Good day, and welcome to the Fluent Inc. Q1 2020 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ryan McCarthy. Please, go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our first quarter 2020 earnings results. Joining me on today's call are Fluent's CEO, Ryan Schulke; and CFO, Alex Mandel. Our call will begin with comments from Ryan Schulke and Alex Mandel, followed by a question-and-answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investor Relations page on our website www.fluentco.com. Before we begin, I would like to advise listeners that certain information discussed by management during the conference call will contain forward-looking statements, covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date hereof. Actual results could differ materially from those stated or implied by our forward-looking statements, due to risks and uncertainties associated with the company's business. These statements may be identified by words such as expects, plans, projects, could, will, may, anticipates, believes, should, intends, estimates and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q. During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of our business on a variety of indicators, including media margin, adjusted EBITDA and adjusted net income. The definitions of these metrics and reconciliations to the most directly comparable GAAP financial measure are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent's CEO, Ryan Schulke.

Thanks, Ryan and good afternoon and thanks to everyone for joining us today. I hope you're all healthy and staying safe. Needless to say, the backdrop of today's call is unlike any time I or perhaps any of us have ever experienced, a time that requires unique and special considerations. We all know the real heroes are those on the front lines of the COVID-19 crisis, working tirelessly to support those who are sick or in need. We're extremely grateful for the commitment and sacrifices healthcare professionals, first responders and essential personnel are providing in an unprecedented situation. While you can rest assured, we're extremely focused on driving our business forward, it's critical that our priorities are being led through the lens of safety and well-being of our employees, families and business partners. And that we operate in a manner that fully respects the sensitivities of the conditions we're all confronting. Since our offices closed across North America in mid-March, we made a conscious decision to make no layoffs, while committing many resources and financial aid to Fluent colleagues and the communities we operate in. Foremost, our home base here in New York City, where the majority of our colleague base resides. Despite the uncertainty in the marketplace, as we and our clients navigate unchartered waters, we delivered a solid Q1, with revenue up 19%, media margin up 4% and adjusted EBITDA off just 1%, each case versus the previous year. Even while some of our valued clients are taking a cautious approach, our revenue growth is a strong indicator that Fluent is forging stronger bonds with leading brands across numerous verticals. We're becoming a more critical component of our partners' overall marketing strategy in the process. Yes, we chose to invest in margin, but we did so in strategically important growth areas, centered around solutions we provide our clients, growing our media footprint domestically and now investing in international expansion, where we feel confident we'll improve our margin mix over time. I'll start with some headlines. First, I'll touch on how the crisis has impacted our business and what we're doing about it. Second, I'll speak to the three core pillars driving Fluent's performance marketplace; our performance solutions, our publishing platform and our in-house technology platform. Big overarching trends that have been well documented across our industry are that, while consumers are spending more time on the internet, advertisers are spending less overall dollars to reach them. In turn, Fluent's business model, as a performance marketing company, playing in a range of verticals, has helped to somewhat insulate us from the volatility occurring across the marketing and advertising space. The good news is that we're seeing more traffic to our media properties at lower costs to acquire that traffic. But the offset in this challenging window is that we have had certain advertiser segments decrease pricing or temporarily pause, depending upon how their industry and business have been impacted by the crisis. With that said, we've talked about how diversified Fluent's advertiser base is, due to the nature of our business model and the multitude of verticals in which we play. This diversification has helped us maintain our balance through this period while capturing greater market share in our sector. Our revenue growth was an important metric driving our strategy. As we continue to build strong relationships with top-tier brands who rely on Fluent for profitable customer acquisition solutions at scale. While media margin obviously grew at a more modest rate, we're bullish on our ability to optimize down the road as we continue to press on capturing greater share of wallet with advertisers due to the expansion of our media footprint. In this challenging environment, we're continuing to look for opportunities to provide value to our partners. While the marketing environment remains dynamic and we will need to react to our new realities, here's an example of a strategy where Fluent is winning. We've consistently emphasized the importance of our media and entertainment sector, which hosts two key segments of clients, streaming services and mobile games. We have deeply embedded partnerships with a host of clients in each of these verticals and they're performing very well in this environment. We believe our momentum will continue here as we enhance these strategic relationships. On a global scale, Fluent aspires to be a much larger performance marketplace connecting consumers with great products and services while empowering advertisers to execute more efficient digital marketing programs. Three pillars driving Fluent's performance marketplace are, one, our performance solutions, which service the advertiser demand driving the marketplace dynamic; two, our publishing platform, which establishes our media footprint including a portfolio of web properties and the channels where we engage consumers to traffic those sites; and three, our in-house platform, which is the data, technology and analytics that tie the marketplace together. Our first pillar, performance solutions enable us to directly partner with thousands of top advertisers across numerous verticals. The clients can operate with us on a pay-for-performance basis across a number of executions such as app installs, subscriptions, lead generation, and inbound phone calls. We're leaning in here to enhance our capabilities, as we recently announced our investment into Winopoly, which is essentially a contact center with technology to enable live agents to work from home while still protecting sensitive consumer data. This further expands our marketplace, enabling us to host sales calls on behalf of our advertising partners in addition to driving things like inbound calls and phone-verified leads. The second pillar, our publishing platform, is predominantly comprised of a number of owned and operated web properties with about 90% of consumption happening on mobile devices. We've previously talked about product development initiatives centered around winning big on messaging and video applications. These are taking shape nicely and represent some of the fastest-growing revenue streams though understandably at slightly lower media margin. Importantly, Facebook, Snapchat and some of the emerging social and gaming platforms still represent a large growth opportunity for Fluent and will continue to be an area of focus. The other key avenue to grow our media footprint via the publishing platform is through international expansion. We've learned a lot in our 10 years in the marketplace, both successes and failures. Now it's time for us to leverage all that key learning as we crystallize and expand our international strategy. We beta-launched in Germany in November and are now ready to begin scaling. To do so, we've engaged on-the-ground resources to help us take that effort to the next level. Importantly, we believe this investment is leaning into pre-validated client demand; our existing clients cooperate leading global brands are asking us to expand our footprint to meet their needs. Our European footprint now includes two large markets, the U.K. and Germany. We're also prioritizing additional markets in Europe and North America and anticipate this will be a continued area of focus and growth over the next few years. The third pillar is Fluent's in-house platform, which utilizes proprietary, first-party data collected on our media properties and our technology and analytics stack to service our marketplace and expand our media footprint. You can think of this as the creation of relevant experiences for consumers as they engage with us and offer us information about themselves along with the opportunity to present our clients' offerings. In closing, we're doing all of this under a set of conditions we certainly didn't plan for since we closed our offices in mid-March. Thankfully our colleague base has transitioned well to working in remote environments. Our team has always exhibited a high degree of adaptability and agility and thus our businesses remain solid. Looking forward to the second quarter, we too will be affected by the near-term industry realities and we see our revenue pacing as relatively flat compared to the same period a year ago. Within this challenging environment, we also believe we are strengthening the fundamental alignment between Fluent's performance marketing capabilities and our clients' objectives. Our platform brings consumers further down the funnel, providing greater clarity on consumer needs while increasing our clients' return on investment and derisking their marketing budgets. As a result, we believe the dollars being deployed to us are more sustainable in good times and in bad, as they are better alternatives than the marketplace in general. Thank you for your support. Let me turn the discussion to Alex to review the numbers more specifically and I'll return for Q&A afterwards.

Thanks, Ryan and good afternoon. As Ryan mentioned and as we alluded to on our last earnings call, we saw considerable revenue expansion in the first quarter as the company achieved 19% year-over-year growth to $78.9 million in the quarter. For the quarter overall, we saw low teens growth year-over-year in user traffic to our websites. Earlier in the year we saw a brief period of reduced competition for media while later in the quarter, the onset of the COVID pandemic resulted in consumers spending more time on their mobile devices as the country largely sheltered at home. After peaking in April, volume is moderating somewhat albeit still pacing well. In terms of monetization, early in the quarter we saw particular strength from two verticals, financial products and services and media and entertainment. Later in the quarter, economic dislocation caused advertisers in several verticals, notably staffing and recruitment and financial products and services to reduce their demand with us. This reduced advertiser demand in certain segments coincided with particularly strong growth in user traffic such that our monetization was reduced later in the quarter. We offset some of this in turn by reducing the cost of unit traffic acquisition. But importantly, as Ryan mentioned, we saw the diversity of client verticals and breadth of our client base, which totaled over 500 clients in 2019, as an important benefit of our business model and a differentiator in the performance marketing industry. While rapid shifts in supply and demand can affect economics within our marketplace, we were very pleased that demand could rotate from certain verticals to others relatively quickly in this unprecedented environment. As a result, our media margin dollars grew 4% year-over-year to $23.9 million and represented a margin of 30.3%. In addition to the core supply-demand factors affecting our margin in the quarter, certain initiatives that Ryan discussed, such as newer media supply channels, consumer media formats and geographic markets, represented an increased portion of our overall media margin dollars. While strategically relevant to our core, growing nicely year-over-year and profitable, these segments of our business naturally carry a lower margin relative to their stage of development. In Q2 to date, we have continued to reduce our unit cost of supply while demand continued to reflect the uncertain economic environment broadly, which along with traffic trending are the factors underpinning Ryan's comments on our current pacing approximately flat to last year's quarter. Our operating expenses comprising sales and marketing, product development and G&A grew by an aggregate of $1 million year-over-year. To date, we've discussed our investments into technology and analytics largely in terms of human capital. In addition, we began the configuration of our new ERP system, NetSuite in Q3 of 2019. The general ledger component went live on January 1, while integration of platforms throughout the business is currently ongoing and we anticipate will be largely complete in Q3 of this year. In connection with this investment, we incurred approximately $500,000 of expense in Q1 with no corresponding cost in the prior year's quarter. As part of this implementation, we anticipate remediating the existing material weakness in our internal control of the financial reporting by automating certain processes and controls that have historically been carried out manually. We also anticipate this investment in our technology infrastructure will provide meaningful business benefits in terms of visibility and internal reporting, enabling efficiencies in the years ahead. Adjusted EBITDA of $9 million in the quarter represented a decline of 1% and a margin of 11.4% as compared with a margin of 13.7% in the prior year period. Interest expense declined year-over-year as we reduced our debt principal outstanding by $7.7 million year-over-year and benefited from a lower effective interest rate. We continue to be a non-cash taxpayer due to the availability of NOLs. We thereby reported GAAP net income of $408,000 in the quarter or $0.01 per share. Turning to the balance sheet. We ended the quarter with $14.6 million of cash and restricted cash. Working capital, defined as current assets minus current liabilities, ended the quarter at $32.8 million. Total debt as reflected on the balance sheet ended the quarter at $48.3 million, while including unamortized discount yields a closing balance of $51.8 million. During the quarter, our primary uses of cash went towards fortifying our capital structure including $3 million of principal reduction on our credit facility and approximately $1.3 million deployed through our stock repurchase program. In the quarter, we repurchased approximately 658,000 shares at an average price of $1.98 per share. Notwithstanding the extraordinary challenges brought about by the pandemic, our team has operated relatively seamlessly having pivoted fluidly to a completely remote work environment. We're very fortunate that our business has continued to perform as it has, and we're sincerely appreciative of our team's efforts and the strong relationships with our business partners. Beyond all, we're most grateful to the real heroes Ryan acknowledged, those on the front lines. At this time we're glad to field questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Jim Goss with Barrington Research. Please go ahead.

Hi, good afternoon. I was wondering streaming services are a pretty hot item at a time when there's a stay-at-home mandate. Can you talk about how many different ones you can support and represent all at the same time? Or do you have a competitive issue where around one that their competitors aren't really anxious to have you do the other?

Hey, Jim, it's good to hear from you and great question. I think it's something that's often a little bit misunderstood about the Fluent business model, since we aren't an agency. To answer the back end of your question, we're not subject to any type of non-compete or anything like that. So we're able to service the whole sector. Really, the way our business model functions, we're dynamically segmenting audiences. We're able to inject survey questions to discover more about them. For instance, and not to say that, these are necessarily clients who may understand better, who is more apt to be a sticky customer for a Spotify versus a Pandora. You'll look at certain companies that are maybe more specifically embedded to certain devices. Apple would be an example of somebody who is going to do really well with an audience that has an Apple phone – has an iPhone, but not perform very well with folks on Android devices. On the video streaming side, it's a bit more of a competitive marketplace based on the types of content they're featuring and things like that. But we're also able to really dynamically segment audiences and service across the category for the best consumer, not just for adoption for that trial period, but for the long-term value of that consumer. A lot of the data we bring to the table and our capabilities enable us to operate across these categories and work with many, if not the majority, of the key players that are out there trying to recruit new subscribers right now.

Okay. And with regard to the components of media margin, can you talk about the trends in the media costs right now versus those same trends as applied to your own ability to price your services? And how do they sort of interrelate?

Yeah. So it's essentially – you're seeing similar types of patterns where we're able to go out and access media at a lower cost. We referenced at the top of the call, there were segments of advertisers who were somewhat dislocated and had to decrease their pricing or pause. So it's been somewhat similar, though due to the diversification of our model we've been able to lean in. I've historically referenced these uncapped type budgets in sectors like media and entertainment, which have shown no pullback whatsoever. So we're able to go out and operate still in this environment, though we have had to make some conscious decisions on where to make more strategic investments around media margin profiles based on the types of clients we're servicing and where we really want to drive into. Both parts are moving a bit, but it's basically staying consistent with one another and things are staying in line. Overall, it's just been a bit of a balancing act, if you will, to ensure that we're focusing on the right areas and operating strategically with the client side, on the demand side of our business.

One last one. One thing that has helped perk up your stock a little bit over the past month has been the announcement of your international expansion. I wonder if you could talk more about the details of that in terms of size and scope and what you plan to do with the new position?

Yeah. Jim, international has really been sort of fundamentally supported by a great job that our team has done with partnering and leveling up the types of advertiser partnerships. We're operating directly with leading global brands. This truly helps us to expand our footprint internationally. We rely on unit economics, not just one client but many clients that may have products and services in the market that are attractive to a broad set of consumers. Those leading global brands and some of the partnerships we're forging are helping to drive that charge. We had one client, who I can say is one of the 10 largest companies in the world, actively requesting us to get into more markets as recently as just a month ago. We're really proud of the company we keep. It's helping us to drive that. We've also talked about mobile gaming, which tends to translate into almost any language and any type of country typically. The more established mobile gaming companies are open for business in most countries, especially in Western Europe and North America. So, we'll stay focused on the larger markets in Western Europe and North America. We think it's something that we can continue driving into. We've seen our model work effectively there even without a ground presence. Now that we're emphasizing it a bit more internally, we're certainly seeing signs that this will be a fruitful line for the business.

Okay. Thank you very much.

Thank you.

Our next question will come from Bill Dezellem with Tieton Capital. Please go ahead.

Hi, thank you. I had a couple of questions here. The first one is on the last conference call, which was around the middle of March, I think you had said that your revenue growth through that time was about 10% quarter-to-date, and you just turned in a 19% number. If we do the math, you would have had gargantuan growth in the last couple of weeks. Is that what happened, or were you just being a bit cautious with your 10% number, at least to give us some positive indication where things were going not knowing where the last two weeks were headed?

Yeah, great question and good to hear from you Bill. I think it's a little of column A, a little from column B. To be honest with you, we certainly did want to be a bit more conservative. On top of that, what you historically see is at the end of any period, monthly or quarterly, certain capped budgets, which albeit the minority of our revenue has any type of cap on it. They tend to be fairly profitable dollars. So we wanted to be a bit more conservative when we forecasted that during our end of year conference call. But also the spike in activity, especially at the onset from some of our traffic partners who had very sudden shutdowns from other clients who were essentially competitors of ours, and few options in which to deliver, in addition to just increased consumption of internet activity worked somewhat in our favor. We did know that as advertisers started to get their arms around their overarching strategies in specific sectors, some budgets and pricing did come down. We were able to largely offset that, but it is a little bit of a column A and column B in response to your point.

And then, if you allow me to have a little fun with you here. You've given some indication that the second quarter will essentially be flat. Since you did so much better in Q1 relative to your initial read, how much conservatism are you building into -- I mean, the genuine unknowns for the remainder of this quarter?

I think in this operating environment, we just need to be a little bit more conservative and we tend to be fairly conservative in our estimates in general. But I certainly understand where the question comes from, right now that is what we're seeing. With the way things are playing out and the way demand and supply really shift on a weekly if not daily basis based on what's going on in the country right now, it's something that we feel good about that in terms of being able to stay level, being able to make no layoffs whatsoever and retain 100% of our colleague base and make sure that we're moving forward in a productive and positive way on behalf of our partners. So it's a tough question to answer. We gave this a lot of thought when we put it out there. We thought it best -- and it is what we're seeing right now. Now, could the back half of the quarter look a lot different? It potentially could be, and we would give any signs of anything truly negative if we saw anything. But right now, we're trending about equal with last year. Our team is working hard and we're looking for ways to serve our clients in new and innovative ways, and we hope that that does drive some upside.

Great. And then lastly, the 10-K points out that in the last year, you had an average of about 900,000 first-party registrations on a daily basis. How many are you seeing since mid-March with so much of the country home?

That number has gone up. I'm actually going to defer to Alex Mandel to comment on that, because I think he probably has the numbers a bit more accessible to him in terms of what we are able to share. So Alex, do you mind?

Sure. We see traffic to our websites up over 20% since that time. There's been volatility to it. Now with the country beginning to reopen in many states to limited degrees, we're keeping an eye out to see whether those trends will continue or not, but that's what we have seen to date.

Great. Thank you.

Thanks, Bill.

Our next question comes from Ben Rubenstein with Robotti. Please go ahead.

Hi, Ryan. Hi, Alex.

Hey, Ben. Good to hear from you.

I guess, could you talk about the international expansion? What's the biggest hurdle to replicating the success you've had in the U.S. and then what does it mean potentially financially if you do hit your goals?

Great question, Ben. I think the biggest hurdle is really a cultural thing. We were able to get the U.K. off the ground. We talked about that back in 2018 when we first launched, and getting to profitability at reasonable rates was pretty quick and scaling became more of the issue. We found that especially in -- with European culture, U.K. culture, the absence of that on-the-ground presence can lead to some skepticism in forming true partnerships, which is how Fluent really goes about acquiring traffic at great scale. We make partnerships with a lot of different types of media companies, media owners, not just the duopoly of Facebook and Google, but many other types of media companies. Those look different overseas. That on-the-ground talent and domestic flavor is certainly something we've been missing. We feel as we start to fill in more gaps with respect to local advertisers in these markets, but also traffic partners, media owners that we can partner with, we can go out to gain more scale. We have some big opportunities. The large brands that I referenced to the earlier question, the global brands, mobile gaming can fill in 80% of the gaps in terms of the monetization of traffic. However, those local brands that only a German would know and trust, or somebody in the U.K. residing in London or Birmingham would trust, those are important relationships to forge. Without the on-the-ground talent, we haven't done that yet. Also, the scale of our mobile gaming client is greatly helpful here. We see our users are attracted to those types of campaigns and have a large appetite for international. As we fill in the gaps on on-the-ground talent, local relationships, and better understanding of these cultures, we start to accelerate a lot more quickly here.

That's helpful. And then I guess just on operating expenses related to COVID. I mean, is there any meaningful amount of operating expenses that are higher just related to COVID that aren't necessarily repetitive going forward?

There are some puts and takes there. We're certainly trying to provide resources to our staff. We're located here in New York City. We've had people who have themselves contracted COVID and had family members. We're trying to do everything in our power to be sensitive to that and to provide financial aid where possible. Our people team has done an extraordinary job of just finding ways to keep the staff engaged. You could see some minor costs, but really, we're tugging on some overhead that you normally wouldn't need if you're all working from home, but also there's some savings in there too. We're clearly not traveling to events right now and doing things like that. So we have made a commitment to make no layoffs. We're going to hold the line there. Ultimately, I'm not seeing any dramatic increases in operating costs per se.

And then lastly, it looked like you repurchased a little bit of stock in the quarter. Can you just comment on your thoughts going forward? Given that the results seem pretty robust, can you be more aggressive with that? I guess just how are you thinking about capital allocation?

I'll let Alex augment off this. But in general, we launched that program because we felt we were undervalued. We feel good about the amount of stock we were able to acquire. I will say in this operating environment, cash on hand is valuable and important to us. We do see the potential for opportunities down the road to deploy cash strategically. We'll be mindful about that. The stock repurchase did end at the end of Q1 as planned prior to COVID. I think preserving cash on the balance sheet at this point is probably the priority, but I'll let Alex augment with any other comments there.

Thanks Ryan. I clearly share the same point of view. We're always looking to make investments when we think we can earn an attractive rate of return on our capital. Of course, in this environment, we believe that as a general matter, there is a greater value and importance to be placed on cash. And ensuring that we preserve liquidity for a variety of potential operating scenarios and for potential other kinds of strategic opportunities. For the moment, we're pursuing that path. As circumstances evolve, we'll continue to make active decisions about our capital deployment strategies.

Thanks a lot. It’s great to see the company execute so well especially in these times. Thanks.

Thanks Ben.

This concludes our question-and-answer session and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.