Fluent, Inc. Q1 FY2022 Earnings Call

Good afternoon. Thank you for attending the Fluent, Inc. Q1 2022 Earnings Call. My name is Matt and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host Dan Barsky with Fluent. Dan, please go ahead.

Good afternoon and welcome. Thank you for joining us to discuss our first quarter 2022 earnings results. Joining me today 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 today's 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 this conference call will contain forward-looking statements which are covered by 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. 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 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. Our first quarter results are consistent with what we articulated in our 2021 year-end earnings release and represent the continued progress we're making towards our long-term strategic growth plan, focused on building high-quality digital experiences for consumers who are creating more effective, efficient, and sustainable customer acquisition solutions for marketers. We continue to invest in strategic platforms, and we remain confident that as we establish Fluent’s presence and gain market share, we’ll also be able to expand our margin over time by way of our operational capabilities. In Q1 2022, our financial results were as follows: revenue of $89.1 million represents 27% year-over-year growth and is a positive reflection of prioritizing our long-term growth strategies. We continue to lean into opportunities where we can establish and leverage Fluent’s brand credentials in the marketplace. Our media margin of $26 million is up 4% year-over-year at 29.1% of revenue. This reflects our ongoing strategic investments focused on expanding our media footprint. Adjusted EBITDA of $4.8 million represents 5.3% of revenue. As we've consistently stated throughout 2021, our strategic growth plan is focused squarely on consumers and the quality of their experience in a performance marketplace. We believe this consumer-centric strategy represents the winning road forward and provides us a competitive advantage. Fluent’s inherent brand strength and a foundational principle of our business model is creating more effective and sustainable customer acquisition solutions for our clients while successfully positioning Fluent as a market leader in a rapidly evolving industry environment. A strategic growth plan, along with our ferocious appetite to test and learn, has validated two major hypotheses. First, delivering consumers more meaningful, quality-grounded experiences has enabled Fluent to more frequently reengage them after their initial visits to our owned and operated media properties, all based on their needs and wants. In turn, we're enhancing consumer lifetime value for clients, as well as Fluent. Second, we connect a more engaged consumer to our clients' brand platform which enables us to more efficiently and effectively deliver against our clients' customer acquisition goals while improving their ROI. In turn, our total alignment with consumers and clients is driving improved monetization across our Fluent performance marketplace while enhancing our brand equity with clients. We will continue to focus on revenue growth, leaning into a variety of strategic growth initiatives that we believe are sustainable. As we continue to learn, evolve, and scorecard our business initiatives, we also assess where we believe we have the competitive advantage, utilizing market share gain as a consumer validator of our longer-term potential. We believe this is the road to strategic revenue growth and opens the door for expanding margins over time. In the near term, our quarterly margin profile will reflect our strategic investments in growth. As we have consistently articulated, Fluent’s competitive advantage is grounded in three strategic growth pillars: our media footprint, our platform, and our performance marketplace. Strengthening our go-to-market capabilities within each individual pillar is our everyday mission. While Fluent is differentiated, it is building out our preferred market while determining logical points of intersection across each strategic pillar. With an operational scale for growth, we are enhancing client performance here across functional team play. The end result is exceeding clients' performance expectations by delivering a more targeted and engaged consumer audience, which also increases client ROI. In the past, we've discussed our media footprint and performance marketplace. Today, I’ll spend a little more time on our platform and its strategic relevance. Our platform, at its highest level, is a proprietary and integrated data, analytics, and technology marketing solution and capabilities. We previously outlined investments we made to expand and strengthen our marketing position. At the core is our first-party data asset, which, given the ongoing and well-documented data privacy changes, is designed to provide a significant competitive advantage in delivering higher-quality interactions and value for consumers and clients within our performance marketplace. Apple’s move to enhanced consumer privacy on its devices and Google's announcement for 2023 being the year to end third-party cookies is forcing the market to take action by shifting away from third-party data. Data from outside sources can improve short-term performance and marketing, but unlike first-party data, it can't explain the relationship with consumers and their past purchases. The breadth and depth of Fluent’s first-party data gives us an important advantage, providing the kind of insight that gives us real control over our long-term strategic growth plan. The power of our first-party data and our ability to gather and enable real-time insights through analytics and technology is critical to driving meaningful, higher-quality consumer engagements tied to measurable performance-based outcomes. When a new consumer visits the property within Fluent’s digital media portfolio, we ask simple questions to determine individual interest, needs, and preferences and then present relevant offers from our world-class clients, ultimately creating a more meaningful and rewarding experience. When a consumer returns, they proactively enable us with their prior survey responses and performance marketplace experience, which allows us to utilize these key insights to enhance engagement. In essence, this increases lifetime value for both the consumer and our roster of clients. As you can see, our platform is foundational, and we believe it's a clear competitive advantage that differentiates us in the industry. Our platform efficiently and effectively connects our media footprint with our performance marketplace. In turn, we've established Fluent capacity to solve the marketing problem that every advertiser chases: delivering the right offer at the right time to the right consumer, in real-time, with the convenience of automation. Over time, as our media footprint and performance marketplace strengthen and expand, our platform is strategically positioned to drive long-term value to consumers and our clients, which represents the key revenue and margin path to our operating business units. Given the strategic value data plays within our ecosystem, we recently completed our Q1 data evaluation with Truthset, which measures data accuracy across several popular demographic attributes and provides scoring against their current cohorts and data providers. Across 19 top-tier data providers, including Axiom, Epsilon, and Data Axle, Fluent ranked number one for accuracy in more attributes than any other data provider except one. The accuracy of our first-party data is a reflection of higher-quality consumer experiences in the Fluent marketplace and further enhances our relationship with them while enabling us to competitively leverage relevant strategic insights with our clients. In Q1, we were also encouraged by our continued progress with our other two strategic growth pillars, our media footprint and our performance marketplace. We are actively expanding our media footprint via strategic growth initiatives that extend our reach into new media channels, where we can provide more relevant content and offers to consumers and our clients. We believe that’s strategically and financially motivated as we explore longer-term growth opportunities that a larger Fluent media footprint will create while we concurrently extend our reach into new media channels. We'll discuss this further as we learn more. Relative to our performance marketplace, our key strategic growth initiatives continue to primarily be driven by building out Fluent sales solutions and separately our CRM capabilities, both of which are grounded in higher-quality consumer experiences. These strategic initiatives provide a significant marketplace and create meaningful downstream experiences for consumers, while expanding our relationship with world-class clients and key industry verticals. Critically inherent to our strategic framework is that we are enhancing each consumer's lifetime value. More to follow here in subsequent quarters. In closing, we remain focused on our well-defined pillars and will continue leaning into strategically compelling 2022 revenue opportunities where we believe we have a differentiated position and significant consumer runway. Earnings and market share where we can leverage our consumer-centric core and execute via our operational capabilities will be the key driver of our longer-term growth agenda. These are the strategic facts we are constantly making, prudent investing as we launch and establish our longer-term path in a growing marketplace. In parallel, we'll manage the business mix across our investment profiles with a clear goal of expanding Fluent’s business margins as we scale and establish a competitive advantage. Overall, we believe our 2022 financial results will show revenue growth returning at or above industry growth rates as our priority number one. We are then shifting our sights on sequential margin improvement as we scale.

Thank you, Don, and good afternoon to everyone. We are pleased with strong first-quarter results and continued momentum in the business as they execute on the fundamentals and progress with our strategy. Third-party data assets and strong advertiser relationships have put us in a great competitive position. The Q1 results build on the momentum that we saw close 2021 in terms of progress against both strategic and operational priorities. In the first quarter, Fluent generated $89.1 million of revenue, up 27% year-over-year, and above the guidance that we provided in the previous earnings call. This growth was driven by three primary areas. Firstly, we saw significant strength in our core rewards business, driven by expanding our media footprint in both the U.S. and international markets. Rewards is the largest segment of the Fluent business, and our portfolio includes websites in the U.S., UK, Canada, Australia, and a mobile app. Millions of consumers visit our modern properties to discover products and offers while earning rewards, and we are encouraged by the strong top-line growth from our rewarded properties. The second area of growth in the first quarter was our internal CRM capability, primarily emails and SMS, which enables us to reengage consumers who have registered on our own media properties and enhance their overall lifetime value. Lastly, Fluent sales solutions remains a strategic priority for us and continues to be a key growth driver. With this live agent capability, we are now able to drive new demand across different industry verticals and high-conversion categories while reducing the use of contracted call center personnel. As part of the traffic quality initiative, we require a strategic and deliberate approach, involving high-quality targeted media traffic by reducing the volume of lower-quality traffic. While we are conscious that this quality approach will reduce our traffic volume, we are pleased that our monetization increased almost 50% in Q1 compared to the same quarter last year, supporting strong double-digit revenue growth. Our media margin in Q1 was $26 million, up 4% year-over-year and representing 29.1% of revenue. For context, we spent nearly $63 million on paid media in the quarter, our largest cost component. In deploying the media spend, we found success with new promotional campaigns, which expanded our addressable audience and new means of cost-promoting our program across Fluent’s own media properties. On the last earnings call, we noted the opportunity to drive high-quality traffic from variable platforms, albeit at margin levels below the affiliate side of our media mix. While we expect this mix shift to digital media platforms to continue in the near future, we remain confident in our ability to optimize our spend levels and ultimately drive higher profitability over time. Our operating expenses on a GAAP basis for Q1, comprising sales and marketing, product development, and G&A, grew in aggregate by $1.6 million or 8.8% year-over-year to $19.7 million. Within that mix, sales and marketing increased by $900,000, driven largely by an increase in business travel, events, and in-person meetings. Our product development expense increased by $1.1 million, reflecting continued investments in our technology and analytics platform, as well as development of new ad-based media properties expanding beyond our traditional focus on media properties. Finally, our G&A expense came down by $400,000. The decrease was mainly a result of an accrued expense for put call consideration related to the Winopoly acquisition during the first quarter of 2021, which did not exist in the first quarter of this year. This G&A expense offset partially the increased litigation cost and certain acquisition-related expenses. On March 31, 2022, we released a settlement with the New York State Department of Taxation and Finance regarding sales use tax of $1.65 million. The amount was paid to the tax department on April 1, 2022. Our accrual increased from $823,000 in the fourth quarter of 2021 to $1.65 million, resulting in an incremental expense of $827,000 in Q1. Finally, on profitability, our adjusted EBITDA for the first quarter was $4.8 million, representing 5.3% of revenue and up 0.5% year-over-year. This is higher than the outlook we provided at our last earnings call and is driven largely by the benefits we saw on media margins. Moving forward, we will continue to focus on driving revenue growth and market share gains while maintaining a disciplined approach to overall operating expenses, turning revenue down to the bottom line. Our interest expense declined by $600,000 year-over-year, benefiting from the lower cost of debt under our new credit facility. In Q1, we continued to be a non-cash federal taxpayer, due to the availability of NOLs. We reported a GAAP net loss of $2 million in the quarter and adjusted net income, a non-GAAP measure of $1.1 million. As a reminder, our non-GAAP metrics are reconciled in the earnings release and our 10-Q filings. Turning to the balance sheet, we ended the quarter with $29 million of cash and cash equivalents. This represents a decrease of 12% year-over-year. Working capital, defined as current assets minus current liabilities, ended the quarter at $46.6 million, up 1.7% year-over-year. Total debt, as reflected on the balance sheet, ended the quarter at $47 million. Again, we are pleased with the first quarter results and feel good about the underlying strength of our business. Our leadership team has a number of exciting strategic initiatives currently underway that will allow us to differentiate ourselves, enhance Fluent’s value proposition, and generate a strong revenue and earnings profile. Thank you for your time. We are glad to take questions now.

Thanks a lot. And hey, everyone. Thanks for all the good information on the call. I wanted to ask a couple of questions, if I could. The first one is just, it seems like on your traffic quality initiative, you're still getting some good benefits from that. Can you just maybe provide a little context on where you think we are in terms of the evolution of that footprint? And then I have one other question.

Thanks, Michael. Thanks for the question. The TQI is something that we're over a year into, and it originally started around the traffic and the quality of that. It is something that we initially thought would be a project for about a year and then we would move on from that. Actually, we've seen such strong benefits from it in our business that at this point it is embedded into our core operating principles. The quality of the traffic is paying dividends, both with our clients from an ROI perspective and is equally important in our monetization side. So we continue to work with the partners aggressively to continue to improve their quality so we can drive better results for our clients and better results for us. I feel good about where we are from a foundational perspective, but there's still a lot of opportunity around the monetization side that we think we can explore.

Great. Thanks, Don. And then I also just wanted to ask about CTV more broadly, which is such a dynamic area. I just want to kind of get some updates from you about how it's going and how it's impacting your business model going forward.

Yes, Michael, in terms of channel expansion, connected TV and other mediums where we can utilize our first-party data and everything that comes with that strength is very, very attractive to us. TV is a new format for us where we're testing and learning as we go, but we are seeing some really interesting performance trends as we start to apply some of the best practices driven approaches from the digital world into places like connected TV. We are starting to learn more on the creative side of how that will influence results. So it's still very new but exciting for us and our partners; this type of traffic is coming in at a different quality profile, and we're noticing different types of behavioral trends with consumers coming from these new types of mediums that we're testing.

All right. Awesome. Thanks, Ryan. I’ll go back in the queue.

Okay. Thanks. I've got a couple. First, it seems that the initiative involves reducing the number of overall clients to favor quality over quantity. If that's the correct assumption, please tell me that? Is there a way to scale just how many points of contact you have right now relative to how many you did have and where that would be headed?

Thanks, Jim. So you're asking about reducing the number of clients, it's clients not consumers, is that your question?

Yeah. Well, the individuals you are targeting, not the business clients, but the consumers you are focusing on.

Yes. That’s a great question, Jim. Thanks. There are multiple pieces to answer here, so I will sort of walk through a couple. First is, as we've talked about before, there's when the consumer first comes onto our properties, and then there's how long and the lifetime value we have in terms of our relationship with them. One of the things we have been discussing for a little over a year is all our CRM efforts and our ability to build the consumer journey and extend that over a much longer time period than traditionally for Fluent. So although there might be a decrease in overall consumers coming in, the number of consumers that are on our properties every single day has continued to increase. The second significant point is that we've talked about how, when they're on our websites and properties, we're observing how many interactions we have with them, and what we can do with those interactions using our first-party data. We have millions of site interactions and hundreds of thousands of campaign interactions per day that we use to make it more relevant for the consumer and drive better ROI for our clients. It’s more about the quality and the lifetime value that's extended. Another piece is that we have been expanding our media footprint and our pillar. That expansion is not only on traditional web-based properties, but we've been expanding internationally, with mobile apps, and with other properties such as jobs, allowing us to continue to drive consumers and interactions with them.

Okay. And are you looking to sort of maintain more of a continuous relationship with these clients? How do you effectively make that happen?

Absolutely. We are looking to maintain and continue to leverage relationships over a longer time period, defined by the engagement we have with the consumers and the value they’re receiving. A key piece of our fundamental business proposition is the relevance and engagement of our digital properties to the needs and wants of consumers at the time they visit. We measure this by how often they come back, what their monetization looks like, what verticals they are interested in, and the duration of our relationships, whether it’s thirty days, sixty days, three years, or five years.

Okay. Last thing for me, you mentioned the accuracy of first-party data. How is that measured?

The example we provided in the earnings release is a third-party evaluation company called Truthset. They conduct evaluations quarterly, pulling together volunteer cohorts, and independently rank data providers based on the accuracy compared to external sources. We ranked first in more categories than everyone else except one, and the names we are competing against are long-standing data providers in this business. This indicates the strength of our first-party data and the relevance of delivering meaningful experiences that promote continued consumer interaction with us.

Okay. Thank you very much. Appreciate it.

Thanks, Jim.

Yeah. Thanks. I just wanted to slip in one more. You mentioned your sales capabilities and expanding those. Could you provide any kind of framework around the magnitude of that effort and what it looks like over the next year or so?

Sure. Thanks, Michael. We've seen continued strong growth in the Fluent Sales Solutions Group, and Q1 was indeed another strong quarter for us. As we discussed last time, we are leaning heavily into the health vertical, and in Q1 we entered the life insurance segment. We are currently launching our third vertical around auto. The main difference is that our competitors take a sales approach focusing on demand and how to get the supply for it. We take a consumer-centric approach, examining our audiences on our digital properties to see how we can connect them with world-class brands. We may not be the biggest but we believe our quality and consumer experience will be the best. We did grow double digits and expect to have double-digit growth throughout 2022, mainly by building out the new verticals, refining the marketplace, and driving value within those core verticals. You'll see another vertical in Q3, and as we continue to test and learn, we plan to introduce another in Q4. We're being very methodical about our growth.

All right. Thanks a lot, Don.

Thanks, Michael.

Thank you for your questions. There are currently no further questions registered. The next question is a follow from Michael Graham. Your line is now open.

I want to thank everyone for joining us today. The earnings release will be out shortly. Thank you very much for your support and your questions.

That concludes the Fluent, Inc. Q1 2022 earnings call. Thank you for your participation. You may now disconnect your lines.