Fluent, Inc. Q3 FY2024 Earnings Call

Good afternoon and welcome. Thank you for joining us to discuss Fluent's Third Quarter 2024 Earnings Results. With me today are Fluent's Chief Executive Officer, Don Patrick; Chief Financial Officer, Ryan Perfit; and Chief Strategy Officer, Ryan Schulke. Our call today will begin with comments from Don and Ryan Perfit 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 Fluent's website. To access the webcast please visit the Investor Relations page at 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 covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call only speak as of the date hereof. Actual results could differ materially from those stated or implied by such 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, 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, management will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of the company's business on a variety of indicators, including these non-GAAP metrics. 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, Don Patrick.

Good afternoon. Thank you all for joining our call today. I'm here together with Ryan Schulke, our Chief Strategy Officer and company Co-Founder; and Ryan Perfit, our Chief Financial Officer. I will start with some brief comments regarding our strategic repositioning of our business and progress against our initiatives in the third quarter. On the strategic front, we've been clear regarding the business pivot we are making in our growth strategies that is grounded in leveraging our leadership position and competitive advantage in our owned and operated marketplaces as a springboard into new high-volume, high-growth syndicated performance marketplaces. We are highly energized by the progress we continue to make and we are rebranding our syndicated marketplaces as Commerce Media Solutions to better reflect our broad-based marketplace solutions that represent long-term growth opportunities for Fluent and for the industry as a whole. As a result of our repositioning, Fluent is organized around three synergistic business solutions that we will use to strategically frame our business moving forward. Our Commerce Media Solutions enables and empowers businesses to monetize consumers on their commerce website and apps by connecting advertisers to their most relevant customers. This includes our post-event and post-transaction offerings, including Fluent's Ad flows brand. We continue to see strong growth here and margins that are accretive to the core. Owned and operated marketplaces is our performance marketplace focused on customer acquisition for world-class brands. This is our legacy business, where we've built valuable consumer acquisition, engagement and monetization expertise along with proprietary first-party data, technology and AI. Our leadership position in this marketplace provides us a distinct competitive advantage as we continue to pivot into commerce media solutions. Our goal here remains to financially stabilize this business, focused exclusively on the core assets that provide proprietary capabilities and competitive advantage for long-term growth. Additionally, we have our call solutions business and AdParlor agency business that provide performance marketing and agency services for health, retail, and direct-to-consumer verticals. These businesses strategically enhance both our media capabilities and our customer expertise while deepening our relationship with critical industry verticals. Our Commerce Media solutions represents the tip of the spear in our strategic growth agenda as we accelerate Fluent's brand in very large, high-growth, dynamic markets, where we can unleash our core owned and operated grounded capabilities, providing us with a unique competitive advantage in the marketplace and our broader industry. In the earnings release today, we reported quarterly results that continue to demonstrate the meaningful progress in our new Commerce Media Solutions that has delivered triple-digit year-over-year revenue growth every quarter this year. While also reflecting some cyclical advertising headwinds in our owned and operated marketplace related to the presidential elections that had an effect on our ability to acquire media at acceptable margins. Our third quarter financial results were as follows: as we continued to deliver sequential trend line improvement via our strategic growth agenda. Revenue of $64.5 million representing a 9.9% increase versus Q2 2024. Our media margin of $18.2 million was an increase of 15.9% versus Q2 2024. Adjusted EBITDA negative $0.1 million represents a negative 0.1% of revenue. Our Q3 quarter results were primarily driven by two major business and industry trends. Our Commerce Media Solutions continues to accelerate, adding 15 new partners in Q3 and in growing revenue aggressively by triple digits year-over-year, while also expanding margins as we scale. This year-over-year growth continues to shift the mix, consistent with our strategic and financial growth agenda, as we continue to establish Fluent's differentiated market-based position in the market. In Q3 2023, Commerce Media accounted for 3% of our revenue compared to 16% in Q3 2024 and we expect this percent of revenue to continue to increase going forward. Our owned and operated marketplace revenue and media margins were negatively impacted by the enormous social media advertising spend driven by the US Presidential election. Starting in late August, media costs on the biddable platforms increased significantly, which affected our ability to buy media at acceptable margins. Given our long-term commitment to further establish our equity and more rapidly grow our Commerce Media Solutions business, we consciously chose not to chase this volume at unacceptable margins. Over the past week, we have seen media pricing start to come back to more traditional levels after the election. So, our momentum continues to accelerate. We remain confident that we've reached the initial stage of Fluent's financial rebound given the foundational elements that we've established in the consumer media solutions. As a result of the business and industry trends outlined above, we expect continued strong quarter-over-quarter revenue growth in Q4. And in 2025, as our business mix continues to shift into our Commerce Media Solutions, our momentum will build and we anticipate a strong year-over-year consolidated double-digit revenue growth. Let me step back and provide investors with more context around the opportunity in front of us in the commerce media front. According to Boston Consulting Group, the commerce media industry is currently estimated at over $50 billion annually is expected to reach over $100 billion and predicts that it will account for over 25% of the digital media spend by 2026 as the market continues to evolve both traditional and digital advertising. Fluent's Commerce Media Solutions both enables and empowers our commerce partners to participate in the large and rapidly growing commerce media market, a transformative advertising channel that has exploded over the last three years. We continue to align our strategic priorities and tactical execution with the definitive goal to capture an expanding share of this critical and vibrant market. Fluent's Commerce Media Solutions are designed to provide advertiser and media partners with high ROI marketing solutions while enhancing the quality of our revenue base. Our proprietary first-party data and embedded AI-powered technology allow us to establish long-term contracts and mutually beneficial revenue share agreements with our media partners. Our Commerce Media Solutions leverage our established owned and operated marketplaces, where over 14 years of expertise in customer acquisition and performance marketing experience, provide us consumer access and insights that give us a distinct competitive advantage in the market. As part of the company's strategic pivot in 2023, the Commerce Media Solutions business continued to exhibit long-term growth potential and generated revenue of $10.4 million in Q3 and as I stated earlier, represents triple-digit growth over the same period last year. Importantly, with the partners that we've added throughout the year, we've also surpassed the $50 million annual revenue run rate as of September 30 2024. More detail on how we calculate the annual revenue run rate operating metric is in today's earnings release. And we continue to accelerate our momentum with adding additional five new partners being added in Q4. It is also important to note that we're seeing higher gross margins in our Commerce Media business with gross margins in Q3 at 33% versus consolidated gross margins at 24% in the quarter. One of the key reasons we remain strategically and financially enthusiastic about our ongoing path is that we've established beachheads for growth in multiple verticals including retail, ticketing, quick-serve restaurant, and grocery to name several. And in 2025, our plans are for continued expansion into additional verticals where we see strategic partnership growth opportunities with our clients including; entertainment, travel, and finance. As a reminder, and as we've discussed in previous earnings releases, as we are rapidly growing our Commerce Media Solutions business, the fundamental business model includes a longer sales cycle that can affect our quarterly trajectory based on the enterprise sales process, priority of the partners' technology integration, and seasonality of certain verticals. And we're looking forward with a strategic intent to broaden our position in the Commerce Media Solutions marketplace. In 2025, we'll be updating you further regarding our additional growth and expansion plans for a new Loyalty Solution. This is an exciting adjacent marketplace where we believe we can play a highly differentiated industry-leading role with our clients beyond post-transaction that enhances the consumer engagement experience, increases retention and builds loyalty across our partners' commerce platforms. We continue to work with select partners on this Innovative Loyalty Solution to further validate our proof of concept. We have leading-edge industry capabilities that provide a next-generation loyalty solution, with what we believe is especially compelling economic value proposition to advertisers and partners alike. This is a powerful and unique strategic combination, a marriage of our owned and operated leadership position, coupled with insights that are proprietary to Fluent. While leveraging the credibility we are earning with our commerce media platform, as a launching point into relevant early-stage marketplaces. Based on our partners' robust feedback, we believe this is another large growth opportunity that is right in our sweet spot. So stay tuned on this. So hopefully, you can now better understand why we're energized by the early performance of our Commerce Media Solutions business and look forward to driving aggressive, profitable growth and value for our advertisers and for our 80-plus media partners, as we continue to prioritize and scale the strategic segment of our business. Bottom-line, we have major brands enthusiastically endorsing our Commerce Media strategies and those new partnerships will go live and contribute to revenue in subsequent quarters Q4 and into fiscal year 2025, as we align against executional tactics and timelines. Our focus remains on expanding our market share through continued growth in our Commerce Media Solutions business while positioning Fluent's enterprise to return to consolidated year-over-year growth that we believe will accelerate sequentially throughout 2025. We are quite enthusiastic regarding the strategic and financial roles that our Commerce Media Solutions business is playing and we continue to shift our revenue and gross profit mix in delivering our long-term growth agenda. As we continue to expand our platform we are strengthening Fluent's brand equity with our partners while delivering higher enterprise margins than our owned and operated marketplaces. And as the strategic trend line continues in 2025, we believe shareholder value will follow. And with that, I'll turn it to Ryan Perfit, to provide more detail on our financial results.

Thank you, Don and thanks to everyone who's joining us today. I'll now provide some additional details on our Q3 earnings. We generated revenue of $64.5 million in the third quarter of 2024, down 2.6% from prior year and up 9.9% sequentially compared with Q2. As Don mentioned in his remarks, we're intently focused on our strategic shift in revenue mix and higher gross margins related to commerce media. We believe this represents a significant opportunity for Fluent as more media partners and advertisers are turning to this dynamic advertising medium to maximize customer monetization and return on ad spend. Since its launch in Q1 2023, Commerce Media Solutions has demonstrated triple-digit year-over-year growth and driven this business to an increasingly larger part of our revenue and gross profit. Our sequential growth in revenue in the quarter was in part driven by Commerce Media Solutions which increased to $10.4 million in the third quarter compared with $7.3 million in the second quarter and $2.3 million in the prior-year period. Thanks to new long-term contracts with media partners in the ticketing, retail, grocery, and QSR sectors. Owned and operated revenue was down 18% year-over-year, but we've begun to see some quarter-over-quarter stabilization in media supply in this marketplace. While we do expect these year-over-year declines in our owned and operated marketplace to continue into Q4, we believe this will be offset by the improving performance of our Commerce Media Solutions as this business continues to scale. Media margin in the third quarter was $18.2 million, which represents 28.1% of revenue compared to $19.3 million, and 29.2% of revenue last year, and $15.7 million, and 26.7% of revenue last quarter. As we've said in previous quarters, we expect media margin as a percentage of revenue to improve over time as we continue to scale Commerce Media Solutions. During the third quarter, our Commerce Media Solutions business produced media margins of 33.7% meaningfully higher than our consolidated media margins. On a GAAP basis, total operating expense in the third quarter of 2024 totaled $17.2 million, a decrease of $488,000 compared to the third quarter of 2023. G&A in the third quarter of the current year was $9.1 million, compared with $8.7 million prior year. The slight increase was due primarily to the absence of a $1.6 million credit for certain litigation and related costs due to an insurance reimbursement for previously incurred legal fees, and an increase of $205,000 in restructuring and other severance costs. Additionally, we recognized no goodwill and intangible asset impairment charges in the quarter compared with goodwill and intangible asset impairment charges of $29.7 million in the third quarter of 2023. Adjusted EBITDA in the third quarter of 2024 was negative $71,000 compared with negative $1.7 million in Q3 2023, or an increase of approximately 94%. As stated in our second quarter call, we expect adjusted EBITDA margin to improve as our revenue mix continues to shift to Commerce Media Solutions. The company cannot provide a reconciliation to expected net income or net loss as a percentage of revenue for 2024 due to the unknown effect timing and potential significance of certain operating costs and expenses share-based compensation expense and the provision for or benefit from income taxes. Interest expense in the third quarter increased to $1.3 million from $936,000, primarily due to a higher average interest rate on our term loan with SLR as compared to our term loan with Citizens Bank in the prior year period. For the quarter, our income tax benefit was $35,000, an effective tax rate of 0.4%, which differed from the statutory federal income tax rate of 21%, primarily due to state and local tax expense and losses for which no tax benefit is recognized. This is compared to an income tax benefit of $1.2 million and an effective tax rate of 29.2% in the third quarter of 2023. In the quarter, we recognized a fair value adjustment of convertible notes entered into with related parties of $2.8 million. We reported a net loss of $7.9 million in the third quarter compared with a net loss of $33.6 million in the prior year period and an adjusted net loss, a non-GAAP measure of $3.7 million, equivalent to a loss of $0.22 per share in Q3 of 2023 compared with an adjusted net loss of $4.1 million or a loss of $0.30 per share in Q3 of 2023, which excludes the previously mentioned impairment charge in the third quarter of 2023. Now turning to our balance sheet. We ended the quarter with $7.8 million in cash and cash equivalents, including restricted cash. Long-term debt, as reflected on the balance sheet as of September 30, 2024, was $33.1 million, an increase of approximately $2.6 million from $30.5 million at December 31, 2023. Additionally, the balance sheet reflects $2.1 million of convertible notes with related parties marked to fair value at $4.9 million. As of September 30, 2024, we had an outstanding principal balance of $32.5 million on our credit facility with SLR Credit Solutions. This facility provides us with $20 million term loan and a revolving credit facility of up to $30 million that matures on April 2, 2029. In the third quarter, we invested $1.2 million into product development CapEx, largely to support the growth of Commerce Media Solutions as this business continues to scale. This compares to $1.7 million invested in Q3 of 2023. The decrease is primarily related to lower spend on IT-related vendors. Overall, we're encouraged by the ongoing growth of Commerce Media Solutions and the opportunities that we're seeing in the market related to this business. Our 14 years of experience in customer acquisition through our owned and operated marketplaces differentiates us from our competitors, and we believe we're well positioned to continue capturing market share in this new high-growth sector of digital advertising. We're happy to take questions at this time.

Thank you. Our first question comes from the line of Maria Ripps from Canaccord.

Great. Good afternoon. Thanks for taking my questions. So you touched on this a little bit in your prepared remarks and sort of recognizing the election headwinds here. But were there any other factors that contributed to the softer Q3 and Q4 outlook relative to your expectations last quarter?

Hi, Maria. Thanks for the question. The biggest impact was the election and the amount of spend that was on the social media channels. Obviously we've been through a bunch of election cycles. Media tends to go up. But in this specific time period beginning in August, we saw prices jump at a significant rate. eMarketer gave some stats, Maria that basically said, digital ad spending for political increased over 156% compared to 2020 and was over $3.6 billion. And that just all came in towards the end and made it hard for us to buy on those same biddable platforms during that time. So we had the demand that we expected was there in our owned and operated marketplace. The supply was a restriction on growth in starting really in mid-August and then it started to get better after the election on Tuesday last week.

Got it. That's helpful. And can you maybe talk about what's embedded in your expectations for double-digit revenue growth next year both from the sort of macro standpoint but also for your O&O segment as well as the Commerce Media Solutions business?

Yes. Great question, Maria. So basically from an owned and operated perspective we're not looking for that to grow and we're actually looking that to be slightly down next year. All the growth is going to come from the commerce media side of our business. And we have – as we've given some numbers earlier, we continue to accelerate the number of partners we're bringing on. We've actually brought five on in Q4, which is a historically slow month because retailers tend to put their tech on any changes on – and frozen during that time period. But we are really excited about the opportunity that we're bringing. We have growth already embedded based on the ones that we brought on throughout the year that will be with us the full part of next year and we have real line of sight in terms of how that can grow for us. So that's the biggest piece of where we are. We started the commerce media business. We were calling it AdFlow basically beginning part of 2023. And we now have clear line of sight on how to continue to aggressively grow that business. And we're winning in the marketplace in a significant way. And the results we're driving for our partners and the advertisers are certainly emboldening us to continue to lean in and invest into that business.

Got it. That's helpful. And if I could maybe squeeze in one more please here. Can you maybe refresh us on why media margins in your growing Commerce Media Solutions segment are higher? I guess what are some sort of structural reasons behind that? And where do you see media margins expanding to once that segment is sort of at scale?

Yes. So good question Maria. And we've talked about before our legacy owned and operated business marketplaces that we've been in for 14 years, the media margin has always been between sort of 28% to early 30s. And we obviously bring that up and down based on media costs and things like we had with the election and we will scale down to manage the margin to that numbers. The key part of the commerce media business model is that it's – we are being basically paid on a revenue share. So we split the revenue share of what the advertiser is paying us between us and the digital media property that we're working with. So as a revenue share we have a much more consistent margin and embedded in that margin is currently in the 30s. I think as we scale we'll get some economies driven by our machine learning models and also some of the more targeting that we're doing as we grow into certain verticals. So we see that margin going in from that early 30 number we gave earlier and disclosed to sort of the late 30s early 40s.

Great. Thank you so much for the color.

Thank you. One moment for our next question. Our next question comes from the line of James Goss from Barrington Research. Your line is now open. One moment for our next question. Our next question comes from the line of Bill Dezellem from Tieton Capital Management.

Thank you, Don. Could you please provide an overview of how the third quarter progressed compared to your initial plans from our last conference call?

Sure. Thanks for the question, Bill. I'll divide this into the two business segments. Regarding commerce media, we mentioned at the end of Q2 that we expected to accelerate growth and acquire new clients. We successfully added 15 new partners in this area, and the volume met our expectations. As for commerce media, everything unfolded as we anticipated, and we continue to gain momentum as we approach Q4. On the owned and operated marketplace side, we were aiming for a strong closing around July and in mid-August. However, we encountered media challenges later in August related to supply issues in the biddable channels due to rising prices, which affected our ability to purchase at the right margin. Towards the end of the quarter, we noticed a significant impact primarily from the US presidential election spending on those channels. This issue persisted until November 6, after which we observed a reduction in pricing for our owned and operated business.

And did we just hear you say that you added 15 new commerce media customers in Q3?

Yes. We added an additional 15 in Q3 and we've added five to date so far in Q4.

Thank you. The five new businesses in the fourth quarter was a pleasant surprise for us, considering many of them tend to be quite active in Q4. Do you expect to bring on more customers before the end of the quarter, or are your potential customers currently in lockdown as they approach the Black Friday and Christmas selling season?

It's mostly going to be a lockdown, Bill. We officially added one today. In the retail sectors we operate in, they typically implement a code freeze around mid-October. Once that happens, it's difficult for them to integrate our ad tech platform into their commerce sites until after the year ends.

Great. Thank you. And then relative to the commerce media business again, do you see that revenue growth slowing from the triple-digit growth in the let's say next four quarters? Or do you believe you can continue and it will continue to grow at a triple-digit rate for that window?

We are experiencing continued acceleration. We have strong partners coming on board, and we can also expand our relationships with some of these partners. Part of our growth will come from this expansion. For instance, if we add a particular retailer, they may have another brand we can introduce. Additionally, we've previously mentioned that we partnered with a grocery store chain as our initial move into that market, and they have other chains as well. Therefore, we will keep growing by expanding our existing partnerships and onboarding new ones.

Okay. I'm not quick enough with the calculator to do the math here. But if the owned and operated is flat to down slightly next year, and the commerce business is up triple digits next year that puts us up in a pretty decent growth rate.

We expect to return to year-over-year double-digit growth for 2025. The new commerce media business does have some seasonality, particularly influenced by the partners we onboard and the verticals they represent, with most activity happening in Q3 and Q4. We are confident about achieving that double-digit growth for the entire year, although quarter-by-quarter results may fluctuate based on verticals and their seasonal trends.

Not to belabor this, but does that imply that the rate of growth would then accelerate double digits over the course of the year but each quarter has a higher growth rate as you go through 2025?

You'll typically see that. But again just to give you Bill something we've talked about before Q1, the retailers obviously go down, because there's less holiday season, less sales things like that. So we'll have the Q1 number sequentially will be down from Q4 and then we'll continue to see acceleration beyond Q1.

Right. I'm sorry Don, I was looking at it on a year-over-year comparison. So meaning that the fourth quarter would have a higher growth rate versus Q4 than the Q1 would have versus Q1?

Yes that's right. That's absolutely right, Bill.

Okay. Thank you. And I'm going to ask for your grace to get one more question in here. The loyalty business you commented on in your opening remarks would you dive into more detail as to really what that business is and how your solutions are different or innovative relative to competitors?

Our core commerce media solutions primarily operate in the post-transaction space. This means that when a customer completes a purchase on a website, just before they receive their confirmation page, they may see an overlay ad offering promotions, like a free Hulu subscription for three months. This ad model represents our business in the commerce solution sector. The inventory available in this post-purchase stage is the most valuable for our partners because the consumer has already made a purchase and is in a buying mindset, making them more inclined to purchase again. However, as consumers navigate through our partners' commerce websites, there are additional opportunities for us to engage with them and enhance their experience, driving revenue for our partners while improving consumer satisfaction. For example, we are launching a program where alongside the Hulu offer, customers can earn loyalty points. These points incentivize consumers to return to the partner's site, fostering loyalty and encouraging them to spend more. Typically, loyalty programs may be viewed as a cost for commerce partners, as they invest money without always seeing immediate returns. This is an example of how we can generate additional revenue from our post-transaction business to help make loyalty programs profitable for them.

It does, Don. But I'm unclear on how what you just described differs from a typical loyalty program. It sounds pretty standard to me, and I think I'm not grasping how your approach is different from a normal loyalty program.

Yes. A typical loyalty program will not include advertising for products outside the company's focus. What we're doing is introducing non-endemic ads to generate revenue and allowing the partner to choose how to utilize that revenue, whether for their own benefit or to incentivize loyalty among consumers. This approach usually serves as a revenue generator for them instead of a loss leader.

Excellent. That's great differentiation. Thank you, and congratulations on starting to see the inflection point in the business turn.

Thank you, Bill.

Thank you. Our next question comes from James Goss from Barrington Research.

Hi. I apologize for the call dropping earlier. I have a couple of other questions. First, you mentioned that year-over-year declines will continue into Q4. Given the slower growth in Commerce Media Solutions, should we expect a leveling off in Q1 followed by a potential rise in Q2? Or will it take until Q3 to see any improvement? Additionally, regarding the election, how do you perceive the change in the administration in Washington and its impact on your business?

Thank you for the question. I'll break it down for you. The year-over-year decline in Q4 is mainly related to our owned and operated business and the challenges we faced with the US election. In Q1 and Q2, we anticipate year-over-year growth, though it's expected to be in the low single digits, and this should accelerate throughout the year. This growth is primarily driven by the scaling and continued development of our Commerce Media initiatives that we have yet to fully onboard in Q3 and Q4 of this year.

Okay. All right. And the other just related to the change in the presidency and how does that affect your business? Do you think that creates more of a tailwind than you had before? Or will it be not really a significant event?

It's a great question, Jim. We view it as more of a tailwind, but there is significant variability regarding potential outcomes. We're assessing the situation on a daily basis to ensure progress. One major concern has been the previous administration's pressure regarding TikTok and its future. That situation hasn't been fully resolved yet, but there are signs indicating that the pressure to eliminate it or enforce a sale is lessening. If that happens, it will be beneficial for us.

All right. Thank you very much.

Thanks, Jim.

Thank you. At this time I would now like to turn the conference back to Don Patrick for closing remarks.

Thank you for joining our call today. Fluent's focus remains on strategic and financial path forward which is to extend our equity and rapidly build the growing Commerce Media Solutions business, while leveraging the foundational strength in our owned and operated marketplaces. We look forward to giving you an update in Q4 and thank you for your continued support.

This concludes today's conference call. Thank you for participating. You may now disconnect.