Quotient Technology Inc (QUOT) 2016 Q4 法說會逐字稿

Welcome to the fourth quarter 2016 Quotient earnings conference call. During the call all participants will be in a 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 replay 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.

Hello everyone. Welcome to our fourth quarter and full year 2016 earnings call. Please note that slides to accompany the remarks on today's call are available on the IR section of our corporate website. On the call and here with me today are, Steven Boal, our Founder and CEO, Mir Aamir, President and COO, and Ron Fior, our CFO.

Before we begin please note that during this call you will hear forward-looking statements. These forward-looking statements include projections for our first quarter and full year 2017, our expectations for our Retailer iQ platform and consumer CPG patterns, and as well as the expected growth of and investments in our business generally. Forward-looking statements are based on information available to, and the good faith beliefs of our management as of the time of this call, and are subject to known and unknown risks and uncertainties, that could cause actual results or performance 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 November 8th, 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, operating expenses, gross margins, and net income 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. And with that, I will now turn the call over to Steven.

Thank you Stacie. Welcome everyone. We had a great fourth quarter, with revenue and adjusted EBITDA hitting record levels, and coming in well ahead of guidance. I will quickly walk through some of the quarterly highlights and main achievements in 2016. I will then turn the call over to Mir, to talk about 2017, and some of the exciting things to come, as we continue to scale and connect CPGs, retailers and shoppers. For the quarter revenue was $75.4 million, and adjusted EBITDA was $11.3 million. For the year we delivered record revenue of $275.2 million, up 16% over last year, and adjusted EBITDA was $32.5 million, up 77% from 2015.

We ended year with over $175 million in cash, up $14 million from Q3. Volume continued to rise, and we delivered 691 million transactions in the quarter, 47% more than last year, as retailers and CPGs continued to leverage our scale and robust solutions, to shift more marketing and promotion campaigns to digital. We also expanded our national coverage footprint, ending the year with approximately 40 million shoppers registered on programs powered by Retailer iQ. This represents approximately 30% of all US households, an engaged and powerful army of shoppers, that retailers and CPGs can quickly reach and influence with personalized offers and effective media messages. With these registered shoppers we offer CPGs and retailers solutions to drive sales and manage their budget with far more flexibility and efficiency than offline channels, eliminating the long lead times and complexity of offline. In fact, CPGs have come to count on us when they need to move quickly to influence large numbers of shoppers.

During the quarter we ran large year-end campaigns from great brands, such as Kraft, Nestle, PepsiCo, Kimberly Clark, Post, Unilever, Mars, Hormel, Clorox, Starbucks, and others. This increased spending resulted in upside in both promotions and media in the quarter. Looking at the full year the increased momentum we saw early in the year continued through year end. Transactions for the full year grew 48% over 2015, ending the year just shy of 2.5 billion. Digital paperless grew 92% over 2015, and accounted for 68% of all transactions in the year.

We focused on expanding our market reach through retailers that serve the CPG industry, which annually sell over $600 billion of products in the grocery, drug, mass, dollar, and club channels. In particular we signed new retailers partnerships, extending our market reach to almost $400 billion of annual CPG sales. We now have 21 major retailer banners and distributors live on Retailer iQ, and of those banners, 16 have started to market the program. Looking to 2017 we have several more banners to implement, which we believe ensures a long run way of shopper adoption and continued scale. We also started a new partner program to efficiently reach the fragmented long tail of the US grocery channel.

We have several partnerships signed, and already over 200 banners implemented on Retailer iQ through this channel. With this expansive scale, we are an industry leader with a significant competitive advantage. We continue to help our retailer partners ramp their digital marketing programs, and better use of breadth of tools we offer. Over the year a number of retailers have built significant shopper adoption, and have seen momentum in their programs. Transaction volume from four retailers who are marketing well, increased 20% from the third quarter to the fourth quarter. We have many more retailers still in the early phases of marketing, and will continue to work with all of our partners, as they attract and engage more shoppers.

We believe the pace of shift from offline to digital is increasing. Primarily driven by changes in consumer behavior and mobile adoption, and evidenced by the digital paperless volume acceleration. Retailers, CPGs and shoppers are all pushing to do more with digital, and we believe Quotient is well-positioned at the forefront of this transformation, and I'm excited about the opportunity ahead. I will now hand the call over to Mir to talk about our focus in 2017.

Thank you Steven. As you just heard, we had a great year, and I'm excited by the opportunity ahead. With our robust solutions, rich data and expansive scale, we can help CPGs and retailers drive more sales through digital channels, bringing efficiency and flexibility. As we begin 2017 our strategic focus includes, one, spending a large shopper base through mobile, two, continuing to grow distribution and use of digital coupons primarily through Retailer iQ, three, significantly growing our shopper marketing business, and four, leveraging data to drive media and analytics. Last month we released a significant update to our Coupons.com app, and early indications are that consumers love it. The app gives shoppers more choices offering digital paperless, cash back receipt-scanning, and digital print. For CPGs and retailers, our new app offers another channel to reach millions of valuable shoppers to drive sales. We'll also continue to expand Retailer iQ with even more content and targeting, and work with our retail partners to get everyone live and using proven marketing tactics.

Already in 2017 we have seen volumes rise rapidly with just a subset of retailers consistently marketing well. As most of our retailers are still in the early phases of their digital marketing programs, we believe we have a long run way of opportunity. CPGs continue to use our platform for digital coupons, as they shift away from offline channels, including the freestanding inserts found in Sunday newspapers. Some large brands have shifted significant budget to digital already, and results have been positive in terms of ROI, market share, and retailer support. We continue to share analytics to support an all-digital strategy, building roadmaps with our CPG partners, as they begin to shift more out of FSI, and into digital. We believe this idea is now beginning to become a reality.

We're also focused on delivering more value to retailers and brands through shopper marketing. As CPGs become more focused on ROI and digital strategies, shopper marketing budgets are becoming more important. We sit at the intersection of retailers, CPGs, and shoppers, and are well-positioned to deliver shopper marketing campaigns to help drive sales, bringing coupons and digital media together through our technology and relationships. Additionally, three promotions estimated at roughly $200 billion annually, is another area of primed for destruction, as CPGs turn to digital to drive more targeted promotions to shoppers. With our scale and proprietary targeting engine based on shopper data, we have already begun delivering digital promotion campaigns, aimed at increasing efficiency of their spend.

In addition to promotions CPGs are also shifting traditional offline media budgets to digital. E-marketer estimates that CPGs will spend close to $7 billion in 2017 in digital advertising, much of which is expected to be targeted to specific consumer segments. As we have mentioned over the past few quarters, we have been building the Quotient Insights platform to do exactly that. This platform has vast amounts of valuable shopper data, combining Retailer iQ transaction data, with our unique Coupons.com data.

Through this platform we're excited today to announce the launch of QMX, Quotient Media Exchange. Our data driven targeted media solution enabling CPGs to reach specific audience segments on any publisher property, mobile or desktop. As of now the data in QMX has a potential audience reach of 55 million, including identifiable consumer segments based on offline transaction data and online behavior. In addition to targeted media, QMX enables brands to measure the digital advertising effectiveness in driving in-store sales. We believe that the integrated capability to deliver targeted media and measurement based on comprehensive data, as well as our platform to deliver targeted digital promotions at scale, provides us with a compelling competitive advantage in allowing brands and retailers to convert digital marketing into actual sales.

At the end of 2015 we changed our name to Quotient, to better reflect the breadth and scale of our growing business. With the momentum from 2016, we are broadening our marketing efforts. We will continue to invest in our consumer campaign more for today, particularly as seek to drive adoption and usage of our new mobile app. We have also initiated new B2B marketing efforts, to gain even greater brand visibility for Quotient. In summary we had a great year, and we expect 2017 will prove to be another busy an exciting year for us. We continue to help drive the transformation of digital marketing for retailers and CPGs, as they look to use digital channels to influence shoppers through personalization and targeting. With our scale, technology platforms and broad set of data, we believe we are well-positioned to lead the industry with continued long-term growth. I will now turn it over to Ron.

Thank you Mir, and welcome everyone. Quarter four capped off a very successful 2016. As we enter 2017, I am excited about our opportunity and momentum. I am going to start by reviewing the fourth quarter financials, speak to the full-year-results, and then discuss 2017. Revenue in the fourth quarter was $75.4 million, ahead of guidance, and up 9% over a year ago, reflecting strength across our business particularly in digital paperless. Transactions In the quarter were 691 million, up 47% from Q4 of 2015, and slightly up from the last quarter. In the fourth quarter we recorded GAAP net income of $3.5 million. This reflected a $5.5 million net gain in fair value of escrowed shares and contingent consideration. Excluding this gain GAAP net loss was $2 million. This compares to a net loss of $3.6 million in Q4 of 2015.

Adjusted EBITDA which excludes the net gain in fair value, stock based comp, and implementation costs of our new ERP was a record $11.3 million, up from $7.5 million in Q4 of 2015, and $8.8 million in Q3 of 2016. This is a result of our strong revenue, and a balanced approach between investments and operational efficiencies. We ended the year with a cash and short-term investment balance of $175.3 million, up $13.7 million from Q3. In 2016 we generated $21.8 million in cash from operations. All-in-all we were very pleased with our performance this quarter and the full year. Let's look at revenues.

Drilling down into our $75.4 million Q4 revenues, digital promotions came in at $58.5 million, a 14% increase over last year, and up 13% from Q3. Revenue from media was $16.9 million, a 7% decrease compared to last year, but up 14% from Q3, reflecting increased opportunity across our platform, as we scale transaction volume. Total revenue for the year was $275.2 million, up 16% over 2015, reflecting 20% growth in promotion revenue, and 3% growth in media revenue. Let's look at transactions. Total transactions in the fourth quarter were 691 million, up 47% from a year ago, and up slightly on a sequential basis, due to continued strength in digital paperless.

Digital paperless transactions which are primarily from Retailer iQ grew 11% sequentially, and represented 77% of all transactions in the fourth quarter. Digital print transactions decreased 22% sequentially, as more content was delivered through digital paperless, to meet the growing demands on Retailer iQ. Total transactions for the year were more than $2.4 billion. Up 48% over 2015, as retailers brought more shoppers onto Retailer iQ through their digital marketing programs. Average promotion revenue per transaction in the fourth quarter was $0.085, an increase from $0.076 in Q3.

Keep in mind that the average promotion revenue per transaction will fluctuate from a variety of upward and downward pressures, including customer and product mix, seasonality, and alternative pricing strategies. As volumes continue to decline, it is difficult to predict exactly where revenue per promotion transaction will be. At this time we are modeling 2017 to be between $0.07 and $0.08. Most importantly, we believe that rapid volume growth can more than offset the lower revenue per transaction, resulting in growing promotion revenue dollars as we saw in 2016.

Moving on to the P&L. GAAP gross margin in the fourth quarter was 61.1%, down slightly from 63.4% in Q4 of 2015, primarily due to $2.3 million of amortization of acquired intangible assets. Non-GAAP gross margin excludes the following noncash items. Amortization of acquired intangible assets, the one-time charge in Q3 associated with a non-refundable prepaid distribution fee arrangement, and stock-based compensation expense. Q4 non-GAAP gross margin was 64.6% slightly down from 65.2% in Q4 of 2015, due to product mix ,and up from 61.7% in the third quarter. The Q4 over Q3 increase was primarily due to increased media and leverage and fixed costs, as revenue increased over Q3. GAAP gross margin for the year decreased from 61.1% to 58.3% as compared to 2015, primarily from the one-time charge recorded in Q3. Non-GAAP gross margin increased from 62.9% to 63.8% as compared to 2015, primarily due to cost management and leverage in fixed costs, offset by increased Retailer iQ distribution fees.

Let's look at operating expenses. For the fourth quarter GAAP operating expenses were $42.5 million, which included a $5.5 million net gain in fair value of escrowed shares and contingent consideration. Q4 operating expenses were flat compared to Q3, and down from $47.7 million in Q4 of last year. Non-GAAP operating expenses which excludes stock-based compensation, the net gain in fair value of escrowed shares and contingent consideration, and our ERP implementations costs, were $41.6 million. This is flat from Q4 of last year, and up from $36.6 million in Q3 of this year, reflecting anticipated increased Q4 marketing spend, commissions, bonuses, et cetera.

In percentage terms non-GAAP operating costs were 55% of revenues in Q4 of 2016, a marked improvement over last year's 60% level. This improvement was driven primarily by leverage in the model, as our revenue increased while we continued to invest in new products, and at the same time benefited from operational efficiencies and expense management actions. Looking at the full year while GAAP operating expenses were up slightly in absolute dollars, operating expenses as a percentage of revenue dropped from 74.5% in 2015, to 65.4% in 2016. 2016 non-GAAP operating expenses were $160 million, or 58% of revenue compared to $145.1 million, or 61% of revenue in 2015. Improvement as a percentage of revenue came from a combination of increased revenues and leverage in our sales and marketing spend.

Adjusted EBITDA. In the fourth quarter, adjusted EBITDA was a record $11.3 million, representing a 15% margin as compared to 11% in Q4 of 2015, and 13% in the third quarter of 2016. Primarily driven by increased revenues and a balanced expense approach. In the fourth quarter we started our ERP implementation to drive further operational efficiencies across the business. Given the implementation and the associated expense will continue over the next three quarters, and it's non-recurring nature, we are excluding it from our adjusted EBITDA calculation. In the fourth quarter the expense associated with the implementation was approximately $168,000.

We anticipate this expense to increase to approximately $0.5 million in both Q1 and Q2, decreasing in Q3 as the implementation nears completion. Adjusted EBITDA for the year was $32.5 million, a 77% increase over 2015, outpacing our revenue growth of 16% for the full year. This reflects the benefits from our platform scaling, and progress we have made in managing expenses.

Moving on to cash. We ended year with $175.3 million in cash and short-term investments. Over the year we repurchased a total of 1.7 million shares for $11.1 million through our share repurchase program. We generated $21.8 million in cash from operations, over double the amount we generated in 2015. Let's move on to our outlook for Q1 and full year 2017. For the first quarter 2017, we expect revenue to be in the range of $70 million to $73 million, we expect adjusted EBITDA to be in the range of $6.5 million to $7.5 million.

For the full year we expect revenue in the range of $307 million to $317 million, reflecting a 12% to 15% increase over 2016. We anticipate typical seasonality in the first half of the year, with the impact of greater Retailer iQ marketing, Quotient Insights, QMX, and other initiatives helping to drive strength in the back half of the year. Full year adjusted EBITDA is expected to be in the range of $40 million to $45 million. For modeling purposes we are expecting amortization of acquired intangibles to remain around $2.3 million per quarter.

Operating expenses are expected to increase slightly in absolute dollars in 2016, while continuing to decline as a percentage of total revenues. We expect total stock-based compensation to be up slightly over 2016. We are estimating weighted average shares outstanding to be approximately 87.4 million for Q1, and 88.5 million for the full year. As we look to the opportunities ahead of us, we will continue to balance between driving for growth, while tightly managing expenses towards improving margins. We will now open the call for questions. Operator.

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

Hi. Good afternoon. This is Jim Chauncey stepping in for Mark. Just one quick one, and a follow-up if I may. Revenue per transaction, really appreciate the color a little more on what you expect for the full year. Maybe we could drill down a little more on what drove the sequential uptick in Q4, and then maybe some of the puts and takes that would get us to a different ends of that $0.07 to $0.08 range? Thanks.

Sure. It is Steven. Thanks for asking the question. So just as a high level, remember that revenue per transaction, although I know it's a KPI that we have been reporting in the past, it has become important for modeling purposes. For us really the focus is on aggregate dollar shift and so between alternative pricing strategies and product mix and customer mix, which I'll talk about in a minute, you will see fluctuation in that. The objective for us, however, is to look at the 90% of spend that still takes place in the offline world, and incentivize our complaints to move as much of that shift over to our platform, as they go from offline to digital. Growing our volumes at a rate that greatly outpaces any kind of price change in the rate per transaction is our objective. And so in the last quarter of the year, we talked about this on our last call.

In the last quarter of the year, as our volumes really started to inflect upwards the back part of the year, the budgets had really been tapped out, and couldn't really grow across our broad client base to meet those demands. Our biggest customers, our largest partner customers who have the ability to shift budget, also typically have a lower aggregate or imputed rate per transaction because of the amount of business they do with us. And so that will drive the rate per transaction to fluctuate quarter-over-quarter, but the really important thing to focus on really is just the aggregate dollar spend shift to our platform, and whether or not our volumes are growing to outpace any kind of change in pricing.

And, Jim, your question on the color around the $0.07 to $0.08 for the year. As Ron mentioned so there are a lot of puts and takes in that. So the downward pressure on that revenue per transaction is on the volume discounts, the mix that Steven talked about, but there is the upward trend on that. One of the factors in there is targeted offers which we had mentioned before. Now again, they're a small portion of our business right now, but they are a fast-growing portion. So as that mix grows, those targeted offers which come at a premium price, would have the upward effect on it.

Got it. That's really helpful. Thank you. And then maybe one quick one on the transaction volumes. Of the 16 marketing today, I guess maybe you can help us understand what percentage of those that are marketing the most are driving that growth? Is it sort of the top-tier driving most of the transaction volumes, and when I say top-tier, the top-tier that are marketing most heavily, or is it more broad-based? Thanks.

Overall from a marketing standpoint it's broad based, but you can imagine that there's a distribution in there where the top several retailers are driving a disproportionately higher share, and it is completely commensurate with A, their size, and B, the amount of marketing they're doing. And I think as we mentioned in the script the top four accounted for 20% growth sequentially, which is higher than the overall growth of paperless sequentially. So you can get a gauge for that.

Got it. Thank you very much.

Thank you.

Your next question comes from Thomas Forte with Maxim Group. Your line is open.

Thanks for taking my question. I want to talk a little bit about your digital media revenue for 2017. Your growth decelerated as the year progressed for 2016. What are the opportunities to see that accelerate in 2017, and what are the assumptions you're making when you're thinking about the contribution from that portion into your overall guidance for both the first quarter and full year? Thanks.

Sure. I'll take the first part of that. So we do expect growth in media to reaccelerate in 2017, and we have been working, planning for it, and working on the strategies and products and we announced one of those today. But just to give a little bit of color on 2016 and the wise of that, we have talked in the past we really have a very good and healthy media business. It is one that is, that CPGs find very ROI accretive, and a lot of our campaigns historically have been on our own property, and combined with promotion transactions. Now that is starting to be more diversified beyond our properties, which is good, and we are doing more and more of that with the launch of QMX. But in the last two quarters we did have some situations where promo and media campaigns that were combined campaigns, and those are good campaigns, because there is a brand equity message, and a call to action.

The promotions or the coupon volume was so rapid, because of the increasing demand in Retailer iQ grown, and so on, that the budgets for promotions were starting to run out a little bit quicker, and it doesn't make sense to have the media any longer than that, so the CPGs balancing some of the media budget between, the total budget between media and promotions. So that was some of the effect on the last few quarters. But as the annual planning of CPGs catches up, and we're working with all of our CPGs, some have calendar quarters, some have fiscal quarters, that should normalize itself out, and then additionally we have additional products both on our own and operated properties, as well as broadly outside of our properties using data, and targeting in segmentation, and with the announcement of the launch of QMX today, we do expect our media revenue to reaccelerate and grow in 2017.

Let me just put a little bit of a lens on what Mir just spoke about. So when a CPG runs a program with us, it's an integrated program where there is media running with promotional activity with digital coupons. If the volume of digital coupons accelerates, then the plan to run those two things together and have them be co-determinant doesn't work, and so you have to start shifting some dollars out of media into the promotion side, in order to keep them running at the same time, but it's not a one-for-one shift. Because if you shift more dollars to promotion, some of those dollars have to go to the redemption of those offers. So it's not as if a dollar from media shifts to a dollar for promotions. And so that's why you see some of that effect as well, and again why we expect to see media reaccelerate in 2017.

Great. Thank you.

Thank you.

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

Good afternoon. Steven, last quarter you talked about testing some alternative pricing strategies given your growth in scale. Just curious were you still testing those in Q4, and then maybe just kind of some learnings that you could share from those tests that you did last quarter?

Sure. So just remember the objective in testing different ways to service our client base and partner is to give our clients reason to shift more dollars to us with some kind of certainty on outcome. The spend versus product move, brand impression, whatever the objectives are, and clients have different objectives across different brands, at different times the year. So those would be the objectives and on our side clearly would be to continue growing our business in a healthy way. Yes, we continued to experiment, and we continued to do it at greater scale, and our clients are shifting more dollars to us, and you're seeing that in our results, and you're also seeing margin expansion and growth in our top line. So all of those things are working well, and we're going to continue to test with those types of things as we go forward.

Great. Since we're talking about the margins can you maybe put a little more color around what drove the 290 basis points of gross margin expansion? I know you talked about product mix, but anything you can add there?

So the gross margin grew in the quarter, primarily because of volume and the mix. I mean you remember the revenue was up substantially last quarter, and we did as you saw, we saw increased media and those were the two drivers. Additionally there's some fixed costs that are also consistent, that there were savings on, so we believe able to leverage on those.

Just one more, Ron, if I could. Did you provide, I may have missed it, the Retailer iQ percentage within paperless during the quarter?

No.

It's most of it.

Okay. Thank you.

Thank you.

Your next question comes from Blake Harper with Loop Capital. Your line is open.

Yes. Thanks. Beyond the new app that was just released, what else can we expect from the Coupons.com platform from a product perspective, and how would that affect anything from your marketing spend or R&D spend that you expect for the year?

Sure. It's Steven. So we announced today QMX, a very exciting announcement. The Quotient media exchange. We have just released our new mobile app, and short of announcing or pre-announcing prematurely any products releases that are coming up, you would expect that the pipeline that we have developed for the year is in line with our spending, and on the consumer marketing side nothing extraordinary is planned. So it's all within our existing plan.

Got it. Thanks. And then I appreciate Steven, given the commentary on the revenue per transaction. I wanted to see could you maybe offer a little bit more on just the number of transactions, now that the past two quarters you have accelerated up through the level you have or a different run-rate now. Just wanted to see if you could offer any color for your expectations there for the year?

Yes. So the way to think about it again, it will fluctuate, and remember, our business is a bit lumpy in the quarters, and so the way to really think about this is what Ron said earlier, and that's for modeling purposes we're looking at $0.07 to $0.08 on a rate per transaction imputed for the remainder of the year. If that changes we'll certainly let everybody know, but we're thinking about that range right now.

Your next question comes from Aaron Turner with Wedbush Securities. Your line is open.

Okay. Great. Thanks for taking my questions. Two if I may. The first one around Samsung Pay. Wondering if you could share with us any traction with users, or any early learnings, any color around that if you can? Also, if you have a plan to roll that out to other mobile wallets. And then the second question around the Shopmium app. Now that receipt-scanning functionality is included in the Coupons.com app, any thought about perhaps maybe winding down the Shopmium app, and just having one app for Coupons.com.

So the Shopmium app operates, let me take that one first. The Shopmium app operates in the US, it operates in France, it operates in the UK, and we did a very quick rollout into the UK after we acquired the business. It's a logical conclusion to think that in the US, we'll consolidate the consumer behavior into a single app experience. So that's a fair question and a logical conclusion to come to. I'm sorry. What was the first part of your question again?

Just around Samsung Pay. Any early learnings there, any color around traction with users, and then also, if you plan to roll that out to other mobile wallets?

Sure. Now I know why I forgot the question. We can't really comment on any specific partnerships that we have got, other than to say that we are happy with the relationship.

Got it. All right. Thank you.

Thank you.

There are no further questions at this time. I will now turn the call back over to Steven Boal for closing remarks.

Thank you all for joining us today. Before we close, I would like to take a moment to thank everyone on our team for their passion and excellence, and for delivering a great year. Many years ago we laid out our vision to become the digital marketing platform of choice, for brands and retailers to drive sales with consumers. We have never been more excited about the opportunity ahead than we are right now. Thank you.

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