Fluent Inc (FLNT) 2018 Q3 法說會逐字稿

Good afternoon, and welcome to the Fluent, Inc. Q3 2018 Earnings Conference Call. (Operator Instructions) Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Ms. Jordyn Tarazi. Ma'am, please go ahead.

Good afternoon, and welcome. Thank you for joining us to discuss our third quarter 2018 earnings results. With me today are Ryan Schulke, CEO; and Ryan Perfit, Interim CFO. Our call today will begin with comments from Ryan Schulke and Ryan Perfit, followed by a question-and-answer session. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit our Investor Relations page on our website, www.fluentco.com.

Before we begin, I would like to advise listeners that certain information discussed by management during this conference call are forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. The company undertakes no obligation to update the information provided on this call. For a discussion of risks and uncertainties associated with Fluent's business, I encourage you to review the company's filings with the Securities and Exchange Commission, including the most recent annual report on Form 10-K and the company's 10-Q.

During the call, we will present certain non-GAAP financial information relating to adjusted gross profit, adjusted EBITDA and adjusted earnings. Management evaluates the financial performance of our business on a variety of key indicators, including adjusted gross profit, adjusted EBITDA and adjusted earnings. The definitions of adjusted gross profit, adjusted EBITDA and adjusted earnings and the reconciliation to the most directly comparable GAAP financial measure is provided in the earnings press release issued earlier today.

With that, I am pleased to introduce Fluent's CEO, Ryan Schulke.

Thanks, Jordyn, and good afternoon, everyone. As we continue to establish our stand-alone footprint in the marketplace, we're pleased with our third quarter results with $66.5 million, $27.4 million and $12.4 million in revenue, adjusted gross profit and adjusted EBITDA, respectively; which marks 21% growth on revenue, 43% adjusted gross profit growth and 56% adjusted EBITDA growth as compared to the third quarter of last year.

We're continuing to see positive trends on our core business. Our advertising partners remain confident in Fluent's strategic capabilities and have been increasing demand for our performance-based marketing services. Simultaneously, we've continued to drive operating efficiencies that are increasing our gross profit margins, including advancing our life cycle marketing initiatives and implementing machine learning technology. These 2 factors coming together really increased demand from our advertising partners. Life cycle marketing along with machine learning are really helping to drive network effects across our performance marketplace.

Our U.K. beta launch has continued to show positive trends. After 2 full quarters of testing, we've increased scale and profitability and are receiving positive feedback from our partners. We'll continue to assess a more expensive global rollout during our 2019 planning process.

Understanding consumer trend and expectations in the digital era has been vital to Fluent's success. Our always-on surveying capability provides us critical insight regarding the attitudes, the lifestyles and the purchase behaviors of millions of consumers every month. The depth and breadth of our first-party, opt-in, self-declared data asset allows us to deliver an unparalleled point of view to advertisers, which differentiates Fluent as a primary growth partner to many of the world's leading and fastest-growing brands.

As we reach the midpoint of our third quarter as a stand-alone public company, Fluent's leadership and colleague base are very focused on delivering our growth agenda while creating value for our partners, our brand and our shareholders. Our performance commitment has facilitated our investment in personnel and resources so that we can continue to execute our key initiatives with excellence. In turn, we're feeling positive about the traction we're gaining in the broader digital marketing ecosystem and our overall growth strategy.

I look forward to updating you on continued progress during our fourth quarter and 2018 full year earnings call, and we'll now turn things to Ryan Perfit on the financial results.

Thanks, Ryan, and thank you, everyone, for joining our Q3 2018 earnings call. As Ryan Schulke mentioned, compared to third quarter of 2017, Fluent delivered 20-plus percent growth on 3 of our key financial operating metrics. We drove 21% top line revenue growth, 43% growth in adjusted gross profit and 56% growth in adjusted EBITDA. We also generated $4.5 million in net income from continuing operations, representing an earnings per share of $0.06. That's up from a loss of $0.19 per share for the third quarter of last year.

I'll now review the P&L in more detail. Unless otherwise noted, I'll be comparing the third quarter of 2018 to the third quarter of 2017. Favorable market conditions in Q3 drove revenue up $11.6 million to $66.5 million. The 21% increase was a result of increased adoption of our core performance-based marketing products across multiple advertiser verticals and media channels.

Adjusted gross profit increased $8.2 million to $27.4 million, and adjusted gross margin increased to 41%. That represents a 600 basis point increase in margin over Q3 2017. The increase in adjusted gross margin was the effect of life cycle marketing initiatives and the successful rollout of machine learning technology. Our life cycle marketing initiatives expand margin by re-engaging consumers at limited additional media cost. And our machine learning technology creates custom audience segments and helps boost monetization through iterative testing.

Selling and marketing expenses declined 18% to $4.2 million, mainly due to a decrease in the provision for bad debt. General and administrative expenses dropped 29% to $13.6 million in the third quarter. The decrease was largely a result of decreased share-based compensation expense to former executives, partially offset by an increase in employee salary and benefits. Salary and benefits, our core operating expense, was up 77% and accounted for 45% of general and administrative expenses in Q3. Expansion of our core workforce to support growth accounted for the increase.

Provision for income taxes for the quarter was 0, consistent with prior year. We recorded a full valuation allowance against our deferred tax assets for both periods and intend to continue to maintain a full valuation allowance until there is sufficient evidence to support a reversal of all or some portion of the allowance.

Income from continuing operations was $4.5 million. That represents a $15.2 million increase from $10.8 million loss in the same quarter of last year, largely driven by the increased adjusted gross profit and the aforementioned decreases in selling and marketing expenses and general and administrative expenses.

The historical results of Red Violet, the entity we spun off in Q1, and the cost associated with the transaction are reflected in Fluent's consolidated financial statements as discontinued operations. The net loss from discontinued operations for the third quarter was 0 but $3.3 million for the same period prior year. Net income for the quarter was $4.5 million compared with a loss of $14.1 million prior year.

For profitability, the Fluent management team principally uses the metric adjusted EBITDA. In the third quarter of 2018, adjusted EBITDA increased 56% to $12.4 million. And adjusted EBITDA margin expanded 19%, a 500 basis point increase over the same period last year.

Moving on to the balance sheet. Cash and cash equivalents were $17.4 million at September 30. Debt, including the current portion of long-term debt and net of capitalized debt cost, was $59.7 million. In accordance with the debt agreement, a $3.7 million excess cash flow-based principal payment is scheduled for November 15, 2018 and is presented in the current portion of long-term debt on the balance sheet.

For the 9 months ended September 30, cash provided by operating activities from continuing operations was $22.5 million compared with $5 million for the same period in 2017. The $22.5 million generated from operating activities was primarily the result of year-to-date income from continuing operations of $4.5 million, adjusted for $23.5 million of noncash items and an increase in assets and liabilities of $2.6 million.

Cash used in investing activities was $22.2 million for the 9 months ended September 30, mainly the result of $19.7 million contributed to Red Violet in connection with the spinoff and $1.4 million associated with Red Violet's discontinued operations. Cash provided by financing activities was $17.4 million for the 9 months ended September 30, primarily the result of net proceeds from the issuance of 2.7 million shares of common stock used to help to fund the contribution to Red Violet, offset by repayment of the term loan principal and cash paid to take shares related to vested RSUs into treasury.

We're extremely pleased with our financial performance in Q3 and confident we will achieve our full year financial goals communicated at the beginning of the year.

That concludes our prepared marks on the third quarter financial results. Our operator will now open up the line for Q&A.

(Operator Instructions) Our first question today comes from Jim Goss from Barrington Research.

I've got a couple. First, is there anything further to unwind with Red Violet in terms of the information you had been sharing?

No, Jim. Nothing further to unwind. They're completely spun off at this point.

Okay. And one thing we've talked about in the past, trying to create some better information to help us identify just what the vertical targets might be or the horizontal areas within the funnel that you would be serving. Maybe you could provide some of the say largest companies or sectors that are currently generating the bulk of your revenues.

Yes, Jim. And I know there's been some dialogue around that level of transparency. As previously mentioned, we did just emerge as stand-alone March 26, had really been focused on the foundational elements of the business and governance as a stand-alone public company, really head down, driving the business forward, making sure we're delivering results for shareholders. So that level of transparency is something that we're eager to start to talk about a bit more. As I've mentioned in the past, we really work across all consumer verticals due to the nature of our solutions and our interactions with audiences, really understanding their lifestyle, their interest, connecting them with brands that deliver products and services that meet their needs. So whether it be financial, home, legal services, media and entertainment, CPG and retail, we're playing in all of these verticals at different capacities with our solutions. So we will work to kind of talk about those trends a little bit more, as you can imagine, any specific area where you have a lot of new products coming into market. We talked in the past about streaming services and some of the things happening in the music and video industry. Whenever there's a competitive landscape, our acquisition solutions are really a go-to for marketers. But to be honest, we do run across all different verticals and are preparing on how we want to talk about that a bit more in the future.

Can you say if they tend to be the larger brand-name companies or rather there might be a variety of smaller companies that might be a little less under the radar that could use your services for visibility from their part?

Yes, I would describe them as a mix of the disruptors and the disrupted. And clearly, the disruptors are going to come on and be a bit more active. But we're continuing to see larger brands, Fortune 500s that are attempting to be more innovative. They want to defend their turf and make sure that they're interacting with the millennial consumer as much as their legacy customers. So it's certainly a mix, maybe a little bit more on the disruptor side where you have new companies coming into markets using technology really as a differentiator. But it's a bit of a mixed bag.

Our next question comes from William Gibson from Roth Cap Partners.

How many employees did you have at the end of the third quarter? And what was that up for the year?

I don't have the exact headcount handy, but it's right around 140 at the end of the third quarter.

Okay. And how many of those are in sales and marketing?

About 35 in sales and marketing. We're still relatively light there compared to more of our product and technology and analytical resources.

And in terms of the debt, Ryan, could you repeat what you were -- I missed -- you went so quick on the next repayment.

Sure. So in terms of debt, this isn't -- let's say, before the debt capitalization -- the capitalized debt cost, our outstanding debt is $64.9 million at the end of the quarter. We have an ECF, the excess cash flow, payment for November 15 scheduled of $3.7 million and then another amortization payment just as scheduled, the amortization payment at 12/31. So with those 2 payments in Q4, we would be down to $60.3 million in debt. That's again, not taking into consideration the capitalized debt cost, which would show differently on the balance sheet.

Okay. And what's sort of the timing do you think you can refinance that debt?

I mean, there are prepayment penalties that play out -- that tear down over the life of the loan and make-whole payments. So I don't think there's anything in the near term, but we're constantly kind of looking at the balance and whatever the refinance would look like and the profitability of that. So we're keeping an eye on it, but I don't see anything in the near term happening.

And ladies and gentlemen, at this time, we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Ryan Schulke for any closing remarks.

Yes, just thanks again to everybody for joining today. We're really pleased with the progress we're making as a second full quarter as a stand-alone public company. And really -- hopefully, we're demonstrating that this leadership team really has a lot of discipline and rigor about it, feel really -- feeling positive about our momentum right now and eager to get out in front of the 2018 full year and share more when that's upon us.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation.

You may now disconnect your lines.