Quotient Technology Inc (QUOT) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Jay and I will be your conference operator today. Welcome to the Coupons, Inc second-quarter 2014 financials results conference call.

(Operator Instructions)

Please note that this call is being recorded today, Wednesday, August 6, at 5 o'clock Eastern time. I would now like to turn the meeting over to your host for today's, Paul Sloan, Vice President, Corporate Communications. Please go ahead.

Hello and welcome to our second-quarter 2014 earnings call. Please note that slides to accompany the remarks on today's call are available on the IR section of our website and I urge everyone to take a moment to download them, along with our financial results press release. On the call and here with me today are Steven Boal, our Founder, President, and CEO, and Mir Aamir, CFO and COO.

Before we begin, please note that during this call, you will hear forward-looking statements. These forward-looking statements include our projections regarding future financial performance, our expectations regarding financial benefits from Retailer iQ, and our expectations to successfully leverage our investment and operating expenses and grow our business, including a discussion about our acquisition of Eckim.

Forward-looking statements are based on information available to and the good faith beliefs of our Management team as of the time of this call, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed. Additional information about factors that could potentially impact our financial results can be found in today's press release and in the risk factors identified in our quarterly report on Form 10-Q filed with the SEC on May 8.

We disclaim any obligation to update any information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. Please note that with the exception of revenues, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain expenses. Now I will turn the call over to Steven for a summary of our business in the quarter.

Thank you, Paul, and thank you everyone for joining us this afternoon. As you can see from our results, we've had a great second quarter, highlighted by year-over-year revenue growth of 32%, which was at the high-end of our guidance. Adjusted EBITDA grew over 36 times that of Q2 last year and was over 20% higher than the top end of our range, reflecting the margin leverage we are experiencing as we continue to scale our business.

These results reflect the continued efforts by CPGs and retailers to ship promotion and media spend from traditional offline vehicles to Coupons.com's digital platform. This quarter, we saw continued momentum with Retailer iQ, our retail point-of-sale digital couponing platform.

Today, I'm happy to announce that since our last earnings call, we signed an additional three retailers onto the platform. Two of these are top 10 grocery retailers, bringing our total to nine retailers that have signed up. Together, these nine retailers have annual sales of almost $200 billion. Some of the recent signs are scheduled for implementation in early 2015, as we begin to fill our pipeline for additional Retailer iQ rollout into next year.

We also announced today that we acquired Eckim. Eckim brings nearly 10 years of performance marketing leadership and over 60 top retailer relationships to Coupons.com. I want to welcome the Eckim team and look forward to applying their skills and technology across our entire suite of products.

Our card link offer platform, CardLink iQ, continued to scale, as we completed the YUB acquisition integration and saw the number of offers triple, while bringing on great brands such as PetSmart, Gap, and Lord and Taylor, to name a few. The growth in our media business continues to accelerate, as we saw more integrated programs, whereby both CPGs and retailers linked their promotional campaigns to media, including video and mobile. These integrated programs run both on and off our owned and operated properties and amplify the program's ROI.

As a reminder, for more than 40 years, CPGs and retailers have used couponing to drive sales and traffic to their businesses. To give you an idea of just how big this industry is, in 2013 CPGs distributed a total of 315 billion coupons in the United States alone. 99% of those coupons were distributed in paper form, mainly through the Sunday newspaper.

However, as shoppers spend more time online and with their mobile devices, the efficiency of this legacy method of coupon distribution is in rapid decline, exacerbated by the continued drop in newspaper circulation. It's not surprising that redemption rates of paper coupons has decreased 60% over the past 13 years. CPGs and retailers must find new ways to reach the right consumers.

Additionally, CPGs have the costly challenge of distributing promotions through each and every retailers that sells their product. Coupons.com is helping to lead CPGs, retailers, and shoppers through this digital transformation. Our digital promotion platform connects over 700 CPGs, 2,000 brands, and retailers representing over 58,000 store locations in the US.

Our scale and range of products enables CPGs and retailers to connect with each other to run campaigns in a seamless, cost-effective, and high ROI manner. For example, traditionally, a CPG would run a promotion through each retailer it does the business with, one at a time. Coupons.com makes this process much simpler. That same CPG can use our digital platform to distribute a promotion through its retailer network at once, lowering their operational overhead.

Our digital platform extends to consumers through our web and mobile channels, as well as mobile applications and websites of our CPGs, retailers, and approximately 30,000 third party publishers. Consumers can easily find promotions for the favorite products in stores and either print them or save them digitally for use in store without the need to print.

With a network of this size, we are able to collect vast amounts of data, which gives CPGs and retailers the ability to target consumers with highly relevant promotions at the time that they are making purchase decisions, commonly referred to as the zero moment of truth. Not only are CPGs gaining efficiencies, but they can reach far more consumers with targeted promotions in a way that offline coupon distribution cannot.

A great example is Retailer iQ, which integrates into retailers' point-of-sale systems and uses real-time and historical purchase data, purchase intent information, and integrated shopping lists to enable CPGs and retailers to distribute targeted coupons and product recommendations. Last week, Dollar General announced that they have completed the successful rollout of their DG Digital Coupons program at more than 11,300 stores. Our technology allows Dollar General and other retailers to deliver personalized digital coupons that become more and more relevant over time.

Shoppers simply select the offers on their mobile phone or on a desktop computer and add them to their account to be redeemed at checkout. Our targeted approach enables retailers to drive more consumer traffic into stores, while allowing CPGs to become much more efficient in their promotional campaigns.

While we only recently rolled out Retailer iQ, our scale is growing fast. We are on track to implement a total of six retailers by the end of this year, at which point we will be able to reach the majority of US households through Retailer iQ.

In summary, we've had a strong Q2 and we are more excited than ever about the business. With hundreds of billions of dollars spent by CPGs and retailers and as the shift to digital couponing continues, we have a large and growing opportunity ahead of us. I'll now turn the call over to Mir who will walk you through the financial details.

Thank you, Steven, and welcome everyone. I will first review our financial results and key metrics for the second quarter and then provide financial guidance for the third quarter and full year 2014. We had a strong second quarter with top-line and bottom-line growth. Total revenue for second quarter was $51.7 million, up 32% year-over-year, which was at the higher end of our guidance for the quarter.

Adjusted EBITDA for Q2 was $3.7 million, beating guidance by more than 20%. We saw strong growth across all areas of our business, driven by the continued shift to our digital couponing platform by CPGs, retailers, and consumers.

Revenues from digital promotions increased 24% over last year. Revenues from media and advertising increased 64% from a year ago, primarily due to a higher number of digital promotional campaigns with integrated media, including video and mobile, as Steven just highlighted. Together, these underscore the strength of our platform. We believe that the capability of our proprietary technology to deliver targeted digital coupons, along with related advertising, gives us a competitive advantage as we continue to drive the shift to digital.

Total digital promotion transactions in the second quarter were $384 million, up from $315 million in the same period a year ago. As you look at transactions sequentially, I would like to remind you that we typically see a softer Q2 and Q3 due to summer seasonality with coupon activity. Additionally, as we mentioned on our first-quarter earnings call, Q1 of this year benefited from one-time end-of-quarter budget deployments by several CPGs.

Moving down the P&L, as expected, we continue to see operating leverage this quarter. Operating expense in Q2 of this year was $37.5 million compared to $28.8 million in Q2 last year. Excluding stock-based compensation, operating expense was $31.3 million, or 61% of revenue in the quarter.

This is a significant improvement over Q2 last year, when operating expense, excluding stock-based compensation, was 71% of revenue. As a reminder, the operating leverage we are seeing is the result of our significant investment in the prior three years in technology, network operations, engineering, and sales capabilities to drive and support our revenue growth in 2014 and future years.

A significant portion of this investment was to build a Retailer iQ platform, which as Steven mentioned, is now live at several retailers. As revenues begin ramping, we expect to see continued leverage in the model, as most of the investment and implementations expenses will have been realized prior to us generating meaningful revenue from Retailer iQ.

Adjusted EBITDA in Q2 2014 was $3.7 million, above the top end of our guidance. This represents significant EBITDA growth over Q2 of last year when adjusted EBITDA was approximately $100,000. Net loss for the quarter was $6.9 million. Excluding stock-based compensation, net loss was $236,000, an improvement of 87% from the same period last year.

Net cash generated from operating activities was $5.2 million in the second quarter of 2014 compared to $1.4 million in the same period last year. As of June 30, 2014, we had $222 million in cash and cash equivalents.

Now I would like to briefly review our financial guidance for the full year and third quarter 2014. Consistent with the guidance we gave out at our first-quarter earnings call, we expect revenues for the full year 2014 to be between $217 million and $223 million and adjusted EBITDA to be between $12 million and $17 million. For the third quarter, we expect revenue to be between $52 million and $54 million and adjusted EBITDA to be between $2 million and $3 million.

Please note that our guidance as of today for Q3 and full year 2014 does not reflect the Eckim acquisition, as we just closed the deal and have begun integration process. However, we expect the Eckim acquisition to be revenue and profit accretive.

As we mentioned on our Q1 earnings call, a key factor incorporated in our EBITDA guidance is the incremental expenses for Retailer iQ. We will continue to incur support and infrastructure expenses for the full platform before meaningful revenues are realized from Retailer iQ. Although we have begun to realize initial revenues, we expect such revenues to begin ramping in the back half of Q4 as retailers begin marketing the platform to their shoppers and as we implement additional retailers.

To close, we continue to be pleased with the momentum we see in our business. Our platform enables CPGs and retailers to easily take advantage of the shift to digital couponing and drive sales volume and shopper loyalty at a higher ROI. We strongly believe that our ability to grow our top-line business, especially through our new Retailer iQ platform, and our continued operating leverage position us well for future growth and towards achieving our long-term financial objectives. We will now open up the call for questions. Operator?

(Operator Instructions)

Mark Mahaney, RBC Capital Markets.

Hi, it's Brian Peak on for Mark. Just a couple questions for you guys. Gross margin a little lower than expected and I was wondering if you could discuss some distribution fee trends that you've seen within the quarter, potentially if that was part of the -- at the lower gross margin, if that has flexed at all, any other things that contributed to that possibly? And then also, I understand it's early, but then any color around the adoption of Receipt iQ (sic -- see answer below, "Retailer iQ"), maybe with Walgreens customers, now that it's been live for some time this year? Thank you.

Brian, let me tackle the gross margin question first. Consistent with our prior-quarter discussions, the gross margin was lower in Quarter Two, primarily because of the Retailer iQ infrastructure and support expenses, like we talked about, that come on and came in Quarter Two at the full level for the platform, even before meaningful revenues have been -- are realized from the platform, which are expected in back half of Q4.

Regarding your question on distribution fees, yes, like we had -- consistent with our forecast and our prior discussions, distribution fee as a percent of revenue will go up this year and that is one factor that will pressure gross margin down a little bit. That, of course, in the Quarter Two and in future quarters is and will be offset by the operating leverage that we continue to see on the fixed piece of cost of goods sold, cost of revenue. So that's an offset there, but the big impact in terms of driving our gross margin rate lower in Quarter Two was the Retailer iQ supporting infrastructure expenses and it was all as planned and as forecasted and as baked into our guidance for the year.

On your second question regarding Retailer iQ adoption rates, while we've said publicly, and they have as well, that both Walgreens and Dollar General are up and running, we really can't comment specifically about individual retailers, or given that there were two that have been announced, specific adoption rates.

But what we can say clearly is that we are absolutely meeting our expectations internally, we've got -- our expectations are being met, both from a technology perspective and also from a volume and consumer adoption perspective. So we are continuing to see volumes grow across both those platforms.

Okay, thank you.

Thank you.

Nat Schindler, Bank of America Merrill Lynch.

Hi. Thanks for taking my questions. And I wanted to just see if you guys can help me just a little bit on understanding the seasonality of the business on the transaction side. The data we have going back doesn't really paint much of a picture because there were differences that happened in different quarters as you go backwards. And obviously your comps were quite a bit harder this quarter, so explaining the deceleration.

But why would you see as sequential decline in 2Q over 1Q in number of transactions? What is the behavior that occurs that is different in those months that leads to fewer Tide coupons being out there? And then on the second question, how well do number of campaigns correlate with number of coupons distributed? If I look on your site and see a number of campaigns, and see that it had grown by 10%, is that going to correlate with the number of transactions you do or is it largely irrelevant?

Let me take the first question on the sequential and the seasonality. There are two factors, if you explain -- if you look at our sequential Quarter One and Quarter Two trends this year, there are two factors. One, and a big factor, is seasonality. Summer is typically a slow season for coupons, especially grocery coupons.

It also reflects, by the way, based on grocery sales itself. The consumer behavior, the grocery shopping behavior is different. School is out, vacation starts and so on. That's typically the case. And now we are feeling it more, obviously, because we are at scale you see that more. Last year, as you saw, we were still on a smaller base growing, so we were growing through seasonality, so that's the seasonal implication of this.

But one other factor that figured into our Quarter One to Quarter Two trends this year, if you recall on our Quarter One earnings call, we talked about how, in Quarter One, our transaction trends were better than what we had forecasted. One of the big factors there was this quarter-end budget deployment by CPGs that was unanticipated.

We've talked about how, every now and then, we could see something like that. Now that we're at scale, we have the ability to be able to deploy a large number of coupons and enable CPGs who want volume at the very end of the quarter to drive their volume. We saw that in Quarter One and that increased our Quarter One transaction in a unseasonably high, [if I may]. That was the second factor that explained this sequential trend between Quarter One and Quarter Two.

Nat, on the number of campaigns versus number of coupons distributed, to try and figure out transaction volume and things like that, unfortunately the number of campaigns isn't correlated to the number of coupons distributed for a variety of reasons. Certainly, number one, geography comes into play. So when you look at the display at Coupons.com, or up on our owned-and-operated and our non-owned-and-operated properties, the coupons that you see displayed there are going to differ widely by geography. That's number one.

Number two, the display and the positioning and offering is highly customized now, given all the data that we're collecting. So you may see something that's very different than somebody else sees. And then, the depth of offer, the depth of coupons, the number of coupons that are ordered per coupon you see varies greatly as well. And oftentimes coupons will come on mid-month or at the beginning of the month and then come off when they hit potentially a limit in a month and then show up again the next month because there's an overall campaign limit. So there are a variety of factors that would make it very difficult to just look at the number of campaigns on the screen and try and divine out how many coupons are being distributed.

Makes sense. Just one follow-up on the seasonality effect. Taking out everything, and I know that there was a unusual event in Q1, that upped the numbers towards the end, but if you had to think about how you would break down a year in number of transactions, how would you split that amongst the quarters in a percentage basis?

Sure. Let me give you the overall trend in the year, how it flows, and then that can be translated into some numbers here. But Quarter One is stronger than Quarter Two. Quarter Two, especially the back half of Quarter Two, as you approach the summer, is softer. Quarter Three, first half of Quarter Three is softer because it's summer. Then the last month of Quarter Three starts to pick up because of back-to-school.

Then grocery shopping behavior comes -- really, back-to-school is a big event in the grocery world because of the preparation coming back into the routine of the family and so and so forth, cooking at home and so on, school lunches and so on. So then back-to-school then translates into the holiday season, which is typically a very strong season and you start to see much higher couponing activity in Quarter Four. So you can look at it as Quarter Four being the biggest quarter, followed by Quarter One, back half of Quarter Three, and then Quarter Two, [at least] the back half of Quarter Two, being the weakest.

Okay. And on a very final point, average promotional revenue per transaction has been rather volatile. How do you see that? Is this a stabilized level at this point?

I'm just curious, average? If you take just the promotion dollars divided by transaction, it's pretty consistent and flat.

On a year-over-year basis, but not necessarily on a quarter-over-quarter. Does it change with the seasonality as well?

No, it shouldn't change with seasonality. The factors driving average promotion per revenue that we've talked about is -- and it varies very, very little -- is, like we've mentioned earlier, some CPGs have rate cards, some CPGs have volume discounts. The mix in the quarter makes a difference, but for the most part, it has been pretty flat.

Okay, thank you.

Thank you.

Heath Terry, Goldman Sachs

Thanks. Steve, there seems to have been a development in the relationship with Safeway during the quarter, with them coming off of the Coupons.com app, or at least that's what it seems from a user perspective. Is that a function of the Albertsons deal? Is there something else going on there? Any sort of color that you can provide, and to the degree that there's any financial impact, would be helpful.

And then also, Mir, I know in response to Nat's question, you touched on some of the factors around revenue per transaction, but with revenue growing faster than transactions, as much as it did this quarter, can you give us a little more clarity in terms of what specifically drove that in the quarter? And finally, if you can give us, especially now that you're doing more load-to-card digital transactions, if you could give us a sense in what you are seeing in terms of revenue per transaction on digital versus print, and the trends within each of those?

Sure. Why don't I take the first one. No, there have been no changes to the relationships we have with our major retailers. We can't comment specifically on what Safeway's marketing objectives are. We have a good relationship, a healthy relationship, with most of the top retailers.

Over the past several years, we haven't lost a retailer or we haven't lost any revenue associated with a retailer. So if you channel check carefully, you'll find that marketing objectives and changes may be leading you to draw a conclusion that probably isn't the case.

Heath, on your second question regarding revenue from transaction being higher than transaction growth, if we look at promotion revenues, which is what's relevant for transaction, in Quarter One, we had promotion revenues growing at a slightly higher rate than transaction growth year-over-year. Same is the case in Quarter Two, a couple of hundred basis points higher from a growth standpoint.

That is not -- and I mentioned this at our Quarter One earnings call -- does not represent a trend of us raising rates or necessarily doing something in the pricing that is a major trend as of yet. What it is simply -- it's actually very close -- if you do the math, it's actually counted down to the third decimal point.

What it is basically is, the mix, like I mentioned, different CPGs, we have different relationships from a volume discounts and volumes versus rate card and so on standpoint. So depending on the quarter and the mix of that, how it tweaks, that could tweak that. But for the most part, revenue per promotion transaction, we would consider flat and we would recommend you model it that way.

There are no further questions. At this time, I will turn the call back to Management for closing comments.

Thank you. And thank you, everybody, for joining us this afternoon. We appreciate your questions and your interest in our Business. If you have any further questions, we encourage you to reach out directly to us through our Corporate website. Thanks again and have a great day.

This concludes today's conference call. You may now disconnect.