Quotient Technology Inc (QUOT) 2015 Q3 法說會逐字稿

Welcome to the third-quarter 2015 Quotient, formally Coupons.com's earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded, and a webcast replay will be available from the Investor Relations section of quotient.com's website following this call.

I will now turn the call over to Stacie Clements, Vice President of Investor Relations. Thank you. Miss Clements, you may now begin.

Thank you, and hello, everyone, and welcome to our third-quarter 2015 earnings call.

Please note that slides to accompany the remarks on today's call are available in the IR section of our corporate website, investor.quotient.com. And I urge everyone to take a moment to download them with our financial results press release. On the call and here today with me are Steven Boal, our Founder and CEO, and Jenny Ceran, our CFO. Mir Aamir, our President and COO, is also here and available for Q&A after our prepared remarks.

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 shift in our industry. The impact of mobile on our platform, our expectations regarding the pace of the continued rollout of Retailer iQ platform, and bringing new retailers live on it, as well as the anticipated financial benefits there from. Our expectation regarding our targeted digital circular product, our digital print initiative, and our efforts with respect to attract additional retailers. Our ability to meet the demands of CPG and retailer partners, and our expectations to successfully leverage our platform, 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 performances or results to differ materially from those expected.

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 August 13. 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 previously announced, third-quarter results were soft, primarily due to digital print from shoppers accelerating shift to mobile, and in delays in retailer rollouts. We recently rolled out a new coupon printing experience, and consumers can now print offers directly from their mobile devices. Although still very early, we're pleased with the results so far.

Consumers are relying on their mobile devices when it comes to shopping-related activities. Using a retailer's app, in particular, has grown by 9 percentage points in 2015 versus last year. US mother's ownership of smart phones has grown from 9% in 2009 to 84% this year. With our new printing experience, these shoppers can now take full advantage of our platform. Either in digital print or digital paperless.

In addition to digitally engaged shoppers, there are approximately 45 million households who still rely on coupons delivered in the newspaper. As newspaper circulations continue to decline and consumers want more relevant and personal experiences, primarily on mobile, we believe the majority of these shoppers will convert to digital.

This quarter, we made some important executive changes. Mir was promoted to President and COO, and we hired Jenny Ceran to fill the CFO role. Jenny's leadership in public company experience make her a traffic addition to the team, and I couldn't be more thrilled to have her on board.

Before I go over the quarter, I want to touch on two recent and exciting announcements. The first is our new corporate name, Quotient. The breadth and sophistication of our products and services along with our deepening relationship with fortune 500 CPGs and retailers, require a corporate identity that extends beyond our consumer brands.

In many ways, the strength of the coupons.com brand overshadowed the broad set of services we provide. Coupons.com, our top web property and popular consumer app, will not change as a result of the corporate name change and will continue to lead our great portfolio of consumer brands.

And earlier this week, we announced the acquisition of Paris-based Shopmium, which runs a receipt scanning and cash back app platform. Shopmium's award-winning app is popular in France. And after speaking with our CPG clients, we believe there is a big opportunity in the US where Shopmium is just getting started, as well as in other international markets.

I'm thrilled to welcome the talented Shopmium team to Quotient, and our sales force is eager to bring this new set of capabilities to our over 2,000 existing brand clients. CPGs, retailers and consumers are embracing our digital platform, and we continued to launch new products and features to drive faster consumer adoption.

Revenue in the third quarter was $56.5 million, and adjusted EBITDA was $2.2 million. Total transactions in the quarter were up 8% sequentially, and digital paperless transactions grew 26% from a year ago.

Retailer iQ volumes were up 44% over last quarter, primarily as a result of the early marketing efforts of several already announced retailers. As of today, we have 12 retailer banners live on the platform with 7 of those marketing. This is up from our last earnings call when we had 9 retailer banners live, and 6 marketing.

We have also started to upgrade our load-to-card retail partners onto Retailer iQ. These retailers will now be able to take full advantage of our expanded set of digital offers and new features and functionality that the older platform does not provide. We have also continued to sign new retailers to the platform.

I'm excited to announce that we've added retailers representing over $100 billion of sales to Retailer iQ, bringing the total to over $350 billion, which we estimate to be well over half of the total US market. CPGs and retailers have been asking us for a digital platform with enough scale to move more of their off-line budgets to digital and to be able to engage with shoppers who increasingly want personalized, relevant, and mobile access to savings. With the new retailers we've signed and the ones already announced, we believe we have the foundation in place to accomplish that. And although the launches and marketing of these programs have been difficult to predict, we expect to continue to roll out more deployments beginning early next year, with marketing programs to follow.

The retailers who have started marketing are seeing shopper adoption build. Shoppers engaged with Retailer iQ showed average comparative sales increases of approximately 17% in Q3. This is remarkable, given that Retailer had generally report low single-digit comp sales growth.

Remember, a relatively small percentage of shoppers generally represent the majority of a retailer's revenue. We believe that as retailers and CPG brands engage with these shoppers through the platform, they will have a significant impact on total sales. Overall, we are very pleased with shopper adoption and engagement on Retailer iQ, where retailers have started marketing.

Our media business quarter was up slightly from a year ago, as advertisers continued to recommend the value of our audience. We are also beginning to monetize mobile media, as we've recently rolled out a mobile printing experience giving us access to new inventory. This quarter we also expanded our media solutions by integrating them directly with Retailer iQ.

We are now using network data to reach consumers on and off a retailer's website, mobile applications, and in geographies around a retailer's stores. The first major retailer recently turned this capability on, and we are excited by this growing opportunity. We also believe there is a huge opportunity to leverage our platform to drive greater efficiency and trade spend, where CPGs and retailers spend approximately $200 billion annually in the United States. Our new targeted offers are designed to bring more efficiency to trade spend, and momentum in targeted campaigns is building.

We also rolled out several other new products and upgrades. A major grocery retailer recently went live with our new digital circular product, which will provide shoppers with a personalized experience, complete with the relevant and targeted coupons and media, and our digital circular is highly optimized for use on mobile. Integrated with Retailer iQ, our digital circular product is designed to speed the digitization of the approximately 60% to 70% of retailer's marketing budgets currently spent on printed ads.

We've also started bringing together national and targeted offers into the Coupons.com mobile apps and web experiences. Retailers and CPGs can now reach their most desirable shoppers with digital paperless offers the across our network. 54% of Coupons.com visitors visit a grocery store within 48 hours of using our sites or mobile apps. We have also recently released an upgrade to our Coupons.com app, and now shoppers can download paperless offers directly to their retailer accounts.

In summary, we continue to help our customers bring the promotions industry into the digital age. As we expand our network, consumer adoption builds, and we reach more and more shoppers.

The more shoppers we reach, the more demand we have of the platform and the more campaigns we can run. We believe this network effect is very powerful, and can enable us to scale up to meet the growing demands of our CPG and retailer partners.

I will now hand the call over to Jenny to discuss the quarter in more detail.

Thank you, Steven, and welcome, everyone.

I first want to begin by saying how excited I am to be here today. It's been nearly two months now since I joined the Company and during this time, I've had the opportunity to learn more about the business and meet many of the passionate people that have built Quotient into what it is today. I'm really looking forward to working with Steven, Mir, and the entire team to deliver on the opportunity ahead of us.

Let me now discuss third quarter financial results. Revenue was $56.5 million, up 1% sequentially and down 4% versus a year ago. Reflecting softness in digital print, partially offset by strength in Retailer iQ, which helps drive digital paperless growth. Transactions were $403 million, up 8% sequentially as consumers embraced digital coupons.

Adjusted EBITDA was $2.2 million, reflecting the softer revenue and an increase in expenses, most notably in brand marketing and media, as well as headcount. With respect to capital structure, we repaid our outstanding debt, repurchased approximately $6.8 million in stock, and ended the quarter with a cash balance of $190 million. Since the end of the quarter, we've also continued to buy back stock, and I will share more details with you shortly.

Let me now provide more details starting with revenue. As I just mentioned, total revenue for third quarter was $56.5 million. Breaking it down even further, revenue from digital promotions was $41.7 million, a decrease of 6% over last year, while revenue from media was $14.8 million, an increase of 3% over last year. Keep in mind that last year, we benefited from a strong back-to-school season, as well as customer's shifting budgets from Q4 to Q3 to further support the strength retailers and CPGs were seeing from back to school.

Let me now provide some details on transactions on the next slide. For the first time, we are showing the breakout between digital print and paperless transactions to provide more insights as to how our business is evolving. Transactions were $403 million in third quarter, an 8% sequential increase, driven by growth in both digital print and paperless. Digital print transactions were up 7%, and digital paperless transactions were up 10%, respectively, over the last quarter.

Retailer iQ transactions, a growing subset of digital paperless, were up 44% sequentially, a testament to the growth opportunity ahead of us in Retailer iQ. Compared to a year ago, digital print declined 28%, as consumers shift from desktop to mobile, and total digital paperless increased 26%. Finally, average revenue per promotion transaction for Q3 was $0.10, consistent with Q3 a year ago and in range with what we've seen historically.

As we mentioned in our last call, we will continue to experiment with different pricing models. Because the way we monetize transactions continues to evolve, we are updating our definition of transactions to be any action that generates revenue, directly or indirectly, including per item transaction fees, set-up fees, volume-based fixed fees, and revenue sharing. Transactions continue to exclude retailer offers that generate no direct revenue.

Moving on to Retailer iQ, at the end of the third quarter, we had a total of 21 retailer banners under signed contracts. 10 of those retailer banners have been implemented, and 7 of those have started marketing. As we've mentioned before, delays have occurred on the retailer side ss IT departments shifted the POS release schedules to other priorities, particularly for EMV compliance this year to meet the October deadline. Based on recent conversations with these retailers, we expect many of them to start implementing and marketing Retailer iQ early next year. As of today, we now have 12 retailer banners live, as Steven mentioned earlier.

Moving down the P&L, non-GAAP gross margin, which excludes stock-based compensation expense, was 60.4% in the third quarter compared to 61.5% a year ago, driven primarily by revenue softness, while cost of sales improved.

Let's move on to non-GAAP operating expenses. For the third quarter, non-GAAP operating expense was $36 million compared to $31.8 million in Q3 of last year. This quarter, we saw an increase in sales and marketing expense as compared to last year, driven primarily by online media and the recently launched Coupons.com branding campaign.

We also a smaller increase compared to last year in both R&D and G&A expenses, primarily driven by headcount growth and consulting services. We believe the investments we've made will enable us to capture growth as we scale, and our operating expenses as a percent of revenue will improve.

Let's move onto adjusted EBITDA. In the third quarter, adjusted EBITDA was $2.2 million, or 4% margin, as compared with 8% margin in Q2, primarily driven by revenue softness and the increased OpEx costs I just mentioned. Compared to the third quarter last year, headcount grew 16% to 587 full-time employees in anticipation of revenue growth, with the primary increases coming from our India and Cincinnati, Ohio offices.

I would like to provide more detail as it relates to adjusted EBITDA in the third quarter. On the next slide, we compare adjusted EBITDA for the third quarter a year ago to the third quarter just ended. Revenue softness represented nearly a third of the decline, while media and brand marketing costs represented another third. Approximately half of the costs for brand marketing were one-time in nature and related to developing the campaign. The remaining increase comprised of headcount, higher facility costs, and other offering expenses. We expect our adjusted EBITDA margin to improve as our sales improve.

Moving to capital structure, during the quarter, we repurchased approximately $6.8 million of our common stock, and as of September 30, total shares repurchased year to date were approximately 920,000 for $8.8 million. As of November 3 year to date, we've repurchased over 1.6 million shares for a total of $13.9 million.

Our buyback program is managed under a 10B51 plan that we established at the beginning of the year and includes increasing purchases at lower stock-priced levels. We also paid back $7.5 million in outstanding debt, and terminated our $25 million line of credit, since we did not plan to use it in the foreseeable future.

Now let me move on to our Q4 and full-year outlook. For the fourth quarter, we expect revenue to be in the range of $59 million to $61 million. We expect adjusted EBITDA to be in the range of $1 million to $2 million, with continued investment brand marketing and infrastructure particularly related to building out our data analytics and research capabilities.

This guidance also assumes that Shopmium, our recently announced acquisition, will add less than $1 million in revenue in the fourth quarter with expected acquisition costs of approximately $0.5 million, and business operation costs to be neutral to EBITDA. Going forward, we expect the acquisition to be EBITDA positive as we execute on our growth plan.

For the full year, we expect revenue to be in the range of $227 million to $229 million. We expect adjusted EBITDA to be in the range of $12 million to $13 million, reflecting a 5% to 6% margin for the year. As we look to 2016, we expect the pace of signed Retailer iQ deployments to increase, and will update you on the rollout schedule at our next earnings call. Keep in mind, that consumer option builds over time in conjunction with a retailer's marketing efforts.

In summary, we end Q3 marginally better than Q2. Driven by weakness in digital print, as well as ongoing Retailer iQ implementation and marketing delays. However, digital paperless continues to grow, and we expect more Retailer iQ deployments to drive greater momentum in the new year, and we will keep you posted on our progress.

In the meantime, we continue to roll out a new offerings, such as new coupon printing capabilities on mobile, and a new digital circular offering. We are laying the foundation to take advantage of the secular shift from off-line to digital by connecting consumers, brands, and retailers in the mobile world.

We will now open it up for questions. Operator?

Deb Schwartz, Goldman Sachs.

Two questions -- first, as it relates to Shopmium, do you expect to roll that functionality into your existing Coupons.com platform, or even Retailer iQ? Or do you plan to leverage your existing CPG relationships and build that as a stand-alone brand in the US?

And then second is related to print at home, can you just help us understand a little bit more as it relates to the softness that you saw? Was it coming from CPG budgeting, or was it more on the consumer usage side that you're seeing a platform shift toward mobile?

Sure, great. Hi, Deb, it's Steven.

So, first one on Shopmium -- in France, we don't expect to have any change to the existing application. It's very popular, and we'll leave the app as it is there. For the rest of Europe, that remains to be seen as we roll it out through Europe with our existing CPG relationships there. And in the US, that remains to be seen. Ultimately, I think consumers want convenience; they want convenience in one place. But we'll need to take a little bit of time to do that full evaluation. But in Europe, where Shopmium already has a really strong presence and is growing, that will remain a stand-alone app.

On the question around print at home, the softness is really not about budget at all. In fact, there was budget deployed to us that we were not able to get all the way through. And really that's a function of the shift to mobile. And I think we talked about this on the last call as well.

We've been working all year on a new print experience, and we did finally roll that out, but not in enough time to see an effect in the third quarter. But so far, results are positive; we're very happy with it. And now, all of that mobile traffic can engage directly with our print process and our print experience. And in addition, that allows us to open up additional inventory for media. So, the two are kind of interrelated. So, you should expect to see the print softness go away going forward.

Great, thank you.

Mark Mahaney, RBC Capital Markets.

It's Jim Shaughnessy stepping in for Mark today. I guess just another question -- maybe a little broadly on the M&A strategy in terms of -- should we expect more deals like Shopmium going forward? And specifically, what are you looking for in terms of the deals? Is it more people or technology -- just some of the characteristics there would be great. Thanks.

Sure. Thanks, Jim. We think of M&A much the same way that we always have. We're going to continue to be opportunistic. If it makes sense, we'll look at it. We evaluate three things. Do we build, do we buy, or do we partner?

And there are really two buckets to think about in more of a strategic way. And that's, on the human capital side, on the people side, and on the technology side. And I would say, specifically with Shopmium, it fits into both technology and people. So it really fit the profile as a perfect fit for us as a Company. But broadly speaking, we look at M&A from a people, product and data perspective, and we'll continue to be opportunistic.

Great, thank you.

Jason Mitchell, Bank of America.

So, when you referred -- I have a couple questions. When you referred in your release, your historical load to loyalty partners that signed on to Retailer iQ, is that people that used the old Coupons.com load to loyalty? Or are those just other retailers that were on competitor load to loyalty programs?

And then, what are you assuming for your Q4 guidance? It seems to imply a little bit of a decline in transactions still. Are you just seeing a soft Q4 coming? Could you give us a little more color there?

Sure, this is Mir, Jason. I'll answer the first one, and I'll hand it over to Jenny to answer the second one.

The answer to your question on the first is both. It really was a conversion of some retailers that we were delivering digital content in the version-one scenario of load to account. And then also converting some of that, that might be getting some of that content from elsewhere into this.

So, keep in mind, I want to reinforce what Steven mentioned, that Retailer iQ, a much more advanced platform, gives much more functionality and technical capabilities to each consumer in a personalized manner. But also increases the digital offer content that is available.

And with respect to the Q4 guidance, I would say that it is somewhat cautious. We do have some goodness that we are pulling into guidance related to digital paperless. And while we think digital print is stabilizing, we still want to hold out and make sure that we see that come through. So, that's how we're guiding to Q4.

Okay. And just on the $100 billion of retailers that you've added or signed on, does that fill out your entire 2016 pipeline? Or do you have room to add even more on there, or is that going to fill you out for all of 2016, you think?

This is Steven. So, I would say that we're getting operationally a little bit more efficient the more retailers that we bring on board. So, we have room in 2016 to bring on additional retailers beyond the $100 billion, although, quite frankly, there aren't that many more.

Okay. Thanks, guys. Great.

(Operator Instructions)

Mitch Bartlett, Craig-Hallum.

Steven, maybe you could just broaden the discussion or expand on the discussion of why the retailers have been slow to -- the deployments have been slow, the marketing rollouts and the like. Could you just go over that again, and what is the overall feel of that?

Sure, Mitch. Look, there are really two reasons why we see delays. One of them is more emergent things that have to take place in and around point-of-sale and payment. And certainly this year, we've seen that EMV conversion -- although everybody knew about it, we figure it's a little bit like year 2000. Everybody knew about it for a very long time, but in the weeks and months leading up to that, there was panic in the industry. And I think that this is somewhat of a similar situation. Everybody knew that October would come, but as we got closer, there were other competing priorities that retailers had, and then this happened late in the game. So, that's certainly a headwind we faced this year, and we don't expect we're going to see again.

And then the other piece of this is that retail releases typically get scheduled four to five times a year. And our work gets bundled into those releases. So, anything can delay a release on the retailer side, and we're just a component to that, and we get carried along with the release schedule. So, it's really entirely out of our hands.

The good news though is that we do all the work on our side. So, we -- at the original scheduled release date, we've actually done all of the work on our side required to go live, and we're just waiting for the deployment at retail, and then for the marketing to ensue after that. So again, it's not a technical limitation on our side. And it's not a human capital limitation on our side. We've thoughtfully scheduled these releases, and done them to meet the expected release dates.

And as the retailers roll them out, our side is already done, and then the marketing starts. And we already know what the effect of marketing is for retailers that have started to do that. And we're very happy with the results to date, both on the deployments to individual consumers on their properties, and now on ours. So, we look forward to more continued success as more retailers roll out and market.

So, you must be scheduled into their software releases into the first half, or what gives you confidence that the early part of 2016 you'll see that begin to happen? Anything else you could add to that?

Sure. And I can just point back to a statistic that we've just started to share. We've said -- we've always said that as we get more data, and more retailers come on board, we'll be able to share more data. Retailer iQ transactions are up 44% quarter over quarter. That's an indication that retailers are beginning to market, and that's really just the very beginning.

So, we are bundled into releases. We do know that there are more releases happening this year. But again, it's not just the releases; it's release and marketing. So, we do have confidence that that's going to start to move a little bit faster now, and that the delays are largely behind us.

Shopmium -- is there an analogous company in the US, Ibotta perhaps, or is there some -- can you talk about that company and its products a little bit more, please?

Sure. So, Shopmium provides a receipt scanning and cash back app platform, with a really terrific operational flow behind it. So, we did look at the whole landscape. We looked at the real needs of our clients, both in Europe and the US. And we really felt, of the available and products that are in the market, Shopmium really had the best solution, both from an operational component, and also a consumer touchpoint.

In addition, there's a really great opportunity to [interweave] promotions and media into the Shopmium experience. And they're really well ahead on that as well. So, we think, based on what we've seen in the marketplace, this was really the best of the bunch.

Thank you; appreciate it.

You have no further questions at this time. I will turn the call back over to Mr. Boal.

Thank you. And thank you, everybody, for joining us this afternoon. We believe that the majority of the roll-out delays are now behind us, as I've just said, and that the next several quarters will be exciting ones for Quotient and for the industry. And we look forward to sharing more updates with you at our next earnings call. Thanks again, everybody.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.