Quotient Technology Inc (QUOT) 2017 Q2 法說會逐字稿

Welcome to the Second 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 Second 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, 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 third quarter and full year 2017; our expectations for our Retailer iQ platform and consumer and CPG patterns; innovation of Crisp Mobile and its financial and business impact; the company's media platforms; Coupons.com mobile app; as well as the expected growth of and investments in our businesses generally.

Forward-looking statements are based on the 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 quarterly report on Form 10-Q filed with the SEC on May 5, 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, gross 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 website.

And with that, I'll now turn the call over to Steven.

Thank you, Stacie, and welcome, everyone. First, I want to congratulate Mir on stepping into the CEO role on September 1. Mir and I have worked side-by-side for nearly 4 years at Quotient, and prior to that, for another 3 years while he was at Safeway. He's the perfect person to lead the company as we continue to transform the industry and grow our business.

Three years ago, we launched Retailer iQ, and today, it's core to our business, delivering revenue growth in the second quarter of 69% over last year and representing 41% of total company revenue and nearly all driven by mobile.

I've never been more excited about our future. We have key partnerships and customers, proprietary shopper data and a broad set of digital offerings to help brands and retailers navigate the demands of operating in an increasingly competitive and digital world.

With Mir in his new role, I will continue to focus on key strategic initiatives and product direction, while taking a step back from day-to-day operations.

Now onto the quarter. We had a great second quarter. We delivered revenue of $74.5 million at the top end of our guidance and adjusted EBITDA of $13 million, well above our guidance. We are also raising our guidance for the full year to incorporate Crisp Mobile, which Ron will talk about shortly.

Transactions in the quarter grew 48% year-over-year to 793 million. Looking at the first half of 2017, transactions are already almost 2/3 of the total transactions in all of last year.

CPGs and retailers are recognizing the growing importance of a digital strategy that reaches shoppers effectively, drive profitable sales and strengthens customer loyalty.

The retail landscape is experiencing change faster than ever before. Many retailers are feeling increased pressure and a greater urgency to reexamine the status quo and to be able to make bold decisions about their businesses.

The importance of digital is understood like never before, and we believe Quotient stands to benefit as retailers and CPGs speed up their efforts to embrace digital across their businesses.

Our Retailer iQ media and data platforms arm our partners to better compete in this evolving landscape. Our retailer partners rely on us to deliver personalized and targeted promotions in media, which drive profitable sales and increase store traffic, in addition to campaign measurement analytics that guide how marketing dollars are spent.

At the core, it's something else of extreme value, a one-to-one digital relationship with shoppers. In addition to driving in-store sales, retailers can leverage these relationships to convert these shoppers into e-commerce customers, including home delivery and click-and-collect.

For CPG brands, the changing retail landscape directly affects them as well. We believe CPGs who do not have an action plan to exit the declining offline promotional vehicles over the next few years will be left behind, and those that move quickly will benefit disproportionately, establishing a personalized digital relationship with shoppers and giving them first-mover advantage over their competitors.

An example of this disproportionate benefit is how niche brands who have traditionally been locked out of offline promotional vehicles are gaining market share through digital-only strategies.

Big brands, however, have an extremely powerful asset on their side, data and partnerships with large omni-channel retailers who's objective are aligned with theirs, to drive profitable sales, primarily with greater marketing efficiency.

Quotient digitally connects retailers and CPGs to help them do this, empowering them to leverage each other's digital strategies and the growing importance of shopper data.

Our scale, focus and vision is aligned with the business challenges of today. CPGs and retailers look to us as their strategic partner's, with data playing an increasingly important role as we engage with them in their long-term planning.

Our strategy is proving itself out. Our platform is scaled to meet the future volume demands of the industry, and we continue to strengthen and expand our products based on the visibility and insights we have and to what shoppers are interested in and where and when they purchase.

When we ended 2016, we had 40 million shoppers registered on programs powered by Retailer iQ. That number has now climbed to almost 50 million, representing about 40% of all U.S. households. As a market leader, our expertise, scale and agility in a disruptive environment will, we believe, continue to serve us and our partners well.

I'll now turn the call over to Mir for more color on the quarter.

Thank you, Steven. Before I discuss the quarter, I want to say that I am honored to become CEO of Quotient. 7 years ago when Steven and I set out to transform the offline promotions industry, recognizing early on the importance of shifting to digital and the great opportunities that would bring. We began as business partners, and then became colleagues when I joined Quotient almost 4 years ago. It's been exciting to bring our vision to reality, as we've led the industry shift to digital. I also want to thank our talented and dedicated employees. I'm proud to be part of such a world-class team.

Now moving on to Q2. As Steven mentioned, we had a great quarter. Retailer iQ continued to scale and promotions revenue increased 15% year-over-year, as brands and retailers look to reach shoppers and drive sales through digital.

At the start of the year, I outlined 4 focus areas as we headed into 2017. To recap, they were: one, build a large shopper base through mobile; two, continue to grow distribution and use of digital coupons through Retailer iQ; three, significantly grow our shopper marketing business; and four, leverage data to drive media and analytics.

I'm proud to say that we're making significant progress on all 4 fronts. The first 2 are interrelated. Retailers continued to drive scale on the platform through their marketing efforts. More retailers are marketing their programs in their printed circulars, offering special promotions to drive registrants and using Retailer iQ to personalize offers and media for their shoppers.

Another 3 retailer banners started marketing in the second quarter, and we're excited to be their digital partner as they look to drive customer loyalty and sales.

As a strategic partner to our retailers, we're also arming them with best practices when it comes to digital marketing, using our playbook to drive shopper engagement and sales. 5 out of our top 10 retail partners by volume, who have been live for over a year, grew their volume more than 100% in quarter 2 versus a year ago.

Not only did these activities drive transaction volume, but it also increased the total registrants on programs powered by Retailer iQ to almost 50 million shoppers. This gives us national reach into approximately 40% of U.S. households.

With greater shopper demand through our platforms and network, including that Coupon.com mobile app, CPG brands are shifting more dollars from offline to digital, and we continue to partner with them in their long-term planning process.

In the second quarter, total transactions grew 48% year-over-year, driven primarily by mobile usage on Retailer iQ. Revenue from Retailer iQ crew 69% year-over-year and represented 41% of total revenue.

Turning to media. Revenue was [down] 6% from the first quarter and flat compared to a year ago, reflecting a tough market. We ran large-scale campaigns across our network on behalf of prominent brands and retailers and are excited about our growth potential in media.

Towards the end of the first quarter, we launched Quotient Media Exchange, or QMX, our data-driven media solution, to expand our media and measurement offerings. Through QMX, brands and retailers can reach targeted audience segments at the right moments using proprietary shopper data and insights.

We can also do closed loop measurement, timed digital marketing campaigns to in-store sales at our shopper level in near real-time. The data in QMX continues to grow, further strengthening our capabilities around targeting and measurement. Today, our verified buyer audience reach is over 70 million, up from 55 million at launch just a quarter ago.

QMX is a natural extension of Retailer iQ and fits the needs of our customers and partners as they look to grow digital and user media to efficiently drive sales.

We believe this also positions us well to address the growing opportunity within shopper marketing which has grown and evolved over recent years. It is now anticipated that by 2019, roughly $19 billion will be spent annually in shopper marketing, particularly in mobile media.

Increasingly, CPGs are combining digital promotions and media into campaigns targeted at shoppers using in-store and online data. We believe Quotient is accelerating this trend, given our trend -- given our footprints for Retailer iQ, data and brand and retailer relationships.

We are delivering shopper campaigns with good results and our shopper marketing business is starting to accelerate.

We expect this to drive our overall media revenue to double-digit growth in the back half of this year.

Crisp Mobile, our recent acquisition, further accelerates this opportunity. Their mobile media platform and deep expertise and relationships with shopper marketing teams has been a natural fit. Additionally, the Crisp brand is well-known to CPGs and retailers.

Since closing the acquisition, we've already executed a number of campaigns, where brands drove our targeted, holistic, digital marketing message on mobile, combining promotions and media.

In summary, we had a great quarter and remained focused on helping CPG brands and retailers reach shoppers, drive profitable sales and spend marketing dollars that drive measurable sales growth in-store and online.

Our platforms are generating and using a significant and increasing amount of shopper data to deliver targeted promotions and media. With over 85% of redeemed CPG coupons still delivered through offline channels and the media trend towards sales driving digital strategies, we believe we are well positioned to continue this transformation from offline to digital and drive business growth and shareholder value.

I will now turn the call over to Ron.

Thank you, Mir, and welcome, everyone. Driven by continued growth in the promotions revenues, Q2 finished strongly with revenues of $74.5 million, growing 11% over Q2 2016, helping deliver a solid first half year-on-year growth rate of 10%.

We recorded a second quarter GAAP net loss of $5.8 million compared to a GAAP net loss of $3.5 million in Q2 of 2016. The GAAP net loss increased quarter-on-quarter and year-on-year, primarily due to a $3.9 million charge related to the change in the fair value of escrowed shares.

Adjusted EBITDA, which excluded the net change in fair value of escrowed shares and continued consideration, stock-based comp, restructuring charges, ERP implementation costs and certain acquisition-related costs, was a record $13 million, up from $8.1 million in Q2 of 2016.

For the first half of 2017, we delivered an adjusted EBITDA margin of 14%, compared to 9% a year ago. The Crisp Mobile acquisition closed on May 31, and their June results are included in our numbers.

Our cash and short-term investment balance at the end of Q2 was $170 million, down $4.6 million from the end of Q1. In the quarter, we generated $15.3 million in cash from operation, a significant increase over Q1.

During the quarter, we used approximately $21 million, net, for the Crisp acquisition. Excluding the impact of the Crisp acquisition, we would have added $16.4 million of cash to our balance sheet.

We continued to deliver a balanced approach between revenue growth and investments while driving operational efficiencies throughout the business.

Drilling down into our $74.5 million Q2 revenues, digital promotions came in at $58.4 million, a 15% increase over last year, reflecting the growing demand on our platform and the increased dollars CPGs are spending on promotions.

In the second quarter, revenue from our core business, Retailer iQ, grew 69% compared to a year ago and represented 41% of total revenue generated. Revenue from media was $16.1 million, about flat compared to last year, and up 6% from Q1 in a tough market.

Let's look at transactions. Total transactions in the second quarter were 793 million, up 48% from a year ago and about flat from last quarter. Q2 is typically a seasonally light quarter from a promotion point of view. Digital paperless transactions, primarily Retailer iQ, grew 84% from a year ago. Digital print transactions declined 13% from the same period last year.

Average promotion revenue per transaction in the second quarter was calculated at $0.074, primarily a reflection of customer mix, with strong revenue growth among a broad group of CPG customers.

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.

Let's move on to the P&L. Gross margin. GAAP gross margin in the second quarter, which included an increase in distribution fees, offset by a decrease in depreciation and amortization expense related to Retailer iQ, was 59.7%, about flat with last quarter.

Non-GAAP gross margin, excluding amortization of acquired intangible assets, stock-based compensation expense and restructuring charges, came in at 63.8%. This was effectively flat compared to last quarter and was a function of product mix as well as benefiting from the decrease in depreciation and amortization related to Retailer iQ.

On a dollar basis, cost of goods sold increased slightly quarter-over-quarter, primarily due to increased distribution fees. As we grow our revenue from QMX, we anticipate increased distribution of fees associated with it.

Operating expenses. For the second quarter, which included a small amount of expense from Crisp, GAAP operating expenses were $50.1 million, up from $46.3 million in the last quarter. This was primarily driven by the higher charge for the net change in fair value of escrowed shares and contingent consideration, restructuring charges of $1.3 million and acquisition-related costs of approximately $800,000.

Non-GAAP operating expenses, which excludes stock-based compensation, the change in fair value of escrowed shares and contingent consideration, our ERP implementation costs, certain acquisition-related costs and the restructuring charge, were $36.3 million. This is a slight significant improvement over last quarter's $40.7 million as we continue to benefit from operational efficiencies and expense management and the seasonal decrease in FICA expense as we began to hit the caps.

In percentage terms, non-GAAP operating costs were 49% of revenues in Q2 of 2017, significantly down from last quarter's 56% level and a marked improvement over last year's 59% level, reflecting a combination of increased revenues and leverage in our overall operating expense.

As our business evolves, we continue to find additional ways to drive operational efficiencies and manage costs. As noted earlier, in the second quarter, adjusted EBITDA was a record $13 million, representing a 17% margin, a substantial increase over last quarter's 11% and 12% in Q2 of last year, driven by increased revenues and lower operating expenses.

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

We anticipate ERP implementation costs in Q3 to be approximately $500,000, 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 Q2 associated with the Crisp acquisition were approximately $800,000.

Before I turn to guidance, I'll give you a few details around our Crisp Mobile acquisition, which closed on May 31.

Total purchase price, on a net basis, was $34 million, including net cash paid and fair value of stock issued, not including any potential earn-out payments.

While we have already mostly integrated Crisp into our daily business, and will not be breaking out the results separately, we do expect Crisp to contribute approximately $10 million of revenue in the back half of this year.

With that in mind, let me provide guidance. For the third quarter 2017, we expect revenue to be in the range of $81 million to $84 million. We expect adjusted EBITDA to be in the range of $10 million to $12 million. We expect stock-based compensation to be flat to a slight increase over Q2.

We are raising our full year guidance range. Total revenue is now expected to be in the range of $317 million to $323 million, including Crisp, or approximately 16% growth at the midpoint.

Adjusted EBITDA for the full year 2017 is expected to be in the range of $45 million to $48 million, or approximately 14% to 15% of revenue, an increase over the 2016 margin of 12%.

We will continue to balance between driving for growth while tightly managing expenses towards improving margins and building shareholder value. We believe we have a large opportunity in front of us as retailers and CPGs continue to reach and engage shoppers through digital channels.

We will now open the call for questions. Operator?

(Operator Instructions) And your first question comes from the line of Mark Mahaney with RBC Capital Markets.

I'll limit myself to 2 questions, please. First, Steven, congratulations on the success in building the business to where it is today. The broad strategic question I want to ask you is, in terms of industry events, is the pending acquisition of Whole Foods by Amazon, does that have a material interest in industry demand for Quotient's solutions? And then, Ron, one specific question to you. In terms of a guidance, I know you said Crisp was going to be contributing about $10 million a year in revenue. I see that you lowered -- I'm sorry, you raised the upper -- the lower end of your range by $10 million, but the upper end of your range by less than $10 million. So just walk through that. Why didn't you just take up the bottom and the upper end of the range by $10 million each?

Okay, Mark, it's Steven, thanks for the kind words. The Amazon-Whole Foods announcement, while not completely unexpected, certainly did get everybody's attention. Amazon has been focused on the grocery area for a while now, and those that have been in the industry were sort of expecting something like this to take place. So your question is an appropriate one, and the answer is yes. Yes, it gets people's attention. Yes, it gets people's focused. And yes, people now recognize that one of the largest reasons for something like this to happen is really to get their arms around data, and data management, data analytics and the predictive nature of knowing what shoppers do. So that, we consider that to be very beneficial.

And Mark, on the guidance. So as you noted, we did raise the low end by $10 million, and that's effectively what we're doing there is tightening the low end. On the high end, the increase there is -- still assumes more opportunity relative to the midpoint within that versus our original guidance when you include -- add on top of that the Crisp number, the $10 million for Crisp. So we're getting a little bit more with narrowing the gap.

Your next question comes from the line of Nat Schindler with Bank of America.

So you now have 27 retailers signed up and using Retailer iQ, and you're still growing transactions on the digital basis of 84% level. But most of these 27 are not using it to the full extent that may be some of your earlier clients, like Dollar General, are. What can you do from here to really implement Retailer iQ within those clients and get it moving more? And where do you think you are in the -- what inning do you think it is in the rollout of Retailer iQ within these businesses?

Nat, it's Mir, I'll take that. So you're right that there's all flavors of level of adoption and marketing within those 27, and then if you see, the other stats that we gave is 19 of them are actually marketers. So there's a few that have gone live but have not started marketing yet. We anticipate that they will. And all the ones that are marketing, some are doing a much deeper, more holistic jobs and so on. And we are working with them. As we mentioned in our previous calls, to the playbook -- or the playbook of -- to do more and more marketing. So we do expect there to be more user-based growth, based on retailer marketing, including the ones that are already marketing to do more and the ones that are not to start marketing and then move from there. I would say that we are probably in the first or second innings of this, just in terms of you to get the number of users on the platform already, which is great and growing, but how much more it could be, given the shoppers that shop these retailers every day.

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

First question for Mir, Steven. Oftentimes, the CPGs set budget cycles in sort of the June timeframe. Can you sort of walk us through how those conversations went this year now that you're at significantly higher scales than last year? And then the second question, just to follow up on the guidance for EBITDA, I'll ask that question. How much of the EBITDA guide was a result of sort of the accretive transaction, I think you had called out before, from Crisp versus just sort of the current business performing better than originally expected?

Sure, Ralph, it's Mir. Let me take your first one, and then Ron can tackle the second one. So the budget in annual planning process when we participated with CPGs, those discussions and that process is going really well. And successively, the discussion has been focused on -- and the planning has been focused on more and more from offline to digital, which is what we've been seeing, but it comes in year chunks, as you can imagine. That's why you see the quarterly trends as they are, and then, the annual trends, right? As a reminder, not all CPGs are on a calendar fiscal, some are at mid-year fiscal, some are at June first starts, some are at different times. So in each of their cycles, we work. But what I can tell you is that the successive conversations have been deeper, broader, with a very much bigger and much more serious focus of our roadmap of getting out of the offline type of promotion vehicles into more and more digital. And a lot of -- as we mentioned last time, we're hearing more and more. Now it defines sort of a stated time frame of 2 years or 3 years to be completely out of those vehicles.

On the EBITDA, if you stop, and clearly, it's actually a mix of both us and the impact of Crisp. We did indicate that Crisp was going to be accretive. But if you look at the increase and the amount of -- even in the low end of our EBITDA range and you think about how much revenue we're actually talking about Crisp contributing, clearly that's not all theirs. Does that make sense?

It does. Maybe as a follow-up there, Ron. I think in the prepared remarks, you talked about OpEx being a little bit better for seasonality and the FICA caps. Broader question, are you still sort of working through and seeing the impacts of the reduction earlier than you called about earlier? And then I think you talked about continuing to manage costs. Do you think you'd continue to have opportunities to sort of look at varying OpEx line items going forward?

The answer is yes to both of those. Yes, we are continuing to see benefits of the restructuring that we did in the quarter, and we'll see more of that. But we also have a number of other ideas and action plans actually underway to help us some continue to reduce costs.

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

I wanted to follow up on the move to offline from online, just sort of with stated time frame of 2 to 3 years. Are you thinking of a wide adoption of moving all programs digital? Or is that more of a start and a few brands and type?

This is Steven. It's more widely -- it's more widely discussed now than ever before. And one of the reasons is that it's starting to become pretty clear to the folks in the industry that have traditionally done a lot of work in the offline vehicles, that once those degrade in effectiveness to a certain point, the snowball gatherers speed downhill. And in my prepared remarks, I made mention of this, if you don't have an active plan now, at least we believe, if you don't have an active plan to move out of those vehicles, you're almost left holding the bag because you're stuck in there with commitments with other folks pulling out of them, which will reduce scale significantly, and yet you've got a spend commitments against them. So it's much more of a widely discussed 2- to 3-year planning now than we've ever seen before.

And give us a ballpark, all that -- the significance of what that could mean for you.

Well, if you just look at some of the public metrics, it was about 85% of just national promotion dollars still in offline vehicles, or north of 85%. Really, just -- it's a straight line equation, and then you can add into that the fact that there are brands that have never been able to operate in those vehicles before because they couldn't negotiate for effective rates and dates, but now can participate in digital. And they may not able to participate on a sustained basis, but they certainly can put their products up for promotion and get retailer credit and reach shoppers in real-time now, and they can do it in cycles. It actually expands the marketplace for the very first time in almost 40 years.

Sounds pretty promising. One clarification -- just one quick clarification on your media business, I thought I heard you say expect double-digit growth in the back half of the year. Did that include Crisp? Or was that more on the core business without Crisp?

When I was referring to it, I was including Crisp. But even if the numbers that Ron gave about some estimated attribution to Crisp, even if you exclude that, it's still double digit.

Your next question comes from the line of Aaron Turner with Wedbush Securities.

Okay, great, and congratulations, Mir, on the promotion. Couple of questions, if I may. One is on the online grocery, and you touched on it on the prepared remarks. But I was wondering if you could provide a little more color on how Quotient can participate in that growth if it ever gains widespread adoption. Second question is on the guidance on the take rate for this year has been very helpful. And as we look further afield, I was wondering if you foresee that $0.07 transaction rate as possibly the floor as we look beyond 2017? And then if I could slide a third one in, what was the Crisp revenue contribution for this quarter?

So it's Steven, let me tackle the question about online and e-commerce integration, and Ron will answer your second question. So how could we help? We're already examples of the use of our platform, integrating it into a retailer's omni-channel experience. So not just the products that you can shop for in store, but when you're on their website or using their mobile apps and buying products for home delivery. And this is the case for any retailer that wants to have an experience where shoppers can fluidly move between an online e-commerce, either home delivery or click-and-collect experience or shop in-store. The important point here is that you want to have parity. Shoppers want to be treated the same way regardless of where they want to shop. And those shopping behaviors can move back and forth. Our platform was designed for omni-channel use. It's also designed for multicurrency, multilingual use, but certainly designed for integration with a retailer's e-commerce experience as well as their in-store experience.

And just to add to that, and Steven mentioned it in his prepared remarks also. One other way that our platform helps this situation is that, based -- the retailers' program is powered by Retailer iQ in our platform, resulting a lot of shoppers being digitally connected to the retailer. I mean, there's a lot of relationship that gets built digitally, primarily through mobile for digital coupons, digital shopping list, digital circulars and so on, and that is a very frequent and deep relationship that for retailers will have an e-commerce business about getting into more and more of an e-commerce, home delivery or click-and-collect. The conversion of those shoppers into e-commerce relationships online becomes much, much easier.

And on the Crisp revenue, so in the quarter, we recognized approximately $750,000 of the Crisp direct revenues.

Got it. And then, on the take rate, the transaction rate question on that $0.07 floor, is that something we can expect going forward?

So we've talked in the past about we expected to be -- earlier on, we've said between $0.07 and $0.08, and then we said that better to look at -- or at least the way we're looking at it towards the bottom end of that, and I think that assumption from what we know so far still holds true.

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

Thank you all for joining us today. As we said before, with over 85% of the markets yet to ship and our leading position in digital, we believe we are ideally positioned to capitalize on its opportunity and help our partners for many years to come. Thank you again.

Thank you, ladies and gentlemen. This concludes today's conference call, you may now disconnect.