Quotient Technology Inc (QUOT) 2015 Q2 法說會逐字稿

Welcome to the second quarter 2015 Coupons earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded and will be available for replay from the investor relations section of Coupons.com's website following this call. I will now turn the call over to Stacie Clements, Vice President of Investor Relations. Thank you Ms. Clements. You may now begin.

Thank you, Ian. Hello and welcome everyone to our second quarter 2015 earnings call. Please note that slides to accompany remarks on today's call are available on the IR section of our corporate website www.investors.Coupons.com, 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 and CEO, and Mir Aamir, our 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 ability to grow our business, the continued shifts in our industry, our expectations regarding the continued rollout of Retailer iQ platform and bringing new retailers live on it as well as anticipated financial benefits therefrom, our expectation regarding our targeted digital circular products, our digital print initiative and our efforts with respect to attract additional retailers and our expectations to successfully leverage our investment and operating expenses.

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 the quarterly report on Form 10-Q filed with the SEC on May 14. We disclaim any obligation to update 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. A reconciliation between GAAP and non-GAAP measures can be found in the financial results press release issued today and on the slide deck posted on the Company's website. With that I'll now turn the call over to Steven.

Thank you, Stacie, and welcome, everyone. As you can see from our results we've had another solid quarter as we continue to build strength across our network. In Q2 revenue was $55.9 million, at the high end of our guidance. And adjusted EBITDA came in above our guidance at $4.6 million.

Before I walk through the business highlights I want to take a minute to make an important announcement. Mir Aamir, our CFO and COO is being promoted to President and COO. Mir is an outstanding leader, and I'm thrilled that he will be able to commit his full attention to an operating and strategic role. At the same time we've been conducting a CFO search and expect to announce a new CFO soon. Until then Mir will continue as CFO.

We've spent years building a leading digital promotions platform that connects CPGs and retailers to millions of shoppers. And our business continues to scale across specialty retail, grocery, drug, mass, dollar and now club retailers. To date we have nine retailer banners live on the Retailer iQ platform. Several have been marketing for a few months now and we anticipate the remaining retailers to ramp up their marketing efforts in the coming months. A few weeks ago we went live in digital print with a large mass retailer. It's a great consumer experience, and we expect that the digital paperless solution will soon be live. I'm also pleased to announce that we recently signed our first club retailer on to our digital promotions platform.

Our media business this quarter grew 14% year-over-year. Advertisers recognize the value of our audience, our data and the strength of our entire network to deliver high ROI Digital Media for their brands. As the network expands so do opportunities for media.

Now I'd like to share more information on the progress we're making with Retailer iQ. Shopper adoption is growing, and the platform is demonstrating significant ROI compared with traditional off-line promotions. CPGs and retailers are seeing the benefit in the form of growing sales, and indications are they are eager to do more with us. Engagement levels on Retailer iQ are remaining high. Monthly unique users click an average of 12 coupons with the top 20% of users clicking an average of 46 coupons per month. Keep in mind that the majority of usage, over 70%, is through mobile devices. And the frequency of mobile usage is significantly higher than desktop usage. Please remember we monetize mobile exactly the same way we do desktop.

We are also excited about the growth in the number of registered shoppers. Registrations increased 70% in the first half of this year from the end of 2014. We believe retailers have a big opportunity to turn their registered shoppers into heavy users by delivering more personalized offers which is something shoppers say they want and exactly what we do.

CPGs and retailers are starting to use our network to deliver targeted digital offers based on shopper data. Last quarter we mentioned a few pilot targeting programs and their positive results. That success allowed us to roll targeting out to our entire sales organization. Momentum is building with targeted campaigns scheduled to run this year starting with the current back-to-school season. Through our platform and network, CPGs and retailers can now target more than 12 million households with digital offers based on shopper data, our reach and capability that we believe is significantly higher than any other alternative in the grocery digital coupon space.

As we launch additional retailers we are also bringing innovations to market. Earlier this year we mentioned our personalized and targeted digital circular product. We now believe the first major retailer will be live this year adding yet another digital vehicle to drive personalization in media across our shopper base. This is designed to speed the migration of the approximately $200 billion US annual trade spend to digital. While two retailers went live this quarter, a few banners scheduled to launch in Q2 pushed their live dates to later this year, in most cases to line up with their internal release schedules. This has an effect on our forecast for the platform for the remainder of this year, which Mir will talk about in greater detail in a few minutes.

Turning to digital print. Our print business has been impacted we believe primarily due to an increase in mobile usage. To better serve mobile users we recently began piloting a new enhanced printing solution that we believe makes printing from mobile devices a seamless experience. We have two additional initiatives we believe will drive increased print volumes this year as well. This month we will begin rolling out a consumer marketing and branding campaign, and we recently released the latest version of Brandcaster which better automates the system for delivery of coupons through our nearly 30,000 publishers. We believe that digital print has pretty of room to grow. As a reminder approximately 90% of grocery coupons redeemed in this country, roughly 2.4 billion coupons per year, are still cut from a newspaper or other paper source. This is a multi-billion dollar industry, and we believe the shift to digital is inevitable, and we are uniquely positioned to take advantage of it.

As we look to the rest of the year in addition to growing our media, digital FSI and specialty retail businesses, we are focused on two things. The first is getting Retailer iQ live and marketing with our signed partners. The second is continuing to enhance our overall platform for greater partner and consumer experiences. As we scale, our business model will continue to evolve.

Retailers are now starting to implement their own offers that indirectly increase revenue to Coupons.com. For example when a retailer uses the platform to market their own offers, shoppers often select additional offers that we monetize directly. And, as targeted campaigns become a greater portion of our business, commanding a premium price per transaction, we anticipate an impact in transaction volumes offset by a higher revenue per transaction with increased margins.

Additionally, pricing on the platform may become more dynamic, for example, auction-based. In the past quarter we started experimenting with alternative pricing models. While keeping a sharp focus on revenue and margin growth. For the foregoing reasons we believe transaction volume will become a less predictive indicator of future operating performance.

In summary, we had another solid quarter. We continue to see momentum in media, specialty retail, Retailer iQ and other products. And we're rolling out new initiatives to grow digital print. Our platform supports a large market where CPGs and retailers spend hundreds of billions of dollars on coupons, media, and trade promotion. These dollars have primarily been spent in off-line vehicles that we expect will inevitably shift to digital.

We are using exciting leading-edge technologies such as machine learning to digitally connect CPGs, retailers and shoppers which we believe gives us a unique competitive advantage. 100% of the Fortune 500 CPGs are our customers, and we provide digital coupons to over 80% of the Fortune 500 grocery, drug, mass and dollar retailers. With the contracts we have signed, the rollout schedule for the next several quarters, our product pipeline, and our fantastic team, since founding this Company I have never been more excited about our growth prospects than I am today. And with that I'll turn the call over to Mir

Thanks, Steven, and welcome, everyone. I will review our financial results for the second quarter and then provide financial guidance for the full year 2015.

Total revenue for the second quarter was $55.9 million at the top end of our guidance and up 8% year-over-year. Revenues from digital promotions increased 6% over last year while revenues from media and advertising increased 14% from a year ago as our CPG and retail partners increasingly want to reach our valuable audience across our network. Revenues from digital paperless coupons continue to build in the quarter.

Digital transactions through Retailer iQ increased almost 70% in the first half of 2015 as compared with the second half of 2014. Transactions for the second-quarter were $372 million as compared with $384 million in Q2 of last year. Three retailer banners that were scheduled to go live in Q2 were delayed, and this impacted transactions during the quarter versus earlier forecasts. These delays primarily resulted from shift in POS related release schedules by the retailers. Additionally, as we mentioned earlier, we expected first half of this year to be less strong than the second half due to the launch schedules of retailers and then subsequent marketing.

Of the more than 18 retailer banners signed on the platform, nine are live to date and six have begun marketing, two of them very recently. In addition to the three retailers that delayed launches originally scheduled for Q2, a few other banners' live dates have also moved from Q3 into Q4 for similar reasons resulting in a larger than anticipated number of launches now targeted for the last quarter. As we have discussed before we continue to share these forecasts with our CPG clients to help them better plan digital coupon budgets for this year and encourage sufficient budget availability in the later part of this year to meet the growth and demand of digital paperless coupons. Net, the performance of Retailer iQ post-implementation and marketing is strong, as expected. Retailers seem eager to launch and drive sales, and therefore we are confident of launching all signed retailers thereby driving revenue growth.

Moving down the P&L, gross margin was 60% in the second quarter, flat from a year ago. As a reminder, as revenues grow we expect to continued leverage in gross margins given that more than half of our cost of revenue is fixed expense and is not expected to grow in line with revenue. Operating expense in Q2 of this year was $41.5 million compared with $37.5 million in Q2 last year excluding the impact from the change in fair value of contingent consideration related to the Eckim acquisition. Excluding stock-based compensation and the impact of this contingent consideration, operating expense was $33.5 million or 60% of revenue in Q2 of 2015 as compared with 61% of revenue in Q2 2014 and 62% in Q1 of 2014. We believe this continues to demonstrate our ability to leverage operating expenses as we grow our revenue. Adjusted EBITDA in Q2 was $4.6 million, beating our guidance for the quarter. As a percent of revenue adjusted EBITDA was 8% in the quarter as compared with 7% in Q2 of 2014.

Moving to cash flow we generated $6.9 million in cash from operations in Q2 2015. This reflects our growing ability to generate free cash flow as we build our business and leverage our past investments and fixed expenses. During the quarter we repurchased additional shares of our common stock bringing the year-to-date share repurchase level through the end of Q2 at 212,300 shares for $2.1 million. This is based on the approved stock repurchase plan we announced during our Q4 earnings call in February and demonstrates our confidence in our business growth potential and commitment to our shareholders.

Before I turn to guidance for the year I would like to provide some color on our exciting growth prospects for the business that will also inform our financial performance for the rest of this year and beyond. First, Retailer iQ platform performance at launched retailers is solid, especially with the retailers who are marketing the program. The network effect of more retailers on the platform enabled by shopper data is getting to be significant. With the majority of usage through mobile devices and double-digit increases in baskets and shopper sales at retailers, the platform is truly becoming a foundation for our clients to connect with consumers at scale with data-driven personalization.

Second, we continue to bring platform enhancements and innovations to market. We believe this will further grow revenue and increase average revenue per transaction. One such program that we're very excited about is targeted digital coupons to more than 12 million households. Additionally, we recently launched our first Retailer iQ media campaign leveraging our platform's capability to do targeted media across retailer and other web and mobile properties based on data, on shopper transactions, as well as online behavior.

Third, we have a healthy pipeline of additional retailers in active discussion or close to signing on the Retailer iQ platform, likely for 2016 implementations. Fourth, we are working on initiatives to grow our digital print business. One example is the new branding and marketing campaign for Coupons.com that we're launching this month. This we believe will have a sustainable impact on converting the estimated 45 million exclusively off-line paper coupon households into digital coupon users as well as increasing the frequency of existing users. And finally with the innovations and evolution of our business model, we believe that digital coupon transactions as reported are beginning to become a less accurate reflection of our revenues.

For example as Steven mentioned we started to experiment with ultimate pricing models like fees per redemption and combining media with promotion campaigns. Another example is a launch of targeted digital offers which are priced at a premium with the effect of increasing revenues at lower transaction levels especially when committed CPG budgets are used for such offers. We believe all of these factors will positively impact and accelerate the growth in our business later this year and lay the foundation for growth in 2016 and beyond.

Now turning to guidance for the year. For the full year 2015 we forecast revenues to be between $255 million and $270 million, and adjusted EBITDA to be between $30 million and $40 million. This primarily reflects the impact of delayed rollouts of a few signed retailer vendors. In this estimate we have also assumed that two small to mid-sized retailer banners launch in Q1 of 2016 versus the original schedule of Q4 2015.

To summarize, we are pleased with the results from our retailer platform implementations driving sales growth for our retail and CPG partners. These results are also becoming more visible in the market and reinforcing us as a key enabler for retailers' digital personalization strategies. This gives us very high confidence that, although we're facing launch delays, many more retailers will be live in the coming months and year. With millions more shoppers adopting and driving sales for brand and retailers.

We believe that our sizable network for digital coupons, our mobile focused platform capabilities based on shopper data and personalization, digital receipts and new innovations like personalized digital circulars provide us with a significant competitive advantage. As we are still in the very early stages of a sizable secular shift from on -- off-line to digital, we believe we are best positioned to maintain significant market share and achieve our long-term growth objectives.

We will now open up the call for questions. Operator?

(Operator Instructions)

Jason Mitchell, Bank of America Merrill Lynch.

My first question is transactions came in a bit softer this quarter, and you mentioned mobile impacting the print-at-home business. I've also seen some stats saying paperless industry in general coupons are doing twice the distribution that print at home is. How is the print-at-home business trending? How do see that mix with your Retailer iQ platform going over time?

This is Steven. We've said before, over time, we expect that digital paperless volume will be greater than digital print volume. And, in fact, we said, in quarter past I believe, that there were periods in which we saw up to 50% of our volume coming from digital paperless. We certainly expect that to be the case over time.

On the digital print platform, two things. One, mobile growth, we all are aware is growing. We have been working on a program that we just rolled out in pilot now that makes mobile printing seamless. So, visitors on mobile phones that visit our platform will be able to print directly from mobile web without having to install anything special and not have to run any specific new application.

The other thing that may have impacted digital print in this quarter --although we can't be sure -- is that we've had very open dialogue with our CPG partners about Retailer iQ volumes in the back half of the year. And we've asked our clients to think about reserving budget and volume to be able to meet those demands. And those demands are still there.

And so, that certainly could have had an effect on the digital print volume in the quarter. Having said all that, the digital print volume, we believe, has got plenty of room to grow. We've got three specific initiatives we just mentioned to drive digital print forward, and we expect that digital print will continue to grow and return to growth in the quarters ahead.

Okay. And as a follow-up, when you think about how the remainder of the year is going to go with transaction growth, is it going to be pretty heavily weighted towards Q4 versus 3Q? And then, on Retailer iQ I think you mentioned, last quarter, you were shooting for a retailer rollout every three weeks through the end of 3Q. Are still trying to keep that schedule this quarter? Or is it going to be a bit more delayed than that? Thanks.

Your first question on transaction, yes, I think you can expect Q4 to be heavier in terms of transaction and revenue than Q3 because of the rollout scheduled that we just talked about, resulting in Q4 growth being much better than the Q3 growth factor and us exiting the year on the very nice growth level. On the scheduled rollouts, the last time where we gave you the estimate, that was the schedule average estimate at that time.

Right now, because of the schedules and what I mentioned, just to be clear and reiterate again: we did have three move out of Q2 into Q4 launches. We had a few move out of Q3 into Q4 launches. Now we have a number of those retailers scheduled to go live in Q4. It's not that the work for that -- those launches has not begun; the work has begun much earlier on, so we're all gearing up for that. It's just retailers had some upgrades and things they wanted to schedule in before this launch, and that's what starts to delay this by X number of months. So, you can expect a lot more retailer launches in quarter 4 than earlier quarters.

Okay, thanks a lot guys. I appreciate it.

Mark Mahaney, RBC Capital Markets.

This is Dylan on behalf of Mark. We just had a question on transaction sales. Wondering if you can provide a little bit more detail on the guidance. You mentioned the Retailer iQ rollout, and I know we've been discussing this, but any other color you can provide would be great. Thank you very much.

I'd like to provide guidance on transaction, but you can imagine and forecast in from the dollar revenue guidance that we've given and back into your estimates for transactions. I would point back to one of the things we did mention and you should factor that in, that we are implementing programs that we expect will start to increase average revenue per transaction.

So, if you want to look at that for your model, historically we've said -- historically we've been $0.10. We forecast it at $0.10. Now we're looking at forecasting between $0.10 and $0.11, with higher being in Q4 also due to seasonality. But if you want to keep -- put that in your model to get an estimate for transactions for the year, we would recommend using between $0.10 and $0.11.

Thank you.

Mitch Bartlett, Craig-Hallum

Hi. I'm wondering if you could walk us down the path of the CPG, thinking about targeting and the trade-off between the way they did business a year ago and the way they might do business next year.

Sure. When you say trade-off, Mitch, you're talking about year ago versus this year? Is that what you mean by trade-off?

When you talk about targeting, you're talking about volumes coming down but prices going up. They have an ROI associated with that. What are they looking at as far as the trade-off between the way they did business a year ago and the way they might do business under a targeting umbrella a year from now.

Sure. There's a lot of factors that benefit that quite a bit. Just to give you a sense of targeting -- we're referring to over here is the CPG's ability now for the first time at scale in a digital world to be able to take a targeted offering and deliver it to specific shopper segments -- for example, pet owners, organic buyers, what have you.

And what happens in that case is that the resulting ROI -- the resulting redemption and the ensuing sales and repeat purchase is very significant such that it allows -- just like it allows in any other marketing medium for targeting -- for premium pricing. And what we meant by that is -- by the effect of that meaning that for the same number of transactions we premium price and when it gets added into our transaction count it has a net effect of increasing our average revenue per transaction.

And we had talked in our earlier calls that we will be doing it this year. At that time we were piloting, and we had talked in our earlier earnings call that the results were good. We just now ruled it out nationally across our organization and across all of our customers. So, now we are expecting to see those campaigns come in, in the rest of this year and impact our -- positively impact our revenue per transaction.

Got it. Second question was the -- I wonder if we could somehow put a little more meat on the 70% increase in the transaction volumes on Retailer iQ between the second half of last year and the first half of this year. You have six retailers marketing actively right now, and in the second half of last year, I think it was probably one or two at the most.

Does that 70% seem meaningful? I know your script -- in your script you talk about everyone is very happy with the returns, but maybe you could talk about that 70%. What does that -- at that volume increase?

Sure. The 70% you could think about that as being driven a lot more by retailers that had already started marketing earlier part of the year or came into this year marketing. Two retailers at the end of December had been marketing per our earlier conversation, and then six now. But six now as of today --one of them, in fact, this week and one of them earlier in this quarter -- so the end of quarter 4 you could think of it as four instead of six.

And, again, a few of those four were in the second quarter, so you can think about the 70% as a ramp that is driven a lot more by retailers that have started marketing earlier and the effect of the more recent retailer marketing will be felt in quarter 3 and quarter 4. That puts some dimension onto those numbers.

Good. Last question would be --.

Mitch, sorry. Mitch, one more thing, the second part of your question about enthusiasm. One factor I do want to share it -- it was in our release -- is the sales increase from shoppers that shop in two time frames -- a year ago and this year -- for retailers that were in the program but also shopped last year when there was no program, those sales increase when we're seeing early numbers, based on shopper data -- because we can measure shopper data going back over a year -- was north of 20%. So that's very significant for retailers that are really struggling hard to get comp store sales of 1% or 2%. That's very exciting and that's what's fueling the enthusiasm for them to go live.

Got it. Last question is, I believe you said you had a mass merchant go live on digital print -- or at least sign up, and I think it's live at this point -- which will affect your print volumes. You also last quarter mentioned that a retailer -- a mass merchant had signed up for Retailer iQ for 2016 launch. I wonder if they are one in the same. Can you comment on that?

Yes, they are the same.

Terrific. Thank you.

Debra Schwartz, Goldman Sachs.

Thanks. I've two quick questions. First, in the print-at-home business you mentioned the category shift to mobile. I'm curious if you are seeing an impact from any recent Google algorithm changes on traffic. And then, second, within your lowered guidance, is that fully due to the delayed rollout of those retailers on Retailer iQ? Or do expect continued weakness in the print-at-home business?

Sure, thanks, Deb. It's Steven. On the SEO question, we don't believe we've seen any negative impact from any Google algorithmic changes in any parts of our business, whether it be in the specialty retail or in the bigger part of our business which is the print at home. So, no, I don't think we have seen any negative effect from any Google algorithm changes.

And, Deb, on your second question on guidance, the primary effect is the delay that we just talked about and the compounded effect of that as you can imagine. The print-at-home impact that we saw in Q2 and what Steven talked about in mobile, continuing a little bit in the early part of Q3, but the initiative that we just talked about to grow that -- so we're optimistic about the growth of that business for -- in fact, for the rest of the year also. It has a lot of room to grow.

That is helpful. Thanks.

If there are no further questions, I'd like to turn the call back over to Stacie Clements.

Thank you, everyone, for joining us this afternoon. If you have any further questions please reach out to me directly or through our Investor Relations website. Thanks again and have a great day.