Transcript
Thank you. Hi, everyone, and thanks for joining our Q4 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 that will be filed with the SEC. 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 thank you, everyone, for joining this afternoon's call. During today's call, Paul and I will provide you details on our fourth quarter and full year results, update you on our key business initiatives, and provide guidance for the first quarter of 2024. I am happy to report that SpringBig is in an excellent position. We continue to execute on a sound strategy, and I am confident that we are making the right investments to both add value to our clients and at the same time, capture the long-term opportunity in front of us. While throughout the year, we have experienced some end market challenges, we grew revenues by 5% year-on-year, and we have diligently reduced our operating expenses by 17% and 31% year-on-year for the full year and fourth quarter, respectively. We achieved our target of delivering positive adjusted EBITDA before the end of the fiscal year, with December being our first profitable month. And in Q4, our adjusted EBITDA loss was a modest $200,000 compared to $3.2 million in the same quarter last year. Shortly after the end of the year, we secured $8 million in debt financing with a syndicate of lenders, which allows us to move forward with a much stronger and cleaner balance sheet as we look to continue to expand and deliver shareholder value. Paul will discuss our financial results and the recent debt financing in a moment, but first, I would like to highlight some of our accomplishments over the past year. As a reminder, our retail and brands platform provides merchants and brands with the toolset that they need to create and manage a successful loyalty and digital marketing program along with instituting a data-driven approach to how they connect and engage with their customers. Throughout 2023, we have been operating in a challenging end market environment with broader macroeconomic concerns weighing on marketing budgets and digital spend and compression of margins in the cannabis industry increasing the financial stress on our clients, and we have worked diligently to support them. In such an environment, it is pleasing that we have continued to grow revenue with full year growth of 5% year-on-year and with our subscription revenues underpinning this growth and increasing by 14% year-on-year. As the cannabis market benefits from an improving macroeconomic environment and potentially rescheduling from Schedule 1 to Schedule 3, we anticipate an acceleration in growth. We have also focused our attention on a small number of high potential growth initiatives. And while we continue to develop and launch innovative product offerings to enable our clients to retain and grow their customer bases within our core platform, these new initiatives both complement our core and provide discreet new offerings. We have talked in prior quarterly calls about the launch of subscriptions by SpringBig, which enables our retail clients to offer consumers the opportunity to earn additional loyalty rewards, access to special promotions and other perks as VIP subscribers in return for a monthly or annual subscription fee. Progress has been at a pace we expected given this is truly an innovative offering in the market. We have 13 clients that have expanded their contracts to incorporate this offering and six have already launched their VIP subscriber programs with more than 1,800 consumers already subscribing to these programs. We see meaningful potential from both the revenue growth and profitability perspective for both our retail partners and SpringBig as the VIP subscription programs are launched and mature over time. Our second key initiative was launched in Q4: 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 cards. We expect meaningful revenue from these two initiatives to start accruing in the second half of 2024. Finally, 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. While these newer initiatives are going to take time to evolve, we are confident that in time it will fuel significant growth to complement the potential we believe is present to further expand our existing offerings. Before I hand over to Paul, who will walk through our financial results in detail, I want to conclude with my assessment of the current status of SpringBig. 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 present in the smartphones of over 35 million marketable consumers. We have a significant opportunity in front of us to continue to offer and develop innovative technology solutions that enable our clients to retain and grow their customer bases. Our financial position has improved both from the perspective of having cash in our balance sheet and having optimized our operating expenses to a level that enables us to generate meaningful and sustainable earnings in the future without being reliant on revenue growth. For 2024, our focus is on ensuring successful execution of our key initiatives, so we start realizing some of the significant potential, further expanding our subscription revenue-generating loyalty and digital messaging platform, and continuing to be highly disciplined in our expense management to deliver meaningful adjusted EBITDA. With that, I'd like to turn things over to Paul.
Thank you, Jeff, and thanks again to everyone for joining us. I want to start by talking about the $8 million debt financing we completed in January 2024 before discussing our results for the fourth quarter and 2023 fiscal year and ending with our guidance for both the first quarter and full year of 2024. On January 24, we announced that we had secured $8 million of debt financing with a syndicate of investors consisting of a $6.4 million 8% secured convertible note and a $1.6 million 12% secured term loan. Both the convertible note and term loan mature in 2026, and there are no amortization payments prior to maturity. The convertible notes can be converted into common stock at the option of the investor at any time prior to maturity at a conversion price of $0.15. The proceeds were partially used to repurchase the entire existing secured convertible note including associated warrants, which had been issued at the time we became a public company in June of 2022 and for a discounted amount of $2.9 million. The net proceeds after repurchasing the existing note and transaction costs were $4.6 million. Following this refinancing, SpringBig has a much stronger and cleaner balance sheet with the capital that will enable us to continue to expand and deliver shareholder value. Now turning to our results for the fourth quarter and fiscal 2023. We are pleased to be able to report a year in which revenues grew 5% year-on-year to $28.1 million and one in which we were able to show a significant reduction in our adjusted EBITDA loss from $12.6 million in 2022 to $3.6 million in 2023, benefiting from a 2% improvement in gross profit margin to 77% and a 17% year-on-year reduction in our operating expenses to $29.9 million. Our Q4 adjusted EBITDA loss was $0.2 million compared with $3.2 million in the same quarter last year, reflecting the progress that the company has made along our path towards profitability during 2023. In December, we posted positive adjusted EBITDA for the first time. Q4 revenue came in at $6.8 million, representing growth of 1% year-on-year and a 1% decline sequentially. In our earnings call, we talked about the challenge in the current macro environment of ensuring we receive payment for our services and that while we have worked diligently with many clients to support them through the introduction of payment plans, it has inevitably also led to us having no choice in some cases but to cease servicing nonpaying clients. This, of course, impacts our reported revenues and has continued to be a factor during Q4. Being a technology business, we derive most of our revenue from the recurring subscription contracts. In 2023, 79% of revenue was subscription revenue compared with 73% in the prior year, and we grew our subscription revenues by 14% year-on-year to $22.3 million and by 10% year-on-year in Q4. The majority of the non-subscription revenue is excess use revenue arising when clients exceed the messaging volume within their subscription. And we also derive revenue from brands clients and other ancillary services. Over time, we anticipate the sensitive revenue which is derived in subscriptions will continue to increase as we replace excess use revenue with larger subscription contracts that are more predictable and higher quality. The byproduct, of course, of this conversion into subscription revenue has been a year-on-year reduction in our excess use revenue by 24% in Q4 and by 28% for the full year. We ended the fourth quarter of the year with 1,298 discrete plan platforms and are installed in more than 2,900 retail locations. While net revenue retention, a measure of the growth in our recurring subscription revenue, excluding the impact of new client acquisitions, was 97% in 2023 compared with 105% in the prior year, a reflection of the challenging market and slightly below our target range of 100% to 110%. Our gross was $4.8 million, representing a margin of 70%, which is lower than recent quarters due to absorbing higher message distribution costs imposed by the telecom operators. For the full year, our gross profit was $21.6 million, representing 8% year-on-year growth and a margin improvement of 2% from 75% in 2022 to 77% in 2023. Moving on to operating expenses. We have seen the impact of our diligent management expenses now flowing through into our operating results, and we continue to remain highly focused on optimizing the leverage in our business while, of course, at the same time, balancing this with our investments for sustainable growth. Total operating expenses in Q4 were $6.9 million, representing a 31% year-on-year reduction. At the end of the year, our employee count was 83 compared with 126 employees at the end of 2022. Sales, servicing, and marketing expenses were $1.8 million for the quarter, representing 26% of total revenue. Sales and marketing expenses decreased by 46% year-on-year due to cost rationalization towards the end of 2022 and during the current year, resulting in lower employee headcount. Technology and software development expenses were $1.8 million in the quarter representing 26% of total revenue. These expenses decreased 41% year-over-year, with the savings being attributable to lower expenses associated with the use of offshore contractors and a reduction in employee costs. G&A expense was $3.4 million for the quarter, representing 50% of total revenue and a 9% year-over-year reduction. For the full year, operating expenses were $29.9 million, representing a year-on-year reduction of 17%. While operating expense reduction initiatives have been implemented throughout the year, we have not yet seen the full impact of these initiatives. Our current annual run rate is expected to result in a year-on-year reduction of approximately 30% from 2024 compared with the 2023 operating expenses. Adjusted EBITDA is our key earnings metric since we believe this most closely equates to operating cash flow. Adjusted EBITDA loss in the fourth quarter was $0.2 million, representing an adjusted EBITDA margin of negative 4%. The adjusted EBITDA loss represents an improvement sequentially compared with the $0.9 million adjusted EBITDA loss in Q3 and is significantly lower than the $3.2 million loss reported in Q4 last year. For the full year, our adjusted EBITDA loss is $3.6 million compared with $12.6 million in 2022 or a 71% reduction. Free cash flow for the fiscal year was negative $3.2 million, comprising primarily $5.3 million cash used in operations, $12.7 million in repayment of our convertible note, $4.2 million received from the issuance of stock and our equity raise, which was completed in May, and $1.9 million in short-term cash advances. I shall now conclude with our guidance for the first quarter of fiscal 2024. With regard to our outlook, I would include our usual caveat that our clients continue to experience industry-specific headwinds and the macroeconomic uncertainties continue to be highly prevalent. For the first quarter of fiscal 2024, we expect total revenue in the range of $6.4 million to $6.7 million and an adjusted EBITDA profit in the range of $0.2 million to $0.4 million. For the full year of fiscal 2024, we expect total revenue in the range of $29 million to $32 million and 10% year-on-year growth at the midpoint and an adjusted EBITDA profit in the range of $3.5 million to $5.0 million. With that, I'd like to open it to Q&A. Operator, please poll for questions.
Thank you, and good afternoon. Just wanted to follow up real quick on the guidance here, looking at your 2024 guidance. You're expecting kind of a sequential decline in Q1; you factor a little bit on the macro side of that. There's some seasonality in there, but I just want to get a sense for what that means for a much bigger ramp in the second half of '24. But can you help us understand the Q1 kind of softness from that standpoint, continuing challenges for clients or adding new customers here in the current environment? And what sales initiatives or programs are going to account for kind of the stronger second half of '24 cadence? Just unpack that a bit; that would be helpful.
Scott, thanks for the question. To address the Q1 decline at first, obviously, there's still a little bit of seasonality. Revenues tend to be a little higher in holiday periods. So in Q4, we have all the traditional holidays, and in Q2, we have things like 4/20 and some events through this summer. Very few occur in Q1. So we try to factor that in. And then secondly, we feel there's ongoing challenges in the macro environment. So we don't want to assume there's too much of an uptick in Q1. In terms of the second half of the year, and as you rightly say, there's an acceleration in growth as the year progresses. That really is the impact of the seasonality that I just talked about, but also the effect of some of the newer products coming on board, particularly the VIP subscription product, which we launched in the second half of 2023 and is already gaining good momentum in the marketplace. We've already got nearly 2,000 consumers subscribed to those programs across several retailers, and many more retailers have already signed up to launch their subscription programs. And then the second initiative is the gift card program by SpringBig, which allows retailers to have a gift card payment option within the mobile wallet. That will allow consumers to combine payments with loyalty points and the use of the prepaid gift card. So these two will drive some revenue growth in the second half of the year along with seasonality. So that's why we get the profile that we do through 2024.
Thank you. I appreciate that detail. And just kind of follow up on the overall weakness here, just kind of provide an update on what you're seeing from the new business side. The last couple of quarters, obviously, there's been attrition of accounts that have been tough times for many clients. We see that in California as more retailers are going out of business or not paying their bills or taxes from that standpoint, but just kind of a little more visibility on the new account side. With that said, can you regionalize it since the mature market is still tough? New York is coming on with legal retailers, providing growth opportunities, or the states that are looking positive for adding new retailers from that standpoint? And then I have one follow-on after that; that would be great.
You almost answered the question. Yes, the mature states continue to be tough. New retail comes on from some of the newer states and the states that are transitioning from medicinal to recreational. We added 396 new clients during the past year. So that's a nice average. And it is a fairly constant rate of between 30 to 35 clients added in each and every month during the year. But we're still seeing too much churn. We're particularly at the lower end with many clients who are financially challenged. We've talked about before that while we try to help them by putting them on payment plans and supporting them through these challenging periods that the industry is going through, at times, we also have to suspend them and stop the service because if they are not going to pay us, at the end of the day, we have no alternative.
Got it. And then just kind of a follow-up on that, are you seeing any positive outreach from the large MSOs? Obviously, the big MSOs are really reporting meaningful cash flow generation. And that's not even counting the potential elimination of 280E, right? As cash flow generation comes from a lot of these larger clients of yours. What's kind of the sense for whether they want to drive growth and perhaps add to the program or ramp up your new initiatives from that standpoint? Just kind of a little bit of color from your large clients that are seeing good cash flow from that standpoint.
We're seeing the major MSOs that are our clients, and we've got plenty of the top 10 among them. They continue to expand their spend with us. We've seen growth and interest from them in some of the newer products. A lot of them are also transitioning to the mobile app, which allows for push notifications rather than relying on text messaging because push provides better deliverability and is more cost-effective. So we're seeing accounts from those big MSOs continuing to grow.
Overall, the marketing budgets are still pretty tight. We just haven't seen that open up and we're kind of waiting for potential rescheduling for that to occur...
Yes. And we feel that if we get rescheduled and the 280E issues go away, then that could be a big boost not only for the larger MSOs but also for the smaller retailers. A proportion of that additional cash injection into the industry will flow into marketing budgets.
Appreciate the update. I will jump back in the queue.
Good afternoon, gentlemen. Thanks for the update today. I just had a couple of quick questions. Scott, I got most of the relevant ones. But on the messaging costs, I guess the gross margins, Paul, you may have missed this in your commentary, but is that sort of a number that does get passed along to clients in that sort of increased messaging costs as we move into '24? Or is that sort of a permanent state for gross margins, which is fine if it is? But maybe you can remind me of that if I wasn't paying close enough attention.
It's an additional cost. The messaging costs have gone up as carriers have increased their costs. To date, we've not passed that on. So we've been absorbing that additional cost. As we think about pricing going forward and we think about our margins, then some of it will largely get pushed and transferred. Some of it won't, and we'll have to absorb it. But at the same time, we try to promote alternative distribution methods. As I mentioned in response to Scott's question, the more people can be using push notifications, which we don't have the associated carrier costs with and which offers better deliverability. That is more cost-effective for both us and for our clients. Interestingly, you will also see an increased use of email, which may seem sort of antiquated as a method nowadays, but again, you get more cost-effective and better deliverability. So we now have about 40% of our messages going out via either email or push notifications, and that in time will impact the gross margin.
Yes, it's interesting. The dip from Q3 to Q4 raises the question of whether we can equate that decline to the dollar amount of the net price increases. Is it reasonable to make that comparison?
Yes, that's okay.
It seems that the trend is moving in the right direction with bad debt expense decreasing to $732,000 this quarter compared to approximately $1.1 million in the same period last year. However, I've heard from others in the industry that some have shifted to requiring upfront payments from certain customers. This approach has a similar effect as being more stringent with credit. Have you found that this has negatively impacted cash flow when customers are required to pay upfront for services? Additionally, have you reduced the length of service terms that allow customers to consume services before being billed? I'm interested in how you're handling payment durations, as it seems the norm a few years ago allowed customers a quarter to pay, but that timeframe appears to have been decreasing due to ongoing cash flow issues with smaller clients.
We've said to the larger players, we obviously try to stay with quite tight payment terms. I don't think those have changed that much over the last year or so. What we have done is implement a system to ensure that particularly the smaller clients are prepaying before usage.
Correct. Okay. Okay.
That actually has a benefit to the client as well in that, as you know, Casey, the relatively small businesses. By prepaying, it helps them manage their own budgets. Because if you have access to our platform and can send out endless messages, and then you get the bill afterward, you may find you suddenly spent x times what you thought you were going to spend. And that's not good for the client or for us because at the end of the day, we've got an unhappy client. So implementing a prepayment system means we're helping them manage their budgets on a month-to-month basis.
Right. Okay. Okay, good. So that structure, has that been sort of fully implemented? Meaning, is there more to go in terms of telling some people that we're moving to a prepaid model, or have we sort of completed a lot of that work in terms of adjusting our payment plans and billing practices?
We've largely completed that. We transitioned to that for the customers we were going to transition with effect from January.
Okay. Okay, good. Super. That means it's sort of great progress. And I think hopefully, the bad debt expense is showing us a positive trend there. So in terms of the revenue guidance, and this is for both, can that be achieved with just the existing client base, meaning it doesn't rely on new customer adds? Or is there some expectation for sort of normal customer adds to support that?
My expectation is that normal customer adds at the rate of 30 to 35 a month will continue and that we'll get some reduction in the churn that we've seen through the last year or so. But hopefully, we'll be on the cautious side on our revenue guidance.
That's good to hear. Regarding the last question, can you share if there were any commercial revenues from the non-cannabis segment, like alcohol or tobacco, even if it was just a small amount in Q4? I'm not looking for a specific figure, just curious if we're generating any revenues there.
Yes, we are. We've got about 10 contracts that are in that broad non-cannabis category. So they're generating revenue. It's not a significant number yet, and if it becomes a significant number at some point, obviously, we'll start breaking that out. We've also started marketing a significant integration with a point-of-sale system in the non-cannabis space, and that is driving some acceleration in that area in Q1 of 2024. So we're quite optimistic about growth in that non-cannabis space.
Okay, great. I have one more question, understanding that we are still in the early stages. Do the revenue patterns appear similar? For instance, if a non-cannabis client has five locations and a cannabis client also has five locations, does their spending and margin profile look the same? I'm assuming it relates to software and encompasses communications, marketing, and loyalty, which could potentially mirror each other. However, I wonder if there's a reason for any differences. Generally, do you expect the revenue and margin profiles for cannabis and non-cannabis to be similar or different, and can you elaborate on that?
I think it's relatively similar. I would expect that the revenue outside of cannabis for a client that was similar in every other aspect. But for the market, the revenue would be slightly lower. The reason I say that is there are specific challenges in the cannabis space, as you know, around communicating with your consumer. That drives many cannabis retailers to message more than people probably will in markets outside of cannabis, where the restrictions don't apply. So I think on average, the revenue for a non-cannabis client will be slightly lower than it is in the cannabis space.
Right. Okay, got it. Well, thank you. Thank you for the encouraging outlook. And yes, we're looking forward to a good year. So thanks for your time.
Thank you. And thank you, everyone, for joining our call and for your continuing support of SpringBig. We're certainly excited about the next year and what's ahead of us, and we look forward to updating you with our progress as the year progresses. Thanks again, and have a good evening.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may now disconnect. Have a great day.