Quotient Technology Inc (QUOT) 2019 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2019 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.

Great. Thank you, operator. Hello, everyone, and welcome to our fourth quarter and year-end 2019 earnings call. On the call with me today are our CEO, Steven Boal; Pam Strayer, our CFO; and Scott Raskin, our President. Full prepared remarks have been posted on the IR section of our corporate website, investors.quotient.com, alongside our press release and earnings presentation. In the interest of time, we have summarized the posted remarks for today's call and look forward to jumping into Q&A.

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 2020; the impact to revenue from a change in delivery in certain media services; our expectations for our solutions, partnerships, product launches, Ubimo, CPGs -- and CPGs' plan to exit FSI; and our ability to leverage investments and operating expenses 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 quarterly report on Form 10-Q filed with the SEC on November 8, 2019, and our future filings with the SEC. 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's website.

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

Thank you, Stacie, and good afternoon, everyone. Along with our earnings release, we also published a complete transcript of prepared remarks. Consistent with last quarter, rather than read those verbatim, I want to spend just a few minutes highlighting some important points. I'd also like to welcome Pam Strayer to her first Quotient earnings call.

I couldn't be more pleased with how we ended the year. We had a great quarter. And as you saw from our release, we delivered record revenue in the fourth quarter and well above the top end of guidance, ending the full year with revenue of $436 million or 13% year-over-year growth.

Our fourth quarter performance delivered continued strength in Retailer IQ, Retailer Performance Media or RPM and social influence marketing and benefited from some overall budget flush from those CPGs ending their calendar fiscal budgeting cycles. For the fourth quarter, we also delivered adjusted EBITDA above the top end of guidance, and we ended 2019 with $45 million of adjusted EBITDA.

Our teams have worked hard, demonstrating true teamwork and collaboration, and I couldn't be more proud of all that we've accomplished. Over the last 6 months, we've strengthened our team and established key operating priorities to drive the business forward. We are now on course for steady growth in revenues, gross margin and adjusted EBITDA.

I'll start with some of the business changes. We're making some process changes to improve the delivery of some of our media products. As a result, and starting with Q2, we'll now be recognizing revenue from these products on a net basis as opposed to gross. Pam will give more details around this, but the impact to 2020 revenue would be estimated to be about $33 million higher. If you take this into consideration, the forecast for 2020 revenue growth would have been 20%, significantly higher than our 12% guidance at the midpoint of our range, which includes the net accounting treatment. This demonstrates the accelerating growth of our core and stronger-margin businesses.

We also expect to drive 5 to 6 percentage points of gross margin improvement over the course of 2020. A portion of this improvement comes from these process changes around some of our media products which I just mentioned, with the remaining improvement coming from Ubimo acquisition and additional automation and process improvements. Together, we believe these efforts will yield overall improvement in gross margin. With these changes, we're forecasting steady progress in getting to a Q4 adjusted EBITDA margin in the high teens.

With an eye on operational excellence, we've identified several other areas where we can improve how we run. In the past 5 years, we've nearly doubled our revenue to almost $0.5 billion without the benefit of focusing on automation and internal process improvements that you would expect from a company our size. This has started to change over the past few months, and we are already benefiting from the internal attention.

To say that the past 6 months have been exciting would be an understatement. Since I've returned, along with Scott Raskin, we have brought on board a new CFO, a new SVP of Revenue Operations, a new SVP of Customer Success and a new Chief People Officer, who starts this coming week. Each of these leaders are world-class executives in their respective areas with strong track record delivering results. We have also flattened parts of our organization, which eliminated the need for certain other senior roles in an effort to streamline decision-making with clear accountability.

We've also expanded our network and shopper demand on the platform, launched numerous products in market and acquired Ubimo, bringing many benefits, including a great team, technology and cost efficiencies. This is an exciting time in the CPG and retail sectors. Retailers and brands are in sync with each other as they look to leverage digital to help them transition from off-line to omnichannel. This dynamic has created a tailwind for our growth.

In 2020, we expect to see continued growth from the 3 CPGs that had softer spend with us in 2019. We also expect to see benefits in the second half of the year from certain CPGs planning to exit the FSI. As a reminder, CPG is representing more than 20% of national coupons are expected to come out of the print FSI by the end of 2020, creating an opportunity to bring those dollars to Quotient.

And we also expect to see growth from RPM as retailers start to mandate that CPGs commit up to 1.5% of their gross sales be spent on digital marketing and merchandising. We spoke about this at great length at our Investor Day, and over this past quarter, we've seen strong momentum build as brands commit dollars towards these retailers' initiatives.

The industry is finally shifting to digital at an accelerated pace. We've laid the foundation for this opportunity. We have one of the largest networks of retailers and shoppers. We have integrated solutions that pull all the necessary levers to drive sales and shift nonworking dollars to working dollars. And we bring robust analytics and insights to our customers and partners. We've done a lot of heavy lifting over the past 6 months. We now have a great team in place, the right products and a market-leading position to capture more dollars as they shift to digital. There's still work to be done, but there's a new energy and excitement from our customers, partners, employees and leadership that gives me the confidence that we're focused on all the right things.

I'll now turn the call over to Pam.

Thank you, Steven, and good afternoon, everyone. I'm excited to be here with you today, and I look forward to meeting you all over the coming months. I'll touch on a few P&L items right now but encourage you to read the full prepared financial results posted on our website for additional detail.

We delivered Q4 and full year 2019 revenue and adjusted EBITDA above the top end of guidance. We delivered record revenue for the year of $436.2 million driven by strength in Retailer IQ, RPM and social influencer. Our customers continue to spend more on our platform. And when combined, all 3 of our customer cohorts grew revenue by 15% over 2018, with 20% growth coming from customers outside our top 40.

GAAP gross margin for Q4 was 39.1%, and although it was down over Q4 2018, it was an improvement of approximately 50 basis points over Q3 2019. This is the first time in 2 years we saw improvement in gross margin. Gross margins over the past 2 years have been primarily impacted by product mix shift. In Q4, gross margins benefited slightly from product mix shift. And as Steven mentioned, we've put a plan in place to continue this improvement throughout 2020.

Q4 operating expenses declined as a percentage of revenue compared to Q4 2018, even with increased headcount in sales and marketing and the absorption of Ubimo expenses. Over the past few months, we've done a review of our operations and sales and marketing effectiveness. As a result, we have added talent and realigned resources and business functions to help scale the business and operate more effectively going forward. For 2020, we expect a typical seasonal increase in operating expenses in Q1 with a relatively flat spending trend through Q3 while we expand margins and build leverage throughout the year with increasing revenues. Q4 will see a typical seasonal increase in operating expenses, but we expect revenue growth during the year to outpace that spend with expanding margins throughout the year.

We delivered $11.5 million of adjusted EBITDA in Q4 2019, which was down over Q4 2018, impacted by product mix shift and a onetime charge of approximately $600,000 taken for bad debt expense, partly offset by leverage in operating expenses. On a full year basis, 2019 adjusted EBITDA was $45.2 million or 10.4% margin compared to $57.6 million in 2018 or 14.9% margin.

Looking at cash. In 2019, we spent approximately $85.5 million, repurchasing approximately 8.1 million shares. We ended the year with cash and cash equivalents of $224.8 million. Excluding cash paid for the Ubimo acquisition and capital expenditures, we generated cash flow from operations of approximately $1.8 million during the fourth quarter.

I want to spend a minute discussing a change we're making to a portion of our media business and the impact this change will have to both our 2020 revenue growth rate and gross margin. Starting in Q2, we will be improving the delivery of some of our media products. Not only do these changes improve the customer experience, but they also strengthen the health of our business as we continue to grow. As a result, and starting on April 1, 2020, we will recognize revenue from these products on a net basis as opposed to gross, which increases our gross margin and reduces the total media revenues we were recognized in 2020.

As a result of these changes, the revenue growth rate for 2020 will be lower than if we had not made these changes. Q1 2020, however, is not affected. To try to quantify the impact, if we continue to recognize revenue on a gross basis, the impact to projected revenue in full year 2020 would be approximately $33 million spread over Q2, Q3 and Q4. Our revenue growth rate in 2020 would therefore be approximately 20% over 2019. This change will also result in approximately 3 percentage points improvement on the gross margin in the quarter we make the change.

Overall, we expect gross margin to improve by approximately 5 to 6 points by the end of 2020. In addition to the approximately 3 points improvement from our operational change in certain media products, we expect about 1.5 points improvement from Ubimo, with the remaining improvement coming from operational automation. This change in our media business has no impact to our net income or adjusted EBITDA.

As for guidance, for the full year 2020, we expect revenue to be in the range of $485 million to $495 million or approximately 12% growth at the midpoint compared to last year, which includes a portion of our media business delivered as net in Q2 through Q4. For the first quarter of 2020, we expect revenue to be in the range of $106 million to $109 million. We expect the second half of 2020 to be stronger than the first half with approximately 56% of total revenue being delivered in the back half of 2020. Revenue mix between promotions and media for the year is expected to be similar to the back half of 2019, with media revenue contributing approximately 46% to 47% of total revenue for the year in 2020.

Adjusted EBITDA for the full year 2020 is expected to be in the range of $58 million to $62 million or approximately 12% of revenue at the midpoint. Adjusted EBITDA is expected to grow throughout the year with the fourth quarter adjusted EBITDA margin in the high teens resulting from increased revenue, improved gross margins and level operating expenses. For the first quarter of 2020, we expect adjusted EBITDA to be in the range of $1 million to $3 million.

We expect weighted average diluted shares outstanding for 2020 to be approximately 92 million.

In summary, I believe Quotient has tremendous opportunity in the market. The Quotient team has laid an incredible foundation of technology and partnerships throughout the retail/CPG ecosystem. The focus for us in 2020 is to take this great foundation and improve operations for greater scale and sustainable growth as more dollars shift to digital, and more importantly, to our platform. I believe we're well on our way.

Operator, I'll now open the call for questions.

(Operator Instructions)Your first question comes from the line of Shweta Khajuria from RBC.

Great. A few questions, please. First, could you please provide us some guidance on -- is the cadence of the revenue growth, on a pro forma basis, on a fair comp basis, it will be 20% that you called out for the full year? How should we think about -- through the year, it seems like it would be an acceleration from Q1 to Q4.

Second, media growth, revenue growth was 12% in Q4. Any color there? That seems a little bit lower than we would have expected.

And then third is on just EBITDA margin guide of high teens in fourth quarter versus the guidance that you gave for first quarter. How should we think about it? I know, Pam, you talked about it a little bit. Any guidance on that cadence will be helpful.

Yes, sure. Shweta, this is Pam. So in terms of the revenue guidance for 2020, yes, as we said, if you look at apples-to-apples comparison, the growth is expected to be 20% year-over-year. But because of the gross to net change, it's a bit lower than that on an as-reported basis. The revenue throughout the year will accelerate quarter-over-quarter from Q1 all the way consistently through Q4. So that's what gives us leverage at the bottom line throughout the year, and that's going to be a consistent growth pattern throughout that full year.

As I talked about EBITDA, the margin guide, as you can see, for the full year, we expect it to be somewhere between 12% to 13%. However, there's a strong growth ramp through the year. We start out Q1 with lower revenue. And as we do every year, there's a small step-up in operating expenses from Q4 to Q1 as payroll taxes turn over and we have our sales meeting spend. So a slight step-up in operating expenses in Q1, and then it remains flat through Q3 with another small seasonal increase in Q4.

So with relatively flat operating expenses, with gross margin expanding throughout the year, ending close to 50% in Q4, that's going to expand EBITDA margins consistently throughout the year.

And then I think your last question was on media growth, 30% year-over-year, and whether that's low.

I thought -- sorry, I thought...

Shweta, your question was...

12%, is that right? Or maybe I read that wrong.

Is it 12%? Media growth year-on-year, I think it was 30%.

In the fourth quarter, media revenue grew 11.5% over fourth quarter of 2018 is what I thought I read.

Okay. And your question is about that growth rate?

Being lower than you would have expected. It would have -- it would depend on what was in Q4 of 2018. But I think the year-on-year media growth rate was 30%. Hang on. We're just looking at what that comp on that is.

Yes. Year-over-year for the full year 2018 and 2019, media grew by 34%.

Right. And the Q4 growth rate was...

Q4 growth was 11%.

Was 11%. So it's going to depend on what was in Q4. There must have been a strong growth in Q4 of '18. We can come back to you with that, Shweta.

Your next question comes from the line of Chad Bennett from Craig-Hallum.

So going back to the media growth, the prior caller was right. I think it was 11.5% or 12%, which is pretty material deceleration from where you started the year. Are you thinking fundamentally different about the growth rate of that business going forward? And would that -- I think we're going from maybe last year this time believing, because of our special sauce there, that we were going to be -- that was going to be the significant growth part of the business, but it seems like that might not be the case.

Yes. Actually, Chad, this is Steven. So the fast growth rate on the media business, remember, it's a standing start business not too long ago. So it was on a low base that we were growing as fast as we were. What we also said is that we expect the product mix to stay roughly even with where we were at the end of '19 through 2020. And so we actually expect to see promo growing as well this year. And so again, just keeping in mind, a, it was off a smaller base getting started; and b, the year-over-year quarterly number, we have to just look at what was in Q4 of '18. I don't have that in front of me.

Okay. So we should just view the media business as a media business growth rate industry-wise?

Definitely not. Year-on-year, again -- and we've talked about this with a significant focus for a long time. You really need to look at the way our business runs year-on-year. The way dollars move in and out of the quarters affects our media business as well. It's not just promotion spend. Our clients spend money in the media segment with us and the promotion segment because we have a lot of products in both.

And so year-on-year, our media business grew. I think the number is now 34% year-on-year. That's the way you have to think about this business. So again, quarters are very hard for us to predict, and a single quarter doesn't predict the outcome of the year of future growth rates.

And your next question comes from the line of Steven Frankel from Dougherty.

Steven, maybe a little more insight to start with about these 3 large CPGs. You talked about the nice snap back year-on-year. But on average, maybe tell us what you think their budgets are with spending to you in 2020.

Sure, Steve. So obviously, I can't talk specifically about what their budgets are because we have a good idea at this point on what their minimum spends will be because we've gone through some planning with them. But all 3 of those CPGs have returned to growth spending with us. And so -- and that's factored into our thinking right now for 2020.

Remember, when we do our projections, we really work against a minimum committed spend. And that's how we build our programs with our customers over the course of the year. So all 3 of those CPGs -- and we said this last quarter as well, but we'll put a fine point on it now that we're continuing to process with them. All 3 of those CPGs are returning to growth spending with us this year.

Okay. And how material is the FSI decline as a part of the growth you're forecasting for the year?

I would say this. I would say that from an industry perspective, it's material. We're hearing about it from more and more clients now than we were just a quarter ago in discussions. And the biggest impact will be in 2021. As I said last quarter, CPGs representing over 20% -- over 20% of national coupon distribution off-line vehicles are completely withdrawing from the FSI by the end of 2020.

And so for their 2021 calendar years, for those that are on a calendar year basis, they will not be in the FSI. And for anyone who's on a half year fiscal, we'll start to see some impact of that in the back half of this year. And we think it's very meaningful.

One of the things that happens when you start to -- when you start to change the dynamics of a vehicle like that is that others who are left in that vehicle are left sitting in a nonperforming asset. So they're sitting with dollar value of coupons in a product that isn't being utilized anymore because the aggregate value of that product has gone down. And so that sort of speeds up the process a little bit. So we actually think it's quite meaningful.

Just one thing here. Just -- we want to make one comment on the media question, if we could.

Yes. So just looking forward to 2020, to give you a little bit more context around our media growth. On an as-reported basis, we do expect media to continue to grow healthily at 24% year-over-year on a like-for-like basis. So kind of a pro forma when you compare apples to apples, assuming that we would have kept our portion of our media business recognized as gross the whole year, the year-over-year growth would have been more like 35%.

That's helpful. Just to sneak in a couple more.

Yes, that makes a lot more sense.

Yes, that definitely does. So could you talk a little bit about the pipeline for the POS couponing product and also for potential new RPM partners?

Absolutely. The pipeline for both is healthy. We expect to add more retailers, exciting more retailers, over the course of the next months and quarters this year. And we also expect to add more retailers onto our in-line product, both.

And your next question comes from the line of Jed Kelly from Oppenheimer.

Great. Just on your approach to guidance, Pam, since you've been at the company, and Steven, since you've taken over 6 months ago, is there any change in approach -- the way you're approaching guidance? I know it was back half weighted last year. And any changes you're kind of thinking on how you're approaching the guidance?

Yes. If you're asking about changes from maybe what the former CFO did, I don't have a lot of insight into how he set guidance. But I will say that we go through a whole process of looking at pipeline, revenue expected to close, what past forecast accuracies or inaccuracies we've had. We look at risks and opportunities, what are the upsides and the downsides. We take that all into account when we set guidance. We set a range based on what we think will be a realistic but conservative range for us. It's also based on feedback we get from our customers, especially with the large CPGs, on their annual budget.

I think we've made a lot of progress in talking with CPGs and getting annual commitments to spend during the year and actually raising commits year-over-year. We're talking with a lot of CPGs right now on what their commit will be for the 2020 year. So all of that's taken into account when we set the range for guidance.

And then is -- I guess this is hard to answer. But do you have any exposure in the supply chain with the coronavirus?

None.

None. All right. And then one last question for me, Steven. You've been at the company now 6 months. I mean where have you -- where do you think you've made the most impact?

That's a fair question. I would say culture, number one; organizational alignment, clarity of roles, accountability, number two; and creating probably greater ability for our teams to go out and do their jobs without a lot of interference. So we've really created an opportunity for people to go out and scale and do their jobs the way that they had intended to do for a long time.

Next question comes from the line of Elliot Alper from D.A. Davidson.

Great. So I want to ask how Quotient is helping retailers kind of work to grow the number of shoppers onto their digital loyalty programs. And then secondly and separately, how much visibility do you guys have kind of into your CPG partners' spending with you throughout the quarter and the year?

Great. Elliot, it's Steven. So let me take the second one first. So I think we have a very good ability now to see into the spending patterns of our CPGs. It gets a little bit better as we continue to move forward. So this year, with the changes that are anticipated taking place in the FSI over time and with retailers really engaging directly with their CPG partners to drive digital spending on their platforms because the evidence is now in the marketplace that the ROI on a digital shopper is much higher than a nondigitally engaged shopper, I think our visibility is getting a lot better. So that's that part of it.

And again, on the year, our visibility is getting a lot better. Quarters are tough to manage. They really are tough for us to predict sometimes. And that goes to Pam's comment about taking a conservative view. We have to be -- we have to do planning with our customers and our clients on an annual basis. And then we do the very best we can to quarterize it.

The question about how do we help retailer partners grow, we take a very active role in helping our retail partners grow. We share best practices. We work with them on their marketing initiatives. We, in many cases, have team members on their teams, sitting in their offices, working with them day in and day out. We help them run programs. We bring value to them. So when a retailer is going to run a program to drive shopper registrations and engagement. Our network will bring national dollar value to help amplify basically the message that they're delivering on their own.

And I can give you specifics, if you'd like. But suffice to say, I think that when CPGs are running national promotions and a retailer is going to go launch an initiative to drive more registrations, they typically do it with some form of promotion. So we'll bring national dollars to bear as part of our network on top of the promotion dollars that they're bringing to bear. And that just drives an awful lot of engagement. So I think we're playing a very active role in helping our retailers grow those registrants.

Great. Helpful. And then one more. I just want to ask if you're seeing any impact on CCPA or expect any headwinds from these regulations in the future.

There were a lot of questions about this 2 quarters ago, 3 quarters ago, last quarter. What I can tell you is that as we predicted, CCPA is really turning out like GDPR. Shoppers see the banner. They click accept and they move on. And the number of people that opt out of tracking their data is really very, very low. So I would tell you that there's been no impact that we can feel at all from CCPA, other than the expense of getting ready for it.

And your last question comes from the line of David Gearhart from First Analysis.

First question. I want to talk a little bit about the gross margin. Last quarter, you had mentioned 500 to 600 basis points improvement as you go through the year. And you cited Ubimo, greater automation, terminating a nonstrategic product and the new products gaining traction. Was that guidance last quarter contemplating the change with the media segment in terms of how you record revenue from gross to net, and if not, shouldn't have not been additive to that expectation last quarter?

So that was under heavy consideration, but we had a lot of work to do internally to make sure that we could make those changes. So there are process changes here and engagement changes here. And so we have a number of initiatives on the table to drive gross margin improvement. That was part of the contemplated set, but we have to get through the process of getting ready to do it to be able to really quantify it.

Okay. And then lastly for me, can you give us an update on your sponsored search product?

Sure. We have, to date, 2 retailers that are live with sponsored search. We have a good pipeline against rolling that out to additional retailers. And that product is being met with very favorable responses. Implementation times are quite quick. Seamless integration into websites and content availability. So we're very happy so far with that product. It's early days, but we're very happy with that product. And we're especially happy with the fact that we've wrapped it all up into our overall suite of products so that we can actually deliver targets in there and we can measure the effectiveness of it. I'm personally very pleased with the way that's going.

We will now turn the call back over to Quotient for closing remarks.

Thank you, operator. And thank you all for joining us today. As you've just heard, the combination of our sharp focus on operating priorities, including improving gross margins, coupled with major tailwinds now converging in the market, CPGs planning to exit the FSI and retailers mandating a shift to digital merchandising and marketing, we believe Quotient is well positioned to accelerate both our revenue growth and margin expansion while continuing to expand our network and share of market. We're also on the road the week of March 9 and look forward to seeing many of you then. Thank you, everyone.

Thank you for joining the conference today. You may now disconnect. Thank you for your participation.