Earnings Call Transcript - CDLX Q1 2022

Operator, Operator

Thank you for being here, and welcome to the Cardlytics, Inc. Earnings Conference Call for the first quarter of 2022. All participants are currently in listen-only mode. Please note that this conference is being recorded. After the presentation, we will have a question-and-answer session. I will now turn the call over to Kirk Somers. Please proceed.

Kirk Somers, Executive

Good evening, and welcome to Cardlytics first quarter 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 future financial performance and results, our financial guidance for the second quarter, our ability to achieve our key long-term priorities, the increase in MAUs or Monthly Active Users connected to our ad server, the increase in ARPU or Average Revenue Per User, the growth in Bridg ARR or Annual Recurring Revenue, the impact of COVID-19 on our business and the economy as a whole, the sufficiency of our capital structure, economic recovery across verticals by the end of 2022, the growth in advertisers on Ads Manager, the use of cash for the Bridge run up, maintaining 30% annual growth rates, achieving positive adjusted EBITDA in the second half of 2023, plans for Entertainment and their content, adding new financial institutions and banking partners, renewal of our Bank of America contract, growth with Bridg, our margin profile, continued momentum with agencies and advertisers in 2022 and the anticipated benefits of our acquisitions of Dosh, Bridg and Entertainment. 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 March 31, 2022, which will be filed 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 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 Cardlytics' website. Please note that a supplemental presentation to our first quarter results has also been posted on the Investor Relations website. Joining us on the call today are Cardlytics CEO and Co-Founder, Lynne Laube; 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 Lynne.

Lynne Laube, CEO

Good evening, and thank you for joining our Q1 2022 earnings call. We had our largest Q1 ever and delivered results that exceeded our guidance. Our sales team continues to deliver against our plan despite a choppy macroeconomic environment. Here are the numbers. Billings increased 28.7% year-over-year to $98.2 million. Revenue increased 27.6% year-over-year to $67.9 million, and adjusted contribution increased 34.6% year-over-year to $32.8 million. Our Q1 results reflect year-over-year billings growth in all of our industry verticals, except restaurants, which continues to be impacted by labor and supply chain issues. The choppiness in restaurants was balanced by significant improvement in travel and entertainment as well as improvements in the direct-to-consumer and retail industries, which reflect the continued diversification of the business. Let me share some specific examples of what we accomplished. Travel and entertainment had a great quarter and was up nearly 150% over Q1, 2021. We saw consumers transact frequently for concerts, cruises and travel, leading to a 54% increase in overall consumer spending in this sector. In addition, the bank co-brand partnerships that we mentioned last quarter were a key driver to outperformance, and these relationships continue to help us unlock new sources of marketing budgets. In the direct-to-consumer sector, a large subscription service provider that piloted with us in 2021 signed a new contract in the mid-seven figures. While incremental return is important to this client, a key factor in the increase was the unique insights that we can provide on purchase behavior around subscription rates and churn rates. For retail, consumer spending is still growing, and we're seeing a stronger than expected return to brick-and-mortar. We had eight seven-figure contract wins in the retail space in Q1 due to our incremental return and custom competitive insights. Advertising spend from agency accounts grew over 60% year-over-year and represented over 10% of advertiser spending during the quarter. Over a third of active Q1 agency accounts were new business in this quarter, but our earliest partners are also scaling quickly. We also produced several new reports for agencies via our self-service tool in the quarter. Moving on from results, I want to provide an update on our key platform enhancement initiatives. Our work on the ad server, ads manager, and user experience adoption continues to progress. We have bank commitments to connect 50% of MAUs to the new ad server by the end of the year. But as a reminder, we are dependent on banks sticking to these timelines. In the first quarter, we began piloting local content from a partner with one of our major banks. This is an exciting development and allowed us to test the scalability of our new Ads Manager. In this pilot, we included over 300 hyper-local advertisers from a third-party content provider. In addition, our newly formed mid-market group sold and republished 200 mid-market advertisers in Q1, bringing our total advertiser count for the quarter to over 600 advertisers. We are well on our way towards reaching our goal of having over 1,000 advertisers running simultaneously on the platform in 2022. This pilot is also important because it tests our new platform scalability. On the old platform, we could launch a maximum of 40 new campaigns a week. With this pilot on the new platform, we launched 325 campaigns over a few days. This is a compelling early proof point on the potential to reach many thousands of advertisers over time. Our bank relationships continue to be strong. All but two of our banks have committed to moving to the cloud, and one of those two is in the final stages of approval. The last bank is a midsized bank, and we expect to receive approvals from them in 2022. The Bank of America contract is still on pace to be renewed, and we're progressing nicely. We fully expect to come to an agreement that is mutually beneficial for both parties. One of our large banks has seen twice as many mobile activations since they improved the program visibility in late February. Another large bank is planning to nearly double their 2021 investment spend into the program to leverage our offers as an extension of their core loyalty program. And despite small sample sizes, we continue to see the new ad server outperform the old server in interesting ways. For instance, customers that are served hero imagery are two to four times more likely to visit an advertiser's website via an external click. With our recent focus on neobanks and fintechs via Dosh, we now have 18 publishers live and 15 publishers that are under contract and scheduled to launch later this year. Additionally, despite the delay, the marquee partner we mentioned last year is scheduled to launch the Dosh program this quarter. This partner reaches more users than any Dosh partner we've signed, and we are excited to be working with them. We remain enthusiastic about the long-term growth opportunities with these partners as well as their ability to further diversify our base of MAUs. The Bridg progress and pipeline remains strong and still includes late-stage opportunities in CPG and grocery that we mentioned last quarter, which are very close to being signed. In addition, we have several new pipeline opportunities within retail, grocery, convenience, and restaurants that were initiated through a joint sales effort between the Cardlytics and Bridg teams. Integration with Entertainment is proceeding well. The acquired business met expectations for the quarter, and we're working to start leveraging their content on the broader Cardlytics platform. Our UK business grew revenue 52.6% year-over-year for its largest Q1 ever. The result was driven by a recovering economy and execution from our sales team. The business saw year-over-year growth across all industries, and grocery and gas were standout performers. Additionally, several top clients that lapsed with the pandemic returned in Q1, so we believe the UK business had strong momentum going into Q2. Overall, these strong results exceeded our expectations, especially in light of the challenging macroeconomic conditions in a quarter that is historically the seasonal low point for our business. US consumer spending in the quarter was the highest in four years despite risks from inflation. However, we did see US spending pull back in the last two weeks of March, down 5% and 3% year-over-year, respectively. We're watching consumer spending carefully and will continue to monitor its effects on the business as interest rates rise in this inflationary environment. It feels prudent to point these risks out to investors, but we also believe that the performance-based nature of our platform can deliver results in a price-sensitive consumer environment. We remain cautiously optimistic we will meet and even exceed our 30% growth target for 2022. Before I turn the call over to Andy, I want to take a moment to welcome Jose Singer to the Cardlytics team. We recently announced that Jose is joining us as Chief Product Officer, succeeding Michael Akkerman. I want to thank Michael, who did a great job in building our product organization and expanding the capabilities of our platform. Michael hired a talented team that is well-positioned in their functional areas during this transition. Our new Ads Manager is running 100% of campaigns. And as I mentioned, we're starting to deliver the self-service capabilities we discussed with investors back when Michael started. Our Ads Manager is performing well, and we have solid visibility to connect 50% of MAUs to our new ad server before the end of the year. Thank you, Akk. We were incredibly fortunate to attract Jose to the team. He brings over 16 years of experience building and running product teams. He has the skills we need to build on the foundation Akk laid. Jose joins us from Nextdoor, where he served as Head of Product for the business and agency solution. In this role, Jose was responsible for the end-to-end product experience, unifying the ad platforms and the overall strategy for small and enterprise advertisers. Prior to his role at Nextdoor, Jose held various leadership positions at Yahoo, including the Vice President of Product for their advertising solution, where he ran their native, search, service delivery and supply side ad platforms.

Andy Christiansen, CFO

Thank you, Lynne. The business strengthened in the second half of the quarter, allowing us to exceed expectations. Year-over-year, we managed to grow billings 28.7% to $98.2 million, grow revenue 27.6% to $67.9 million, and grow adjusted contribution 34.6% to $32.8 million. Geographically, US revenue grew 25.5% year-over-year, and UK revenue grew 52.6%. Strong back-to-back quarters in the UK is a welcome sign that they are recovering from their extended pandemic-related lockdowns in 2021. Before I move to EBITDA, I wanted to discuss Bridg results. Bridg revenue grew 17.3% sequentially from Q4 to Q1, which is nearly 90% growth on an annualized basis. Despite this impressive growth in revenue, ARR, which is calculated as the annualized revenue for the last month of the quarter, declined quarter-over-quarter from $15.3 million in Q4 to $14 million in Q1. This temporary decline was primarily due to the expiration of two large contracts in Q1 that we are close to extending at even higher ARR renewals. We also have a large multiyear contract pending signature. So our expectation is for ARR to grow significantly next quarter and then resume growing more consistently with revenue. Bridg gross margin increased to 55.6% this quarter from 40.7% in Q4 of 2021. As a reminder, the Bridg business incurs higher expenses during client onboarding given the large amount of historical point-of-sale data that is transferred upon implementation. Gross margins will grow over time as the business matures and develops a larger base of customers, but we expect Bridg gross margins to be pressured over the next few years, as the business continues to grow at a fast pace. Longer term, we expect Bridg to achieve 75% gross margins. To help investors understand this dynamic, we introduced a new slide in our supplemental earnings deck with additional information. Adjusted EBITDA was a loss of $10.5 million in Q1 of '22 compared to a loss of $3.9 million in Q1 of '21. We expect a slight improvement in EBITDA in Q2 compared to Q1, given the uptick in adjusted contribution. But as I mentioned last quarter, we also expect an increase in operating expenses, largely as a result of wage increases in April, along with some planned investments in sales and technology. We remain confident that we'll reach sustainable positive adjusted EBITDA in the back half of next year, but with continued strong performance, it's possible that we can accelerate our path to profitability. We ended Q1 with $208.3 million in cash and cash equivalents compared to $233.5 million at the end of Q4. We used $2.3 million of cash in connection with the Entertainment acquisition and also saw an increase in working capital, driven by the timing of collections, prepayments for insurance and software, and payments for incentive compensation earned in 2021. Our balance sheet and liquidity remain very strong, and we also have $50 million available to us under our loan facility, so we see no immediate need to raise additional funds. We are thoughtfully considering the right blend of cash and equity to satisfy the Bridg earn-out payment due in Q2, and we expect to use more cash than the 30% minimum required under the merger agreement. MAUs were $178.5 million, an increase of 5.9% 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 first quarter was $0.36, an increase of 12.5% year-over-year. We expect ARPU to continue to increase on a sequential and year-over-year basis through the rest of the year as revenue continues to grow at a faster rate than MAUs. We had 33.8 million shares outstanding at the end of Q1 compared with 33.5 million at the end of Q4. Weighted average shares outstanding during the quarter was $33.7 million compared to $29.3 million during Q1 of 2021, which reflects both our 3.9 million share equity offering last year and the issuance of 1.1 million shares for the Dosh and Entertainment acquisitions. Now turning to guidance. Consistent with our long-term outlook, we expect year-over-year growth of approximately 30% in Q2, which equates to total billings of between $106 million and $116 million, total revenue of between $73 million and $80 million, and adjusted contribution of between $36.5 million and $40.5 million. I want to reiterate what Lynne mentioned earlier about the outlook for next quarter and the rest of the year. Our internal reports of macro US consumer trends show that spending in the first two weeks of April was down slightly year-over-year, but our platform is clearly outpacing that and showing solid year-over-year growth. We are keeping a close eye on consumer spending and external events, but I'm cautiously optimistic we can continue to deliver solid performance throughout the year in what is an increasingly price-sensitive environment. Q1 was a solid quarter, and we're really pleased with the execution despite significant uncertainty in the global economy. As I've said in the past, we remain focused on the things we can control, developing and maintaining strong relationships with all of our partners, expanding our offerings and developing a technology platform that will unlock the massive potential of our channel. We remain focused on strong execution here in Q2. We look forward to sharing more updates on our progress throughout 2022. And with that, I'll turn it back over to Lynne.

Lynne Laube, CEO

Thank you to everyone supporting our business. Q1 was a solid start to the year, and we believe our business will continue trending towards the 30-plus percent year-over-year growth target we set out last quarter. We're looking forward to executing on our plans, both financially and strategically. With that, I'll open up the call for your questions.

Operator, Operator

Thank you. Your first question comes from Aaron Kessler with Raymond James. Your line is open.

Aaron Kessler, Analyst

Thank you for the question. Regarding the agency pipeline, could you provide some insight into its status and the size of the agencies you are encountering? Are you primarily seeing mid-market agencies or larger ones? Additionally, I noticed that the campaign spending seems to have slightly decreased in the groceries and restaurants categories, while it appears to have significantly increased in the travel sector. I would be interested in your thoughts specifically on the groceries and restaurants areas as well. Thank you.

Lynne Laube, CEO

Sure, Aaron. It's Lynne. How are you?

Aaron Kessler, Analyst

Good.

Lynne Laube, CEO

We've identified around 35 agencies that we are focusing on, primarily mid-sized agencies. There are a few larger ones, but the challenge with these big agencies is that they consist of various divisions, so you need to enter the agency as a whole, establish a Master Services Agreement, and then work your way through each division. Most of the agencies we are targeting tend to be mid-sized and represent upper mid-market clients, which are not the top 100 advertisers in the country, but they are certainly among the top tiers.

Aaron Kessler, Analyst

Correct.

Lynne Laube, CEO

And then on kind of the verticals, you're absolutely right. So restaurant was really impacted this quarter. We saw a lot of choppiness. We saw continued supply chain and labor issues with several of our large restaurant clients, including Starbucks, which has been pretty vocal about it, but also several others. Grocery is more a mix issue. Nothing to read into there, but travel really was the offset for restaurants.

Aaron Kessler, Analyst

Got it. That's helpful. And then just any additional details on maybe cross-selling this quarter between Bridg and Cardlytics? I think last quarter, you noted some nice synergies there?

Lynne Laube, CEO

Yeah. I mean we're starting to figure it out. I want to be cautious. We have 25 clients that we've identified as ideal cross-sell targets for Cardlytics and Bridg. These are clients that we know would benefit from the Bridg solution, and in many cases, these are clients that are worried about measurement and attribution on the Cardlytics solution. So the ability to have Bridg be their own attribution solution is really powerful. We have a very small team of Cardlytics and Bridg people that are joint selling. We are definitely in the early days, but we have three clients for sure and probably another two in the hopper that are actively working with us on joint deals. So we're seeing a lot of momentum there, but it's just momentum. You don't see it quite yet in the numbers.

Aaron Kessler, Analyst

Got it. Great. Thank you.

Operator, Operator

Your next question comes from Kyle Peterson with Needham. Please go ahead.

Kyle Peterson, Analyst

Good afternoon. Thank you for taking my questions. I wanted to follow up on the comments you made about a slight decline in the last two weeks of March. I noticed you mentioned that in the first couple of weeks of April, you are outperforming the overall consumer spending. Could you provide some insight into how the early weeks of April compared to the latter part of March? Was there further decline, stability, or perhaps even improvement? I'm trying to understand how things are progressing based on your latest available data.

Andy Christiansen, CFO

Thanks, Kyle. In the latter half of March, we noticed a turnaround in spending. For most of the quarter, we experienced solid year-over-year growth, although we started to see some decline in March. There was a slight improvement in April, though it was minimal. Despite the spending environment being challenging, our platform continued to exceed expectations, and we're pleased with the positive trend and our ability to deliver results despite market difficulties.

Kyle Peterson, Analyst

That's really helpful. As a follow-up, regarding your diversification efforts with the platform, when I think back to around the second quarter of last year compared to now, it seems that various challenges, such as supply chain issues and inflation along with consumer pressures, have become more pronounced. Despite this, your performance appears to have remained consistent. Is this due to a more diversified platform, or are there significant travel campaigns contributing to a boost this quarter? I'm trying to understand how you are managing to outperform in this environment.

Lynne Laube, CEO

Yes, Kyle, the answer to your questions is yes. To provide a bit of historical context, we were surprised by the supply chain and labor issues in Q2 last year. This was the first time we faced those challenges. Since then, we have improved our ability to anticipate such issues. We are now scrutinizing our pipelines more closely and gaining a better understanding of the risks our clients may encounter in their businesses. We have also seen greater diversification, as evidenced by the 600 advertisers we had in Q1, compared to approximately 120 or 130 in Q2 of last year. There is a noticeable recovery in travel, as mentioned, but this is somewhat balanced by challenges in the restaurant sector. Overall, the situation remains quite complex, but we are becoming more adept at navigating these difficulties and working with our clients on diversification.

Kyle Peterson, Analyst

Great. It's very helpful. Thanks guys. Nice quarter.

Operator, Operator

Thank you. Your next question comes from Jason Kreyer with Craig-Hallum. Please go ahead.

Jason Kreyer, Analyst

Great. Thanks for taking the questions. Just given the success-based nature of the platform, I think you could conclude that the Cardlytics ad budgets could be a little more isolated from the macro than the broader ad industry. So just curious if you're hearing dialogue from advertisers that would support that maybe those budgets are a little stickier.

Lynne Laube, CEO

Hey, it's Lynne. A little bit, I mean, I think what we're hearing much more consistently from clients is just the macroeconomic challenges that they're dealing with. And so they're either pulling back. In most cases, if they're pulling back, they're pulling back everywhere, probably less so with us. But while we are seeing some positive response to the performance-based nature of the channel, I think it is way too early to declare that we're going to be less susceptible than other ad budgets out there right now just because it is so messy, as I've been saying.

Jason Kreyer, Analyst

Fair enough. And then just on the ad server, wondering if there's any notable progress. You called out that you have commitments to get to that 50% goal. Just curious if those are new commitments to get to that level? And then if you're hearing any commentary from the bank partners on what that deployment timeline looks like.

Lynne Laube, CEO

We have been collaborating with our banks for several quarters to secure commitments. These commitments are not new; we are simply getting closer to the deadline, which increases our confidence. We do have commitments from several banks, although not all for this year. As we all know, events can sometimes progress slowly and may delay a project for seemingly trivial reasons. This remains an ambitious goal, but we are getting nearer to a committed date.

Jason Kreyer, Analyst

Perfect. Thank you.

Operator, Operator

Thank you. Your next question is from Jeff Cantwell with Wells Fargo. Please go ahead.

Jeff Cantwell, Analyst

Hey, thanks for entering in this call. Congrats on the results. I have a couple of follow-ups on your commentary earlier. Can you maybe talk some more about the rest of the year on billings? Is there any additional color you can provide on what type of cadence should we expect to see here? There seems to be a lot of moving parts. Maybe just help us understand the seasonal trends you might be looking forward on billings. And how optimistic you might be about the back half of the year? Any thoughts there would be appreciated. Thanks.

Andy Christiansen, CFO

Yes. You bet, Jeff. So we've talked quite a bit here recently around our growth, target growth rate of 30% plus growth rate. And we still are very comfortable with achieving that this year and beyond. Now Q2 and Q3, historically, we've had a little bit of inconsistency as to which quarter is going to be larger than the others. I do think, though, this year that we're going to see Q3 larger than Q2. And we always see Q4, right, with the seasonal uplift of spend in ad budgets. It's always our biggest quarter. So I don't think that's going to be a real dramatic growth from Q2 to Q3, but we will see Q3 be larger. We have a very difficult comp in Q4. So we do think that we should have some nice growth rates in the next couple of quarters. In Q4, it may be a little bit more challenging there, but that should be kind of how things play out in the next couple of quarters.

Jeff Cantwell, Analyst

Okay. Great. Appreciate that. And could you just clarify? It sounded like you might have been talking earlier about seeing an opportunity to potentially accelerate the path to profitability around the back half of next year. Is that right? What are the drivers there? Can you walk us through that and talk a little bit more about what you see as the drivers there?

Andy Christiansen, CFO

Yes, that's correct. We have mentioned our aim to be profitable in the latter half of next year. If we can maintain our growth and meet our objectives over the upcoming quarters, we will be well-positioned to speed up that process. This involves achieving higher growth rates, managing our operating expenses more effectively, and exercising greater discipline in that area. With these growth rates, we anticipate profitability in the second half. It will depend on the specific growth rates from quarter to quarter, as our growth pattern isn't always linear. If we can keep up with our planned growth rates, we'll be in a strong position to accelerate our progress.

Jeff Cantwell, Analyst

Okay. Great. Appreciate all the color and thanks again. Congrats on the results.

Operator, Operator

Thank you so much. Next question is from Nat Schindler with Bank of America. Please go ahead.

Nat Schindler, Analyst

Yes. Hi, everyone. I have a quick question regarding Slide 16, specifically about the offer activation rates by industry. It's noticeable that travel has increased, which makes sense given more people are traveling. However, everything else has actually decreased compared to last year. Is there a specific reason for this?

Lynne Laube, CEO

Yes. Thanks, Nat. It's Lynne. The quarter started slowly, which is why we were cautious with our guidance. It definitely had a slow beginning, likely due to everything happening at the time, including the wave of Delta or COVID we were experiencing.

Nat Schindler, Analyst

Omicron. Yes.

Lynne Laube, CEO

The war in Ukraine was beginning, and gas prices were skyrocketing. I believe this contributed to the quarter starting off on a tough note. One area worth mentioning is grocery, which presents more of a mix issue. We have several large grocery platforms in the channel that operate like subscription services, resulting in lower click rates but significantly higher revenue potential. Overall, the sluggish start to the quarter was primarily due to external factors, and January and February were particularly unusual, not just for Cardlytics but globally.

Nat Schindler, Analyst

Totally understand that, but do you see April engagements backed up on a year-over-year basis? I know that this is really hard with different waves of COVID just messing with the macro. But April was pretty clean last year and April now, how does that compare?

Lynne Laube, CEO

April is looking clean. As Andy mentioned, we are closely monitoring our spending. While spending is slightly down compared to last year in April, it is not as significant as what we experienced in the last two weeks of March. Overall, April appears to be cleaner than before.

Nat Schindler, Analyst

It's been interesting to see the grocery sector, particularly due to the mix of different products. Given the inflation impacting consumers, wouldn't your discounting service, which relies on coupons, see an increase in usage during this economic climate? Or is it simply the overall spending that's influencing these trends?

Lynne Laube, CEO

We have some new grocery advertisers on the platform that are more focused on subscription models. This results in a higher upfront cost for the consumer, although they end up saving more in the long run. There are more of these types of offers on the platform now compared to before. While you're still seeing promotions like saving 3% on groceries at certain retailers, there's also a trend where you might spend $100 on a specific subscription to save $20. I believe these types of offers will lead to lower click rates because the upfront cost is higher for consumers. Even though they pay more and we earn more, the click rates naturally decline. Generally, across all verticals, higher ticket prices tend to correlate with lower click rates.

Nat Schindler, Analyst

That makes sense. Thank you.

Lynne Laube, CEO

Yeah.

Operator, Operator

Thank you. And with that, we conclude the Q&A session. I will turn it back to Ms. Lynne Laube for her final remarks.

Lynne Laube, CEO

Well, thanks, everyone, for listening to our earnings call. We were pleased with the quarter. We saw some puts and takes. But overall, pleased with the quarter, and we continue to believe that we can see 30-plus percent growth year-over-year for multiple years to come, even with some lumpiness out there. But we're feeling good about where we're positioned as a company, as a business, and as a leadership team.

Operator, Operator

And with that, ladies and gentlemen, we conclude our conference for today. Thank you for participating, and you may now disconnect.