Quotient Technology Inc (QUOT) 2016 Q2 法說會逐字稿

Welcome to the second quarter 2016 Quotient earnings conference call. During the call, all participants will be in listen-only mode. After the presentation, we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded, and will be available for play from the Investor Relations section of Quotient'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. Hello everyone and welcome to our second quarter 2016 earnings call. Please note that slides to accompany the remarks on today's call are available on our IR section of our corporate website, Quotient.com.

On the call on here with me today are Steven Boal, our founder and CEO; and Jennifer Ceran, our CFO. Mir Aamir, our President and COO, is 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 for our third quarter and full year 2016. Our expectations for our Retailer iQ platform, Shopmium app, our targeted media offering, and consumer and CPG patterns. As well as the expected growth of and investments in our business generally. Including our expectations regarding the anticipated introduction of the redesigned Coupons.com app.

Forward-looking statements are based on information available to and in good faith of our management team as of the time of this call, and are subject to known and unknown risks and uncertainties that could cause actual performances or results to differ materially.

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 6th, 2016.

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 and operating cash flow, 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 all know this is Jenny's last earnings call with us. I want to take a moment to thank Jenny for her many contributions to the Company. And we wish her all the best in her new endeavors.

Before I walk through the highlights from the quarter, I have an exciting announcement to make. I'm excited to welcome Ron Fior as our new CFO. Ron brings more than 30 years of public and private company CFO experience to Quotient. Prior to Quotient, Ron was CFO at Good Technology, at Callidus Software, and at Remedy. Many of you will already know him. And we're thrilled to have him join the team. Ron's first day will be August 10th.

Now onto the quarter. As you've seen from our results, we had another strong quarter delivering revenue of $67.2 million and adjusted EBITDA of $8.1 million, both ahead of guidance. Cash from operations was $4.8 million. We saw momentum across all parts of our business as we helped consumer package goods brands and retailers connect directly with their shoppers through digital offers and relevant media messaging.

Our scale and consumer reach is growing. And with that, so is our ability to influence shoppers through both the audience we've built on Coupons.com and our other consumer properties and through the audiences of our many retailer partners.

We delivered 535 million transactions in Q2, up 44% from a year ago as we continue to scale Retailer iQ delivering value to CPG brands, retailers, and shoppers. As more shoppers, particularly millennials, rely on promotions and deals to decide where they shop and what they buy we are seeing the expected shift from digital print to digital paperless. In the second quarter, digital paperless transactions represented 63% of all transactions up from 50% in the same quarter a year ago.

Additionally, shopper reach on Retailer iQ is expanding as we continue to migrate retail banners from our legacy save to card platform. Benefits to retailers and CPGs include a more robust data and analytics platform. And additional features such as digital circulars, digital receipts, personalized emails, and access to sophisticated targeting capabilities.

I'm also excited to announce that we have signed our first club retailer onto the platform. In addition, we've started signing our first partners to a new program we've put in place to reach the fragmented long tail of the US grocery channel.

In total, retailers in this segment are estimated to have approximately $100 billion in annual sales. Through this program we're able to extend our reach more efficiently. To date, we have three partners signed and they have implemented over 75 retailers onto Retailer iQ.

Excluding this channel, we now have 18 major banners live on Retailer iQ, and 13 of those are marketing. Of those marketing, there are some retailers that are just getting started, and others that have implemented a steady drum beat of personalized digital marketing activities. With the later showing higher levels of shopper adoption and engagement.

Retailers on Retailer iQ, show increased basket sizes, more frequent shopping trips, and growth in comp store sales the key objectives of retailers everywhere. CPG brands and retailers are embracing digital marketing strategies as they realize the importance of personalized and targeted marketing in an increasingly competitive environment.

A recent Forrester study found that 91% of marketers ranked personalization at top priority as they seek to meet the expectations of today's shoppers. Forester concludes that retailers doing the best job of this go beyond simple segmentation to create real-time personalization based on shopper intent.

Retailer iQ is built for this exact purpose. Enabling retailers to user purchase and intent data to influence shoppers at the right times. Retailers with a more sophisticated approach to digital marketing use Quotient in a variety of ways.

For example, we are seeing more retailers create digital marketing programs around themed events. With the aid of Retailer iQ, retailers are using shopper data and insights to launch personalized digital marketing programs for these events through email, social channels, and digital circular integrations with little or no lead time.

They're also deploying targeted offers to improve their digital marketing efforts. Although still a new feature of retailer iQ, we launched over 80 targeted offers in the quarter representing more than 30 brands. This was ten times the number of targeted offers launched in the first quarter. Early results indicate that when shoppers are targeted with relevant promotions, basket sizes increase on average by over 20% compared to shoppers who purchased the same items without targeted promotions.

We also know that engagement from these shoppers is higher, and redemption rates from targeted Retailer iQ offers are two times higher compared to untargeted offers. We believe these are meaningful results as CPGs and retailers leverage Retailer iQ to efficiently engage shoppers and drive increased sales.

Until recently, our primary focus has been to engage with CPG brand managers as they look to shift their promotions and media to digital. Having achieved significant scale in Retailer iQ, we are expanding CPG relationships and having more conversations with their shopper marketing teams who are also eager to leverage Retailer iQ.

We believe this provides more opportunity for us as they increase online marketing efforts with merchandising support from retailers. As a reminder, trade spend is approximately a $200 billion a year market and primarily funded by CPGs through shopper marketing.

On the consumer front, we continue to grow Shopmium, the mobile cashback app and platform that we acquired in October. After shoppers scan their receipts we send their savings directly to a PayPal or bank account giving us a more direct economic relationship with shoppers.

CPGs can now take advantage of our Shopmium technology to reach a wider range of shoppers. For example, CPGs can now distribute mobile cashback offers via their own branded sites, social channels, and digital media all powered by our Shopmium platform.

We also continue to focus on expanding our own consumer audience. And later this year, we expect to launch an entirely new Coupons.com app that among other improvements also incorporates our new receipt scanning technology.

Turning to Quotient Media, this quarter we saw growth as CPG brands and retailers continue to reach our valuable audience across the network and influence shoppers as they plan their shopping trips. We recently released a new targeted media offering available on mobile and desktop. For the first time for participating retailers were able to target shoppers with media in addition to promotions. And identify incremental sales in real time using point-of-sale data collected through Retailer iQ.

Most importantly, CPGs now have the capability of managing performance and adjusting for in flight campaign optimization based on actual product purchase data. We already have programs in market, and early results are encouraging. We're also now focused on expanding our media offerings to partners in other networks giving us access to shoppers across the mobile and web landscape and beyond our owned and operated properties.

Over time, we expect this to greatly expand our saleable inventory. As our network grows, our ability to deliver greater value to CPG brands, retailers, and shoppers grows as well. We are continually looking to enhance our product offerings and bring new capabilities to market such as Quotient Insights, our emerging data and analytics business.

Last quarter I talked about some of the exciting things we're doing under Quotient Insights. We continue to build our media measurement offerings that will deliver real-time attribution of in-store sales for both digital and offline media.

In summary, we had a great quarter with strong momentum across the business. With Retailer iQ now operating at scale, we're able to launch new products and capture new opportunities including the opportunity to modernize the $200 billion of annual trade spend we've talked so much about.

Retailers continue to embrace digital marketing strategies as they realize the benefits of timely personalization and targeting. We believe we are well positioned to digitally connect retailers, CPG brands, and shoppers together. And we are excited about the opportunity ahead.

I'll now turn the call over to Jenny.

Thank you, Steven. And welcome everyone. As Steven noted, we had another strong quarter. Revenue was $67.2 million, up 20% over a year ago reflecting healthy performance across the business. Transactions were $535 million, roughly flat versus last quarter and up 44% versus a year ago. Driven by continued momentum and digital paperless and solid results in digital print.

GAAP net loss was $3.5 million. Adjusted EBITDA came in at positive $8.1 million, reflecting strong revenue coupled with an increased focus on expense management, while we continued to make important investments in Quotient Insights.

We ended the quarter with a cash and short-term investment balance of $156 million, and we generated $4.8 million of cash from operations. All in all, we were very pleased with the performance in the first half of the year as Retailer iQ drove strong paperless transactions and enabled consumer packaged goods companies to meet increasing shopper demand.

Let me now provide more details on the quarter. As I just mentioned, total revenue for the second quarter was up 20% versus a year ago. A slight acceleration in growth versus the prior quarter. Breaking it down even further, revenue from digital promotions was $50.9 million, a 25% increase over last year. And revenue from media, was $16.3 million, a 9% increase over last year. Excluding the acquisition of Shopmium, which occurred in the fourth quarter of 2015, total revenue growth would have been two percentage points lower.

Moving to transactions, Q2 transactions were $535 million about flat with last quarter. And compared to last quarter, digital paperless transactions were up 8% while digital print transactions declined 12%. Comparing transactions to the same quarter a year ago, digital paperless grew 83% and digital print grew 5%. Reflecting the continued trends toward paperless.

During the quarter, we migrated a couple of retailers from our legacy save to card platform to Retailer iQ. And as a result, Retailer iQ transactions now represent about two-thirds of all paperless transactions.

Finally, average promotion revenue per transaction in the second quarter was $0.095, about the same as last quarter. As we've mentioned before, this metric will fluctuate as it's dependent upon the mix of transactions and customers, changes to our pricing models and volume discounts. We expect this metric to remain in the $0.09 to $0.10 range over the course of this year.

Moving onto Retailer iQ, during the second quarter we continued to sign new retailers onto the platform, adding retailers in the club channel and through our new partner program. We had one major banner go live and one start marketing. And as of this week, we now have 18 major banners implemented and 13 marketing.

As Steven mentioned, we are starting to see more digital marketing activities from our existing banners. A key driver of shopper adoption and engagement on the platform. Keep in mind however, that the majority of our banners are still in the early stages of marketing.

Moving down to P&L, GAAP gross margin in the second quarter was 62.6%. Non-GAAP gross margin, which excludes stock based compensation expense, was 63.3%. Up approximately 210 basis points compared to a year ago, and 70 basis points compared to last quarter. Due primarily to higher revenue, leverage in our fixed costs, and expense management, partially offset by a higher proportion of distribution fees from the [growth] and Retailer iQ.

Let's move to operating expense. For the second quarter GAAP operating expenses were $45.4 million. Non-GAAP operating expenses which excludes stock-based compensation and the fair value of contingent considerations were $39.5 million compared to $42.2 million last quarter.

This quarter, we saw an overall reduction in non-GAAP operating expenses driven primarily by lower consulting and audit fees, employee-related expenses, and lower media and advertising costs. We will continue making investments to grow our business and scale in the future while we focus on operational efficiencies to improve our overall profitability in the long term.

Let's move onto profitability. In the second quarter, adjusted EBITDA was $8.1 million, representing a 12% margin compared to $4.3 million and a 7% margin in the prior quarter. Primarily driven by operational efficiencies and cost management initiatives that drove lower spending.

Let me move onto our outlook for Q3 and full year 2016. For the third quarter, we expect revenue to be in the range of $65 million to $67 million. We expect adjusted EBITDA to be in the range of $5.5 million to $6.5 million. Relative to Q2, we plan to spend more in marketing this quarter to drive awareness and engagement, and as we gear up for the release of our new mobile app later this year.

For the full year, we are raising guidance to reflect the momentum in our business. We now expect revenue to be in the range of $265 million to $270 million, reflecting 12% to 14% growth over 2015. We are also raising our guidance for full-year adjusted EBITDA. We now expect adjusted EBITDA to be in the range of $25 million to $27 million.

Before I conclude, I'd also like to share a little more context around my decision to leave Quotient. It has been a great ride, but I've decided to pursue another opportunity that enables me to balance my career goals and personal interests. I've really enjoyed this past year building the finance team and implementing best practices that will help Quotient scale. And I'm confident in the Company's future.

Retailers are recognizing the need for digital marketing. CPGs are looking for more ways to utilize Retailer iQ. And consumers are embracing digital promotions.

Internally, we're also focusing on improving our profitability while continuing to invest for growth. We are very pleased with the momentum in the first half of 2016, and are excited about the opportunities ahead.

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

(Operator Instructions) Your first question comes from the line of Mark Mahaney of RBC Capital Markets. Your line is open.

Thanks. Two questions please. Was there any pushback of expenses from the first half, or Q2 into the back half of the year? It's a small thing, but your raise in your full year EBITDA is less than the [beat] in the second quarter. And I think you talked about some of those marketing initiates, maybe you're just getting more -- you're hitting the accelerator in terms of some of those investments given the opportunity.

And then secondly, if you talk about transactions or the revenue per transactions and it's similar to the last quarter in that $0.09 to $0.10 range you talked about that being the pace for the balance of the year. The last two years, you've been kind of a little bit north of that, more in the $0.10 plus range. Could you just talk about why the revenue per transactions has come down? And is the stable way to think about it not just this year but in the years going forward? Thank you.

So, Mark, I'll take the first one. This is Mir. No, there wasn't any pushback from quarter to the future quarters. But typically if you look even at our prior years, the back half of the year has more marketing. More than 10%, more than the first half of the year just in terms of seasonality because back to school is in the back half of the year. The holiday is in the back half of the year so our marketing spend follows that.

And then the other smaller factor, but a factor that does figure into our EBITDA guidance for the back half of the year is the investment that we are making in some headcount and some platform technology for Quotient Insights.

So those two are the main factors that are factoring into EBITDA guidance on the back half of the year.

Jennifer, do you want the next one?

Yes, sure. And on average promotion revenue per transaction we talked about this in the last call, that it's really dependent on a number of factors. The mix of the transactions that go through it as well as the customers, the volume discounts. And it just worked out this quarter that it was roughly flat with last quarter. We expect it to vary from quarter to quarter, but to be within that $0.09 to $0.10 for the rest of the year. And then we'll update as the business evolves towards the end of the year.

Thank you.

Your next question comes from the line of Ralph Schackart of William Blair. Your line is open.

Good afternoon. Just looking at the Q3 guidance and sort of what's implied at the midpoint for Q4, after the kind of three really strong quarters of reaccelerating growth. Just curious if there's anything different in the way you're approaching the outlook for Q3 and Q4 because it would imply sort of pretty strong deceleration with what appears to be pretty strong trends with Retailer iQ. So just trying to assess whether there's something unique there or just conservatism in the outlook?

Yes, so this is Jenny. I'll answer the question. As you know, the way that we've been guiding this year is really looking at kind of what we know so far and having a bit of reserve as we look farther out because we have less understanding of what could happen for the quarter.

So looking at our guidance for the full year we did raise quite a bit. There is some upside to the back half, but I would say it's not -- it's a bit conservative for Q3. While we have greater capabilities for paperless based in our iQ we are still impacted by mix, retail marketing efforts, and consumer demand. It's also the summer months which tend to be seasonally slow. And so we've just started off with what we feel confident in and we'll update it after the quarter ends.

Hi, Ralph, just to add to that, this is Mir. One thing to keep in mind, we've said it in our past quarters, right? We are working on building demand with retail rights. We demand for digital coupons, primarily paperless and so on, right?

And then we share our forecast with CPG brands, but they plan in longer cycles so if we had faster demand and it looks like we're growing that in quarter two for example. Their speed to catch up isn't always as quick. So that's why you start -- that's a bit of the factor you start to see that quarter over quarter there's a bit of a flatness for some time until the supply or the CPG budgets catch up. And then over the longer, or multiple quarters, it's definitely an upward trend.

Okay, that's fair. And appreciate the extra color. One more if I could, on the fragmented long tail sort of market that you're addressing, I think you talked about three partners and 75,000 retailers. Can you give us any sense of that $100 billion that you're addressing? Is it sort of an 80/20 rule here or is this a pretty fragmented market that sort of will build over time to address that $100 billion of spend? Thanks.

Sure. It is a fragmented market just in terms of the overall $600 plus billion that we talked about on CPG grocery sales. You heard us talk earlier on about adding up to the $500 billion with the relatively larger retailers.

And the smaller retailers you can talk about a handful of stores up to 30, 50 stores or something like that all across the country. So this segment is long-tail.

And then it depends if -- your timing question of how long it will take to cover that is a bit difficult to answer right now. But what we did know is that the right strategy for us to do that is to partner with smaller players or other players that can go ahead and do that at the grass roots level, and that's what we've done. We've just started implementing that right now.

And just to add to that, it's Steven, so it's not quite 80/20. And I'm not sure exactly where the percentage break would fall. But it's also not every retailer and every partner is created equally. And so there will be a tilt towards the large ones. And those will most likely be the ones that have a more digitally engaged audience anyway.

Okay, thanks Steven. Appreciate it.

Your next question comes from the line of Nat Schindler of Bank of America, Merrill Lynch. Your line is open.

Hi, a great quarter guys. This is Jason here for Nat. Just kind of talking, you mentioned the 80 targeted programs you ran this quarter for coupons. How much of that is -- what percentage of your overall program is that so far? And how big do you think the targeted campaigns will grow versus regular coupon campaigns over time?

And then just following up on that kind of the long tail partners, since you're using partners for that is there any different economics for Retailer iQ in that situation versus when you get the retailers yourself? Thanks.

Let me take the first one. Let me take the second one, it's Steven. There's no difference in economics. It's basically the same. So you wouldn't expect any kind of change in mix there.

And, Jason, on your first one the targeted over 80 campaigns in quarter two over 30 brands involved in that. Still a relatively small portion of our business, relatively small, right? We do thousands and thousands of campaigns a week overall.

From a potential standpoint, this has the potential to be very, very significant as we've talked about in our prior quarters. So we're just excited to be able to get it off the ground with some scale which we have. And to aggressively push it which we will keep pushing.

Keep in mind, this is one factor. You know we talked about how pricing gets impacted by mix and so on. This is one factor where this is at a premium price. So the more we do of this, it has an upward pressure on average revenue per transaction.

Okay. And then on your new kind of analytics program I think you mentioned you are allowing the CPGs to do kind of real-time campaign monitoring. Is that part of the new Quotient platform? And are you kind of comfortable with your level of investment in that platform right now?

Sure. It's very new so it's part of the new Quotient Insights platform, the revenue for that in some ways would show up in media. But we're just getting started. The first few campaigns on that were launched very recently. We are investing in that. So when I talk about Quotient Insights investment on analytics data platforms and also on -- in the people for that it is part of the whole. It is part of this new business.

Okay, great. Thanks, guys.

Thank you.

(Operator Instructions) Your next question comes from Joe Maxa of Dougherty & Company. Your line is open.

Thank you. A question on your thoughts regarding the back to school outlook. I think it's expected to be stronger maybe earlier than normal. I mean are you assuming or factoring that into your guidance or is that potential upside?

This is Mir. Back to school is hard to predict. As you've seen in the last two years, we've had a year where the back to school was so much better than we thought it would, and another year that was not as strong. So our sense right now is the same sense that you might have from what the sentiment out there from what's been written. It seems like [these] CPGs do want to win in this back to school. We like that. But it remains to be seen how it will transpire.

I think from an economy standpoint, a consumer standpoint, it feels like from what I've read that the back to school should be good. But it still remains to be seen. It's a bit early right now.

Okay, the second question I have is on the $100 billion in annual sales from the retailers you were addressing with your partner channel. Do you have a sense of how much of that has been signed? Is it 10%, 5%?

That'd be really hard for us to estimate at this juncture. We've got over 75 retailers now implemented through that channel program. And that's just with three partners. And so as that channel develops, we'll probably be able to deliver more of an estimate for you. But right now we're in the early phases.

Okay, thank you.

Thank you.

And your last question comes from the line of Aaron Turner of Wedbush Securities. Your line is open.

Great. Thanks for taking my question, two questions if I could? Just wondering if you could update us on how many registered shoppers you have on the Retailer iQ platform as of Q2? And if we could possibly get that number for Q1 that would be great. And then the second question is around the partnership with Target. And the integration in the Cartwheel app. Any color there would be helpful. And did that have any meaningful impact on the quarter and possibly how do you see that relationship evolving over time?

Yes, I'll take the second one. It's easiest. You know we're not able to comment on any specific programs we're running with any specific retailers beyond what either they or we have already said publically.

Sure, and I'll take the first one. You know we don't disclose registered shoppers, but we did in the past have talked about over 16 million registered. That was a couple of quarters ago, so I'm pointing to that information to give you some guidance on this because we had talked about that in the context of as we were launching our targeting programs. We had talked about that we had registered shoppers, households, of over 16 million at that time. So that gives you a gauge.

Hopefully, maybe in a couple of quarters we should be able to come out with when we have enough metrics on the customers that we are able to aggregate and share. We'd be able to come out and share that.

Okay, great. Thanks.

Thank you.

And there are no further questions at this time. I would like to thank you for joining the second quarter 2016 Quotient earnings conference call. This concludes today's call and you may now disconnect.