rolling out this year. I think certainly next year it will be a much bigger impact on the business, and I think it will be one of the items where we're going to see it start to produce results in the next few quarters. By the end of the year, we might start to feel it, but really it's a big 2024 opportunity. There’s upside right in 2023, if we are able to pull that forward and execute.

Appreciate it. Thanks guys.

Thank you. Please stand by for our next question. Our next question comes from the line of Douglas Anmuth with JPMorgan. Your line is open.

Thanks for taking my questions. It looks like the two industries where activation rates increased year-over-year were entertainment and travel. Just curious how you're thinking about the shift of consumer spending from things to experiences and how that impacts your business in the go-to-market strategy going forward? And then separately, you talked about one major partner launching the new user experience. Can you just give us some more insight regarding the benefits of the new user experience? How will that be better for users and for advertisers?

Sure. Thanks for the questions. On your first point, we have discussed the momentum we felt in Q4 around travel and entertainment; it’s been a very strong vertical for us. In fact, Q4 of ’22 compared to '21 was up 80%. So, we're obviously seeing significant engagement there and a lot of spend happening. I think it's top of mind, and an active area where people are looking to save money as they're traveling. To your second point, you know, I'll let maybe Karim chime in on that one, but the entertainment and travel perspective is pretty clear given our spend trends.

Yes. Thanks, Andy. I'll just add to that. Essentially, the hardware go-to-market strategy is important for us in acquiring the right customer base. An important aspect is how we optimize for the right offers to be surfacing to the right customers, which is where becoming a much stronger product-led company with our modern Ad Server will significantly enhance our ability to place these rewards in front of the right customers at the right time. This will make a vast difference to our business going forward, both in terms of engagements from the ads and the revenue that we can generate from these rewards across the board.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Jason Kreyer with Craig-Hallum. Your line is open.

Great! Thank you guys. Just wanted to see if you can help us bridge the gap between the guidance you provided for Q1 and the commentary on cash flow generation in Q3. It doesn't seem like you're factoring in any further cost reductions in there but just wondering if you can help fill in that gap over the next two quarters.

Yes, sure. Happy to help here. Our expense run rate gives a bit of color, right, it's sort of where we're at. There are certainly opportunities for us to continue to manage our costs, but that's one anchor that we want people to consider. As we get to breakeven in Q3 from a cash flow perspective, we really need to ensure that you're considering the interest payments for the software development costs and then be able to back into the adjusted contribution numbers that we would expect to reach breakeven. So, Karim spent a lot of time in his prepared remarks discussing the various avenues for growth. We feel comfortable that, when you put these factors together, we can grow the business. One aspect that might be slightly underappreciated is the growth in the Bridg business, which typically offers higher margins for us, where those dollars flow down to the contribution metrics.

Thanks Andy. And you may have just answered my second question, but you guys were talking about updates to the product suite that are giving you confidence in that return to growth. I mean, what are the near-term product changes that can influence growth here in '23?

Yes. So there are many different perspectives on this. Let me break it down into a couple of aspects. Product is certainly one area; our new user experience with new offer constructs is on the horizon. Additionally, consider our transformation into a product-led organization, which brings benefits across how we conduct business today. How we consume and optimize ad campaigns—all those areas create upside opportunities for us which we've already noticed at a smaller scale in our smaller bank partners. Now, we are applying those capabilities and automation to our larger banking partners as well, which leads us to expect some meaningful impacts. As we introduce product offers in the upcoming months, we might accelerate these initiatives and realize some growth earlier than anticipated.

Okay, and one last one if I can squeeze one in. Karim, I think you did a great job discussing various new product changes and related aspects. There were three product changes you highlighted, and I believe the second one was more about offers that were more tied to impressions and expanding reach. Just wanted to see if you can provide some clarity around that.

You're referring to the pricing models that are more aligned with serve and impression events? Those represent distinct remarks. What we want to ensure is that we revisit our pricing models to optimize returns on investments for our customers. We are also understanding which impression events drive those purchases and balancing the reach and performance goals for each advertiser, enabling us to surface more relevant ads to customers rather than inundating them with the same ads repeatedly. This provides considerable improvements for budget management and delivery, granting us greater control over reaching the right outcomes for our customers. It's beneficial not only for customer engagement but also optimizes the overall experience for users of their banking apps.

Okay, great. Thank you very much.

Thank you. I'm not showing any further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.