Transcript
Hello, and welcome to SpringBig Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Claire Bollettieri. You may begin.
Thank you. Hi everyone, and thanks for joining our Q3 earnings conference call. Joining me on the call today are Jeff Harris, our CEO, Founder, and Chairman; and Paul Sykes, our CFO. By now, everyone should have access to our earnings announcement. This announcement is also on our Investor Relations website. During this call, we'll make forward-looking statements, including statements about our business outlook, strategies, and long-term goals. These comments are based on our plans, predictions, and expectations as of today, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors outlined in our 10-K filed with the SEC on March 28th, 2023. Also during this call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not intended to be a substitute for our GAAP results. Please refer to our earnings release on our Investor Relations website for a reconciliation of GAAP to non-GAAP financial measures, as well as additional context on our key operating metrics. And finally, this call in its entirety is being webcast from our Investor Relations website at www.investors.springbig.com, and an audio replay will be available on our website in a few hours. With that, I'd like to turn the call over to Jeff.
Thanks, Claire, and thanks to everyone for once again joining our quarterly earnings call. Q3 was a solid quarter in which, despite the very challenging end market conditions, we continue to make progress towards our stated priority for this year of reaching positive adjusted EBITDA. During today's call, Paul and I will provide you details on our third quarter results, update you on key business initiatives, and provide guidance for the balance of 2023. Let me start by addressing upfront some of the end market challenges that we have experienced throughout the year, which seems to have become more acute over this last quarter. While broader macroeconomic concerns continue to weigh on marketing budgets and digital spend, the headwinds caused by lower revenue growth and the compression of margins in the cannabis industry have also increased the financial stress on many of our clients. In an environment where cash is king, this has emerged as a challenge of ensuring timely, or in some cases, any payment for our services. We have been and continue to work diligently with many clients to support them through the introduction of payment plans, but inevitably, this difficult economic climate also has led to us having no choice in some cases but to see servicing nonpaying clients. This impacts our revenues, which reduced by 5% year-on-year in the quarter to $6.9 million. Given the prevailing economic conditions and the prior year quarter being a particularly tough comparable, we view this as a solid performance and are particularly pleased that our subscription revenue continues to grow at 13% and 19% year-on-year growth in the quarter and year-to-date, respectively. Our commitment toward the stated goal of EBITDA breakeven during 2023 is as strong as ever, and we are now tantalizingly close to reaching that objective. We have continued to derive greater efficiencies across the company, enabling us to reduce our operating expenses. We completed a reduction in force a few weeks ago, reducing our employee roster to 89, representing almost half of employees compared to the peak in June of last year. And when taken together with non-employee-related expense savings, we anticipate our operating expenses in Q4 this year will be approximately 40% lower than Q4 last year. We are now operating at an expense level that should enable us to deliver positive EBITDA even in the absence of meaningful revenue growth, and given our gross margin profile in the high 70% range, as we do deliver revenue growth, we can reasonably anticipate a rapid expansion in EBITDA. Turning to our revenue growth initiatives, we continue to develop and launch innovative product offerings to enable our clients to retain and grow their customer bases. Last quarter, we reported the launch of a VIP loyalty program subscriptions by SpringBig. This program enables our retail clients to offer consumers, in return for a monthly or annual subscription fee, the opportunity to earn additional loyalty rewards, access to special promotions, and other perks as VIP subscribers. Progress has been at a pace that we expected. In Q3, we had 20 clients expand their contracts to incorporate this new offering, and four have already launched their VIP subscription programs. We have a strong pipeline of client interest and anticipate both an acceleration in clients committing to this program and, of course, those already signed up rolling out their VIP subscriber programs. We see meaningful potential from both a revenue growth and profitability standpoint for both our retail partners and SpringBig as these VIP subscription programs get launched and mature over time. Our second key initiative, which we also see as having meaningful potential and expect to launch in Q4, is our offering of a unique gift card payment option that can be used by consumers as a method of payment in-store directly from their existing loyalty wallet and will also enable the consumer to uniquely combine the use of loyalty points and the prepaid gift card. Third, we continue to expand beyond the cannabis vertical with our loyalty and messaging communications platform, servicing other regulated industries such as alcohol, vape, smoke, and CBD. These newer initiatives are going to take time to evolve, especially given the current macro environment, but we are confident that in time, they will fuel significant growth to complement the potential we believe is present in our existing offerings. We should not overlook the continuing growth in our core. As mentioned earlier, we grew our subscription revenue by 13% year-on-year in Q3, and we added 89 new clients during the quarter. Before I hand over to Paul, who will walk through our financial results for the third quarter in detail, I do want to comment on the state of SpringBig. We are managing our business efficiently for the factors within our control and recognize the challenging current macro and industry-specific realities. We are delivering on a rich pipeline of revenue-generating initiatives, and we have a strong, high-growth recurring subscription revenue base. SpringBig is in an excellent position. Our technology platform is operational in more than 2,900 retail locations across the United States and Canada and is present in the smartphones of over 35 million marketable consumers. We now have our operating expenses optimized at a level that will enable us to generate meaningful profitability in the future. I remain as confident as ever that our strategy is sound, with feedback from our clients and partners reaffirming that we are making the right investments to capture the long-term opportunity in front of us. With that, I'd like to turn things over to Paul, who will walk through our financial results for the third quarter in greater detail and discuss our outlook.
Thank you, Jeff, and thanks again to everyone for joining us. We delivered a solid result in the third quarter with further reductions in our adjusted EBITDA loss as we continue to move along our path towards profitability. The progress was a little slower than we would have liked, but as Jeff mentioned earlier, we have experienced some cash collectability challenges that have certainly necessitated some tough decisions and impacted near-term performance for the benefit of our longer-term business health. I will start by providing a brief overview of our third quarter results before moving on to our guidance for the balance of the year. Our Q3 revenue came in at $6.9 million, representing a year-on-year decline of 5%. It should be noted that the prior year quarter was particularly strong, caused by high excess use revenue last year. Our year-to-date revenue of $21.3 million represents 7% year-on-year growth. Our Q3 subscription revenues grew 13% year-on-year to $5.8 million, representing now 84% of total revenue. Year-to-date subscription revenues have increased by 19% to $17.2 million, or 81% of total revenue. SpringBig is a SaaS technology business with now more than 80% of our revenue being derived from primarily annual auto-renewing contracts compared with 72% of revenue last year. We have seen this percentage increase as we continue to replace excess use revenue with larger subscription contracts that are more predictable and higher quality. Given the tendency for clients to upgrade subscriptions, we continue to see declines in excess use revenue. While primarily the decline is due to clients upgrading so that their subscriptions better match their activity level, to some extent, given the prevailing economic conditions, we have also seen downward pressure due to clients being more diligent in ensuring they manage their expense within budgeted subscription amounts. As mentioned, excess revenues were particularly high in Q3 last year; in fact, they were at an all-time peak of $1.7 million, and therefore, the decline is particularly acute this quarter at 55%. The year-to-date decline in excess revenue is 30%. Brand revenue in Q3 was slightly higher sequentially at $0.2 million, and year-to-date has increased by 5%, albeit in the quarter, we had a 12% year-on-year decline due to the timing of brand campaigns. Our topline growth continues to be driven by strong customer demand, both in terms of new customer acquisition on the retail platform, as well as expansion within the installed base. In Q3, we added 89 new customers with annualized subscription revenue of $0.7 million, and a further $0.9 million in annualized subscription revenue was added through customers upgrading their subscriptions. We ended the third quarter with 1,356 discrete client platforms in use and are installed in 2,941 retail locations across the United States and Canada. Gross profit in Q3 was $5.3 million, representing a 5% year-on-year decline, in line with the revenue movement, and our gross profit margin for the quarter was consistent year-on-year at 77%. Moving on to operating expenses, we remain highly focused on improving the leverage in our business, while at the same time balancing this with our investments for sustainable growth. At the start of Q4, we reduced our employee roster, eliminating approximately 20 positions. Our current employee count is 89. Total operating expenses in Q3 were $8.0 million or $6.9 million, excluding the one-time cost of settling a litigation claim. The $6.9 million represents a 24% year-on-year reduction and 13% sequentially. Sales, servicing, and marketing expenses were $1.9 million for the quarter, representing 27% of total revenue. Sales and marketing expenses decreased by 39% year-on-year due to cost rationalization towards the end of 2022 and during the current year resulting in lower employment headcount. Technology and software development expenses were $1.9 million in the quarter, representing 28% of total revenues. These expenses also decreased by 32% year-over-year, with the savings being attributable to lower expenses associated with offshore contractors and a reduction in employee costs. G&A expense was $4.2 million for the quarter, representing 61% of total revenue, and a 31% year-over-year increase. However, as mentioned earlier, this includes a $1.1 million non-recurring cost relating to the settlement of a litigation claim. Excluding this cost, G&A expense was $3.1 million, representing 46% of total revenue and a 2% year-on-year reduction. Our key earnings metric is adjusted EBITDA as we believe this most closely equates to operating cash flow. Adjusted EBITDA loss in the third quarter was $0.9 million, representing an adjusted EBITDA margin of negative 13%. The adjusted EBITDA loss represents an improvement sequentially compared with the $1.1 million adjusted EBITDA loss in Q2 and is significantly lower than the $3.4 million loss reported in Q3 last year. For the first nine months of the fiscal year, our adjusted EBITDA loss is $3.4 million compared with $9.4 million during the same period last year, a 64% improvement. Free cash flow for the first nine months of the fiscal year was negative $3.3 million, comprising primarily $3.6 million cash used in operations, $4.3 million repayment of our convertible note, and $4.2 million received from the issuance of stock in our equity raise completed last May and from the exercise of stock options, and a further $0.8 million from short-term cash advances. I shall now turn to our updated guidance for the balance of the year. With regard to our outlook, I would include our usual caveat. Our clients continue to experience industry-specific headwinds, coupled with a slowdown in discretionary spending by consumers given the general macro environment. In addition, we are experiencing increasing receivables challenges, which, as mentioned, impact revenue and earnings as we implement a stricter policy towards non-payment. For the full year for fiscal 2023, we expect total revenues of $28 million to $28.5 million, implying 6% year-on-year growth at the midpoint, and an adjusted EBITDA loss, which for the full year, we expect to remain approximately at the current year-to-date amount of $3.4 million. In Q4, we expect our adjusted EBITDA to be approximately at breakeven, with positive adjusted EBITDA in the latter months of the quarter.
Thank you. Our first question comes from the line of Scott Fortune with ROTH. Your line is open.
Yes, good afternoon, and thank you for the question. Regarding the top line, you added 89 new accounts, but the growth in accounts is slower than before. It seems that much of this pressure is due to the process of upgrading existing clients. Can you elaborate on what you're observing from customers in terms of upgrades? Also, can you provide a sense of the timeline for when you expect to see a revival or renewal of growth in both operations and subscriptions? More details on that would be appreciated.
Sure. Hi, Scott. So, on the new business side, so our new business velocity is pretty much where it's been the last few quarters. As we've always talked about, we're usually adding between 85 to 105 customers every quarter, and that was consistent in Q3. Q3 is always a little bit softer, a little bit on the lower end of that number just because of the vacation schedule in August. So, there's not as long on what I'll call a quarterly selling season as there is usually in other quarters. In terms of upgrades, upgrades continue to be strong. We continue to move customers that have a spend cadence that has a percentage of subscription as a percentage of overage, and we move more of those to subscription. I think through Q3, we've upgraded over $5.5 million in annual contract value, and I think in Q3, we upgraded close to $900,000. So, we had some big upgrades in the first two quarters, so those were kind of taking off the table, so to speak, for the remainder of the year because when we upgrade them, we operate them for 12 months, but we had a successful upgrade quarter as well. Now, with the upgrade, so basically, what we're doing is we're moving more of our client spend to subscription spend as compared to overage. So, it doesn't necessarily mean that they're going to spend a lot more money with us, although over time, they will in our belief. It does mean, though, that a larger percentage of revenue that we're seeing is locked into subscription contracts. I hope that answers the question.
Yes, that's helpful from that standpoint. And then obviously, the other pressure, and we've seen this in the industry for a little bit of while now that you guys really experienced in this quarter, what was the client accounts. You've had clients come off your subscription a little bit. But just kind of step us through the pressure of continuing to write off other clients who are not being able to pay. Kind of where do you your sense of where we're at in that challenges as we look into 3Q and into 2024 here?
We have been actively addressing the cycle, and we have identified that the pressure is mostly affecting the lower and mid-level segments of our customer base. There are some mid-level customers facing challenges, but we are not seeing issues with our higher-end customers as they are able to meet their financial commitments. They seem well-informed about their invoices and are keeping up with their payments. The real concern lies with the lower and mid-tier customers. A decision we made a few months ago was to adopt a more aggressive approach not only to retain customers who are falling behind on payments but also to improve the efficiency of our collections process. We have started suspending services if payments are not made by a certain deadline, which has prompted many customers to engage with us and settle their accounts, allowing us to reactivate their services. However, there is a noticeable increase in the number of customers unable to pay their bills, leading us to suspend their services and refer them to collections. We aim to avoid investing time on accounts that are unlikely to settle their debts and to ensure we are not relying on anticipated revenue that may not come to fruition. We have made significant progress over the last few months, and while we are not at the final stages of this process, we are certainly not at the beginning either. We are likely in the middle stages of removing unviable customers and onboarding new ones. To prevent future issues, we are implementing a prepaid system for all new customers, ensuring they pay for services before usage. If they need to purchase additional credits for their subscription during the month, they must do so upfront. By clearing out non-paying accounts and integrating these prepaid customers, we expect to significantly reduce payment issues moving forward.
That’s helpful.
Scott, we may get a little bit of pressure on revenue, but we'll certainly see some in the bad debt expense we've been experiencing. So, we'll have a much higher quality of revenue.
Yes, for the industry, but you can't control that, that you can from there, and that’s great. And then one last question for me. You provided a little bit of color on the adoption of subscriptions by SpringBig and that loyalty, VIP loyalty base. What's going to really drive that ramp? And then how should we start looking at that kind of cadence or the opportunity from a revenue standpoint going into 2024? Just kind of a little more color on the opportunity there as we go forward.
Yes, sure. From a subscription standpoint, the key for us is focusing on our customer base that have larger consumer bases. So, we have two additional programs that are launching. One is launching next week, one is launching a week after that, just have much larger consumer bases because this is a play on larger consumer bases because some percentage of that consumer base is going to join the VIP program, our retailer's VIP program. So, we've had over 20 clients sign contracts. We have four programs that are actually active right now. It is taking a little while for retailers to think through and build out what their VIP program is going to look like. And then, in addition to that, they need to make sure that they have the time to train their retail staff because this actually gets sold in-store for the most part. I mean, there is some additional marketing that happens in social media and on the website of a retailer's e-commerce site, but the majority of these subscriptions, these consumer subscriptions are going to be sold in-store. So, what we are realizing it does take a little bit longer from once the client signs the contract until they have all their ducks in a row to launch. But we've been focusing on getting our larger retailers. So, we haven't necessarily focused on our largest MSOs yet because we want a little bit more time to prove out what we're seeing from subscriptions, but we are definitely moving upmarket in terms of the prospects that we're calling on, the clients that are signing contracts, and the programs that are launching. The two programs that are launching in the next couple of weeks have consumer databases that are much larger than the ones that we have in place. And we have more on the docket that are coming through in the next couple of months. So, again, we believe that in 2024, we're going to see substantial revenue growth in subscriptions. We've been pretty conservative in our projections as we thought about them for next year, but we believe that there's a really substantial opportunity there as we start getting larger clients interested in running these programs.
Got it. Thank you for the detail. I will jump back in the queue.
Thank you. Please standby for our next question. Our next question comes from the line of Casey Ryan with WestPark Capital. Your line is open.
Thank you. Good afternoon, everyone. I'm interested in whether you could provide some clarity on customer weakness from a geographic perspective. Is this issue more national and consistent across states? We are affected by certain states that may be contributing more to the current market. Additionally, what are your thoughts on new states that are experiencing positive activity? Are you noticing good performance in states that have recently come online? I would appreciate if you could include a geographic context in your commentary.
Certainly. In terms of customers who are facing financial difficulties and unable to fulfill their commitments, it's not just limited to a few states, but areas like California and Colorado are showing more signs of retailer struggles. The Northeast is not experiencing the same challenges. In regions east of the Mississippi, these issues are more prevalent on the West, particularly in mature markets where numerous stores compete against each other. To summarize, we're seeing challenges primarily in California and Colorado, with some signs in Oregon and Washington, but mainly in older states with a larger number of competing retailers. Conversely, states like New Mexico and Missouri are performing well, showing increased activity. Newer states appear to be well-funded, and we are seeing positive results in both customer acquisition and retention.
Thanks. That's very helpful. Would you be able to sort of frame the non-cannabis opportunity? Because I think it sounds exciting and something that we've been excited about, but not wanting to overstate what its potential is? I guess, how should we think about it as sort of an adjacent TAM?
Yes, if you consider the four types of verticals we are targeting for expansion beyond cannabis—liquor, smoke, vape, and CBD—there are likely more than 100,000 retail locations across the US and Canada that represent the potential market. We have completed the integration with our second point-of-sale system in the non-cannabis sector, called Lightspeed. This is a well-established system with thousands of clients in these verticals, and we will begin co-marketing with them soon. We plan to start with light co-marketing until the end of the year, followed by more extensive initiatives. We anticipate a significant increase in our non-cannabis location count, with heavy marketing efforts beginning in Q1 and continuing into Q2. While we do not have a specific number of locations that Lightspeed serves in these markets, we know it is in the thousands, and there is a genuine demand for support from a company like SpringBig. We are looking forward to these developments.
That's really helpful. And just one more on that sort of adjacent space. Does it matter how many POSs were with, so just that were with enough to sort of get a sizable piece of that hundred thousand store count?
Yes. The more partners we have, the better it is because our platform functions optimally when integrated with point-of-sale systems. This allows retailers to manage their SpringBig Loyalty programs directly from their point-of-sale. For example, we've integrated with Corona, a comp-based point-of-sale system that serves several non-cannabis clients, and with Lightspeed, where retail staff can manage the loyalty program from within the system. This two-way communication between our platform and the point-of-sale simplifies the process for retailers. We prioritize creating a unique and comprehensive integration with point-of-sale systems, as we recognize it enhances the retailer's experience and encourages long-term partnerships. We are focused on building relationships with point-of-sale providers that can mutually benefit both parties.
Yes. Okay, that's terrific. And just to clarify to make sure I heard it correctly. You were saying sort of Q2 of 2024 would be a time where maybe we'd start seeing customer counts kind of rise in that segment, I think is what you're giving time to go market?
Correct. 100%.
Okay, good. Thank you very much. That’s it for me. I appreciate it.
Thank you all very much for joining. We appreciate you spending the time with us. And please, if there are any questions, follow up with us afterwards. Have a great night. Bye, bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.