Earnings Call Transcript - FLNT Q2 2025

Operator, Operator

Good afternoon, and welcome. Thank you for joining us to discuss Fluent's second quarter 2025 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 the 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 speak only 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 measures are provided in the earnings press release issued earlier today. With that, I'm pleased to introduce Fluent's CEO, Don Patrick. Please go ahead.

Donald Huntley Patrick, CEO

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. As we projected during our last earnings call, our second quarter consolidated financial results continue to reflect the investment we've made over the last 30 months to shift our mix into the commerce media growth strategies. While this has created expected difficult consolidated comps for our business as expected, we are executing a very intentional strategy that we are confident will build a more valuable business. We are approaching a tipping point where in the second half of 2025, we believe we will begin seeing the financial impact of our Commerce Media Solutions business as the revenue and gross profit mix shift begins to show in the consolidated Fluent financials. Our Q2 consolidated financial results were as follows. Revenue of $44.7 million, representing a 19% decline versus Q1 of 2025. Our media margin of $11.9 million was a decrease of 13% versus Q1 2025. And adjusted EBITDA of negative $2.8 million, representing a $300,000 improvement versus Q1 2025. Our positive commerce media revenue growth trend in the quarter was not yet enough to offset our owned and operated marketplace decline of 31% quarter-over-quarter, exacerbated by strong regulatory headwinds, one of our key strategic motivators behind our shift to mix strategy. We expect commerce media to become the majority of our revenue as we move into 2026. To be clear, owned and operated remains core to our long-term growth strategy, albeit with a much tighter nucleus. And while we continue to reduce our strategic reliance on owned and operated, it represents the strong brand equity we built in the marketplace over the last decade that is still highly leverageable by our commerce media business. Put simply, owned and operated provides an essential operational and capability platform that our competitors can't rival, which acts as a springboard for our commerce media marketplace expansion. And the cash flow our owned and operated business generates fuels our long-term growth strategies. That said, the key driver to our business trajectory right now is the growth in Commerce Media Solutions. We fundamentally believe we are creating a differentiated commerce media business that represents a transformational pivot for Fluent while delivering a competitive advantage in a rapidly growing higher gross profit marketplace. As of June 30, 2025, our commerce media revenue grew 121% compared to the prior year, representing 36% of our consolidated revenue and has surpassed an annual revenue run rate of $80 million, over 20% sequential increase from Q1 as we continue to expand our model and grow market share based on the consumer value we are creating for our clients and advertisers. We are on a decided path to deliver sustainable growth with margins that are accretive to our core business. To support the strategic pivot we are executing, today, we announced over $10 million equity financing with a high-quality and diversified group of fundamental investors who are also joined by insiders. This financing bolsters our balance sheet and will fuel the growth to profitability. And we appreciate the support of such a solid group of investors who got to know us, became confident in our strategy and growth trajectory. I just want to take a minute to stand back and remind everyone the market opportunity that we are going after. Commerce media is projected to grow over $100 billion over the next 5 years and is expected to account for 25% of all digital media spend in 2026. This is a considerably larger market opportunity than our legacy owned and operated business, and the growth we are seeing in the commerce media segment reflects how we are squarely positioned as a leader in this quickly growing marketplace. In Q2, Commerce Media Solutions revenue grew 121% year-over-year while increasing its percent of consolidated enterprise revenue from virtually 0, 2 years ago to now account for 36% of our consolidated revenue as we aggressively establish Fluent's equity in the commerce media marketplace. Its impact on Fluent's consolidated annual financials was actually partially masked by the seasonality-driven lower marketplace volume that is reflective of the retail vertical. As such, its growth was not yet enough to offset the decline in our still larger owned and operated marketplace where revenue and media margins continue to be negatively impacted by the volatility in media costs on the biddable platforms, which affect our ability to buy media at scale at acceptable margins. We will more aggressively shift the mix to commerce media in the second half as we onboard new partners and continue to scale our marketplace. In turn, our shareholders will begin to see the financial momentum behind our strategic pivot, and that momentum will carry into fiscal year 2026. Importantly, our strategic premise continues to be validated by the staple of iconic brands who are choosing to partner with us. We are energized by the world-class brands that continue to engage us in partnership as we added 15 new partners to our commerce media platform since the beginning of Q2 that will provide long-term dividends. This growing list of partners recognizes the fundamental value we are creating in building consumer loyalty as we are consistently exceeding their revenue and advertiser return on ad spend expectations. As one example, subsequent to the quarter, we expanded our relationship with Authentic Brands, a leading sports, lifestyle, and entertainment brand owner generating more than $32 billion in global retail sales. This expanded relationship supports additional brands like Reebok, Champion, and more. Also, our recently announced strategic partnership with Rebuy Engine, a leading e-commerce personalization platform for Shopify brands, has opened an expansive network of over 12,000-plus active e-commerce brands on the Shopify ecosystem, which is a new channel for us. That execution is progressing as planned, but the strategic partnership also creates an oasis of upside as we cultivate new business relationships. What's most important to the business and our shareholders is ultimately having our financial scorecard reflect our strategic wisdom. We expect to see strong momentum in the second half of the year and into 2026. Specifically, we expect the Commerce Media Solutions will continue to grow at a triple-digit rate this year and next. These results are a testament to the investment we've made in the marketplace platform the Fluent team has built, which is validated by the world-class brand partnerships we are establishing and that trend is accelerating. As commerce media scales, we expect to be adjusted EBITDA positive in Q4 and achieve positive adjusted EBITDA for the full year 2026 and beyond. I will now turn the call over to Ryan to review the financial results.

Ryan Macnab Perfit, CFO

Thank you, Don, and thanks to everyone for joining us today. I'll now provide a review of our second quarter results. While total revenue of $44.7 million in the second quarter of 2025 reflects a decrease of 24% from the prior year, as Don just mentioned, Commerce Media Solutions revenue grew 121% to $16.1 million, consistent with our expectation of triple-digit growth of this business for 2025. Commerce Media Solutions represents 36% of our total consolidated revenue in the second quarter of 2025 compared with just 12% in the second quarter last year. We're optimistic about the growth we're seeing in Commerce Media Solutions and believe this segment is positioned to displace our owned and operated business as the main component of our consolidated revenues before the end of the year. Owned and operated revenue decreased approximately 49% in the quarter as our long-term strategy has shifted to focus on commerce media. Media margin in the second quarter was $11.9 million, which represented 26.7% of revenue compared to $15.7 million or 26.7% of revenue last year. Our commerce media margin in the second quarter of 2025 was $3.2 million or 20% of Commerce Media Solutions revenue compared with $2.2 million or 30.4% of revenues in the second quarter of 2024. Second quarter commerce media margin was compressed related to flexibility around our pricing structure to remain competitive and win long-term partners and gain traction in new verticals. As we improve monetization in those new verticals and move past short-term pricing incentives, we expect media margin to return to the high 20s. On a GAAP basis, total operating expense in the second quarter of 2025 totaled $14.9 million compared with $18.2 million in the second quarter of 2024. Interest expense in the second quarter decreased to $702,000 from $1 million in the prior year period. We reported a net loss of $7.2 million in the second quarter compared with a net loss of $11.6 million in the prior year period. Net loss also improved on a sequential basis compared to $8.3 million in the first quarter of 2025. Adjusted net loss, a non-GAAP measure, was $5.9 million, equivalent to a loss of $0.24 per share compared with an adjusted net loss of $7.3 million or a loss of $0.47 per share in the second quarter of 2024. Adjusted EBITDA in the second quarter of 2025 was a loss of $2.8 million compared with an adjusted EBITDA loss of $4.5 million in the second quarter of 2024. As we continue to drive our shift in revenue mix to focus more on Commerce Media Solutions, we expect adjusted EBITDA margin to improve over time. Now shifting to our balance sheet. We ended the quarter with $4.9 million in cash and cash equivalents and an additional $2.4 million of restricted cash. We also announced today a private placement in excess of $10 million with multiple quality new investors as well as participation from insiders. This private placement gives us the working capital to support the continued growth of our commerce media business and gives us sufficient capital to reach adjusted EBITDA profitability in Q4 and for the full year of 2026 and beyond. Our total net long-term debt was $19.9 million at June 30, 2025, compared with $31.9 million at December 31, 2024. We had an outstanding principal balance of $20 million on our credit facility with SLR Credit Solutions. This facility provides us with a $20 million term loan and a revolving credit facility of up to $30 million that matures on April 2, 2029. We will continue to strategically utilize debt as a source of capital as our business scales. We're encouraged by the progress we've made so far this year, and we believe that we're well positioned for success as we move through the back half of 2025. Commerce Media Solutions has consistently grown at triple-digit pace, and we're approaching a key inflection point where revenue from this segment is set to surpass owned and operated revenue as the main contributor to consolidated revenue. With that shift, we expect to deliver increased revenue, enhanced margin performance, positive adjusted EBITDA, and positive cash flow for our business. With our current visibility, we expect positive adjusted EBITDA in the fourth quarter of 2025 as well as full-year double-digit consolidated revenue growth and full-year adjusted EBITDA profitability in 2026. With that, we'll be happy to take questions at this time.

Maria Ripps, Analyst

Can you maybe expand a little bit more on what drove some sort of steeper declines in your O&O segment here in Q2? And just given sort of the run rate of the business now, what are your thoughts on sort of stabilizing that segment from here?

Donald Huntley Patrick, CEO

Thanks, Maria. Thanks for your question. So I'll unpack it a little bit. You guys know that the owned and operated business, we've been operating for 15 years now. The first 12, we were able to drive it and grow it on a compounded average growth rate of double digits until the FTC settlement. We had very diversified media channels across a very wide group. So as media moved up and down in pricing, we were able to obviously adjust that and be much more adept in terms of managing across the media channels. The FTC settlement really restricted our ability to buy in certain media channels profitably, and it was primarily on the biddable platforms. And those biddable platforms are even more volatile than the other channels that we're on. So if you think about it, the owned and operated, the advertiser side, the demand has stayed very, very strong. The media supply is now very, very much narrowed in terms of our diversification, and there's a lot more variability in that. So we had a steep increase in pricing on those biddable platforms that happened in the later part of Q1 and launched, continued into Q2, and we managed the margin. So that business has always managed the margin. We've obviously lowered the revenue but kept the margin percentage in line as we manage it. So it's a combination of, obviously, the volatility of those biddable platforms. But equally important, it's obviously our lack of diversification in those media channels right now, Maria.

Maria Ripps, Analyst

Got it. That's very helpful. Can you talk about the progress of your partnership with Rebuy regarding your Commerce Media Solutions? Are you fully engaged with most brands on the Rebuy platform? Also, could you discuss the pace at which they are adopting your offerings?

Donald Huntley Patrick, CEO

Sure. It's still very new, having been announced in June, and we're just two months in. We're quite pleased with the progress of the partnership. The teams are collaborating well and have a strong cultural fit. On the product and operational fronts, we're ahead in our partnership efforts. Since the partnership started in June, it had no significant impact on Q2, but we're beginning to see it reflected in our metrics. Currently, it's contributing less than 10% of our commerce media volume, but there's positive momentum as we onboard their merchant partners. There's a lot of acceleration occurring in this area. It's early days, but we see significant potential in reaching all of their 12,000 merchants, especially the top 50 that they're targeting. We believe this will contribute to our growth not just in the latter half of 2025, but also significantly into 2026.

Patrick William Sholl, Analyst

I wanted to ask about the commerce media aspect. Regarding the new agreements you're forming with companies, are they primarily based on revenue sharing or do they resemble minimum guarantees? I'm curious about how long we should expect the margin pressures to ease. Is it mainly due to better monetization that will automatically improve margins, or what other factors might enhance the margin profile?

Donald Huntley Patrick, CEO

Yes, Pat, thanks for the question. And obviously, our margin did decline as you saw in Q2 on the commerce media side. There's really three things that are driving that. The first is that we have launched into some adjacent Commerce Media Solutions that are very early stage that we are starting to scale. So much like when we got first into the post-transaction side, margins were lower. But as we scaled up, those margins came back in line to where the industry is at. So the first piece has been some additional solutions that we're working with existing partners on to establish and continue to build our strategic relationship. In Q3, we've already seen those margins increase significantly compared to Q2, close to doubling that. So we see that opportunity, the margins improving from Q2 over the new solutions that we're scaling. The second piece is, as you talked about, depending on how competitive the sales process is, we will provide some different revenue splits in a very short-term targeted way to encourage them to come on to our platform faster or some guarantees to get them to move. They hit harder in Q1 and Q2 because of the lower volume. Those are fixed dollars that obviously, over the course of the year will equal out. But when they're lower volume and lower margins, they have a bigger impact into that. So that obviously is going to continue to trend. And then the third one is there is tremendous upside in the Rebuy and the other channel partnerships that we are working on, but they tend to have slightly lower margins than the enterprise side. So those are the three moving pieces in there. As we head into the second half here, Pat, we have significant new enterprise clients coming on. The new enterprise solutions that we're excited about, and we'll talk more about later this year, obviously, is starting to scale back up to the margins. So we see us getting back to historical margins in the Q4 timeframe.

Patrick William Sholl, Analyst

Okay. Regarding the new solutions, do they alter the advertiser relationships you currently have? Or have you had to seek out additional advertising partners to accommodate that inventory?

Donald Huntley Patrick, CEO

For the most part, it's the same advertising group. There might be a different concentration or mix depending on the solution. But obviously one of the benefits of the owned and operated business is we used a lot of the advertiser relationships to launch into commerce media. And then we've been able to use those advertisers from both to launch and continue to have that strong demand in our newer solutions also.

William Joseph Dezellem, Analyst

I have a group of questions. First of all, would you please discuss the new placements beyond post transactions that you referenced in the press release?

Donald Huntley Patrick, CEO

Bill, thanks for the question. We've talked about this in other earnings releases, and we've sort of hinted at exciting opportunities that we're being asked to move into with our partners that we have now. We've talked about a loyalty play, which allows us to really bring our commerce media post-transaction technology and solution into a loyalty play to help retain existing customers of our partners. We have a couple of opportunities there that we're building. And then in general, what I'll call post-event. So other things like post-receipt or post-registration, we're helping our commerce partners monetize within those other consumer experiences. So it is still pretty early days on those. But obviously, they are big, very large, big opportunities beyond post-transaction that we think is a very strong road map for continued growth.

William Joseph Dezellem, Analyst

Don, would you like to expand on the post receipt and how that might work and practically kind of how we could envision that?

Donald Huntley Patrick, CEO

Yes. The post receipt is similar to the post-transaction bill. As consumers go through the process of obtaining a receipt, there’s an ad module that pops up, which is highly targeted based on our data and one-to-one marketing to show them the most relevant ad. This experience is very much like the current consumer flow. However, the key difference is that during a post transaction, the consumer is actively engaging with their credit card out, making them a more engaged customer compared to those receiving a post receipt or registering. While they are still engaged, they may not have the same intention as a post-transaction consumer. On the loyalty side, which we find quite exciting, instead of just showing an ad for services like Hulu's streaming, we will present offers that allow consumers to earn loyalty currency, helping them gain coins, points, or scorecard points. This enhances their loyalty programs with our partners, transforming loyalty into a strategic advantage rather than a mere expense for them, promoting consumer engagement and higher loyalty overall. We are in the early stages, with just a few clients we are scaling with, but we recognize the strong demand and believe our solution can successfully meet that need and expand.

William Joseph Dezellem, Analyst

Great. And then I believe in prior press releases, you may have also alluded to this, but you explicitly stated it here in this release that your first-party data differentiates you from competitors in this market. Would you please discuss how that becomes important and the implications from, I guess, a winning of business perspective and as a shareholder, the shareholders' benefit. So I guess, really, the question is what's the benefit to your customer? What's the benefit to your bottom line?

Donald Huntley Patrick, CEO

We announced Authentic Brands Group and Rebuy, and we will unveil several other significant partnerships on our platform within the next four to six weeks. We are experiencing strong success. At the heart of our progress is our ability to deliver better results than our competitors. Ultimately, it's about providing a meaningful experience for consumers and effectively monetizing that for our partners. In just two years, we have established a robust brand focused on driving results. Two key factors contribute to this. First, our first-party data asset, developed over 15 years, allows us to quickly identify customers and understand their purchasing behaviors. This data helps us deliver the most relevant ads. Second, our extensive experience as performance marketers enables us to work effectively with advertisers and understand which audiences and offers drive better monetization. Our proprietary first-party data sets us apart in the post-transaction space, providing us with a competitive advantage and helping us achieve superior results.

William Joseph Dezellem, Analyst

And so you said very directly that first-party data allows you to essentially have more of your customers' consumer convert over and take one of your ads. That means your customer makes more money. And when they make more money, so do you since it's a revenue or profit split?

Donald Huntley Patrick, CEO

Yes. Basically, that's right, Bill.

William Joseph Dezellem, Analyst

Okay. That's helpful. If you'll allow me a couple more questions, I realize I'm taking more than my share of time here. You mentioned that the commerce media second quarter revenues were $16.1 million. If you annualize that, it comes to $64 million. However, the press release states that your run rate exceeds $80 million. This suggests to me that there has been new business won in just the last 6 weeks. Is that the correct interpretation, or am I mistakenly comparing different metrics?

Ryan Macnab Perfit, CFO

Bill, this is Ryan. The annual revenue run rate, we use that metric because we believe that it better references kind of what the next 12 months would look like if we didn't grow from there. It takes into account seasonality that you wouldn't see there, but it doesn't take into account anything that happened after the end of the quarter. So as of 6/30, that would count all of the media partners that we had brought on through that point and take into account their annual sessions. We then take what we earn per session and kind of annualize that over a full 12-month period. So any new partners that we add in Q3 will add to that number additionally on top of that. But the difference you're seeing between Q2 and that annual number is seasonality, generally speaking.

William Joseph Dezellem, Analyst

That's really helpful. And then maybe you can help me make sure I'm doing some math correctly here. You said that you anticipate having double-digit revenue growth in 2025. Last year, you had $255 million of revenues. So if we take the very lowest possible double-digit number is 10%. 10% growth on $255 million is $280 million. And if we remove what you have had for revenues in the first half, that would imply that you need another $180 million in the second half or to split evenly, which I understand it won't be. But if it were, that would be $90 million a quarter between Q3 and Q4. So Q3 will be something less than $90 million and Q4 something greater than $90 million to hit your target. Is that the correct math in the way you're thinking about that? Those are really massive numbers.

Ryan Macnab Perfit, CFO

Sorry, Bill, I think you misunderstood. We've been experiencing triple-digit growth in commerce media. What we mentioned on the call is that we anticipate double-digit growth in 2026 on a consolidated basis, which means 2026 compared to 2025.

William Joseph Dezellem, Analyst

It's '26, not 2025?

Ryan Macnab Perfit, CFO

Correct.

William Joseph Dezellem, Analyst

So basically, the math that I did will work in 6 months when we know what the 2025 revenues are?

Operator, Operator

I'm not showing any further questions at this time. I would now like to turn it back over to Don Patrick for closing remarks.

Donald Huntley Patrick, CEO

Thank you. This month marks an incredible milestone. It's the 15th anniversary of Fluent. And I just want to extend a heartfelt thank you to every team member, every partner, and every shareholder for your invaluable contributions to this journey. Over the last 15 years, we've had incredible growth and have witnessed great milestones achieved, all thanks to your dedication and your support. We remain very bullish on our agenda and excited about our momentum we've generated. We continue to lean into the significant mega opportunity in the rapidly growing commerce media industry, where we're expanding our strategic value proposition to world-class partners beyond customer acquisition and delivering higher-quality consumer engagement across the entire marketing funnel. As our strategic trend line continues throughout the second half of 2025, we believe shareholder value will follow. Thanks, everyone, and we look forward to speaking to you again next quarter.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.