Fluent, Inc. Q4 FY2021 Earnings Call

Hello and welcome to the Fluent, Inc. Fourth Quarter and full-year 2021 earnings call. My name is Harry and I'll be your Operator for today. I will now hand you over to Dan Barsky with Fluent to begin. Mr. Barsky, please go ahead.

Afternoon and welcome. Thank you for joining us to discuss our Fourth Quarter and Full Year 2021 earnings results. Joining me on today's call are Fluent's CEO, Don Patrick, our CFO, Sugandha Khandelwal, and Ryan Schulke, our Co-Founder and Chief Strategy Officer. Our call will begin with comments from Don Patrick and Sugandha Khandelwal, 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 the 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, anticipate, believe, should, intend, estimate, and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. Over the 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 related 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 measures are provided in the earnings release issued earlier today. With that, I'm pleased to introduce Fluent's CEO, Don Patrick.

Thank you, Dan. And good afternoon. Thanks to all of you for joining our call today. I'm here together with Ryan Schulke, our Chief Strategy Officer, Chairman of the Board and Company Founder, and Sugandha Khandelwal, our new Chief Financial Officer. Sugandha joined us in December 2021 from Sam's Club, a division of Walmart, and we're very excited to have her deep strategic and financial acumen as part of our team. Before we start and on a serious note, Fluent has employees with family ties, as well as business partners who operate in Ukraine. And that's why we're compelled to comment on the crisis unfolding there. It's devastating to see friends, families, and professional colleagues so greatly impacted. But the greatest tragedy of all is the horrific loss of lives. Unfortunately, there will be more suffering in the weeks ahead. We want to express our most sincere thoughts and prayers for all the Ukrainian people who are living in chaos. Our results in Q4 speak to the continued progress we're making towards our long-term strategic growth plan. It was in Q4 of 2020 when we committed to a strategic transition of our business, focused on building higher quality digital experiences for consumers, while creating more effective and sustainable customer acquisition solutions for marketers. This has been a major strategic and operational undertaking that Fluent leadership has consciously chosen, a course where we knew would be challenging, and would require us to forego near-term revenue and margin, which we consider to be an investment in our long-term and more sustainable roadmap. While our journey is far from complete, we are pleased with our progress and even more resolute regarding our strategic path. By delivering our clients a higher-quality engaged consumer, we're focusing squarely on delivering their ROI goals. We are enhancing Fluent's brand equity with our current partners while opening the door to new client opportunities. And while we continue to appropriately invest in our growth agenda, we do so with the confidence that has us building margin back into these businesses over time, ultimately building enterprise value for our stakeholders. In the earnings release today, we reported a full-year 2021 revenue of $329.3 million, which represents top-line growth of 6% versus 2020, $100.4 million of media margin, a decline of 9% at 31% of revenue and $23.2 million of adjusted EBITDA, a decline of 44% at 7% of revenue. Overall, our 2021 financial results were consistent with the business roadmap we laid out in our earnings release for the fourth quarter 2020 and full-year 2021. We emphasized quality and value to both our consumers and clients, as a strategic course to return to historical growth revenue in the later part of the second half. Our fourth quarter results represent additional progress in our business agenda. For revenue, we hit a quarterly record of $99.8 million, up 22% year-over-year. Media margin of $31.2 million down 3% year-over-year. At 31% of revenue, this reflects ongoing media and strategic investments, and adjusted EBITDA of $10.2 million or 10% of revenue. We accelerated revenue in Q4, as we leaned into different strategic areas of growth that we believe are more sustainable. At this stage in the transition, we are consciously investing margin to establish our brand position in the marketplace, taking share in these newer strategic markets and building Fluent brand equity. We are confident that we will enhance our margins in the businesses as we scale them over time. As we've noted previously, fiscal year 2021 was about setting our strategic growth plan while positioning our founding team on the front lines of our business, where their leading-edge industry expertise is driving our strategic and operational agenda forward. As we continue to learn and evolve in the scorecard of business initiatives, we ended 2021 in a stronger market position, and we're encouraged by our progress against a very thoughtful and deliberate strategic course. Reflecting on both the full year and the fourth quarter, I'll share some thoughts in context of our three strategic growth pillars: our media footprint, our platform, and our performance marketplace. I'll also speak to our key initiatives, sharing progress that we've made in each. Fluent's competitive advantages are grounded not only in the initiatives articulated within our pillars, but more so, how the pillars intersect with one another in our operating model, providing forward-looking growth opportunities. Our media footprint continues to evolve with our operating focus on traffic quality initiatives, or TQI. To think they stated, our commitment to quality grounded in consumers' experiences is leading to more quality outcomes in our marketplace. Fundamentally, this effort is creating a higher-value marketplace for consumers and for our partners. In turn, we believe this will pay strategic and financial dividends for our evolving Fluent business model as we work to capitalize on both. As we stated in the first half of 2021, our unyielding commitment to TQI led us to make appropriate strategic and financial calls to forego near-term revenue as we eliminated traffic that did not meet our enhanced quality standards. In an industry that continues to rapidly grow and evolve with more discerning consumers who are redefining quality engagement, we realize this work will remain ongoing and we will obviously adapt with the consumer as the marketplace demands. In turn, our efforts led us to growing our media spend on digital platforms like Facebook, Google, Snap, and TikTok. While this represents a significant growth opportunity for Fluent, as one might expect, this revenue comes at lower margins in the intermediate term versus our historical traffic mix. Throughout 2021, we were able to expand our platform media spend and grow our media margin dollars over 50%, comparing the second half versus the first half, even though we pulled that growth back in Q4, given the seasonal increase in the cost of platform traffic around the holiday. As we previously noted, while relatively more expensive, we believe that traffic from these digital media and technology platforms carries higher quality and higher value, while also representing a significant growth opportunity. Given the logical and strategic connectivity to TQI across our entire business model, I'll provide more detail regarding its relevancy as I review our performance marketplace, where we continued to improve monetization throughout 2021, which we have seen as a sustainable growth trend moving forward. Throughout the year, we also continued to strategically expand our media footprint with more relevant content and offers for consumers and brands within our jobs business, our AdParlor agency, and our international business. Although these are early-stage Fluent businesses within our total mix, they continue to show long-term promise as they are performing very well, achieving 50% year-over-year revenue growth. In Q4, these business units accelerated revenue growth over 75% year-over-year. All are well-positioned in 2022, although we anticipate that international and AdParlor's revenue growth will be more in line with industry growth rates as we now focus more on margin expansion. We expect our jobs business revenue will slow in Q1 as we migrate to an enhanced technology platform that better accesses our machine learning and data capabilities. We anticipate that a higher quality consumer experience with tighter technical integration with partners will pay long-term dividends, and we expect to accelerate jobs growth in the second half of 2022. Another key strategy we are excited about is the successful launch of the expansion of our mobile apps business. While also in early stages, this is a sizable and growing audience marketplace and an excellent strategic growth opportunity for Fluent, and margins that we also expect to improve over time. The mobile app total available market for Fluent is roughly two times the size of mobile web, where our owned media properties primarily connect digitally with our consumers today. To capitalize on this opportunity, we've developed new media products and are exploring strategic partnerships that enable us to bring our advertiser offers to mobile app consumers. We are quite excited regarding this long-term growth implication here, and the corresponding strategic and financial returns. Our second strategic growth pillar, our performance marketplace, was driven primarily by two key initiatives in 2021, both grounded in higher-quality expenses. First, with our investment in Fluent Sales Solutions, which provided us enhanced capabilities with our live agent platform, which connects consumers with marketers in high consideration, high-value categories, including insurance, home, financial, and legal services. A new business for us in the second half of 2020, Fluent Sales Solutions has already grown to represent roughly 10% of our 2021 annual revenue and performed notably well in Q4, showing roughly six times revenue growth year-over-year, as we leaned into the seasonality of the insurance market. We saw a very strong demand from high-quality clients in a high-value vertical, where we've strategically grown the available size of our performance marketplace. This is another business we are confident we can grow as we expand to other high-value categories, so we will focus on margin expansion in the intermediate term, again managing our mix of key. Overall, we are excited about the progress and anticipate being able to play more strategically into the various seasonal patterns of these verticals. Our second key initiative in our performance marketplace is expanding our CRM agenda. The build-up of our internal CRM capabilities, as part of our platform pillar, which I will speak to shortly. This enables us to reengage consumers after their initial visits to our own media properties. We previously mentioned having approximately doubled monetization from Q4 2020 to Q1 2020 and sustaining those increases going forward. In Q4, monetization continued to increase quarter-over-quarter, primarily as a result of our enhanced CRM capability and the impact of expanding our marketplace through Fluent Sales Solutions. We see significant marketplace opportunities before us to further create meaningful downstream experiences for our consumers, expanding relationships with world-class brands and key industry verticals, grounded in enhancing our consumer’s lifetime value. Shifting to our third growth pillar, our platform, where our investments led us to make further strides in increasing monetization. Our CRM platform, specifically building out our internal email capabilities, which had previously been activated solely through partnerships, continued to scale and exceed our expectations. We're now driving significant, consistent, high-margin revenue by re-engaging consumers after their initial visits to our owned media property. CRM increased 50% in 2021 year-over-year. In Q4, we were able to continue to capture increases in revenue per user through strong client demand in certain verticals, and through our efforts to re-engage consumers beyond their initial visits to our websites. Over time, as our media footprint and performance marketplace expand and strengthen, CRM will strategically drive incremental revenue and margin across our business units. In closing, we saw fiscal year 2021 as a consumer call to action, with quality at the core and our Fluent TQI initiative as an aggressive and appropriate strategic growth forward. We recalibrated our strategic growth plan and made the tough calls in walking away from businesses that we felt were no longer strategic in nature, accepting the near-term revenue and margin impact. And we did this with confidence, as we can currently make appropriate business investments that set us up to grow long-term with our strategic client partners, not simply in 2022, but with a sustainable growth trajectory beyond. We will continue to strategically lean into revenue opportunities and grab market share, focusing execution on our businesses that differentiate brand Fluent. In parallel, we will manage the business mix across different investment profiles, being mindful of our margin expansion goals over time. Overall, we believe our 2022 financial results will show revenue growth returning at or above industry growth rates with sequential margin improvement over time. And finally, as our industry continues to rapidly evolve, we remain steadfast that building higher quality digital experiences for consumers, while creating effective and sustainable customer acquisition solutions for our clients, represent the winning run forward. As we accelerate against our strategic and financial growth agenda, our team remains grounded in our operating principles, and I can be more proud of their ability to navigate the strategic transition. To be clear, I'm excited about the long-term opportunity for Fluent and for shareholders. And with that, I will turn to Sugandha to provide more detail on our financial results.

Thank you, Don, and good afternoon to everyone. I'm pleased to continue the discussion about our results for Q4 and the full year 2021. In the fourth quarter, Fluent generated $99.8 million of revenue, a record quarter of 22% year-over-year and up 16% sequentially from Q3. In the last quarter, EBITDA jumped to double digits for year-over-year revenue growth, as our strategic investment in quality provided a return in the form of growing new revenue streams and supporting pricing spend in our marketplace. Our Q4 results demonstrate continued progress against these investments, both from an operational and a financial perspective. For the full year, Fluent generated $329.3 million of revenue, up 6% year-over-year, driven by three primary areas. These are significant growth in Fluent Sales Solutions, our live agent capability, focused on high consideration categories that expanded its operating skills through the increased use of contracted call center personnel. Additionally, strong client demand in the recruitment vertical resulted in improvements in both pricing and volume in 2021 compared to the prior year. We also expanded CRM capabilities, specifically, an internally developed email capability, which enables us to reengage consumers who have already registered on our own media properties. In terms of volume versus monetization, our revenue and margin profile continue to shift. As part of the traffic quality initiative, our business moved more aggressively to focus on high-quality traffic while reducing the volume of lower-quality traffic, a trend that continued throughout the year. We expect this trend to continue in Q1 and anticipate revenues to be up 15% to 20% compared to the same period last year. Our media margin in Q4 was $31.2 million, representing 31% of revenue and down 3% year-over-year. Our team continues to find new opportunities to deploy media spend and accelerate our test and learn discovery. The incremental volume was sourced primarily from digital media platforms, which accelerated the discovery of supply but carried a lower margin profile. This mix between traditional traffic sources and biddable platforms was the primary driver of our margin reduction. In context, we expanded $68.6 million on paid media in the fourth quarter, representing our largest cost component. On the positive side, we continue to see strong monetization, but as I spoke to earlier along with CRM and data strategies, which target increased lifetime value of consumer relationships. For the full year 2021, our media margin came in at $100.4 million, representing 31% of revenue and down 9% year-over-year. Looking at Q1 2022, we continue to invest in margin by driving our top line. The macro situation in Ukraine has impacted our media business. External business partners have operations in the area, constraining the impact of both internal and external factors. We currently anticipate our media margin dollars to increase in the range of 1% to 3% in the first quarter compared to the same period last year. Our operating expenses on a GAAP basis for Q4, comprising sales and offerings, product development, and G&A grew an aggregate by $0.5 million or 3% year-over-year to $19.8 million. Product development increased $9 million as we continue to invest in technology and analytics. Sales and marketing increased by $46,000 and our G&A came down by $1.2 million. Overall for the full year 2021, our operating expenses increased by $5.6 million. The biggest component of this increase was product development spend at $3.2 million, G&A at $1.4 million, and sales and marketing expenses at about $1 million. The increased operating expenses reflect strategic investments in the business as product enhancements to our technology platform and internal capabilities. Finally, on profitability, our adjusted EBITDA for the quarter was $10.2 million, representing 10% of revenue and down 8% year-over-year. For the full year, it came in at $23.2 million, or 7% of revenue, down 44% year-over-year. Looking at Q1 of 2022, we have seen a sequential increase in our operating expenses, driven largely by the continued investments that I mentioned earlier. While the expense structure puts short-term pressure on our P&L, we are confident that we will build margin into the business over time by monitoring our media mix, focusing on margin-accretive initiatives, and driving operating leverage. Given the outlook, we currently anticipate going-adjusted EBITDA in the range of 2% to 4% of revenue. Our interest expense benefited from the lower cost of debt under our replacement credit facility that has closed during Q1. This credit facility consists of a $50 million term loan that was drawn at close with a $15 million ramp on revolvers. The new facility reduced our current effective interest rate by 500 basis points, resulting in a $3.2 million year-over-year reduction in interest expense to $2.2 million. In Q4, we continued to be a non-cash federal taxpayer due to the availability of NOLs. We reported GAAP net income of $3.8 million in the quarter and adjusted net income, a non-GAAP measure of $6.4 million. For the full year, our GAAP net loss was $10.1 million, and the non-GAAP adjusted net income was $7.6 million. As a reminder, our non-GAAP metrics are reconciled in the earnings release and our 10-Q and 10-K filings. Turning to the balance sheet. At the end of the year, there was $34.5 million of cash and cash equivalents, representing an increase of $13.4 million year-over-year and $17.4 million sequentially. Working capital, defined as current assets minus current liabilities, ended the quarter at $49.3 million, up $13.3 million year-over-year. The total assets reflected on the balance sheet ended the quarter at $45.3 million. In closing, we are confident that our high-quality model and strategic investments are the right path to achieving substantial growth by generating a strong earnings and revenue profile. Our outlook this year reflects continued progress operationally and financially, with a strong focus on building long-term value for consumers, clients, and Fluent shareholders. We are now happy to take questions at this time.

And our first question is from Maria Ripps from Canaccord. Maria, your line is now open if you'd like to proceed.

Congratulations on the strong results. It's encouraging to see your traffic quality initiatives gaining traction, and welcome to the company, Sugandha. My first question is regarding your impressive Q4 performance. You're indicating ongoing strong growth in Q1. How do you assess the sustainability of this growth? What kind of signals or feedback are you receiving from your advertising clients that might indicate this elevated growth can be maintained throughout the year?

Hi, Maria, it's Don. How are you?

Hi, Don.

There are several components to the monetization aspect you mentioned, Maria. Firstly, it's about advertiser demand and how that demand has increased, which is reflected in our revenue per user or the revenue compared to what advertisers are willing to pay. We continue to see major brands leaning in, requesting more supply, and being willing to pay more, especially for quality. The TQI has significantly led to attracting a higher-quality consumer, allowing us to achieve a higher ROI and command better prices. Secondly, concerning CRM, when users visit our platform, we are now engaging them more meaningfully and for longer periods. We are still in the early stages but believe we can ultimately assess this from a lifetime value standpoint, extending our relationship with consumers much longer than we currently do. Lastly, we have discussed the Fluent Sales Solutions extensively. This business significantly broadens our performance marketplace. It enables us to pursue higher consideration and higher value industries, which we previously would not have explored, usually deferring to intermediaries. The ability for consumers to engage with our properties and for us to maintain that engagement through CRM, while also guiding them toward higher value options, is what drives our monetization and growth.

Great. That's very helpful, Don. Thank you. Maybe extend a little bit on these. Should investors think about you managing your business to growth in media margin dollars here in the near-term? Or what are some levers that you could pull to improve your media margin, as a percent of revenue over time? And I know you mentioned some of the initiatives that have higher margins, but sort of how should investors think about that dynamic?

We are focused on revenue growth and media margin as our key metrics. From a revenue growth standpoint, we believe we are growing at or above industry standards and are well-positioned with the right products and services for our advertisers. Revenue growth serves as our external performance measure, while media margin is our internal focus. Over the past year, as we acquired other businesses, we recognize it may take time for their media margins to align with our targets. We maintain a disciplined approach regarding the expected range for media margin. If it's below a certain threshold, we are clear about our investment strategy; if it's above, we acknowledge the potential need for increased investment in that area.

Got it. Understood. That's very helpful. And maybe one last question if I could. You mentioned expanding into mobile app as one of the growth initiatives here, launching new products. What are some key developments or milestones for you here? And is this something that we could see developing or contributing to revenue this year?

Yes, Maria, you can. We've always prioritized mobile, mainly focusing on the mobile web. We started testing and developing our rewards product mainly on the Android platform, and now we have the key performance indicators in place and have officially launched it on a larger scale. To give you a sense of the market size, eMarketer reports that the mobile app market is worth $80 billion. Excluding Google and Facebook, about $30 billion is available to us, which is twice the size of the mobile web market we currently operate in. We're very enthusiastic about the market opportunity ahead. Right now, it accounts for less than 5% of our revenue, but it has been growing, and we see significant potential for it later this year.

Got it. Thank you very much, Don. And good luck with the rest of the quarter.

Thank you, Maria.

And our next question is from Jim Goss. Jim, your line is now open if you wish to proceed with your question.

Alright, thanks. Just summarizing a little of what you've been saying. Your financial statements are going to go through somewhat of a redo because you're going to have a higher cost of customer acquisition, but better solid through. I'm wondering if you might give any targets for key accounts as we might think about it. And does the bottom line rate of profitability improve or deteriorate with maybe a higher turnover benefiting the growth?

Jim, how are you? Thanks for the question.

Good.

So I would not say it's a redo of our financial statements. I think the way we are really looking at it is its expansion of how we're able to interact with the consumer and monetize that consumer. We went through a little bit of the monetization with Maria about what's driving that and how we can continue to look at. So we don't really look at it as the redo, but we certainly look at it as the ability to drive that margin, keep the margins within a range, drive revenue at a higher level. From a bottom line perspective, we are investing from a perspective of both gross profit and operating margins, but we are very consistent in our outlook from where we were in early part of 2021.

Okay. It does seem like the new shift will adjust somewhat your mix of end markets and perhaps even the mix of competitors you would be dealing with. Is there any comments you can make in terms of those markets you'll be addressing?

Sure. You're absolutely right, Jim, because it does open up some different places to us. So let me just hit a little bit on the verticals. The verticals you will see that we've traditionally, as you know, are very diversified. So verticals, and it is still diversified, and that's one of our strengths in terms of how we build our marketplace. But you're going to see higher consideration, higher value verticals like insurance and financial and home services, things like that come into our mix. That will be point number one. Point number two, strategically, you're bringing up a great point because there are a lot of people that are in that higher consideration. I just want to point out sort of what our differentiation is. Most of our competitors go out from a sales perspective, which is let me win the client and then I'll work back towards the consumer, back towards supply. We're taking a very different approach. Our approach is starting with the consumer, focusing on quality, and then moving towards the advertiser or brand and matching up to the brands that can best drive meaningful experiences for consumers and also drive the right ROI for the client. So from a competitive standpoint, we feel very, if we were going after the volume game, I would tell you that we're obviously at a disadvantage, but the fact that we have a deep first-party database that we can utilize is a strategic advantage. It is a major opportunity for us to go at this in a much different way than other people are.

About a year ago, you made adjustments to your business model and mentioned that it would take a quarter or two to stabilize and start generating renewed growth. Now that we are about a year into that change, I’m curious about your current perspective on this process. It seems to have taken longer than anticipated, but it could be worthwhile if it leads to the desired outcome. How would you assess your progress in relation to that process?

Yes. Originally, we indicated that we would return to our traditional growth rates in the later part of 2021. I believe we have achieved that with a 22% increase in Q4, which is obviously higher than our historical performance. We are pleased with our ability to create value for our brands and to bid more effectively for our inventory. We are making progress in monetization. However, regarding traffic quality initiatives, we underestimated the challenge of collaborating with media suppliers to enhance quality, which has not been as straightforward as we anticipated. Some media companies have opted not to pursue the quality path, requiring us to adopt a more aggressive approach in testing and learning across our platform and other media areas. Overall, the journey throughout 2021 had its ups and downs, but by the end of the year, we feel we are aligned with our expectations for entering 2022.

Okay. Thanks very much.

Okay. Thanks, Jim.

It appears we have no further questions. So I will hand back to the management team for further remarks.

Thank you, everyone, for joining us today. And we look forward to continuing to execute and build shareholder and stakeholder value. Thank you.

Thank you to everyone who has joined us today. This concludes the conference call, and you may now disconnect your lines.