Cardlytics, Inc. Q2 FY2023 Earnings Call

Good day and thank you for joining us. Welcome to the Q2 2023 Cardlytics, Inc. Earnings Conference Call. All participants are currently in a listen-only mode. After the speaker's presentation, there will be a session for questions and answers. I will now turn the conference over to your speaker today, Nick Lynton, Chief Legal and Privacy Officer.

Good evening and welcome to the Cardlytics second quarter 2023 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, including for the third quarter of 2023, adding new partners to the network and increasing our MAUs, our partners' transitions to the new ad server and user experience, the growth and expansion of our advertiser base, the impacts of our new product initiatives, including our retail media network, our liquidity, and our growth and profitability, including expectations related to achieving positive operating cash flow, free cash flow, and adjusted EBITDA on an annual basis. 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 factor section of the company's 10-Q for the quarter ending June 30, 2023, which has been filed with the SEC. Also during this call, we will discuss non-GAAP measures of our performance, GAAP financial reconciliation, and supplemental financial information 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 second quarter results has also been posted on our Investor Relations website. Joining us on the call today is Cardlytics CEO, Karim Temsamani, and Director of Corporate Development and Investor Relations, Robert Robinson. Following their prepared remarks, we'll open the call to your questions. With that said, let me turn the call over to Karim.

Good evening, and thank you for joining our Q2 2023 earnings call. This was a solid quarter for Cardlytics. Our billing, revenue and adjusted EBITDA all exceeded our expectations for the quarter. The results reflect the hard work in transforming the business during a difficult period for the economy and advertising market. Adjusted EBITDA performance in Q2 improved by $11.7 million year-over-year, as our efficiency measures and our new product initiatives took hold. Our operating cash flow for the quarter was a positive $5.7 million. These are great outcomes delivered ahead of schedule. While we are excited about the positive changes on the way, and the early momentum we have in driving new customer-facing product innovation, we have much more to accomplish in the business. Every transformation has challenges, but we are making the right long-term decisions for Cardlytics, and as our numbers demonstrate, we are clearly making progress. Here are the results for Q2: Billings increased $1.6 year-over-year to $109.4 million. U.S. billings increased 7% year-over-year. Revenue increased 1.7% year-over-year to $76.7 million. Adjusted contribution increased 6.8% year-over-year to $37.5 million. Bridge revenue decreased 3% year-over-year to $6 million. This is in line with our expectations of short-term viability in the business, given our focus on Bridge Retail Media Network products. Our focus on sales effectiveness, delivering new products, and making operational improvements led us to exceed expectations, despite the lukewarm consumer spend in advertising synergy. While restaurants and retail categories are still underperforming versus last year, the travel and payment vertical continue to outperform for us, even as consumer spending in that category slows. On the expense side, we continue to make the right financial decisions for the business. We renegotiated several contracts in the quarter and implemented cost optimizations across AWS and Snowflake. The underlying fundamentals in our business continue to show strength. Unique consumers activating offers increased 2% year-over-year in Q2. We saw total activations increase 10% year-over-year and total redemptions 7% year-over-year. Just like last quarter, we increased the number of users activating offers year-over-year and our current users are engaging more often. While we don't have any significant updates to our partner pipeline, discussions with multiple top 20 U.S. banks and several high-upside fintechs remain ongoing. We are confident we will sign at least one of these major partners by the end of 2023. We will continue to update you as we make progress on these potential partnerships. Now I would like to discuss our strategic initiatives. As we are making short-term financial progress, we are also becoming a strong product-led organization, where our partners and consumers are at the center of the decisions we make as a business. First, as you know, we announced this quarter that we renegotiated a contract with Chase. While we cannot discuss financial details outside of what we already presented in last month’s 8-K, this is a testament to the strategic value of our partnership. Additionally, we are happy to announce that Chase is 100% live on the new user experience. Second, our three important product initiatives for our bank partners and advertisers, the new Ad Server, our new user experience and cloud migration, are on track to deliver long-term benefits. All our major U.S. banks have data in AWS, and most have systems in AWS. We expect nearly all major banks to move to the new Ad Server end user experience by the middle of 2024 versus the end of 2023. As we said in the past, bank timeliness can change quarter-to-quarter. We're having constructive conversations with our partners, and our goal is for adoption to happen as soon as possible. Our partners continue to adopt our ad decisioning engine or ADE to drive higher monetization and offer relevancy for the business. Most of our banks have now migrated or have agreed to migrate to ADE. Not only this, but we are still seeing great results using ADE. Billings using enhanced targeting are up 10%. Activations are up 6.5% and redemptions are up 5.7%. Third, new advertising product initiatives are showing similarly exciting results. For example, multi-tier offers, which provide variable incentives based on objectives, have been effective in shifting purchase channel behavior. In a pilot of a 21-day period, in-store channels as a percentage of total spend increased from 34% to 71%. The product and engineering teams are also hard at work on new capabilities and improvements. We launched our first campaign with receipt-level reporting. This is important because it opens up incremental demand from CPGs and retailers who need product-level reporting, and it also gives consumers access to better content and offers they want to see. We reduced the time it takes to process transactions from 70 hours to 35 hours. This reduction allows us to deliver rewards sooner to our partners' customers. It also makes our billings and ad serving systems more efficient. We can make more effective adjustments based on budget consumption, meaning we can more efficiently throttle campaigns at risk of over-delivering or boost campaigns that aren't meeting targets. We launched a target return on our spending pricing pilots in the past months. This pricing model leverages a dynamic marketplace and features bidding on impressions, dynamic pricing adjustments and immediate reconnection of campaign spend. While early, these capabilities at scale will vastly improve the efficiency of our financials in the long term. Fourth, we continue to diversify our business. We are making fast progress in transforming the Bridg business. Our retail media network pilots have received positive responses from major national CPG brands, and the initial feedback we've gathered highlights the excitement around the flexibility they'll have in building sophisticated audiences, seamless access to a national footprint and user-friendly tools that empower them to get valuable insights, drive substantial incremental sales, and accurately measure the impact of their campaigns. Product is not the only area we are upgrading. We are responsibly investing in our people too. I want to welcome our new CFO, Alexis DeSieno at Cardlytics. We are thrilled to have attracted such a talented and capable executive. Alex's track record of collaboration across business lines and driving financial results through data-driven analysis is a perfect fit to drive long-term growth and profitability for Cardlytics. She started in less than two weeks and is excited to speak with all of you on our next earnings call. Alexis is just one example of the high-level talent we are adding to the business. Cardlytics potential and the tangible improvements we are making are attracting diverse and innovative talent. We saw several senior-level hires with exceptional backgrounds during our product, engineering and sales teams this quarter, which will continue to elevate our capabilities and bolster our competitiveness in the market. Before I turn to our market trends and outlook, I want to share some additional insight from our platform. To give investors a better idea of our value proposition and our future potential, each quarter we will surface some of the data we share with our advertising customers. This quarter, we were focused on multiline retail, a category that includes over 100 brands that sell items such as apparel, electronics, and home goods. In the quarter, we saw consumers spend $67 billion, a decline of 1.3% year-over-year and an uptick of 6.1% quarter-over-quarter. Average spend per customer is $196 per month in this category. This is a competitive category where customers exhibit lower loyalty. On average, consumers choose to spend with 2.7 brands per quarter. This loyalty decreases further during the holiday season in Q4, which represents 28% of the yearly spend. On a state-by-state basis for Q2, California represented 16% of multiline retail spend, followed by Texas at 11% and Florida at 9%. Interestingly, despite the low brand loyalty, this market is not fragmented. Multiline retail has seen significant consolidation in recent years, with four brands representing over 85% of the spend that we analyze. This has been maintained year-over-year with the top two brands gaining market share largely from the next two brands. These insights are shared with our clients to help them make critical business decisions, and we're excited to continue to share more of these insights with you moving forward. Moving to market trends and our outlook. Consumer spend in the first half of the year was flat compared to 2022. Year-over-year, spend was down 2% in Q2. Restaurant and retail spend are still struggling, with growth of 1% and a decline of 3% year-over-year, respectively. Travel spend also slowed significantly with 1% growth year-over-year. There is positive news, too; the consumer remains strong based on deposit data, and the July Consumer Confidence Index increased for the third consecutive month, hitting its highest level in two years. Labor markets have softened, but job growth remains solid. Inflation appears to be declining as interest rate hikes have their intended effect. Given the uncertain economy and growth environment, we do expect some bumpiness in our results over the next several quarters. While there will be differences quarter-to-quarter, we are now on a path to sustain positive operating cash flow, free cash flow, and adjusted EBITDA on an annual basis. Regardless of the economic environment, the teams are focused on improving the business, and we are moving forward with a disciplined approach. The organizational changes we are making continue to give our teams room to operate with speed and a clear focus. Our results this quarter are a great sign that our strategy and priorities are moving the company towards achieving consistent growth and profitability. Now I will turn it over to Robert, who is filling in this quarter to discuss our financial results.

Thank you. Like Karim said, we are excited about our results in Q2. I've seen the considerable effort from our teams in the past few months, and this outcome is well-deserved. Our financials are under control, and we are focused on positioning the business for long-term success. The numbers are a great sign that the business is moving in the right direction, but we want to stress that the near-term economy and advertising environment are still uncertain. The chance of a severe to moderate recession has decreased, but consumer spending is uneven, causing advertisers to continue to review costs and exercise caution with their budgets. We expect some variability in our quarter-to-quarter results moving forward. Here are the numbers for Q2: Billings increased 1.6% year-over-year to $109.4 million. Revenue increased 1.7% year-over-year to $76.7 million. Adjusted contribution increased 6.8% year-over-year to $37.5 million. Bridge revenue decreased 3% year-over-year. As we mentioned last quarter and earlier in the call, the transformation of the business will cause fluctuations in our growth rates quarter-to-quarter. As we begin to convert proof of concepts, we expect growth rates to increase and normalize in the future. Geographically, U.S. revenue increased 7% year-over-year. U.K. revenue decreased 35% year-over-year. U.K. revenue is still affected due to the loss of a bank partner in the channel, but we have opportunities in the pipeline to increase our supply of U.K. MAUs to historical levels. We expect growth rates in the U.K. business to normalize in future quarters. Moving to customer concentration, our top 5 customers accounted for 15.7% of revenue this quarter compared to 15.8% in Q2 of 2022. Concentration will remain a key focus as we continue to grow and expand our advertiser base. Adjusted EBITDA was a loss of $4.1 million this quarter compared to a loss of $15.8 million in Q2 of 2022. Operating cash flow was a positive $5.7 million. These results highlight our discipline in the actions we've taken to rightsize our cost base. That said, we do expect choppiness over the next several quarters. Our expectation moving forward is to be operating cash flow positive and adjusted EBITDA positive on an annual basis starting in 2024. On the balance sheet, we ended Q2 with $92.1 million in cash and cash equivalents compared to $139.2 million at the end of Q1 of 2022. During Q2, we used $4.3 million of cash in operating activities and $5.5 million for software development and capital expenditures. Additionally, we paid $50.1 million in cash related to the Bridg earnout. As of the end of Q2, we had $7 million of unused available borrowings under our line of credit. We still believe that our available liquidity is sufficient to support our business plans. We had 37.1 million shares outstanding at the end of Q2, compared with 33.7 million at the end of Q1 of 2023. Diluted weighted average shares outstanding during the quarter was 34.8 million compared to 33.7 million for Q2 of 2022. As of Q2, we have issued 2.7 million shares in connection with the Bridg earnout. MAUs were $188.1 million, an increase of 4.6% year-over-year. ARPU during the second quarter was $0.38, which is flat year-over-year. Now turning to guidance, while there is renewed optimism in the economy, our advertising clients are still taking a cautious approach to 2023. We still believe this uncertainty is disproportionately affecting smaller advertising platforms. That said, we do expect sequential improvement in our Q3 results, given seasonality and our focus on operational efficiency. With that in mind, for Q3, we expect billings of between $111 million and $123 million, revenue of between $75 million and $84 million, an adjusted contribution of between $39 million and $45 million and adjusted EBITDA of between negative $2 million and $2 million. Our transformation into a product-led company is fully in place. I again want to commend our team's tireless work on improving the business. As we said in the past several quarters, the team is fully committed to achieving a profile of consistent growth and profitability that will allow us to fulfill our long-term potential. And with that, I will turn it back over to Karim.

We are committed to running the business with a disciplined focus and closing out the year strong. I'm looking forward to discussing the new capabilities we are providing to our advertisers and partners with all of you. I will now open the call to questions.

Our first question comes from Kyle Peterson with Needham & Co. Please proceed.

Hey guys. This is Sam on for Kyle today. Thanks for taking the question. Nice results here. I was wondering if you could talk a bit more about how ad budgets progressed throughout the quarter and maybe parse that out across some of the core verticals you guys are in.

Sure. Thanks for the question. Overall, we've seen that consumer spending is definitely slowing. As we mentioned during the call, spend from consumers is down in retail by 3%, for instance, and only slightly up in travel when it was up quite dramatically over the last several quarters. Overall spend is only up 2% year-on-year, which means that there is some level of impact on advertising budgets as well. Having said that, there are two factors that are positive for us: One, we're seeing some of the products that we're driving to market starting to have an impact, and two, we're really driving more efficiency with our sales teams. Our sales teams are spending more time in market, and we are seeing more demand from advertisers as a result of that. The results have actually been somewhat counterintuitive versus what we have seen on the consumer side, where some of the areas of slowness on the consumer side, specifically travel versus the growth seen before and restaurants and retail have started to come back for us. So there's a positive trend in this area for our business.

Got it. That's helpful. Appreciate the color there. And then just thinking about the back half of the year, how are you guys thinking about ad budgets there? And maybe how does that stack up relative to your expectations from last quarter?

Yes. We're still seeing some choppiness, and that’s why we are being cautious with regards to the back half of the year. But there are definitely some positive signs starting to showcase, both because of the continued efficiency drives within our sales teams and some of our products coming through. We're also seeing positive signs from some clients who want to drive additional spend in the back half of the year. So positive discussions are occurring there. Again, we need to be cautious regarding what we're seeing, but there are definitely some positive signs of what we might see in the overall economy.

Our next question comes from the line of Jason Kreyer with Craig-Hallum. Please proceed.

I just wanted to ask about your FI partner contract negotiations. I'm curious if you could talk about what new products or services you're providing that would encourage bank partners to renegotiate with terms that would be more favorable to Cardlytics. Do you think that you can replicate the contract revisions that you've already seen with either existing FI partners or new FI partners that you're looking to onboard?

Thanks for the question. The key here, as I mentioned in the first call when I moved to Cardlytics, is that we are really focused on our partners. We listen to their needs and provide the right level of tech and services to what they want to do to achieve better results for them and for consumers. I'm proud to see the improvements and strides we are making. We have excellent engagement and more senior engagement than ever before. We're better listening to what our partners want and creating products that align with those needs. Some of these improvements are evident in the UI changes we've made, as well as several new product trials I've mentioned that drive benefits for both our partners, consumers, and advertisers. Products like receipt-level offers and the target return on spend pricing pilot contribute to this overall issue. This effort shows that we are a long-term partner they can trust, encouraging banks to invest changes with us.

And Karim, since you've been here, you've talked a lot about product and making the right investments. You touched on a few of these in the last response, but can you highlight specific product improvements that you've rolled out? How are these manifesting in the numbers? You’ve had a strong quarter; are we seeing those result in new bookings or new share? Where should we see that in the numbers today and going forward?

Yes. You are definitely starting to see that in the numbers to some degree, although not at scale yet. The first significant change is that the UI of the product is different from what it was before. When you look at this UI that has rolled out 100% on Chase, the look and feel of the program is entirely different. This new look and feel is driving more engagement at the consumer level, which is essential for our program overall and for the banks and advertisers. The second area is that we're enabling new product initiatives that create more engaging constructs, which is critical in driving engagement and activation. This is reflected in our numbers, but as we gain more scale with our banking partners, you should see an even deeper impact across the business.

And I’m going to sneak in a third question. You mentioned Chase being fully rolled out. I'm curious what aspects have resonated with Chase or your advertisers to validate this new user experience?

We are seeing all of our key numbers—whether you're thinking of activations, redemptions, or general engagement in the program overall—continue to improve. These are very positive signals for us, confirming that we are making the right changes in the business.

Our next question comes from the line of Doug Anmuth from JPMorgan.

This is Wes on for Doug. Great quarter, guys. I wanted to touch on the EBITDA guide. Breakeven for Q3 at the midpoint; just curious what that assumes in terms of investments into these newer products and what you would need to see at each level to reach the upper end and be flat-positive in Q3?

Thanks for the question. To a great degree, this is a continuation of the scaling of the products we believe will happen across the quarter, as well as continued discipline from a cost perspective. We are cautious with our views on the advertising market in general, and because of that, we are again being careful with how we guide based on our views. Nevertheless, as we continue to roll out products and see improvements in the economy, we have the potential to continue doing better financially. This guide is based purely on what we see now and the continued progress we're making at both the product level and with advertising customers.

Great. I believe you guided around like $40 million to $42 million in cash OpEx before. Is that run rate still safe to assume here? Or are there any changes to that number?

No. You certainly answered the question. There is no change from what we've told you guys in the past few quarters.

At this time, I am showing no further questions. I would now like to turn the conference back over to Karim for closing remarks. Please proceed.

Thank you. This brings the call to a close. I want to leave you all with this: Product is at the forefront of our strategy, and it is helping us build stronger partnerships and new capabilities that will attract more advertisers to our business. We are highly focused on the long-term financial health of the business. Our expectation is positive annual adjusted EBITDA and operating cash flow for 2024. We'll continue to be disciplined as we make investments to reach our full potential. Thank you for your continued support, and I look forward to speaking with you all soon.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.