Earnings Call Transcript - MAPS Q4 2022

Operator, Operator

Thank you for joining us. Welcome to the WM Technology, Inc. Fourth Quarter 2022 Earnings Conference Call. Please note that today's program is being recorded. I would now like to introduce your host for today's program, Greg Stolowitz, Vice President of Investor Relations.

Greg Stolowitz, Vice President of Investor Relations

Hi, everyone. Thanks for joining us today to discuss our fiscal 2022 fourth quarter results. We have our Executive Chair, Doug Francis; and our CFO, Arden Lee with us today. By now, everyone should have access to our earnings announcement. This announcement is also on our Investor Relations website along with the supporting slide deck. During this call, we'll make forward-looking statements including statements about our business outlook, strategies, and long-term goals. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and on our Investor Relations website, as well as the risk and other important factors discussed in today’s earnings release. We specifically disclaim any intent or obligation to update these forward-looking statements except as required by law. For the benefit of those who may be listening to the replay or archived webcast, this call was held and recorded on March 16, 2023. Since then, we may have made announcements related to the topics discussed, so please refer to the company's most recent press releases and SEC filings. Also during this call, we'll discuss certain non-GAAP financial measures, which are not intended to be financial information prepared in accordance with GAAP. These non-GAAP financial measures should be considered in addition to, but not as a substitute for the information prepared in accordance with GAAP. Reconciliation of these measures to our GAAP results can be found in our earnings presentation available on the Investor Relations website. And finally, this call, in its entirety, is being webcast from our Investor Relations website. An audio replay will be available on our website in a few hours. With that, I'd like to turn the call over to Doug.

Doug Francis, Executive Chair

Thanks, Greg, and thanks everyone for joining us. Our fourth quarter results came in as expected. We posted $49 million in Q4 revenue, $2 million in Q4 adjusted EBITDA and ended the year with $29 million in cash, while continuing to be debt-free. Further, we grew our paying clients by double digits versus last year despite challenges in our end markets. In my first quarter back at the helm, our team's focus was stabilizing revenue and getting back to our operating culture of driving profitability. And while there is still work to do, we're pleased with the progress we've made so far and are confident we have the right team and strategy in place. Like many companies, we are facing challenges in the current environment. Inflation is eating into consumer and business spending power. The higher cost of capital is slowing growth, and the fear of a looming recession is prominent on folks' minds. The cannabis industry is facing additional headwinds as we deal with over-regulation, the slow rollout of new licenses across the country, a lack of government support combined with high taxes from all levels of government, commoditization of cannabis products, frozen capital markets, limited access to banking, and a thriving black market. Cannabis companies need all the help they can get right now. And when they're letting us know that Weedmaps continues to be one of the best ways to engage with the active cannabis community and acquire targeted consumers. Our omni-channel approach of integrated digital, in-store events, community engagement, and street activations can create hyper-local traffic for our clients. Given the nature of our users, each user engagement that we send to our clients, whether online or offline, creates meaningful value, especially in times like these. As we've been getting back to our roots and focusing on making the plant front and center, both brands and retailers alike want to associate their brand with Weedmaps, given how we engage and help shape the culture of cannabis. The outreach from our industry has been great, and we're making plans with key partners to tell the cannabis story in our pursuit of legalization and safe access. We have a clear plan to maximize our opportunities in what may be a difficult 2023 and lay the foundation for healthy growth in 2024 and beyond. As I mentioned last quarter, the key for us in 2023 is focus. We are focused on three things: our marketplace experience with users, delivering undeniable value to our clients, and doing all of that with a goal of profitable and sustainable growth. First on our marketplace. We're getting back to what we do best and the roots of what made Weedmaps special by celebrating weed culture and the magic of the plant. We will create differentiated content showcasing the craft nature of cannabis. We will elevate the conversation about genetics and terpenes. For example, we're engaging with expert scientists, cultivators, and breeders across the country to tell the terpene and cannabinoid story across Weedmaps. Through educational content and by offering differentiated products through our marketplace, we will help eliminate the high THC equates to the best weed fallacy. This will benefit the brands and retailers that we showcase on Weedmaps by highlighting differences other than just THC levels. We're also engaging with Dr. Bonni Goldstein, our former Medical Director and leading cannabis physician, to create educational content on the therapeutic effects of cannabis. Weedmaps has historically been, and will continue to be, a safe place for users to find cannabis for wellness and to help treat serious conditions and ailments. We're also working to improve the shopping experience of our users by enhancing our taxonomy, algorithms, and our search results to make search more intuitive across our platform. We will better leverage our first-party user data to drive more personalized experiences and influence our user journeys toward making the right purchase from our clients. We sit in a privileged position given the first-party datasets that we own, and the rise of large language modeling and AI reinforcement learning tools. Weedmaps has historically been the authoritative source for all things cannabis and will continue building on that marketplace reputation by differentiating our content, user experience, and data in 2023. Next, we'll focus on delivering undeniable value for our clients to improve their returns. We plan to expand our advertising solutions across product categories, giving our clients more ways to reach our high intent users mid-funnel and impact our purchase decisions. We're expanding the regional logic that drives our local ad offerings to give our clients more options on where they show up in our search experience. We have projects in flight to create new and differentiated deal types for our clients to reach users seeking value. We're working on integrating our SaaS solutions as value-added features and extensions of our marketplace to provide more utility to our users and clients. We will make it easier for our clients to onboard, integrate, and grow with Weedmaps, regardless of their tech stack, and we will support our clients with local activations, retailer appreciation tours, brand collaborations, and exclusive merchandise drops so they can leverage the power of the Weedmaps brand to tell their own stories. Finally, we'll focus on driving profitable and sustainable growth. We will focus on what we can control while preparing to accelerate our growth when markets improve. Rather than a one-size-fits-all approach to markets, clients, and solutions, we will be disciplined in how we prioritize investments. We'll be pulling back spend against some of our newer non-marketplace solutions while we evaluate the product-market fit of these offerings. We'll focus on driving a lean operating mentality in everything that we do. We've already done the heavy lifting, removing excess layers of management across the company, simplifying processes, and changing the way we work to drive sales and savings. We already restructured our workplace ahead of the start of this year, as difficult as that was, so that we can hit the ground running. I'm proud of what our teams have accomplished over the last several months, and for doing the hard work to set ourselves up for success in 2023. Productivity is a year-round effort with no finish line, and that's our mindset in 2023. Before I hand the call to Arden, I also want to provide a brief update on leadership. The Board and I have decided to put our CEO search on hold for now, and I will continue leaning in and working with our senior leadership team for the time being. I am deeply invested in the success of Weedmaps and will continue to drive our pace as we do our part in driving profitable growth for the industry. It's always darkest before the dawn. And though 2023 will be challenging, we believe that the future of the cannabis industry is bright and exciting for those with a vision, know-how, and willingness to take it on. real Weedmaps have deep knowledge of the plant, the supply chain, and where the industry is headed. We know how to leverage that insight into our marketplace and technology. And we know how to leverage data to not only acquire customers, but to showcase the products that will keep them coming back. We believe that Weedmaps is in a great position to capture opportunities across all value chain segments if and when broader legalization arrives. Until then, we'll continue executing against our focus priorities and leading from the front as we take the industry through this next stage of growth. It's in times like these where the power of the Weedmaps brand, the value of our marketplace, and the strength of our leadership position within cannabis truly shine with our users and clients. With that, I'll turn it over to Arden.

Arden Lee, CFO

Thanks, Doug, and hello to everyone on today's call. Our fourth quarter performance aligned with our growth expectations going into the quarter and the actions we took to enhance profitability throughout. Q4 revenue was $49 million, reflecting a 5% decline in total second half revenue, consistent with our prior guidance. Adjusted EBITDA for Q4 stood at $2 million. While adjusted EBITDA remains affected by provisions for doubtful accounts, we anticipated and observed a reduction in these non-cash charges in Q4. Adjusted EBITDA before these charges amounted to $4 million, mirroring the cost-cutting efforts implemented during the quarter. Our growth is still facing market challenges leading to diminished client spending, yet we continue to grow our client base, with a 19% increase in paying clients compared to last year. Existing client spending shows signs of stabilization, as our net dollar retention maintains consistent levels with the previous quarter. In California, our largest market, which made up 54% of Q4 revenue, net dollar retention improved in Q4 compared to the last quarter. The $2 million in adjusted EBITDA for Q4 also represented a 9% reduction in adjusted operating expenses compared to last year. We streamlined several areas across the company, reducing excess management layers in our sales and marketing teams and shifting to a centralized operating structure. Consequently, our adjusted sales and marketing and G&A decreased by 14% and 11%, while product development saw an 11% increase year-over-year. We recorded a net loss of $61 million for the quarter, including $6 million in stock-based compensation and around $56 million in other non-recurring charges. Most of these are related to the valuation allowance against our deferred tax assets, which is a non-cash item, along with severance payments from the headcount reduction we implemented during the quarter. Additional details on these charges can be found in our earnings release and Form 10-K. We concluded the year with $29 million in cash, remain debt-free, and are comfortable with our liquidity. We are carefully monitoring our banking situation and feel secure regarding our cash deposits, having no relationships or direct exposure to Silicon Valley Bank or Signature Bank. Our fully diluted share count across our Class A and V shares was 148 million at the end of the quarter. A reconciliation of adjusted EBITDA to net loss, along with details of our share classes and calculations, is available in our earnings presentation on our Investor Relations site. Lastly, as mentioned in our release, we reported in our Form 10-K a material weakness regarding our general IT controls related to internal user access and change management in certain systems relevant to our financial reporting. I can assure you that no misstatements were found during our audit resulting from these deficiencies, and we have already initiated remediation efforts. Looking ahead, we believe that our strong focus on our marketplace, client value, and profitability will guide us through the ongoing market challenges that affect our skilled markets. We anticipate growth in our paying client base due to the opportunities we see but also expect continued revenue pressures per client across various skilled markets due to ongoing declines in our end markets. Given these challenges and the overall uncertainties in the current macro environment, we will not provide full-year guidance on revenue or adjusted EBITDA. For Q1, which is typically our lowest quarter, we anticipate revenue to be slightly down compared to Q4 at $47 million due to seasonal factors related to the Q4 holidays. Regarding profitability, we project double-digit adjusted EBITDA margins and positive cash flow in 2023. We have already taken measures during Q4 to ensure a clear path to positive cash flow regardless of market dynamics. We are starting this year with an adjusted operating expense run rate similar to what it was after our go-public transaction, before we accelerated investments. Yesterday, we have a presence in more regions with a broader client base and improved platform capabilities than we did back then. We will invest based on growth trends and do not foresee significant investments to achieve our growth objectives. Additionally, we see ongoing opportunities to enhance productivity that will enable us to fund growth investments. Therefore, we expect Q1 adjusted EBITDA to be around $4 million as we ramp up investments leading into the 420 holiday. The first half will still be impacted by remaining severance and termination costs associated with the headcount reductions from last quarter. Nonetheless, we are committed to generating positive cash flow this year, and we clearly see a pathway to meet that goal thanks to the cost reductions we've achieved and our focused strategy on new investments this year. In conclusion, I want to extend my gratitude to the Weedmaps team and Doug for his continued leadership as we progress into 2023. As Doug mentioned, this year will be significant as we concentrate on our priorities. Now, let's open the floor for questions.

Operator, Operator

And our first question comes from DJ Hynes from Canaccord. Your question, please.

DJ Hynes, Analyst

Hey guys, thanks for taking the questions. Arden, really nice progress on the margin front in Q4 and what's implied in Q1. As we think about the historical financial profile of the business, is that aspirationally where you think you can get back to? And as we think about the dials that are turning to get there, is it more broad-based discipline? Are there specific areas where we're taking a more calculated step back?

Arden Lee, CFO

Thank you for your question. I appreciate it. To address your points, our business model is designed to generate cash flow, and historically, after periods of increased investment, we've seen a return to strong cash flow generation. For example, after the investment acceleration in fiscal 2019, we demonstrated robust EBITDA and cash flow in fiscal 2020. We believe we can achieve similar results again. We've made significant operational improvements over the last quarter to enable this. As for finding new opportunities, we are adopting a mindset focused on productivity and efficiency throughout the company. In Q4, we implemented targeted cost reductions, which included eliminating excess management layers that had been slowing progress. We've also refined our go-to-market strategies to better align with current market opportunities. Additionally, we've identified non-essential areas to cut back on in this environment, focusing on maximizing productivity by minimizing redundancies.

DJ Hynes, Analyst

Yes, yes. Okay, got it. And then just as a follow-up. At what level do you think we might see a floor in that monthly revenue for paying client metric? And I guess the question really is like, how are you internally thinking about modeling and budgeting for that over the course of '23?

Arden Lee, CFO

Yes, so for us, we expect to continue to see pressure against that number. And I guess the answer to your question, DJ is a bit nuanced. And why I say that is, in theory, when we're dealing with healthy marketplace dynamics, we would like to see that number not grow too much because we're continuing to expand in new regions, right? And as we talked about in the past, as we're expanding in new regions, those tend to have lower spending levels compared to our skilled regions. Now, the issue that we're having in this environment, as we talked about for the last few quarters, is that across our scaled markets, specifically California, Colorado, and Oklahoma, as folks have seen with third-party data, end market GMV continues to decline on a quarter-over-quarter basis. If you look at the data year-to-date in 2023, so far, it's been sequentially down for the better part of the Q1-to-date period. And so we're very mindful of that dynamic in terms of how we're modeling our plan and planning against those skilled markets or the skilled states of California, Oklahoma, and Colorado. What I will say though, is outside of those three states, we're seeing very healthy demand trends among our clients. We're seeing healthy demand trends in terms of not only our ability to grow our paying client base but also spend levels across these regions. So for us, what does that mean? We've got our eyes focused specifically on those three states to just get a read around client tone and health of our clients, because it's still touch-and-go obviously in those three states, but outside of that, it's business as usual in going after the opportunity.

Operator, Operator

Thank you. Our next question comes from Andrew Carter from Stifel. Please go ahead with your question.

W. Andrew Carter, Analyst

Hey, thank you. Good evening. Good afternoon. So first question I would ask in terms of what you're seeing on the cash needs, I think the cash burn in the quarter was $4 million versus the kind of adjusted $4 million number. How much was cash charges? How much is kind of left to go in cash charges and help us understand if there's anything due on the distributions given the special shareholder class? Or on the cash basis?

Doug Francis, Executive Chair

Yes, yes. So Andrew, I can take that one. So a couple of things. As we referenced earlier on the call, we still have some residual charges, cash costs related to the cost reduction efforts that we took in Q4. So we talked, or we filed in our 8-K last quarter, the severance charges related to the headcount reductions that we took. The bulk of those will hit in the first half. So we talked about just under $11 million of cash charges when we filed our 8-K in December. We paid out over the course of Q4 about a quarter of those. So we still have some residual costs to go. On your question around tax distributions, our tax distributions have been averaging at about a buck a quarter or so. And so we don't expect much movement in the very near term on that front. What I will say is, we've fully thought through the severance charges that are left to go in terms of our liquidity and cash management planning and the like. And as you mentioned on the call, we feel very comfortable with our liquidity position. We've sized our cost base at a level where we have a clear line of sight toward generating positive cash flow regardless of what happens in California, Colorado, and Oklahoma. And I've touched on the dynamics that we're seeing in some of these other states.

W. Andrew Carter, Analyst

Okay. My second question is about third-party metrics. We see that time on the platform has decreased significantly and this decline has accelerated year-to-date. This could partly be due to the state of the end markets. What are your thoughts on the Monthly Active User base? I understand you are still assessing that and revisiting what you’ve previously disclosed, but your sales teams need some kind of information to gauge the value. Can you provide any insights on that? Also, do you believe you are investing appropriately in demand generation across both sides of the funnel?

Doug Francis, Executive Chair

Yes, I will take that. This is Doug. We recently hired a new CMO who is an absolute pro on that. So we've been digging in. There's no doubt there's absolute pressure across the board on the marketplace, but we're still dialing in to see what the best metric is that reflects the health of our marketplace. But again, the end markets are tough. We are feeling it. But there are pockets of what we used to do great at Weedmaps, which is kind of tell the plant story. So we feel within like health and wellness with Dr. Goldstein and some of these other moves, we have top of the funnel moves that we can make that are opportunistic. And then these new features that we discussed, like category-based, allow us to really penetrate lower in the funnel. So we have enough slots that are coming up here where we think we can get positive movement. But again, there's no question there's pressure.

W. Andrew Carter, Analyst

Got it. Final question, I guess I'll just ask, and I realize you can't control the market. But if you think, if you step back and think about the original thesis of the Go Public transaction, a lot of it was to take advantage of being a public cannabis play and being kind of most capital efficient. And if you're not rewarded for that, do you see the strategic value in remaining there? And given you've got cash flow insight, this is a capital-efficient platform, you’re going to have more options than others? So just anything, I'd love to hear any commentary on that.

Doug Francis, Executive Chair

Yes, I can start on that one, Andrew. We're focused on executing our plan. We went public for a reason and have benefited from the ability to share our story and showcase our business model. It's a challenging capital markets environment, but we're concentrating on what we can control, which is executing our plan. I'll leave it at that.

W. Andrew Carter, Analyst

Fair enough. I'll pass it on.

Operator, Operator

Thank you. Our next question comes from Tom Champion Callahan from PSC. Please go ahead with your question.

Unidentified Analyst, Analyst

Hi, thanks. This is Jim on for Tom. Thanks for taking the question. So I guess first, one for Doug, you've been back with the company for about four months now. And there are a lot of macro challenges you're kind of dealing with. Can you just kind of talk us through some of your biggest takeaways and what you've learned so far as you've been getting back involved with the business? And I had one for Arden; it seems like the allowance for doubtful accounts kind of keeps coming up. I guess curious how we think about the cadence of that through the balance of the year. Thank you.

Doug Francis, Executive Chair

Yes. So, this is Doug. It's a really challenging market, that's for sure. But it is really a state-by-state and market-by-market story. So as I'm getting out there and talking to folks, the one thing that does come up is that, because a lot of budgets are compressed in the industry, they're really relying on Weedmaps to tell their brand story. So kind of bringing in some of the old gang back in the company has been exciting as well, because we've been able to build some relationships with the MSOs and brands on the East Coast that were a little elusive to us. So, what we're really doing now is focusing on the marketplace, our data, and our search. We're really developing our content, which we think will help in all markets. Weedmaps really used to be the source of truth for the industry. Through our data integrations and bringing kind of the pros back around, that's really our goal is to be the thought leader. We hope that drives from state to state as we help folks learn how to search for cannabis and how to consume cannabis the right way. But the main takeaway that I've gotten from most folks is that, it's tough. Since we have full knowledge of the supply chain, we are already giving counsel and advice kind of beyond technology. So, the main takeaway, again, is just the support that's needed.

Arden Lee, CFO

Yes, and even on the second question you had, you're right, we did have bad debt expense again in the quarter; it was about just over $2 million. We did call out in our November call that we expected bad debt to remain elevated in Q4 and to start normalizing over the course of 2023. Listen, it's still touch and go, as I mentioned before, in those three states, and with end market declines trending the way they are, we continue to be very vigilant around not only collections and or gross AR growth but how AR is moving through various aging buckets. We've done a lot; we continue to do a lot operationally to control what we can control. One of the big moves that we put into place starting the year was to put the accountability of our collections back into the hands of a lot of our account teams because they're quite successful in terms of managing client relationships. So we're seeing some good results stemming out of that.

Operator, Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.