Earnings Call Transcript - CDLX Q3 2023

Operator, Operator

Good day and thank you for standing by. Welcome to the Q3 2023 Cardlytics, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the call over to your speaker for today, Nick Lynton, Chief, Legal and Privacy Officer. Nick, please go ahead.

Nick Lynton, Chief, Legal and Privacy Officer

Good evening, and welcome to the Cardlytics Third 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 fourth quarter and full year 2023, adding new partners to the network, our partners' transition to the new ad server and user experience, the growth of Rippl, improvements to our operations, our platform and our U.K. business, international expansion, the Bridg earn-out payments and our liquidity. 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-Q for the quarter ended September 30, 2023, 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 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 the information I have just described in the Investor Relations section of the Cardlytics website. Please note that a supplemental presentation to our third quarter results has also been posted on our Investor Relations website. Joining us on the call today is our CEO, Karim Temsamani; and our CFO, Alexis DeSieno. Following their prepared remarks, we'll open the call to your questions. With that said, let me turn the call over to Karim.

Karim Temsamani, CEO

Good evening, and thank you for joining our Q3 2023 earnings call. To start the call, I'd like to provide some context to this quarter, now that I've spent a year in the business. When I arrived last year, our finances needed to improve. Before I started, our Q2 2022 adjusted EBITDA annual run rate was worse than negative $55 million and added to the difficulty our teams were facing. My immediate priority was to rightsize our cost structure and reinvest in building the foundations of our business, starting with our financial institution relationships. While we have much left to accomplish, I am proud of the work our teams have done so far. The financial foundations of our business are stronger, and our banking relationships are in a much better place. We can now think longer term about our growth prospects. Our results this quarter match this sentiment. We were in line with guidance on our top line metrics and better than expected on our profitability metrics. Of note, adjusted contribution grew 22% year-over-year and our adjusted EBITDA was positive for the first time in 2023 at $3.9 million. We also had positive operating cash flow for the sixth straight quarter. Alexis will provide more details later on our full financial results. Our solid financial performance this quarter points back to our underlying value proposition. For example, gas, grocery, and convenience grew more than 65% this quarter year-over-year. We saw success because we help brands target shoppers who buy competing brands. We deliver strong ROI for them, which helps us succeed in this category. Another area that saw success was travel and entertainment, which grew more than 20% in the quarter year-over-year. While consumer spending in travel and entertainment has softened in the back half of the year, our clients are still leaning into budgets. Our platform helps them reward loyalty and acquire new customers, particularly in environments where spending is volatile. These positive results were balanced by subpar performance in restaurants and retail. We believe these verticals can and should be significant contributors to our business, and we are aiming to drive high growth moving forward by reinvesting in our teams in these categories. As we saw with our vertical performance in the quarter, underlying fundamentals were mixed; unique consumers activating offers decreased 7% year-over-year in Q3, driven by the loss of a previously mentioned large restaurant client. That said, unique customers redeeming or spending per serve in the quarter saw a 13% increase, which indicates we are serving relevant and engaging offers to consumers. Where there will be quarter-to-quarter variation in activations, we expect unique customers activating to increase over time as we continue to evolve our platform. As we mentioned last quarter, our expectation was to sign one new bank partner by the end of 2023. We are excited to announce that our U.K. team signed Monzo, one of the fastest-growing banks in the U.K. We can't wait to launch in 2024 to help their customers save money on the brands that they love. And the teams aren't stopping there. Our partner pipeline remains strong, and we believe we will secure at least one more major bank partner in the U.S. over the next few months. Let's move to our strategic initiatives. In the quarter, we spent a considerable amount of time on strategic planning. While I expect an Investor Day at a later date, I do want to provide initial color on how I see our strategy evolving over the next four years. Our vision for the future of Cardlytics is aligned around four strategic pillars: First, strengthening our core product by driving user engagement and building out demand, supply, and marketplace liquidity while simultaneously expanding the core business globally outside of the U.K.; second, scaling Bridg and Rippl and connecting it with the core Casodex to unlock a unique data and measurement ecosystem; third, broadening our reach to non-FIs to diversify supply and access the broader merchant ecosystem. This represents a large growth vector for our business but will require further exploration in the New Year. And last, but also most importantly, embedding insights into everything we do, internally and externally, to become the trusted commerce partner. As a data company, this builds credibility to reinforce our core and tap into new revenue streams. I'm excited about the future and potential of Cardlytics, and can't wait to discuss the detailed initiatives behind our strategy with all of you. And while I could spend most of the call discussing our strategic plan, I do want to move to our near-term initiatives that are critical to realizing many elements of this vision. So first, let's discuss the key initiatives for our bank partners and advertisers. On the bank front, like last quarter, all our major U.S. banks have data in AWS, and most have systems in AWS. In the quarter, a large U.K. bank completed the migration, moving us closer to 100% completion. We still expect nearly all our major banks to migrate to AWS and the new user experience by the middle of 2024. We continue to have constructive conversations with our partners, and we want to drive to full adoption as soon as possible. One bank focused area that saw significant progress was the adoption of our ad decisioning engine or ADE. If you recall, ADE drives higher monetization and offer relevancy for the business through improved targeting. This quarter, two of our largest banks fully adopted ADE. We're excited about the increases in overall engagement we see with ADE and can't wait for all of our banks to adopt these new capabilities. We continue to scale our advertising product to provide our partners and advertisers new ways to drive engagement and return on ad spend. Multi-tier offers, which provide variable incentives based on objectives, are seeing rapid adoption and have shown two times better performance than our baseline offering in some campaigns. For example, a customer came to us with a request to increase premium membership purchases. Historically, this customer saw a split of 50% premium membership to 50% basic memberships. Our multi-tier offers were able to drive consumers to an 80% premium membership split, providing additional value for its advertisers and its consumers. We're also continuing to make improvements to our operations. Several key items were completed in the quarter that we expect to significantly improve execution, including transitioning legacy processors to our data lake and facilitating new interfaces for onboarding new publishers such as Monzo. We are also continuing to make improvements to our operations. Several key items were completed in the quarter that we expect to significantly improve our execution, including transitioning legacy processes to our data lake and facilitating new interfaces for onboarding new publishers such as Monzo. We've also made process improvements that have significantly reduced the time to onboard a merchant from two weeks to just two days. Moving to Bridg and Rippl. For our customer data platform or CDP product, we resigned a national retailer to a large long-term contract. This is a great win for us and evidence that the CDP product can deliver the data enrichment that larger retailers need. Earlier this quarter, we launched Rippl, our retail media network. To remind you, we believe Rippl will provide retailers brand flexibility in building sophisticated audiences, seamless access to a national footprint, and user-friendly tools that empower them to gain valuable insights, drive substantial incremental sales, and accurately measure the impact of their campaigns. While the lumpiness we expected in growth for the platform is materializing, we have solid progress in transforming the business. We have 33 million profiles live on Rippl, and the initial feedback is strong. We also recently hired a Chief Revenue Officer for the business to help increase our growth. We expect to announce some big wins in the coming quarters, and we see strong potential for Rippl to scale in 2024 and beyond. Let's move to the global business. While Monzo is the big news, I do have another important update. Please join me in welcoming Ian Harrington, who will serve in a newly created General Manager of International role. Ian has built several billion-dollar global businesses from scratch at Google and has over 25 years of experience in global markets. At Cardlytics, he will be charged with leading a global expansion and strategic business development. We're extremely excited to have attracted him to Cardlytics, and I look forward to providing more updates around our global business plans in the near future. Moving to our outlook. On the surface, consumer spending looked solid this quarter with a 5.6% increase year-over-year, largely driven by gas prices. But despite this persistent spending, inflation is still higher than normal and some of our financial institution partners highlighted elevated interest rates, lower deposits, and higher credit card charge-offs as negative indicators. In our conversations with advertisers, we are seeing elevated caution around commitments and the size of advertising budgets given trends that they are seeing in Q4. It appears that some of the optimism in Q2 has cited ground to renewed recessionary concerns. Economic volatility will impact our Q4 billings and revenue, but our adjusted EBITDA should still be positive in Q4. We can also reach positive adjusted EBITDA for the full year if we execute on our plan. We remain highly focused on our cash flow and profitability as we navigate this choppy environment. The trajectory of our adjusted EBITDA and operating cash flow since Q1 of 2022 is reflective of the incredible effort and dedication from our team to rightsize our business, and I think it's a great predictor of our future success. And like we've discussed, there are many exciting developments coming over the next few quarters that will drive growth for us in the coming years. By the end of 2024, we expect our platform to look completely different, with new large bank partners, a broader and deeper data set, more sophisticated audience targeting, better analytics and reporting, and a variety of ad formats that will drive increased engagement. We are confident in our strategy for the next four years, and our belief in our long-term growth prospects has never been stronger. Now I will turn it over to Alexis to discuss our financial results.

Alexis DeSieno, CFO

Thank you, Karim. I'm thrilled to be addressing all of you today on my first earnings call. I spent my first 80 days as CFO meeting the teams, evaluating next steps for our capital structure, and beginning to optimize our finance processes and systems. I also helped lead the four-year strategic planning process that Karim mentioned. There is room to expand our addressable market and diversify our revenue streams while maintaining a focus on profitability and cash flow to strengthen our balance sheet. I'm excited to be joining at this time in our trajectory. We are positioned to be the leader in providing trusted and intelligent business insights, and there are a few other platforms that have the level of data and reach that we do. This gives us the right to compete with any platform in our space. And in the post-cookie landscape, the trends align with our strengths. In the near term, I have three major priorities: First, driving incremental revenue through pricing improvements and monetization of our assets, which will ultimately allow us to deliver more insights to our partners. Second, continuing to embrace automation and data analytics across the organization to allow us to make more informed decisions more quickly. Third and most importantly, being hyper-focused on profitability, and improving our balance sheet and capital structure. This will allow us to deliver on our goals and our promise to investors. Now let's move to our results and guidance. As Karim mentioned, we delivered solid third-quarter results with billings, revenue, and adjusted contribution consistent with our Q3 guidance, and adjusted EBITDA exceeding our Q3 guidance. We had our second consecutive quarter of positive operating cash flow at $1.2 million and our first quarter in 2023 of positive adjusted EBITDA of $3.9 million. We are showing sequential improvements and momentum on profitability. My comments will be year-over-year comparisons for the third quarter unless I state otherwise. Billings increased 5% to $116.4 million, primarily due to sales to new advertisers. Revenue increased 9% to $79 million, primarily due to a decrease in consumer incentives as a result of changes in our mix of financial institutions and pricing. Our top five customers accounted for 22% of revenue this quarter compared to 19% last year. Adjusted contribution increased 22% to $42.9 million. Geographically, U.S. revenue increased 10%. For our top advertisers across both years, revenue increased 30%. These increases were driven by higher brand spend and pricing improvements. U.K. revenue decreased 12% due mainly to the loss of a major partner last year. For the U.K., this is a sequential improvement over Q2, which we expect to continue in the next several quarters due to the additional supply from signing Monzo and from auto enrollment launching with another large bank partner set to begin in the next several months. For Bridg, revenue increased 10%, driven by contract extension of existing clients. As Karim said, we launched Rippl in August and have added 33 million profiles to our database with a line of sight through adding additional profiles in the near term, which enables us to scale and drive network effects. Adjusted contribution grew 22% with the margin calculated off of revenue of 54% compared to 48% one year ago. We are seeing the benefits of our partner share renegotiation with JPMorgan Chase as well as product improvements. Adjusted EBITDA exceeded the high end of guidance and was positive for the first time in 2023 at $3.9 million, which is $16.7 million better than Q3 of 2022. The Bridg was profitable for the second quarter in a row. Operating cash flow was $1.2 million and positive for the second consecutive quarter. While operating expenses, excluding stock-based compensation, came in lower than expected at $38.9 million, we still expect the run rate to be in the low $40 million range per quarter. Our focus is on improving our profitability and cash flow, and the expectation moving forward is to be operating cash flow positive and adjusted EBITDA positive on an annual basis in 2024. On the contingent consideration for the second anniversary earn-out payment related to our acquisition of Bridg, we continue to believe the payment amount is correct. However, SRS, the group representing the former Bridg shareholders, submitted a notice in Q3 objecting to our calculations. We continue to believe our calculations are correct and are fully prepared to defend our position of $0. On the balance sheet, we ended Q3 with $90.1 million in cash and cash equivalents, and we had $4 million of unused available borrowings under our line of credit. We still believe that our available liquidity is sufficient to support our long-term plans. However, capital structure is top of mind for me, and we plan to address our upcoming debt maturities on an appropriate timeline. Before I turn to guidance, I want to note that we changed the definition of how we report our MAUs to reflect unique users within each bank regardless of the number of cards or accounts that they have at that bank. We believe this change is a more accurate view of our regional monetization ability. Under the new definition, MAUs were $162.5 million, an increase of 4%. Also, based on this new definition, ARPU during Q3 was $0.49 compared to $0.47 last year. Now turning to Q4 guidance. For most of the year, we have discussed the macro trends and dynamics that are causing uncertainty and mixed results in the advertising market. Our advertisers have shown renewed caution around budgets. However, we expect a strong adjusted EBITDA result given the work we've done on our cost structure. With that in mind, for Q4, we expect billings between $122 million and $133 million, revenue between $82 million and $90 million, adjusted contribution between $44 million and $50 million, and adjusted EBITDA between positive $4 million and positive $8 million. Billings are primarily driven by growth in travel and continued success in our everyday spend categories. This growth is partially offset by weakness in restaurant and retail. Despite the mixed trends, we are seeing our largest clients spend more with us. Advertisers spending more than $1 million per year are up 15%. For example, we closed a deal in October with one of the largest retailers in the United States that should push them to over 8 figures in billings in 2023 and around 20 times their spend from 2022. This is a solid demonstration of how we can grow budgets with our existing clients as they get comfortable with the value proposition of our platform, particularly around our ability to drive incremental loyalty spend. And in most years prior to 2022, we saw unplanned holiday budgets materialize in the fourth quarter. We have not assumed these budgets in our forecast, so they could provide additional upside given the large number of days between Thanksgiving and Christmas this year. While Q4 and full-year billings growth is mixed, we are on track for a second consecutive quarter of positive adjusted EBITDA. The midpoint of our Q4 adjusted EBITDA guidance implies we will be close to breakeven for the full year 2023. Our annual adjusted EBITDA could be over $40 million better than 2022. These are incredible achievements by the teams. Like Karim said, we are bullish on the long term. We've added more supply in the U.K. We expect to sign another bank partner in our core business, and nearly all of our banks should be on our new systems by the middle of 2024. We are adding profiles to the Bridg Retail Media network, and revenue should follow as we continue to scale the business. We have identified our strategic costs, and our teams are hard at work on turning these initiatives into real growth. While we expect some bumpiness given the seasonality of our business, we are on a path to sustain positive operating cash flow and positive adjusted EBITDA on an annual basis. And with that, I will turn it back over to Karim.

Karim Temsamani, CEO

As you know, I am extremely happy with the progress we've made on our financial structure. The trajectory of our profitability has dramatically improved from our run rate in Q2 of 2022. We are gathering speed with each passing quarter. Our platform is starting to look different, and the collective improvements we are making to our products and operations are far exceeding our pace from prior years. I can back this up with recent feedback from our banks, who have told us we are moving at a much better pace than in prior years. Our dedication to product leadership, financial health, and strategic growth is setting us on a promising course, and I'm looking forward to the future.

Operator, Operator

Your first question comes from Kyle Peterson from Needham. Please go ahead, Kyle.

Kyle Peterson, Analyst

Great, thanks, and congratulations, guys. I wanted to start off on the outlook, checking on billings and revenue. I guess a lot of the commentary sounds pretty positive in terms of feedback you guys are getting from your larger clients, but I guess the numbers looked a little light. So I just wanted to see what is driving that. Is this more of a consumer spending headwind, kind of the other side of the funnel? Or is this just broader pressure, especially with some clients that maybe aren't some of the larger advertisers? Or is there something else at play here?

Karim Temsamani, CEO

Thanks, Kyle, for the question. Just to step back first, as you know, Kyle, our priority has been to put this company back on the right financial footing while obviously, at the same time, rebuilding many parts of our operations. I think we've demonstrated that we've made significant progress going from a run rate of close to $55 million in EBITDA losses to a breakeven situation. So what's really exciting here is that we now believe that we can run the company profitably on a much lower cost base. This will allow us to concentrate on growing our revenues going forward. But going back to sort of the gist of your question, it's clear that our revenue guidance is lower than we had hoped for, for a couple of reasons. One, there are macro factors at play. I mentioned some of that on the call, we're seeing that inflation is still high, interest rates are also elevated, and we're definitely seeing some points of weakening consumer demand with signals pointing to that. There's a lot of additional feedback that you're hearing in the market regarding signals. We're also seeing some weakness in some of the sectors, which we are addressing internally. That's definitely not easy for us to improve our sales drive in some of our teams given that we're seeing inconsistency in delivery between some high-growth sectors and some much lower declining sectors. So there's definitely work that we want to do internally. I would also say there are a few areas that we wanted to be cautious around in the guidance we provided, but those could provide additional benefits in the quarter. The longer-than-normal holiday sales cycle this year could potentially help us, and we're still hoping that there will be unplanned budgets that we could encounter at this time of year, similar to last minute budgets we've seen. Overall, we're very positive about the future. We're cautious about Q4, but we're very optimistic about the future, seeing a positive EBITDA for Q4 and possibly for the whole year as we've said. We note that some categories are growing very well and that we're continuing to grow large accounts that are spending significantly more with us. We want to emulate that more consistently across the business. We see that we're winning more supply, and we expect that new ad formats and ad tech like ADE will soon be at scale and will improve our monetization potential. So definitely not where we want to be in Q4, but some very promising outlook for us longer-term.

Kyle Peterson, Analyst

Got it. That's helpful. And then maybe if I could follow up on some of the newer products. It seems like there's some good traction there. I guess any metrics you might be able to share, whether it's qualitative or quantitative on some of the adoption of these products? Are your clients that are using these new logo wins interested in these? Or is this expansion with existing clients? Or is there some pure substitution, but happier clients are kind of all of the above?

Karim Temsamani, CEO

Yes. I think there's two parts to your question. The adoption of our technology at scale is a great benefit for us longer term. So in the call, I mentioned that ADE drives high monetization and offer relevancy for the business, enabling us to improve targeting. Now that we have two of our largest banks that have fully adopted ADE, we can see that there will be further benefits for us going forward. Certainly, the adoption of new product features like multi-tier offers, which I also discussed on the call, enables us to have different discussions with clients and bring new clients into the ecosystem. I have been mentioning over the last few quarters about new pricing models; we're trialing some of these now. While there are no numbers that we want to share just yet, we see many elements of co-offering where we really see potential growth going forward.

Kyle Peterson, Analyst

Got it. That makes sense, and it’s helpful. And maybe if I could just squeeze one more modeling question in. Nice to see the adjusted contribution margin move up nicely in the third quarter, and the Q4 guide kind of implies that seems like it's going to continue. Is there any mix, whether it's types of offers or anything in the pipeline? Or is this kind of 54-ish percent run rate for contribution a good run rate to use moving forward in our models?

Alexis DeSieno, CFO

Hi, this is Alexis. I can take this one. So the benefit you're seeing in adjusted contribution is primarily due to the renegotiation of a major bank contract, as well as a small mix shift from our financial institutions. We do have different agreements with each one, which does drive some of the changes there. You're also seeing that impact in revenue. As I said on the call, we're seeing changes to partner mix and also improvements in pricing. I think that Q3 is a more normalized state going forward. So that would be a good estimate to continue.

Operator, Operator

One moment for your next question. The next question comes from the line of Jason Kreyer from Craig-Hallum. Jason, please go ahead.

Jason Kreyer, Analyst

Thank you, Karim. I was wondering if you could discuss the indications of increasing instability as we approach Q4. What feedback are you receiving from advertisers? Are you noticing any campaigns being paused or terminated? Is there any visibility into short-term pauses along with signs that they might resume in the future? I'm looking for more detail on this.

Karim Temsamani, CEO

Yes. Thanks. What we're seeing is that there's no uniformity across the various verticals. There's definitely a number of verticals where we're seeing very strong growth, as we've mentioned on the call. Some of our everyday spend categories like grocery, gas, and convenience are growing very strongly year-over-year. Travel and entertainment also is doing well. We are definitely seeing that in other industries like retail and restaurants, for instance, there’s more caution and some of the budgets that you would expect normally at this time of the year are softer than we anticipated. Some of that is driven by caution around the economy and the ability for consumers to spend. We know that there are issues for many retailers as consumers get further into the year. We’re also assessing opportunities to drive more consistency across all of our verticals. So yes, does that answer your question, Jason?

Jason Kreyer, Analyst

That's very helpful. Thank you. I wanted to take a moment to discuss your perspective on the market opportunity for Rippl. Additionally, could you share your plans for going to market? Do you anticipate operating independently in this area, or are you considering partnerships to enhance or expand your approach?

Karim Temsamani, CEO

Yes. As a reminder, Rippl really provides a single point of access to anonymous shopper profiles, which we enrich with SKU level data. Advertisers using Rippl will have the ability to access transparent shopper data, which they can use to drive additional spending and a better shopping experience for consumers. We expect there will be fluctuations in how Bridg and Rippl scale since these are new businesses. We are in early stages of conversations with many of our customers there. I would also say that the timelines for onboarding customers into the Rippl network are longer than for our core product. However, I can say we are thrilled with the progress we are making. We are getting a lot of positive feedback from discussions we're having with both retailers and CPG brands. We have promising pilots underway and several discussions with large clients that are progressing well. Additionally, we’ve just hired a new CRO for Bridg who will help us scale the Bridg and Rippl business, and we expect that to significantly contribute in 2024, so we're very excited about the prospects, but expect some fluctuations as we build that business.

Jason Kreyer, Analyst

Thank you. Last one for me. I wanted to just maybe double-click on multi-tier offers, which seem like a really interesting opportunity. What is the gating factor to that growing more rapidly? Do you need more banks on the ADE or the user experience? Or does it just take more time to get advertisers on board?

Karim Temsamani, CEO

Yes, it depends on the goals advertisers have and their ability to have differentiated pricing models for their customers. Multi-tier offers are going to be a very successful product for us. That's going to be relevant for many of our customers but not for all. We're certainly having many discussions about multi-tier offers with customers right now, and we're planning to scale it as fast as we can. One thing to note is that having more of these products also opens up discussions for the core product. As we offer more products for sale and engage in discussions with various tiers, even if they see that perhaps the multi-tier offer is not relevant for them right now or even in the future, they may still end up spending on our normal rewards offers. It’s relevant in many different areas. As we get these products to scale, we appreciate the interest, and we'll come back with more meaningful data regarding their impact on our network in the future.

Jason Kreyer, Analyst

Got it. Alright, thanks Karim. Thanks everyone.

Karim Temsamani, CEO

Thank you, Jason.

Operator, Operator

Thank you. At this time, I would now like to turn it back over to the speaker for any further comments. So back to you, Karim.

Karim Temsamani, CEO

Thank you very much, Felicia. That brings the call to a close. As mentioned, we remain committed to positioning the business for future success. Thank you for your continued support, and I look forward to speaking to you all soon.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.