Quotient Technology Inc (QUOT) 2017 Q1 法說會逐字稿

Welcome to the First Quarter 2017 Quotient 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 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 First Quarter 2017 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, our 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 second quarter and full year 2017; expectations for our Retailer iQ platform and consumer and CPG patterns; expectations regarding the acquisition of Crisp Media; expectations regarding its media platform; expectations for the Coupons.com mobile app; 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 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 annual report on Form 10-K filed with the SEC on February 16, 2017.

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, growth margins and net loss, 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. We had a strong start to 2017. We delivered revenue of $72.6 million, at the high end of our guidance, and adjusted EBITDA came in above our guidance at $7.7 million.

Transactions in the quarter grew 48% year-over-year to a record 795 million, well on our way to 1 billion transactions per quarter. As retailers continued to market their digital coupon programs and CPG shifted more budget to digital, which in turn grew shopper engagement.

Digital paperless transactions grew 100% over Q1 of last year, reflecting the accelerating industry shift from offline to digital.

Three years ago, we embarked on our vision of moving the industry to pure digital, with the introduction of Retailer iQ. Today, more than 75% of our total transactions are digital paperless. With all of the advantages of digital, from our ability to personalize and target offers and media to the overall ease for shoppers, we believe the sheer volumes possible in digital will surpass the limitations in the offline world.

Retailers and brands are embracing digital for the ability to influence shoppers, often with short lead times not possible offline to help drive sales, critical in today's competitive environment. Many of our partners have been talking publicly about their focus on digital strategies, keying in on the importance of driving sales through greater personalization and marketing efficiency.

Additionally, retailers are looking for more out of their own legacy on-premise technologies. They are shifting towards technologies and services that can accommodate their needs in a faster-paced, omni-channel environment. With our increased scale and multiyear history operating Retailer iQ, we're starting to think of Retailer iQ like a fast-paced platform for retailers.

Already, we have started to pilot products that we will deliver to retailers on a fixed-fee, multiyear recurring revenue basis. And although still very early, this demonstrates the overall shift we're seeing from retailers as they start to appreciate all the benefits technology and data can bring.

We believe increased scale on the platform will lead to growth in other areas. We've talked a lot about shopper marketing, which is estimated to become a nearly $19 billion annual market over the next few years.

We have expanded our products to meet the specific needs of retailers and shopper marketing teams, and now have members of our sales team working from the headquarters of many of our retail partners, giving us a seat at the table with retailers and CPG shopper teams as they build their marketing campaigns.

Today, I'm thrilled to announce our intent to purchase Crisp Mobile, a mobile media company that accelerates our offers -- our efforts in shopper marketing. Using shopper data, Crisp delivers a premium digital media experience to a targeted mobile audience. With over 70% of Retailer iQ usage on mobile, Crisp's Mobile focus is a natural fit.

You'll recall we recently announced QMX, our data-driven media solution, where advertisers can leverage our audience reach and exclusive shopper data to serve targeted media across mobile and web.

We believe our acquisition of Crisp, a proven mobile media platform, will help accelerate our media growth.

Crisp brings existing shopper marketing relationships with leading CPGs such as Coca-Cola, Kellogg's, Unilever and Clorox, just to name a few, the same companies that we already work with across our digital platform.

Crisp also works with many advertising agencies that manage large media and shopper marketing budgets for CPGs. The Crisp team brings to Quotient deep industry expertise and a unique improvement platform for growth.

Crisp's current CEO, Jason Young, has 2 decades of media experience, including 3 years as CEO of Ziff Davis. I'm excited to welcome Jason and the Crisp team to Quotient.

I'll now turn the call over to Mir and Ron, who will talk about some of the quarterly highlights and the financial results and guidance. Mir?

Thank you, Steven, and welcome, everyone. As Steven mentioned, we had a strong start to the year as retailers and brands continue to use Retailer iQ for their digital marketing activities to engage shoppers and drive sales.

The convergence of digital promotions data and digital media is gaining momentum, enabling integrated targeted marketing programs for CPG brands and retailers to drive measurable sales growth.

While brands have long shared this strategic objective, it is now made possible at scale through our Retailer iQ promotions and our media platforms. We believe we have built a compelling competitive advantage in this space, focused on data, mobile and shopper marketing.

This quarter, many of our retail partners ran large marketing activities around their digital programs. Some examples include marketing digital coupons in the printed weekly circulars, offering specials to shoppers who register in their programs, sending personalized e-mail to loyalty members and running targeted social media campaigns. This marketing leads to more registrants, which in turn drive transaction and sales.

7 out of 8 of our leading retailers on Retailer iQ saw transaction growth of more than 70% over Q1 of last year. And we are seeing strong momentum each quarter, with 6 of those 8 retailers delivering average transaction growth of 25% from the prior quarter. This momentum clearly demonstrates the importance of marketing in the overall secular shift to digital.

This quarter, we went live with another 4 retailers, bringing the total to 25 live on Retailer iQ. We anticipate rolling out another large retailer onto the platform, with large-scale digital marketing activities scheduled to ramp in the back half of the year.

We are very excited to be their partner of choice, helping CPG brands reach tens of millions of shoppers through their loyalty program. At their recent Analyst Day, executives stressed the importance of digital marketing as they look to further leverage data, efficiently drive sales through personalization.

We continue to believe that CPGs are focusing on shifting away from paper to digital. Their growing volumes on our platform are evidence of that, and we're now in engaged in many discussions with CPGs about their desire to move away from paper completely.

As a reminder, paper coupons still represent about 90% of CPG brand coupons redeemed in the U.S. in each year out of more than $300 billion coupons distributed, suggesting significant upside potential for us.

Turning to media and data. Media revenue rose slightly over last year as we delivered campaigns for both brands and retailers. QMX, our data-driven media solution, is also beginning to deliver revenues.

I also want to welcome the Crisp team. Their mobile media platform and CPG shopper marketing relationships complement our strategy and capabilities and fit well with our QMX solution.

We'll work closely to combine synergies across sales and operations as we look to expand mobile media opportunities across our business.

For Crisp, that means leveraging QMX data and our retailer programs to deliver more mobile shopper marketing campaigns. For Quotient, we have an opportunity to leverage Crisp's mobile media technology platform to deliver additional shopper engagement through enhanced mobile campaigns for our CPG brand and retail clients across our network.

Additionally, our data analytics and media measurement efforts are encouraging. We are in the market with sizable pilots to deliver analytics on the conversion of digital media to in-store sales for brand and retailer campaigns. On the consumer front, we continue to enhance our platform for the benefit of our shoppers, CPG customers and retailer partners.

In Q1, we rolled out a major update to our Coupons.com app. Included in the update is a more retailer-centric, location-based digital paperless experience, where shoppers can download offers directly to their favorite stores. We're seeing organic user growth on the app and plan to shift marketing spend to accelerate user adoption.

We are also seeing momentum in cash-back receipt scanning through our app. These offers expand our shopper reach into retailers that don't yet have a paperless coupon program, including 2 newly added club retailers.

Overall, we are very excited by the growth and momentum we are seeing across the platform. We continue to build scale and the number of users -- as the number of users and transactions grow. And with scale and data, our ability to close the loop between digital marketing campaigns and sales increases. We believe this will increase our ability to grow revenue across promotions, media and data and analytics.

I'll now turn the call over to Ron for details on the financials.

Thank you, Mir, and welcome, everyone. 2017 started strongly, with Q1 delivering 10% revenue growth and 79% growth in adjusted EBITDA over Q1 of 2016.

I'm going to start by reviewing the first quarter financials, then I'll provide some financial color around our Crisp Mobile acquisition and update our guidance for Q2 and the full year.

Revenue in the first quarter was $72.6 million, up 10% over a year ago, reflecting strength in promotions, particularly in digital paperless. Transactions in the quarter were 795 million, up 48% from Q1 of 2016 and up 15% from last quarter.

In the first quarter, we recorded a GAAP net loss of $2.7 million, an improvement over the net loss of $8.2 million in Q1 of 2016.

Adjusted EBITDA, which excludes a net gain in fair value of escrowed shares and contingent consideration, stock-based comp, ERP implementation costs and acquisition-related costs, was $7.7 million, up from $4.3 million in Q1 of 2016. This is a result of our balanced approach between revenue growth and investments, while driving operational efficiencies throughout the business.

Our cash and short-term investment balance at the end of Q1 was $174.6 million, about flat from end of year 2016. This excludes the cash impact associated with the acquisition of Crisp.

In the quarter, cash from operations was essentially flat, as we've paid out typical year-end bonus and commissions as well as incurred the substantial Q1 FICA reset. All in all, we are very pleased with our performance this quarter.

Drilling down into our $72.6 million Q1 revenues, digital promotions came in at $57.4 million, a 13% increase over last year, reflecting our increase in transaction volume across the platform. Revenue for media was $15.2 million, up slightly from last year.

Let's look at transactions. Total transactions in the first quarter were 795 million, up 48% from a year ago and up 15% on a sequential basis, primarily due to continued strength in Retailer iQ. Digital paperless transactions grew 100% from a year ago, and represented 79% of all transactions in the first quarter. Digital print transactions, as expected, declined 25% from last year, as more promotions were delivered through digital paperless to meet the rapidly growing demands on Retailer iQ.

Average promotion revenue per transaction in the first quarter was calculated at $0.072, primarily reflecting strong revenue growth among our top 20 CPG customers. These customers typically have larger budgets and can spend more to meet the accelerated demand from retailers.

Keep in mind that our pricing model is tiered, giving lower prices for larger-spend commitments and higher volumes, creating a customer mix effect that can fluctuate by quarter.

Our focus is on increasing volumes and associated revenues, which we believe unlocks opportunity across the platform, as CPGs and retailers shift more dollars from offline to digital.

Moving on to the P&L. GAAP gross margin in the first quarter was 59.8%, slightly down from 61.1% last quarter, primarily due to an increase in distribution fees, offset by a decrease in depreciation and amortization expense, all related to Retailer iQ. Non-GAAP gross margin excludes amortization of acquired intangible assets and stock-based compensation expense.

Q1 non-GAAP gross margin was 63.5%, down from 64.6% last quarter due to product mix, while benefiting from a decrease in depreciation and amortization related to Retailer iQ. On a dollar basis, cost of goods sold were flat quarter-over-quarter as we continue to manage our fixed costs.

Operating expenses. For the first quarter, GAAP operating expenses were $46.3 million, up from $42.5 million in the last quarter, primarily driven by the lower net gain in fair value of escrowed shares and contingent consideration.

Non-GAAP operating expenses, which excludes stock-based compensation, the net gain in fair value of escrowed shares and contingent consideration, our ERP implementation costs and certain acquisition-related costs, were $40.7 million. This is a slight decrease from last quarter, as we continue to benefit from operational efficiencies and expense management, offset by over $2 million of incremental annual Q1 expenses, such as the Q1 FICA reset.

In percentage terms, non-GAAP operating costs were 56% of revenues in Q1 of 2017, up 1 percentage point from last quarter and a marked improvement over last year's 64% level, reflecting a combination of increased revenues and leverage in our overall operating expenses.

As our business evolves, we continue to find ways to drive operational efficiencies and manage costs. In April, we reduced our worldwide staff by approximately 5%. On an annualized basis, this represents potential savings of approximately $6 million. Some of these savings will flow through to our improving EBITDA margin, while a portion will be reinvested in our strategic focus on shopper marketing, media and data analytics.

Adjusted EBITDA. In the first quarter, adjusted EBITDA was $7.7 million, representing an 11% margin as compared to a seasonably stronger Q4 margin of 15% and 7% in Q1 of last year, driven by increased revenues and a balanced expense approach.

As a reminder, we are excluding our ERP implementation costs as well as certain acquisition-related costs from our adjusted EBITDA calculation.

In the first quarter, the expense associated with the implementation -- with the ERP implementation was about flat compared to Q4. We anticipate future spend on this of approximately $1 million, spread across the next 2 quarters, with a significant reduction in Q4 as the implementation nears completion. We are looking forward to its completion and the realization of important control and operational efficiencies. Acquisition-related costs in Q1 associated with Crisp were approximately $700,000.

Today, we also announced this new stock buyback program of up to $50 million effective May 5 for the next 12 months.

Before I turn to guidance, I'll give you a few details around the definitive agreement we announced today to acquire Crisp Mobile. The company will pay approximately $33 million in upfront consideration, comprising cash and stock of $20 million and $13 million, respectively, subject to certain customary adjustments at closing. Additionally, contingent consideration of up to $24.5 million in cash may become payable upon the achievement of certain financial metrics over a period of 1 year after closing. We expect the deal to close before the end of Q2 and expect it to have minimal impact on our Q2 results. Assuming a closing in Q2, we will incorporate the acquisition into our Q3 guidance.

On an annualized basis, we would expect Crisp to contribute around $20 million in additional revenues while generating an accretive adjusted EBITDA margin.

Let me move on to our outlook for Q2. For the second quarter 2017, we expect revenue to be in the range of $72 million to $75 million. We expect adjusted EBITDA to be in the range of $9 million to $10 million. These numbers do not reflect any contribution from the Crisp acquisition. We expect stock-based compensation to be flat to slightly increased over Q1.

Our outlook for the full year 2017 remains unchanged. Total revenue is expected to be in the range of $307 million to $317 million. Adjusted EBITDA for the full year is expected to be in the range of $40 million to $45 million. Again, these numbers do not reflect any contribution from the Crisp acquisition. We look forward to having Crisp contribute to our future growth, and in the meantime we will continue the 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 the line of Mark Mahaney with RBC.

A few things, please. One, I think you've talked about a large pharmaceutical retailer or drug retailer coming on. Could you just talk about the status of that, an update on that? And then secondly, I think Ron, you were cutting in and out a little bit or it was maybe my phone here. Did you mention something about a reduction in force in April? And then just a little bit more color, I think you gave the numbers on that, but the rationale behind it?

Sure, I'll take -- this is Mir, Mark. I'll take the first one and then let Ron answer the second one. So in the last quarter earnings call, we had talked about that we had signed a large drug retailer on the Retailer iQ platform. So -- and you can expect that, that retailer to go live in this year, which is what we had said, and that's still on track. Okay?

On the second one, yes, we did talk about a 5% reduction in force, worldwide. That represents roughly savings of approximately $6 million that we have -- had anticipated. And also, we are going to move some of that to the bottom line, and EBITDA, you're going to see some of that fall through to the bottom line, and the other parts are going to be reinvested, where we're now spending our focus on the shopper marketing, the media and the data analytics side of our business.

Your next question comes from the line of Joe Maxa with Dougherty & Co.

I was wondering if you could talk a little bit more about the Crisp acquisition, maybe some synergies and how you see that unfolding as you integrate the company.

Sure, Joe. So Crisp Mobile fits strategically very well with our strategy and our capabilities, as I mentioned on the call. So we've been focusing on, as we've talked about in the past calls, is on shopper marketing, digital promotions, media, there's a convergence going on, and it's all happening on mobile. So the accelerating of the shift from offline to digital and the convergence that we're talking about. Crisp Mobile, their focus is really their mobile media solution, and they've been working in shopper marketing with CPGs and retailers, and really focused on delivering very rich, interactive experiences on mobile, which -- you would think that by now, we would be in a place that, that would be very commonplace, but it is not easy to do. It's technically something that is very -- something that they bring to the party that we -- they're able to deliver. So if you put these 2 things together, that's a nice combination for us to be able to service our brands and our retailers, with rich mobile media experiences that connect the conversions of promotions and shopper marketing and deliver sales in store.

Right. Okay, that's helpful. So on the media segment, obviously, this is where that will fall into, but you had talked about moving beyond your owned and operated sites with your QMX and whatnot. What success are you seeing outside your owned and operated today?

Sure. It's early, but we're seeing good success. And you're right, this is where it fits in very well. QMX, like we mentioned in our last call, we had just launched it in market. It is starting to generate revenues. It is backed by data, a lot of shopper data, which enables targeting. And then Crisp Mobile fits right in to be able to deliver those experiences on mobile devices, across devices.

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

Historically, you've talked about the average revenue per transaction being in the range of about $0.07 to $0.08. I just wanted to see if that was still sort of a good metric to think about. And then Steven, I think, on the call, sorry, I might have been cutting out, you talked about potentially moving to a SaaS model. Just curious, what are sort of the revenue benefits to Quotient or is that model outside of, obviously, the visibility and the forecasting?

Sure, so just quick on revenue per transaction. Just remember that it's a calculated number, and that our objective is in, and you heard it in the prepared remarks, that we're moving dollars from offline to online, and the larger customers get great rates for spend commitments, larger spend commitments and volume commitments. So while we're not focused on rate per transaction, I realize you use it as a calculus in the model. So $0.07 to $0.08 is kind of the range, at the lower end of the range. I think for your modeling purposes you could use $0.07 to be conservative. I think that's probably reasonable. On the SaaS comment, look, we're providing a service that is hosted by us and providing a lot of functionality to the retailers to allow them to engage with their shoppers. And as we grow the platform and grow the data and analytics capabilities, it's clear that retailers want to take advantage of some of those services that we were using ourselves, to reach customers, too. And so we're bundling some of those services up and selling them on a reoccurring monthly basis, on a long-term contract basis. And so we'll see how that continues to progress over time, but I certainly see that developing.

Your next question comes from Tom Forte with Maxim Group.

So two things. One, on Retailer iQ, it looks like the number of retailers marketing was 16, which is the same as last quarter. How should we think about that for a figure going forward in 2017? And then second, digital media returned to revenue growth in the quarter. How should we think about price increases flowing through as the year progresses, and then what the quarterly gross rates could look like for digital media for the remainder of 2017?

Sure. So as far as retailer marketing is concerned, you are right. Now when retailers do some minimal marketing, we do not include it in that 16 numbers, I just want to remind you of that. That includes retailers that are doing bigger marketing efforts. And even though that was flat, which you saw our volumes grow quite a bit, which is very encouraging because the retailers that are marketing are continuously, sequentially doing really, really well. Having said that, we do expect the rest of them to start marketing in much bigger ways throughout this year, such that you will see that number be much higher towards the end of the year. I think that's what we expect.

On the question of media, if you look at the historic trends, Q3, we had a 0.3% year-over-year growth, Q4 minus 7% and our Q1, 1.1%. And consistent with what we've said over the past 2 quarters, we expect our media business to reaccelerate through the back half of 2017. Remember the effect that caused that was largely due to the fact that our volumes grew so quickly in Q3 and Q4, that the media programs that were coupled with promotions designed to be coterminous with their coupon offering, the coupons were running through too quickly. And so we were shifting money away from the media business into the promotions business, but it's not a one-for-one shift because there's redemption dollars that flow out of the system. And so that has an effect of softening the media business, while supporting the continued rapid growth of our promotions business. Add to that the fact that some of our largest customers, CPG customers, don't reset their fiscal year until midyear. And so the benefit of the rapid increase in volume we saw in Q3, Q4 and, certainly, as you've seen in Q1, with the record number of transactions, we really won't see the full effect of that until Q3, when some of our larger customers changes over to the new fiscal year and start to tap new budgets. So those are the effects. So that's why you'll see media continue to inflect upwards through the back half of this year.

Your next question comes from Blake Harper from Loop Capital.

I wanted to ask about Crisp. It seems similar to the Shopmium acquisition that you did, in some ways, and I wanted to just see if you could revisit that now, what you've got from that, more from a business standpoint. I understand you had the receipt scanning technology now in the Coupons.com app, but if you could highlight where you are as far as with -- from a business standpoint, what we've got from Shopmium and how -- what you've been able to do with that since the acquisition.

Sure. We're very pleased with that acquisition. It did 2 things for us, as we've mentioned in the past. One, it gave an increasing foothold for us, although that business is still small in Europe, where Shopmium is the leading brand in France. And we launched, like we mentioned earlier, we launched it in U.K. in the back half of last year, and that seems to be growing on a small base, albeit, but it's doing really well over there. And then the second reason for that acquisition, and which is what we've brought on, is for the technology and the capabilities to be brought into the U.S. And we bundled that technology and capability into our own mobile app. And the relaunch of our mobile app, coupons.com, as you saw in Quarter 1, now has that in there, and that allows us the advantage to be able to have a paperless mobile offering of -- for coupons, for retailers that don't yet have a Retailer iQ-type paperless offering.

Got it, okay. And then if I could just follow up again on the recurring revenues from the fixed fees that you were talking about in your comments, Steven. Are you able to share maybe what percentage of your revenue that you would expect to get from that, either this year or next year?

Sure. It's very early in the chapter on that for us, so it would be hard for me to project that. But we've long looked at the ability to take the services that we use internally out to the marketplace. And just consistent with what I said before, as retailers recognize the need to adapt quicker to the evolving landscape and use technologies that are a lot more flexible, I think we're perfectly situated to provide those types of services. Those are typically done on a SaaS-like basis.

There are no further questions at this time. I turn the call back over to the presenters.

Great. Thank you. Thank you all for joining us today. This is a very exciting time for us, with the breadth of our retailer distribution, our vast audience reach and our growing data and analytics capabilities. Our momentum is continuing to build, and with so much opportunity ahead we believe we're in the perfect spot to lead the industry, overall, in their shift to digital. Thank you, everyone.

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