Fluent Inc (FLNT) 2020 Q2 法說會逐字稿

Good day, and welcome to the Fluent, Inc. Second Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Ryan McCarthy. Please go ahead, sir.

Good afternoon, and welcome. Thank you for joining us to discuss our second quarter 2020 earnings results. Joining me on today's call are Fluent's CEO, Ryan Schulke; and CFO, Alex Mandel. Our call will begin with comments from Ryan Schulke and Alex Mandel, 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 will contain forward-looking statements covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made during this call speak only as of the date hereof. 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. These statements may be identified by words such as expects, plans, projects, could, will, may, anticipates, believes, should, intends, estimates and other words of similar meaning. The company undertakes no obligation to update the information provided on this call. For a discussion of the risks and uncertainties associated with Fluent's business, we encourage you to review the company's filings with the Securities and Exchange Commission, including the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q.

During the call, we will also present certain non-GAAP financial information relating to media margin, adjusted EBITDA and adjusted net income. Management evaluates the financial performance of our business on a variety of indicators, including media margin, adjusted EBITDA and adjusted net income. The definitions of these metrics and reconciliations to the most directly comparable GAAP financial measures are provided in the earnings press release issued earlier today.

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

Good afternoon, and thanks to everyone for joining us today. As we continue to navigate this challenging and uncertain environment, I want to thank our entire colleague base for their exceptional work under the most difficult circumstances. During these unprecedented times, Fluent remains resilient and steadfast and striving to support our colleagues, clients, consumers and communities.

The second quarter's performance once again demonstrated the strength and diversification of our platform and macro benefits of Performance Marketing. In spite of uncertainty in the marketplace, we delivered a solid Q2 with revenue up 1% and media margin up 8%, ahead of our prior business outlook for results in line with the previous year. Adjusted EBITDA is up 3% versus last year's Q2, which reflects an investment into our owned and operated media properties as well as the overhead impact of AdParlor, whose business we acquired in Q3 of last year.

On today's call, I'd like to first speak about the Q2 operating environment along with our results and then provide broader context relative to our strategic growth pillars. Regarding the operating environment, our core focus remains on access to cost-effective media at scale while leveling out volatility across our advertiser base. Concurrently, we're enhancing our owned and operated media properties, which enable consumers to earn, win or save with Fluent and our partners. While media remained accessible at relatively favorable pricing for most of the quarter, we did see a bit more unpredictability on a channel-by-channel basis. And our team did an excellent job of rightsizing our pricing against volume.

On the advertiser side of our business, the diverse nature of our client base helped to offset any verticals that lacked in demand as a result of COVID. From a vertical standpoint, the quarter was again a standout for our media and entertainment clients, particularly in the streaming services and gaming app categories, where we continue to fortify strategic relationships with top-tier global brands.

The key strategy we remain enthusiastic about is our international expansion. In particular, the U.K. business more than doubled its top line year-over-year, while expanding its media margin profitability. In fact, revenue from non-U. S. markets exceeded 5% of total revenue in the quarter for the first time.

Now I'll turn to an update on Fluent's 3 strategic growth pillars. First, our Performance marketplace. This refers to the demand or interactions between our advertising clients and consumers on our platform. Fluent's advertiser solutions enable our clients to bid on outcomes, not impressions at predictable pricing and scale. As part of our ongoing effort to expand our Performance solution offering, in April, we acquired 50% interest in Winopoly, a contact center that further extends our ability to engage consumers in order to connect them with our advertisers, products and services across multiple industries. Winopoly is specifically geared operationally to service Fluent consumers, affording us the opportunity to provide high-quality experiences while yielding incremental monetization. Today, Winopoly is achieving its plan and continuing to scale. Strategically, we view this as a critical capability in further extending the life cycle of Fluent's relationship with its consumers.

Second, our media footprint. This pillar represents our portfolio of media properties, which enable us to entice and engage consumers, learn about their interest and preferences, and match them with brands and offers within our Performance marketplace. Key path to extending our equity and expanding our media footprint has been via deployment beyond the U.S. Our European launch now includes 2 large markets: the U.K. and Germany. And in North America, we're in the early stages of tests in Canada. Our growth in the U.K. in Q2, which I touched on, was enabled by operational enhancements that increased our monetization or LTV profile, thereby further enabling us to drive additional traffic. We'll continue to focus on non-U. S. markets and anticipate continued growth over the next few years.

Third, our platform, represents the technology, analytics and product innovation that wire the first 2 pillars together. I earlier referenced investments being made into our media properties as we constantly seek to better align our value proposition with consumer expectations. While some of these enhancements increased certain operating expenses, we believe they create a foundation for future revenue centers and strategic growth for the business. In addition to these front-end platform upgrades, we also made meaningful improvements to our back-end technology, which seek to help us onboard advertisers with greater efficiency and test new media channels at a more rapid pace. We're excited about how these new capabilities and features should help us move faster in the back half of 2020 into 2021.

In closing, given the current operating environment, we're pleased with our second quarter results. Our business remains solid, benefiting from the strength and diversification of our platform and our unique and advantageous positioning within the industry.

Looking ahead to Q3, we'll continue to adjust to the dynamic realities of the marketplace during COVID. And we'll remain focused on driving our business forward on behalf of Fluent and our clients through further innovation, such as media format expansion, deeper insights around conversion behavior and exploring new channels to engage consumers cost effectively. We see this operating environment as further validation regarding the benefits of Performance Marketing to our clients. We're bringing consumers further down the path to purchase, while giving our clients clarity on their ROI, creating predictability that derisks their marketing budget. We see this as a fundamental alignment with our clients' needs and objectives. As a result, we believe the dollars available to us are more predictable in times like this than with other marketing channels, which don't provide the same benefits and financial return.

Thank you for your support. Now, as always, let me turn the discussion to Alex to review the numbers more specifically and I'll return for Q&A afterwards.

Thanks, Ryan, and good afternoon. We're pleased that for the second quarter, we met our prior business outlook for revenue, up 1% year-over-year to $71.5 million and exceeded our media margin, up 8% year-over-year to $24.8 million.

Ryan spoke about media trends during the quarter. To elaborate, we capitalized on the market opportunity to acquire substantial volumes of traffic, potentially owing to consumers spending more time with their devices and economic uncertainty, among other buyers of traffic amidst the pandemic. Fluent has stepped up and took on that volume opportunity while achieving favorable media pricing due to our strong and always on-presence in the market. We were confident in doing so as the demand from our client base was sufficient to absorb the volume and at favorable margins to Fluent. Our clients include large global brands, innovative disruptors and ambitious entrepreneurs who leverage Fluent's performance marketing platform to build or scale their businesses.

The interaction of strong volume and favorable pricing with ongoing client demand from robust counterparties underpinned our profitability in the quarter. Media margin dollars grew 8% year-over-year to $24.8 million, representing 34.7% of revenue. Based on Q3 performance to date, we see the quarter returning to the seasonal patterns experienced in 2016 through 2018 as it relates to media margin dollars without a recurrence of the factors which affected Q3 results last year. Our operating expenses on a GAAP basis, comprising sales and marketing, product development and G&A grew in aggregate by $400,000 or 2.6% year-over-year.

If we think about Fluent's non-GAAP metrics of media margin and adjusted EBITDA, and the amount between them represented by expenses included in adjusted EBITDA but not media margin, that also grew year-over-year. This was primarily attributable to the inclusion of the AdParlor business as well as increased reward redemptions by consumers on our media properties.

During the quarter, we tested certain changes to our reward redemption flows, which elevated these expenses. As we optimize relative to our learnings, we anticipate this cost to moderate going forward. Accordingly, adjusted EBITDA of $9.4 million in the quarter represented a decline of 3% year-over-year and a margin of 13.1%. While a reduction of 60 basis points year-over-year, this margin reflects an improvement of 170 basis points quarter-over-quarter. Interest expense declined by $400,000 year-over-year as we reduced our debt principal outstanding by $6.3 million and benefited from a lower effective interest rate environment.

In Q2, we continued to be a noncash taxpayer due to the availability of NOLs. We reported GAAP net income of $452,000 in the quarter or $0.01 per share and adjusted net income, a non-GAAP measure, of $4.2 million or $0.05 per share. Adjusted net income reflects the add-back of $2.6 million of noncash expenses and $1.1 million of certain legal and related costs. Our non-GAAP metrics are reconciled in today's earnings release and our 10-Q and 10-K filings.

Turning to the balance sheet. We ended the quarter with $21.7 million of cash and restricted cash. Working capital, defined as current assets minus current liabilities, ended the quarter at $30.5 million. Total debt is reflected on the balance sheet ended the quarter at $47.8 million while including unamortized discount yields a closing balance of $50.9 million.

At the beginning of the quarter, we completed the acquisition of a 50% stake in Winopoly, a contact center that sources consumer leads exclusively for Fluent. Taking this competency in-house provides several benefits. It enables us to directly control the experiences as consumers have with the operators contacting them, create better connections and more value for clients, and capture incremental economics for Fluent. During the quarter, we funded the initial purchase price and a first milestone payment, totaling approximately $1.75 million. The results of Winopoly are consolidated in our income statement. The structure of the transaction involves a put call feature. In relation to this option structure, a noncash quarterly expense of $530,000 deemed accrued compensation to the sellers runs through G&A on our GAAP income statement. This amount is added back in the reconciliation of non-GAAP metrics.

Based on current performance of the business versus plan, we anticipate this will be a consistent and recurring amount each quarter until exercise, which is at least 4 years from the acquisition date. Our team continues to operate seamlessly in a fully remote environment. While risks and uncertainties remain, to date, the pandemic has not had any material adverse effect on our business. Meantime, the ongoing shift of performance-based digital solutions for markets and brands who seek measurable outcomes and greater accountability from their spend plays squarely to Fluent's long-term market opportunity.

We're glad to field questions at this time.

(Operator Instructions) And it looks like our first question today comes from Bill Dezellem with Tieton Capital.

I had a group of questions. The first one, you've referenced the return to normal seasonality. And am I seeing that correctly that, that's a pretty meaningful increase in revenues in Q3 versus Q2?

Bill, good to hear you -- go ahead, Alex, please.

Likewise, good to be with you, Bill. We were referring in that context to media margin dollars as it related to the seasonal patterns that we've experienced. We didn't comment specifically on revenue.

All right. So I have gone back and looked at revenue and other than at last year and a couple of other years, there's actually been a pretty decent increase sequentially. Is there something different about the business then, either younger, more faster-growing? Or something different now that would skew what I was looking at historically?

Bill, as you're familiar, our business is one that involves volume of consumers that come to our platform, the monetization that we achieve with our end advertisers and the cost of traffic and bringing investors to our platform. And so there may be dynamics among those different levers and metrics at different points in time. And hence, at this point, we're not making a specific reference to that metric, and we're focused on media margin, which is ultimately the dollars that help us pay the bills.

All right. Let's jump to the U.K. What do you see driving that success there? Is it the same [of] streaming and gaming companies? Or is there something different that is driving that success? And I suppose also your success in Germany.

Yes. I'll field that one, Bill. It's really the international market launches. We've sort of taken a phased approach. Phase 1 being heavily reliant on a lot of those global brands we referenced within the media and entertainment sector as well as a couple of other verticals that we play in where our clients have international demand. So largely, phase 1 of these launches have been on the back of those domestic relationships that we have a very strong reputation and relationship within the U.S. and expanding it overseas. Actually partnering with local advertisers in those markets is more of our phase 2. As we've announced further expansion, we do expect that to help us continue driving forward.

And that phase 2 expansion, Ryan, what's the time frame when you're expecting to hit full stride with that?

We're already knee-deep in it in terms of having several people overseas at this point and actively recruiting for additional roles that will help us just move the ball that much faster. So we're moving it right along, and it's something that will be a focus the back half of this year into 2021.

Great. And then 2 additional income statement questions. The goodwill impairment and would you please discuss that? And then secondarily, the expense for the put call consideration, would you talk to kind of what that is? I'll have to apologize in advance. I just simply do not know what you're referring to there.

Sure thing, Bill, this is Alex speaking. As it relates to the goodwill impairment, in the quarter, we deemed there to be a triggering event as it related to one of our business segments, which is primarily the AdParlor business that we acquired last year in July. The triggering events, and this is disclosed in our upcoming document, speak to the macro conditions that were playing out relative to the COVID backdrop as well as some of the social unrest that took place in the United States during the course of the quarter. And some of those factors we deemed to have -- caused us to adjust at our near-term forecast for the business and our other elements of our outlook for the business.

So while we don't see any material impact to the business on a long-term basis -- in fact, we were actually quite pleased, interestingly that during Facebook's earnings call just a week or 2 ago, Sheryl Sandberg actually referenced a campaign for one of their advertisers who happens to be a client of AdParlor's for some of their innovative work during the quarter. We were very pleased with that. But as a result of just the near-term financial aspects that are relevant to the business, we address the carrying value of the goodwill in our balance sheet.

Fascinating. And the put call?

Put call. The structure of the Winopoly transaction involves a put call as between the counterparty who owns 50% of the business vis-á-vis Fluent, who owns 50% of the business. And as we work through the purchase accounting for the transaction in the course of the quarter and worked on the ongoing accounting for the business as it goes into the future, we determined that the structure of the put call indicated that there was a deemed compensation expense, an accrued compensation expense that's not paid out currently along the way, but essentially relates to some estimate as to a point in the future of the value of the business at a time where the put call could be exercised. And in relation to that value, that ultimate value was deemed to be a compensation expense, and therefore, there's an accrual between now and that future point of such expense on a ratable basis going forward.

And so that amount is going to continue to run through our income statement but represent the noncash expense, and we've added it back to our non-GAAP metrics that are provided in the reconciliation with today's press release and will be in our quarterly report as well. Is that helpful?

And our next question today comes from Jim Goss with Barrington Research.

I've got a couple of them. First, in the media and entertainment area, a couple of the big sectors are streaming services and mobile gaming. I'm wondering, are these priced down on an exclusive basis? Or does it depend on what the demand is and whether you're able to have multiple clients at nonexclusive pricing versus exclusives paying more? And then maybe start with that.

Yes, Jim, good to hear from you, and I'll speak directly to that. The nature of our model, more of a marketplace model, where we're willing to work with our clients to drive those further down funnel actions in streaming services, whether that be somebody who actually pulls their credit card out for a free trial or somebody that even goes from free to paid at a larger premium. It's really that action that they're looking to go out and have us drive for them that informs all the pricing. And we don't really entertain exclusive arrangements because of the performance nature of our work. It really doesn't work as well with our model. So really what you see in the way of pricing is more reflective of us being able to hunt with a bit more of an accuracy with a spear as opposed to a machine gun, if you will, and be able to go out, drive at precision, drive that quality, and that's where we see premium pricing.

Okay. And then one other thing, Ryan. The seasonal pattern for 2016 to 2018 you referenced, could you talk about the -- what type of pattern you were talking to? Is it that [relevant] and what are the factors that were driving that seasonality? Whether they were higher costs in certain areas or higher revenues in certain time frames?

Yes. Alex referenced that. We really think about media margin as that most important metric driving the business. So we might have some ebbs and flows on revenue. But if we're preserving and building on media margin, we know that we're efficiently growing the business. So the reference there was, if you recall, Q3 of 2019 was really a low point for the company. Had a couple of stumbles there. And we're really referencing that we don't expect to see that type of aberration this coming quarter.

And thank you, ladies and gentlemen. This concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.