Cardlytics Inc (CDLX) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Cardlytics Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Kirk Somers, Chief Legal and Privacy Officer.

You may begin.

Good afternoon, and welcome to Cardlytics Third Quarter Financial Results Call.

Before we begin, let me remind everyone that today's discussion will contain forward-looking statements based on our current assumptions, expectations and beliefs, including projected 2018 fourth quarter and full year financial results and operating metrics; 2019 preliminary growth expectations; business strategies; expected long-term growth and profitability; and other forward-looking topics such as anticipated growth in monthly active users from Chase and Wells Fargo; the impact of the anticipated Chase launch; growth in monthly active users and in new verticals, including travel, e-commerce, grocery and premium brands; our ability to sell premium inventory at increased prices; growing ARPUs; enabling automated buying and campaign validation; integrating into third-party advertising systems; and improving market adoption and customer engagement with real-time and location capabilities.

For a discussion of the specific risk factors that could cause our actual results to differ materially from today's discussion, please refer to the Risk Factors section of the company's 10-Q filed August 14, 2018, and in subsequent periodic reports that company files with the Securities and Exchange Commission.

Also during this call, we will discuss non-GAAP measures of our performance.

GAAP financial reconciliations and supplemental financial information are provided in the press release issued today and the 8-K filed with the SEC.

Today's call is available via webcast, and a replay will be available for 2 weeks.

You can find all of the information I've just described on the Investor Relations section of Cardlytics website.

Joining us on the call today are Cardlytics leadership team, including CEO and Co-Founder, Scott Grimes; COO and Co-Founder, Lynne Laube; and CFO, David Evans.

Following their prepared remarks, we'll open the call to you for your questions.

With that, let me turn the call over to Scott Grimes, Cardlytics CEO and Co-Founder.

Scott?

Thanks, Kirk, and thank you to everyone for joining us in our third quarter earnings conference call.

On today's call, we'll discuss our third quarter 2018 results, provide you with an update on an upcoming bank launch and discuss our plans for the remainder of 2018.

Total revenue for the third quarter was $34.6 million.

Our core Cardlytics Direct revenue grew 14% year-over-year to $34.4 million, primarily reflecting continued growth with new and existing marketers and early entry into new verticals.

David will discuss additional details around our revenue and adjusted EBITDA along with other financial and operating metrics later in his prepared remarks.

While we've beaten the bottom line, we were disappointed that revenue did not meet the guidance we provided during the Q2 earnings call.

This was primarily due to a couple of advertisers unexpectedly not participating in the platform during September, creating a gap that we weren't able to build quickly.

On a much more positive note, we are excited to announce that we will be rolling out Cardlytics Direct with Chase in the coming weeks.

Once it's fully launched, Chase will extend offers to their credit and debit card customers nationwide via mobile and online banking along with e-mail.

While we don't speak to metrics for individual banks, a launch with Chase will significantly increase our MAU base starting in Q4 2018 and continuing into Q1 and Q2 of 2019.

Launch of this important national bank will further strengthen our ability to deliver impactful and profitable growth for marketers.

Lynne and I are proud of our team's hard work and flawless execution in preparing for the Chase launch.

Nobody is taking a breather as we continue our efforts to consolidate the U.S. banking market for Purchase Intelligence.

As we have discussed the last few quarters, we have been investing in scaling our technology across Cardlytics to support a rapid expansion of MAUs and the parallel implementation of 2 national banks.

We now have the infrastructure and operations in place to support $150 million or more MAUs in the United States.

We are well positioned to support significant MAU growth starting now and continuing throughout 2020.

As these major investments near completion, we're now able to focus our resources in the things we need to do to drive ARPU growth that is commensurate with our rapid MAU expansion by entering new verticals and focusing on the ways to monetize the inventory across our MAUs.

We drive ARPU growth by increasing the number of advertisers and the amount they invest in Cardlytics Direct.

For marketers, significant MAU acceleration will give us the unmatched ability to provide powerful, actionable insights for our marketing clients in store and online.

With Cardlytics Direct, we can find exactly the right customers, reach them in a brand-safe trusted channel and fully close the loop to help advertisers understand precisely the impact and return of their marketing investments.

With our increased scale, we are able to drive meaningful results for marketers in new sectors that we don't serve today.

We are investing to penetrate the travel, e-commerce, premium and grocery verticals.

The addition of large credit and debit populations allows us to connect with the majority of a brand's customers, whether they are affluent or millennial when they are thinking about how to spend their money in these verticals.

We are scaling MAUs, creating significant inventory.

While we have historically focused on building our network of bank partners, we are now concentrating our resources on monetizing this inventory as we consolidate the U.S. banking market.

We have the same levers available to us that are available to all other digital publishers and each create significant upside.

We can create premium ad units, moving up funnel with increased pricing.

We can drive engagement, especially mobile, by leveraging our unique real-time payments and location capabilities.

We can optimize how we serve impressions for different types of marketing across different channels.

And we can automate our buying processes to enable more marketers to buy more from us more efficiently.

Lynne will discuss some of these recent enhancements that we have launched.

When I think about the different ways we can unlock the value of our inventory, I'm really excited about how well we are positioned to drive accelerating sustained growth.

Basically, 2018 was about doubling MAU scale.

In 2019 and 2020, we are focused on monetizing the scale, creating real value for our marketing clients, our bank partners and their share of customers.

I'll now hand this call over to Lynne to highlight some accomplishments from Q3 and how our anticipated growth is being received by our current marketing clients as well as brands new to our platform.

Lynne?

Thanks, Scott.

I would like to provide some more detail on the accomplishments and the challenges the company faced in Q3 and moving into Q4.

As Scott mentioned, launching a national bank is enormous effort.

Chase represents one of the most significant implementations in Cardlytics' history, both in terms of the overall scale and complexity.

As we've discussed before, we had to dramatically increase the capacity of our systems and our processes to handle a material increase in MAU and to manage the distribution of media across the broad range of consumer touch points.

And we are doing this during the biggest quarter of the year for our existing marketers.

In 2018, our technology and operations team have been preparing for the launch of 2 national banks.

They have accomplished a tremendous amount, both ahead of schedule and under budget.

We can now focus these resources on the investments we need to serve more advertisers in an increasingly effective way.

We have been preparing our marketing clients for significant scale in 2019 for the past several months.

The overall receptivity to our new scale is encouraging.

Marketers are looking for brand-safe ways to invest their marketing dollars.

Our platform now brings significant scale they require and also provides unique benefits.

Our platform is a pristine advertising platform.

There are no bots.

There is no fraud.

There is no viewability issues.

And there is no unsavory content.

We are a channel where marketers can reach real customers who have bank accounts and spend money.

And of course, we have the ability to target people based on actual purchases and then measure the results of their advertising using actual purchases.

These are unique advantages of our platform and marketers are engaged.

Historically, we've concentrated our efforts on building bank partnerships to grow MAU scale and inventory.

Now that the MAU scale is coming online, we are focusing our resources on monetizing the inventory across our MAUs.

One key area of focus to become frictionless publisher for our marketing clients.

As we serve more marketers and they scale their investments in Cardlytics Direct, they want us to become more integrated into their marketing processes.

There are a number of touch points that we can expand our technology to address these needs, including media planning, media buying and media mix measurements.

By building and automating these connections, we reduce friction and move towards an automatic always-on part of their media mix.

We've started to roll out these new capabilities and will throughout 2019 and 2020.

As an example, in Q4, we launched an important new validation capability to scale advertising budgets many prospects and clients need to verify that the results and the return on ad spend that we report are accurate.

To address this demand, we partnered with Nielsen as an independent trusted third-party to measure the performance of our platform, consistent with the way they measure sales lift on other digital platforms.

They have delivered our first report and dozens of new ones are underway.

Second, virtually all of our marketing clients or their agencies are buying and managing digital media in an automated manner.

In fact, currently about 80% of our digital display advertising is purchased in this fashion.

One of our key 2019 growth strategies is to make the buying process for Cardlytics Direct easier potentially by integrating into digital media platforms that advertisers and agencies use.

We are also evaluating other strategies to move from our Insertion Order sales model to an always-on form of advertising.

We are working closely with our bank partners to create premium ad units to drive engagement and optimize how we unlock the value of our inventory.

One of the key investments in the platform that we made in 2018 is to enable receiving and processing transaction data from our bank partners in real time.

This is an important capability that will enable us to create new solutions for our marketing clients and bank partners.

For example, for marketers, we will be able to optimize when we serve marketing across the channels to maximize sales and return on ad spend.

For our bank partners, we can create new real-time user experiences to increase relevancy and drive engagement.

Finally, we would be remiss if we did not discuss some of the other key accomplishments during the quarter.

We continue to remain on track for Wells Fargo launch in 2019.

We recently negotiated a contract renewal with Lloyds Bank with improved terms to provide Cardlytics Direct to their customers through 2020.

And we announced the opening of a new technology center in India, which will increase the pace with which we can develop new products and features for marketers and banks.

We believe the significant investments made this year position us well for accelerating growth in 2019 and 2020.

With that, I will turn it over to David.

Thanks, Lynne.

Revenue within our core Cardlytics Direct business was $34.4 million, representing 14% year-over-year growth over the third quarter 2017.

Our U.S. direct business was up 20% year-over-year in Q3, partially offset by a temporary decline in our U.K. business.

Revenue for our direct business fell short of our expectations in the third quarter, primarily due to a few anticipated advertisers that were not in the channel.

Total revenue for the third quarter was $34.6 million, representing an increase of 10% over the third quarter 2017.

Revenue from Other Platform Solutions was approximately $0.2 million compared to $1.2 million in the third quarter of 2017.

Our third quarter core Cardlytics Direct revenue growth reflects growth from new marketers, improved engagement enhancements with our banks and year-over-year growth in MAUs.

MAUs grew 7% over the third quarter of 2017 from 55.4 million to 59.3 million.

Consistent with our commentary on our last call, we expect significant MAU growth in the first half of 2019 and continuing into 2020 as we prepare to launch Wells Fargo in addition to Chase.

Our third quarter 2018 ARPU was $0.58, up 6% from $0.55 in the third quarter of 2017, reflecting continued momentum with our marketer base.

Total adjusted contribution profit was $17 million in the third quarter, up from $16.2 million in the prior quarter and down slightly from $17.2 million in the third quarter of 2017.

To be fair, during the third quarter 2017, we reversed a noncash guarantee shortfall accrual of $3 million.

And during the third quarter 2018, we recognized a positive impact and true-up from the Lloyd's revenue share contract change of $800,000.

Excluding these benefits, total adjusted contribution profit represents 14% year-over-year growth, and Cardlytics Direct adjusted contribution profit represents 17% period-over-period growth when excluding the benefits I just discussed.

Adjusted EBITDA was a $1.7 million loss in the third quarter 2018 compared to a positive $71,000 in the third quarter of 2017.

Our third quarter adjusted EBITDA was above our expectations and benefited from the $800,000 true-up from our renegotiated Lloyds contract mentioned previously, timing related to new hires and coming in under budget on certain Wells- and Chase-related investments.

On an apples-to-apples basis, when excluding the Lloyds contract benefit and guarantee shortfall adjustment in Q3 2017, our adjusted EBITDA would have improved by 18%.

We ended the quarter with $67.8 million in cash compared to $70.5 million at the end of Q2 2018.

Our cash balance includes $20 million of restricted cash.

We ended the quarter with $3.1 million in availability on our AR facility.

Now turning to our guidance.

We are updating our full year 2018 revenue guidance of $146 million to $148 million.

We expect our 2018 adjusted EBITDA loss to be between minus $9.4 million and minus $8.4 million.

This is over $3 million improvement from the midpoint of our previous full year adjusted EBITDA guidance, as we efficiently managed budgets and accrue some of the Q3 savings that flow through the remainder of the year.

As an aside, we are no longer anticipating any accruals in 2018 for any FI share commitment shortfall.

We currently expect this to take place sometime in 2019, and in which case, we would anticipate a shortfall in the 12 months thereafter.

In the fourth quarter, we currently expect revenue to be between $43 million and $45 million.

It is worth noting that we have added a bit of room for variability in Q4 top line revenues, as Chase comes online.

Given the timing of the late Q4 launch relative to marketing budgeting cycles, we expect that the Chase launch will impact Q4 MAUs.

However, we don't expect to see material financial impact until early next year as marketers expand budgets for our increased scale.

While we have gone to great lengths to analyze and estimate Chase's impact on revenues, we ultimately will not know with precision until they're up and running.

We expect adjusted EBITDA loss for the fourth quarter to be between minus $2.5 million and minus $1.5 million.

While our bottom line exceeded expectations for 2018, revenue is not expected to meet our prior expectations.

However, we remain very excited about the 2019 opportunity for Cardlytics, especially with the launch of the first of 2 new national banks.

With that, I'll hand it back to Scott for his closing remarks before we open the call to your questions.

Scott?

Thanks, David.

We are excited about the significant investments we have made to expand our MAU scale over the past 3 quarters.

We believe our team's accomplishments position us well for accelerating and sustained growth for many years.

With the addition of 2 new national banks, we will be able to deliver great value to the majority of bank customers in the United States.

We will be able to bring powerful new insights to our marketing partners.

And with these insights, we can deliver profitable sales growth at scale, both in-store and online, through our trusted, brand-safe, fraud-free Cardlytics Direct native advertising channel.

2018 was about building MAU scale with largest U.S. banks.

In 2019 and 2020, we will focus on monetizing that scale by driving the usage and performance of the inventory across our bank partners.

With that, I will open up the call for your questions.

Thank you.

(Operator Instructions) Our first question comes from Doug Anmuth of JPMorgan.

Just wanted to ask 2. I guess, first just on Chase, and I know you said that you don't expect much in terms of 4Q.

But just can you talk about, as you go into '19 and then maybe in '20 as well, just how you think about the passive kind of timing around MAU increases related to Chase and how that can ramp?

And then also how ARPU should follow on in implementation this big.

And then secondly, just on 3Q and the advertising, any particular reason why those couple of advertisers pulled that you noted?

And then how can you get the advertiser base to kind of really have that scale and kind of density where a couple of advertisers are not impacting your results to this degree?

Thanks, Doug.

Before I answer your questions, let me sort of add one clarification to the prepared remarks we had.

The launch of Chase is now officially underway with Chase's mobile app users with e-mail and banking -- online banking to follow.

You'll be hearing a lot more from Chase about that soon.

We'll let them communicate the details of the launch, but we did want everyone to know it's officially underway.

Doug, to now go back to your questions, first of all, as we have talked about 2019 -- and we're certainly not ready to give 2019 guidance today.

But as we've talked about it, we believe in 2019 and 2020, our constraint in growth will not be MAUs, will not be our inventory.

We have a ton of MAUs, a ton of inventory.

It'd be the rate at which we drive advertiser adoption.

And one thing that we really try and emphasize on this call is now that we have stood up the infrastructure that we've really worked hard in 2018, we're kind of pointing our guns at the things we need to do to drive that advertiser adoption.

To touch -- to get to your point about the shortfall we had in Q3, the -- every quarter, we have some advertisers come in later in the quarter that we didn't project and we have some advertisers come out.

Frankly, we just had a few fallout without some of the ones averaging coming in at end of the quarter, and we didn't see it when we gave the guidance.

It wasn't anything a lot more complicated than that.

That being said, when we were talking about the investments we're making in 2019 and 2020, we believe as we become more and more part of the automated buying processes that our advertisers use for their other types of digital media, it just makes it easier for more advertisers to buy from us.

Frankly, for us, those cost effectively serve more, and it makes it more efficient for them to use us in kind of an always-on advertising mode than the IO base model we have today.

So I think we have our arms around what we need to do to serve more advertisers at scale better than we do today, and we're starting to make the investments to go and do that.

And our next question comes from Aaron Kessler, Raymond James.

A couple of questions.

Maybe as a follow-up on that.

You talked about kind of the integration of what's the ad platform maybe as we go into 2019.

Can you just give a little more details on that?

Seems like it's a little bit of maybe a different user experience, though, from a different type of ad to work that seamlessly.

And then second if you guys could talk about maybe the organic MAU growth, how you're looking to drive that as we going into 2019, especially once you kind of get the larger base of MAUs?

Yes.

Yes.

Thanks, Aaron, thanks for the questions.

So we see the journey of tying into the ad platforms as definitely a multiyear journey, both in 2019 and 2020.

We actually think the way we run the media today, we can support it through the automated buying processes, but we also think there's an opportunity to bring, as Lynne mentioned, things like premium ad units into the user experience.

We'll make the user experience more engaging for users and more engaging for our banks also.

So we will kind of talk about these enhancements we're making kind of quarter-over-quarter as we roll them out in the market, similar to what we did with Nielsen this quarter.

What was the second question?

MAUs.

MAUs.

So we obviously talked about the growth of Chase MAUs today.

We will see that growth both in Q4 and going into Q1 and Q2.

We are also tracking on the Wells implementation and that will, of course, a big driver of MAUs in 2019 also.

And behind all of that is digital banking continues to grow at a high single-digit growth every year.

We benefited from that across all of our banks, and that will continue to drive MAU growth -- on top of the MAU growth we get from bringing new banks online.

The question just as it relates to organic, I think we've told people on the past historically, there's a mid- to single high-digit type of growth rate that we would get organically.

I think we saw that this past quarter.

We got 1.5% growth sequentially, and I would expect to see us kind of continuing to make the same types of enhancements across the board that would translate into continued improved MAU growth.

I was just going to quickly ask you, the lower FI costs we saw in the quarter, about 52% of revenue.

Would that be onetime item, some of that?

Or can you just give more color on that, why that dropped down sequentially?

Yes.

You've got $800,000 good guy on FI share and it was predominantly that.

And our next question comes from Andy Hargreaves of KBCM.

I wanted to see if you could talk about any metrics around average engagement per user.

Are you seeing any improvements that the product helped drive higher frequency?

And then just a follow-up on sort of moving to more automated buying process.

I guess, 2 follow-ups on that.

Can you give us a little bit more detail on what your expectations are from a time standpoint?

How long will it take to develop the tools necessary?

And then just how would it work as it's not a normal ad unit.

You have the sort of discount element you have to integrate.

So can you just talk about how that might work?

This is Lynne.

I'll take those questions.

So in terms of user engagement, you have to look at how long your bank has been online with the program and that's how user engagement flows.

So a new bank, for example, like Chase is going to have much lower overall engagement in the first month of the program than a bank that's been live for 4 years.

So when you look at any given bank, based on its vintage curve of how long it's been live, user engagement grows every month both in terms of new users adopting the program for the first time and in terms of users using it more often, existing users using it more often.

We do benchmark that across all of our banks based on what their vintage curves are.

And a lot of the product enhancements that we make are to drive more frequent and more user adoption.

There is still plenty of upside in even our existing banks to drive more user adoption than we have today.

What I would say is we track fairly well to other new banks' products that are launched.

So for example, our adoption tracks similarly to the adoption of online banking or the adoption of mobile deposit or the adoption of bill pay in terms of both the curves and how they look, but also where they ultimately cap out.

Never going to have 100% of our MAUs using their program.

But when the bank then has maturity, you are going to see users in multiple high-digit use rates.

In terms of the automated buying, it's definitely going to be a journey.

It's similar to what we said today about the automation that we rolled with Nielsen.

We'll be rolling them out quarter-by-quarter over the next -- certainly over the full year 2019 and likely going into 2020.

And you sort of take these in bite-sized chunks.

The ad units I want to make sure everyone understands, there are -- when you integrate into the buying processes, there are ways to create private marketplaces, so you're able to control the type of ad units that someone can actually push into your inventory.

That is clearly what we have to do in the early days so that we're actually able to take their ad unit and then convert them into a discount through our own network and processes, which is very similar to what we do today with our CPS pricing model.

Today with CPS, the advertisers are buying a certain number of impressions and a return on ad spend.

We take some of the revenue and convert that into a discount.

You can do that same concept in a private marketplace with automated buying.

And those are the things that we're looking at rolling out.

And our next question comes from Matt Trusz of Gabelli Research.

I was wondering, can you discuss where you are in the build out of these 4 new advertising verticals?

What are the different milestones we've achieved or need to achieve just speaking of retail accounts or key hires?

Yes.

So I would say we're in the early stages and focused on the key leaders for each of the verticals.

We've either announced or just about to announce that we've hired the leader of our travel vertical.

I think we just announced it.

And we are recruiting leaders for the other 3 new verticals.

So it's in the early days.

I think there are a couple of key milestones we're focused on.

Number one, making sure that we have our pricing and positioning correct for the new vertical, because the way we sell in retail, for example, shouldn't necessarily be the way we sell in travel or for e-commerce.

And the second thing we are very much focusing on is who are the 3 or 4 first wins you want to get to sort of have the reference clients as we try to penetrate the vertical.

Okay.

My other question would just be are you seeing or did you quantify any sort of like negative revenue churn you could call it trend with your seasoned advertisers where they keep coming back for more?

And how has that just been trending as the platform evolves?

David, do you want to take that?

I'm not quite sure I understand the question with regard to seasoned churn, but we obviously do experience some from time-to-time.

Our top 20 will rotate to some degree, but it's not something we disclose.

I don't know if there's any more to add to that.

All I would -- this is Lynne.

I would just say that we don't have -- if you look at churn across the course of a 6- to 12-month buying cycle, we have very little of it.

We do have, as we've commented before, variability within the quarters and within certain advertisers being in versus out relative to other strategies that they have.

So for example, in this past quarter, it was primarily one advertiser in the U.K. who was going through some significant internal issues that they were dealing with, and they're now back in.

So really you have to look at churn over a longer period of time, which is why we're so very focused on trying to move to less of an IO-based model and more of a kind of an always-on model, which will help with that.

And the reason overall that we continue to grow budgets with our advertisers is for every dollar they spend with us, we bring him $5 of return, and that's really what we focus on is making sure they understand that and working with them to make sure that they understand how we can do that not just to drive online sales, but also to get people in the store.

So that's our strength, and we think we really continue to show well with advertisers because of that.

(Operator Instructions) And this does conclude our question-and-answer session.

I would now like to turn the call back over to Scott Grimes for any closing remarks.

Well, everybody, thanks for joining the call today.

Look, while we clearly weren't pleased with our top line results in Q3 and we're really focused on keeping those back in line, we are super-excited about the launch of Chase and about the scale this brings to our advertisers and the impact that we can directly have in their businesses.

So we appreciate everybody's time tonight and look forward to talking to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program, you may all disconnect.

Everyone, have a great day.